-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FB8j9AaaZOjfIHmRBXAd8IV4mdbzVosrBNVda3BaJl4YvhD07P8jXsWtzfDPpmyF VUXBaMrUNDyycpwI1HyTKQ== 0000277948-98-000001.txt : 19980220 0000277948-98-000001.hdr.sgml : 19980220 ACCESSION NUMBER: 0000277948-98-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971226 FILED AS OF DATE: 19980218 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CSX CORP CENTRAL INDEX KEY: 0000277948 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 621051971 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-28523 FILM NUMBER: 98545062 BUSINESS ADDRESS: STREET 1: ONE JAMES CNTR STREET 2: 901 E CARY ST CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 8047821400 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 26, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number 1-8022 ------ CSX Corporation ---------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 62-1051971 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 901 East Cary Street, Richmond, Virginia 23219-4031 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 782-1400 Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------------- ----------------------- Common Stock, $1 Par Value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) On January 23, 1998, the aggregate market value of the Registrant's voting stock held by non-affiliates (using the New York Stock Exchange closing price) was $11 billion. On January 23, 1998, there were 218,308,863 shares of Common Stock outstanding. 1 DOCUMENTS INCORPORATED BY REFERENCE The proxy statement for the annual meeting of security holders on April 28, 1998, is incorporated by reference for Part III. ITEM CAPTIONS AND INDEX -- FORM 10-K ANNUAL REPORT Item No. Page Part I 1. Business..............................................3-4, 12-27 2. Properties.......................................12-27, 33-34,39 3. Legal Proceedings....................................10,18-19,48 4. Submission of Matters to a Vote of Security Holders..........N/A 4a. Executive Officers of the Registrant..........................52 Part II 5. Market for the Registrant's Common Equity and Related Stockholder Matters...............................54-56 6. Selected Financial Data........................................4 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............12-27 8. Financial Statements and Supplementary Data..........See Item 14 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................N/A Part III 10. Directors and Executive Officers of the Registrant...........(a) 11. Executive Compensation.......................................(a) 12. Security Ownership of Certain Beneficial Owners and Management..............................................(a) 13. Certain Relationships and Related Transactions...............(a) Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K a. Consolidated Statement of Earnings for the Fiscal Years Ended Dec. 26, 1997, Dec. 27, 1996, and Dec. 29, 1995.........................................29 Consolidated Statement of Cash Flows for the Fiscal Years Ended Dec. 26, 1997, Dec. 27, 1996, and Dec. 29, 1995.........................................30 Consolidated Statement of Financial Position at Dec. 26, 1997, and Dec. 27, 1996..........................31 Consolidated Statement of Changes in Shareholders' Equity for the Fiscal Years Ended Dec. 26, 1997, Dec. 27, 1996, and Dec. 29, 1995..........................32 Notes to Consolidated Financial Statements for the Fiscal Years Ended Dec. 26, 1997, Dec. 27, 1996, and Dec. 29, 1995......................................33-50 Report of Independent Auditors............................51 b. Reports on Form 8-K: None. c. See Index to Exhibits.....................................61 d. Audited Consolidated Financial Statements and Schedule of Conrail Inc. for the Years Ended Dec. 31, 1997, 1996 and 1995. (a) Part III will be incorporated by reference from the registrant's 1998 Proxy Statement pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K. 2 CSX Corporation CSX Corporation is a Fortune 500 transportation company providing rail, intermodal, container-shipping, barging and contract logistics services worldwide. Our holdings include: CSX Transportation Inc., Sea-Land Service Inc., CSX Intermodal Inc., American Commercial Lines Inc. and Customized Transportation Inc. The company's non-transportation interests include: The Greenbrier, the Grand Teton Lodge Company, and CSX Real Property Inc. CSX also holds a majority interest in Yukon Pacific Corporation. In 1997, CSX generated more than $10.6 billion of operating revenue. 3 Financial Highlights
(Millions of Dollars, Except Per Share Amounts) 1997(a) 1996 1995(b) 1994(c) 1993(d) ----------------------------------------------------- SUMMARY OF OPERATIONS Operating Revenue $10,621 $10,536 $10,304 $ 9,409 $ 8,766 Operating Expense 9,038 9,014 8,921 8,227 7,792 Restructuring Charge(e) -- -- 257 -- 93 ----------------------------------------------------- Total Operating Expense 9,038 9,014 9,178 8,227 7,885 ----------------------------------------------------- Operating Income $ 1,583 $ 1,522 $ 1,126 $ 1,182 $ 881 ----------------------------------------------------- Net Earnings $ 799 $ 855 $ 618 $ 652 $ 359 ----------------------------------------------------- PER COMMON SHARE(f) Net Earnings $ 3.67 $ 4.00 $ 2.94 $ 3.12 $ 1.73 Net Earnings, Assuming Dilution $ 3.62 $ 3.96 $ 2.91 $ 3.08 $ 1.71 Cash Dividends $ 1.08 $ 1.04 $ .92 $ .88 $ .79 Market Price - High $ 62.44 $ 53.13 $ 46.13 $ 46.19 $ 44.07 - Low $ 41.25 $ 42.25 $ 34.63 $ 31.57 $ 33.19 ----------------------------------------------------- PERCENTAGE CHANGE FROM PRIOR YEAR Operating Revenue .8% 2.3% 9.5% 7.3% 2.5% Operating Expense .3% (1.8)% 11.6% 4.3% (5.4)% Operating Expense, Excluding Restructuring Charge .3% 1.0% 8.4% 5.6% 2.0% Cash Dividends Per Common Share 3.8% 13.0% 4.5% 11.4% 3.9% ----------------------------------------------------- SUMMARY OF FINANCIAL POSITION Cash, Cash Equivalents and Short-Term Investments $ 690 $ 682 $ 660 $ 535 $ 499 Working Capital Deficit $ (532) $ (685) $(1,056) $ (840) $ (704) Total Assets $19,957 $16,965 $14,282 $13,724 $13,420 Long-Term Debt $ 6,416 $ 4,331 $ 2,222 $ 2,618 $ 3,133 Shareholders' Equity $ 5,766 $ 4,995 $ 4,242 $ 3,731 $ 3,180 Book Value Per Common Share(f) $ 26.41 $ 23.04 $ 20.15 $ 17.81 $ 15.27 ----------------------------------------------------- EMPLOYEE COUNT(g) Rail 27,864 28,559 29,537 29,729 30,461 Other 19,047 18,755 18,428 17,974 17,847 ----------------------------------------------------- Total 46,911 47,314 47,965 47,703 48,308 -----------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. (a) Net earnings for 1997 include the effects of the company's 42% investment in Conrail Inc. (Conrail). Pending regulatory approval of the joint acquisition of Conrail by CSX and Norfolk Southern Corporation, the ownership interest in Conrail is being held in a voting trust and the company is not permitted to consolidate its portion of the Conrail system with its rail operations. Under the equity method of accounting, the company has recognized income from its share of Conrail's net earnings, as well as expense for amortization of its purchase price in excess of its share of Conrail's net book value. The combined effect of these items, net interest on debt issued to acquire the investment, and other expenses related to the joint acquisition reduced the company's net earnings for 1997 by $97 million, 43 cents per share. (b) In 1995, the company recognized a net investment gain of $77 million, $51 million after tax, 24 cents per share, on the issuance of an equity interest in a Sea-Land terminal and related operations in Asia and the write-down of various investments. (c) In 1994, the state of Florida elected to satisfy its remaining unfunded obligation issued in 1988 to consummate the purchase of 80 miles of track and right of way. The transaction resulted in an accelerated pretax gain of $69 million and increased net earnings by $42 million, 20 cents per share. (d) The company revised its estimated annual effective tax rate in 1993 to reflect the change in the federal statutory income tax rate from 34% to 35%. The effect of this change was to increase income tax expense for 1993 by $56 million, 26 cents per share. Of this amount, $51 million, 24 cents per share, related to applying the newly enacted statutory income tax rate to deferred tax balances as of Jan. 1, 1993. (e) In 1995, the company recorded a $257 million pretax charge to recognize the estimated costs of initiatives to revise, restructure and consolidate specific operations and administrative functions at its rail and container-shipping units. The 1995 restructuring charge reduced net earnings by $160 million, 76 cents per share. In 1993, the company recorded a $93 million pretax charge to recognize the estimated costs of restructuring certain operations and functions at its container-shipping unit. The 1993 restructuring charge reduced net earnings by $61 million, 30 cents per share. (f) Net earnings per common share, assuming dilution, includes the effect of potentially dilutive securities such as stock options on average common shares outstanding and has been calculated in accordance with the provisions of Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," adopted by the company in 1997. Amounts per common share for 1993 through 1995 have been restated to reflect a 2-for-1 common stock split distributed to shareholders in December 1995. (g) Employee counts based on annual averages. 4 Chairman's Message [PHOTO] 1997 was a historic year for CSX Corporation, one in which we embarked on a course that will transform our company and create immense potential for growth and prosperity. The landmark agreement to divide Conrail with Norfolk Southern -- the most important milestone for CSX since the 1980 merger that created the company -- significantly advances our strategic interests. It gives CSX a new, important dimension: an opportunity to grow rail revenues substantially and enhance our earnings power greatly. Once the Surface Transportation Board (STB) approves the Conrail transaction and we have combined Conrail's Northeast and Midwest operations with CSX Transportation's larger, complementary network, we will markedly change the competitive environment for transportation services in the region. For the first time, Eastern railroads will be in a position to compete effectively with trucks - -- especially on north-south shipments - for an important share of the $77 billion intercity transportation market in the East. Such a robust competitive environment will set the stage for a growing and dynamic CSX. We will create growth for ourselves and for the customers and communities we serve, bringing more business and more jobs to the region. By attracting freight to the rails and accommodating communities and rail passenger services in the region, we will improve highway safety and the environment while reducing highway maintenance and construction costs. These important public benefits can be achieved only with approval of this transaction. No railroad merger in recent history has experienced as lengthy and as thorough a review as this transaction will have undergone by the time it is approved in mid-1998. We are making the most of this time. Since the middle of last year, hundreds of our employees and managers, along with their counterparts at Conrail, have been involved in an intense planning process to ensure the effective and efficient integration of our portion of Conrail's operations. We are delighted with the quality of the Conrail employees and the railroad they have created. 5 [PHOTO] Continued improvement in safety and in service will be key to our ability to compete more effectively. We are taking a fresh look at how we run our railroad, while conducting a parallel review of the way Conrail approaches the same operational tasks. This review will allow us to improve overall service by adopting a best-practices approach to the Conrail integration, one that takes full advantage of the best each organization has to offer. Our management team also has studied the recent rail mergers in the Western United States and the safety issues and service disruptions there that frustrated shippers and raised concerns among them about our own transaction. The Western railroads, their customers and the regulatory agencies have been open and candid with us, sharing many valuable lessons. While we are certain to encounter bumps in the road when we move forward, we are confident in our abilities and committed to accomplishing two imperatives: continued improvement in safety and in customer service. Both are key to our ability to compete more effectively with trucks and to achieve our growth strategy. We realize that integrating two great rail systems is a huge, complex task, but our employees and those who will be joining us from Conrail are up to the challenge. We will move forward with our integration process only when the necessary labor agreements, staffing, capital improvements, technology enhancements and operating plans are tested and in place. The Conrail transaction affords us an exciting opportunity to usher in a new era of transportation in the East. We firmly believe the new CSX will be a powerhouse company, fully capable of meeting our aggressive growth, profit and free cash flow targets, thus creating exceptional value for our shareholders. 1997 FINANCIAL RESULTS Strong performances by our rail, intermodal and contract logistics units during 1997 were tempered by disappointing results at our container-shipping and barge companies. Still, CSX produced operating income of $1.58 billion, up 4% from 1996's record level. On a consolidated basis, CSX earned $799 million in 1997, or $3.62 a share on a diluted basis, vs. $855 million in 1996, or $3.96 a share. 1997 earnings reflected the impact of the Conrail transaction, including the interest expense on the money we borrowed to finance the transaction. Excluding the effects of the Conrail transaction, CSX would have earned $896 million, up 5% from 1996's record. These were solid results, considering the severe impact that rate erosion exerted at our container-shipping and barge companies. Our shareholders were rewarded with returns that outpaced rail industry peers. The total return of CSX stock in 1997, including reinvested dividends, was 30.5%, exceeding that of the S&P Railroad Index and Dow Jones Industrial Average and only slightly trailing that of the S&P 500 Index. Confidence in CSX's financial strength and future earnings growth led the CSX Board of Directors to raise the quarterly dividend 15%, from 26 cents a share to 30 cents a share. 6 We will maintain our focus on improving performance and profitability. RAIL RESULTS While devoting considerable attention to the Conrail acquisition and integration planning, our rail unit, CSX Transportation Inc. (CSXT), maintained its focus on cutting costs, improving service and increasing revenue in 1997. The result was another operating income record of $1.23 billion, up 9% from 1996's level. The railroad's strategy to grow its business was evident in the merchandise sector, where revenue rose 4%. Total revenue growth was held to 2%, however, as mild weather and weak foreign demand reduced coal revenue. CSXT's determined campaign to control costs, combined with its strategy to improve margins, continued to pay dividends. The operating ratio, a productivity measure that divides operating expense by operating revenue, improved to a record 75.4%, down a point and a half from 1996's level and an impressive 12 points since 1990. PRO FORMA NET EARNINGS (Millions of Dollars, Except Per Share Amounts*) 1997 1996 1995 ---------------------------------------------------- Description Per Per Per (all after tax) Amt. Share Amt. Share Amt. Share - ------------------------------------------------------------------------- Net Earnings as Reported $799 $3.62 $855 $3.96 $618 $2.91 Effect of Investment in Conrail 97 .43 -- -- -- -- Net Gains from Investment Transactions -- -- -- -- (51) (.24) Restructuring Charge -- -- -- -- 160 .76 ---- ----- ---- ----- ---- ----- Pro Forma Net Earnings $896 $4.05 $855 $3.96 $727 $3.43 ==== ===== ==== ===== ==== ===== * All per-share amounts assume dilution. Per-share amounts for 1995 have been adjusted to reflect a 2-for-1 stock split. INTERMODAL RESULTS CSX Intermodal Inc. (CSXI) produced 1997 operating income of $46 million, up 31% from the prior year's level. The improved results reflected both stronger demand for intermodal service and the favorable results of CSXI's action in 1996 to streamline its national intermodal network. That network redesign eliminated less-profitable routes and enhanced traffic and service levels on more-profitable routes. Late in the year, Les Passa, a 20-year veteran of Conrail and a highly respected member of its management team, took the reins as chief executive officer of CSXI. His leadership strength and knowledge of Conrail operations and markets will be of great value to CSX as our intermodal company adds critical Conrail routes and makes significant investments to its expanded intermodal network. Intermodal service -- when trailers and containers are placed directly on rail cars for longer hauls -- is the rail industry's fastest growing sector. CSXI will be an increasingly important contributor to CSX earnings as we absorb Conrail routes and move significant volumes of freight off the nation's congested highways. CONTAINER-SHIPPING RESULTS Our container-shipping business, Sea-Land Service Inc. (Sea-Land), performed admirably in adverse market conditions. Excess capacity in the container-shipping industry has resulted in significant rate deterioration over the past two years in most major trade lanes. Sea-Land offset much of the impact of lower rates through stringent cost control and higher volumes. In 1997, the company handled 1.65 million loads, up 7% from 1996's level, but the average rate it received for shipping a container fell 8%. Consequently, operating income at Sea-Land fell 13% to $278 million. 7 Though disappointed with prevailing industry conditions, we are encouraged that Sea-Land has weathered this period of severe rate declines better than its competitors and has increased its market share significantly in key trade lanes. Furthermore, we see continued consolidation within the container-shipping industry and increased government deregulation as promising signs that the industry is responding favorably to rational market forces. BARGING RESULTS Severe flooding and a difficult rate environment dealt a double blow to American Commercial Lines (ACL), our barging company. The worst flooding along the Ohio River in 30 years shut down portions of the river system beginning in March and resulted in restricted operations along the Ohio and Lower Mississippi rivers through May. In addition, lower demand for U.S. grain exports reduced freight rates for grain and other dry cargo. This combination of events led to a 38% drop in ACL's operating income, to $69 million. More favorable barge operating conditions are expected in 1998, though rate pressures are likely to persist. Improved grain demand, coupled with stringent cost control, should produce improved results. [PHOTO] CONTRACT LOGISTICS RESULTS Customized Transportation Inc. (CTI), our contract logistics company, has enjoyed terrific growth in recent years by helping businesses more effectively and efficiently manage and coordinate their delivery and supply systems. In 1997, CTI continued its unbroken record of performance improvement since joining the CSX family in 1993. Revenue rose 23% and operating income rose 40% to $24 million. LOOKING AHEAD 1998 promises to be a year of unprecedented activity, challenge and opportunity for CSX. We eagerly await the completion of the regulatory review of the proposed Conrail acquisition so we can begin achieving the sizable benefits that will flow from the extension of single-line service to customers, consumers and communities within the Conrail territory. We also look forward to competing aggressively throughout the Conrail service territory with Norfolk Southern, our partner and competitor, as we restore rail competition to the East and take freight off the highways. As we push ahead with our Conrail integration planning, we will maintain our focus on improving the performance and profitability of each CSX transportation unit. As always, our efforts will be driven by our commitment to maximize shareholder value. Clearly, 1998 will be a watershed year for CSX. Our employees and those who will be joining us from Conrail are eager to begin leveraging the strengths of our two great companies. I have complete confidence in their ability to execute a smooth transition that will enable CSX to emerge from the Conrail acquisition as the best rail-based transportation company in the nation. /s/ John W. Snow ------------ John W. Snow Chairman and Chief Executive Officer 8 Public Policy Statement In 1997, government at all levels again played an important role in several issues touching the heart of CSX's business. Decisions made in 1998 will affect not only our company but the entire transportation industry. CONRAIL The successful completion of the acquisition of Conrail by CSX and Norfolk Southern Corporation is of critical importance to us. It is now the subject of a painstaking, 345-day review by the Surface Transportation Board (STB), the federal agency that must approve the acquisition. Excellent progress has been made. We have been successful in building strong support not only from government officials, but from our major shippers and shipper organizations as well. It is noteworthy that the Department of Justice and the Department of Transportation, U.S. government agencies that have been skeptical of railroad mergers in the past, had comments about the transaction, but did not oppose it. The public benefits of the acquisition -- increased rail competition, improved service and the diversion of trucks from congested highways--were clearly recognized by the more than 2,000 shippers and 14 states, from Massachusetts to Florida, that have officially endorsed the CSX-Conrail acquisition. As a result of this public support, Congress rejected legislative efforts to block or delay the transaction. As we write this, the STB continues its careful study of the impact of the transaction on the environment, customers, employees, communities, passenger service and safety. The problems that occurred in the West, following the Union Pacific-Southern Pacific merger, have raised concerns among shippers over whether mergers of this magnitude can be implemented smoothly. We are determined that our transaction will not repeat what happened in the West. The railroad that CSX will acquire is much smaller, well run and in excellent condition financially and otherwise. Its employees are highly skilled and motivated. From the outset of the transaction, CSX has been planning with great intensity for the integration of the railroads in such key areas as safety, capital improvements, information technology, manpower and labor agreements. Combined operation of Conrail lines will not begin until these components are effectively in place and service can be assured. We are already working with our shippers, public constituents and labor to assure a smooth transition. COMMITMENT TO SAFETY Above all, CSX is committed to operating in the safest manner possible. In October, the United Transportation Union (UTU) and CSX Transportation (CSXT) entered into a partnership to build a model rail industry safety process. Working with the Federal Railroad Administration (FRA), the UTU and CSXT will develop specific action plans to improve safety and to foster greater cooperation between union employees and managers. In December, CSX submitted its Safety Integration Plan for the new CSX rail system to the STB. This first-of-its-kind document spells out the careful processes by which the safety aspects of the Conrail integration and consolidated operation of the systems will be addressed. In terms of legislation, as Congress prepares to take up the Federal Railroad Safety Act in 1998, CSXT is working to improve upon the gains made in rail transportation safety over the past decade. The most important objective is to set realistic standards by which to measure safety improvements. "OPEN ACCESS" AND RE-REGULATION The Staggers Rail Act of 1980, which freed the railroads from outdated economic regulation, set the stage for the remarkable recovery of the railroads from the financial disasters of the 1970s. Now there are calls from some shippers for a return to the old era of stifling government intervention. Some of this new regulation is bring given the misleading label of "competitive" or "open" access. In reality, what some shippers want is to force a freight railroad such as CSXT to allow other railroads to operate over its property without fair compensation. Far from creating competition in a free marketplace, this so-called "open" access would have to be administered by a government agency and would result in long regulatory proceedings that would take away the economic benefits of freedom from regulation. Another proposal would simply gut the Staggers Act by repealing its key provisions. Almost all rail rates would again be subject to challenge before a regulatory agency, and railroads would lose the ability to price their services based on competitive market forces. 9 From the vantage point of today's multibillion dollar freight business, it is easy to forget that just 20 years ago, when shipping rates and virtually every other aspect of the freight rail business were tightly controlled by government regulators, America's railroads were on the brink of collapse. In fact, nearly a fourth of the nation's rail assets were then in bankruptcy. The last thing today's railroads or their customers need is a return to a failed system of government regulation that did not work then and will not work now. The impact of the current proposed changes would be to wreck the balance that exists today between the interests of shippers and railroads. They would jeopardize the ability of railroads to attract needed capital and to provide the safe and reliable service our customers want and expect. [PHOTO] [PHOTO CAPTION] CSX will continue working to insure that changes to rail safety laws are consistent with our widely acclaimed safety process and our voluntary safety programs. TORT REFORM CSX has been a proponent of tort reform for some time, and the urgency for that reform hit home this year with a jury verdict against CSXT of $2.5 billion in punitive damages. The case grew out of a tank car leak and fire in New Orleans for which CSXT was in no way responsible -- an incident that fortunately caused local residents no serious injuries or significant property damage. Moreover, after a very careful and thorough investigation, the National Transportation Safety Board confirmed CSXT was not at fault for the incident. But the event provided further evidence of the need to restore rationality to our civil-justice system and to rein in greedy trial lawyers and runaway juries. We are pleased that the Louisiana Supreme Court vacated and set aside the judgment until all liability issues have been determined. We are now working to undo the remaining injustice of the case. Although our case was extreme, it was far from the only instance of huge punitive awards bearing no relationship to fault. There is something fundamentally wrong with a system that allows penalties to be assessed based on the depth of a company's pockets rather than its responsibility for an incident. Laws define unacceptable conduct and set the penalties to be imposed for not abiding by its rules. The very existence of a system permitting unlimited punitive damages for ill-defined actions encourages lawyers to inflame juries and juries to ignore the facts and, instead, to act on pure emotion. Lawyers, government officials and the general public should be deeply concerned about punitive damages that effectively distort the rule of law and punish capriciously. The law should never tolerate distinctions based on status. This is a fight that should not be left solely to business interests, but should be of concern to every citizen. MARITIME ISSUES Because of the overriding importance of the Conrail transaction, our main public policy focus has been on rail issues. There also is legislation of great significance for the future of the maritime industry, which the Congress should act on during 1998. One bill would reduce economic regulation of the container-shipping industry. This legislation, which has the strong support of CSX and its subsidiary Sea-Land, will give shipping lines the freedom they need to negotiate service contracts tailored to the needs of their customers. Another piece of legislation awaiting action is a bill to carry out the terms of the international treaty to eliminate subsidies by foreign governments to their shipyards and to allow U. S. shipyards to compete effectively. THE YEAR AHEAD 1998 will be a critical year in which the future structure of the rail industry will be decided by the STB and in which Congress may make important decisions affecting the rail and maritime transportation industries. While the Conrail acquisition will be of paramount importance, high on our agenda will be ensuring that any changes to rail safety laws are consistent with our voluntary safety programs, and turning back efforts to reimpose burdensome economic regulation on the railroads. CSX will continue to play an active role in public policy debates concerning transportation, to ensure that the outcomes enhance our ability to provide safe, reliable and efficient transportation services to our customers and superior returns to our shareholders. 10 Financial Policy CSX'S FINANCIAL PRINCIPLES The management of CSX Corporation reports the company's financial condition and results of operations in an accurate, timely and conservative manner in order to give shareholders all the information they need to make investment decisions about the company. In this section, financial information is presented to assist you in understanding the sources of earnings, the financial resources of the company and the contributions of the major business units. In addition, certain information needed to meet the Securities and Exchange Commission's Form 10-K requirements has been included in the Notes to Consolidated Financial Statements. Our key objective is to increase shareholder value by improving the return on invested capital and maximizing free cash flow. To achieve these goals, managers utilize the following guidelines in conducting the financial activities of the company: Capital - CSX business units are expected to earn returns in excess of the CSX cost of capital. Business units that do not earn a return above the CSX cost of capital and do not generate an adequate level of free cash flow over an appropriate period of time will be evaluated for sale or other disposition. Taxes - CSX will pursue all available opportunities to pay the lowest federal, state and foreign taxes, consistent with applicable laws and regulations and the company's obligation to carry a fair share of the cost of government. CSX also works through the legislative process for lower tax rates. Debt Rating - The company will strive to maintain its investment grade debt ratings, which allow cost-effective access to financial markets. The company will manage its business operations in a manner consistent with meeting this objective, insuring adequate cash to service its debt and fixed charges. Derivative Financial Instruments - From time to time the company may employ derivative financial instruments as part of its risk management program. The objective is to manage specific risks and exposures, not to trade such instruments for profit or loss. Dividends - The cash dividend is reviewed regularly in the context of inflation and competitive dividend yields. The dividend may be increased periodically if cash flow projections and reinvestment opportunities show the higher payout level will best benefit shareholders. CSX cannot always guarantee that its goals will be met, despite its best efforts. For example, revenue and operating expenses are affected by the state of the economy and the industries the company serves. Changes in regulatory policy can drastically change the cost and feasibility of certain operations. The impact of factors such as these, along with the uncertainty involved in predicting future events, should be borne in mind when reading company projections or forward-looking statements in this report. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements of CSX have been prepared by management, which is responsible for their content and accuracy. The statements present the results of operations, cash flows and financial position of the company in conformity with generally accepted accounting principles and, accordingly, include amounts based on management's judgments and estimates. CSX and its subsidiaries maintain internal controls designed to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized by management and are recorded in conformity with generally accepted accounting principles. Controls include accounting tests, written policies and procedures and a code of corporate conduct routinely communicated to all employees. An internal audit staff monitors compliance with and the effectiveness of established policies and procedures. The Audit Committee of the board of directors, composed solely of outside directors, meets periodically with management, internal auditors and the independent auditors to review audit findings, adherence to corporate policies and other financial matters. The firm of Ernst & Young LLP, independent auditors, has been engaged to audit and report on the company's consolidated financial statements. Its audit was conducted in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent deemed necessary for the purpose of its report, which appears on page 51. 11 Analysis of Operations CSX Corporation, headquartered in Richmond, Va., is a leading provider of multimodal freight transportation and contract logistics services around the world. CSX's unique combination of rail, container-shipping, barging, intermodal and logistics services offers shippers global reach unmatched by any other freight transportation company. The company's goal, advanced at each of its business units, is to provide efficient, competitive transportation and related services for customers and to deliver superior value to CSX shareholders. CSX TRANSPORTATION INC. CSXT is a major eastern railroad, providing rail freight transportation over a network of approximately 18,300 route miles in 20 states in the East, Midwest and South; and in Ontario, Canada. Headquartered in Jacksonville, Fla., CSXT accounted for 47% of CSX's operating revenue and 78% of operating income in 1997. SEA-LAND SERVICE INC. Sea-Land is the largest U.S.-based ocean carrier and a leader in the global shipping industry. The carrier operates a fleet of 98 container ships and approximately 220,000 containers in U.S. and foreign trade and serves 120 ports. In addition, Sea-Land operates 28 marine terminal facilities across its global network. Headquartered in Charlotte, N.C., Sea-Land accounted for 37% of CSX's operating revenue and 18% of operating income in 1997. AMERICAN COMMERCIAL LINES INC. ACL, headquartered in Jeffersonville, Ind., is a family of marine companies providing a wide range of services to the shipping public and other inland waterway carriers. ACL is a leader in barge transportation, operating 135 towboats and more than 3,800 barges on U.S. and South American waterways. Additionally, ACL operates marine construction facilities, river terminals and communications services. ACL accounted for 6% of CSX's operating revenue and 4% of operating income in 1997. CSX INTERMODAL INC. CSXI provides transcontinental intermodal transportation services and operates a network of dedicated intermodal facilities across North America. Every week, CSXI runs more than 300 dedicated trains between its 33 terminals. CSXI contributed 6% of CSX's operating revenue and 3% of operating income in 1997. CUSTOMIZED TRANSPORTATION INC. CTI is one of the nation's leading third-party logistics providers, offering inventory management, distribution, warehousing, assembly and just-in-time delivery services. The fastest growing unit of CSX, CTI provided 4% of CSX's operating revenue and 1% of operating income in 1997. NON-TRANSPORTATION Resort holdings include the Mobil Five-Star and AAA Five-Diamond hotel, The Greenbrier in White Sulphur Springs, W.Va., and the Grand Teton Lodge Company in Moran, Wyo. CSX Real Property Inc. is responsible for sales, leasing and development of CSX-owned properties. CSX holds a majority interest in Yukon Pacific Corporation, which is promoting construction of the Trans-Alaska Gas System to transport Alaska's North Slope natural gas to Valdez for export to Asian markets. 12 DISCUSSION OF EARNINGS CSX produced solid results in 1997, positioning itself to increase core earnings significantly in the years ahead. Strong rail, intermodal and logistics results produced record operating income. Average Return on Assets (Percent) [GRAPH] '93* '94 '95* '96 '97 2.7 4.8 4.4 5.9 4.3 * Excluding after-tax restructuring charges and the impact of the 1993 tax-rate increase, return on assets in 1993 and 1995 would have been 3.6% and 5.6%, respectively. Net earnings for 1997 totaled $799 million, $3.67 per share, compared with $855 million, $4.00 per share, in 1996, and $618 million, $2.94 per share, in 1995. Earnings per share on a diluted basis were $3.62, compared with $3.96 in 1996 and $2.91 in 1995. The 1997 results include the impact on earnings of the company's 42% investment in Conrail, which has been reported under the equity method of accounting. While the transaction awaits regulatory approval, the company is incurring interest on the debt issued to acquire the investment, as well as certain expenses associated with the acquisition and activities undertaken to prepare for the integration of the CSXT and Conrail systems. Interest on the Conrail-related debt totaled $236 million for the year, while acquisition and integration-related expenses totaled $61 million. Under the equity method of accounting, the company is recognizing income from its proportionate share of Conrail's net earnings and expense for the amortization of its purchase price in excess of its share of Conrail's net book value. Equity in Conrail's net earnings totaled $144 million, and amortization of the excess purchase price totaled $42 million for the year. The combined effect of these items reduced CSX's net earnings by $97 million, 43 cents per share on a diluted basis. The 1995 net earnings included the effect of a restructuring charge and a non-recurring gain from the issuance of an equity interest in a Sea-Land terminal and related operations in Asia. The restructuring charge reflected the write-down of obsolete telecommunications assets and related employee separation costs at CSXT, as well as costs associated with reflagging five Sea-Land vessels and consolidating Sea-Land's corporate and divisional headquarters in Charlotte, N.C. The combined effect of these items reduced CSX's 1995 net earnings by $109 million, 52 cents per share on a diluted basis. Average Return on Equity (Percent) [GRAPH] '93* '94 '95* '96 '97 11.7 18.6 15.5 18.9 15.2 * Excluding after-tax restructuring charges and the impact of the 1993 tax-rate increase, return on equity in 1993 and 1995 would have been 14.0% and 19.1%, respectively. Consolidated operating revenue for 1997 was $10.6 billion, 1% above 1996 and 3% above 1995. CSXT contributed $80 million of additional revenue over 1996, largely resulting from strength in its automotive business unit, chemicals and most other merchandise groups. Additionally, the company's intermodal unit increased revenue by 1% to $669 million, reflecting strong demand and a relatively stable rate environment. The contract logistics unit, CTI, posted revenue of $389 million, an increase of $73 million over 1996 and $149 million over 1995. Despite generating significant volume increases, Sea-Land's revenue decreased $60 million to $4.0 billion, due to continued rate weakness across all major trade lanes. ACL generated $618 million of revenue, almost level with 1996's total. Revenue from barge operations at ACL declined 4% from 1996 as a result of rate weakness and difficult weather, although a 10% increase in barge construction and other revenue offset most of the shortfall. In 1997, all CSX units continued their efforts to control costs through performance improvement initiatives. Consolidated operating expense remained level with 1996 at $9.0 billion. Operating expense in 1995 totaled $9.2 billion, including the $257 million pretax restructuring charge recorded by CSXT and Sea-Land. Consolidated operating income for 1997 was $1.6 billion, compared with $1.5 billion in 1996 and $1.1 billion in 1995. Absent the restructuring charge, 1995 operating income would have been $1.4 billion. 13 Other income for 1997 totaled $51 million, compared with $43 million in 1996 and $118 million in 1995. The 1997 total includes $34 million in net income related to the investment in Conrail, consisting of the equity in Conrail's net earnings less amortization of the excess purchase price and acquisition and integration expenses. Other income for 1995 included a $77 million pretax net investment gain related to the issuance of the equity interest in a Sea-Land terminal facility and related operations in Asia. [PHOTO] [PHOTO CAPTION] Performance Improvement Teams work beyond traditional boundaries to identify and close competitive gaps. PIT initiatives are responsible for millions in capital and operating expense savings since their inception in 1992. DISCUSSION OF CASH FLOW Cash provided by operating activities totaled $1.6 billion in 1997, compared with $1.4 billion in 1996 and $1.6 billion in 1995. Cash from operations was adequate to fund net property investments and cash dividends in 1997, 1996 and 1995. In addition, CSX funded scheduled long-term debt payments of $98 million, $486 million and $343 million in 1997, 1996 and 1995, respectively. The company's net cash flow for 1997 and 1996 included significant items related to the Conrail transaction. Cash used to acquire the investment in Conrail totaled $2.2 billion for a 22.1% ownership interest in 1997 and $2.0 billion for a 19.9% interest in 1996. Proceeds from the issuance of long-term debt were used to finance the Conrail acquisition, including $2.5 billion from an offering of fixed rate debentures in 1997 and $2.0 billion from commercial paper in 1996. Approximately $300 million of the proceeds from the debentures was not required to complete the acquisition of the Conrail investment in 1997 and was used to reduce the commercial paper borrowings incurred in 1996. In addition to the acquisition of the ownership interest in Conrail and the related financings, property additions for 1997 included $119 million of expenditures associated with upgrading routes on CSXT's rail system and intermodal facilities in CSXI's network in preparation for the consolidation of CSXT and Conrail lines. Productivity and restructuring charge payments totaled $51 million, $88 million, and $155 million for 1997, 1996 and 1995, respectively. These payments related principally to CSXT's 1991/92 productivity charge covering labor agreements providing for two-member train crews. Through 1997, the company has made total payments of $975 million related to this productivity charge. Fixed Charge Coverage [GRAPH} '93* '94 '95* '96 '97 2.3 3.1 3.2 4.0 2.9 * Excluding after-tax restructuring charges, fixed charge coverage in 1993 and 1995 would have been 2.5x and 3.7x, respectively. Asset utilization and capital productivity continue to be areas of significant emphasis at CSX. Capital investments for 1997, including the $119 million in spending to prepare for the Conrail integration, totaled $1.1 billion, down from $1.2 billion in 1996 and 1995. Excluding the Conrail spending, capital investments for 1997 reflect a $217 million reduction from 1996. The reduction is primarily attributable to fewer locomotive deliveries at CSXT in 1997. Capital investments at Sea-Land were down $56 million, primarily due to one-time spending in 1996 to acquire containers previously covered under operating leases. 14 Cash dividends per common share were $1.08 for 1997, compared with $1.04 in 1996 and 92 cents in 1995. The Board of Directors increased the quarterly dividend to 30 cents per share in the fourth quarter of 1997, reflecting confidence in the company's financial strength and future earnings growth. CSX expects its operations to continue generating significant cash flow to fund working capital requirements, capital investments, debt obligations and dividends. The company expects to continue to have access to financial markets, if necessary, to fund operations, working capital, or other cash requirements. Two-thirds of the capital spending required to integrate the CSX and Conrail systems is expected to occur in 1998. With this spending, total capital investments are expected to increase to a level near $1.4 billion for the coming fiscal year. Sea-Land's program to add nine high-performance, fuel-efficient container vessels to its fleet was substantially complete at the end of 1997 and, as a result, capital investments at the unit are expected to decline in 1998. DISCUSSION OF FINANCIAL POSITION Cash, cash equivalents and short-term investments totaled $690 million at Dec. 26, 1997, vs. $682 million at Dec. 27, 1996. The company's working capital deficit decreased $153 million during 1997, primarily due to reductions in short-term debt levels. The company had a year-end working capital deficit of $532 million in 1997, compared with $685 million in 1996. A working capital deficit is not unusual for CSX and does not indicate a lack of liquidity. CSX maintains adequate resources to satisfy current liabilities when they are due and has sufficient financial capacity to manage its day-to-day cash requirements. 15 The company's investment in Conrail increased to $4.2 billion at Dec. 26, 1997, from $2.0 billion at Dec. 27, 1996. The increase reflects the change in CSX's ownership interest in Conrail from 19.9% to 42% in May 1997 under the joint acquisition agreement with Norfolk Southern. Long-term debt at Dec. 26, 1997, totaled $6.4 billion, $2.1 billion higher than the end of fiscal year 1996. The increase is attributable to the issuance of debt to finance the completion of the joint Conrail acquisition. The ratio of debt to total capitalization increased to 52% at the end of 1997, from 46% in 1996. Cash Provided by Operations (Millions of Dollars) [GRAPH] '93 '94 '95 '96 '97 $962 $1,326 $1,567 $1,440 $1,558 [PHOTO] [PHOTO CAPTION] CSX Transflo, a network of specialized terminals that enables customers not served by rail to transfer product between rail- cars, trucks, and containers, plans to expand its bulk transfer terminal network by more than 50% in 1998, to well over 100 locations.
Operating Results (Millions of Dollars) 1997 Container Contract Elim./ Rail Shipping Intermodal Barge Logistics Other Total -------------------------------------------------------------------- Operating Revenue $4,989 $3,991 $669 $618 $389 $(35) $10,621 -------------------------------------------------------------------- Operating Expense Labor and Fringe Benefits 1,963 903 56 151 153 -- 3,226 Materials, Supplies and Other 878 1,191 119 262 61 -- 2,511 Building and Equipment Rent 349 600 77 40 45 -- 1,111 Inland Transportation (158) 757 356 -- 83 (35) 1,003 Depreciation 429 128 14 39 10 -- 620 Fuel 299 197 1 57 13 -- 567 Miscellaneous(b) -- (63) -- -- -- 63 -- Restructuring Charge -- -- -- -- -- -- -- --------------------------------------------------------------------- Total Operating Expense 3,760 3,713 623 549 365 28 9,038 --------------------------------------------------------------------- Operating Income (Loss) $1,229 $ 278 $ 46 $ 69 $ 24 $(63) $ 1,583 --------------------------------------------------------------------- Pro Forma Operating Income (Loss)(c) $1,229 $ 278 $ 46 $ 69 $ 24 $(63) $ 1,583 --------------------------------------------------------------------- Operating Ratio(c) 75.4% 93.0% 93.1% 88.8% 93.8% --------------------------------------------------------------------- Average Employment 27,864 9,105 800 3,559 2,334 --------------------------------------------------------------------- Property Additions $ 712 $ 251 $ 32 $ 52 $ 13 --------------------------------------------------------------------- 1996(a) Container Contract Elim./ Rail Shipping Intermodal Barge Logistics Other Total --------------------------------------------------------------------- Operating Revenue $4,909 $4,051 $660 $622 $316 $(22) $10,536 --------------------------------------------------------------------- Operating Expense Labor and Fringe Benefits 1,933 900 63 138 124 -- 3,158 Materials, Supplies and Other 919 1,190 109 242 49 -- 2,509 Building and Equipment Rent 365 630 73 35 40 -- 1,143 Inland Transportation (160) 750 364 -- 64 (22) 996 Depreciation 416 135 15 36 9 -- 611 Fuel 309 192 1 59 13 -- 574 Miscellaneous(b) -- (64) -- -- -- 87 23 Restructuring Charge -- -- -- -- -- -- -- --------------------------------------------------------------------- Total Operating Expense 3,782 3,733 625 510 299 65 9,014 --------------------------------------------------------------------- Operating Income (Loss) $1,127 $ 318 $ 35 $112 $ 17 $(87) $ 1,522 --------------------------------------------------------------------- Pro Forma Operating Income (Loss)(c) $1,127 $ 318 $ 35 $112 $ 17 $(87) $ 1,522 --------------------------------------------------------------------- Operating Ratio(c) 77.0% 92.2% 94.7% 82.0% 94.5% --------------------------------------------------------------------- Average Employment 28,559 8,982 1,090 3,418 2,120 --------------------------------------------------------------------- Property Additions $ 764 $ 307 $ 24 $ 91 $ 15 --------------------------------------------------------------------- 1995(a) Container Contract Elim./ Rail Shipping Intermodal Barge Logistics Other Total --------------------------------------------------------------------- Operating Revenue $4,819 $4,008 $707 $554 $240 $(24) $10,304 --------------------------------------------------------------------- Operating Expense Labor and Fringe Benefits 1,900 934 85 122 92 -- 3,133 Materials, Supplies and Other 990 1,231 122 232 46 -- 2,621 Building and Equipment Rent 373 636 72 20 33 -- 1,134 Inland Transportation (160) 730 383 -- 41 (24) 970 Depreciation 397 139 14 32 6 -- 588 Fuel 255 165 1 42 10 -- 473 Miscellaneous(b) -- (65) -- -- -- 67 2 Restructuring Charge 196 61 -- -- -- -- 257 --------------------------------------------------------------------- Total Operating Expense 3,951 3,831 677 448 228 43 9,178 --------------------------------------------------------------------- Operating Income (Loss) $ 868 $ 177 $ 30 $106 $ 12 $(67) $ 1,126 --------------------------------------------------------------------- Pro Forma Operating Income (Loss)(c) $1,064 $ 238 $ 30 $106 $ 12 $(67) $ 1,383 --------------------------------------------------------------------- Operating Ratio(c) 77.9% 94.1% 95.8% 80.9% 94.7% --------------------------------------------------------------------- Average Employment 29,537 9,168 1,434 2,914 1,853 --------------------------------------------------------------------- Property Additions $ 765 $ 269 $ 57 $ 33 $ 8 ---------------------------------------------------------------------
(a) Certain prior-year data have been reclassified to conform to the 1997 presentation. (b) A portion of intercompany interest income received from the CSX parent company has been classified as a reduction of Miscellaneous expense by the container-shipping unit. This amount was $63 million, $64 million and $65 million in 1997, 1996 and 1995, respectively, and the corresponding charge is included in Eliminations/Other. (c) Excludes restructuring charge. 16 CONRAIL ACQUISITION In April 1997, CSX and Norfolk Southern entered into an agreement providing for their joint acquisition of Conrail and the division of its routes and other assets. Under the terms of the agreement, CSX and Norfolk Southern acquired all outstanding shares of Conrail not already owned by them for $115 per share in cash during the second quarter of 1997. CSX and Norfolk Southern each possess 50% of the voting and management rights of a jointly owned acquisition company, and non-voting equity is divided between the parties to achieve overall economic allocations of 42% for CSX and 58% for Norfolk Southern. Following approval by the STB as described below, Conrail's assets will be segregated within Conrail, and CSX and Norfolk Southern will each benefit from the operation of a specified portion of the Conrail routes and other assets through the use of various operating arrangements. Certain Conrail assets will be operated for the joint benefit of CSX and Norfolk Southern. The total cost of acquiring the outstanding shares of Conrail under the joint CSX/Norfolk Southern agreement was approximately $9.8 billion. Pursuant to the agreement, CSX has paid 42%, or approximately $4.1 billion, and Norfolk Southern has paid 58%, or approximately $5.7 billion, of such cost. Including its capitalized transaction costs, CSX's total purchase price was approximately $4.2 billion. JOINT STB APPLICATION The Conrail shares have been placed in a voting trust pending STB approval of the joint acquisition, control and division of Conrail. The exercise of control over Conrail by CSX and Norfolk Southern remains subject to a number of conditions and approvals, including approval by the STB, which has the authority to modify contract terms and impose additional conditions. CSX and Norfolk Southern filed an application for control of Conrail with the STB in June 1997. The STB has adopted a schedule that contemplates a decision in late July 1998. CSX believes that the STB will approve the joint application for control without imposing onerous conditions. However, should the application not be approved by the STB, or should the STB impose onerous approval conditions, the closing may be delayed, or CSX may be required to, or may choose to, dispose of some or all of its investment in Conrail in a manner that could cause CSX to incur a loss on its investment in Conrail. [PHOTO] [PHOTO CAPTION] CSX maintains a top-to-bottom commitment to environmental protection. FINANCING ARRANGEMENTS CSX originally arranged a $4.8 billion bank credit facility in November 1996 to provide initial financing for the Conrail acquisition and to meet general working capital needs. The facility was amended in May 1997, and the lenders' commitments were reduced to $2.5 billion, reflecting the issuance of fixed rate debentures. Currently, the facility is used as support for commercial paper issuance. 17 The fixed rate debentures, issued through a $2.5 billion multitranche private offering in May 1997, have maturities ranging from 2002 to 2032 and interest rates ranging from 6.95% to 8.30%. ENHANCED EFFICIENCIES AND REVENUE GROWTH Management expects the integration of Conrail operations resulting from the transaction to add approximately $1.7 billion, or 16%, to CSX's annual revenue beginning in the first 12 months following operational consolidation. Management believes that the transaction also will result in growth of the company's rail revenue base through expansion of single-line service and CSX's ability to compete more effectively against trucks on major freight routes. INTEGRATION PLANNING The company is actively planning for the smooth integration of Conrail operations into the CSXT rail system after the STB control date. Plans involve all facets of combining the two systems, including: safety; customer service; train scheduling, switching, and routing; equipment utilization and track programs; commuter and passenger rail; marketing; technology; labor agreements; and administration. Related capital improvements to certain routes and facilities on the CSX rail system also have been initiated. Operational integration is expected to take place once the necessary implementing agreements have been reached, which currently is anticipated in late 1998. FINANCIAL EFFECTS Including transaction costs, the overall purchase price paid by CSX exceeded the historical book value of its proportionate share of Conrail's net assets by approximately $2.9 billion. A substantial portion of the excess purchase price is expected to be allocated to reflect the fair value of Conrail's property and equipment. The company has based its provision for amortization of the excess purchase price on preliminary estimates of the fair values of such property and equipment and estimates of their remaining useful lives, as well as estimates of the fair values of other assets and liabilities of Conrail. Because of the time required to obtain necessary regulatory and other approvals, CSX does not expect integrated operations to have a significant effect on operating and financial results prior to fiscal 1999. The primary impact of the Conrail transaction on net earnings prior to the integration of operations will be the after-tax effect of the company's share of Conrail's net earnings, reported under the equity method of accounting, less amortization of the excess purchase price and interest on debt incurred to acquire the Conrail investment. Net cash flow prior to operational integration is expected to be reduced by interest payments on the acquisition debt. At Dec. 26, 1997, the average interest rate on debt incurred to acquire Conrail shares was approximately 6.9%. The degree of negative impact on net earnings and net cash flow during 1998 will depend primarily on the net earnings reported by Conrail and the average interest rate and timing of interest payments on the related debt. OTHER MATTERS LITIGATION In September 1997, a state court jury in New Orleans returned a $2.5 billion punitive damages award against CSXT. The award was made in a class-action lawsuit against a group of nine companies based on personal injuries alleged to have arisen from a 1987 fire. The fire was caused by a leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour evacuation of a New Orleans neighborhood. In the same case, the court awarded a group of 20 plaintiffs compensatory damages of approximately $2 million against the defendants, including CSXT, to which the jury assigned 15% of the responsibility for the incident. CSXT's liability under that compensatory damages award is not material. In October 1997, the Louisiana Supreme Court set aside the punitive damages judgment, ruling the judgment should not have been entered until all liability issues were resolved. CSX believes this decision means that 8,000 other cases must be resolved before the punitive damage claims can be decided. CSXT is pursuing an aggressive strategy on all legal fronts, and management believes that any adverse outcome will not be material to CSX's or CSXT's overall results of operations or financial position, although it could be material to results of operations in a particular quarterly accounting period. CSX has been advised that activities of a former subsidiary that administered U.S. government guaranteed student loans are under investigation. The subsidiary was sold in 1992. The U.S. Attorney's Office has said that it may institute proceedings against CSX based on government insurance payments made on uncollected loans as a result of alleged processing deficiencies or errors before the sale. While the amount of potential damages is not yet reasonably estimable, based upon information currently available to the company, management believes any adverse outcome will not be material to CSX's results of operations or financial position, although it could be material to results of operations in a particular quarterly accounting period. 18 ENVIRONMENTAL MANAGEMENT CSX generates and transports hazardous and nonhazardous waste in its current and former operations, and is subject to federal, state and local environmental laws and regulations. The company has identified approximately 250 sites at which it is or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. Approximately 120 of these sites are or may be subject to remedial action under the federal Superfund statute or similar state statutes. Certain federal legislation imposes joint and several liability for the remediation of identified sites; consequently, CSX's ultimate environmental liability may include costs relating to other parties, in addition to costs relating to its own activities at each site. A liability of $99 million has been accrued for future costs at all sites where the company's obligation is probable and where such costs can be reasonably estimated; however, the ultimate cost could be higher or lower than the amounts currently provided. The liability includes future costs for remediation and restoration of sites, as well as for ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates were based on information available for each site, financial viability of other potentially responsible parties (PRPs), and existing technology, laws and regulations. CSX believes that it has made adequate provision for its ultimate share of costs at sites subject to joint and several liability. However, the ultimate liability for remediation is difficult to determine with certainty because of the number of PRPs involved, site-specific cost-sharing arrangements with other PRPs, the degree of contamination by various wastes, the scarcity and quality of data related to many of the sites, and/or the speculative nature of remediation costs. Total expenditures associated with protecting the environment and remedial environmental cleanup and monitoring efforts amounted to $36 million in 1997. This compares with $44 million in 1996 and $43 million in 1995. During 1998, the company expects to incur remedial environmental expenditures in the range of $40 million to $50 million. The majority of the year-end 1997 environmental liability is expected to be paid out over the next five to seven years, funded by cash generated from operations. Future environmental obligations are not expected to have a material impact on the results of operations or financial position of the company. SAFETY REVIEW On Oct. 16, 1997, the Federal Railroad Administration (FRA) issued a report on a joint review of safety on the CSXT rail system. The review was undertaken as a cooperative effort with CSXT and rail labor, and was conducted between July and September 1997. CSXT and its labor representatives, in cooperation with the FRA, are actively addressing the issues cited in the report and have already initiated numerous actions to ensure that all issues are fully resolved. CSXT has improved its safety record dramatically over the past decade and, in recent years, has been among the safest Class I freight railroads in the nation. The cooperative effort with rail labor and the FRA reaffirms the commitment to safety by all parties involved and helps ensure that safety will remain the top priority as CSXT plans the integration of Conrail lines into its system. LABOR Discussions with labor representatives in connection with the Conrail acquisition are underway. In January 1998, the United Transportation Union, which represents approximately a third of CSXT's unionized workforce, announced its support for the CSX/Norfolk Southern joint acquisition of Conrail. Under CSXT's latest national agreement with the UTU and the Brotherhood of Locomotive Engineers, study commissions were established to address key issues such as basis of pay, quality of work life and productivity improvements through work rule modifications. These commissions are meeting regularly and exploring projects that could lead to reaching consensus or creating a set of recommendations covering these important matters. At the request of the parties, the National Mediation Board is facilitating the discussions. 19 YEAR 2000 PLANNING AT CSX CSX has determined it will need to modify or replace portions of its software so its computer systems will function properly with respect to dates in the year 2000 and beyond. The company also has initiated discussions with its significant suppliers, large customers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with CSX systems or otherwise impact the company's operations. The company is assessing the extent to which its operations are vulnerable should those organizations fail to remediate properly their computer systems. The company's comprehensive Year 2000 initiative is centrally managed by CSX staff, utilizing outside consultants as necessary. The team's activities are designed to ensure that there is no adverse effect on CSX core business operations and that transactions with customers, suppliers, and financial institutions are fully supported. The company is well under way with these efforts, which are scheduled to be completed in mid 1999. While the company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which CSX systems and operations rely will be converted on a timely basis and will not have a material effect on the company. The cost of the Year 2000 initiatives is not expected to be material to the company's results of operations or financial position. [PHOTO] [PHOTO CAPTION] Already a leader in technology, CSX has established a large Year 2000 team to prepare for the technology challenges of the new millennium. FORWARD-LOOKING STATEMENTS Estimates and forecasts in the Analysis of Operations are based on many estimates and assumptions about complex economic and operating factors with respect to industry performance, general business and economic conditions and other matters that cannot be predicted accurately and that are subject to contingencies over which the company has no control. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the company to differ materially from any future results, performance or achievements expressed or implied by such statements. Certain of those risks, uncertainties and other important factors that could cause actual results to differ materially include: future economic conditions in the markets in which CSX and Conrail operate; financial market conditions; inflation rates; changing competition; changes in the economic regulatory climate in the U.S. railroad industry; the ability to eliminate duplicative administrative functions; and adverse changes in applicable laws, regulations or rules governing environmental, tax or accounting matters. These forward-looking statements speak only as of the date of this filing. CSX disclaims any obligation or undertaking to disseminate any updates or revisions to any such statement to reflect changes in CSX's expectations or any change in events, conditions or circumstances on which any such statements are based. 20 RAIL RESULTS CSX Transportation Inc. (CSXT) turned in another strong performance in 1997. Operating income was a record $1.23 billion, a 9% increase over 1996 and 16% over 1995, excluding 1995's restructuring charge. The 1997 results were primarily driven by strength in merchandise traffic, as well as continued emphasis on cost reduction. Rail Operating Revenue (Millions of Dollars) [GRAPH] '93 '94 '95 '96 '97 $4,380 $4,625 $4,819 $4,909 $4,989 Gains in carloads for most merchandise commodities allowed CSXT to generate operating revenue of $4.99 billion, an increase of 2% over 1996 and more than 3% over 1995. CSXT enjoyed growth in practically all merchandise commodity groups during 1997. Total merchandise traffic increased 4% over 1996, to 2.97 million carloads and 3% over 1995 levels. This growth was largely attributed to targeted marketing efforts and stronger general demand. Demand for automobiles and light trucks remained strong in 1997, resulting in a 5% increase in carloads and a 4% increase in revenue over 1996. Compared with 1995 results, CSXT's automotive business experienced an increase of 8% in both carloads and revenue in 1997. Chemical traffic benefited from steady demand for plastics as well as the success of the railroad's efforts to target truck traffic. The railroad hauled 435,000 carloads of chemicals, an increase of 6% over 1996 and 7% over 1995. Corresponding revenues were $747 million in 1997, $721 million in 1996 and $700 million in 1995. [PHOTO] [PHOTO CAPTION] Service reliability improvements and customer-focused initiatives combined to produce growth in practically all commodity groups in 1997. Shipments of coal were level with 1996 at 1.71 million carloads, compared with 1.68 million carloads in 1995. Coal revenue totaled $1.56 billion in 1997, vs. $1.58 billion in 1996 and $1.52 billion in 1995. The 1997 results were adversely affected by mild temperatures across the eastern United States during the year, as well as weak demand for U.S. export coal due to the strong dollar. Cost control remained a priority. Rail operating expense was $3.76 billion, vs. $3.78 billion in 1996 and $3.76 billion in 1995, excluding the restructuring charge. The company achieved record operating ratio of 75.4% in 1997, compared with 77% in 1996 and 77.9% in 1995, excluding the restructuring charge. RAIL ASSETS Owned or leased units as of Dec. 26, 1997 - -------------------------------------------- Freight Cars Box Cars 15,131 Open-Top Hoppers 24,144 Covered Hoppers 18,356 Gondolas 25,279 Other Cars 14,568 - -------------------------------------------- Total 97,478 - -------------------------------------------- Locomotives 2,781 Track Route Miles 18,285 Track Miles 30,941 - -------------------------------------------- 21 Rail Traffic by Commodity Carloads Revenue (Thousands) (Millions of Dollars) --------------------- --------------------------- 1997 1996 1995 1997 1996 1995 --------------------- --------------------------- Automobiles 387 367 357 $ 543 $ 520 $ 503 Chemicals 435 409 406 747 721 700 Minerals 445 430 414 394 381 375 Food & Consumer 149 134 145 163 148 168 Agricultural Products 269 261 286 347 343 344 Metals 316 277 301 314 290 291 Forest Products 471 466 479 499 499 488 Phosphates & Fertilizer 506 511 511 292 279 282 Coal 1,714 1,711 1,684 1,560 1,584 1,530 --------------------- --------------------------- Total 4,692 4,566 4,583 4,859 4,765 4,681 --------------------- Other Revenue 130 144 138 --------------------------- Total Operating Revenue $4,989 $4,909 $4,819 --------------------------- Lower operating expense was, to a large degree, achieved through the efforts of the railroad's Performance Improvement Teams (PITs), which removed approximately $115 million in costs through reductions of overtime and absenteeism, foreign car-hire days and maintenance costs. Cost reduction was furthered by the introduction of a new rail car distribution optimization system, which in its early stages yielded significant improvements in car utilization. Customer service continued to improve in 1997 through an Operational Excellence initiative, begun in the first quarter of 1996 and implemented throughout CSXT's 54 terminals during 1997. This process emphasizes continuous improvement in service to customers and more precise operations within and among terminals. The initiative is expected to achieve higher service levels at lower cost, providing a foundation for successful competition as CSXT integrates its portion of Conrail. Improved asset utilization continues to enhance CSXT's ability to control capital expenditures. Capital expenditures in 1997 were $712 million, compared with $764 million and $765 million in 1996 and 1995, respectively. Of the 1997 expenditures, $100 million was for projects related to the integration of Conrail. The most significant spending on Conrail-related projects was for upgrading the B&O lines between Chicago and Cleveland. When completed later in 1998 and linked with Conrail's route from Cleveland to New York, this line will allow for high-speed, high-density freight traffic between Chicago and New York. CSXT's 1997 capital spending for its current rail system was mainly for track, freight cars, locomotives, signals and bridges. The railroad expects continued earnings growth in 1998. The company anticipates modest volume and revenue increases, as well as cost reductions similar to those achieved in 1997. 1998 will be a year of intense planning for the integration of Conrail. People at all levels of the company are involved in this effort in order to ensure a smooth transition. That concentrated planning, along with CSXT's continued emphasis on performance improvement and service reliability, should position the railroad to increase revenue and profitability in truck-competitive markets. Rail Operating Expense (Millions of Dollars) [GRAPH] '93 '94 '95* '96 '97 $3,634 $3,696 $3,951 $3,782 $3,760 * Restructuring charge in 1995 was $196 million. 22 CONTAINER-SHIPPING RESULTS Continued intense rate competition, due to over- capacity, dominated the container-shipping industry in 1997. In the face of this challenging environment, Sea-Land Service was able to mitigate partially revenue losses through higher volumes. Additionally, continued cost cutting helped Sea-Land achieve a respectable level of profitability while many other carriers were faltering. Container-shipping Operating Revenue (Millions of Dollars) [GRAPH] '93 '94 '95 '96 '97 $3,246 $3,492 $4,008 $4,051 $3,991 Sea-Land generated $278 million in operating income in 1997, vs. $318 million in 1996. In 1995, Sea-Land's operating income was $238 million, excluding a restructuring charge. Volume in 1997 increased more than 7% to 1.65 million loads from 1.54 million loads in 1996. This increase was driven by continued global trade growth and market-share gains in virtually all trade lanes. In 1995, volume totaled 1.44 million loads. Due to lower rates, operating revenue decreased to $3.99 billion vs. $4.05 billion in 1996 and $4.01 billion in 1995. In 1997, the average revenue per container fell 8% due to over-capacity in the major trade lanes. Sea-Land's operating expense declined by $20 million from 1996, to $3.71 billion, despite higher volumes. In 1995, operating expense totaled $3.77 billion, excluding that year's restructuring charge. The company continues to improve its per-unit cost structure through its ongoing emphasis on cutting costs and improving productivity. In 1997, Sea-Land accomplished major cost reductions in the areas of inland transportation, procurement, network management and equipment management. Borrowing from the railroad's Performance Improvement Team (PIT) process, Sea-Land managed to remove $217 million from its operating expense structure. The company has set aggressive targets for 1998 to achieve similar results. [PHOTO] [PHOTO CAPTION] Emphasis on cost control and productivity helped Sea-Land slash millions from its operating cost structure while handling greater volumes, thus maintaining profitability despite intense rate competition. Similarly aggresive targets are on track for 1998. Container-shipping Load Volume (Thousands) [GRAPH] '93 '94 '95 '96 '97 1,180 1,288 1,442 1,541 1,653 Implementation of the global alliance with Maersk continued in 1997. This alliance gives Sea-Land a substantial advantage over its competitors, providing a global network with excellent frequency and scope of service. In addition to the integrated vessel network, the alliance initiated a number of terminal, equipment and information technology rationalization efforts, which will be key to further cost reduction. These efforts included facility rationalization in Baltimore, Houston and Kobe, Japan; joint central dispatch pilot programs; chassis rationalization in North America; and coordination in the areas of procurement and electronic data interchange (EDI). The financial benefits from the alliance in 1997 were approximately $78 million. Sea-Land is on target to exceed this level of benefits in 1998. 23 [PHOTO] In 1997, capital expenditures totaled $251 million, as the company completed its fleet enhancement program and invested in information technology and rolling stock. This amount compares with $307 million in 1996 and $269 million in 1995. CONTAINER-SHIPPING ASSETS Owned or leased units as of Dec. 26, 1997 - -------------------------------------------- Containers 40- and 20-foot Dry Vans 182,514 45-foot Dry Vans 14,147 Refrigerated Vans 20,457 Other Specialized Equipment 2,972 - -------------------------------------------- Total 220,090 - -------------------------------------------- Chassis 67,454 Container Ships 98 Terminals Exclusive-Use 14 Preferential Berthing Rights 14 - -------------------------------------------- In 1998 trade growth is expected to continue, albeit at a slightly slower pace than in recent years. The effect of the current Asian economic difficulties potentially could slow the double-digit growth rates of the early 1990s to more moderate levels. Ongoing rate pressures are causing realignment and consolidation in the container-shipping industry. With the exception of the Sea-Land/Maersk alliance, every major carrier alliance experienced dramatic structural change during 1997. This trend is expected to continue, causing further customer uncertainty regarding competitive offerings. Sea-Land's stability is proving to be a reassuring advantage to customers. As a stable, global carrier with costs under control, Sea-Land is well-positioned to compete effectively in 1998. 24 BARGE RESULTS Severe weather and unfavorable operating conditions in the first half, combined with rate pressures later in the year, significantly affected American Commercial Lines' (ACL's) 1997 results. The barge company reported operating income of $69 million, vs. $112 million in 1996 and $106 million in 1995. The 1996 and 1997 results reflect the acquisition of Conti-Carriers and Terminals Inc. in January 1996. Total operating revenue for 1997 was $618 million, a decrease of 1% from 1996, and a 12% increase from 1995's revenue of $554 million. Operating expense in 1997 totaled $549 million, vs. $510 million in 1996 and $448 million in 1995. The increase in expense was primarily due to weather-induced adverse operating conditions, expansion start-up expense in Argentina and increased production at the company's barge-building subsidiary, Jeffboat. The year started with ice problems on the Ohio and Mid-Mississippi rivers, followed by major flooding on the Ohio and Mississippi Rivers. These adverse operating conditions forced the company to operate smaller tows at lower speeds, resulting in lower productivity and corresponding lost volume. Additionally, operating boats and barges in unfavorable river conditions led to higher maintenance expense. BARGE ASSETS Owned or leased units as of Dec. 26, 1997 - -------------------------------------------- Towboats 135 Barges Covered/Open-Top Hoppers 3,569 Tankers 249 - -------------------------------------------- Total 3,818 - -------------------------------------------- Marine Services River Terminals 11 Fleet Operations 16 Shipyards 2 - -------------------------------------------- In 1997 rates were negatively affected by lower U.S. grain exports due to increased grain production by foreign competitors. Reduced exports, combined with a net increase in barge industry capacity, created a supply/demand imbalance, leading to lower rates for grain and other dry commodities. Barge Operating Revenue (Millions of Dollars) [GRAPH] '93 '94 '95 '96 '97 $417 $449 $554 $622 $618 Transportation demand for non-grain commodities, such as steel and raw materials for steel minimills, was steady, while demand for liquid cargo movements remained robust, leading to a $4 million increase in revenue for this sector. Coal tonnage was up slightly from 1996, but revenue was flat due to rate pressures. International growth continued as the Argentina-based business (ACBL Hidrovias, S.A.) expanded, though earnings lagged due to start-up costs. ACBL Hidrovias is well-positioned to profit from strong growth in 1998. ACL continued its focus on safety in 1997, with a 33% improvement in its incident rate. ACBL, the company's domestic barge subsidiary, is the safest barge line in the United States. ACL's South American operations adopted ACBL's safety practices, and ACBL de Venezuela completed the year injury free. Capital additions at ACL, which included additions to domestic marine equipment and expansion in South America, totaled $52 million in 1997. This compares with $91 million in 1996 and $33 million in 1995. ACL anticipates more favorable operating results in 1998. Steady demand is expected, but rate pressures will likely persist as barge supply continues to exceed demand in the short term. Corn production is expected to be among the highest in U.S. history; and record-level soybean exports are projected, indicating strong demand. Demand for the transportation of liquid commodities should remain strong, while demand for transportation of coal, steel and other commodities is expected to remain steady. 25 INTERMODAL RESULTS CSX Intermodal's (CSXI's) earnings in 1997 rose to attractive levels due to significant cost reductions generated by the unit's network redesign, as well as modest tightening of truck capacity. Intermodal Operating Revenue (Millions of Dollars) [GRAPH] '93 '94 '95 '96 '97 $599 $684 $707 $660 $669 Operating income totaled $46 million in 1997, up 31% from 1996. Revenue increased $9 million, to $669 million, while volume increased 5%, to 1.03 million trailers and containers. In 1995, operating income was $30 million on revenue of $707 million. CSXI's network redesign, implemented in the fourth quarter of 1996, resulted in significant productivity gains. The company expanded train capacity in markets with the greatest growth and profit potential. Service reliability improved significantly as a result of the network redesign and enhanced coordination between CSXI and CSXT. During the year, CSXI's overall performance was adversely affected by service problems on the western section of its transcontinental network. International volume rose 7% in 1997, with revenue up 10% over 1996. While domestic volume increased 4%, revenue decreased 1% due to rate pressure and traffic mix. Productivity initiatives related to equipment management and terminal-trucking operations reduced operating costs by $8 million. INTERMODAL ASSETS Owned or leased units as of Dec. 26, 1997 - --------------------------------------------- Equipment Domestic Containers 5,322 Rail Trailers 5,119 Facilities CSX Intermodal Terminals 33 Motor Carrier Operations Terminals 23 - --------------------------------------------- Capital expenditures totaled $32 million in 1997, $19 million of which related to preparation for the Conrail integration, vs. $24 million in 1996 and $57 million in 1995. During 1997, CSXI began expansion of its terminal facilities in Atlanta, New York/New Jersey, and at its Chicago gateway. The company also expanded its domestic container fleet by more than 30%. In 1998, CSXI will focus on expanding its business in key lanes and developing new markets to enhance the value of the CSXT core franchise. At the same time, the company will be preparing for the integration of Conrail routes. CSXI anticipates growth patterns in 1998 similar to those achieved in 1997. The unit's capital plan for 1998 includes a significant investment for the continuing expansion of terminal facilities in key markets in preparation for the Conrail integration. [PHOTO] [PHOTO CAPTION] Trailers loaded for shipment in Jacksonville now arrive in the Northeast faster and more reliably due to CSXI's service re- design, undertaken in conjunction with CSXT. 26 CONTRACT LOGISTICS RESULTS Customized Transportation Inc. (CTI) continued its rapid growth in revenue and operating income in 1997. Revenue rose to $389 million, 23% above 1996 and 62% above 1995. Operating income increased to $24 million, 40% above 1996 and 91% above 1995. Contract Logistics Operating Revenue (Millions of Dollars) [GRAPH] '93 '94 '95 '96 '97 $145 $182 $240 $316 $389 Much of CTI's 1997 results were attributable to its success in providing logistics management services to the automotive, tire, machinery, electronics, consumer durable, and chemical industries. More than 65 million transactions were completed in 1997 with an error-free rate of 99.9858%. This commitment to quality earned nine additional ISO 9002 certifications during the year. In addition, CTI continued to expand overseas, with the management of contract operations in South America and Europe. CTI expects to continue its rapid growth in 1998. [PHOTO] [PHOTO CAPTION] CTI is building upon its U.S. automotive base while expanding into other industries and international markets. CONSOLIDATED OUTLOOK Though uncertainty about the direction of Asian economies makes economic forecasting more difficult than usual, CSX expects modest growth in the U.S. economy and continued expansion of global trade during 1998. We expect each of our transportation units to improve upon its 1997 financial performance in 1998. The railroad should continue to improve its operating ratio through stringent cost control and modest revenue growth. For our waterborne businesses, we expect improving supply-demand fundamentals to result in a more stable rate environment and improved profitability. Our intermodal and logistics units should continue their recent trend of strong earnings growth. Costs associated with the Conrail transaction and integration will affect 1998 consolidated results, as CSX makes investments in capital improvements and information technology to prepare for the Conrail integration. We expect regulatory approval in mid-1998 and are determined to execute a smooth integration of the Conrail assets. The steps we are taking will strengthen CSX's position by expanding our market reach. 27 FINANCIAL INFORMATION CONTENTS 29 Consolidated Statement of Earnings 30 Consolidated Statement of Cash Flows 31 Consolidated Statement of Financial Position 32 Consolidated Statement of Changes in Shareholders' Equity 33 Notes to Consolidated Financial Statements 51 Report of Ernst & Young LLP, Independent Auditors 28 Consolidated Statement of Earnings (Millions of Dollars, Except Per Share Amounts)
Fiscal Years Ended Dec. 26, Dec. 27, Dec. 29, 1997 1996 1995 ---------------------------------- OPERATING INCOME Operating Revenue $10,621 $10,536 $10,304 Operating Expense 9,038 9,014 8,921 Restructuring Charge -- -- 257 ---------------------------------- Total Operating Expense 9,038 9,014 9,178 ---------------------------------- Operating Income 1,583 1,522 1,126 ---------------------------------- OTHER INCOME AND EXPENSE Other Income 51 43 118 Interest Expense 451 249 270 ---------------------------------- EARNINGS Earnings Before Income Taxes 1,183 1,316 974 Income Tax Expense 384 461 356 ---------------------------------- Net Earnings $ 799 $ 855 $ 618 ---------------------------------- PER COMMON SHARE Earnings Per Share $ 3.67 $ 4.00 $ 2.94 Earnings Per Share, Assuming Dilution $ 3.62 $ 3.96 $ 2.91 Average Common Shares Outstanding (Thousands) 217,796 213,633 210,270 Average Common Shares Outstanding, Assuming Dilution (Thousands) 220,792 216,205 212,329 Cash Dividends Paid Per Common Share $ 1.08 $ 1.04 $ .92 ----------------------------------
See accompanying Notes to Consolidated Financial Statements. 29 Consolidated Statement of Cash Flows (Millions of Dollars)
Fiscal Years Ended Dec. 26, Dec. 27, Dec. 29, 1997 1996 1995 ---------------------------------- OPERATING ACTIVITIES Net Earnings $ 799 $ 855 $ 618 Adjustments to Reconcile Net Earnings to Net Cash Provided Depreciation and Amortization 688 620 600 Deferred Income Taxes 190 166 (26) Restructuring Charge Provision -- -- 257 Productivity/Restructuring Charge Payments (51) (88) (155) Equity in Conrail Earnings and Other Operating Activities (121) 12 10 Changes in Operating Assets and Liabilities Accounts Receivable (99) (67) (82) Other Current Assets (2) (65) (22) Accounts Payable 39 84 170 Other Current Liabilities 115 (77) 197 ---------------------------------- Net Cash Provided by Operating Activities 1,558 1,440 1,567 ---------------------------------- INVESTING ACTIVITIES Property Additions (1,125) (1,223) (1,156) Proceeds from Property Dispositions 51 84 97 Investment in Conrail (2,163) (1,965) -- Short-Term Investments-- Net (119) 21 (65) Purchases of Long-Term Marketable Securities (60) (45) (114) Proceeds from Sales of Long-Term Marketable Securities 45 137 97 Other Investing Activities 23 4 87 ---------------------------------- Net Cash Used by Investing Activities (3,348) (2,987) (1,054) ---------------------------------- FINANCING ACTIVITIES Short-Term Debt-- Net (509) 187 (53) Long-Term Debt Issued 2,530 2,118 121 Long-Term Debt Repaid (98) (486) (343) Cash Dividends Paid (235) (223) (194) Other Financing Activities (15) (1) 11 ---------------------------------- Net Cash Provided (Used) by Financing Activities 1,673 1,595 (458) ---------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (117) 48 55 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and Cash Equivalents at Beginning of Year 368 320 265 ---------------------------------- Cash and Cash Equivalents at End of Year 251 368 320 Short-Term Investments at End of Year 439 314 340 ---------------------------------- Cash, Cash Equivalents and Short-Term Investments at End of Year $ 690 $ 682 $ 660 ---------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest Paid-- Net of Amounts Capitalized $ 423 $ 265 $ 275 Income Taxes Paid $ 141 $ 381 $ 253 ----------------------------------
See accompanying Notes to Consolidated Financial Statements. 30 Consolidated Statement of Financial Position (Millions of Dollars)
Dec. 26, Dec. 27, 1997 1996 --------------------- ASSETS Current Assets Cash, Cash Equivalents and Short-Term Investments $ 690 $ 682 Accounts Receivable 987 894 Materials and Supplies 227 229 Deferred Income Taxes 134 139 Other Current Assets 137 128 --------------------- Total Current Assets 2,175 2,072 Properties-- Net 12,406 11,906 Investment in Conrail 4,244 1,965 Affiliates and Other Companies 394 345 Other Long-Term Assets 738 677 --------------------- Total Assets $19,957 $16,965 --------------------- LIABILITIES Current Liabilities Accounts Payable $ 1,179 $ 1,189 Labor and Fringe Benefits Payable 477 499 Casualty, Environmental and Other Reserves 298 306 Current Maturities of Long-Term Debt 229 101 Short-Term Debt 126 335 Other Current Liabilities 398 327 --------------------- Total Current Liabilities 2,707 2,757 Casualty, Environmental and Other Reserves 711 715 Long-Term Debt 6,416 4,331 Deferred Income Taxes 2,939 2,720 Other Long-Term Liabilities 1,418 1,447 --------------------- Total Liabilities 14,191 11,970 --------------------- SHAREHOLDERS' EQUITY Common Stock, $1 Par Value 218 217 Other Capital 1,552 1,433 Retained Earnings 4,016 3,452 Minimum Pension Liability (20) (107) --------------------- Total Shareholders' Equity 5,766 4,995 --------------------- Total Liabilities and Shareholders' Equity $19,957 $16,965 ---------------------
See accompanying Notes to Consolidated Financial Statements. 31 Consolidated Statement of Changes in Shareholders' Equity (Millions of Dollars) Common Shares Minimum Outstanding Common Other Retained Pension (Thousands) Stock Capital Earnings Liability Total - ---------------------------------------------------------------------------------------------- Balance Dec. 30, 1994 104,722 $105 $1,368 $2,391 $(133) $3,731 Net Earnings -- -- -- 618 -- 618 Dividends - Common -- -- -- (194) -- (194) Common Stock - Stock Purchase and Loan Plan Stock Canceled (155) (1) (11) -- -- (12) Purchase Loans-- Net -- -- 12 -- -- 12 Other Stock Issued -- Net 716 1 55 -- -- 56 Minimum Pension Liability -- -- -- -- 24 24 2-for-1 Stock Split 105,212 105 (105) -- -- -- Other -- Net -- -- -- 7 -- 7 - ---------------------------------------------------------------------------------------------- Balance Dec. 29, 1995 210,495 210 1,319 2,822 (109) 4,242 Net Earnings -- -- -- 855 -- 855 Dividends-- Common -- -- -- (223) -- (223) Common Stock -- Stock Purchase and Loan Plan Stock Issued 7,652 8 356 -- -- 364 Stock Canceled and Exchanged (2,786) (3) (67) -- -- (70) Purchase Loans-- Net -- -- (240) -- -- (240) Other Stock Issued-- Net 1,524 2 65 -- -- 67 Minimum Pension Liability -- -- -- -- 2 2 Other-- Net -- -- -- (2) -- (2) - ---------------------------------------------------------------------------------------------- Balance Dec. 27, 1996 216,885 217 1,433 3,452 (107) 4,995 Net Earnings -- -- -- 799 -- 799 Dividends - Common -- -- -- (235) -- (235) Common Stock - Stock Purchase and Loan Plan Stock Issued 138 -- 8 -- -- 8 Stock Canceled and Exchanged (379) -- (11) -- -- (11) Purchase Loans-- Net -- -- 26 -- -- 26 Other Stock Issued-- Net 1,666 1 96 -- -- 97 Minimum Pension Liability -- -- -- -- 87 87 ---------------------------------------------------------------- Balance Dec. 26, 1997 218,310 $218 $1,552 $4,016 $ (20) $5,766 - ----------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 32 Notes to Consolidated Financial Statements NOTE 1. SIGNIFICANT ACCOUNTING POLICIES. Nature of Operations CSX Corporation (CSX) is a global freight transportation company with principal business units providing rail, container-shipping, intermodal, barging and contract logistics services. Rail transportation services are provided principally throughout the eastern United States and account for nearly half of the company's operating revenue, with coal, bulk products and manufactured products each contributing a relatively equal share of rail revenue. Coal shipments primarily supply domestic utility and export markets. Container-shipping services are provided in the United States and more than 80 countries and territories throughout the world and account for more than one-third of the company's operating revenue. Intermodal, barging and contract logistics services are provided principally within the United States and together account for the company's remaining operating revenue. Principles of Consolidation The Consolidated Financial Statements include CSX and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in companies that are not majority-owned are carried at either cost or equity, depending on the extent of control. Fiscal Year The company's fiscal reporting period ends on the last Friday in December. The financial statements presented are for the fiscal periods ended Dec. 26, 1997, Dec. 27, 1996, and Dec. 29, 1995. Each fiscal year consists of four 13-week quarters. Common Stock Split The company distributed a 2-for-1 common stock split to shareholders in December 1995. In the accompanying Consolidated Statement of Earnings and Notes to Consolidated Financial Statements, all references to shares of common stock and per share amounts for periods prior to the stock split have been restated. Cash, Cash Equivalents and Short-Term Investments Cash in excess of current operating requirements is invested in various short-term instruments carried at cost that approximates market value. Those short-term investments having a maturity of three months or less at the date of acquisition are classified as cash equivalents. Cash and cash equivalents are net of outstanding checks that are funded daily from cash receipts and maturing short-term investments. Accounts Receivable The company has sold, directly and through Trade Receivables Participation Certificates (Certificates), ownership interests in designated pools of accounts receivable originated by CSX Transportation Inc. (CSXT), its rail unit. At Dec. 26, 1997, the company had $200 million of Certificates outstanding, at 5.05%, due September 1998. The Certificates represent undivided interests in a master trust holding an ownership interest in a revolving pool of rail freight accounts receivable. The Certificates were collateralized by $249 million of accounts receivable held in the master trust. The company has the ability to issue $50 million in additional Certificates through September 1998 at prevailing market terms. The company also has a revolving agreement with a financial institution to sell with recourse on a monthly basis an undivided percentage ownership interest in designated pools of freight and other accounts receivable. The agreement provides for the sale of up to $200 million in accounts receivable and expires in October 1998. The company has retained the responsibility for servicing and collecting accounts receivable held in trust or sold. At Dec. 26, 1997, and Dec. 27, 1996, accounts receivable have been reduced by $372 million, representing Certificates and accounts receivable sold. The net costs associated with sales of Certificates and receivables were $29 million, $30 million and $32 million in 1997, 1996 and 1995, respectively. The company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable, including receivables collateralizing the Certificates and receivables sold. Allowances for doubtful accounts of $86 million and $97 million have been applied as a reduction of accounts receivable at Dec. 26, 1997, and Dec. 27, 1996, respectively. Materials and Supplies Materials and supplies consist primarily of fuel and items for maintenance of property and equipment, and are carried at average cost. Properties Main line track on the rail system is depreciated on a group basis using a unit-of-property method. All other property and equipment is depreciated on a straight-line basis over estimated useful lives of three to 50 years. 33 Regulations enforced by the Surface Transportation Board (STB) of the U.S. Department of Transportation require periodic formal studies of ultimate service lives for all railroad assets. Resulting service life estimates are subject to review and approval by the STB. Significant premature retirements for all properties, which would include major casualty losses, abandonments, sales and obsolescence of assets, are recorded as gains or losses at the time of their occurrence. Expenditures that significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed. All properties are stated at cost, less an allowance for accumulated depreciation. Properties and other long-lived assets are reviewed for impairment whenever events or business conditions indicate the carrying amount of such assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets. Where impairment is indicated, the assets are evaluated for sale or other disposition, and their carrying amount is reduced to fair value based on discounted net cash flows or other estimates of fair value. Revenue Recognition Transportation revenue is recognized proportionately as shipments move from origin to destination. Environmental Costs Environmental costs relating to current operations are expensed or capitalized as appropriate. Expenditures relating to remediating an existing condition caused by past operations, and that do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when CSX's responsibility for environmental remedial efforts is deemed probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the company's commitment to a formal plan of action. Derivative Financial Instruments Derivative financial instruments may be used from time to time by the company in the management of its interest, foreign currency and commodity exposures, and are accounted for on an accrual basis. Income and expense are recorded in the same category as that of the underlying asset or liability. Gains and losses related to hedges of existing assets or liabilities are deferred and recognized over the expected remaining life of the related asset or liability. Gains and losses related to hedges of anticipated transactions also are deferred and recognized in income in the same period as the hedged transaction. There were no significant derivative financial instruments outstanding at Dec. 26, 1997. Stock-Based Compensation The company records expense for stock-based compensation in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees" and related Interpretations. Disclosures required with respect to the alternative fair value measurement and recognition methods prescribed by Financial Accounting Standards Board (FASB) Statement No. 123 "Accounting for Stock-Based Compensation" are presented in Note 12 -- Stock Plans. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates in reporting the amounts of certain revenues and expenses for each fiscal year and certain assets and liabilities at the end of each fiscal year. Actual results may differ from those estimates. Prior-Year Data Certain prior-year data have been reclassified to conform to the 1997 presentation. Accounting Pronouncements The FASB has issued Statement No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information," both of which the company will adopt in 1998. Statement No. 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. With the exception of net earnings, such changes are generally not significant to the company; and the adoption of Statement No. 130, including the required comparative presentation for prior periods, is not expected to have a material impact on its financial statements. Statement No. 131 requires that a publicly held company report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. The Statement also requires additional disclosures with respect to products and services, geographic areas of operation and major customers. The company operates diversified freight transportation businesses and has historically provided detailed operating segment and other information in its communications to shareholders; however, such information has not typically been presented in the consolidated financial statements and related notes. 34 NOTE 2. JOINT ACQUISITION OF CONRAIL. During the second quarter of 1997, CSX and Norfolk Southern Corporation (Norfolk Southern) completed the acquisition of Conrail Inc. (Conrail) through a jointly owned entity pursuant to an agreement dated April 8, 1997. The joint acquisition was the outcome of negotiations that followed separate, competing initiatives by CSX and Norfolk Southern to acquire Conrail. These initiatives began in October 1996 when CSX and Conrail entered into an agreement to combine in a strategic merger transaction in which Conrail shareholders would receive cash and CSX common stock for their shares. Norfolk Southern challenged the CSX/Conrail merger agreement and made an all-cash competing offer for Conrail. As a result of these initiatives, CSX and Norfolk Southern completed separate cash tender offers for 19.9% and 9.9%, respectively, of Conrail's outstanding shares in late 1996 and early 1997. Subsequent developments surrounding the efforts of CSX and Norfolk Southern to acquire Conrail led to discussions that produced the joint acquisition agreement. Completion of the Conrail acquisition was achieved through a joint tender offer and subsequent merger in which all outstanding Conrail shares not already owned by the company and Norfolk Southern were acquired for cash, or were converted into the right to receive cash, of $115 per share. Under the agreement, CSX contributed approximately $4.1 billion, in the form of cash and Conrail shares previously acquired, for a 42% investment in Conrail. Norfolk Southern contributed approximately $5.7 billion, also in the form of cash and Conrail shares previously acquired, for a 58% investment in Conrail. The Conrail shares acquired by CSX and Norfolk Southern have been placed in a voting trust pending approval of the transaction by the STB. CSX financed the acquisition of its 42% investment in Conrail by issuing a combination of fixed-rate debentures and commercial paper. In June 1997, CSX and Norfolk Southern completed supplemental agreements governing the legal structure of the transaction and operations of the Conrail rail system subsequent to STB approval. The terms of these agreements, the operating plans of the respective companies, and the benefits expected to result from combining the respective rail systems are incorporated in a joint railroad control application that was filed with the STB on June 23, 1997. The STB is expected to issue a final decision on the application in July 1998. It is anticipated that operational integration of the CSX and Conrail systems will take place upon completion of labor agreements with Conrail's contract workforce, currently expected to be in late 1998. The completion of the joint tender offer and subsequent merger, and the resulting increase in CSX's ownership interest in Conrail from 19.9% to 42%, required a change from the cost method to the equity method of accounting for the investment during the second quarter of 1997. The change in accounting method included adjustments retroactive to the date of CSX's initial investment in Conrail in November 1996. The net amount of these retroactive adjustments applicable to fiscal year 1996 was not material. The company will continue to use the equity method of accounting while the Conrail shares are held in the voting trust. Under this method, the company recognizes income from its proportionate share of Conrail's net income and expense for amortization of its purchase price in excess of its proportionate share of Conrail's net book value. For the fiscal year ended Dec. 26, 1997, equity in Conrail's net income totaled $144 million, and amortization of the excess purchase price totaled $42 million. Summary financial information for Conrail for its fiscal years ended Dec. 31, 1997, 1996 and 1995 is as follows: For the Year Ended Dec. 31, -------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ Income Statement Information: Revenues $3,765 $3,714 $3,686 Income from Operations 322 601 456 Net Income 7 342 264 - ------------------------------------------------------------------------------ As of Dec. 31, -------------------- 1997 1996 - ----------------------------------------------------------------------------- Balance Sheet Information: Current Assets $ 954 $1,117 Property and Equipment and Other Assets 7,530 7,285 Total Assets 8,484 8,402 Current Liabilities 1,208 1,092 Long-Term Debt 1,732 1,876 Total Liabilities 5,319 5,295 Stockholders' Equity 3,165 3,107 - ----------------------------------------------------------------------------- 35 Conrail's operating results for 1997 include certain charges that the acquiring companies are required to record as liabilities established in connection with a purchase business combination under generally accepted accounting principles. These charges reflect obligations for separation-related compensation to certain Conrail executives and include vesting of benefits under certain stock compensation plans and the termination of Conrail's Employee Stock Ownership Plan. The charges, which totaled $363 million on an after-tax basis, were excluded from the net income of Conrail in determining the proportionate share of such income recorded by CSX. Excluding these separation-related charges, Conrail's net income would have been $370 million for the year ended Dec. 31, 1997. Conrail's 1997 operating results also include one-time expenses for other acquisition-related costs and a cumulative income tax adjustment. On an after-tax basis, the acquisition-related expenses totaled $72 million for the year. The adjustment to income tax expense, $22 million, was recorded to increase deferred income taxes as a result of a change in a state tax rate. These expenses were included in the net income of Conrail in determining the proportionate share of such income recorded by CSX. CSX is amortizing the difference between its purchase price for the investment in Conrail and its proportionate share of Conrail's net assets. A substantial portion of the excess purchase price is expected to be allocated to reflect the fair value of Conrail's property and equipment. The provision for amortization of the excess purchase price has been based upon preliminary estimates of the fair values of such property and equipment and estimates of their remaining useful lives, as well as estimates of the fair values of other assets and liabilities of Conrail. The combined effect of equity earnings, excess purchase price amortization, net interest on debt issued to acquire the Conrail investment, and other expenses related to the transaction reduced CSX's net earnings for the fiscal year ended Dec. 26, 1997, by $97 million, 43 cents per share on a diluted basis. The net effect of the investment in Conrail on CSX's net earnings for the fiscal year ended Dec. 27, 1996, was not significant. The company's method of accounting for the investment subsequent to the STB decision and dissolution of the voting trust will depend upon the final terms of the joint ownership arrangement approved by the STB. NOTE 3. 1995 RESTRUCTURING CHARGE. In 1995, the company recorded a $257 million pretax restructuring charge to recognize the estimated costs of specific initiatives at CSXT and at Sea-Land Service Inc. (Sea-Land), its container-shipping unit. The charge reduced 1995 net earnings by $160 million, 76 cents per share. CSXT Initiative CSXT recorded its $196 million portion of the pretax restructuring charge to recognize the costs associated with a contractual agreement with a major telecommunications vendor to replace, manage and technologically enhance its existing private telecommunications network. The initiative resulted in a write-down of assets rendered technologically obsolete and a provision for separation and labor protection payments to affected employees. The agreement, which originally was to expire in May 2005, provided for the vendor to supply and manage new technology to replace CSXT's existing telecommunications system, thereby rendering it commercially obsolete. These assets, comprising CSXT's internal companywide telecommunications network including existing microwave and fiber optic communications systems, have no alternative use and their net realizable value is not significant. As a result of the agreement, the net book value of the assets to be replaced was reduced by $163 million. During 1996, CSXT and the vendor amended the agreement to change the termination date to June 30, 1998, to increase the payments required over the revised service period, and to relieve the vendor's obligations to replace certain technology. CSXT is in the final stages of negotiating a multiyear agreement with a successor telecommunications vendor and expects to have service arrangements with that vendor in place prior to June 30, 1998. Sea-Land Initiatives The restructuring initiatives at Sea-Land represented $61 million of the total charge and included its global integration program and the reflagging of five U.S.-flag vessels to the registry of the Marshall Islands in accordance with approval from the Maritime Administration. Sea-Land's global integration program resulted in the consolidation of worldwide senior management functions, the relocation of the corporate headquarters to Charlotte, N.C., and the integration of information technologies. The vessel reflagging initiative primarily involves crew separations on the five vessels. 36 NOTE 3. 1995 RESTRUCTURING CHARGE (CONTINUED). Summary The 1995 restructuring charge and related activity through Dec. 26, 1997, is as follows:
Separation Lease and and Labor Facility Obsolete Protection Exit Assets Costs Costs Total ------------------------------------------------ Restructuring Charge $163 $80 $14 $257 Amounts Utilized through Dec. 26, 1997 163 31 9 203 ------------------------------------------------ Remaining Reserve as of Dec. 26, 1997 $ -- $49 $ 5 $ 54 ------------------------------------------------
The total provision for separation and labor protection payments relates to approximately 800 affected employees and was based on existing collective bargaining agreements with members of clerical, electrical, and signal crafts and seafarer trades. Through Dec. 26, 1997, approximately 560 employee separations have been finalized. The company expects the remaining affected employees to be impacted within the next four years. NOTE 4. OPERATING EXPENSE. 1997 1996 1995 -------------------------------- Labor and Fringe Benefits $3,226 $3,158 $3,133 Materials, Supplies and Other 2,511 2,509 2,621 Building and Equipment Rent 1,111 1,143 1,134 Inland Transportation 1,003 996 970 Depreciation 620 611 588 Fuel 567 574 473 Miscellaneous -- 23 2 Restructuring Charge -- -- 257 -------------------------------- Total $9,038 $9,014 $9,178 -------------------------------- Selling, General and Administrative Expense Included in Above Items $1,106 $1,210 $1,249 -------------------------------- NOTE 5. OTHER INCOME.
1997 1996 1995 ------------------------------- Interest Income $53 $48 $ 62 Income from Real Estate and Resort Operations(a) 71 62 54 Net Gain (Loss) on Investment Transactions(b) -- (4) 77 Net Costs for Accounts Receivable Sold (29) (30) (32) Minority Interest (41) (42) (32) Income from Investment in Conrail-- Net 34 8 -- Equity Earnings (Losses) of Other Affiliates 6 6 (3) Foreign Currency Gain (Loss) (1) 5 (1) Miscellaneous (42) (10) (7) ------------------------------- Total $51 $43 $118 -------------------------------
(a) Gross revenue from real estate and resort operations was $206 million, $186 million and $178 million in 1997, 1996 and 1995, respectively. (b) In December 1995, the company recognized a net investment gain of $77 million on the issuance of an equity interest in a Sea-Land terminal and related operations in Asia and the write-down of various investments. The The equity interest portion of the transaction resulted in proceeds of $105 million and a pretax gain of $93 million, $61 million after-tax, 29 cents per share. Sea-Land's interest in the terminal operations was reduced from approximately 67% to 57%. 37 NOTE 6. INCOME TAXES. Earnings from domestic and foreign operations and related income tax expense are as follows:
1997 1996 1995 -------------------------------- Earnings Before Income Taxes: - Domestic $ 987 $1,158 $765 - Foreign 196 158 209 -------------------------------- Total Earnings Before Income Taxes $1,183 $1,316 $974 Income Tax Expense (Benefit): Current - Federal $ 143 $ 250 $337 - Foreign 35 30 26 - State 16 15 19 -------------------------------- Total Current 194 295 382 -------------------------------- Deferred- Federal 168 166 (26) - Foreign 1 -- -- - State 21 -- -- -------------------------------- Total Deferred 190 166 (26) -------------------------------- Total Income Tax Expense $ 384 $ 461 $356 --------------------------------
Income tax expense reconciled to the tax computed at statutory rates is as follows:
1997 1996 1995 ------------------------------------------------ Tax at Statutory Rates $414 35% $461 35% $341 35% State Income Taxes 24 2 10 1 12 1 Equity in Conrail Net Income (30) (2) -- -- -- -- Prior Years' Income Taxes (12) (1) (27) (2) -- -- Other Items (12) (1) 17 1 3 1 ------------------------------------------------ Income Tax Expense $384 33% $461 35% $356 37% ------------------------------------------------
The significant components of deferred tax assets and liabilities include:
Dec. 26, Dec. 27, 1997 1996 -------------------- Deferred Tax Assets: Productivity/Restructuring Charges $162 $ 171 Employee Benefit Plans 334 434 Deferred Gains and Related Rents 119 195 Other 370 252 -------------------- Total 985 1,052 -------------------- Deferred Tax Liabilities: Accelerated Depreciation 3,173 3,095 Other 618 538 -------------------- Total 3,791 3,633 -------------------- Net Deferred Tax Liabilities $2,806 $2,581 --------------------
38 NOTE 6. INCOME TAXES (CONTINUED). In addition to the annual provision for deferred income tax expense, the change in the year-end net deferred income tax liability balances included the income tax effect of the changes in the minimum pension liability in 1997 and 1996. The company has not recorded domestic deferred or additional foreign income taxes applicable to undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested. Such earnings amounted to $290 million and $279 million at Dec. 26, 1997, and Dec. 27, 1996, respectively. These amounts may become taxable upon their remittance as dividends or upon the sale or liquidation of these foreign subsidiaries. It is not practicable to determine the amount of net additional income tax that may be payable if such earnings were repatriated. The company files a consolidated federal income tax return, which includes its principal domestic subsidiaries. Examinations of the federal income tax returns of CSX have been completed through 1990. Returns for 1991 through 1993 are currently under examination. Management believes adequate provision has been made for any adjustments that might be assessed. NOTE 7. PROPERTIES.
Dec. 26, 1997 Dec. 27, 1996 - -------------------------------------------------------------------------------------------- Accumulated Accumulated Cost Depreciation Net Cost Depreciation Net - -------------------------------------------------------------------------------------------- Rail: Road $ 9,603 $2,658 $ 6,945 $ 9,308 $2,619 $ 6,689 Equipment 4,400 1,580 2,820 4,220 1,427 2,793 - -------------------------------------------------------------------------------------------- Total Rail 14,003 4,238 9,765 13,528 4,046 9,482 - -------------------------------------------------------------------------------------------- Container-shipping 2,673 1,111 1,562 2,437 1,017 1,420 Other 1,594 515 1,079 1,455 451 1,004 - -------------------------------------------------------------------------------------------- Total $18,270 $5,864 $12,406 $17,420 $5,514 $11,906 - --------------------------------------------------------------------------------------------
NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES. Activity related to casualty, environmental and other reserves is as follows:
Casualty and Environmental Separation Other Reserves(a)(b) Reserves(a) Liabilities(a)(c) Total ---------------------------------------------------------------------- Balance Dec. 30, 1994 $579 $140 $394 $1,113 Charged to Expense and Other Additions 279 22 80 381 Payments and Other Reductions (288) (25) (70) (383) ---------------------------------------------------------------------- Balance Dec. 29, 1995 570 137 404 1,111 Charged to Expense and Other Additions 254 16 -- 270 Payments and Other Reductions (290) (36) (34) (360) ---------------------------------------------------------------------- Balance Dec. 27, 1996 534 117 370 1,021 Charged to Expense and Other Additions 277 12 -- 289 Payments and Other Reductions (249) (30) (22) (301) ---------------------------------------------------------------------- Balance Dec. 26, 1997 $562 $ 99 $348 $1,009 ----------------------------------------------------------------------
(a)Balances include current portions of casualty and other, environmental and separation reserves, respectively, of $245 million, $20 million and $33 million at Dec. 26, 1997; $234 million, $20 million and $52 million at Dec. 27, 1996; and $241 million, $20 million and $37 million at Dec. 29, 1995. (b)Casualty reserves are estimated based upon the first reporting of an accident or personal injury to an employee. Liabilities for accidents are based upon field reports and liabilities for personal injuries are based upon the type and severity of the injury and the use of current trends and historical data. (c)Separation liabilities include $300 million at Dec. 26, 1997, $318 million at Dec. 27, 1996, and $344 million at Dec. 29, 1995, related to productivity charges recorded in 1991 and 1992 to provide for the estimated costs of implementing work-force reductions, improvements in productivity and other cost reductions at the company's major transportation units. The remaining liabilities are expected to be paid out over the next 20 to 25 years. 39 NOTE 9. DEBT AND CREDIT AGREEMENTS. Average Interest Rates at Dec. 26, Dec. 27, Type and Maturity Dates Dec. 26, 1997 1997 1996 ---------------------------------------- Commercial Paper 6% $2,000 $2,300 Notes Payable (1999-2021) 8% 479 498 Debentures (2000-2032) 8% 3,145 650 Equipment Obligations (1998-2011) 7% 784 739 Mortgage Bonds (1998-2003) 3% 75 76 Other Obligations, including Capital Leases (1998-2021) 7% 162 169 ---------------------------------------- Total 7% 6,645 4,432 ---------------- Less Debt Due Within One Year 229 101 -------------------- Total Long-Term Debt $6,416 $4,331 -------------------- To provide financing for a portion of the Conrail acquisition, the company issued $2.5 billion principal amount of fixed rate debentures through a private offering in May 1997. The debentures were issued in multiple tranches with maturities ranging from 2002 to 2032 and interest rates ranging from 6.95% to 8.30%. In October 1997, the company completed an offer to exchange the privately placed debentures for new freely tradeable debentures with substantially identical terms. In November 1996, the company had entered into a $4.8 billion bank credit agreement to provide financing for the Conrail acquisition and meet general working capital needs. Upon issuance of the debentures described above, the agreement was amended and the maximum borrowing amount was reduced to $2.5 billion. Under the agreement, the company may borrow directly from the participating banks or utilize the credit facility to support the issuance of commercial paper. Direct borrowings from the participating banks can be obtained, at the company's option, under a competitive bid process among the banks or under a revolving credit arrangement with interest either at LIBOR plus a margin determined by the company's credit rating or at an alternate base rate, as defined in the agreement. At Dec. 26, 1997, the company had commercial paper borrowings related to the credit facility of $2.126 billion, of which $2 billion was classified as long-term debt based on the company's ability and intention to maintain this debt outstanding for more than one year. At Dec. 27, 1996, the company had commercial paper borrowings related to the credit facility of $2.635 billion, of which $2.3 billion was classified as long-term debt. The company pays annual fees to the participating banks that may range from .06% to .15% of the total commitment, depending upon its credit rating. The credit agreement, which expires in November 2001, also includes certain covenants and restrictions, such as limitations on debt as a percentage of total capitalization and restrictions on the sale or disposition of certain assets. Commercial paper classified as short-term debt was $126 million at Dec. 26, 1997, and $335 million at Dec. 27, 1996. The weighted-average interest rate for the short-term commercial paper outstanding at year-end was 6% for 1997 and 1996. In September 1992, the company filed a shelf registration statement with the Securities and Exchange Commission to provide for the issuance of up to $450 million in senior debt securities, warrants to purchase debt securities or currency warrants. This shelf registration included a combined prospectus covering amounts remaining to be issued as debt securities under a previous shelf registration. As of Dec. 26, 1997, an aggregate of $250 million of debt is available for issuance under the company's shelf registration statement and combined prospectus. Excluding long-term commercial paper, the company has long-term debt maturities for 1998 through 2002 aggregating $229 million, $94 million, $325 million, $63 million and $561 million, respectively. A portion of the company's rail unit properties are pledged as security for various rail-related, long-term debt issues. 40 NOTE 10. COMMON AND PREFERRED STOCK. The company has a single class of common stock, $1 par value, of which 300 million shares are authorized. Each share is entitled to one vote in all matters requiring a vote. In December 1995, shareholders received one additional share of common stock for each share held, pursuant to a 2-for-1 stock split approved by the board of directors. At Dec. 26, 1997, common shares issued and outstanding totaled 218,309,911. The company also has total authorized preferred stock of 25 million shares, of which 250,000 shares of Series A have been reserved for issuance, and 3 million shares of Series B have been reserved for issuance under the Shareholder Rights Plan discussed below. All preferred shares rank senior to common shares both as to dividends and liquidation preference. No preferred shares were outstanding at Dec. 26, 1997. Pursuant to a Shareholder Rights Plan adopted by the board of directors in 1988 and amended in 1990, each outstanding share of common stock also evidences one preferred share purchase right ("right"). Each right entitles shareholders of record to purchase from the company, until the earlier of June 8, 1998, or the redemption of the rights, one one-hundredth of a share of Series B preferred stock at an exercise price of $100, subject to certain adjustments or, under certain circumstances, to obtain additional shares of common stock in exchange for the rights. The rights are not exercisable or transferable apart from the related common shares until the earlier of 10 days following the public announcement that a person or affiliated group has acquired or obtained the right to acquire 20% or more of the company's outstanding common stock; or 10 days following the commencement or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the ownership by a person or group of 20% or more of the outstanding common stock. The board of directors may redeem the rights at a price of one cent per right at any time prior to the acquisition by a person or group of 20% or more of the outstanding common stock. NOTE 11. EARNINGS PER SHARE. The company adopted FASB Statement No. 128 "Earnings per Share" in the fourth quarter of 1997. In accordance with the provisions of this statement, the following table sets forth the computation of earnings per share and earnings per share, assuming dilution. 1997 1996 1995 - -------------------------------------------------------------------------------- Numerator: Net Earnings $799 $855 $618 Denominator (thousands): Denominator for earnings per share - average common shares outstanding 217,796 213,633 210,270 Effect of Potentially Dilutive Securities: Stock Options 2,598 2,192 1,598 Performance Share Awards and other stock awards 398 381 460 ----------------------------- Potentially dilutive common shares 2,996 2,573 2,058 ----------------------------- Denominator for earnings per share, assuming dilution -- average diluted common shares outstanding 220,792 216,206 212,328 - -------------------------------------------------------------------------------- Earnings per share $3.67 $4.00 $2.94 - -------------------------------------------------------------------------------- Earnings per share, assuming dilution $3.62 $3.96 $2.91 - -------------------------------------------------------------------------------- Note 12 provides additional disclosures regarding employee stock options, Performance Share Awards, and other stock awards. Options to purchase 1,955,000 shares of common stock at $57 per share and 1,977,520 shares at $51.44 per share were outstanding during late 1997 and the second half of 1996, respectively, but were not included in the computation of earnings per share, assuming dilution. The exercise price of these options was greater than the average market price of the common shares and, accordingly, their effect is antidilutive to earnings per share. 41 NOTE 12. STOCK PLANS. The company maintains several stock plans designed to encourage ownership of its stock and provide incentives for employees to contribute to its success. Compensation expense for stock-based awards under these plans is determined by the awards' intrinsic value accounted for under the principles of APB Opinion No. 25 and related Interpretations. Compensation expense recognized for stock-based awards was $66 million, $36 million and $50 million in 1997, 1996 and 1995, respectively. Had compensation expense been determined based upon fair values at the date of grant for awards under these plans, consistent with the methods of FASB Statement No. 123, the company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: 1997 1996 1995 ---------------------------- Net Earnings - As Reported $ 799 $ 855 $ 618 - Pro Forma $ 791 $ 832 $ 610 ---------------------------- Earnings Per Share - As Reported $3.67 $4.00 $2.94 - Pro Forma $3.63 $3.90 $2.90 ---------------------------- Earnings Per Share, Assuming Dilution - As Reported $3.62 $3.96 $2.91 - Pro Forma $3.58 $3.85 $2.87 ---------------------------- The pro forma fair value method of accounting was applied only to stock-based awards granted after Dec. 30, 1994. Because all stock-based compensation expense for 1997, 1996 and 1995 was not restated and because stock-based awards granted may vary from year to year, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Stock Purchase and Loan Plan The Stock Purchase and Loan Plan provides for the purchase of common stock and related rights by eligible officers and key employees of the company and entitles them to obtain loans with respect to the shares purchased. The Plan, which originated in 1991, is intended to further the long-term stability and financial success of the company by providing a method for eligible employees to increase significantly their ownership of common stock. Amendments to the Plan were approved by the company's shareholders and implemented in 1996, providing for continuation of the Plan through February 2006, and increasing the common stock reserved for issuance from 4.4 million to 9 million shares. At the inception of the revised Plan in August 1996, participants who entered the original Plan in 1991 or 1992 either withdrew shares from the Plan, applied all or part of their equity in shares purchased in the original Plan as a down payment to acquire additional shares, or extended their participation at existing levels for up to one year. In addition, shares were offered to certain employees who were not previously eligible to participate in the Plan. In connection with the Plan amendments, from Aug. 1, 1996, through Dec. 27, 1996, 72,497 shares were withdrawn from the Plan, 2,630,727 shares were exchanged and canceled, and 7,651,970 new shares were sold to participants at an average market price of $47.52 per share. In consideration for the shares purchased, participants have provided down payments of not less than 5% nor more than 25% of the purchase price in the form of cash, recourse notes or equity earned in the original Plan. The remaining purchase price is in the form of non-recourse loans secured by the shares issued. All non-recourse loans under the Plan are subject to certain adjustments after a vesting period based upon targeted increases in the market price of CSX common stock. At Dec. 26, 1997, certain of the market price thresholds had been met, resulting in forgiveness of interest (net of dividends applied to interest) plus a portion of the principal balances of the notes. 42 NOTE 12. STOCK PLANS (CONTINUED). At Dec. 26, 1997, there were 170 participants in the Plan. Transactions involving the Plan are as follows: Shares Average (000's) Price(a) ---------------------- Outstanding at Dec. 29, 1995 3,423 $18.64 Issued 7,652 $47.52 Exchanged, Canceled or Withdrawn (2,964) $18.73 ---------------------- Outstanding at Dec. 27, 1996 8,111 $46.26 ---------------------- Issued 138 $59.43 Exchanged, Canceled or Withdrawn (581) $22.48 ---------------------- Outstanding at Dec. 26, 1997 7,668 $45.74 ---------------------- (a) Represents average cost to participants, net of cumulative note forgiveness. 1997 1996 1995 - -------------------------------------------------------------------------------- Down Payment (Recourse) Loans Outstanding $ 7 $ 7 $ 4 Purchase (Non-Recourse) Loans Outstanding $270 $296 $ 60 Weighted-Average Interest Rate 6.59% 6.64% 7.75% - -------------------------------------------------------------------------------- The weighted-average fair value benefit to participants for a share issued under the Stock Purchase and Loan Plan was $19.82 in 1997 and $15.65 in 1996. These values were estimated as of the dates of grant using the Black-Scholes option pricing model with the following assumptions for 1997 and 1996, respectively: risk-free interest rates of 6.1% and 6.5%; dividend yields of 2.2% and 2.4%; volatility factors of 22.2% and 21.5%. Expected lives of six years were used in both 1997 and 1996. 1987 Long-Term Performance Stock Plan The CSX Corporation 1987 Long-Term Performance Stock Plan provides for awards in the form of stock options, Stock Appreciation Rights (SARs), Performance Share Awards (PSAs) and Incentive Compensation Program shares (ICPs) to eligible officers and employees. Awards granted under the Plan are determined by the board of directors based on the financial performance of the company. At Dec. 26, 1997, there were 475 current or former employees with outstanding grants under the Plan. A total of 18,132,238 shares were reserved for issuance, of which 428,638 were available for new grants (5,396,274 at Dec. 27, 1996). The remaining shares are assigned to outstanding stock options, SARs and PSAs. The majority of stock options have been granted with 10-year terms and vest at the end of one year of continued employment. The exercise price for options granted equals the market price of the underlying stock on the date of grant. A summary of the company's stock option activity, and related information for the fiscal years ended Dec. 26, 1997, Dec. 27, 1996, and Dec. 29, 1995, follows:
1997 1996 1995 -------------------------------------------------------------------------------- Shares Weighted-Average Shares Weighted-Average Shares Weighted-Average (000s) Exercise Price (000s) Exercise Price (000s) Exercise Price -------------------------------------------------------------------------------- Outstanding at Beginning of Year 13,102 $35.82 11,881 $32.76 10,206 $30.97 Granted 4,182 $51.44 1,978 $51.43 2,165 $40.25 Canceled or Expired (31) $49.89 (42) $27.69 (57) $38.95 Exercised (1,082) $26.08 (715) $42.08 (433) $27.18 -------------------------------------------------------------------------------- Outstanding at End of Year 16,171 $40.49 13,102 $35.82 11,881 $32.76 -------------------------------------------------------------------------------- Exercisable at End of Year 9,911 $34.08 10,139 $31.90 8,017 $28.79 -------------------------------------------------------------------------------- Fair Value of Options Granted $12.25 $13.78 $11.33 --------------------------------------------------------------------------------
43 The following table summarizes information about stock options outstanding at Dec. 26, 1997:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------ Weighted-Average Number Remaining Weighted-Average Number Weighted-Average Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------------------------------------- ------------------------------ $15 to $20 2,042 2.4 $17.74 2,042 $17.74 $30 to $39 4,987 5.5 $35.57 4,987 $35.57 $40 to $49 5,239 8.0 $43.80 2,234 $40.67 $50 to $57 3,903 9.0 $54.22 648 $51.43 ------------------------------------------------- ------------------------------ Total 16,171 6.7 $40.49 9,911 $34.08 ------------------------------------------------- ------------------------------
The fair value of options granted in 1997, 1996 and 1995 was estimated as of the dates of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free interest rates of 6.5%, 6.3% and 6.8%; volatility factors of 21%, 22% and 23%; dividend yields of 2.2%, 2.4% and 2.4%; and expected lives of 4.8 years, 6 years and 6 years. The value of PSAs is contingent on the achievement of performance goals and completion of certain continuing employment requirements over a three-year period. Each PSA earned will equal the fair market value of one share of CSX common stock on the date of payment. At Dec. 26, 1997, there were 1,269,200 shares reserved for outstanding PSAs. In 1997, 1996 and 1995, respectively, 126,600, 110,600, and 122,200 PSAs were granted to employees. The weighted-average fair value of those shares was $44.88 for 1997, $44.44 for 1996 and $32.56 for 1995. At Dec. 26, 1997, there were 263,696 SARs outstanding with a weighted-average exercise price of $16.44. In 1997 and 1996, respectively, 171,377 and 69,494 SARs were exercised at weighted-average exercise prices of $14.94 and $15.68; there were no exercises in 1995. There were no grants of SARs in 1997, 1996 or 1995. Stock Award Plan Under the 1990 Stock Award Plan, all officers and employees of the company are eligible to receive shares of CSX common stock as an incentive award and certain key employees are eligible to receive them as a deferral award. All awards of common stock are issued based on terms and conditions approved by the company's board of directors. At Dec. 26, 1997, there were 1,314,890 shares reserved for issuance under this Plan, of which 815,390 were available for new grants. In 1997, 1996 and 1995, respectively, 433,500 shares, 633,587 shares and 348,278 shares were granted under the Plan. The weighted-average fair value of those shares was $44.69 for 1997, $45.63 for 1996 and $35.78 for 1995. Stock Purchase and Dividend Reinvestment Plans The 1991 Employees Stock Purchase and Dividend Reinvestment Plan provides a method and incentive for eligible employees to purchase shares of the company's common stock at market value by payroll deductions. To encourage stock ownership, employees receive a 17.65% matching payment on their contributions in the form of additional stock purchased by the company. Each matching payment of stock is subject to a two-year holding period. Sales of stock prior to the completion of the holding period result in forfeiture of the matching stock purchase. Officers and key employees who qualify for the Stock Purchase and Loan Plan are not eligible to participate in this Plan. At Dec. 26, 1997, there were 659,946 shares of common stock available for purchase under this Plan. Employees purchased 35,593 shares in 1997; 40,985 shares in 1996 and 46,224 shares in 1995 under the plan at weighted-average market prices of $51.94, $47.39 and $40.31 for 1997, 1996 and 1995, respectively. The company also maintains the Employees Stock Purchase and Dividend Reinvestment Plan and the Shareholders Dividend Reinvestment Plan, adopted in 1981, under which all employees and shareholders may purchase CSX common stock at the average of daily high and low sale prices for the five trading days ending on the day of purchase. To encourage stock ownership, employees receive a 5% discount on all purchases under this program. At Dec. 26, 1997, there were 4,809,010 shares reserved for issuance under these Plans. 44 NOTE 12. STOCK PLANS (CONTINUED). Stock Plan for Directors The Stock Plan for Directors, approved by the shareholders in 1992, governs in part the manner in which directors' fees and retainers are paid. A minimum of 40% of the retainers must be paid in common stock of the company. In addition, each director may elect to receive up to 100% of the remaining retainer and fees in the form of common stock of the company. In 1997, shareholders approved amendments to the Plan that would permit additional award of stock or stock options. No stock options have been awarded under the Plan. The Plan permits each director to elect to transfer stock into a trust that will hold the shares until the participant's death, disability, retirement as a director, other cessation of services as a director, or change in control of the company. At Dec. 26, 1997, there were 929,377 shares of common stock reserved for issuance under this Plan. NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair values of the company's financial instruments are estimated by reference to quoted prices from market sources and financial institutions, as well as other valuation techniques. Long-term debt is the only financial instrument of the company with a fair value significantly different from its carrying amount. At Dec. 26, 1997, the fair value of long-term debt, including current maturities, was $7.03 billion, compared with a carrying amount of $6.64 billion. At Dec. 27, 1996, the fair value of long-term debt, including current maturities, was $4.56 billion, compared with a carrying amount of $4.43 billion. The fair value of long-term debt has been estimated using discounted cash flow analyses based upon the company's current incremental borrowing rates for similar types of financing arrangements. The company had no significant hedging or derivative financial instruments at Dec. 26, 1997, or Dec. 27, 1996. NOTE 14. EMPLOYEE BENEFIT PLANS. Pension Plans The company sponsors defined benefit pension plans, principally for salaried personnel. The plans provide eligible employees with retirement benefits based principally on years of service and compensation rates near retirement. Annual contributions to the plans are sufficient to meet the minimum funding standards set forth in the Employee Retirement Income Security Act of 1974, as amended. Plan assets consist primarily of common stocks, corporate bonds and cash and cash equivalents. Pension expense is determined based upon annual actuarial valuations and includes the following components: 1997 1996 1995 ---------------------- Service Cost $ 40 $ 37 $ 28 Interest Cost on Projected Benefit Obligation 98 93 91 Actual Return on Plan Assets (271) (89) (190) Net Amortization and Deferral 193 18 117 Foreign Plans 3 4 4 ---------------------- Pension Expense $ 63 $ 63 $ 50 ---------------------- 45 The funded status of the plans and the amounts reflected in the accompanying statement of financial position at year-end are:
Assets Exceed Obligations Obligations Exceed Assets (At Valuation Date) (At Valuation Date) ------------------------- ------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1997 1996 1997 1996 -------------------- ------------------------- Benefit Obligation: Vested Benefits $1,164 $44 $107 $1,161 Non-Vested Benefits 49 1 4 59 -------------------- ------------------------- Accumulated Benefit Obligation 1,213 45 111 1,220 Effect of Anticipated Future Salary Increases 128 1 18 105 -------------------- ------------------------- Projected Benefit Obligation 1,341 46 129 1,325 Fair Value of Plan Assets 1,371 63 -- 1,047 -------------------- ------------------------- Funded Status 30 17 (129) (278) Unrecognized Initial Net Obligation 18 -- 2 18 Unrecognized Prior Service Cost (9) 1 9 (3) Unrecognized Net Loss 69 6 48 257 Recognition of Minimum Liability -- -- (43) (176) Cash Contributions, Oct. 1 through Year-End -- -- 2 2 -------------------- ------------------------- Net Pension Asset (Obligation) at Year-End $108 $24 $(111) $ (180) -------------------- -------------------------
The company experienced a significant increase in the fair value of plan assets between the actuarial measurement dates for 1996 and 1997. Due to this increase, plans comprising a significant portion of the company's total projected benefit obligation experienced a change in funded status. Assets exceeded projected benefit obligations for these plans at Sept. 30, 1997, and the company's aggregate minimum pension liability was reduced by $133 million in 1997. The following actuarial assumptions were used in determining net pension expense and projected benefit obligations: 1997 1996 1995 --------------------------------- Discount Rate at Valuation Date 7.50% 7.50% 7.50% Estimated Long-Term Rate of Salary Increases at Valuation Date 5.00% 5.00% 5.00% Expected Long-Term Rate of Return on Assets During the Period 9.50% 9.50% 9.75% --------------------------------- Savings Plans The company maintains savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining agreements. Eligible employees may contribute from 1% to 15% of their annual compensation in 1% multiples to these plans. The company matches eligible employees' contributions in an amount equal to the lesser of 50% of each participating employee's contributions or 3% of their annual compensation. In addition, the company contributes fixed amounts for each participating employee covered by certain collective bargaining agreements. Expense associated with these plans was $23 million, $23 million and $29 million for 1997, 1996 and 1995, respectively. Other Post-Retirement Benefit Plans In addition to the defined benefit pension plans, the company sponsors three plans that provide medical and life insurance benefits to most full-time salaried employees upon their retirement. The post-retirement medical plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. The net benefit obligation for medical plans anticipates future cost-sharing changes consistent with the company's expressed intent to increase retiree contribution rates annually in line with expected medical cost inflation rates. The life insurance plan is non-contributory. 46 NOTE 14. EMPLOYEE BENEFIT PLANS (CONTINUED). The company's current policy is to fund the cost of the post-retirement medical and life insurance benefits on a pay-as-you-go basis, as in prior years. The amounts recorded for the combined plans in the company's statement of financial position at Dec. 26, 1997, and Dec. 27, 1996, are as follows:
Medical Life Insurance (At Valuation Date) (At Valuation Date) -------------------- -------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1997 1996 1997 1996 -------------------- -------------------- Accumulated Post-Retirement Benefit Obligation: Retirees $206 $214 $59 $60 Fully Eligible Active Participants 37 34 3 3 Other Active Participants 38 38 2 2 -------------------- ------------------- Accumulated Post-Retirement Benefit Obligation 281 286 64 65 Unrecognized Prior Service Cost 4 10 4 4 Unrecognized Net (Loss) Gain (31) (48) -- 1 Claim Payments, Oct. 1 through Year-End (5) (6) (2) (1) -------------------- ------------------- Net Post-Retirement Benefit Obligation at Year-End $249 $242 $66 $69 -------------------- -------------------
Net expense for post-retirement benefits was $30 million, $30 million and $27 million for 1997, 1996 and 1995, respectively. The net post-retirement benefit obligation was determined using the assumption that the health care cost trend rate for medical plans was 9.5% for 1997-1998, decreasing gradually to 5.5% by 2005 and remaining at that level thereafter. A 1% increase in the assumed health care cost trend rate would increase the accumulated post-retirement benefit obligation for medical plans as of Dec. 26, 1997, by $21 million and net post-retirement benefit expense for 1997 by $3 million. The discount rate used in determining the accumulated post-retirement benefit obligation was 7.50% for 1997, 1996 and 1995. Other Plans Under collective bargaining agreements, the company participates in a number of union-sponsored, multiemployer benefit plans. Payments to these plans are made as part of aggregate assessments generally based on number of employees covered, hours worked, tonnage moved or a combination thereof. The administrators of the multiemployer plans generally allocate funds received from participating companies to various health and welfare benefit plans and pension plans. Current information regarding such allocations has not been provided by the administrators. Total contributions of $238 million, $224 million and $239 million were made to these plans in 1997, 1996 and 1995, respectively. NOTE 15. COMMITMENTS AND CONTINGENCIES. Lease Commitments The company leases equipment under agreements with terms up to 21 years. Non-cancelable, long-term leases generally include options to purchase at fair value and to extend the terms. At Dec. 26, 1997, minimum building and equipment rentals under non-cancelable operating leases totaled approximately $414 million for 1998, $356 million for 1999, $304 million for 2000, $290 million for 2001, $262 million for 2002 and $1.9 billion thereafter. Rent expense on operating leases, including net daily rental charges on railroad operating equipment of $239 million, $245 million and $257 million in 1997, 1996 and 1995, respectively, amounted to $1.2 billion in 1997, 1996 and 1995. Purchase Commitments CSXT entered into agreements during 1993, 1996 and 1997 to purchase 450 locomotives. These large orders cover normal locomotive replacement needs for 1994 through 1998 and introduced alternating current traction technology to the locomotive fleet. CSXT has taken delivery of 50 direct current and 301 alternating-current locomotives through Dec. 26, 1997. The remaining 99 alternating-current units will be delivered in 1998. 47 Contingent Liabilities The company and its subsidiaries are contingently liable individually and jointly with others as guarantors of long-term debt and obligations principally relating to leased equipment, joint ventures and joint facilities. These contingent obligations were immaterial to the company's results of operations and financial position at Dec. 26, 1997. In September 1997, a state court jury in New Orleans returned a $2.5 billion punitive damages award against CSXT. The award was made in a class-action lawsuit against a group of nine companies based on personal injuries alleged to have arisen from a 1987 fire. The fire was caused by a leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour evacuation of a New Orleans neighborhood. In the same case, the court awarded a group of 20 plaintiffs compensatory damages of approximately $2 million against the defendants, including CSXT, to which the jury assigned 15% of the responsibility for the incident. CSXT's liability under that compensatory damages award is not material. In October 1997, the Louisiana Supreme Court set aside the punitive damages judgment, ruling the judgment should not have been entered until all liability issues were resolved. CSX believes this decision means that 8,000 other cases must be resolved before the punitive damage claims can be decided. CSXT is pursuing an aggressive strategy on all legal fronts, and management believes that any adverse outcome will not be material to CSX's or CSXT's overall results of operations or financial position, although it could be material to results of operations in a particular quarterly accounting period. The company has been advised that activities of a former subsidiary that administered U.S. government guaranteed student loans are under investigation. The subsidiary was sold in 1992. The U.S. Attorney's Office has said that it may institute proceedings against CSX based on government insurance payments made on uncollected loans as a result of alleged processing deficiencies or errors before the sale. While the amount of potential damages is not yet reasonably estimable, based upon information currently available to the company, management believes any adverse outcome will not be material to the company's results of operations or financial position, although it could be material to results of operations in a particular quarterly accounting period. Although the company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damage, reasonable levels of risk are retained on a self-insurance basis. A portion of the insurance coverage, $25 million limit above $100 million per occurrence from rail and certain other operations, is provided by a company partially owned by CSX. CSXT is a party to various proceedings involving private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible party (PRP) at approximately 120 environmentally impaired sites that are or may be subject to remedial action under the Federal Superfund statute (Superfund) or similar state statutes. A number of these proceedings are based on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal. Such proceedings arising under Superfund or similar state statutes can involve numerous other waste generators and disposal companies and seek to allocate or recover costs associated with site investigation and cleanup, which could be substantial. CSXT is involved in a number of administrative and judicial proceedings and other clean-up efforts at approximately 250 sites, including the sites addressed under the Federal Superfund statute or similar state statutes, where it is participating in the study and/or clean-up of alleged environmental contamination. The assessment of the required response and remedial costs associated with most sites is extremely complex. Cost estimates are based on information available for each site, financial viability of other PRPs, where available, and existing technology, laws and regulations. CSXT's best estimates of the allocation method and percentage of liability when other PRPs are involved are based on assessments by consultants, agreements among PRPs, or determinations by the U.S. Environmental Protection Agency or other regulatory agencies. At least once each quarter, CSXT reviews its role, if any, with respect to each such location, giving consideration to the nature of CSXT's alleged connection to the location (i.e., generator, owner or operator), the extent of CSXT's alleged connection (i.e., volume of waste sent to the location and other relevant factors), the accuracy and strength of evidence connecting CSXT to the location, and the number, connection and financial position of other named and unnamed PRPs at the location. The ultimate liability for remediation can be difficult to determine with certainty because of the number and creditworthiness of PRPs involved. Through the assessment process, CSXT monitors the creditworthiness of such PRPs in determining ultimate liability. Based upon such reviews and updates of the sites with which it is involved, CSXT has recorded, and reviews at least quarterly for adequacy, reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at Dec. 26, 1997, and Dec. 27, 1996, were $99 million and $117 million, respectively. These recorded liabilities include amounts representing CSXT's estimate of unasserted claims, which CSXT believes to be immaterial. The liability has been accrued for future costs for all sites where the company's obligation is probable and where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. The majority of the Dec. 26, 1997, environmental liability is expected to be paid out over the next five to seven years, funded by cash generated from operations. 48 The company does not currently possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, latent conditions at any given location could result in exposure, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the company believes that its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters will not materially affect its overall results of operations and financial position. Legal Proceedings A number of legal actions, other than environmental, are pending against CSX and certain subsidiaries in which claims are made in substantial amounts. While the ultimate results of environmental investigations, lawsuits and claims involving the company cannot be predicted with certainty, management does not currently expect that resolution of these matters will have a material adverse effect on the consolidated results of operations, financial position or cash flows of the company. NOTE 16. SUMMARIZED FINANCIAL DATA - SEA-LAND SERVICE INC. During 1987, Sea-Land entered into agreements to sell and lease back by charter three new U.S.-built, U.S.-flag, D-7 class container ships. CSX has guaranteed the obligations of Sea-Land pursuant to the related charters which, along with the container ships, serve as collateral for debt securities registered with the Securities and Exchange Commission (SEC). In accordance with SEC disclosure requirements, summarized financial information for Sea-Land and its consolidated subsidiaries is as follows: Summary of Operations: 1997 1996 1995(b) - -------------------------------------------------------------------------------- Operating Revenue $3,991 $4,051 $4,008 Operating Expense - Public 3,634 3,648 3,755 - Affiliated(a) 109 122 107 ------------------------------- Operating Income $ 248 $ 281 $ 146 ------------------------------ Net Earnings $ 56 $ 84 $ 86 ------------------------------- Dec. 26, Dec. 27, Summary of Financial Position: 1997 1996 - -------------------------------------------------------------------------------- Current Assets - Public $ 652 $ 747 - Affiliated(a) 4 1 Other Assets - Public 1,880 1,829 - Affiliated(a) 40 14 Current Liabilities - Public 626 725 - Affiliated(a) 37 115 Other Liabilities - Public 687 756 - Affiliated(a) 576 347 Shareholder's Equity 650 648 ----------------------- (a) Amounts represent activity with CSX affiliated companies. (b) Beginning in 1996, Sea-Land assumed primary responsibility for direct purchase of transportation from non-affiliated rail carriers. These services were previsouly purchased through a CSX-affiliated company. Operating expense for 1995 has been restated to report this activity as public expense. SL Alaska Trade Company (SLATCO) is a special purpose, unconsolidated subsidiary of Sea-Land wi th trust-related assets of $117 million securing $106 million of debt maturing on Oct. 1, 2005. The assets of SLATCO are not available to creditors of Sea-Land or its subsidiaries, nor are the SLATCO notes guaranteed by Sea-Land or any of its subsidiaries. 49 NOTE 17. BUSINESS SEGMENTS.
Operating Revenue Operating Income Fiscal Years Ended Fiscal Years Ended Identifiable Assets ---------------------------- ---------------------------- ------------------- Dec. 26, Dec. 27, Dec. 29, Dec. 26, Dec. 27, Dec. 29, Dec. 26, Dec. 27, 1997 1996 1995 1997 1996 1995 1997 1996 ---------------------------- ---------------------------- ------------------- Transportation $10,621 $10,536 $10,304 $1,583 $1,522 $1,126 $18,682 $16,071 ---------------------------- ---------------------------- ------------------- Non-Transportation Segment $ 238 $ 220 $ 200 61 43 46 $ 1,275 $ 894 ---------------------------- ------------------- Other (Net) (10) -- 72 ---------------------------- Total Other Income 51 43 118 Interest Expense 451 249 270 ---------------------------- Earnings Before Income Taxes $1,183 $1,316 $ 974 ----------------------------
The principal components of the business segments are: Transportation - Rail, container-shipping, barge, intermodal and contract logistics operations. The container-shipping operation reported revenue of $4.0 billion for 1997, $4.1 billion for 1996 and $4.0 billion for 1995. Approximate revenue allocation by port of origin for 1997, 1996 and 1995 was: North America - -- 44%; Asia -- 31%; Europe -- 18%; and Other -- 7%. Foreign business activities outside the container-shipping operation do not contribute materially to the company's financial results. Non-Transportation - Real estate sales and rentals, resort management and resort operations. NOTE 18. QUARTERLY DATA (UNAUDITED).
1997 ------------------------------------------- 1st 2nd 3rd 4th ------------------------------------------- Operating Revenue $2,567 $2,678 $2,649 $2,727 Operating Income $ 324 $ 433 $ 384 $ 442 Net Earnings $ 151 $ 227 $ 206 $ 215 Earnings Per Share $ .70 $ 1.04 $ .95 $ .98 Earnings Per Share, Assuming Dilution $ .69 $ 1.03 $ .93 $ .97 -------------------------------------------
1996 ------------------------------------------- 1st 2nd 3rd 4th ------------------------------------------- Operating Revenue $2,514 $2,672 $2,647 $2,703 Operating Income $ 296 $ 408 $ 392 $ 426 Net Earnings $ 146 $ 234 $ 222 $ 253 Earnings Per Share $ .69 $ 1.11 $ 1.04 $ 1.17 Earnings Per Share, Assuming Dilution $ .68 $ 1.09 $ 1.02 $ 1.15 -------------------------------------------
50 Report of Ernst & Young LLP, Independent Auditors TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF CSX CORPORATION We have audited the accompanying consolidated statements of financial position of CSX Corporation and subsidiaries as of December 26, 1997 and December 27, 1996, and the related consolidated statements of earnings, cash flows, and changes in shareholders' equity for each of the three fiscal years in the period ended December 26, 1997. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above (appearing on pages 29-50) present fairly, in all material respects, the consolidated financial position of CSX Corporation and subsidiaries at December 26, 1997 and December 27, 1996, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 26, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP ----------------- Ernst & Young LLP Richmond, Virginia January 30, 1998 51 Board of Directors Elizabeth E. Bailey(2,4) John C. Hower Professor of Public Policy and Management The Wharton School, University of Pennsylvania, Philadelphia, Pa. Robert L. Burrus Jr.(4,5) Partner and Chairman McGuire, Woods, Battle & Boothe, LLP, Richmond, Va. Bruce C. Gottwald(4,5) Chairman and CEO Ethyl Corporation, Richmond, Va. John R. Hall(3,5) Chairman of Arch Coal Inc. and Retired Chairman and CEO Ashland Inc., Ashland, Ky. Robert D. Kunisch(1,3) Vice Chairman Cendant Corporation, Boca Grande, Fla. Hugh L. McColl Jr.(2,4) CEO NationsBank Corp., Charlotte, N.C. James W. McGlothlin(1,5) Chairman and CEO The United Company, Bristol, Va. Southwood J. Morcott(1,2,4) Chairman and CEO Dana Corporation, Toledo, Ohio Charles E. Rice(1,2,3) Former Chairman and CEO Barnett Banks Inc., Jacksonville, Fla. William C. Richardson(3,5) President and CEO W.K. Kellogg Foundation, Battle Creek, Mich. Frank S. Royal, M.D.(2,3) Physician and Health Care Authority, Richmond, Va. John W. Snow(1) Chairman, President and CEO CSX Corporation, Richmond, Va. Key to committees of the board 1 - Executive, 2 - Audit, 3 - Compensation, 4 - Pension, 5 - Organization & Corporate Responsibility Corporate Officers John W. Snow, 58*, Chairman, President and CEO -- elected February 1991 Mark G. Aron, 55*, Executive Vice President-Law and Public Affairs -- elected April 1995(1) Andrew B. Fogarty, 53*, Senior Vice President-Corporate Services -- elected September 1997(2) Paul R. Goodwin, 55*, Executive Vice President-Finance and Chief Financial Officer -- elected April 1995(3) Ellen M. Fitzsimmons, 37, General Counsel-Corporate -- elected September 1997 Arnold I. Havens, 50, Vice President-Federal Affairs -- elected February 1997 Thomas E. Hoppin, 56, Vice President-Corporate Communications -- elected April 1986 William F. Miller, 55, Vice President-Audit and Advisory Services -- elected September 1996 Jesse R. Mohorovic, 55*, Vice President-Corporate Relations -- elected February 1995(4) James P. Peter, 47, Vice President-Taxes -- elected June 1993 James L. Ross, 59*, Vice President and Controller -- elected April 1996(5) Alan A. Rudnick, 50, Vice President-General Counsel and Corporate Secretary -- elected June 1991 Michael J. Ruehling, 50, Vice President-State Relations -- elected February 1995 James A. Searle Jr., 51, Vice President-Administration -- elected April 1996 Peter J. Shudtz, 49, Vice President-Law and General Counsel -- elected September 1997 William H. Sparrow, 54*, Vice President-Financial Planning -- elected January 1996(6) Gregory R. Weber, 52*, Vice President and Treasurer -- elected April 1996(7) 52 Unit Officers CSX TRANSPORTATION INC. Alvin R. (Pete) Carpenter, 56* President and CEO since January 1992 John Q. Anderson, 46* Executive Vice President-Sales & Marketing since May 1996(8) Donald D. Davis, 58* Executive Vice President-Employee Relations since January 1998(9) Gerald L. Nichols, 62* Vice Chairman since January 1998(10) Carl N. Taylor, 58* Executive Vice President-Operations since January 1998(11) Michael J. Ward, 47* Executive Vice President-Finance and CFO since June 1996(12) SEA-LAND SERVICE INC. John P. Clancey, 53* President and CEO since August 1991 Robert J. Grassi, 51* Senior Vice President-Finance and Planning since August 1997(13) Richard E. Murphy, 53* Senior Vice President-Corporate Marketing since June 1996(14) Charles G. Raymond, 54* Senior Vice President and Chief Transportation Officer since May 1995(15) CSX INTERMODAL INC. Lester M. Passa, 43* President and CEO since November 1997(16) AMERICAN COMMERCIAL LINES INC. Michael C. Hagan, 51* President and CEO since May 1992 CUSTOMIZED TRANSPORTATION INC. David G. Kulik, 49 President and CEO since December 1994 THE GREENBRIER Ted J. Kleisner, 53 President and Managing Director since January 1989 YUKON PACIFIC CORPORATION Jeff B. Lowenfels, 49 President and CEO since February 1995 CSX TECHNOLOGY John F. Andrews, 44* President and CEO since April 1995 and CSX Chief Information Officer -- elected November 1997(17) * Executive officers of the corporation. Executive officers of CSX Corporation are elected by the CSX board of directors and hold office until the next annual election of officers. Officers of CSX business units are elected annually by the respective boards of directors of the business units. There are no family relationships or any arrangement or understanding between any officer and any other person pursuant to which such officer was selected. All of the executive officers listed have held their current positions for at least five years except as noted below: 1) Prior to April 1995, Mr. Aron served as Senior Vice President-Law and Public Affairs. 2) Prior to September 1997, Mr. Fogarty served as Senior Vice President-Finance and Planning, Sea-Land, from June 1996 TO August 1997; As CSX Vice President-Audit and Advisory Services from March 1995 TO June 1996; and prior thereto as CSX Vice President-Executive Department. 3) Prior to April 1995, Mr. Goodwin served as an officer of CSXT as Executive Vice President-Finance & Administration from February 1995 to April 1995; as Senior Vice President-Finance from April 1992 to February 1995; and prior thereto as Senior Vice President-Finance. 4) Prior to February 1995, Mr. Mohorovic served as Vice President-Corporate Communications, CSXT, from April 1994 to February 1995, and prior thereto as Vice President-Corporate Communications, Sea-Land. 5) Prior to April 1996, Mr. Ross served as CSX Vice President-Special Projects from October 1995 to April 1996, and prior thereto as Audit Partner with Ernst & Young, LLP. 6) Prior to January 1996, Mr. Sparrow served as Vice President-Capital Planning and Budgeting from May 1994 to January 1996 and prior thereto as Vice President and Treasurer. 7) Prior to April 1996, Mr. Weber served as Vice President, Controller and Treasurer, from May 1994 TO April 1996, and prior thereto as Vice President and Controller. 8) Prior to May 1996, Mr. Anderson served as Senior Vice President-Coal, Metals and Minerals Business for Burlington Northern Santa Fe Corporation. 9) Prior to January 1998, Mr. Davis served as CSXTSenior Vice President-Employee Relations. 10)Prior to January 1998, Mr. Nichols served as CSXT Executive Vice President and COO from February 1995 to January 1998 and prior thereto as Senior Vice President-Administration of CSXT. 11)Prior to January 1998, Mr. Taylor served as CSXT Senior Vice President Transportation & Mechanical and Chief Financial Officer from July 1996 to January 1998; Senior Vice President Engineering & Mechanical from March 1995 to July 1996; and prior thereto as Vice President Mechanical. 12)Prior to May 1996, Mr. Ward served as an officer of CSXT as Senior Vice President-Finance from April 1995 TO May 1996; General Manager-C&O Business unit from 1994 TO April 1995; and prior thereto as Vice President-Coal. 13)Prior to August 1997, Mr. Grassi served as Sea-Land Senior Vice President-Atlantic, AME Services from June 1996 to August 1997 and prior thereto as Senior Vice President-Finance and Planning. 14)Prior to June 1996, Mr. Murphy served as Sea-Land Vice President-Atlantic-AME from 1995 to June 1996; Senior Vice President-Pacific Services from 1993 to 1995; and prior thereto as Vice President-Pacific Services. 15)Prior to May 1995, Mr. Raymond served as Sea-Land Senior Vice President-Operations and Inland Transportation. 16)Prior to November 1997, Mr. Passa served as CSXT Vice President-Commercial Integration from July 1997 to November 1997, and prior thereto as an officer of Conrail Inc. as Senior Vice President-Automotive Service Group from February 1997 to July 1997; as Vice President-Logistics & Corporate Strategy from March 1995 to February 1997; as Assistant Vice President-Corporate Strategy. 17)Prior to April 1995, Mr. Andrews served as Vice President-Systems Development, CSX Technology. 53 Shareholder Information SHAREHOLDER SERVICES Shareholders with questions about their accounts should contact the transfer agent at the address or telephone number shown below. General questions about CSX or information contained in company publications should be directed to corporate communications at the address or telephone number shown below. Security analysts, portfolio managers or other investment community representatives should contact investor relations at the address or telephone number shown below. TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING Agent Harris Trust Company P.O. Box A3504 Chicago, IL 60690 (800) 521-5571 e-mail: WEBSHARE@HARRISBANK.com CSX Direct Invest Harris Trust Dividend Reinvestment Department P. O. Box A3309 Chicago, IL 60690-3309 (800) 521-5571 e-mail: www.harrisbank.com Shareholder Relations Anne B. Taylor Administrator-Shareholder Services CSX Corporation P.O. Box 85629 Richmond, VA 23285-5629 (804) 782-1465 e-mail: Anne_Taylor@csx.com Corporate Communications Elisabeth Gabrynowicz Director-Corporate Communications CSX Corporation P.O. Box 85629 Richmond, VA 23285-5629 (804) 782-1406 e-mail: Elisabeth_Gabrynowicz@csx.com Investor Relations Joseph C. Wilkinson Director-Investor Relations CSX Corporation P.O. Box 85629 Richmond, VA 23285-5629 (804) 782-1553 e-mail: Joseph_Wilkinson@csx.com DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT CSX provides dividend reinvestment and stock purchase plans for employees, shareholders and potential shareholders as a convenient method of acquiring CSX shares through direct purchase, dividend reinvestment and optional cash payments. CSXDirect Invest CSXDirectInvestSM, a direct stock purchase and dividend reinvestment plan, permits the purchase and sale of shares directly though our transfer agent, Harris Trust. Through this plan, no service charges or brokerage commissions apply to share purchases, and sales can be made with minimal charges and commissions. Initial investment for a non-shareholder is $500 plus a $10 one-time enrollment fee. The plan also allows for automatic reinvestment of dividends in CSX common stock without payment of any brokerage commissions or service charges, or you may receive dividend payments on some or all of your shares. You also may make optional cash investments with as little as $50 per month, or up to $10,000 per month, without any charges or commissions. Optional cash investments may be made by mailing a check or money order to Harris, or by authorizing automatic monthly withdrawals from your bank account. You also may make gifts of CSX shares to others through the plan, and present them with a gift memento if desired. You do not need to own shares of CSX stock currently to enroll in this plan. To obtain a prospectus or other information regarding CSXDirectInvestSM, please call or write the Harris Trust Dividend Reinvestment Department at the phone number or address above. Or, if you prefer, you may visit our web site at www.csx.com. 54 Stock Held in Brokerage Accounts When a broker holds your stock, it is usually registered in the broker's name, or "street name." We do not know the identity of individual shareholders who hold stock in this manner. We know only that a broker holds a certain number of shares that may be for any number of customers. If your stock is in a street-name account, you are not eligible to participate in CSXDirectInvestSM, the company's direct stock purchase and dividend reinvestment plan. Also, you will receive your dividend payments, annual reports and proxy materials through your broker. You should notify your broker, not Harris Trust, if you wish to eliminate unwanted, duplicate mailings and improve the timeliness on the delivery of these materials and your dividend payments. LOST OR STOLEN STOCK CERTIFICATES If your stock certificates are lost, stolen or in some way destroyed, you should notify Harris Trust in writing immediately. MULTIPLE DIVIDEND CHECKS AND DUPLICATE MAILINGS Some shareholders hold their stock on CSX records in similar but different names (e.g. John A. Smith and J.A. Smith). When this occurs, we are required to create separate accounts for each name. Although the mailing addresses are the same, we are required to mail separate dividend checks to each account. Duplicate mailings of annual reports can be eliminated if you send the labels or copies of the labels from a CSX mailing to Harris Trust. You should mark the labels to indicate names to be kept on the mailing list and names to be deleted. However, this action will affect mailings of financial materials only. Dividend checks and proxy materials will continue to be sent to each account. CONSOLIDATING ACCOUNTS If you want to consolidate separate accounts into one account, you should contact Harris Trust for the necessary forms and instructions. When accounts are consolidated, it may be necessary to reissue the stock certificates. DIVIDENDS CSX pays quarterly dividends on its common stock on or about the 15th of March, June, September and December, when declared by the board of directors, to shareholders of record approximately three weeks earlier. CSX now offers direct deposit of dividends to shareholders who request it. If you are interested, please contact Harris Trust at the address or phone number shown on page 54. REPLACING DIVIDEND CHECKS If you do not receive your dividend check within 10 business days after the payment date or if your check is lost or destroyed, you should notify Harris Trust so payment on the check can be stopped and a replacement issued. ENVIRONMENTAL/SAFETY REPORT CSX is publishing an environmental/safety report, available to shareholders at the Annual Meeting. Shareholders may order additional copies by calling 804-783-1349 or visiting our website. 55 Corporate Information HEADQUARTERS One James Center 901 East Cary Street Richmond, VA 23219-4031 (804) 782-1400 http://www.csx.com MARKET INFORMATION CSX's common stock is listed on the New York, London and Swiss stock exchanges and trades with unlisted privileges on the Midwest, Boston, Cincinnati, Pacific and Philadelphia stock exchanges. The official trading symbol is "CSX." DESCRIPTION OF COMMON AND PREFERRED STOCKS A total of 300 million shares of common stock is authorized, of which 218,309,911 shares were outstanding as of Dec. 26, 1997. Each share is entitled to one vote in all matters requiring a vote of shareholders. There are no pre-emptive rights. A total of 25 million shares of preferred stock is authorized. Series A consists of 250,000 shares of $7 Cumulative Convertible Preferred Stock. All outstanding shares of Series A Preferred Stock were redeemed as of July 31, 1992. Series B consists of 3 million shares of Junior Participating Preferred Stock, none of which has been issued. These shares will become issuable only and when the rights distributed to holders of common stock under the Preferred Share Rights Plan adopted by CSX on June 8, 1988, become exercisable. Closing Price of Common Stock at Fiscal Year-End (Dollars) [GRAPH] '93 '94 '95 '96 '97 $40.94 $34.82 $45.63 $42.88 $51.13 COMMON STOCK PRICE RANGE AND DIVIDENDS PER SHARE Fiscal Year 1997 - --------------------------------------------------------------- Quarter 1st 2nd 3rd 4th - --------------------------------------------------------------- Market Price High $52.00 $56.13 $62.44 $60.75 Low $41.25 $44.13 $53.94 $50.25 Dividends Per Share $ .26 $ .26 $ .26 $ .30 - --------------------------------------------------------------- Fiscal Year 1996 - --------------------------------------------------------------- Quarter 1st 2nd 3rd 4th - --------------------------------------------------------------- Market Price High $48.50 $53.13 $53.00 $52.38 Low $42.25 $44.13 $42.25 $42.50 Dividends Per Share $ .26 $ .26 $ .26 $ .26 - --------------------------------------------------------------- Fiscal Year 1995 - --------------------------------------------------------------- Quarter 1st 2nd 3rd 4th - --------------------------------------------------------------- Market Price High $39.88 $41.00 $44.63 $46.13 Low $34.63 $36.00 $37.44 $39.06 Dividends Per Share $ .22 $ .22 $ .22 $ .26 - --------------------------------------------------------------- Fiscal Year 1994 - --------------------------------------------------------------- Quarter 1st 2nd 3rd 4th - --------------------------------------------------------------- Market Price High $46.19 $41.63 $39.57 $37.25 Low $39.94 $35.50 $33.00 $31.57 Dividends Per Share $ .22 $ .22 $ .22 $ .22 - --------------------------------------------------------------- Fiscal Year 1993 - -------------------------------------------------------------- Quarter 1st 2nd 3rd 4th - --------------------------------------------------------------- Market Price High $39.98 $39.07 $40.13 $44.07 Low $33.57 $33.19 $33.94 $37.44 Dividends Per Share $ .19 $ .19 $ .19 $ .22 - --------------------------------------------------------------- Data for periods prior to 4th quarter 1995 have been adjusted for a 2-for-1 common stock split. NUMBER OF REGISTERED SHAREHOLDERS 1997 1996 1995 1994 1993 - ------ ------ ------ ------ ------ 52,852 55,176 55,528 57,355 59,714 SHARES OUTSTANDING AS OF JAN. 23, 1998: 218,308,863 COMMON STOCK SHAREHOLDERS AS OF JAN. 23, 1998: 52,599 56 Proposed Acquisition Map The proposed division of Conrail's rail network is along the former New York Central/Pennsylvania systems. CSX's 42% of Conrail is centered around the New York-to-St. Louis Water Level Route of the former New York Central. Historically, the New York Central competed with the Pennsylvania Railroad, which makes up much of the Norfolk Southern acquisition. Thus, the proposed division of Conrail effectively restores rail-rail competition in the Northeast while creating single-line service making CSXT more competitive with trucks. [MAP] 57 ANNUAL SHAREHOLDER MEETING 10 a.m., Tuesday, April 28, 1998 The Greenbrier White Sulphur Springs, W.Va. SHAREHOLDER HOUSE PARTIES AT THE GREENBRIER Throughout the year, The Greenbrier offers Shareholder House Parties featuring discounted rates and special activities. Shareholder House Parties in 1998 are scheduled for: EASTER - APRIL 8-12 ANNUAL MEETING - APRIL 26-29 LABOR DAY - SEPT. 4-8 For information on shareholder parties, contact Maryann Sanford, Reservations Department, The Greenbrier, 300 W. Main Street, White Sulphur Springs, WV 24986, or phone toll-free (800) 624-6070 or e-mail to The_Greenbrier@csx.com Again in 1998, The Greenbrier is pleased to extend to all shareholders a 10 percent discount on their Modified American Plan rates, applicable to one visit per year. Reservations will be accepted on a space-available basis. This offer does not apply during CSX House Parties, when rates are already discounted, or if a shareholder is attending a conference being held at The Greenbrier. CSX CORPORATION One James Center 901 East Cary Street Richmond, VA 23219-4031 (804) 782-1400 Internet address: http://www.csx.com CSX TRANSPORTATION INC. 500 Water Street Jacksonville, FL 32202 (904) 359-3100 Internet address: http://www.csxt.com SEA-LAND SERVICE INC. 6000 Carnegie Blvd. Charlotte, NC 28209 (704) 571-2000 Internet address: http://www.sealand.com CSX INTERMODAL INC. 301 West Bay Street Jacksonville, FL 32202 (904) 633-1000 Internet address: http://www.csxi.com AMERICAN COMMERCIAL LINES INC. 1701 E. Market Street Jeffersonville, IN 47130 (812) 288-0100 Internet address: http://www.aclines.com CUSTOMIZED TRANSPORTATION INC. 10407 Centurion Parkway, N., Ste. 400 Jacksonville, FL 32256 (904) 928-1400 Internet address: http://www.cti-logistics.com THE GREENBRIER 300 W. Main Street White Sulphur Springs, WV 24986 (304) 536-1110 Internet address: http://www.greenbrier.com YUKON PACIFIC CORPORATION 1049 W. 5th Avenue Anchorage, AK 99501 (907) 265-3100 Internet address: http://www.csx.com/docs/ypc/ypc.html CSX Corporation 58 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 18th day of February 1998. CSX Corporation By: /s/ James L. Ross ----------------- James L. Ross, Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title - ------------ ------------------------------------- John W. Snow Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)* Paul R. Goodwin Executive Vice President-Finance (Principal Financial Officer)* Elizabeth E. Bailey Director* Robert L. Burrus Jr. Director* Bruce C. Gottwald Director* John R. Hall Director* Robert D. Kunisch Director* Hugh L. McColl Jr. Director* James W. McGlothlin Director* Southwood J. Morcott Director* Charles E. Rice Director* William C. Richardson Director* Frank S. Royal, M.D. Director* /s/ Peter J. Shudtz - ----------------------------------- * Peter J. Shudtz, Attorney-in-Fact February 18, 1998 59 CSX CORPORATION Statement of Differences 1. The printed Annual Report and Form 10-K contains numerous graphs and photographs not incorporated into the electronic Form 10-K. 2. The 10-K cover sheet and index, presented on pages 49 and 50 of the printed document, have been repositioned to the front of the electronic document. 60 INDEX TO EXHIBITS Description (3.1) Articles of Incorporation (incorporated by reference as Exhibit 3 to Form 10-K dated Feb. 15, 1991) (3.2) Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K dated March 14, 1997) (10.1) CSX Stock Plan for Directors* (incorporated by reference to Appendix A to Proxy Statement dated March 18, 1997) (10.2) Special Retirement Plan for CSX Directors* (10.3) Corporate Director Deferred Compensation Plan* (10.4) CSX Directors' Charitable Gift Plan (incorporated by reference to Exhibit 10.4 to Form 10-K dated March 4, 1994) (10.5) CSX Directors' Matching Gift Plan* (incorporated by reference to Exhibit 10.5 to Form 10-K dated March 14, 1997) (10.6) Form of Agreement with J. W. Snow, A. R. Carpenter, J. P. Clancey, P. R. Goodwin and G. L. Nichols* (incorporated by reference to Exhibit 10.6 to Form 10-K dated March 3, 1995) (10.7) Form of Amendment to Agreement with A. R. Carpenter, P. R. Goodwin and G. L. Nichols (incorporated by reference to Exhibit 10.7 to Form 10-K dated March 14, 1997) (10.8) Form of Amendment to Agreement with J. P. Clancey* (incorporated by reference to Exhibit 10.8 to Form 10-K dated March 14, 1997) (10.9) Form of Retention Agreement with A. R. Carpenter and J. P. Clancey* (incorporated by reference to Exhibit 10.3 to Form 10-K dated Feb. 28, 1992) (10.10) Agreement with J. W. Snow* (incorporated by reference to Exhibit 10.9 to Form 10-K dated March 4, 1994) (10.11) Amendment to Agreement with J. W. Snow (incorporated by reference to Exhibit 10.11 to Form 10-K dated March 14, 1997) (10.12) Amendment to Agreement with J. W. Snow* (10.13) Agreement with G. L. Nichols* (10.14) Stock Purchase and Loan Plan* (10.15) 1987 Long-Term Performance Stock Plan* (10.16) 1985 Deferred Compensation Program for Executives of CSX Corporation and Affiliated Companies* (10.17) Supplementary Savings Plan and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies* (10.18) Special Retirement Plan of CSX Corporation and Affiliated Companies* (10.19) Supplemental Retirement Plan of CSX Corporation and Affiliated Companies* (10.20) 1994 Senior Management Incentive Compensation Plan* (incorporated by reference to Exhibit 10.16 to Form 10-K dated March 3, 1995) (21) Subsidiaries of the Registrant (23.1) Consent of Ernst & Young LLP (23.2) Consent of Price Waterhouse LLP (27) Financial Data Schedule (99.1) Audited Consolidated Financial Statements and Schedule of Conrail Inc. for the Years Ended Dec. 31, 1997, 1996 and 1995 * Management Contract or Compensatory Plan or Arrangement. 61 EX-10.2 2 Exhibit 10.2 SPECIAL RETIREMENT PLAN FOR CSX DIRECTORS As Amended and Restated January 1, 1995 (As Amended through December 31, 1997) 1. Purpose. In order to attract and retain the services of Directors of the highest caliber, to reward them for their services to the Company when they cease to be active Directors, and to retain for the Company the value of their advice and consultation, the Board of Directors adopted a special retirement plan for Directors on April 21, 1981. The Plan, as amended November 14, 1984, is further amended and restated to provide as follows: 2. Definitions. Whenever used in the Plan, the following terms shall have the meanings set forth below unless the context clearly requires a different meaning: (a) Actuary. An actuary or actuaries engaged by the Corporation in conjunction with the Plan; provided that following a Change of Control, the selection or retention of the actuary shall be subject to the approval of the Benefits Trust Committee. (b) Benefits Trust Committee. The committee established pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust Agreement. (c) Board. The Company's Board of Directors. (d) Change of Control. A "Change of Control" means any of the following: (i) Stock Acquisition. The acquisition by any individual, entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (A "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(d); or (ii) Board Composition. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Business Combination. Approval by the shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal subsidiary or all or substantially all of the assets of the Company or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (iv) Regulated Business Combination. Approval by the shareholders of the Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(d); or (v) Liquidation or Dissolution. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company or its principal subsidiary. (e) Committee. The Executive Committee of the Board. (f) Company. CSX Corporation. (g) Director. A person duly elected or appointed to, and serving as an active member of, the Board. (h) Director's Fees. The basic annual retainer fee paid to an active Outside Director for his services, plus meeting fees, special fees for serving as Chairman of a committee, but excluding travel expenses or any other extraordinary form of compensation. (i) Effective Date. April 21, 1981. The effective date of the amendment and restatement is January 1, 1995. A Participant receiving Retirement Payments on the date of the restatement will continue to receive payments in accordance with the terms of the Plan as restated to the extent not inconsistent with the terms of the Plan prior to the date of the restatement. (j) Eligible Service. The period of service with the Company or any of its predecessor companies as an active Outside Director, measured in years and months beginning with the day of the month in which the person first becomes or performs services as an Outside Director and ending with the month in which he ceases to be, or no longer performs services as, an Outside Director. Service need not be continuous. (k) Employee Director. A person who serves or has served as an active Director during a period when he or she is a salaried employee of the Company or a subsidiary company. (l) Outside Director. A Director who, with respect to any period of service as an active Director taken into account under the Plan, is not an Employee Director. (m) Participant. An Outside Director or former Outside Director who has met or can be expected to meet the requirements for and become eligible for Retirement Payments under the Plan as determined under Section 3. The term includes Outside Directors who on the Effective Date of the amendment and restatement are receiving Retirement Payments under the Plan. An Employee Director shall not be entitled to become a Participant in the Plan with respect to any period of service as a Director while an employee of the Company or a predecessor company. (n) Plan. The Special Retirement Plan for CSX Directors. (o) Payment Date. The last day of each calendar quarter beginning with the last day of the calendar quarter in which the Participant becomes entitled to receive Retirement Payments and ending with the payment for the last calendar quarter for the calendar year in which the Participant ceases to be eligible for Retirement Payments under Section 3. (p) Retirement Payment. An annual amount equal to 50% of the Director's Fees paid during the Outside Director's final twelve months of service as a Director with the Company payable in quarterly installments on each Payment Date. (q) Rule of 75. Any combination of age and years of Eligible Service that totals 75 or more. (r) Trust. The CSX Corporation and Affiliated Companies Benefits Assurance Trust or a similar grantor trust established by the Company which will substantially conform to the terms of the Internal Revenue Service model trust as described in Revenue Procedure 92-64, 1992-2 D.B. 422. Except as provided in Section 5, the Company is not obligated to make any contribution to the Trust. (s) Valuation Date. The last day of each calendar year and such other dates as the Committee deems necessary or appropriate to value the Participants' benefits under this Plan. 3. Eligibility for Retirement Payments. (a) An Outside Director who no longer serves as a Director (for any reason other than death), whose service as a Director ended prior to April 17, 1997, and who has (i) attained the age of 68, or (ii) has met the Rule of 75, shall be deemed a Participant in the Plan and shall be entitled to receive Retirement Payments. A Participant who ceased to serve as a Director before attaining the age of 68 will be entitled to receive Retirement Payments when the Participant attains the age of 68 or meets the Rule of 75, whichever event shall first occur. In consideration of the receipt of Retirement Payments under the Plan, a Participant agrees to be available for advice and consultation as requested by the Board. (b) A Participant entitled to compensation under (a) shall receive Retirement Payments on each Payment Date as hereinafter provided. A Participant who has completed 10 or more years of Eligible Service or has met the Rule of 75, will be entitled to Retirement Payments for life. A Participant who has not completed 10 years of Eligible Service and has not met the Rule of 75, will be entitled to receive Retirement Payments for a period equal to the lesser of (i) the Participant's life and (ii) the Participant's period of Eligible Service. A Participant's right to compensation shall terminate as of the last day of the calendar year in which his or her death occurs, or, if the Participant has less than 10 years of Eligible Service and has not met the Rule of 75, as of the end of the calendar year in which falls the date that is the anniversary of the date the Participant's last period of Eligible Service began. (c) Any retirement payment due after the death of a Participant shall be paid to the Participant's surviving spouse, or, if no spouse survives, to the Participant's personal representative. (d) The obligations of the Company or any of its affiliated corporations and the benefit due any Participant, surviving spouse or beneficiary hereunder shall be reduced by any amount received in regard thereto under the Trust. 4. Funding. To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Plan shall be joint and several. 5. Change of Control. (a) If a Change of Control has occurred, the Committee shall cause the Company to contribute to the Trust within 7 days of such Change of Control, a lump sum contribution equal to the greater of: (i) the aggregate unfunded value of the amount each Participant would be eligible to receive, under (b), below; or (ii) the present value of accumulated Plan benefits based on the assumptions the Company's independent actuary deems reasonable for this purpose, as of a Valuation Date coinciding with nor next preceding the date of Change of Control, to the extent such amounts are not already in the Trust. The aggregate value of the amount of the lump sum to be contributed to the Trust pursuant to this Section 4 shall be determined by the Company's independent actuaries. Thereafter, the Company's independent actuaries shall annually determine as of a Valuation Date for such Participant not receiving a lump sum payment pursuant to subsection (b), below, the greater of: (A) the amount such Participant would have received under subsection (b) had such Participant not made the election under subsection (c) below, if applicable; and (B) the present value of accumulated benefits based on assumptions the actuary deems reasonable for this purpose. To the extent that the value of the assets held in the Trust relating to this Plan does not equal the amount described in the preceding sentence, at the time of the valuation, the Company shall make a lump sum contribution to the Trust equal to the difference. In no event, however, shall the Company's contribution to the Trust be less than the amount that would have been contributed thereto with respect to liabilities relating to the Plan (including related administrative and investment expense), pursuant to and at the time and in the manner provided under Section 1(h) of the Trust. (b) In the event a Change of Control has occurred, the trustee of the Trust shall, within 45 days of such Change of Control, pay to each Participant not making an election under subsection (c), a lump sum payment equal to the present value of the Retirement Payments the Participant is entitled to receive from the Company pursuant to the terms of the Plan assuming when applicable for each Participant as of the date of Change of Control that (i) the Participant will complete his current term as Director, (ii) the Participant will survive during the period of his normal life expectancy, and (iii) the age requirement for retirement and receipt of Retirement Payments is the age of the Participant on the Change of Control date. Present value shall be determined by using a discount rate equal to the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended. The amount of each Participant's lump sum payment shall be determined by the Actuary. (c) Each Participant may elect in a time and manner determined by the Committee, but in no event later than December 31, 1996, or the occurrence of a Change of Control, if earlier, to have amounts and benefits determined and payable under the terms of this Plan as if a Change of Control had not occurred. New Participants in the Plan may elect in a time and manner determined by the Committee, but in no event later than 90 days after becoming a Participant, to have amounts and benefits determined and payable under the terms of the Plan as if a Change of Control had not occurred. A Participant who has made an election, as set forth in the two preceding sentences, may, at any time and from time to time, change that election ; provided, however, a change of election that is made within one year of a Change of Control shall be invalid. (d) Each Participant who has made an election under (c), above, may elect within 90 days following a Change of Control, in a time and manner determined by the Benefits Trust Committee, to receive a lump sum payment calculated under the provisions of subsection (b), above, determined as of the Valuation Date next preceding such payment, except that such amount shall be reduced by 5% and such reduction shall be irrevocably forfeited to the Company by the Participant. Furthermore, as a result of such election, the Participant shall no longer be eligible to participate or otherwise benefit under the Plan. Payments under this subsection (d) shall be made not later than seven (7) days following receipt by the Company of the Participant's election. The Benefits Trust Committee shall, no later than seven (7) days after a Change of Control has occurred, cause written notification to be given to each Participant eligible to make an election under this subsection (d), that a Change of Control has occurred and informing such Participant of the availability of the election. (e)Notwithstanding the preceding, following a Change of Control, any election by a Participant to receive his or her payment in an alternate form or to delay his or her payment is subject to the approval of the Benefits Trust Committee in its sole judgment and discretion. 6. Committee Powers. Prior to a Change of Control, the Committee shall have full power and authority to interpret, construe and administer this Plan, and all actions of the Committee under the Plan shall be binding and conclusive on all persons for all purposes. Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Committee as the Plan's administrator. Accordingly, following a Change of Control, any and all final benefit determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefit claims under this Plan shall rest with the Benefits Trust Committee or its delegate in its sole judgment and absolute discretion. 7. Successors. The Plan shall be binding upon and inure to the benefit of Participants. If the Company becomes a party to any merger, consolidation, reorganization or in the event of a sale of substantially all the assets of the Company, the Plan shall remain in full force and effect as an obligation of the Company or its successor in interest. 8. Amendment and Termination. Prior to a Change of Control and upon the recommendation of the Committee, the Board reserves the right to amend or terminate the Plan at any time without the consent of any Participant, but no amendment or termination shall deprive any Participant of the right to continue to receive payment under Section 3 once payments have begun. Notwithstanding the foregoing, if a Change of Control occurs, each Participant, regardless of age or Eligible Service shall be eligible for benefits under the Plan, and the Plan may not be terminated and no amendment may be made that would adversely affect the right of any such Participant to receive Retirement Payments or Accelerated Retirement Payments under the Plan. Following a Change of Control, this Plan may not be amended or terminated without the approval of the Benefits Trust Committee. 9. Construction. The Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. The masculine pronoun shall mean the feminine wherever appropriate. The captions inserted herein are inserted as a matter of convenience and shall not affect the construction of the Plan. EX-10.3 3 Exhibit 10.3 CSX CORPORATION CORPORATE DIRECTOR DEFERRED COMPENSATION PLAN EFFECTIVE NOVEMBER 1, 1980 As Amended and Restated Effective January 1, 1995 (As Amended through December 31, 1997) 1. Purpose The purpose of this Plan is to permit members of the Board of Directors of CSX Corporation to elect deferred receipt of director's fees. This Plan is intended to constitute a deferred compensation plan for corporate director's fees in accordance with Revenue Ruling 71-419, Cumulative Bulletin 1971-2, page 220. 2. Definitions The following words or terms used herein shall have the following meanings: (a) "Administrator: -- means CSX Corporation (i) Prior to a Change of Control, the Administrator shall be responsible for the general administration of the Plan, claims review, and for carrying out its provisions. Administration of the Plan shall be carried out consistent with the terms of the Plan. (ii) Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Administrator. (iii) The Administrator shall have sole and absolute discretion to interpret the Plan and determine eligibility for and benefits hereunder. Decisions of the Administrator regarding participation in and the calculation of benefits under the Plan shall at all times be binding and conclusive on Participants, their beneficiaries, heirs and assigns. (iv) Notwithstanding subsection (iii) above, following a Change of Control, final benefit determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefit claims under the Plan shall rest with the Benefits Trust Committee or its delegate in its sole judgment and absolute discretion. (b) "Benefits Trust Committee" -- means the committee ------------------------- established pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust document. (c) "Board" -- means the Board of Directors of CSX (d) "Change of Control" -- means any of the following: (i) Stock Acquisition. The acquisition, by any individual, entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")](a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock"), or (B) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subsection(i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Corporation; (B) any acquisition by the Corporation; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(d); or (ii) Board Composition. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Business Combination. Approval by the shareholders of the Corporation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Corporation or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (A)all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or its principal subsidiary or all or substantially all of the assets of the Corporation or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be; (B)no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C)at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (iv) Regulated Business Combination. Approval by the shareholders of the Corporation of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(d); or (v) Liquidation or Dissolution. Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation or its principal subsidiary. (e) "CSX" or "Corporation" -- means CSX Corporation (f) "CSX's Accountants" -- means the independent accountants, actuaries, benefits consulting firm or other entity engaged by CSX to provide Participant's accounting services for the Plan and, if selected or changed following a Change of Control, approved by the Benefits Trust Committee. (g) "Director's Fees" -- means any compensation, whether for Board meetings or for Committee meetings or otherwise, earned by a Member for services rendered as a Member during a particular calendar year in which he has elected to be a Participant (h) "Member" -- means any person duly elected to the Board (i) "Participant" -- means any Member who elects to participate in the Plan (j) "Plan" -- means Corporate Director Deferred Compensation Plan (k) "Secretary" -- means the Corporate Secretary of CSX (l) "Trust" -- means the trust created under the CSX and Affiliated Companies Benefits Assurance Trust Agreement or a grantor trust or trusts established by CSX which will substantially conform to the terms of the Internal Revenue Service model trust as described in Revenue Procedure 92-64, 1992-2 C.B. 422. Except as provided in Section 10, CSX is not obligated to make any contribution to the Trust. (m) "Valuation Date" -- means the last day of each calendar quarter and such other dates as the Administrator deems necessary or appropriate to value the Participants' benefits under this Plan. However, following a Change of Control, the selection of a Valuation Date other than the last day of each calendar quarter shall be subject to the approval of the Benefits Trust Committee. In any instance in which the male gender is used herein, it shall also include persons of the female gender in appropriate circumstances. 3. Merger Provisions Any person who was a Participant under the Chessie System, Inc. Corporate Director Deferred Compensation Plan or who was a director and had made an election under the Seaboard Coast Line Industries, Inc. Nonfunded Deferred Compensation Plan for Directors shall automatically become a Participant under this Plan effective upon the merger of Chessie System, Inc. and Seaboard Coast Line Industries, Inc. into the Corporation, provided that such a person shall be a Member as defined in this Plan. Director's Fees deferred previously under the terms of the aforesaid director deferred compensation plans of Chessie System, Inc. and Seaboard Coast Line Industries, Inc. shall remain subject to the terms and conditions respectively provided therein, and the terms of this Plan shall only govern as to Director's Fees earned on and after the date of merger into the Corporation. 4. Participation A Member may become a Participant for any calendar year by filing a written Election to Participate in the Plan with the Secretary not later than December 31 immediately prior to the year in which Director's Fees are to be earned. Following a Change of Control, all Elections to Participate are subject to the approval of the Benefits Trust Committee. An Election to Participate may be made with respect to all or any part of Director's Fees to be earned for any year or years to which such Election to Participate may relate. An Election to Participate, once filed, shall apply to Director's Fees earned in subsequent years in which a Participant shall serve as a Member, unless amended or revoked by written request to the Secretary. Any person who becomes a Member and who was not a Member on the preceding December 31 may file an Election to Participate before his term as a Member begins. 5. Deferral of Director's Fees CSX shall, during any year in which a Participant has an Election to Participate on file with the Secretary, withhold and defer payment of all or any specified part of Participant's Director's Fees in accordance with his Election to Participate. Prior to the beginning of any year, a Participant can elect to have all or any portion of the amounts withheld, including all earnings thereon, or to be withheld, credited to an interest-accruing account ("Interest Account") and/or to an enhanced interest-accruing account for calendar years 1986, 1987, 1989 and 1990 ("Enhanced Interest Account"), and/or to a CSX Phantom Stock Account ("Stock Account"). Such deferral election can be made or changed before the beginning of any year. Interest shall accrue on the Interest Account from the date the deferred Director's Fee would otherwise have been paid to the Participant until it is actually paid, such interest to be credited to the Participant's account and compounded quarterly at the end of each calendar quarter. The rate of interest will be reviewed periodically, provided, however, following a Change of Control, any change in the rate of interest is subject to the approval of the Benefits Trust Committee. Interest shall accrue on the Enhanced Interest Account from the first day of the month following the deferral and shall compound thereafter at an annual rate of 16% until all amounts are finally paid to the Participant. Credits to the Stock Account shall be in full and fractional units based on the closing price for CSX common stock as reported on the New York Stock Exchange Composite Listing ("NYSE") on the date the fees would otherwise have been paid to the Participant. Dividends shall be credited in full and fractional units to the account based on the number of units in the account on the record date and calculated based on the closing price for CSX common stock on the dividend payment date. A Participant, while a Member, may elect prior to the beginning of any year to transfer all or any portion of amounts deferred, including all earnings thereon, to an Enhanced Interest Account, an Interest Account and/or a Stock Account, provided, however, that no transfer may be made out of an Enhanced Interest Account. 6. Distribution of Deferred Director's Fees Amounts deferred under the Plan and credited to an Interest Account or Stock Account shall be distributed to a Participant from the account(s) maintained in respect of his account in a lump sum at the beginning of the year following the year in which a Participant ceases to be a Member, unless he shall elect installments as provided below. Amounts deferred and credited to an Enhanced Interest Account shall be distributed over an installment period elected by the Participant. The value of a Participant's Interest Account shall be the sum of amounts deferred and all interest accrued thereon. The value of an Enhanced Interest Account shall be the sum of amounts deferred and all interest accrued thereon. The value of a Stock Account shall be the value of the units in a Participant's account based on the closing price for CSX common stock as reported on the NYSE on the last business day of the year in which a Participant ceases to be a Member, unless he shall elect annual or quarterly installments as provided below. The value of a Stock Account will fluctuate in value in line with the fluctuation in the price of CSX common stock. There can be no assurance on the market value of the phantom units either at the time of acquisition or at any time during the distribution period, nor can there be any assurance as to the continuation of dividends. Distribution of Deferred amounts shall begin with either the first day of the calendar year immediately following the year in which a Participant shall cease to be a Member for any reason other than death, or the first day of the calendar year immediately following the year in which a Participant shall cease to be a Member and shall have attained age 65, as the Member may elect. If installment payments are elected for Interest or Stock Accounts, payments shall be made, as the Participant may elect, for either (a) five years, (b) ten years, or (c) any other designated period which shall be not less than the period he was a Participant nor exceed ten years. For Enhanced Interest Accounts, the Participant may elect to receive payments over (a) five years, (b) ten years, or (c) fifteen years. For Interest Accounts and Stock Accounts, installments shall be on an annual or quarterly basis as the Member may elect. The amount of each installment shall be determined by multiplying the value of the Participant's account at the end of the calendar quarter immediately preceding the installment date by a fraction, the numerator of which shall be one (1) and the denominator of which shall be the number of installment payments over which payment of such amount is to be made, less the number of installment payments theretofore made. For Enhanced Interest Accounts, payments shall be in level installments on a monthly basis over the number of years (five, ten, or fifteen) as elected by the Member. The elections provided in this Section 6 shall be made in writing in a Participant's Election to Participate and shall be subject to all other provisions of the Plan relating thereto and to the deferral of receipt of Director's Fees. In the event a Participant shall die while he is a Member, the amount appearing as the credit balance of his account, or the value of the units in his Stock Account, shall be paid in either a lump sum or installments (consistent with the election made by the Participant as described in this Section 6) to his Designated Beneficiary. Each Participant may file with the Secretary a Designation of Beneficiary for this purpose. In the event a Participant shall die after he ceases to be a Member and before he has received complete distribution from his account, any credit balance of his account, including interest, or the value of the units in his Stock Account, shall be paid to his Designated Beneficiary consistent with the election made by the Participant as described in this Section 6. In the event a Participant shall not file a Designation of Beneficiary, or his Designated Beneficiary is not living at the Participant's death, the balance credited to his account, including interest, shall be paid in full to his estate not later than the tenth day of the calendar year following his date of death. 7. Death Benefit For Participants electing to have deferred Director's Fees credited to an Enhanced Interest Account who die while a Member, a death benefit equal to the greater of three times the amount of Director's Fees deferred or the amount of Director's Fees deferred plus accumulated interest will be paid to the Member's Designated Beneficiary. For Participants in an Enhanced Interest Account who die after ceasing to be a Member, a lump sum death benefit of $10,000 will be paid to the Designated Beneficiary. This death benefit shall apply only to Director's Fees deferred after December 31, 1985 and which have been credited to an Enhanced Interest Account. This death benefit shall not apply to any amounts credited to an Enhanced Interest Account by reason of transfer from an Interest Account and/or a Stock Account. In the event a Participant shall not file a Designation of Beneficiary, or the Designated Beneficiary is not living at the Participant's death, the death benefit shall be paid to the Participant's estate. 8. Amendment or Termination of Election to Participate A Participant may amend or terminate his Election to Participate by written request to the Secretary, which shall become effective for the calendar year following the year in which his request is made; provided, however, that no amendment shall be made to contravene the deferral of Director's Fees previously made under the provisions of this Plan. In the event a Participant amends or terminates his Election to Participate and remains a Member, he shall not be entitled to receive any distribution from his account until he ceases to be a Member, and distributions shall be made only as provided in Section 6 of this Plan. 9. Obligation of CSX This Plan shall be unfunded and credits to the memorandum account(s) of each Participant shall not be set apart for him nor otherwise made available so that he may draw upon it at any time, except as provided in this Plan. Neither any Participant nor his Designated Beneficiary shall have any right, title, or interest in such credits or any claim against them. Payments may only be made at such times and in the manner expressly provided in this Plan. CSX's contractual obligation is to make the payments when due. No notes or security for the payment of any Participant's account shall be issued by CSX. 10. Change of Control 10.1 If a Change of Control has occurred, the Administrator shall cause CSX to contribute to the Trust, within 7 days of such Change of Control, a lump sum payment equal to the unfunded aggregate value of the amount each Participant would be eligible to receive (determined under 10.2 below) as of the latest Valuation Date coinciding with or preceding the date of Change of Control to the extent such amounts are not already in the Trust. The aggregate value of the amount of the lump sum to be contributed to the Trust pursuant to this Section 10 shall be determined by CSX's Accountants after consultation with the entity then maintaining the Plan's records. Thereafter, CSX's Accountants shall annually determine as of a Valuation Date for each Participant not receiving a lump sum payment pursuant to Section 10.2, below, the amounts which would be payable under such subsection were a Change of Control to occur at the date of such determination. To the extent that the value of the assets held in the Trust relating to this Plan do not equal the aggregate amount described in the preceding sentence, at the time of the valuation, as determined by CSX's Accountants, CSX shall make a lump sum contribution to the Trust equal to the difference. In no event, however, shall the Company's contribution to the Trust be less than the amount that would have been contributed thereto with respect to liabilities relating to the Plan (including related administrative and investment expenses), pursuant to and at the time and in the manner provided under Section 1(h) of the Trust. 10.2 In the event a Change of Control has occurred, the trustee of the Trust shall, within 45days of such Change of Control, pay to each Participant not making an election under 10.3 below, a lump sum payment equal to the amount the Participant would have been entitled to receive determined under Section 6 had he ceased to be a Member and selected an immediate lump sum payment. The amount of each Participant's lump sum payment shall be determined by CSX's Accountants. 10.3 Each Participant may elect in a time and manner determined by the Administrator but in no event later than December 31, 1996, or the occurrence of a Change of Control, if earlier, to have amounts and benefits determined and payable under the terms of the Plan as if a Change of Control had not occurred. New Participants in the Plan may elect in a time and manner determined by the Administrator, but in no event later than 90 days after becoming a Participant, to have amounts and benefits determined and payable under the terms of the Plan as if a Change of Control had not occurred. A Participant who has made an election, as set forth in the two preceding sentences, may, at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change of Control shall be invalid. 10.4 Notwithstanding anything in the Plan to the contrary, each Participant who has made an election under Section 10.3, above, may elect within 90 days following a Change of Control, in a time and manner determined by the Administrator, to receive a lump sum payment calculated under the provisions of 10.3, above, determined as of the Valuation Date next preceding such payment, except that such calculated amount shall be reduced by 5% and such reduction shall be irrevocably forfeited to CSX by the Participant. Furthermore, as a result of such election, the Participant shall no longer be eligible to participate or otherwise benefit from the Plan. Payments under this Section 10.4 shall be made not later than 7 days following receipt by CSX of the Participant's election. The Administrator shall, no later than 7 days after a Change of Control has occurred, give written notification to each Participant eligible to make an election under this Section 10.4, that a Change of Control has occurred and informing such Participant of the availability of the election. 11. Claims Against Participant's Account No credits to the account of any Participant under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so shall be void. Nor shall any credit be subject to attachment or legal process for debts or other obligations. Nothing contained in this Plan shall give any Participant any interest, lien, or claim against any specific asset of CSX. No Participant or his Designated Beneficiary shall have any rights other than as a general creditor of CSX. 12. Competition by Participant In the event a Participant ceases to be a Member and becomes a proprietor, officer, partner, employee, director, or otherwise becomes affiliated with any business that is in competition with the Corporation, the entire balance credited to his account, including interest, or the value of the units in his Stock Account, if prior to a Change of Control, may, if directed by the Board in its sole discretion, be paid immediately to him in a lump sum. Following a Change of Control, such a decision by the Board is subject to the approval of the Benefits Trust Committee. 13. Payment of Credit Balance to Participant's Account Notwithstanding anything herein to the contrary, prior to a Change of Control, the Board may, in its sole discretion, direct payment in a lump sum, of any or all of the credit balance appearing at the time in the account of a Participant, and/or of the value of the units in his Stock Account. Following a Change of Control, such action by the Board is subject to the approval of the Benefits Trust Committee. Further, the obligations of CSX and the benefit due any Participant or Designated Beneficiary under the Plan shall be reduced by any amount received in regard thereto under the Trust or any similar trust or other vehicle. 14. Joint and Several Obligation To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Plan shall be joint and several. 15. Amendment or Termination Prior to a Change of Control, this Plan may be altered, amended, suspended, or terminated at any time by the Board, on the recommendation of the Compensation Committee of the Board, provided, however, that no alteration, amendment, suspension, or termination shall be made to this Plan which would result in the distribution of amounts credited to the accounts of all Participants in any manner other than is provided in this Plan without the consent of all Participants. EX-10.12 4 Exhibit 10.12 AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------- AMENDMENT, dated this 17th day of April, 1997, by and between CSX CORPORATION, a Virginia corporation (the "Company") and John W. Snow (the "Executive"). WHEREAS the Company and the Executive are parties to an Employment Agreement dated as of the first day of February, 1995 (the "Agreement"); WHEREAS the Company and the Executive desire to amend the Agreement to deal appropriately with the transactions contemplated by the Agreement and Plan of Merger by and among Conrail, Inc., a Pennsylvania corporation, Green Acquisition Corp., a Pennsylvania corporation, and the Company dated as of October 14, 1996, as subsequently amended. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Section 2 of the Agreement is amended by adding a new clause f. at the end thereof to read in its entirety as follows: "f. Final Regulatory Action (as defined in Section 3.b.) approving the merger (the "Conrail Merger") contemplated by the Agreement and Plan of Merger by and among Conrail, Inc., a Pennsylvania corporation, Green Acquisition Corporation, a Pennsylvania corporation, and the Company dated as of October 14, 1996, as subsequently amended." 2. Section 5.c. of the Agreement is amended so that clause (iii) shall read in its entirety as follows: "other than in the case of the Conrail Merger, the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a) (i) (B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;" 3. Section 5.c. of the Agreement is further amended by adding a new clause (iii) at the end of the final paragraph thereof, and such final paragraph of Section 5.c. shall read in its entirety as follows: "Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason shall be deemed to be a termination for Good Reason for all purposes of this Agreement if such termination occurs (i) in the case of a Change of Control that is not a Regulated Business Combination, during the 30-day period immediately following the first anniversary of the Effective Date, (ii) in the case of a Change of Control that is a Regulated Business Combination consummated pursuant to Final Regulatory Action, during the 30-day period immediately following the first anniversary of the Final Regulatory Action (it being understood that the Executive will have no rights under this paragraph in the case of a Change of Control that is a Regulated Business Combination (x) denied by the Agency or (y) for any other reason not consummated within one year of Final Regulatory Action, or (iii) in the case of the Conrail Merger, during the 30-day period immediately following the second anniversary of the Final Regulatory Action approving the Conrail Merger." 4. The Agreement shall remain in full force and effect in all other respects. The Executive acknowledges that this Amendment does not alter the Executive's rights under any other plan, policy or program of the Company, and the Conrail Merger shall not constitute a Change of Control under any such plan, program or policy. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company as caused these presents to be executed in its name and on its behalf, all as of the day and year first above written. ----------------------------- John W. Snow CSX CORPORATION ----------------------------- By: Mark G. Aron Executive Vice President-Law and Public Affairs EX-10.13 5 Exhibit 10.13 June 23, 1995 Mr. G. L. Nichols EVP and Chief Operating Officer CSX Transportation, Inc. Mr. Nichols: This will confirm our understanding of the terms of a special incentive opportunity which has been established for you. Accomplishment of part or all of the following by December 31, 1997 will qualify you for an award of up to 5,000 shares of CSX stock, payable in February of 1988: 1. Achievement of a Safety Frequency Index of 1.0 or better for the Operating Department for the 1997 calendar year, 2. Achievement of a 75 percent Operating Ratio for the 1997 calendar year, 3. Reduction in customer complaints by 20% over the January- June 1995 average, 4. PIT savings of $412 million during the 1995-1997 period, 5. Substantial improvements in customer service measures, e.g., dock-to-dock performance, Intermodal service, and Q train performance, and, 6. Accomplishment of your key MICP goals during the 1995-1997 plan years. Payment of this special incentive will be contingent upon your continuous employment through December 1997 and approval by John W. Snow, Chairman and CEO, and the CSX Board of Directors. Dividends will not be paid on the 5,000 shares until they are awarded. Please indicate your concurrence with these terms by signing below. I look forward to working with you to accomplish these challenging objectives. A. R. Carpenter Accepted: G. L. Nichols, EVP and Chief Operating Officer ---------------------------------------------- EX-10.14 6 Exhibit 10.14 CSX CORPORATION Stock Purchase and Loan Plan As Amended and Restated February 14, 1996, as Amended through December 10, 1997 1. Purpose The CSX Corporation 1991 Stock Purchase and Loan Plan (the "1991 Plan") was established to encourage and increase the ownership of the common stock of CSX Corporation (the "Company") by those employees of the Company or a Subsidiary who, by virtue of their responsibilities or positions, were most likely to have the opportunity to enhance long-term performance of the Company and shareholder value. The Company continues to believe that ownership of the Company's common stock stimulates the efforts of those employees upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business and will further the identification of those employees' interests with those of the Company's shareholders. Unless the 1991 Plan is extended or replaced, these benefits will generally end July 31, 1996. Management believes it is in the best interests of the Company's shareholders to extend the 1991 Plan in order to continue the original objective of assuring that significant amounts of the Company's common stock are held by employees whose interests are identified with those of the Company's non-employee shareholders. Accordingly, the 1991 Plan is amended and restated as of February 14, 1996 (the "Plan"), to maintain and expand this objective. Notwithstanding anything contained in this amended and restated Plan, the provisions of the 1991 Plan in effect prior to the amendment and restatement reflected herein shall continue to apply with respect to Company Stock acquired pursuant to a Purchase Award under the 1991 Plan as to which a Participant is not granted or does not exercise an Exchange Award. 2. Definitions and Construction Unless the content clearly indicates to the contrary, in reading this Plan, the singular shall include plural and the masculine shall include the feminine. As used in the Plan, the following terms have the indicated meanings: (a) "Applied Dividends" means, as provided in Section 6(e), dividends paid on pledged Company Stock used to reduce Interest. (b) "Board" means the Company's Board of Directors. (c) "Business Day" means, if relevant to a determination of the value of Company Stock, a day on which shares of Company Stock are or could be traded on the New York Stock Exchange. (d) "Cause" means a Participant's: (i) act or acts of personal dishonesty intended to result in substantial personal enrichment at the expense of the Company or a Subsidiary; (ii) repeated violations of the Participant's responsibilities which are demonstrably willful and deliberate and which are not remedied in a reasonable period of time after receipt of written notice from the Company or a Subsidiary; or (iii) conviction of a felony involving moral turpitude. (e) "Change of Control" means any of the following: (i) Stock Acquisition. The acquisition, by any ----------------- individual, entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person")of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(e); or (ii) Board Composition. Individuals who, as of the date ----------------- hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Business Combination. Approval by the --------------------- shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or its principal Subsidiary that is not subject, as a matter of law or contract, to approval by the Surface Transportation Board or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal Subsidiary or all or substantially all of the assets of the Company or its principal Subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the Board of Directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (iv) Regulated Business Combination. Approval by the -------------------------------- shareholders of the Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(e); or (v) Liquidation or Dissolution. Approval by the ------------------------------ shareholders of the Company of a complete liquidation or dissolution of the Company or its principal Subsidiary. (f) "Commitment Date" means a date fixed by the Committee which shall be the first day of the Commitment Period. (g) "Commitment Period" means a period of twenty (20) Business Days beginning with the Commitment Date during which a Participant who has been granted a Purchase Award must purchase all or part of the underlying Company Stock. (h) "Committee" means the Committee of the Board appointed to administer the Plan as provided in Section 10. (i) "Company" means CSX Corporation. (j) "Company Stock" means the common stock of the Company and rights, options or warrants for the purchase of securities of the Company which may be issued with shares of common stock pursuant, and subject to, plans or agreements adopted or entered into from time to time by the Company. (k) "Disability" means the inability to perform the services for which a Participant was employed as a result of a physical or mental impediment entitling the Participant to begin receiving benefits under the CSX Salary Continuation and Long-Term Disability Plan. (l) "Equity" means, as of any date, the Exchange Award Purchase Price of a share of Company Stock less the applicable portion of the unpaid balance and accrued interest of a Purchase Loan to which such share of Company Stock is subject. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Exchange Award" means a Purchase Award granted pursuant to Section 4 to a Participant who received a Purchase Award under the 1991 Plan. (o) "Exchange Award Down Payment" means a dollar amount computed by taking a percentage, to be determined by the Committee, of the Exchange Award Purchase Price of the Company's common stock on the Commitment Date multiplied by the number of shares in the Exchange Award; provided, however, such percentage shall not be less than 10% nor more than 25%. (p) "Insider" means any person subject to Section 16(b) of the Exchange Act. (q) "Interest" means an amount calculated using the Applicable Federal Rate, as determined for purposes of Section 1274(d) of the IRC. (r) "Interest Spread" means, at the time of determination, Interest accrued on a Purchase Loan reduced by Applied Dividends. (s) "IRC" means the Internal Revenue Code of 1986, as amended. (t) "Market Price" means the average of the high and the low price of a share of Company Stock on the New York Stock Exchange (or the average of the bid and asked prices if there were no sales), on any Business Day as reported in The Wall Street Journal. (u) "Participant" means an employee of the Company or a Subsidiary who is designated by the Committee, in its sole discretion, as eligible for and who receives a Purchase Award. (v) "Purchase Award" means a right to purchase a specified number of shares of Company Stock with Purchase Loan rights. (w) "Purchase Loan" means an extension of credit to a Participant by the Company evidenced by a non-recourse promissory note for (i) in the case of a new Purchase Loan, 90% or 95% of the Purchase Price of the Company Stock awarded to the Participant under the Plan, or (ii) in the case of a Purchase Loan made pursuant to an exchange of Company Stock pursuant to Section 4, the Purchase Price of the Company Stock awarded to the Participant under an Exchange Award, less his Exchange Award Down Payment, and in either case, bearing Interest, and secured by a pledge of all of the shares of Company Stock purchased by the Participant. (x) "Purchase Note" means a promissory note evidencing the Purchase Loan for the balance of the Purchase Price without recourse rights against the maker and with other terms and conditions established by the Committee consistent with the Plan. (y) "Purchase Note Repayment Amount" means the then unpaid balance of the Purchase Note, accrued and unpaid interest, applicable federal and state payroll and withholding taxes on income recognized on the transaction, and any brokerage fees, collection fees and costs associated with the Purchase Loan. (z) "Purchase Price" or "Exchange Award Purchase Price" means, with respect to a share of Company Stock, the average of the Market Price for the five (5) consecutive Business Days immediately preceding the Commitment Date. (aa) "Retirement" means the termination of employment (for reasons other than Cause) (i) at or after age 65, or (ii) after age 55 with at least 10 years of service with the Company and/or a Subsidiary. (ab) "Subsidiary" means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Company. 3. Company Stock There shall be an aggregate of 9,000,000 shares of Company Stock reserved for issuance under the Plan, subject to Section 9 of the Plan (concerning changes in the capital structure of the Company). Shares that have been awarded under the Plan but not issued, or shares that have been issued but are returned to the Company in conformity with the Plan (including shares of Company Stock retained, canceled or repurchased by the Company in conjunction with the payment of a Purchase Loan or withholding taxes), may again be awarded under the Plan. 4. Exchange of Shares To encourage, extend and expand the continued ownership of Company Stock, Participants in the 1991 Plan whose Purchase Loans mature July 31, 1996, without regard to the one-year extension provided for under Section 6(b), may be given a one-time irrevocable election to exchange all, or a portion to be determined by the Committee, of any shares purchased under the 1991 Plan for an enhanced Purchase Award under the Plan (an "Exchange Award"). To the extent such shares are exchanged they shall constitute the "Exchanged Shares." Exchange Awards shall be issued for not more than the number of shares of common stock determined by dividing the excess of the Exchange Award Purchase Price, as of the Commitment Date of the Exchange Award, of the number of shares relating to a Purchase Loan issued pursuant to the 1991 Plan over the outstanding amount due on the Purchase Loan on such date by 25% of the Exchange Award Purchase Price of the Company's common stock on such date. In the case of a Participant who exercises an Exchange Award, his 1991 Purchase Notes shall be canceled. 5. Stock Purchase Awards On or as soon as practicable after a Commitment Date, the Committee shall give notice to each Participant (or to the class of Participants) eligible for an award stating (i) the number of shares of Company Stock covered by each such Purchase Award or a formula for determining the number of shares of Company Stock covered by each such Purchase Award, and (ii) the price, other terms and conditions, if any, pertaining to each such Purchase Award and Purchase Loan that must be satisfied by a Participant in order to exercise the Purchase Award. A Participant shall exercise a Purchase Award and Purchase Loan rights by delivering to the Company during the Commitment Period (i) a notice stating the amount of his down payment (which shall be 5% or 10% of the Purchase Price or his Exchange Award Down Payment in the case of an Exchange Award) and his intention to deliver a Purchase Note for the balance of the Purchase Price, and (ii) where applicable, the down payment (which shall be deemed paid in the case of an Exchange Award) and a Purchase Note. The grant of a Purchase Award and Purchase Loan to a Participant shall not obligate the Company or a Subsidiary of the Company to pay the Participant any particular amount of remuneration, to continue the employment of a Participant after the grant or to make further grants to a Participant at any time thereafter. 6. Purchase Loans The Company shall, subject to paragraph (a) below, upon the Committee's recommendation, extend a Purchase Loan to a Participant upon exercise of a Purchase Award subject to the following terms and conditions: (a) The original principal amount of a new Purchase Loan shall be the difference between the Participant's down payment (which shall be 5% or 10% of the Purchase Price) and the Purchase Price. In the case of an Exchange Award, the Purchase Loan shall be the difference between the Participant's Exchange Award Down Payment and the Exchange Award Purchase Price. The down payment for a new Purchase Loan shall be in cash, or, if authorized by the Committee (i) by delivery of shares of Company Stock having a Market Price equal to the required down payment on date of transfer to the Company, or (ii) by delivery to the Company of a promissory note with terms and conditions fixed by the Committee and with full recourse rights against the maker. The Exchange Award Down Payment shall be deemed to have been paid by the Equity in a Participant's Exchanged Shares subject to a Purchase Loan under the 1991 Plan. (b) The Purchase Loan shall be due and payable as provided in the provisions of the Purchase Note executed by the Participant. The term of the Purchase Note shall not exceed a period of five (5) years; provided, however, the Participant, in his discretion, may extend the Purchase Note for one (1) year; provided, further, that the Committee, may, in its discretion, extend a Purchase Note for up to two (2) years. In no event may the Purchase Note term, including extensions, exceed seven (7) years. (c) Purchase Notes shall be in the form approved by the Committee and shall contain such terms and conditions, not inconsistent with the Plan, as the Committee shall determine in its sole discretion; provided, that each Purchase Note shall be subject to the terms of the Plan. (d) A Participant shall effect a pledge of all shares of Company Stock acquired by the Participant upon the exercise of the Purchase Award by delivering to the Company (i) the certificate or certificates for the acquired shares of Company Stock, accompanied by a duly executed stock power in blank, and (ii) a properly executed stock pledge agreement in the form approved by the Committee. (e) Dividends paid on shares of Company Stock pledged as security for a Purchase Loan shall be first treated as Applied Dividends and then applied to repay the Purchase Note. At the discretion of the Committee, the Company shall also pay (i) dividend equivalents on the number of shares purchased pursuant to a Purchase Note equal to the number of shares representing the Participant's Equity in the Exchanged Shares, and (ii) only after all interest and Purchase Price reductions are realized under Section 6(g), dividend equivalents on the number of shares purchased pursuant to a Purchase Note in excess of the number of shares in (i), above, if any. (f) Within ten (10) Business Days after the maturity date of a Purchase Loan, or on the date or dates, if installments are elected pursuant to Section 7(c), as of which a Participant elects to prepay a Purchase Loan and Purchase Note in accordance with Section 7, the Participant shall repay in full the Purchase Note Repayment Amount or the portion related to an installment under Section 7(c). If not fully paid when due, the Participant agrees to sell his pledged Company Stock to the Company at the Market Price on the maturity date if a Business Day (or at the Market Price on the Business Day immediately preceding the maturity date if the maturity date is not a Business Day). The Company may sell on the Participant's behalf on the open market (except as hereinafter provided) the number of shares of Company Stock pledged as collateral necessary to repay the Purchase Note Repayment Amount. If, pursuant to procedures established by the Company for compliance with applicable securities laws, the Company believes that the purchase of pledged shares by the Company in repayment of a Purchase Note, or the sale by the Company of pledged shares of Company Stock on the open market to repay a Purchase Note, would violate any provision of applicable securities laws or cause a Participant to incur a liability under Section 16(b) of the Exchange Act, the maturity date may be extended by the Committee until the first day the purchase by the Company of the pledged shares or a sale of the pledged shares on the open market can be made without violating such securities laws or the Participant incurring liability under Section 16(b). If, pursuant to procedures established by the Company for compliance with applicable tax laws, the Company believes that the repayment of a Purchase Note, the purchase of the pledged shares in repayment of a Purchase Note, or the sale by the Company of pledged shares of Company Stock on the open market to repay a Purchase Note would cause any portion of a Participant's compensation under the Plan to be nondeductible under Section 162(m) of the IRC, the maturity date may be extended by the Committee until the first day the repayment of a Purchase Note, the purchase of the pledged shares in repayment of a Purchase Note, or the sale by the Company of pledged shares of Company Stock on the open market to repay a Purchase Note can be made without such compensation being non-deductible under Section 162(m) of the IRC, but in no event shall such extension of the maturity date be for a period greater than one (1) year. (g) The Purchase Price of one half of the pledged shares of Company Stock shall be adjusted as follows if at any time after the first anniversary date of a Purchase Note the Market Price of Company Stock equals or exceeds the Purchase Price of the Participant's Company Stock by the amount specified below for a period of ten (10) consecutive Business Days: Stock Price Purchase Price Reductions ----------- ------------------------- Purchase Price + 20% 10% Purchase Price + 30% 20% Purchase Price + 40% 30% Purchase Price + 50% 40% Purchase Price + 60% 50% Purchase Price + 70% 60% Purchase Price + 80% 70% Purchase Price + 90% 80% Purchase Price + 100% 100% The principal amount of a Participant's Purchase Loan and Purchase Note, plus accrued and unpaid Interest, as well as any accrued and unpaid Interest on a down payment loan referenced in Section 6(a) shall be adjusted pursuant to Section 2.5 of the Stock Purchase Pledge and Loan Agreement. The amount of such adjustment to the principal amount of a Participant's Purchase Loan and Purchase Note shall equal the amount of the Purchase Price adjustment provided above. The provisions of this Section and any applicable adjustments to Interest and a Purchase Note shall be applied at the time of repayment of a Purchase Note. Decreases in the Market Price of Company Stock subsequent to the completion of a measuring period shall be disregarded for purposes of the adjustments authorized by this Section. (h) In the event of a change in capital structure involving any of the pledged shares of Company Stock, as provided in Section 9, such newly acquired shares shall be pledged to the Company as substitute or additional security. (i) Notwithstanding anything in this Section 6 to the contrary, the Company shall not be required to make a Purchase Loan to a Participant if making such Purchase Loan will (i) cause the Company to violate any covenant or other similar provision in any indenture, loan agreement, or other agreement, or (ii) violate any applicable federal, state or local law. (j) Upon issuance by the Company of Company Stock purchased pursuant to a Purchase Award, the affected Participant shall be deemed a shareholder of the Company and (subject to the terms of the Plan, the Purchase Loan, the Purchase Note and related documents) shall be entitled to dividend and voting rights with respect to the Company Stock purchased. 7. Termination of Employment; Change of Control; Prepayment of Purchase Loan If before a Purchase Note is repaid a Participant's employment terminates for any reason, or he is no longer employed by a continuing Subsidiary, or a Change of Control occurs, the following provisions shall apply notwithstanding any terms in the Purchase Note to the contrary: (a) Death or Disability. If a Participant's termination of employment ------------------- results from death or Disability, the affected Participant (or the Participant's estate or personal representative) may either (i) continue to hold the Purchase Note and participate in the Plan for three years (or, if earlier, until the maturity date of the Purchase Loan, as extended by either the Participant or the Committee, pursuant to Section 6(b)), or (ii) within ninety (90) days of said termination of employment (A) elect to prepay the Purchase Note, or (B) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (ii)(A), the Purchase Note shall become due and payable on the prepayment date elected by the Participant. If an election to prepay the Purchase Note is effective prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is effective on or after the first anniversary of its execution, Section 6(g) shall apply. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii)(B), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). (b) Involuntary Termination With Consent of Company. If a -------------------------------------------------------- Participant's employer terminates his employment for reasons other than Cause, the affected Participant may, within ninety (90) days of said termination of employment (i) elect to prepay the Purchase Note, or (ii) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (i), the Purchase Note shall become due and payable on the prepayment date elected by the Participant. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). If the Participant's termination of employment is prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is on or after the first anniversary of the execution of the Purchase Note, Section 6(g) shall apply. (c) Retirement. If a Participant's termination of employment ---------- results from his Retirement, the affected Participant may either (i) continue to hold the Purchase Note and participate in the Plan for three (3) years (or, if earlier, until the maturity date of the Purchase Loan, as extended by either the Participant, or the Committee, pursuant to Section 6(b)), (ii) prepay the Purchase Note within ninety (90) days of said termination of employment, or (iii) repay the Purchase Note in no more than three (3) installments, due over the remaining term of the Purchase Note, including extensions. If a Participant elects to prepay a Purchase Note, the Participant agrees to sell the pledged Company Stock to the Company for the Market Price on the date of prepayment. If an election to prepay the Purchase Note under (ii) or (iii) above is effective prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is effective on or after the first anniversary of its execution, Section 6(g) shall apply. (d) Voluntary Termination with Consent of Company or Involuntary ----------------------------------------------------------------- Termination. If the Participant's termination of employment is ----------- voluntary and with the consent of the Company, or, if his employer terminates his employment for reasons other than Cause and the Company does not consent to the Participant's termination being treated under Section 7(b), the maturity date of the Purchase Note shall be accelerated without further action of the Committee or the Company and shall be required to be prepaid within ninety (90) days of said termination of employment, and the Participant agrees to sell the pledged Company Stock to the Company for the Market Price on the date of prepayment. If a Participant's termination of employment is prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is on or after the first anniversary of the execution of the Purchase Note, Section 6(g) shall apply. (e) Termination for Cause or Voluntary Termination Without Consent ----------------------------------------------------------------- of Company. If the Participant's termination of employment is ---------- involuntary for Cause or a voluntary termination without the consent of the Company, the maturity date of the Purchase Note shall be accelerated without further action of the Committee or the Company to the date of his termination of employment. In such case, Section 6(g) shall not apply and the Participant agrees to sell the pledged Company Stock to the Company for the lesser of (i) the Market Price on the date of termination of employment, or (ii) an amount equal to his Exchange Award Down Payment, as adjusted by Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a) (in any event, less all related taxes and expenses), and the Company shall have the right to retain any excess over such amount and the shares' Market Price. (f) Divisive Transaction. If the Participant's employer ceases to be -------------------- a Subsidiary or if there is a sale of substantially all of the assets of the Subsidiary, the affected Participant may, within ninety (90) days of the closing of such divisive transaction (i) elect to prepay the Purchase Note, or (ii) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (i), the Purchase Note shall become due and payable on the prepayment date elected by the Participant. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). Section 6(g) shall apply to all Participants affected by a divisive transaction. The foregoing shall apply whether or not the Participant continues in the employ of the Subsidiary but shall not apply should the Participant continue in the employ of the Company or another Subsidiary not part of the divisive transaction. (g) Change of Control. If a Change of Control occurs, Sections 7(a) ----------------- through (f) shall no longer be applicable, the Interest and Purchase Price Reductions under Section 6(g) shall be applied as if the Stock Price had increased by 100% and the Participant may either (i) continue to hold the Purchase Note and participate in the Plan until the maturity date of the Purchase Note, including any extensions, or (ii) within ninety (90) days of said Change of Control and, if applicable, within ninety (90) days of a final Agency action in a Regulated Business Combination under Section 2(e)(iv), (A) elect to prepay the Purchase Note, or (B) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (ii)(A), the Purchase Note shall become due and payable on the prepayment date elected by the Participant, and the provisions of Section 6(g) shall apply. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii)(B), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). (h) Adjustment of Exchange Award Down Payment. Solely for purposes of ------------------------------------------ determining the amount available to a Participant under this Section 7, a Participant's Exchange Award Down Payment shall be adjusted as follows: the dollar amount of the Exchange Award Down Payment computed as of the date of the Exchange of Shares pursuant to Section 4 shall be divided by the Market Price on the date of such Exchange of Shares, to arrive at a number of equivalent shares. On the Purchase Loan maturity date or prepayment date applicable under this Section 7, the number of equivalent shares determined in the preceding sentence will be multiplied by the Market Price on such date to arrive at the Participant's Exchange Award Down Payment as adjusted. (i) Certain Terms of Purchase Awards or Exchange Awards. ---------------------------------------------------------------- Notwithstanding any provision of this Plan to the contrary, in the discretion of the Committee, a Purchase Award and/or Exchange Award may provide, to the extent deemed appropriate by the Committee to eliminate or reduce the applicability or impact of Sections 280G and/or 4999 of the IRC, for: (i) the cancellation of shares and/or a reduction or increase in the amount of a Purchase Note, (ii) a limitation of the reduction of the Purchase Price pursuant to Section 7(g) above, (iii) the elimination of any acceleration of a Purchase Note or right to prepay such Note, or (iv) a reduction or limitation of any other benefit under this Plan or otherwise to a Participant. 8. Non-transferability of Purchase Awards Except as provided in Section 7(a), neither right of Participation nor Purchase Awards are assignable or transferable. 9. Change in Capital Structure If the number of outstanding shares of Company Stock is increased or decreased as a result of a subdivision or consolidation of shares, the payment of a stock dividend, stock split, or any other change in capitalization effected without receipt of consideration by the Company (including, but not limited to, the creation or issuance to the shareholders generally of rights, options or warrants for the purchase of common or preferred stock of the Company), or if a spin-off transaction occurs, then the number and kind of shares of stock or securities of the Company to be subject to the Plan, the maximum number of shares or securities which may be delivered under the Plan, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding and conclusive on all persons. If there is a Change of Control, the Committee may take such actions, not inconsistent with the Plan, with respect to outstanding unexercised Purchase Awards as the Committee deems appropriate. Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee's determination shall be conclusive and binding on all persons for all purposes. 10. Administration of the Plan The Plan shall be administered by the Committee, consisting of not less than three Directors of the Company appointed by the Board. Subject to paragraph (d) below, the Committee shall be the Compensation Committee of the Board or such subcommittee appointed by the Compensation Committee consisting of not fewer than two non-employee directors. The Committee shall at all times consist of outside directors within the meaning of Section 162(m) of the IRC. The Committee shall have general authority to impose any limitation or condition upon a Purchase Award the Committee deems appropriate to achieve the objectives of the Purchase Award and the Plan, and in addition, and without limitation and in addition to powers set forth elsewhere in the Plan, shall have the following specific authority: (a) The Committee shall have the power and complete discretion to determine (i) which employees of the Company or a Subsidiary shall be Participants, (ii)which Participants shall receive a Purchase Award with Purchase Loan rights, (iii) the number of shares of Company Stock to be covered by each Purchase Award, (iv) the Market Price of Company Stock,(v) the time or times when a Purchase Award shall be granted, (vi) whether a Disability exists, (vii) the manner in which payment will be made upon the exercise of a Purchase Award, (viii) the number of shares of Company Stock required to be pledged at any given time, and to make appropriate adjustments and (ix) any additional requirements relating to Purchase Awards that the Committee deems appropriate. (b) The Committee may adopt rules and regulations for carrying out the Plan and for the sale or other disposition of Company Stock acquired pursuant to the Plan. The interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. (c) A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting. (d) The Board may from time to time appoint or remove members and fill vacancies, however caused, in the Committee. Insofar as it is necessary to satisfy the requirements of Section 16(b) of the Exchange Act and Rule 16b-3 thereunder, no member of the Committee shall be eligible to participate in the Plan or in any other plan of the Company or a Subsidiary that entitles participants to acquire stock, stock options or stock appreciation rights of the Company or a Subsidiary, and no person shall become a member of the Committee if, within the preceding one-year period, the person shall have been eligible to participate in such a plan. (e) Down payment loans under the 1991 Plan shall be extended on a full recourse basis for up to seven (7) years in the case of any Participant who receives and exercises an Exchange Award. To the extent that a Purchase Note is extended, accelerated or prepaid under the terms of the Plan, said extension, acceleration or prepayment shall also apply to the down payment loan. 11. Effective Date of the Plan The 1991 Plan became effective as of December 12, 1990. This amendment and restatement of the 1991 Plan shall be effective as of February 14, 1996, and shall be submitted to the shareholders of the Company for approval. Until (i) the Plan has been approved by the Company's shareholders, (ii) the Company Stock issuable under the Plan has been registered with the Securities and Exchange Commission, (iii) the Company Stock is accepted for listing on the New York Stock Exchange, and (iv) the requirements of any applicable state securities laws have been met, no Purchase Award shall be granted or Purchase Loan authorized by the Committee. 12. Termination, Modification If not sooner amended or terminated by the Board, this Plan shall terminate at the close of business on February 13, 2006. No Purchase Awards shall be made under this Plan after termination. The Board may terminate the Plan or may amend the Plan in such respects as it shall deem advisable; provided, however, that, if necessary to satisfy the requirements of Section 16(b) of the Exchange Act, the New York Stock Exchange or applicable state law, the shareholders of the Company must approve any amendment that would (i) materially increase the benefits accruing to Participants under the Plan, (ii) materially increase the number of shares of Company Stock that may be issued under the Plan, or (iii) materially modify the Plan's eligibility requirements. A termination or amendment of the Plan shall not, without the consent of the affected Participant, adversely impact a Participant's rights under a Purchase Award previously granted to him. 13. Notice All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (i) if to the Company--at its principal business address to the attention of the Secretary; (ii) if to any Participant--at the last address of the Participant known to the sender at the time the notice or other communication is sent. 14. Governing Law The terms of this Plan shall be governed by the laws of the Commonwealth of Virginia. EX-10.15 7 Exhibit 10.15 CSX CORPORATION 1987 Long-Term Performance Stock Plan As Amended and Restated Effective April 25, 1996 (As Amended through December 31, 1997) 1. Purpose The purpose of the CSX Corporation Long-Term Performance Stock Plan (the "Plan") is to attract and retain outstanding individuals as officers and key employees of CSX Corporation and its subsidiaries, to furnish motivation for the achievement of long-term performance objectives by providing such persons opportunities to acquire ownership of common shares of the Company, monetary payments based on the value of such shares or the financial performance of the Company, or both, on terms as herein provided. It is intended that the Incentives provided under this Plan will be treated as qualified performance-based compensation within the meaning of Section 162(m) of the Code. 2. Definitions Whenever the following words are capitalized and used in the Plan, they shall have the respective meanings set forth below, unless a different meaning is expressly provided. Unless the context clearly indicates to the contrary, in reading this document the singular shall include the plural and the masculine shall include the feminine. a. "Beneficiary": The term Beneficiary shall mean the person designated by the Participant, on a form provided by the Company, to exercise the Participant's rights in accordance with Section 14 of the Plan in the event of his death. b. "Benefits Trust Committee": The term Benefits Trust Committee means the committee established pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust. c. "Board of Directors": The term Board of Directors or Board means the Board of Directors of CSX Corporation. d. "Cause": The term Cause means (i) an act or acts of personal dishonesty of a Participant intended to result in substantial personal enrichment of the Participant at the expense of the Company or any of its subsidiaries, (ii) violation of the management responsibilities by the Participant which is demonstrably willful and deliberate on the Participant's part and which is not remedied in a reasonable period of time after receipt of written notice from the Company or a subsidiary, or (iii) the conviction of the Participant of a felony involving moral turpitude. e. "Change in Control": The term Change in Control is defined in Section 22. f. "Code": The term Code means the Internal Revenue Code of 1986, as amended. g. "Committee": The term Committee means the Compensation Committee of the Board of Directors. h. "Company": The term Company means CSX Corporation. i. "Completed Month": The term Completed Month shall mean a period beginning on the monthly anniversary date of a grant of an Incentive and ending on the day before the next monthly anniversary. j. "Covered Employee": The term Covered Employee shall mean the chief executive officer of the Company or any other individual who is among the four (4) highest compensated officers or who is otherwise a "covered employee" within the meaning of Section 162(m) of the Code, as determined by the Committee. k. "Disability": The term Disability means long-term disability as determined under the Company's Salary Continuance and Long-Term Disability Plan. l. "Divisive Transaction": The term Divisive Transaction means a transaction in which the Participant's employer ceases to be a Subsidiary or there is a sale of substantially all of the assets of the Subsidiary. m. "Exchange Act": The term Exchange Act means the Securities Exchange Act of 1934, as amended. n. "Exercisability Requirements": The term Exercisability Requirements used with respect to any grant of options means such restrictions or conditions on the exercise of such options that the Committee may, in its discretion, add to the one-year holding requirement contained in Sections 7 and 8. o. "Fair Market Value": The term Fair Market Value shall be deemed to be the mean between the highest and lowest quoted selling prices of the stock per share as reported under New York Stock Exchange-Composite Transactions on the day of reference to any event to which the term is pertinent, or, if there is no sale that day, on the last previous day on which any such sale occurred. p. "Functional Group": The term Functional Group means a group of employees, identified by the Compensation Committee, in its sole discretion, to be subject to a common set of Performance Objectives. q. "Incentive": The term Incentive means any incentive under the Plan described in Section 6. r. "Objective Standard": The term Objective Standard means a formula or standard by which a third party, having knowledge of the relevant performance results, could calculate the amount to be paid to a Participant. Such formula or standard shall specify the individual employees or class of employees to which it applies, and shall preclude discretion to increase the amount payable that would otherwise be due upon attainment of the objective. s. "Participant": The term Participant means an individual designated by the Committee as a Participant pursuant to Section 5. t. "Performance Objective": The term Performance Objective shall mean a performance objective established in writing by the Committee within ninety (90) days of the commencement of the Performance Period to which the Performance Objective relates and at a time when the outcome of such objective is substantially uncertain. Each Performance Objective shall be established in such a way that a third party having knowledge of the relevant facts could determine whether the objective is met. A Performance Objective may be based on one or more business criteria that apply to the individual Participant, a business unit or the Company as a whole, and shall state, in terms of an Objective Standard, the method of computing the amount payable to the Participant if the Performance Objective is attained. With respect to Incentives granted to Covered Employees, the material terms of the Performance Objective shall be disclosed to, and must be subsequently approved by, a vote of the shareholders of the Company, consistent with the requirements of Section 162(m) of the Code and the regulations thereunder. The Performance Objectives for any Performance Period shall be based on one or more of the following measures, as determined by the Committee in writing within ninety (90) days of the commencement of the Performance Period: 1. The achievement by the Company or business unit of specific levels of Return on Invested Capital ("ROIC"). ROIC for the Company or business unit means its results of operations divided by its capital. 2. The generation by the Company or business unit of free cash flow. 3. The creation by the Company or business unit of specific levels of Economic Value Added ("EVA"). EVA for the Company or business unit means its ROIC less its cost of capital multiplied by its capital. 4. The creation by the Company of specific levels of Total Shareholder Return ("TSR"). TSR for the Company means total return to shareholders as measured by stock price appreciation plus dividends. u. "Performance Period": The term Performance Period means a fixed period of time, established by the Committee, during which a Participant performs service for the Company and during which Performance Objectives may be achieved. v. "Plan": The term Plan means this CSX Corporation 1987 Long-Term Performance Stock Plan as amended or restated from time to time. w. "Retirement": The term Retirement means termination of employment with immediate commencement of retirement benefits under the Company's defined benefit pension plan. x. "Separation From Employment": The term Separation From Employment means an employee's separation from employment with the Company or a Subsidiary as a result of Retirement, death, Disability, or termination of employment (voluntarily or involuntarily). A Participant in receipt of periodic severance payments shall be considered separated from employment on the day preceding the day such severance payments commenced. y. "Subsidiary": The term Subsidiary means, with respect to any corporation, or corporation more than 50% of whose voting shares are owned directly or indirectly by the Company. z. "Trust": The term Trust means the CSX Corporation and Affiliated Companies Executives' Stock Trust or such other trust or trusts which substantially conforms to the terms of the Internal Revenue Service model trust as described in Revenue Procedure 92-64, 1992-2 C.B. 422. 3. Number of Shares Subject to the provisions of Section 19 of this Plan, the maximum number of shares which may be issued pursuant to the Incentives shall be 16,000,000 shares of the Company's common stock, par value $1.00 per share. Such shares shall be authorized and unissued shares of the Company's common stock. Subject to the provisions of Section 19, if any Incentive granted under the Plan shall terminate or expire for any reason without having been exercised in full, the unissued shares subject thereto shall again be available for the purposes of the Plan. Similarly, shares which have been issued, but which the Company retains or which the Participant tenders to the Company in satisfaction of income and payroll tax withholding obligations or in satisfaction of the exercise price of any option shall remain authorized and shall again be available for the purposes of the Plan, provided, however, that any such previously issued shares shall not be the subject of any grant under the Plan to any officer of the Company who, at the time of such grant, is subject to the short-swing trading provisions of Section 16 of the Exchange Act. 4. Administration a. Prior to a Change of Control, the Plan shall be administered by the Committee. The Committee shall consist of three or more members of the Board of Directors. No member of the Committee shall be eligible to receive any Incentives under the Plan while a member of the Committee. A majority of the Committee shall constitute a quorum. The Committee shall recommend to the Board individuals to receive Incentives, including the type and amount thereof, unless the Board shall have delegated to the Committee the authority and power to select persons to whom Incentives may be granted, to establish the type and amount thereof, and to make such grants. Subject to the express provisions of the Plan, the Committee shall have authority to construe any agreements entered into with any person in respect of any Incentive or Incentives, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of any such agreements and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any agreement under the Plan in the manner and to the extent it shall deem expedient to carry it into effect, and it shall be the sole and final judge of such expedience. Any determination of the Committee under the Plan may be made without notice of meeting of the Committee by a writing signed by a majority of the Committee members. The determinations of the Committee on the matters referred to in this Section 4 shall be conclusive. b. Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Committee as the Plan Administrator. Additionally, following a Change of Control, any and all final benefit determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefit claims under this Plan shall rest with the Benefits Trust Committee or its delegate in its sole judgment and absolute discretion. 5. Eligibility and Participation Incentives may be granted only to officers and key employees of the Company and of its Subsidiaries at the time of such grant as the Committee in its sole discretion may designate from time to time to receive an Incentive or Incentives. An officer or key employee who is so designated shall become a Participant. A director of the Company or of a Subsidiary who is not also an officer or employee of the Company or of such Subsidiary will not be eligible to receive an Incentive. The Committee's designation of an individual to receive an Incentive at any time shall not require the Committee to designate such person to receive an Incentive at any other time. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Incentives, including without limitation (a) the financial condition of the Company, (b) anticipated financial results for the current or future years, including return on invested capital, (c) the contribution by the Participant to the profitability and development of the Company through achievement of established strategic objectives, and (d) other compensation provided to Participants. 6. Incentives Incentives may be granted in any one or a combination of (a) Incentive Stock Options; (b) Non-Qualified Stock Options; (c) Stock Appreciation Rights; (d) Performance Shares; (e) Performance Units; (f) Restricted Stock; and (g) Incentive Compensation Program Shares, all as described below and pursuant to the terms set forth in Sections 7-12 hereof. With respect to Items (a)-(c), the maximum number of shares of common stock of the Company with respect to which these Incentives may be granted in any Plan Year to any Participant will be 750,000. With respect to Items (d)-(f), the maximum number of shares of common stock of the Company with respect to which these Incentives may be granted during any Plan Year to any Participant will be 150,000. 7. Incentive Stock Options Incentive Stock Options (ISOs) will consist of options to purchase shares of the Company's common stock at purchase prices not less than 100 percent of the Fair Market Value of such common stock on the date of grant. ISOs will be exercisable upon the date or dates specified in an option agreement entered into with a Participant but not earlier than one year after the date of grant of the options and not later than 10 years after the date of grant of the options; provided, however, that whether or not the one-year holding requirement is satisfied, any Exercisability Requirements must be satisfied. For options granted after December 31, 1986, the aggregate Fair Market Value, determined at the date of grant, of shares for which ISOs are exercisable for the first time by a Participant during any calendar year shall not exceed $100,000. Notwithstanding the provisions of Section 5 of this Plan, no individual will be eligible for or granted an ISO if that individual owns stock of the Company possessing more than 10 percent of the total combined voting power of all classes of the stock of the Company or its Subsidiaries. Any Participant who is an option holder may exercise his option to purchase stock in whole or in part upon the date or dates specified in the option agreement offered to him. In no case may an option be exercised for a fraction of a share. Except as set forth in this Section 7, Section 12 and in Sections 14 through 16, no option holder may exercise an option unless at the time of exercise he has been in the continuous employ of the Company or one of its Subsidiaries since the grant of such option. An option holder under this Plan shall have no rights as a shareholder with respect to any shares subject to such option until such shares have been issued. For purposes of this Section 7, written notice of exercise must be received by the Corporate Secretary of the Company not less than one year nor more than 10 years after the option is granted. Such notice must state the number of shares being exercised and must be accompanied by payment of the full purchase price of such shares. Payment for the shares for which an option is exercised may be made by (1) a personal check or money order payable to CSX Corporation; (2) a tender by the employee (in accordance with procedures established by the Company) of shares of the Company's common stock having a Fair Market Value on the date of tender equaling the purchase price of the shares for which the option is being exercised; or (3) any combination of (1) and (2). 8. Non-Qualified Stock Options Non-Qualified Stock Options (NQSOs) will consist of options to purchase shares of the Company's common stock at purchase prices not less than 100 percent of the Fair Market Value of such common stock on the date of grant. NQSOs will be exercisable upon the date or dates specified in an option agreement entered into with a Participant but not earlier than one year after the date of grant of the options and not later than 10 years after the date of grant of the options; provided, however, that whether or not the one-year holding requirement is satisfied, any Exercisability Requirements must be satisfied. Any Participant may exercise an option to purchase stock upon the date or dates specified in the option agreement offered to him. In no case may an option be exercised for a fraction of a share. Except as set forth in this Section 8 and in Sections 12 through 15, no option holder may exercise an option unless at the time of exercise he has been in the continuous employ of the Company or one of its Subsidiaries since the grant of his option. An option holder under this Plan shall have no rights as a shareholder with respect to any shares subject to such option until such shares have been issued. For purposes of this Section 8, written notice of exercise must be received by the Corporate Secretary of the Company, not earlier than one year nor later than 10 years after the option is granted. Such notice must state the number of shares being exercised and must be accompanied by payment of the full purchase price of such shares. Payment for the shares for which an option is exercised may be made by (1) a personal check or money order payable to CSX Corporation; (2) a tender by the employee (in accordance with procedures established by the Company) of shares of the Company's common stock having a Fair Market Value on the date of tender equaling the purchase price of the shares for which the option is being exercised; (3) the delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to the Company either sale proceeds of shares sold to pay the purchase price or the amount loaned by the broker to pay the purchase price; or (4) any combination of (1), (2) and (3). 9. Stock Appreciation Rights Any option granted under the Plan may include a stock appreciation right (SAR) by which the participant may surrender to the Company all or a portion of the option to the extent exercisable at the time of surrender and receive in exchange a payment equal to the excess of the Fair Market Value of the shares covered by the option portion surrendered over the aggregate option price of such shares. Such payment shall be made in shares of Company common stock, in cash, or partly in shares and partly in cash, as the Committee in its sole discretion shall determine, but in no event shall the number of shares of common stock delivered upon a surrender exceed the number the option holder could then purchase upon exercise of the option. Such rights may be granted by the Committee concurrently with the option or thereafter by amendment upon such terms and conditions as the Committee may determine. The Committee may also grant, in addition to, or in lieu of options to purchase stock, SARs which will entitle the Participant to receive a payment upon surrender of that right, or portion of that right in accordance with the provisions of the Plan, equaling the difference between the Fair Market Value of a stated number of shares of Company common stock on the date of the grant and the Fair Market Value of a comparable number of shares of Company common stock on the day of surrender, adjusted for stock dividends declared between the time of the grant of the SAR and its surrender. The Committee shall have the right to limit the amount of appreciation with respect to any or all of the SARs granted. Payment made upon the exercise of the SARs may be in cash or shares of Company common stock, or partly in shares and partly in cash, as the Committee in its sole discretion shall determine. For purposes of this Section 9, written notice must be received by the Corporate Secretary of the Company not earlier than one year nor later than 10 years after the SAR is granted. Such notice must state the number of SARs being surrendered and the method of settlement desired within the guidelines established from time to time by the Committee. The SAR holder will receive settlement based on the Fair Market Value on the day the written request is received by the Corporate Secretary of the Company. In certain situations as determined by the Committee, for purposes of this Section 9, written notice must be received by the Corporate Secretary of the Company between the third and twelfth business days after the public release of the Company's quarterly earnings report, or between such other, different period as may hereinafter be established by the Securities and Exchange Commission. For such settlements, a Participant subject to a restricted exercise period shall receive settlement based on the highest Fair Market Value during the period described in the foregoing sentence. The Committee may not grant an SAR or other rights under this Section 9 in connection with an incentive stock option if such grant would cause the option or the Plan not to qualify under Section 422 of the Code or if it is prohibited by such section or Treasury regulations issued thereunder. Any grant of an SAR or other rights which would disqualify either the option as an ISO or the Plan, or which is prohibited by Section 422 of the Code or Treasury regulations issued thereunder, is and will be considered as void and vesting no rights in the grantee. It is a condition for eligibility for the benefits of the option and of the Plan that the Participant agree that in the event an SAR or other right granted should be determined to be void as provided by the foregoing, the Participant has no right or cause of action against the Company. 10. Performance Unit Awards and Performance Share Awards. The Committee may grant Performance Unit Awards (PUAs) and Performance Share Awards (PSAs) under which payment shall be made in shares of the Company's common stock, in cash, or partly in shares and partly in cash, as the Committee in its sole discretion shall determine. PUAs and PSAs may be awarded to individual Participants or to a Functional Group. Awards to a Functional Group shall be subject to distribution by the Chief Executive Officer of the Company, or by his designees, to individuals within such group. At the time of the grant, the Committee shall establish in writing and communicate to Participants, and to members of a Functional Group who can be identified, Performance Objectives to be achieved during the Performance Period. Awards of PUAs and PSAs may be determined by the average level of attainment of Performance Objectives over multiple Performance Periods. Prior to the payment of PUAs and PSAs, the Committee shall determine the extent to which Performance Objectives have been attained during the Performance Period or Performance Periods in order to determine the level of payment to be made, if any, and shall record such results in the minutes of the meeting of the Committee. In no instance will payment be made if the Performance Objectives are not attained. Payment, if any, shall be made in a lump sum or in installments, in cash or shares of Company common stock, as determined by the Committee, commencing as promptly as feasible following the end of the Performance Period, except that (a) payments to be made in cash may be deferred subject to such terms and conditions as may be prescribed by the Company, and (b) payments to be made in Company common stock may be deferred pursuant to an election filed on forms prescribed and provided by and filed with the Company. A Participant may elect annually to defer to a date certain, or the occurrence of an event, as provided in the form, the receipt of all or any part of shares of Company common stock he may subsequently become entitled to receive. On forms provided by and filed with the Company, the Participant shall also specify whether, when the deferral period expires or when the restrictions below lapse, payment will be in a lump sum or installments over a period not exceeding twenty (20) years. The Committee shall prescribe the time periods during which the election must be filed in order to be effective. Elections to defer, once effective, are irrevocable. Changes regarding the date of payment, the period over which payments are to be made and the method of payment are subject to substantial penalties. However, a One-Time Change of Distribution Election may be made to change the timing or the form of payment without penalty. Any such election which changes a distribution election on "termination of employment" or "the earlier of termination or a specified age" shall be void in the event the Participant's employment terminates within twelve (12) months following the date of the election. If a Participant has made an effective election to defer the payment of shares of common stock, the Company shall, within a reasonable period of time after the deferral election is made, transfer shares of common stock or other assets equal in value to the number of shares as to which payment is deferred to the Trust to secure the Company's obligation to pay shares of common stock to the Participant in the future. However, in any event, the Company shall make any previously deferred payment of shares to the Participant upon: a. the death of the Participant; b. the Disability of the Participant; c. the Participant's termination of employment with the Company or a subsidiary of the Company, subject to the Participant's deferral election; d. A Divisive Transaction, subject to the Participant's deferral election; or e. a Change in Control. Notwithstanding a Participant's election to defer the payment of shares of common stock pursuant to this Section 10, the Company shall make cash payments to Participants following each common stock dividend payment date equal to the dividends payable on the number of shares of Company common stock credited to the Participant's account as of the dividend record date (including shares for which an election to defer has been made and any reinvested dividends thereon). A Participant may elect to defer receipt of the cash payments pursuant to election forms prescribed and provided by and filed with the Company. Such deferred cash payments shall be credited to the Participant's account and reinvested in shares of Company common stock as of the dividend payment date. An election to defer, once effective, shall be irrevocable for the calendar year, and shall continue in effect with respect to subsequent calendar years until changed by a timely filed new election. Any dividends paid on shares of Company common stock held in the Trust shall be paid to the Trust and shall be reinvested in shares of Company common stock, or other assets equal in value, to secure the Company's obligation to pay shares of common stock to Participants in the future. 11. Restricted Stock A Restricted Stock Award (RSA) shall entitle the Participant, subject to his continued employment during the restriction period determined by the Committee and his complete satisfaction of any other conditions, restrictions and limitations imposed in accordance with the Plan, to the unconditional ownership of the shares of the Company's common stock covered by the grant without payment therefore. The Committee may grant RSAs at any time or from time to time to a Participant selected by the Committee in its sole discretion. The Committee shall establish at the time of grant of each RSA a Performance Period and Performance Objectives to be achieved during the Performance Period. At the time of grant, the Performance Period and Performance Objectives shall be set forth either in agreements or in guidelines communicated to the Participant in such form consistent with this Plan as the Committee shall approve from time to time. Following the conclusion of each Performance Period and prior to payment, the Committee shall determine the extent to which Performance Objectives have been attained or a degree of achievement between maximum and minimum Performance Objectives during the Performance Period in order to determine the level of payment to be made, if any, and shall record such results in the minutes of the meeting of the Committee. In no instance will payment be made if the Performance Objectives are not attained. At the time that an RSA is granted, the Committee shall establish in the written agreement a restriction period applicable to all shares covered by such grant. Subject to the provisions of the next following paragraph, the Participant shall have all of the rights of a stockholder of record with respect to the shares covered by the grant to receive dividends or other distributions in respect of such shares (provided, however, that any shares of stock of the Company distributed with respect to such shares shall be subject to all of the restrictions applicable to such shares) and to vote such shares on all matters submitted to the stockholders of the Company, but such shares shall not be sold, exchanged, pledged, hypothecated or otherwise disposed of at any time prior to the expiration of the restriction period, including by operation of law, and any purported disposition, including by operation of law, shall result in automatic forfeiture of any such shares. Except as hereinafter provided, if, during the restriction period applicable to such grant, a Separation From Employment of a Participant occurs for any reason other than death, Disability or Retirement, all shares covered by such grant shall be forfeited to the Company automatically. If the Participant's Separation From Employment is because of Retirement or death, or in the event of Disability, the Participant or his successor in interest shall be entitled to unconditional ownership of a fraction of the total number of shares covered by such grant of which the numerator is the number of whole calendar months in the period commencing with the first whole calendar month following the date of grant and ending with the whole calendar month including the date of death, Disability or Retirement, and of which the denominator is the number of whole calendar months in the applicable restriction period. Any fractional shares shall be disregarded. The Committee may, at the time of granting any RSA, impose such other conditions, restrictions or limitations upon the rights of the Participants during the restriction period or upon the Participant's right to acquire unconditional ownership of shares as the Committee may, in its discretion, determine and set forth in the written agreement. At the time of grant of an RSA, the Company shall cause to be issued and registered in the name of the Participant a stock certificate representing the full number of shares covered thereby, which certificate shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such grant, and the grantee shall execute and deliver to the Company a stock power endorsed in blank covering such shares. Such stock certificate and stock power shall be held by the Company or its designee until the expiration of the restriction period, at which time the same shall be delivered to the Participant or his designee if all of the conditions and restrictions of the grant have been satisfied, or until the forfeiture of such shares, at which time the same shall be cancelled and the shares shall be returned to the status of unissued shares. 12. Incentive Compensation Program Shares A Participant who receives base compensation in excess of a dollar level to be determined by the Committee and who is eligible to receive an award under the Company's Incentive Compensation Program ("ICP") may elect, by filing the prescribed election form with the Company in accordance with rules established by the Committee, to receive all or part of his annual ICP award in shares of the Company's common stock, rather than cash; provided, however, the Participant must agree that his receipt of the stock will be deferred until his retirement or termination of employment, with a minimum deferral period of three (3) years. Elections to defer are irrevocable. A Participant who makes such election shall, at the time that the stock is deferred, receive an additional award of stock equal to a percentage, established by the Committee from time to time, of the amount that he elected to have deferred, but not to exceed 25% (the "Stock Premium"). The Participant's election to defer shall also apply to the Stock Premium. If a Participant made an effective election to defer the payment of shares of common stock and receive the Stock Premium, the Company shall, within a reasonable period of time after the deferral election is made, transfer shares of common stock or other assets equal in value to the number of shares as to which payment is deferred to the Trust to secure the Company's obligation to pay shares of common stock to the Participant in the future. However, in any event, the Company shall make any previously deferred payment of shares to the Participant upon: a. the death of the Participant; b. the Disability of the Participant; c. the Participant's termination of employment with the Company or a subsidiary of the Company, subject to the Participant's deferral election and the three (3) year deferral requirement; d. a Divisive Transaction, subject to the Participant's deferral election; or e. a Change in Control. Notwithstanding any provisions of this Plan to the contrary, upon the occurrence of a Divisive Transaction, the three (3) year holding requirement of the stock premium for deferred ICP shares shall be deemed satisfied. Notwithstanding a Participant's election to defer the payment of shares of common stock pursuant to this Section 12, the Company shall make cash payments to Participants following each common stock dividend payment date equal to the dividends payable on the number of shares of Company common stock credited to the Participant's account as of the dividend record date (including shares for which an election to defer has been made and any reinvested dividends thereon). A Participant may elect to defer receipt of the cash payments pursuant to election forms prescribed and provided by and filed with the Company. Such deferred cash payments shall be credited to the Participant's account and reinvested in shares of Company common stock as of the dividend payment date. An election to defer, once effective, shall be irrevocable for the calendar year, and shall continue in effect with respect to subsequent calendar years until changed by a timely filed new election. 13. Contributions to the Trust a. The Company shall make contributions to the Trust to secure a source of future payments with respect to Participant's deferral elections pursuant to Sections 10 and 12. The Trustee shall be responsible only for contributions actually received by it hereunder and the Trustee shall have no duty or responsibility with respect to the timing, amounts and sufficiency of the contributions made or to be made by the Company hereunder. b. The Company may make contributions to the Trust in Common Stock. c. A separate bookkeeping account (an "Account") shall be established by the Trustee for each Participant covered by the Trust pursuant to the Plan, as directed in writing by the Company. A Participant may have more than one Account. Each account is intended to represent the amount of a Participant's deferred and unpaid benefit under the related provisions of the Plan. The value of a Participant's Account at any time will equal the fair market value of the number of shares of Common Stock owed to a Participant under the affected provisions of this Plan at such time. The number of shares owed at any time will equal the number of shares of Common Stock which were originally deferred by the Participant (including any applicable Stock Premium), plus, the number of Common Stock Shares which would have been acquired if dividends subsequently declared by the Company had been paid with respect to such shares and reinvested in Common Stock. "Account" may also mean individual sub-accounts which have been or may be established under this Plan from time to time. d. Within sixty days following the close of each calendar year, or more frequently or at such other time as may be required by the Trust Agreement, the Trustee shall provide the Company and each Participant with a written statement of the Account of each Participant. 14. Separation From Employment and Divisive Transactions If the Participant's Separation From Employment is because of Disability or death, the right of the Participant or his successor in interest to exercise an ISO, NQSO or SAR shall terminate not later than five years after the date of such Disability or death, but in no event later than 10 years from the date of grant; provided, however, that if such Participant is eligible to retire with the ability to begin immediately receiving retirement benefits under the Company's pension plan, his or his successor in interest's right to exercise any ISOs, NQSOs or SARs shall be determined as if his Separation From Employment was because of Retirement. If the Participant's Separation From Employment is because of his Retirement, the right of the Participant or his successor in interest to exercise an ISO, NQSO or SAR shall terminate not later than 10 years from the date of grant. Unless the Committee deems it necessary in individual cases (except with respect to Covered Employees) to extend a Participant's exercise period, if a Participant's Separation From Employment is for any reason other than Retirement, Disability or death, the right of the Participant to exercise an ISO, NQSO or SAR shall terminate not later than one year from the date of Separation From Employment, but in no event later than 10 years after the date of grant. At the time of his Separation From Employment for any reason other than Cause, a Participant shall vest in a portion of any Incentives granted under Sections 7 (ISOs), 8 (NQSOs) or 9 (SARs) that he has held for less than one year from the date of the grant. The portion of such Incentives in which the Participants shall vest shall be determined by multiplying all shares subject to such Incentives by a fraction, the numerator of which shall be the number of Completed Months of employment following the date of grant and the denominator of which shall be twelve. A Participant who vests in any Incentives under the preceding paragraph may not exercise such Incentives prior to the satisfaction of the one-year holding requirement and the Exercisability Requirements pertaining to such Incentives. Any Incentives vested under the preceding paragraph must be exercised within one year from the date of the Participant's Separation From Employment. If the Participant's employer is a Subsidiary involved in a Divisive Transaction, the right of the Participant or his successor in interest to exercise an ISO, NQSO or SAR shall terminate not less than three years after the date of the closing of such Divisive Transaction, but in no event later than 10 years from the date of grant; provided, however, that if such Participant is eligible to retire with the ability to begin immediately receiving retirement benefits under the Company's pension plan, his or his successor in interest's right to exercise any ISO, NQSO' or SAR' shall be determined as if he had retired. Notwithstanding anything to the contrary in this paragraph, a Participant may not exercise such Incentives prior to satisfaction of the one year holding requirement and the Exercisability Requirements pertaining to such Incentives. As to PUAs or PSAs, in the event of a Participant's Separation from Employment because of his Retirement, Disability or death prior to the end of the applicable Performance Period, or if the Participant's employer is a Subsidiary involved in a Divisive Transaction prior to the end of the applicable Performance Period, payment, if any, to the extent earned under the applicable Performance Objectives and awarded by the Committee, shall be payable at the end of the Performance Period in proportion to the active service of the Participant during the Performance Period, as determined by the Committee. If the Separation From Employment prior to the end of the Performance Period is for any other reason, the Participant's participation in Section 10 of the Plan shall immediately terminate, his agreement shall become void and the PUA or PSA shall be canceled. Notwithstanding anything to the contrary in this Plan, if a Participant or former Participant (a) becomes the owner, director or employee of a competitor of the Company or its subsidiaries, (b) has his employment terminated by the Company or one of its subsidiaries on account of actions by the Participant which are detrimental to the interests of the Company or its subsidiaries, or (c) engages in conduct subsequent to the termination of his employment with the Company or its subsidiaries which the Committee determines to be detrimental to the interests of the Company or its subsidiaries then the Committee may, in its sole discretion, pay the Participant or former Participant a single sum payment equal to the amount of his unpaid benefits which were awarded and deferred under Sections 10 or 12 of the Plan; provided, however, if the deferral has been for less than three (3) years under Section 12, the Participant shall not be eligible to receive the Stock Premium. The single sum payment shall be made as soon as practicable following the date the Participant or former Participant becomes an owner, director or employee of a competitor, his termination of employment or the Committee's determination of detrimental conduct, as the case may be, and shall be in lieu of all other benefits which may be payable to the Participant or former Participant under this Plan. 15. Incentives Non-assignable and Non-transferable Any Incentive granted under this Plan shall be non-assignable and non-transferable other than as provided in Section 16 and shall be exercisable (including any action of surrender and exercise of rights under Section 9) during the Participant's lifetime only by the Participant who is the holder of the Incentive or by his guardian or legal representative. 16. Death of Option Holder In the event of the death of a Participant who is an Incentive holder under the Plan while employed by the Company or one of its subsidiaries or prior to exercise of all rights under an Incentive, the Incentive theretofore granted may be exercised (including any action of surrender and exercise of rights under Section 9) by the Participant's Beneficiary or, if no Beneficiary is designated, by the executor or executrix of the Participant's estate or by the person or persons to whom rights under the Incentive shall pass by will or the laws of descent and distribution in accordance with the provisions of the Plan and of the option and to the same extent as though the Participant were then living. 17. No Right to Continued Employment Notwithstanding any other provisions of this Plan to the contrary, it is a condition for eligibility for any benefit or right under this Plan that each individual agrees that his or her designation as a Participant and any grant made under the Plan may be rescinded and determined to be void and forfeited entirely in the absolute and sole discretion of the Committee in the event that such individual is discharged for Cause. Incentives granted under the Plan shall not be affected by any change of employment so long as the Incentive holder has not suffered a Separation From Employment. A leave of absence granted by the Company or one of its subsidiaries shall not constitute Separation From Employment unless so determined by the Committee. Nothing in the Plan or in any Incentive granted pursuant to the Plan shall confer on any individual any right to continue in the employ of the Company or one of its subsidiaries or interfere in any way with the right of the Company or such subsidiary to terminate employment at any time. 18. Funding Method To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Plan shall be joint and several. 19. Adjustment of Shares a. In the event of any change (through recapitalization, merger, consolidation, stock dividend, split-up, combination or exchanges of shares or otherwise) in the character or amount of the Company's common stock prior to exercise of any Incentive granted under this Plan, the Incentives, to the extent not exercised, shall entitle the Participant who is the holder to such number and kind of securities as he would have been entitled to had he actually owned the stock subject to the Incentives at the time of the occurrence of such change. If any such event should occur, prior to exercise of an Incentive granted hereunder, which shall increase or decrease the amount of common stock outstanding and which the Committee, in its sole discretion, shall determine equitably requires an adjustment in the number of shares which the Incentive holder should be permitted to acquire, such adjustment as the Committee shall determine may be made, and when so made shall be effective and binding for all purposes of the Plan. b. Incentives may also be granted having terms and provisions which vary from those specified in the Plan provided that any Incentives granted pursuant to this paragraph are granted in substitution for, or in connection with the assumption of, then existing Incentives granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a subsidiary corporation is a party. c. The obligations of the Company or any of its affiliated corporations and the benefit due any Participant, surviving spouse or beneficiary hereunder shall be reduced by any amount received in regard thereto under the CSX Corporation and Affiliated Companies Executives' Stock Trust or any similar trust or trusts or other vehicle. d. Notwithstanding the preceding, following a Change of Control, the authority to delay payment of a Participant's benefits rests solely with the Benefits Trust Committee 20. Loans to Option Holders The Committee may adopt programs and procedures pursuant to which the Company may lend money to any Participant who is an Incentive holder for the purpose of assisting the Participant to acquire or carry shares of common stock issued upon the exercise of Incentives granted under the Plan. 21. Termination and Amendment of Plan a. Unless the Plan shall have been previously terminated as hereinafter provided, the Plan shall terminate on May 2, 1999, and no Incentives under it shall be granted thereafter. The Board of Directors, without further approval of the company's shareholders, may at any time prior to that date terminate the Plan, and thereafter no further Incentives may be granted under the Plan. However, Incentives previously granted thereunder may continue to be exercised in accordance with the terms thereof. Following a Change of Control, all amendments to this Plan are subject to the approval of the Benefits Trust Committee. b. Prior to a Change of Control, the Board of Directors, without further approval of the shareholders, may, on the recommendation of the Compensation Committee of the Board, amend the Plan from time to time in such respects as the Board may deem advisable; provided, however, that no amendment shall become effective without prior approval of the shareholders which would: (i) increase (except in accordance with Section 19) the maximum number of shares for which Incentives may be granted under the Plan; (ii) reduce (except in accordance with Section 19) the Incentive price below the Fair Market Value of the Company's common stock on the date of grant of the Incentive; (iii) extend the term of the Plan beyond May 2, 1999; (iv) change the standards of eligibility prescribed by Section 5; or (v) increase the maximum awards identified in Sections 7, 8, 9, 10 and 11. Following a Change of Control, all amendments to this Plan are subject to the approval of the Benefits Trust Committee. c. No termination or amendment of the Plan may, without the consent of a Participant who is a holder of an Incentive then existing, terminate his or her Incentive or materially and adversely affect his or her rights under the Incentive. 22. Change in Control a. Notwithstanding any provision of this Plan to the contrary, upon the occurrence of a Change in Control as set forth in subsection b., below: (i) all stock options then outstanding under this Plan shall become fully exercisable as of the date of the Change in Control, whether or not then otherwise exercisable; (ii) all SARs which have been outstanding for at least six months shall become fully exercisable as of the date of the Change in Control, whether or not then otherwise exercisable; (iii) all terms and conditions of RSAs then outstanding shall be deemed satisfied as of the date of the Change in Control; (iv) all PUAs and PSAs then outstanding shall be deemed to have been fully earned and to be immediately payable in cash as of the date of the Change of Control, however, Participants may defer those case payments, as stock, into the Trust, consistent with the deferral provisions of Section 10; and (v) the three (3) year holding requirement of the Stock Premium for deferred ICP shall be deemed satisfied. b. A "Change in Control" shall mean any of the following: (i) Stock Acquisition. The acquisition, by any individual, entity or ----------------- group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the --------- ------- following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 22(b); or (ii) Board Composition. Individuals who, as of the date hereof, ------------------ constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Business Combination. Approval by the shareholders of the --------------------- Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal subsidiary or all or substantially all of the assets of the Company or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (iv) Regulated Business Combination. Approval by the shareholders of the ------------------------------ Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (A), (B) and (C) of subsection (iii) of this Section 22(b); or (v) Liquidation or Dissolution. Approval by the shareholders of the ---------------------------- Company of a complete liquidation or dissolution of the Company or its principal subsidiary. c. Each Participant who has elected to defer the payment of PSAs pursuant to Section 10 or an ICP award pursuant to Section 12, may elect in a time and manner determined by the Committee, but in no event later than December 31, 1996 or the occurrence of a Change in Control, if earlier, to have amounts and benefits currently deferred, and to be deferred, under the Plan determined and payable under the terms of the Plan as if a Change in Control had not occurred. New Participants in the Plan may elect in a time and manner determined by the Committee, but in no event later than ninety (90) days after becoming a Participant, to have amounts and benefits currently deferred, and to be deferred, under the Plan determined and payable under the terms of the Plan as if a Change in Control had not occurred. A Participant who has made an election, as set forth in the two preceding sentences, may at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change in Control shall be invalid. d. Upon a Change of Control, the Company or Subsidiary shall, as soon as possible, but in no event more than seven (7) days following the Change of Control make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Participant or beneficiary of this Plan the benefits to which Participants of this Plan or their beneficiaries would be entitled based on elections under Sections 10 and 12 (including any applicable Stock Premium), and for which the Company is liable pursuant to the terms of this Plan as of the date on which the Change of Control occurred. The amount of the Company's irrevocable contributions shall be based on the actuarial valuation and accounting for the most recent calendar year or more recent period for the Plan, as approved by the independent actuary engaged by the Company prior to the Change of Control and approved by the Benefits Trust Committee if selected or changed following a Change of Control (the "Actuary"), and shall include an amount deemed necessary to pay estimated administrative expenses for the following five (5) years. The Benefits Trust Committee shall cause such actuarial valuations or accountings to be updated, using Participant data supplied to the Actuary by the Company, through a date no earlier than the date of the initial contribution and shall notify the Company of the amount of additional contributions required as soon as practicable. 23. Compliance with Regulatory Authorities Any shares purchased or distributed pursuant to any Incentives granted under this Plan must be held for investment and not with a view to the distribution or resale thereof. Each person who shall exercise an Incentive granted under this Plan may be required to give satisfactory assurances to such effect to the Company as a condition to the issuance to him or to her of shares pursuant to such exercise; provided, however, that the Company may waive such condition if it shall determine that such resale or distribution may be otherwise lawfully made without registration under the Securities Act of 1933, or if satisfactory arrangements for such registration are made. Each Incentive granted under this Plan is further subject to the condition that if at any time the Board shall in its sole discretion determine that the listing, registration or qualification of the shares covered by such Incentive upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of or in connection with the granting of such Incentives or the purchase or transfer of shares thereunder, the delivery of any or all shares of stock pursuant to exercise of the Incentive may be withheld unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 24. Withholding Tax Whenever the Company proposes or is required to issue or transfer shares of common stock under the Plan, a Participant shall remit to the Company an amount sufficient to satisfy any federal, state or local income and payroll tax withholding liability prior to the delivery of any certificate or certificates for such shares. Alternatively, to the extent permitted by applicable laws, such federal, state or local income and payroll tax withholding liability may be satisfied prior to the delivery of any certificate or certificates for the shares by an adjustment, equal in value to such liability, in the number of shares to be transferred to the Participant. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state or local income and payroll tax withholding liability. 25. Non-Uniform Determinations Determinations by the Committee under the Plan, including, without limitation, determinations of the persons to receive Incentives and the form, amount and timing of such Incentives, and the terms and provisions of such Incentives and the agreements evidencing the same need not be uniform, and may be made by the Committee selectively among persons who receive, or are eligible to receive, Incentives under the Plan, whether or not such persons are similarly situated. Without amending the Plan, Incentives may be granted to eligible employees who are foreign nationals or who are employed outside the United States or both, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to further the purposes of the Plan. Such different terms and conditions may be reflected in Addenda to the Plan. 26. Construction The Plan shall be governed by the laws of the Commonwealth of Virginia. EX-10.16 8 Exhibit 10.16 DEFERRED COMPENSATION PROGRAM FOR EXECUTIVES OF CSX CORPORATION AND AFFILIATED COMPANIES As Amended and Restated January 1, 1998 1. Purpose The purpose of this Program is to provide eligible executives with an opportunity to supplement their retirement income. This Program is intended to benefit a select group of management or highly compensated employees. 2. Definitions 2.1 "Administrator" means the Corporation. The duties of the administrator shall be performed by a person or persons designated by the Chief Executive Officer of the Corporation to perform such duties. 2.2 "Affiliated Company" means the Corporation and any company or corporation directly or indirectly controlled by the Corporation which the Compensation Committee designates for participation in this Program in accordance with Section 15.2. 2.3 "Award" means, for any year, the amount awarded to an employee of an Affiliated Company for that year and, in the absence of a Deferral Agreement with respect to such amount, payable to him in the succeeding year under the MICP, including any special incentive award. 2.4 "Benefits Trust Committee" means the committee created pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust Agreement. 2.5 "Board" means the Board of Directors of the Corporation. 2.6 "Change of Control" shall mean any of the following: (a) Stock Acquisition. The acquisition, by any individual, entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock"), or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Corporation; (ii) any acquisition by the Corporation; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation; or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2.6; or (b) Board Composition. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) Business Combination. Approval by the shareholders of the Corporation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Corporation or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or its principal subsidiary or all or substantially all of the assets of the Corporation or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be; (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (d) Regulated Business Combination. Approval by the shareholders of the Corporation of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (i), (ii) and (iii) of subsection (c) of this Section XI(5); or (e) Liquidation or Dissolution. Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation or its principal subsidiary. 2.7 "Compensation Committee" means the Compensation Committee of the Board. 2.8 "Corporation" means CSX Corporation, a Virginia corporation, and any successor thereto by merger, purchase or otherwise. 2.9 "Corporation's Accountant's" means the independent accountant or accountants engaged by the Corporation and, if selected or changed following a Change of Control, approved by the Benefits Trust Committee. 2.10 "Deferral Agreement" means a completed agreement, including any attachments and appendices thereto, in the form determined by the Administrator, between an Eligible Executive and the Affiliated Company of which he is an employee, under which the Eligible Executive agrees to defer all or a portion of his Award in accordance with the provisions of Section 3. 2.11 "Deferral Date" means with respect to any Deferral Agreement entered into by an Eligible Executive, the first day of the month in which the Award subject to the Deferral Agreement would be payable to the Eligible Executive in the absence of such Deferral Agreement. 2.12 "Divisive Transaction" means a transaction in which the Participant's employer ceases to be a Subsidiary or there is a sale of substantially all of the assets of the Subsidiary. 2.13 "Eligible Executive" means, for any year, an employee of an Affiliated Company who is in salary grades 22 through 40 as of (a) December 30th of such year or (b) for calendar years beginning on or after January 1, 1986, the date in such year he retired from the Affiliated Companies or terminated on account of disability, as determined by the Administrator, provided, however, that the Administrator, in its sole discretion, may designate any other employee of an Affiliated Company as an Eligible Executive for such year. Notwithstanding the preceding, following a Change of Control, such action by the Administrator is subject to the approval of the Benefits Trust Committee. 2.14 "Equivalent" means of equal present or accumulated value based on the interest rates set forth in the applicable Deferral Agreements. In determining Equivalent values, only the value of benefits for which the eligibility requirements have been met shall be included. 2.15 "MICP" means the Affiliated Companies' Management Incentive Compensation Plans, as from time to time in effect. 2.16 "Normal Retirement Date" means the later of: (a) the last day of the month in which a Participant's 62nd birthday occurs, or (b) the earlier of (i) the last day of the month preceding the 2nd anniversary of the Participant's earliest Deferral Date or (ii) the last day of the month in which a Participant's 65th birthday occurs. 2.17 "Participant" means an Eligible Executive who elects to defer a portion of his Award in accordance with the provisions of Section 3. 2.18 "Program" means this Deferred Compensation Program for Executives of CSX Corporation and Affiliated Companies. 2.19 "Service" means an employee's months of continuous employment with the Affiliated Companies. In the event the employee has a break in his continuous employment, his period of employment prior to the break shall be credited to the employee in accordance with the rules governing breaks in service under the CSX Pension Plan. 2.20 "Subsidiary" means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Corporation. 2.21 "Trust" means the CSX Corporation and Affiliated Companies Benefits Assurance Trust. Except as provided in Section 18, the Corporation is not obligated to make any contribution to the Trust. 2.22 "Valuation Date" means the last day of each calendar quarter and such other dates as the Administrator deems necessary or appropriate to value the Participants' benefits under this Program. Following a Change of Control, the Benefits Trust Committee shall have final approval over any date selected other than the last day of each calendar year. 3. Deferral of Awards 3.1 At any time prior to the close of business on December 30 in any calendar year, an Eligible Executive may elect to defer all or a portion of his Award, if any, for that year. Such election shall be made by filing a Deferral Agreement with the Administrator on or before the close of business on December 30 of the calendar year for which the Award is made. In the event that December 30 does not fall on a weekday, such filing must be made by the close of business on the last prior business day. 3.2 Subject to the provisions of Sections 3.3 and 3.4: (a) an Eligible Executive in 1985 may elect to defer up to 100% of his 1985 Award; (b) an Eligible Executive in 1986 may elect to defer up to 100% of his 1986 Award; (c) an Eligible Executive in 1988 may elect to defer up to 100% of his 1988 Award; and (d) an Eligible Executive in 1989 may elect to defer up to 100% of his 1989 Award. 3.3 The minimum amount which an Eligible Executive may defer in any year shall be the lesser of $5,000 or the maximum amount determined under Section 3.2. If an Eligible Executive elects to defer less than this amount, his election shall not be effective. 3.4 In its sole discretion, the Compensation Committee may, at any time, impose additional limits on the maximum amount which an Eligible Executive may elect to defer under this Program in any year or may impose additional requirements on the Eligible Executive's right to defer the maximum amount under this Program in any year. 3.5 An Eligible Executive's election to defer all or a portion of his Award shall be effective on the last day such deferral may be elected, under Section 3.1, for the year for which the Award is made. An Eligible Executive may revoke or change his election to defer all or a portion of his Award at any time prior to the date the election becomes effective. Any such revocation or change shall be made in a form and manner determined by the Administrator. 3.6 Notwithstanding the preceding, following a Change of Control, any discretionary decisions made by the Compensation Committee or the Administrator with respect to this Section 3 shall be subject to the approval of the Benefits Trust Committee. 4. Normal Retirement Benefit A Participant who retires from employment with the Affiliated Companies on his Normal Retirement Date shall receive a benefit Equivalent to the sum of the amounts set forth in the Participant's Deferral Agreement(s) plus accrued interest. The benefit shall be paid in 180 equal monthly installments commencing on the first day of the month next following the Participant's retirement date, but in no event prior to the first day of the month next following the Participant's last Deferral Date, unless the Participant elects to receive his benefit in accordance with Section 9 of this Program. 5. Delayed Retirement Benefit A Participant who retires or otherwise terminates his employment with the Affiliated Companies after his Normal Retirement Date shall receive a benefit equal to the benefit he would have received under Section 4 had his benefit commenced on his Normal Retirement Date, increased by 5/6 of 1% for each complete calendar month between his Normal Retirement Date and the date his benefit commences. The benefit shall be paid in 180 equal monthly installments commencing on the first day of the month next following the Participant's termination of employment, but in no event prior to the first day of the month next following the Participant's last Deferral Date, unless the Participant elects to receive his benefit in accordance with Section 9 of this Program. 6. Early Retirement Benefit A Participant who has attained age 55, has completed 120 months of Service and terminates his employment with the Affiliated Companies prior to his Normal Retirement Date shall receive a benefit commencing on the first day of the month following his Normal Retirement Date but in no event prior to the first day of the month following the Participant's last Deferral Date. The Participant's benefit shall be equal to the benefit the Participant would have received under Section 4 had he terminated his employment on his Normal Retirement Date. However, the Participant may elect a lump sum under Section 9 or may elect, in a time and manner determined by the Administrator, to have payment of his benefit commence on the first day of any month preceding his Normal Retirement Date, and following the latest of (i) his termination of employment, (ii) 24 months after his earliest Deferral Date and (iii) the first of the month following his last Deferral Date, in which event the amount of his benefit shall be reduced by 5/6 of 1% for each complete calendar month between the date his benefit commences and the first day of the month next following his Normal Retirement Date. However, in no event shall the monthly benefit be less than an amount Equivalent to the Participant's deferrals with accrued interest. Benefits under this Section 6 shall be paid in 180 equal monthly installments, unless the Participant elects to receive his benefit in accordance with Section 9 of this Program. 7. Separation Benefit 7.1 A Participant who terminates his employment with the Affiliated Companies prior to being eligible for a benefit under Sections 4 or 6, but after having completed 120 months of Service, shall receive a monthly benefit commencing on the first day of the month next following his Normal Retirement Date; provided, however, that a Participant shall not be eligible for a benefit under this Section 7.1 if the Participant terminates employment without the consent of the Affiliated Companies. The benefit shall be equal to the monthly benefit the Participant would have received under Section 4 had he terminated employment on his Normal Retirement Date. However, the Participant may elect a lump sum pursuant to Section 9, or may elect, in a time and manner determined by the Administrator, to have monthly benefits commence on the first day of any month, prior to his Normal Retirement Date, and following the latest of (i) his termination of employment with the Affiliated Companies, (ii) his 55th birthday or (iii) the last day of the month prior to the 2nd anniversary of his earliest Deferral Date, in which event the amount of his benefit shall be reduced by 5/6 of 1% for each complete calendar month between the date his benefit commences and the first day of the month next following his Normal Retirement Date. However, in no event shall the monthly benefit be less than an amount Equivalent to the Participant's deferred amounts with accrued interest. Monthly benefits under this Section 7.1 shall be paid in 180 equal monthly installments. For purposes of this program and particularly this Section 7, if a Participant's employer is involved in a Divisive Transaction, the Participant will be deemed to have terminated his employment with an Affiliated Company with the consent of the Affiliated Company. 7.2 A Participant who terminates his employment with the Affiliated Companies, other than on account of death, and is not eligible for a benefit under Section 7.1 shall receive a single sum payment equal to the sum of the amounts the Participant deferred under his Deferral Agreements plus accrued interest. However, if the Participant terminates his employment with the Affiliated Companies on account of a disability within the meaning of Section 8.1, he shall receive a benefit under this Section 7.2 only if the Participant elects, in a time and manner determined by the Administrator, to receive such benefit and to cease accruing Service under Section 8.1. The single sum payment shall be made on the first day of the month next following the Participant's termination of employment, or as soon as practicable thereafter. The Participant shall not receive any other benefits under this Program. 8. Disability 8.1 A Participant who, in the sole judgment of the Administrator, becomes totally and permanently disabled prior to his termination of employment with the Affiliated Companies, and does not make an election under Section 7.2 to receive a benefit under such Section, shall continue to accrue Service during his period of disability as if he remained an active employee. Such a Participant shall be eligible to receive a benefit under Sections 4, 6 or 7.1 when he meets the age and Service requirements for such a benefit, provided that following a Change of Control, any decisions of the Administrator pursuant to this Section 8.1 is subject to the approval of the Benefits Trust Committee. 8.2 The Administrator may, in its sole discretion, require a Participant to submit to a medical examination by a physician approved by the Administrator, or present other evidence satisfactory to the Administrator, to establish the existence or continuance of his disability. The Administrator may require such medical examination or other evidence not more than once per year. A Participant who refuses to submit to any required medical examination or to present any other required evidence under this Section 8.2 shall not be disabled for purposes of this Program and shall only be eligible to receive the benefit he would have received under the Program had he terminated his employment with the Affiliated Companies immediately prior to the date of such request. Notwithstanding the preceding, following a Change of Control, any decision by the Administrator made pursuant to this Section 8.2 is subject to approval by the Benefits Trust Committee. 9. Single Sum Payments A Participant who is eligible to receive a benefit under Sections 4, 5, 6, 7.1 or 8.1 of the Program but whose benefits hereunder have not yet commenced may, with the consent of the Administrator, elect, in a time and manner determined by the Administrator, to receive his benefit in the form of a single sum. The single sum shall be in the amount of the Participant's deferred amounts plus accrued interest, provided that, in the case of a Participant then eligible for immediate commencement of monthly benefits, such single sum shall not be less than an amount Equivalent to the value of such monthly benefits. Such single sum shall be paid on the first day of the fourth month following the later of (i) the Participant's termination of employment with the Affiliated Companies, or (ii) the date such election is received by the Administrator. Notwithstanding any other provision hereof, such amount shall be determined as of a date three months prior to the date of payment and shall not accrue interest beyond such earlier date. Furthermore, following a Change of Control , any decision of the Administrator made pursuant to this Section 8.2 is subject to approval by the Benefits Trust Committee. 10. Hardship Withdrawal 10.1 While employed by the Affiliated Companies, a Participant may, in the event of a severe financial hardship, request a withdrawal of an amount which does not exceed the single sum amount determined in Section 9. The withdrawal shall be made in a time and manner determined by the Administrator, and shall not be for a greater amount than the amount required to meet the financial hardship, and shall be subject to approval by the Administrator. 10.2 For purposes of this Section 10, financial hardship shall include: (a) Education of a dependent child where the Participant can show that without the withdrawal under this Section 10 the education would be unavailable to the child; (b) Illness of the Participant or his dependents, resulting in severe financial hardship to the Participant; (c) The loss of the Participant's home or it contents, to the extent not reimbursable by insurance or otherwise, if such loss results in a severe financial hardship to the Participant; and (d) Any other extraordinary circumstances of the Participant approved by the Administrator if such circumstances would result in a present or impending critical financial need which the Participant is unable to satisfy with funds reasonably available from other sources. 10.3 If a Participant makes a withdrawal under this Section 10, any other benefit which he may be entitled to under this Program on his termination of employment shall be appropriately adjusted to take into account the amount the Participant received under this Section 10. 10.4 Following a Change of Control , any decision by the Administrator made pursuant to this Section 10 is subject to the approval of the Benefits Trust Committee. 11. Death Benefits 11.1 Except as provided in Section 11.10(b), if a Participant dies while employed by an Affiliated Company, his beneficiary shall be eligible to receive a single sum benefit equal to the greatest of: (a) three times the sum of the amount(s) the Participant deferred under his Deferral Agreement(s); (b) the amounts the Participant deferred under his Deferral Agreement(s) plus accrued interest; or (c) an amount Equivalent to the monthly benefit the Participant could have received under the Program, if any, had he terminated his employment with the Affiliated Companies on the day immediately preceding his death and elected to begin receiving the benefit on the first day of the following month. The benefit is payable on the first day of the month next following the date of the Participant's death, and shall be in lieu of all other benefits payable under this Program, other than any benefit payable under Section 11.6. 11.2 If a Participant who has terminated his employment with the Affiliated Companies after becoming eligible for a benefit under Sections 4, 5 or 6, dies prior to the commencement of any benefit under this Program, his beneficiary shall receive a benefit under Section 11.1 11.3 If a Participant who is totally and permanently disabled under Section 8.1 dies prior to receiving a benefit under this Program, his beneficiary shall receive a benefit under Section 11.1 11.4 If a Participant who is eligible for a benefit under Section 7.1 dies prior to receiving a benefit, his beneficiary will receive a benefit based on the greater of the amounts determined under Sections 11.1(b) and 11.1(c). 11.5 If a Participant dies after commencing to receive a benefit, other than a benefit under Section 7.2, but prior to receiving all remaining benefits due, the remaining benefits shall be paid to the Participant's beneficiary or contingent beneficiary, whichever is applicable. 11.6 In addition to any other benefit payable under this Section 11, in the case of a Participant (i) who dies while employed by an Affiliated Company after becoming eligible for benefits under Sections 4, 5, or 6 hereof, or (ii) who terminates employment while eligible for a benefit under Section 4, 5 or 6 of the Program and then dies, his beneficiary shall be eligible to receive a benefit of $10,000, payable in a single sum. This benefit shall be payable as soon as practicable following the presentation to the Administrator, and the Administrator's examination and approval of, any information or material, including proof of death of the Participant, the Administrator may request. Notwithstanding anything to the contrary, a benefit shall not be payable on account of the death of a Participant who received a single sum benefit under Sections 12 or 16 of the Program. 11.7 A Participant may, in a time and manner determined by the Administrator, designate a beneficiary and one or more contingent beneficiaries (which may include the Participant's estate) to receive any benefits which may be payable under this Section 11. If the Participant fails to designate a beneficiary or contingent beneficiary, or if the beneficiary and the contingent beneficiaries do not survive the Participant, such benefits shall be paid to the Participant's estate. The Participant may also designate a remainder beneficiary to receive any benefits which may be payable under Section 11.9. 11.8 A Participant may revoke or change any designation made under Section 11.7 in a time and manner determined by the Administrator. 11.9 If, pursuant to Section 11.7, payments commence to a beneficiary or contingent beneficiary and if such beneficiary or contingent beneficiary dies prior to receiving all payments due under this Program, any remaining payments shall be made to the Participant's remainder beneficiary. If, at the date of such death, there is no surviving remainder beneficiary, the remaining benefits hereunder shall be paid to the estate of the beneficiary or contingent beneficiary previously in receipt of benefits hereunder. 11.10 (a) If any benefits are payable under this Section 11 to an individual other than the Participant's spouse or child under age 21 (or child under age 25 who is a full-time student at an accredited institution of higher education), the benefit shall be paid in the form of a single sum. (b) If benefits become payable to the Participant's spouse or his child under age 21 (or his child under age 25 who is a full-time student at an accredited institute of higher education), such benefits (other than benefits under Section 11.6) shall be payable in 180 monthly installments Equivalent to the single sum amount determined under Section 11.1 through 11.5 hereof, as applicable. Monthly benefits shall commence on the first day of the month following the Participant's death. The Participant may elect, in a time and manner determined by the Administrator to have any amounts which may be payable under the Program paid in accordance with Section 11.10(a). (c) Notwithstanding anything to the contrary in this Program, if a Participant's child under age 21 (or child under age 25 who is a full-time student at an accredited institute of higher education) is receiving a benefit under this Program in the form of installment payments, upon his attaining age 21 (or age 25 or ceasing to be a full-time student at an accredited institute of higher education) he shall receive a single sum Equivalent to his remaining installments in lieu of receiving such remaining installments. 12. Special Distribution Rules 12.1 Notwithstanding anything to the contrary in this Program, if (a) a Participant becomes the owner, director or employee of a competitor of the Affiliated Companies, (b) his employment is terminated by an Affiliated Company on account of actions by the Participant which are detrimental to the interests of any Affiliated Company, or (c) he engages in conduct subsequent to the termination of his employment with the Affiliated Companies which the Administrator determines to be detrimental to the interests of an Affiliated Company, then the Administrator may, in its sole discretion, pay a Participant a single sum payment equal to the sum of the amounts the Participant deferred under his Deferral Agreements plus accrued interest, reduced by an amount Equivalent to any payments the Participant may already have received under this Program. However, if the Participant is receiving a benefit under the Program, or could be receiving an immediate benefit under the Program, the single sum shall not be less than an amount Equivalent to the remaining monthly benefit the Participant is, or could be, receiving. The single sum payment shall be made as soon as practicable following the Participant's becoming an owner, director or employee of a competitor, his termination of employment or the Administrator's determination of detrimental conduct, as the case may be, and shall be in lieu of all other benefits which may be payable to the Participant under this Program. 12.2 Notwithstanding anything to the contrary contained herein, the Corporation may delay payment of a benefit under this Program to any Participant who is determined to be among the top five most highly paid executives for the year the benefit under this Program would otherwise be paid; provided, however, if a Participant's payment is delayed, the benefit to which he is entitled will not decrease after the date it would otherwise be distributed. 12.3 Notwithstanding the preceding, following a Change of Control, the Administrator's authority to make decisions under this Section 12 is subject to the approval of the Benefits Trust Committee. 13. Benefit Determinations Following a Change of Control 13.1 Following a Change of Control, final benefit determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefits under this Program shall rest with the Benefits Trust Committee or its delegate in its sole and absolute discretion. 14. Funding 14.1 To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Program shall be joint and several. 14.2 The obligations of the Corporation and any of its affiliated corporations and the benefit due any Participant, surviving spouse or beneficiary hereunder shall be reduced by any amount received in regard thereto under the Benefits Assurance Trust or any similar trust or other vehicle. 15.. Administration 15.1 This Program shall be administered by the Corporation. Certain administrative functions, as set forth in this Program, shall be the responsibility of the Administrator. The Administrator shall interpret the Program, establish regulations to further the purposes of the Program and take any other action necessary to the proper operation of the Program. Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Administrator. 15.2 Prior to a Change of Control, the Compensation Committee, in its sole discretion and upon such terms as it may prescribe, may permit any company or corporation directly or indirectly controlled by the Corporation to participate in the Program for such periods as it may determine. Following a Change of Control, no entity shall become or cease to be a participating company without the consent of the Benefits Trust Committee. 15.3 The Administrator shall provide adequate notice in writing to any Participant, beneficiary, contingent beneficiary or remainder beneficiary whose claim for benefits under this Program has been denied, setting forth the specific reasons for such denial. A reasonable opportunity shall be afforded to any such Participant, beneficiary, contingent beneficiary or remainder beneficiary for a full and fair review by the Administrator of its decision denying the claim. Prior to a Change of Control, the Administrator's decision on any such review shall be final and binding on the Participant, beneficiary, contingent beneficiary, remainder beneficiary and all other interested persons. All acts and decisions of the Administrator shall be final and binding upon all Participants and employees of the Affiliated Companies. 15.4 Following a Change of Control, all benefit determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefit claims under this Program shall rest with the Benefits Trust Committee or its delegate in its sole and absolute discretion. 16. Termination and Amendment of the Program 16.1 Prior to a Change of Control, the Board may, in its sole discretion, terminate this Program and the related Deferral Agreement(s) at any time. Following a Change of Control, this Program may not be terminated without the approval of the Benefits Trust Committee. In the event the Program and related Deferral Agreement(s) are terminated, Participants shall receive a single sum payment equal to the sum of the amounts they deferred under their Deferral Agreements plus accrued interest, reduced by an amount Equivalent to any payments the Participant may already have received under this Program. However, if the Participant is receiving a benefit under the Program, or could be receiving an immediate benefit under the Program, the single sum shall not be less than an amount Equivalent to the monthly benefit the Participant is, or could be, receiving. The single sum payment shall be made as soon as practicable following the date the Program is terminated and shall be in lieu of any other benefit which may be payable to the Participant under this Program. 16.2 Prior to a Change of Control, the Board, in its sole discretion, may amend this Program and the related Deferral Agreements in any way on thirty (30) days prior notice to the Participants. Following a Change of Control, all amendments are subject to the approval of the Benefits Trust Committee. If any amendment to this Program or to the Deferral Agreements shall adversely affect the rights of a Participant, the Participant must consent in writing to such amendment prior to its effective date. If the Participant does not consent to the amendment, the Program, shall be deemed to be terminated with respect to the Participant and he shall receive a single sum payment in accordance with Section 16.1. 16.3 Notwithstanding anything to the contrary in this Section 16, prior to a Change of Control, the Board must act to terminate or amend the Program or the Deferral Agreements in a uniform and nondiscriminatory manner. Following a Change of Control, such actions are subject to the approval of the Benefits Trust Committee 17. Miscellaneous 17.1 The existence of this Program or a Deferral Agreement does not constitute a contract for continued employment between an Eligible Executive or a Participant and an Affiliated Company. The Affiliated Companies reserve the right to modify an Eligible Executive's or Participant's compensation and to terminate the employment of an Eligible Executive or a Participant for any reason and at any time, notwithstanding the existence of this Program or of a Deferral Agreement. The Affiliated Companies reserve the right not to grant Awards to Eligible Executives and Participants for any reason. 17.2 A Participant's rights to benefit payments under the Program are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Participant, his beneficiary, contingent beneficiaries, remainder beneficiary, heirs or personal representative. 17.3 Except for Section 18 herein, nothing contained in this Program or in a Deferral Agreement shall require the Affiliated Companies to segregate any monies from their general funds, or to create any trusts, or to make any special deposits for any amounts to be paid to any Participant, beneficiary, contingent beneficiary or remainder beneficiary. Neither the Participant, his beneficiary, contingent beneficiaries, remainder beneficiary, heirs or personal representatives shall have any right, title or interest in or to any funds of the Affiliated Companies on account of this Program or on account of having completed a Deferral Agreement. 17.4 All payments under this Program shall be net of an amount sufficient to satisfy any federal, state or local withholding and payroll tax requirements. 17.5 Prior to paying any benefit under this Program, the Administrator may require the Participant, beneficiary, contingent beneficiary or remainder beneficiary to provide such information or material as the Administrator, in its sole discretion, shall deem necessary for it to make any determination it may be required to make under this Program. The Administrator may withhold payment of any benefit under this Program until it receives all such information and material and is reasonably satisfied of its correctness and genuineness. 17.6 Each Participant shall have the status of a general unsecured creditor of the Affiliated Companies, and this Program constitutes a mere promise by the Affiliated Companies to make benefit payments in the future. 17.7 The Program is intended to be unfunded for tax purposes and for purposes of Title I of ERISA. 17.8 The masculine pronoun shall mean the feminine pronoun and all singular shall include the plural wherever appropriate. 17.9 The terms of this Program and any Deferral Agreement shall be governed by the laws of the Commonwealth of Virginia. 17.10 The invalidity or unenforceability of any provision of this Program or of a Deferral Agreement shall in no way affect the validity or enforceability of any other provision. 18. Change of Control 18.1 If a Change of Control has occurred, the Corporation shall contribute to the Trust, within 7 days of such Change of Control, a lump sum payment equal to the greater of (i) the aggregate value of the amount each Participant would be eligible to receive (determined under Section 18.2 below) as of a Valuation Date coinciding with or next preceding the date of Change of Control or (ii) the amount determined under Section 1(h) of the Trust attributable to liabilities relating to the Program, to the extent such amounts are not already in the Trust. The aggregate value of the amount of the lump sum to be contributed to the Trust pursuant to this Section 18 shall be determined by the Corporation's Accountants after consultation with the entity then maintaining the Program's records. Thereafter, the Corporation's Accountants shall annually determine for each Participant not receiving a lump sum payment pursuant to subsection 18.2 below the amount which would be payable under such subsection were a Change of Control to occur at the date of such determination. To the extent that the value of the assets held in the Trust relating to this Program do not equal the amount described in the preceding sentence, at the time of the valuation, as determined by the Corporation's Accountants, the Corporation shall make a lump sum contribution to the Trust equal to the difference. 18.2 In the event a Change of Control has occurred, the trustee of the Trust shall, within 45 days of such Change of Control, pay to each Participant not making an election under 18.3 below, a lump sum payment equal to the amount the Participant would have been entitled to receive determined under Section 6 had he retired early and selected a lump sum payment. The amount of each Participant's lump sum payment shall be determined by the Corporation's Accountants after consultation with the entity then maintaining the Program's records. 18.3 Each Participant may elect in a time and manner determined by the Administrator, but in no event later than December 31, 1996, or the occurrence of a Change of Control, if earlier, to have amounts and benefits determined and payable under the terms of the Program as if a Change of Control had not occurred. New Participants in the Program may elect in a time and manner determined by the Administrator, but in no event later than 90 days after becoming a Participant, to have amounts and benefits determined and payable under the terms of the Program as if a Change of Control had not occurred. A Participant who has made an election, as set forth in the two preceding sentences, may, at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change of Control shall be invalid. 18.4 Notwithstanding anything in this Program to the contrary, each Participant who has made an election under 18.3 above may elect within 90 days following a Change of Control, in a time and manner determined by the Benefits Trust Committee, to receive a lump sum payment calculated under the provisions of 18.2 above, except that such calculated amount shall be reduced by 5% and such reduction shall be irrevocably forfeited to the Corporation by the Participant. Furthermore, as a result of such election, the Participant shall no longer be eligible to participate or otherwise benefit from the Program. Payments under this subsection 18.4 shall be made not later than 7 days following receipt by the Corporation of the Participant's election. The Benefits Trust Committee shall, no later than 7 days after a Change of Control has occurred, give written notification to each Participant eligible to make an election under this subsection 18.4, that a Change of Control has occurred and informing such Participant of the availability of the election. EX-10.17 9 Exhibit 10.17 SUPPLEMENTARY SAVINGS AND INCENTIVE AWARD DEFERRAL PLAN FOR ELIGIBLE EXECUTIVES OF CSX CORPORATION AND AFFILIATED COMPANIES As Amended and Restated January 1, 1995 (As Amended through December 31, 1997) TABLE OF CONTENTS Page ARTICLE 1. DEFINITIONS.................................................... 1 1.1 Account..................................................... 1 1.2 Administrator............................................... 1 1.3 Affiliated Company.......................................... 1 1.4 Award....................................................... 1 1.5 Award Deferral Agreement.................................... 1 1.6 Benefits Trust Committee......................................1 1.7 Board of Directors.......................................... 1 1.8 Change of Control........................................... 1 1.9 Code........................................................ 2 1.10 Committee................................................... 2 1.11 Compensation................................................ 3 1.12 Corporation................................................. 3 1.13 Deferral Agreement.......................................... 3 1.14 Distribution Option(s)........................................3 1.15 Divisive Transaction........................................ 3 1.16 Effective Date.............................................. 3 1.17 Eligible Executive.......................................... 3 1.18 Independent Accountant........................................3 1.19 Matching Credits............................................ 3 1.20 Member...................................................... 4 1.21 MICP........................................................ 4 1.22 Participating Company....................................... 4 1.23 Plan........................................................ 4 1.24 Salary Deferrals............................................ 4 1.25 Salary Deferral Agreement................................... 4 1.26 Salary Deferral Percentage.................................. 4 1.27 SMICP....................................................... 4 1.28 Subsidiary....................................................4 1.29 Tax Savings Thrift Plan..................................... 4 1.30 Trust.........................................................4 1.31 Valuation Date.............................................. 7 ARTICLE 2. MEMBERSHIP AND DEFERRAL AGREEMENTS............................. 4 2.1 In General.................................................. 5 2.2 Modification of Initial Deferral Agreement.................. 5 2.3 Termination of Membership; Re-employment.................... 5 2.4 Change in Status............................................. 6 2.5 Membership Following a Change in Control......................6 ARTICLE 3. AWARD DEFERRAL PROGRAM.......................................... 6 3.1 Filing Requirements.......................................... 7 3.2 Amount of Deferral........................................... 7 3.3 Crediting to Account......................................... 7 ARTICLE 4. SALARY DEFERRAL PROGRAM......................................... 7 4.1 Filing Requirements.......................................... 8 4.2 Salary Deferral Agreement.................................... 8 4.3 Amount of Salary Deferrals................................... 8 4.4 Changing Salary Deferrals.................................... 8 4.5 Certain Additional Credits................................... 9 ARTICLE 5. MAINTENANCE OF ACCOUNTS........................................ 10 5.1 Adjustment of Account....................................... 10 5.2 Investment Performance Elections............................ 11 5.3 Changing Investment Elections............................... 11 5.4 Vesting of Account.......................................... 11 5.5 Individual Accounts......................................... 11 5.6 Action Following a Change of Control.........................11 ARTICLE 6. PAYMENT OF BENEFITS............................................ 11 6.1 Commencement of Payment..................................... 13 6.2 Method of Payment........................................... 14 6.3 Applicability............................................... 14 6.4 Hardship Withdrawal......................................... 14 6.5 Designation of Beneficiary.................................. 15 6.6 Special Distribution Rules.................................. 15 6.7 Status of Account Pending Distribution...................... 15 6.8 Installments and Withdrawals Pro-Rata....................... 15 6.9 Change of Control........................................... 16 ARTICLE 7. AMENDMENT OR TERMINATION....................................... 17 7.1 Right to Terminate.......................................... 17 7.2 Right to Amend.............................................. 17 7.3 Uniform Action.............................................. 17 ARTICLE 8. GENERAL PROVISIONS............................................. 17 8.1 No Funding.................................................. 17 8.2 Obligation...................................................18 8.3 No Contract of Employment................................... 18 8.4 Withholding Taxes........................................... 18 8.5 Nonalienation............................................... 18 8.6 Administration.............................................. 18 8.7 Construction................................................ 19 ARTICLE 9. POST-SECONDARY EDUCATION SUB-ACCOUNTS.......................... 19 9.1 Post-Secondary Education Sub-accounts....................... 19 9.2 Distribution of Post-Secondary Education Sub-accounts....... 20 9.3 Construction................................................ 21 INTRODUCTION This Supplementary Savings and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies (the "Plan") was adopted October 1, 1987 and has been subsequently amended from time to time. This restatement of the Plan is effective January 1, 1995. This Plan is generally intended to provide certain executives eligible to participate in the Tax Savings Thrift Plan for Employees of CSX Corporation and Affiliated Companies (the "Savings Plan") with an opportunity to defer a portion of their salary, and/or award(s) under the Management Incentive Compensation Program ("MICP") and/or the Senior Management Incentive Compensation Program ("SMICP") until their retirement or other termination of employment and to restore employer matching contributions lost under the Savings Plan because of the application of Sections 401(a)(17), 401(k), 401(m) and 415 of the Internal Revenue Code of 1986, as amended. Commencing with respect to MICP awards paid and salary earned after 1990, eligible executives may, if they so elect, designate all or a portion of such deferrals to be used for payment of education expenses for one or more members of their families. The Plan is unfunded and is maintained by CSX Corporation and Affiliated Companies primarily for the purpose of providing deferred compensation for a select group of management or highly-compensated employees. The Plan as restated effective January 1, 1995 (and amended through December 31, 1997) reads as hereinafter set forth. ARTICLE I. DEFINITIONS 1.1 Account means the bookkeeping account maintained for each Member to record his Salary Deferrals, Matching Credits and the amount of Awards he has elected to defer, as adjusted pursuant to Article 5. The Account shall consist of the "Education Sub-accounts", if any, established pursuant to Article 9 and all amounts not in those accounts shall be allocated to one or more "Retirement Sub-accounts". The Administrator may establish a maximum number of "Retirement Sub-accounts" which a Member may have at any time. The Administrator also may establish such other sub-accounts within a Member's Account as it deems necessary to implement the provisions of the Plan. 1.2 Administrator means the Corporation. The duties of the Administrator shall be performed by a person or persons designated by the Chief Executive Officer of the Corporation to perform such duties. 1.3 Affiliated Company means the Corporation and any company or corporation directly or indirectly controlled by the Corporation. 1.4 Award means, for any year, the amount awarded to an employee of an Affiliated Company for that year (including any special incentive award) and, in the absence of an Award Deferral Agreement with respect to such amount, payable to him in the succeeding year under the MICP and/or SMICP or other incentive award otherwise payable in cash as determined by the Committee. 1.5 Award Deferral Agreement means a Deferral Agreement filed in accordance with the award deferral program described in Article 3. 1.6 Benefits Trust Committee means the committee created pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust Agreement. 1.7 Board of Directors or "Board" means the Board of Directors of the Corporation. 1.8 Change of Control means any of the following: (a) Stock Acquisition. The acquisition, by any individual, entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock"), or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Corporation; (ii) any acquisition by the Corporation; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation; or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.8; or (b) Board Composition. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) Business Combination. Approval by the shareholders of the Corporation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Corporation or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or its principal subsidiary or all or substantially all of the assets of the Corporation or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be; (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (iii)at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (d) Regulated Business Combination. Approval by the shareholders of the Corporation of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.8; or (e) Liquidation or Dissolution. Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation or its principal subsidiary. 1.9 Code means the Internal Revenue Code of 1986, as amended from time to time. 1.10 Committee means the Compensation Committee of the Board of Directors of CSX Corporation. 1.11 Compensation means the "Base Compensation" of an Eligible Executive as defined in the Tax Savings Thrift Plan, determined prior to: (a) any Salary Deferrals under Article 4; and (b) any limit on compensation imposed by Section 401(a)(17) of the Code. 1.12 Corporation means CSX Corporation, a Virginia corporation, and any successor thereto by merger, purchase or otherwise. 1.13 Deferral Agreement means either an Award Deferral Agreement or a Salary Deferral Agreement, or both if the context so requires. A Deferral Agreement shall be a completed agreement between an Eligible Executive and a Participating Company of which he is an employee under which the Eligible Executive agrees to defer an Award or make Salary Deferrals under the Plan, as the case may be. The Deferral Agreement shall be on a form prescribed by the Administrator and shall include any amendments, attachments or appendices. 1.14 Distribution Option(s) means, with respect to each sub-account under the Plan, the election by the Member of (i) the event triggering the commencement of distribution, and (ii) the form of payment. Distribution Option elections are made on the initial Deferral Agreement with respect to any sub-account. 1.15 Divisive Transaction means a transaction in which the Eligible Executive's employer ceases to be a Subsidiary or there is a sale of substantially all of the assets of the Subsidiary. 1.16 Effective Date means October 1, 1987 or with respect to the Eligible Executives of a company which adopts the Plan, it means the date such company becomes a Participating Company. 1.17 Eligible Executive means an employee of a Participating Company, provided that: (a) prior to January 1, 1995, for purposes of the award deferral described in Article 3, such employee is employed by a Participating Company in salary grades 21 through 40 inclusive, as of December 30 of the calendar year in question; or (b) on and after January 1, 1995, for purposes of the award deferral program described in Article 3, such employee: (i) is employed by a Participating Company and is receiving Compensation of one hundred thousand dollars ($100,000) or more per year; or (ii) retired from the Participating Companies or terminated employment with the Participating Companies on account of disability, as determined by the Administrator, and was receiving Compensation of one hundred thousand dollars ($100,000) or more per year at the time of such retirement or termination; or (c) prior to January 1, 1995, for purposes of the salary deferral program described in Article 4, such employee is eligible for membership in the Tax Savings Thrift Plan and is employed in salary grades 21 through 40 inclusive; or (d) on and after January 1, 1995 for purposes of the salary deferral program described in Article 4, such employee is eligible for membership in the Tax Savings Thrift Plan and is receiving Compensation of one hundred thousand dollars ($100,000) or more per year; or (e) the Chief Executive Officer of the Corporation or his designee may designate any other employee or former employee of an Affiliated Company as an Eligible Executive; provided, however, only those employees or former employees considered to be a select group of management or highly compensated may be designated as Eligible Executives under this Plan. Notwithstanding the preceding, following a Change of Control, such designations are subject to the approval of the Benefits Trust Committee. 1.18 Independent Accountant means the independent accountants engaged by the Corporation and, if selected or changed following a Change of Control, approved by the Benefits Trust Committee. 1.19 Matching Credits means amounts credited to the Account of a Member pursuant to Section 4.5. 1.20 Member means, except as otherwise provided in Article 2, each Eligible Executive who has executed an initial Deferral Agreement as described in Section 2.1. 1.21 MICP means the Participating Companies' Management Incentive Compensation Program. 1.22 Participating Company means the Corporation and any company or corporation directly or indirectly controlled by the Corporation, which the Committee designates as eligible to participate in the Plan in accordance with Section 8.6(e). 1.23 Plan means this Supplementary Savings and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies, as amended from time to time. 1.24 Salary Deferrals means the amounts credited to a Member's Account under Section 4.3. 1.25 Salary Deferral Agreement means a Deferral Agreement filed in accordance with the salary deferral program described in Article 4. 1.26 Salary Deferral Percentage means a percentage of an Eligible Executive's Base Compensation elected in a Salary Deferral Agreement, pursuant to Section 4.1 hereof, and shall be an integral percentage not in excess of fifty (50%) percent. 1.27 SMICP means the Participating Companies' Senior Management Incentive Compensation Program. 1.28 Subsidiary means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Corporation. 1.29 Tax Savings Thrift Plan means the Tax Savings Thrift Plan for Employees of CSX Corporation and Affiliated Companies, as amended from time to time. 1.30 Trust means the CSX Corporation and Affiliated Companies Benefits Assurance Trust. 1.31 Valuation Date means the last business day of each calendar month following the Effective Date. ARTICLE 2. MEMBERSHIP AND DEFERRAL AGREEMENTS 2.1 In General: (a) An Eligible Executive shall become a Member as of the date he files his initial Deferral Agreement with the Administrator. However, such Deferral Agreement shall be effective for purposes of deferring an Award or making Salary Deferrals only as provided in Articles 3 and 4. (b) A Deferral Agreement shall be in writing and properly completed upon a form approved by the Administrator, which shall be the sole judge of the proper completion thereof. Except as provided in Section 4.1(d), such Agreement shall provide for the deferral of an Award or for Salary Deferrals, shall specify the Distribution Options, and may include such other provisions as the Administrator deems appropriate. A Deferral Agreement shall not be revoked or modified with respect to the allocation of prior deferrals except pursuant to the establishment of an Education Sub-account as provided in Article 9. Distribution Options elected may not be modified or revoked except as provided in Section 6.1 or 6.2. (c) As a condition of membership, the Administrator may require such other information as it deems appropriate. 2.2 Modification of Initial Deferral Agreement (a) A Member may elect to change, modify or revoke a Deferral Agreement as follows: (i) A Member may change the amount of Award he elects to defer on an Award Deferral Agreement prior to the Agreement's effective date as provided in Article 3. (ii) A Member may change the rate of his Salary Deferrals, or suspend his Salary Deferrals on account of severe financial hardship, as provided in Article 4. (iii) A Member may change the event entitling him to distribution, as designated on his election of Distribution Options, as provided in Section 6.1(c)(i). (iv) A Member may change the event entitling him to distribution as designated on his election of Distribution Options, subject to the five percent (5%) penalty described in Section 6.1(c)(ii). (v) A Member may change the form of payment, as designated on his election of Distribution Options, as provided in Section 6.2(c)(i). (vi) A Member may change the form of payment as designated on his election of Distribution Options, subject to the five percent (5%) penalty described in Section 6.2(c)(ii). (b) Notwithstanding any provision in Section 2.2(a) to the contrary, the establishment of an Education Sub-account with respect to future Salary Deferrals and Awards as provided in Article 9 shall not be deemed a change for the purposes of Section 2.2(a). 2.3 Termination of Membership; Re-employment: (a) Membership shall cease, subject to Section 2.4, upon a Member's termination of employment; provided that if a former Eligible Executive is receiving severance payments under a Participating Company's severance pay program or is eligible to defer an Award under Article 3, he shall not be deemed to have terminated employment until the later of the date the severance payments cease or the date the Award would have been paid. Membership shall be continued during a leave of absence approved by the Participating Companies. (b) Upon re-employment as an Eligible Executive, a former Member may become a Member again as follows: (i) in the case of a former Member who prior to re-employment received the balance in his Account, by executing a Deferral Agreement under Section 2.1 as though for all purposes of the Plan the Affiliated Companies had never employed the former Member; (ii) in the case of a former Member who prior to re-employment did not receive the balance in his Account, by executing a Deferral Agreement under Section 2.1; provided his Distribution Options and beneficiary designation shall remain in effect. : 2.4 Change in Status (a) In the event that a Member ceases to be an Eligible Executive with respect to Salary Deferrals but continues to be employed by an Affiliated Company, his Salary Deferrals and Matching Credits shall thereupon be suspended until such time as he shall once again become an Eligible Executive. All other provisions of his Salary Deferral Agreement shall remain in force and he shall continue to be a Member of the Plan. (b) In the event that a Member ceases to be an Eligible Executive with respect to the deferral of Awards hereunder but continues to be employed by an Affiliated Company, he shall continue to be a Member of the Plan but shall not be eligible to defer any portion of any future Awards until such time as he shall once again become an Eligible Executive. 2.5 Membership Following a Change of Control: Following a Change of Control, any membership determinations or discretionary actions pursuant to this Article 2 shall be subject to the approval of the Benefits Trust Committee. ARTICLE 3. AWARD DEFERRAL PROGRAM 3.1 Filing Requirements: (a) At such time as the Administrator may prescribe prior to the close of business on December 30 in any calendar year, an Eligible Executive may elect to defer all or a portion of his Award, if any, for that year. Such Award is determined and paid in the following calendar year. Such election shall be made by filing an Award Deferral Agreement with the Administrator on or before the close of business on December 30 of the calendar year for which the Award is made. In the event that December 30 does not fall on a weekday, such filing must be made by the close of business on the last prior business day. (b) Notwithstanding Section 3.1(a), an individual who becomes an Eligible Executive after the calendar year for which an Award is made, but prior to the first day of the month in which such Award is determined including required action by the Board, may elect to defer all or a portion of that Award in accordance with this Section 3.1(b). Such election shall be made by filing an Award Deferral Agreement during the 30 day or shorter period beginning on the date the individual becomes an Eligible Executive and ending no later than the last day of the month preceding the month in which the Award is determined. (c) An Eligible Executive's election to defer all or a portion of his Award shall be effective on the last day that such deferral may be elected under Section 3.1(a) or 3.1(b) and shall be effective only for the Award in question. An Eligible Executive may revoke or change his election to defer all or a portion of his Award at any time prior to the date the election becomes effective, as described in the preceding sentence. Any such revocation or change shall be made in a form and manner determined by the Administrator. (d) An Eligible Executive shall not be entitled to defer an Award on or after attaining the age, if any, which he has designated under Section 6.1(c) or 6.1(d) for the purpose of commencing distribution of his Account (or, if applicable, his Retirement Sub-account). In the event a Member establishes an Education Sub-account pursuant to Article 9, he shall not be entitled to defer all or any portion of an Award into such a Sub-account after attaining the age which he has designated for the purpose of commencing distribution from that Sub-account. (e) An Eligible Executive shall not be entitled to defer an Award if he is eligible to defer his award under another nonqualified program of deferred compensation maintained by an Affiliated Company. 3.2 Amount of Deferral: (a) Prior to a Change of Control, in its sole discretion, the Committee may establish such maximum limit on the amount of Award an Eligible Executive may defer for a calendar year as the Committee deems appropriate. Such maximum limit shall appear on the Eligible Executive's Award Deferral Agreement for the year. Following a Change of Control, the Committee's decision is subject to the final approval of the Benefits Trust Committee. (b) The minimum amount which an Eligible Executive may defer in any year shall be the lesser of $5,000 or the maximum amount determined under Section 3.2(a) above. If an Eligible Executive elects to defer less than this amount, his election shall not be effective. 3.3 Crediting to Account: (a) The amount of Award which an Eligible Executive has elected to defer for a calendar year shall be credited to his Account as of the Valuation Date coincident with or next following the date the Award would have been paid to the Eligible Executive. (b) An additional credit shall be made to the Account as of the Valuation Date described in Section 3.3(a) above, determined as if the amount of Award deferred had earned the same rate of return as the CSX Cash Pool Earnings Rate from the date the Award would have been paid until the Valuation Date it is credited to the Eligible Executive's Account. In lieu of the CSX Corporation Cash Pool Earnings Rate, the Committee may designate, prior to a Change of Control, from time to time, such other indices of investment performance or investment funds as the measure of investment performance under this Section 3.3(b). Following a Change of Control, the Committee's decision is subject to final approval of the Benefits Trust Committee. ARTICLE 4. SALARY DEFERRAL PROGRAM 4.1 Filing Requirements: (a) An individual who is an Eligible Executive immediately prior to the Effective Date may file a Salary Deferral Agreement with the Administrator, within such period prior to the Effective Date and in such manner as the Administrator may prescribe. (b) An individual who becomes an Eligible Executive on or after the Effective Date may file a Salary Deferral Agreement with the Administrator during the calendar month he becomes an Eligible Executive, in such manner as the Administrator may prescribe. (c) An Eligible Executive who fails to file a Salary Deferral Agreement with the Administrator as provided in Sections 4.1(a) and 4.1(b) may file a Salary Deferral Agreement in any subsequent month of December. (d) An Eligible Executive who has not otherwise filed a Deferral Agreement shall file a Salary Deferral Agreement under Sections 4.1(a) or 4.1(b), whichever applies, in order to receive the Matching Credits described in Section 4.5, provided that such agreement need not provide for Salary Deferrals. 4.2 Salary Deferral Agreement: An Eligible Executive's Salary Deferral Agreement shall authorize a reduction in his base pay with respect to his Salary Deferrals under the Plan. The Agreement shall be effective for payroll periods beginning on or after the later of: (a) the Effective Date; or (b) the first day of the month following the date the Salary Deferral Agreement is filed with the Administrator in accordance with Section 4.1. Paychecks applicable to said payroll periods shall be reduced accordingly. 4.3 Amount of Salary Deferrals: (a) On each Valuation Date following the effective date of an Eligible Executive's Salary Deferral Agreement, his Sub-accounts shall be credited with an amount of Salary Deferral, if any, for the payroll period ending thereon, as he elects in his Salary Deferral Agreement. Such Salary Deferral for any payroll period shall be determined as the sum of his Basic Salary Deferral for such payroll period determined under subparagraph (i) and his Additional Salary Deferral for such month, determined under subparagraph (ii) as follows: (i) An Eligible Executive's Basic Salary Deferral shall be determined by multiplying his Compensation for a payroll period by the excess of his Salary Deferral Percentage over the percentage determined in subparagraph (ii) below (ii) An Eligible Executive's Additional Salary Deferral shall be determined by multiplying his Compensation for a payroll period by a percentage determined as (A) the excess of his Salary Deferral Percentage over 15%, divided by (B) .85. provided, however, that no Basic Salary Deferral shall be made under this Plan for any payroll period unless the Eligible Executive is prevented from making elective deferrals under the Tax Savings Thrift Plan for such payroll period as a result of Section 402(g) and/or 401(k)(3) of the Code, and provided further that, for the payroll period in which such Basic Salary Deferral is first made, it shall be limited to the excess of the amount otherwise determined for such payroll period under Section 4.3(a)(i) over the Eligible Executive's elective deferrals under the Tax Savings Thrift Plan for such payroll period. If applicable, Additional Salary Deferrals shall be made for each payroll period of the year to which the Salary Deferral Agreement applies, without regard to whether the Eligible Executive makes elective deferrals under the Tax Savings Thrift Plan and without regard to any Basic Salary Deferrals under this Plan. (b) An Eligible Executive shall not be entitled to make Salary Deferrals on or after attaining the age, if any, which he has designated under Section 6.1(c) or 6.1(d) for the purpose of commencing distribution of his Account (or, if applicable, his Retirement Sub-account). In the event a Member establishes an Education Sub-account pursuant to Article 9, he shall not be entitled to make Salary Deferrals into such Sub-account after attaining the age which he has designated for the purpose of commencing distribution from that Sub-account. 4.4 Changing Salary Deferrals: (a) An Eligible Executive's election on his Salary Deferral Agreement of the rate at which he authorizes Salary Deferrals under the Plan shall remain in effect in subsequent calendar years unless he files with the Administrator an amendment to his Salary Deferral Agreement modifying or revoking such election. The amendment shall be filed by December 30 and shall be effective for payroll periods beginning on or after the following January 1. (b) Notwithstanding Section 4.4(a), an Eligible Executive may, in the event of a severe financial hardship, request a suspension of his Salary Deferrals under the Plan. The request shall be made at a time and in a manner determined by the Administrator, and shall be effective as of such date as the Administrator prescribes. The Administrator shall apply standards, to the extent applicable, identical to those described in Section 6.3 in making its determination. The Eligible Executive may apply to the Administrator to resume his Salary Deferrals with respect to payroll periods beginning on or after the January 1 following the date of suspension, at a time and in a manner determined by the Administrator; provided, that the Administrator shall approve such resumption only if the Administrator determines that the Eligible Executive is no longer incurring such hardship. Notwithstanding the preceding, following a Change of Control, such action by the Administrator is subject to approval by the Benefits Trust Committee. 4.5 Certain Additional Credits: On each Valuation Date, there shall be credited Matching Credits to the Retirement Sub-account(s) of an Eligible Executive determined as follows: (a) For payroll periods prior to the inception of Basic Salary Deferrals hereunder, the greater of (b)(i) or (ii) (b) For payroll periods during which Basic Salary Deferrals are effective, the greater of (i) or (iii), minus (iv), where (i) is the employer matching contributions the Eligible Executive would have received under the Tax Savings Thrift Plan if the provisions of Sections 401(k)(3), 401(m)(9) and 415 of the Code had not applied to the Tax Savings Thrift Plan; and (ii) is an amount determined as 3% of the Eligible Executive's additional Salary Deferrals; and (iii)is the employer matching contributions the Eligible Executive would have received under the Tax Savings Thrift Plan if his deferrals under this Plan had been contributed to the Tax Savings Thrift Plan (in addition to those amounts actually contributed to that Plan), based on "Compensation" as defined in this Plan and as if the provisions of Sections 401(a)(17), 401(k)(3), 401(m)(2), 401(m)(9) and 415 of the Code had not applied to the Tax Savings Thrift Plan; and (iv) is the employer matching contributions made on his behalf for the applicable period to the Tax Savings Thrift Plan. No Matching Credits shall be credited to a Member's Education Sub-account. ARTICLE 5. MAINTENANCE OF ACCOUNTS 5.1 Adjustment of Account: (a) As of each Valuation Date each Account (and, if applicable, each Sub-account) shall be credited or debited with the amount of earnings or losses with which such Sub-account would have been credited or debited, assuming it had been invested in one or more investment funds, or earned the rate of return of one or more indices of investment performance, designated by the Administrator and, if applicable, elected by the Member or former Member, for purposes of measuring the investment performance of his Sub-accounts. (b) The Administrator shall designate at least one investment fund or index of investment performance and may designate other investment funds or investment indices to be used to measure the investment performance of Accounts. The designation of any such investment funds or indices shall not require the Affiliated Companies to invest or earmark their general assets in any specific manner. The Administrator may change the designation of investment funds or indices from time to time, in its sole discretion, and any such change shall not be deemed to be an amendment affecting Members' or former Members' rights under Section 7.2. (c) For purposes of Section 5.1(a), the portion of a Member's Retirement Sub-accounts attributable to Matching Credits shall be credited or debited with earnings or losses based upon the performance of "Fund E" (CSX Stock Fund) under the Tax Savings Thrift Plan. (d) As of February 1, 1989, there shall be credited to the Account of each Eligible Executive who participated in the Supplemental Benefit Plan of Sea-Land Corporation and Affiliated Companies the amount of deferred compensation under that plan as of January 31, 1989 attributable to amounts credited under that plan for the purpose of restoring contributions to a defined contribution plan which were limited by Section 415 of the Code. Such amounts shall be treated as Salary Deferrals under the Plan, and unless transferred pursuant to Section 5.3(a), shall earn the same rate of return as the CSX Cash Pool Earnings Rate. 5.2 Investment Performance Elections: (a) In the event the Administrator designates more than one investment fund or index of investment performance under Section 5.1, each Member and, if applicable, former Member, shall file an initial investment election with the Administrator with respect to the investment of his Salary Deferrals within such time period and on such form as the Administrator may prescribe. The election shall designate the investment fund or funds or index or indices of investment performance which shall be used to measure the investment performance of the Member's Salary Deferrals. The election shall be effective as of the beginning of the payroll period next following the date the election is filed. The election shall be in increments of 1%. (b) In the event the Administrator designates more than one investment fund or index under Section 5.1, each Member shall file an initial investment election each calendar year in which he defers an Award with respect to the amount deferred. The election shall be made within such time period and on such form as the Administrator prescribes and shall be in increments of 1% of the amount deferred. The election shall be effective on the Valuation Date on which the amount determined is credited to the Member's Account. (c) A Member may not elect separate investment funds or indices of investment performance with respect to each Sub-account. 5.3 Changing Investment Elections: (a) A Member may change his election in Section 5.2(a) with respect to his future Salary Deferrals, no more than once each calendar quarter, by filing an appropriate written notice with the Administrator. The notice shall be effective as of the beginning of the first payroll period following the date the notice is filed with the Administrator. (b) A Member or, if applicable, former Member may reallocate the current balance of his Retirement and/or Education Sub-accounts, thereby changing the investment fund or funds or index or indices of investment performance used to measure the future investment performance of his existing Account balance, by filing an appropriate written notice with the Administrator. Each Retirement or Education Sub-account may be reallocated separately. The election shall be effective as of the last business day of the calendar quarter following the month in which the notice is filed. No election under this Section 5.3(b) shall apply to the portion of a Member's Account attributable to Matching Credits. 5.4 Vesting of Account: Each Member shall be fully vested in his Account. 5.5 Individual Accounts: The Administrator shall maintain, or cause to be maintained, records showing the individual balances of each Account and each Sub-account. At least once a year, each Member and, if applicable, former Member shall be furnished with a statement setting forth the value of his Account and his Sub-accounts. 5.6 Action Following a Change of Control: Following a Change of Control, any action taken by the Administrator pursuant to this Article 5 is subject to the approval of the Benefits Trust Committee. ARTICLE 6. PAYMENT OF BENEFITS 6.1 Commencement of Payment: (a) The distribution of the Member's or former Member's Account shall commence, pursuant to Section 6.2, on or after the occurrence of (i), (ii), (iii) or (iv) below, as designated by the Member as a Distribution Option election: (i) the Member's termination of employment with the Affiliated Companies, (ii) attainment of a designated age not earlier than age 59-1/2 (on or after January 1, 1995 age 50) nor later than age 70-1/2, (iii) the earlier of (i) or (ii) above, or (iv) the later of (i) or (ii) above. In the event a Member elects either (ii) or (iii) above, he may not elect an age less than three (3) years subsequent to his current age. A Member or former Member shall not change his Distribution Option election of the designation of the event which entitles him to distribution of his Account, except as provided in Section 6.1(c) below. For purposes of this Plan and particularly this Section 6.1(a), if the Member's employer is involved in a Divisive Transaction, the Member will not be considered to have terminated his employment with an Affiliated Company until his employment with his employer terminates. (b) Effective January 1, 1995, a Member or former Member shall, pursuant to Section 6.9, be eligible to make a Distribution Option election of the designation of the event which entitles him to distribution of his Account in the event of a Change of Control. (c) A Member or former Member may change his Distribution Option election of the designation of the events which entitle him to distribution of his Account under Section 6.1(a) and Section 6.1(b), as follows: (i) A Member or former Member may make a request in writing to the Administrator to defer the Member's designated distribution event under Section 6.1(a). The requests must be filed with the Administrator at least one year prior to when distribution would commence based on the current designation. The deferral requests must specify a distribution event described in Section 6.1(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the date that is one year after the request is filed with the Administrator. If the Member's current distribution event will occur upon his termination of employment and the Member's employment terminates within one year after the deferral request is made, the deferral request shall not be effective. A deferral request under this Section 6.1(c)(i) shall not result in a forfeiture of the Member's or former Member's Account. (ii) Notwithstanding Section 6.1(c)(i), a Member or former Member may change his designated distribution event under Section 6.1(a) or 6.1(b), no more frequently than once in any calendar year, by filing with the Administrator an amendment to his Distribution Option election on or before December 30 (or the last preceding business day if December 30 is not a weekday). The change shall be limited to those events entitling a Member to a distribution that are described in Section 6.1(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the last Valuation Date of the calendar year in which the change is filed. Unless the election complies with the requirements of Section 6.1(c)(i), or unless the provisions of Section 6.1(e) apply, an election under this Section 6.1(c)(ii) shall result in the forfeiture of five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. If the Member or former Member changes the form in which his Account is to be distributed under Section 6.2(c)(ii) at the same time as he changes his designated distribution event under this Section 6.1(c)(ii), the combined forfeitures will be five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. (d) Notwithstanding anything in this Section 6.1 or Article 9 to the contrary, a Member's Account shall be distributed upon his death. (e) A Member may not change the designation of the event which entitles him to distribution of one or more Education Sub-accounts, except that a Member may transfer the entire amount in any Education Sub-account to one or more other Education Sub-accounts and one or more of his Retirement Sub-accounts, or any combination thereof, subject to a possible forfeiture of five percent (5%) of the Sub-account so transferred, as provided in Article 9. (f) Notwithstanding the foregoing, prior to a Change of Control, the Corporation may delay payment of a benefit under this Plan to any Member who is determined to be among the top five most highly paid executives for the year the benefit under this Plan would otherwise be paid; provided, however, if a Member's payment is delayed, the benefit to which he is entitled will not decrease after the date it would otherwise be distributed. (g) Notwithstanding the preceding, following a Change of Control, the authority to delay payment of a Member's or former Member's Account rests solely with the Benefits Trust Committee. 6.2 Method of Payment: (a) A Member's or former Member's Retirement Sub-account(s) shall be distributed to him, or in the event of his death to his Beneficiary, in a cash single sum payment as soon as administratively practicable following the January 1 coincident with or next following the date the Member incurs the Distribution Option elected under Section 6.1 or his date of death, as the case may be. Matching Credits earned in respect to periods following the date of such distributable event shall be paid directly to the Member in cash as soon as practical. Notwithstanding the foregoing, a Member or former Member may make a Distribution Option election to receive distribution of his Account in semi-annual installments over a period not to exceed twenty (20) years. Installments shall be determined as of each June 30 and December 31 and shall be paid as soon as administratively practicable thereafter. Installments shall commence as of the July 1 or January 1 coincident with or next following the date the Member incurs the distributable event elected as a Distribution Option under Section 6.1, or as soon as administratively practicable thereafter. The amount of each installment shall equal the balance in the Account as of the Valuation Date of determination, divided by the number of remaining installments (including the installment being determined). The Distribution Option election shall be irrevocable except as provided in Section 6.2(c) below. If a Member or former Member dies before payment of the entire balance of his Account, the remaining balance shall be paid in a single sum to his Beneficiary as soon as administratively practicable following the January 1 coincident with or next following his date of death. (b) Effective January 1, 1995, a Member or former Member shall, pursuant to Section 6.9, be eligible to make a separate Distribution Option election of the form of payment of his Account in the event of a Change of Control. (c) Notwithstanding Section 6.2(a) and Section 6.2(b), a Member or former Member may change the Distribution Option election of the form in which his Account is distributed, as follows: (i) A Member or former Member may make a one-time request to the Administrator to change the form in which his Account is to be distributed under Section 6.2(a). A Member or former Member may also make a one-time request to change the form in which his Account is to be distributed under Section 6.2(b). The request must be filed in writing with the Administrator at least one year prior to when distribution would commence based on the current designation. The requests must specify a form of distribution described in Section 6.2(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the date that is one year after the request is filed with the Administrator. If the Member's distribution event will occur upon his termination of employment and the Member's employment terminates within one year after the request is filed, the request shall not be effective. A request under this Section 6.2(c)(i) shall not result in a forfeiture of the Member's or former Member's Account. (ii) Notwithstanding Section 6.2(c)(i), a Member or former Member may change the form in which his Account is to be distributed under Section 6.2(a) or 6.2(b), no more frequently than once in any calendar year, by filing with the Administrator an amendment to his Distribution Option election on or before December 30 (or the last preceding business day if December 30 is not a weekday). The change shall be limited to those forms of distribution described in Section 6.2(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the last Valuation Date of the calendar year in which it is filed. Unless the election complies with the requirements for a one-time request under Section 6.2(c)(i), or unless the provisions of Section 6.2(d) apply, an election under this Section 6.2(c)(ii) shall result in the forfeiture of five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. If the Member or former Member changes his designated distribution event under this Section 6.2(c)(ii) at the same time as he changes the form in which his Account is to be distributed under Section 6.1(c)(ii), the combined forfeiture will be five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. (d) In the event the Member's Account consists of one or more Retirement Sub-accounts and one or more Education Sub-accounts, the provisions of this Section 6.2 shall apply exclusively to the Member's Retirement Sub-accounts. A Member may not change the form in which his Education Sub-accounts are distributed, except that a Member may transfer the entire amount in any Education Sub-account to one or more other Education Sub-accounts and one or more Retirement Sub-accounts, or any combination thereof, subject to a possible forfeiture of five percent (5%) of the Sub-account so transferred, as provided in Article 9. 6.3 Applicability: In the event the Member's Account consists of one or more Retirement Sub-accounts and one or more Education Sub-accounts, the provisions of Sections 6.1(a) and 6.1(c) and 6.2 shall apply exclusively to the Member's Retirement Sub-accounts. 6.4 Account Adjustment: The obligations of the Corporation or any of its affiliated corporations and the benefits due any Member, former Member, surviving spouse or beneficiary hereunder shall be reduced by any amount received in regard thereto under the Benefits Assurance Trust or any similar trust or other vehicle. 6.5 Hardship Withdrawal (a) While employed by the Participating Companies, a Member or former Member may, in the event of a severe financial hardship, request a withdrawal from his Account. The request shall be made in a time and manner determined by the Administrator, shall not be for a greater amount than the amount required to meet the financial hardship, and shall be subject to approval by the Administrator. (b) For purposes of this Section 6.5 financial hardship shall include: (i) education of a dependent child where the Member or former Member shows that without the withdrawal under this Section the education would be unavailable to the child; (ii) illness of the Member or former Member or his dependents, resulting in severe financial hardship to the Member or former Member; (iii) the loss of the Member's or former Member's home or its contents, to the extent not reimbursable by insurance or otherwise, if such loss results in a severe financial hardship to the Member or former Member; (iv) any other extraordinary circumstances of the Member or former Member approved by the Administrator if such circumstances would result in a present or impending critical financial need which the Member or former Member is unable to satisfy with funds reasonably available from other sources. (c) Notwithstanding the preceding, following a Change of Control, any decisions or determinations by the Administrator under this Section 6.5 shall be subject to the approval of the Benefits Trust Committee. 6.6 Designation of Beneficiary: A Member or former Member may, at a time and in a manner determined by the Administrator, designate a beneficiary and one or more contingent beneficiaries (which may include the Member's or former Member's estate) to receive any benefits which may be payable under this Plan upon his death. If the Member or former Member do not designate a beneficiary or contingent beneficiary, or if the beneficiary and the contingent beneficiaries do not survive the Member or former Member, such benefits shall be paid to the Member's or former Member's estate. A Member or former Member may revoke or change any designation made under this Section 6.6 in a time and manner determined by the Administrator. 6.7 Special Distribution Rules: Notwithstanding anything to the contrary in this Plan, if (a) a Member or former Member becomes the owner, director or employee of a competitor of the Affiliated Companies, (b) his employment is terminated by an Affiliated Company on account of actions by the Member which are detrimental to the interests of the Affiliated Company, or (c) he engages in conduct subsequent to the termination of his employment with the Affiliated Companies which the Administrator determines to be detrimental to the interests of an Affiliated Company, then the Administrator may, in its sole discretion, pay the Member or former Member a single sum payment equal to the balance in his Account. The single sum payment shall be made as soon as practicable following the date the Member or former Member becomes an owner, director or employee of a competitor, his termination of employment or the Administrator's determination of detrimental conduct, as the case may be, and shall be in lieu of all other benefits which may be payable to the Member or former Member under this Plan. 6.8 Status of Account Pending Distribution: Pending distribution, a former Member's Account (and, if applicable, a former Member's Sub-accounts) shall continue to be credited with earnings and losses as provided in Section 5.1. The former Member shall be entitled to change his investment elections under Section 5.3 or apply for Hardship withdrawals under Section 6.5 to the same extent as if he were a Member of the Plan. In the event of the death of a Member or former Member, his Sub-accounts shall be credited with earnings and losses as if the Sub-accounts had earned the same rate of return as the CSX Corporation Cash Pool Earnings Rate or, in the sole discretion of the Administrator, the rate of return of such other index of investment performance or investment fund which may be designated by the Administrator as a measure for investment performance of Members' or former Members' Accounts (and, if applicable, their Sub-accounts), commencing with the Valuation Date coincident with or next following the Member's or former Member's date of death. 6.9 Installments and Withdrawals Pro-Rata: In the event of an installment payment or hardship withdrawal, such payment or withdrawal shall be made on a pro-rata basis from the portions of the Member's or former Member's existing Account balance which are subject to different measures of investment performance. In the event of a hardship withdrawal, the withdrawal shall be made on a pro-rata basis from all of the Member's or former Member's Sub-accounts. 7.0 Change of Control: (a) If a Change of Control has occurred, the Corporation and Participating Companies shall contribute to the Trust within 7 days of such Change of Control, a lump sum payment equal to the greater of (i) the aggregate value of the amount each Member or former Member would be eligible to receive (determined under (b) below) as of the latest Valuation Date coinciding with or preceding the date of Change of Control or (ii) the amount determined under Section 1(h) of the Trust attributable to liabilities relating to the Plan to the extent such amounts are not already in the Trust. The aggregate value of the amount of the lump sum to be contributed to the Trust pursuant to this Section 6.10 shall be determined by the Independent Accountants after consultation with the entity then maintaining the Plan's records, and shall be projected, if necessary, to such Valuation Date from the last valuation of Members' or former Members' Accounts for which information is readily available. Thereafter, the Independent Accountants shall annually determine as of a Valuation Date for each Member or former Member not receiving a lump sum payment pursuant to subsection (b) below the value of each Member or former Member's Accounts. To the extent that the value of the assets held in the Trust relating to this Plan do not equal the aggregate amount described in the preceding sentence, at the time of the valuation, as determined by the Independent Accountants, the Corporation and Participating Companies shall make a lump sum contribution to the Trust equal to the difference. (b) In the event a Change of Control has occurred, the trustee of the Trust shall, within 45 days of such Change of Control, pay to each Member or former Member not making an election under (c) below, a lump sum payment equal to the value of the Member's or former Member's Accounts (determined under Article 5) as of the Valuation Date coinciding with or next preceding the date of such Change of Control. The amount of each Member's or former Member's lump sum payment shall be determined by the Independent Accountants after consultation with the entity then maintaining the Plan's records, and shall be projected, if necessary, to such Valuation Date from the last valuation of Member's or former Member's Accounts for which information is readily available. (c) Each Member or former Member may elect in a time and manner determined by the Administrator, but in no event later than December 31, 1996, or the occurrence of a Change of Control, if earlier, to have amounts and benefits determined and payable under the terms of the Plan as if a Change of Control had not occurred. New Members of the Plan may elect in a time and manner determined by the Administrator, but in no event later than 90 days after becoming a Member, to have amounts and benefits determined and payable under the terms of the Plan as if a Change of Control had not occurred. A Member or former Member who has made an election, as set forth in the two preceding sentences, may, at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change of Control shall be invalid. (d) Notwithstanding anything in the Plan to the contrary, each Member or former Member who has made an election under (c) above may elect within 90 days following a Change of Control, in a time and manner determined by the Benefits Trust Committee, to receive a lump sum payment calculated under the provisions of (b) above determined as of the Valuation Date next preceding such payment, except that such calculated amount shall be reduced by 5% and such reduction shall be irrevocably forfeited by the Member or former Member. Furthermore, as a result of such election, the Member or former Member shall no longer be eligible to participate or otherwise benefit from the Plan. Payments under this subsection (d) shall be made not later than 7 days following receipt by the Corporation of a Member's or former Member's election. The Benefits Trust Committee shall, no later than 7 days after a Change of Control has occurred, give written notification to each Member or former Member eligible to make an election under this subsection (d), that a Change of Control has occurred and informing such Member or former Member of the availability of the election. ARTICLE 7. AMENDMENT OR TERMINATION 7.1 Right to Terminate: (a) Prior to a Change of Control, the Board may, in its sole discretion, terminate this Plan and the related Deferral Agreements at any time. Following a Change of Control, this Plan may not be terminated without the approval of the Benefits Trust Committee. (b) Prior to a Change of Control, the Committee may terminate an Affiliated Company's participation as a Participating Company in this Plan for any reason at any time. Following a Change of Control, an Affiliated Company may not be terminated from participation as a Participating Company without the consent of the Benefits Trust Committee. (c) Prior to a Change of Control, an Affiliated Company's board of directors may terminate that Affiliated Company's participation as a Participating Company for any reason at any time. Following a Change of Control, an Affiliated Company's participation as a Participating Company may not be terminated without the consent of the Benefits Trust Committee. (d) In the event the Plan and related Deferral Agreements are terminated, each Member, former Member and Beneficiary shall receive a single sum payment equal to the balance in his Account. The single sum payment shall be made as soon as practicable following the date the Plan is terminated and shall be in lieu of any other benefit which may be payable to the Member, former Member or Beneficiary under this Plan. 7.2 Right to Amend: Prior to a Change of Control, the Board may, in its sole discretion, amend this Plan and the related Deferral Agreements on 30 days prior notice to the Members and, where applicable, former Members. Following a Change of Control, all amendments to this Plan are subject to the approval of the Benefits Trust Committee. If any amendment to this Plan or to the Deferral Agreements shall adversely affect the rights of a Member or former Member, such individual must consent in writing to such amendment prior to its effective date. If such individual does not consent to the amendment, the Plan and related Deferral Agreements shall be deemed to be terminated with respect to such individual and he shall receive a single sum payment of his Account as soon thereafter as is practicable. Notwithstanding the foregoing, the Administrator's change in any investment funds or investment index under Section 5.1(b) or the restriction of future deferrals under the salary deferral program or award deferral program shall not be deemed to adversely affect any Member's or former Member's rights. 7.3 Uniform Action: Notwithstanding anything in the Plan to the contrary, any action to amend or terminate the Plan or the Deferral Agreements must be taken in a uniform and nondiscriminatory manner. Notwithstanding the preceding, any such action taken by the Administrator following a Change of Control is subject to the approval of the Benefits Trust Committee. ARTICLE 8. GENERAL PROVISIONS 8.1 No Funding: Nothing contained in this Plan or in a Deferral Agreement shall cause this Plan to be a funded retirement plan. Neither the Member, former Member, his beneficiary, contingent beneficiaries, heirs or personal representatives shall have any right, title or interest in or to any funds of the Trust or the Affiliated Companies on account of this Plan or on account of having completed a Deferral Agreement. The assets held in the Trust shall be subject to the claims of creditors of the Corporation, and the Trust's assets shall be used to discharge said claims in the event of the Corporation's insolvency. Each Member or former Member shall have the status of a general unsecured creditor of the Affiliated Companies and this Plan constitutes a mere promise by the Affiliated Companies to make benefit payments in the future. 8.2 Obligation: To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Plan shall be joint and several. 8.3 No Contract of Employment: The existence of this Plan or of a Deferral Agreement does not constitute a contract for continued employment between an Eligible Executive or a Member and an Affiliated Company. The Affiliated Companies reserve the right to modify an Eligible Executive's or Member's remuneration and to terminate an Eligible Executive or a Member for any reason and at any time, notwithstanding the existence of this Plan or of a Deferral Agreement. 8.4 Withholding Taxes: All payments under this Plan shall be net of an amount sufficient to satisfy any federal, state or local withholding and payroll tax requirements. 8.5 Nonalienation: The right to receive any benefit under this Plan may not be transferred, assigned, pledged or encumbered by a Member, former Member, beneficiary or contingent beneficiary in any manner and any attempt to do so shall be void. No such benefit shall be subject to garnishment, attachment or other legal or equitable process without the prior written consent of the Affiliated Companies. Notwithstanding the preceding, following a Change of Control, the Administrator shall not implement such action without the consent of the Benefits Trust Committee. 8.6 Administration: (a) Prior to a Change of Control, the Administrator of the Plan shall be responsible for the general administration of the Plan, claims review, and for carrying out its provisions. Administration of the Plan shall be carried out consistent with the terms and conditions of the Plan. (b) Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Administrator. (c) The Administrator shall have sole and absolute discretion to interpret the Plan, determine eligibility for and benefits due hereunder. Decisions of the Administrator regarding benefits under the Plan shall at all times be binding and conclusive on Members, their beneficiaries, heirs and assigns. Notwithstanding the preceding, following a Change of Control, final benefit determinations for Members, their beneficiaries, heirs and assigns and decisions regarding benefit claims under the Plan shall rest with the Benefits Trust Committee or its delegate in its sole and absolute discretion. (d) Prior to paying any benefit under this Plan, the Administrator may require the Member or former Member, beneficiary or contingent beneficiary to provide such information or material as the Administrator, in its sole discretion, shall deem necessary for it to make any determination it may be required to make under this Plan. The Administrator may withhold payment of any benefit under this Plan until it receives all such information and material and is reasonably satisfied of its correctness and genuineness. The Administrator shall provide adequate notice in writing to any Member, former Member, beneficiary or contingent beneficiary whose claim for benefits under this Plan has been denied, setting forth the specific reasons for such denial. A reasonable opportunity shall be afforded to any such Member, former Member, beneficiary or contingent beneficiary for a full and fair review by the Administrator of its decision denying the claim. The Administrator's decision on any such review shall be final and binding on the Member, former Member, beneficiary or contingent beneficiary and all other interested persons. All acts and decisions of the Administrator shall be final and binding upon all Members, former Members, beneficiaries, contingent beneficiaries and employees of the Affiliated Companies. Notwithstanding the preceding, following a Change of Control, any and all decisions by the Administrator are subject to the approval of the Benefits Trust Committee. (e) Prior to a Change of Control, the Committee in its sole discretion and upon such terms as it may prescribe, may permit any company or corporation directly or indirectly controlled by the Corporation to participate in the Plan. After a Change of Control, such permission must be approved by the Benefits Trust Committee. 8.7 Construction (a) The Plan is intended to constitute an unfunded deferred compensation arrangement for a select group of management or highly compensated employees and all rights hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia to the extent not preempted by federal law. (b) The masculine pronoun means the feminine wherever appropriate. (c) The captions inserted herein are inserted as a matter of convenience and shall not affect the construction of the Plan. ARTICLE 9. EDUCATION SUB-ACCOUNTS 9.1 Education Sub-accounts: (a) Notwithstanding any provision of this Plan to the contrary, with respect to amounts deferred under Salary Deferral Agreements and Award Deferral Agreements effective on or after December 31, 1990, a Member may direct the Administrator to establish a separate sub-account in the name of one or more of: (i) each of the Member's children, (ii) each of the Member's brothers, sisters, their spouses, the Member's spouse, or (iii) each of the foregoing's lineal descendants, for the payment of their expenses directly or indirectly arising from enrollment in a college, university, another post-secondary institution of higher learning or a secondary educational institution. Each sub-account established pursuant to this Section 9.1(a) shall be referred to as an "Education Sub-account." (b) The Member may instruct the Administrator to allocate all or a portion of any amount deferred under an Award Deferral Agreement in respect to an Award granted after December 31, 1990 to one or more of the Education Sub-accounts established pursuant to Section 9.1(a). (c) A Member may instruct the Administrator to allocate all or any portion of the amount he defers for periods commencing after December 31, 1990 pursuant to his Salary Deferral Agreement to one or more of the Education Sub-accounts established pursuant to Section 9.1(a). (d) Any elections pursuant to Sections 9.1(a) and 9.1(b) shall be made in whole percentages. (e) No Matching Credits shall be allocated to any Education Sub-account. 9.2 Distribution of Education Sub-accounts: (a) Amounts allocated to one or more of a Member's Education Sub-accounts shall be distributed to the Member upon the attainment of the certain age of the Member, specifically designated by the Member for this purpose with regard to that Sub-account. (b) A Member or former Member may transfer the entire amount but not less than that amount in any Education Sub-account to one or more other Education Sub-accounts, a Retirement Sub-account, or any combination thereof, by filing the appropriate form or forms with the Administrator not later than the last business day of the calendar year preceding the calendar year in which distribution of that Education Sub-account was to begin; provided, however, if such transfer accelerates the timing of the payment to the Member, there shall be a forfeiture of five percent (5%) of the Member's or former Member's Sub-account so transferred, determined as of the Valuation Date upon which the transfer is effective. In no event may a Member transfer all or any portion of the amount in a Retirement Sub-account to his Education Sub-accounts. Except as provided in this Section 9.2(b) or 9.2(c) below, a Member or former Member may not change the time or form of distribution of his Education Sub-accounts. (c) In the event that the individual for whom an Education Sub-account is established dies while funds remain in that Sub-account, a Member or former Member may transfer without penalty the entire amount but not less than that amount in that Sub-account in accordance with the provisions of (i) or (ii) below: (i) to one or more existing Education Sub-accounts and/or a new Education Sub-account established in accordance with the provisions of Section 9.1 hereof; or (ii) to a Retirement Sub-account. If a Member or former Member elects to transfer funds in accordance with (ii) and he has not previously established a Retirement Sub-account, such a Sub-account shall be established automatically and the Member or former Member promptly thereafter will be required to execute an amendment to his Deferral Agreement which shall specify the option under Section 6.1(a) which will entitle him to distribution of the Retirement Sub-account and the form of distribution under Section 6.2(a). (d) A Member's or former Member's Education Sub-accounts shall be distributed to him, or in the event of his death to his Beneficiary, in a cash single sum payment as soon as administratively practicable following the January 1 coincident with or next following the date the Member incurs the distributable event or events elected under Section 9.2(a) or his date of death, as the case may be. Notwithstanding the foregoing, a Member or former Member may elect to receive distribution of one or more of his Education Sub-accounts in semi-annual installments over a period not to exceed six (6) years. Installments shall be determined as of each June 30 and December 31 and shall be paid as soon as administratively practicable thereafter. Installments shall commence as of the June 30 or December 31 coincident with or next following the date the Member incurs the distributable event elected under Section 9.2(a) with regard to a Sub-account, or as soon as administratively practicable thereafter. The amount of each installment shall equal the balance in the applicable Education Sub-account as of the Valuation Date of determination, divided by the number of remaining installments (including the installment being determined). If a Member or former Member dies before payment of the entire balance of all of his Education Sub-accounts, the remaining balance or balances, as the case may be, shall be paid in a single sum to his Beneficiary as soon as administratively practicable following the January 1 coincident with or next following his date of death. 9.3 Construction: To the extent any provision in this Article 9 is inconsistent with any other provision of this Plan, the provisions in Article 9 shall govern. EX-10.18 10 Exhibit 10.18 SPECIAL RETIREMENT PLAN OF CSX CORPORATION AND AFFILIATED CORPORATIONS As Amended and Restated January 1, 1995 (As Amended through December 31, 1997) TABLE OF CONTENTS Section I - INTRODUCTION........................................... 1 Section II - PARTICIPATION.......................................... 1 Section III - CREDITABLE SERVICE..................................... 3 Section IV - COMPENSATION AND AVERAGE COMPENSATION.................. 4 Section V - SPECIAL RETIREMENT ALLOWANCES.......................... 4 Section VI - FUNDING METHOD.......................................... 6 Section VII - ADMINISTRATION OF SPECIAL PLAN.......................... 6 Section VIII - MODIFICATION, AMENDMENT AND TERMINATION................. 7 Section IX - NON-ALIENATION OF BENEFITS.............................. 7 Section X - MISCELLANEOUS PROVISIONS................................ 8 Section XI - CHANGE OF CONTROL....................................... 8 Section XII - CONSTRUCTION........................................... 10 APPENDIX I PARTICIPANTS GRANTED ADDITIONAL CREDITABLE SERVICE PURSUANT TO SECTION V(4)(b) Special Retirement Plan of CSX Corporation and Affiliated Corporations As Amended and Restated January 1, 1995 (As Amended through December 31, 1997) Section I - INTRODUCTION 1. The purpose of this retirement plan, hereinafter called the "Special Plan," is to provide an incentive for corporate officers comprising a select group of management or highly compensated employees to exert maximum efforts for the Company's success and to remain in the service of the Company until retirement. 2. The Special Plan as provided herein was originally effective as of March 1, 1983, and supersedes the Employees' Special Pension Plan of The Chesapeake and Ohio Railway Company and the Plan for Additional Annuities for Qualifying Members under the Supplemental Pension Plan of The Baltimore and Ohio Railroad Company, hereinafter called the "Former Plans." 3. The "Company" as used herein means CSX Corporation and such other of its affiliated corporations as shall adopt this Special Plan with the approval of the Compensation Committee and by action of their boards of directors for the benefit of corporate officers who are covered or may become covered by the Special Plan. 4. The term "Compensation Committee" means the Compensation Committee of the Board of Directors of CSX Corporation (the "Board of Directors"). 5. "Benefits Trust Committee" means the committee created pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust Agreement ("The Benefits Assurance Trust"). 6. The Company's "Independent Accountant" means an independent accountant or actuary engaged by the Company and, if selected or changed following a Change of Control, approved by the Benefits Trust Committee. 7. The incentives under the Special Plan shall consist of special retirement allowances provided by the Company at retirement to certain employees, hereinafter referred to as "Participants," who shall participate as provided herein (eligibility for participation is set forth in Section II). 8. The Special Plan shall, where appropriate, refer to and have meanings consistent with all of the relevant terms of any other regularly maintained pension plan which currently provides or did provide immediately prior to March 1, 1983, retirement benefits for non-contract employees of the Company and is or was maintained by CSX Corporation or any of its affiliated corporations whose officers participate in the Special Plan. Such existing regularly maintained pension plans which provided benefits immediately prior to March 1, 1983 for employees of the Company, and covered periods of service granted in subsections 4(a) and 4(b) of Section V, or those which may be established hereafter, as amended from time to time, shall be referred to herein as the "Pension Plans." Accordingly, regardless of formal differences which may exist between the Special Plan and the Pension Plans in the use of terminology, the definitions and principles which are set forth in the Pension Plans with respect to compensation, average compensation, credited service, and similar terms shall be applied and construed hereunder in a manner consistent with the purposes of the Special Plan and the Pension Plans. In any instance in which the male gender is used herein, it shall also include persons of the female gender in appropriate circumstances. Section II - PARTICIPATION 1. Every person who was a Participant in the Former Plans as in effect immediately prior to March 1, 1983, shall continue as a Participant in the Special Plan on and after such date for the purpose of any applicable provisions hereof. 2. On and after March 1, 1983, Participants shall include any employees who participate in the Pension Plans and who are entitled to benefits provided under Section V, Subsection 8 hereof; provided, however, that the only benefit that such employees shall be eligible to receive under this Special Plan shall be the benefit provided in accordance with such Subsection unless they are otherwise entitled to benefits under other provisions of this Special Plan. 3. On and after March 1, 1983, additional persons eligible to be Participants shall be those specified in Section V, Subsection 4(c). Section III - CREDITABLE SERVICE 1. Creditable service under the Special Plan shall have the same meaning and apply in the same manner as creditable service under the Pension Plans, except that it shall also include any additional creditable service which may have been or which may be granted to a Participant in accordance with the provisions of Section V, Subsections 3 and 4. Provided, however, notwithstanding any provisions of the Pension Plans to the contrary, a Participant in the Special Plan who is in the employ of the Company and who does not receive compensation in any calendar month due to amounts deferred under the Company's Deferred Compensation Program, Supplementary Savings and Incentive Award Deferral Plan, and any other amounts of compensation deferred under any other arrangement approved by the Compensation Committee nevertheless shall receive creditable service under the Special Plan. 2. Notwithstanding any other provisions of this Special Plan or the Pensions Plans to the contrary, effective January 1, 1989: (a) Prior to January 1, 1992, a Participant must have been continuously employed by the Company for a period of not less than 10 years to become entitled upon retirement to receive payment of a special retirement allowance from this Special Plan in respect of any additional creditable service, pension supplement, pension or benefit granted under Section V, Subsections 3(a) or 3(b) of this Special Plan. After December 31, 1991, this Subsection (a) shall only apply to Section V, Subsection 3(b); and, (b) Prior to January 1, 1992, a Participant must have been continuously employed by the Company for a period of not less than 5 years to become entitled to receive payment of a special retirement allowance from this Special Plan in respect of any additional creditable service granted under Section V, Subsection 4(d), of this Special Plan; provided, however, a person who has already attained age 60 when he first becomes employed by the Company, and who also becomes and continuously remains a Participant from his first date of employment until attainment of age 65, shall become entitled upon retirement to receive payment of a special retirement allowance from this Special Plan in respect of any additional creditable service granted under Section V, Subsection 4(d) of this Special Plan; and (c) After December 31, 1991, a Participant must have been continuously employed by the Company for a period of not less than 10 years and must have attained age 55 to become entitled to receive a special retirement allowance from this Special Plan in respect to any additional creditable service accrued after December 31, 1991, granted under Section V, Subsection 4(d), of this Special Plan or a pension or benefit granted after December 31, 1991 under Section V, Subsection 3(a) of this Special Plan; provided, however, a Participant who has at least 5 years of continuous service and who dies while actively employed shall be entitled to the additional creditable service accrued after December 31, 1991; and provided, further, a Participant who terminates employment with the consent of the Chief Executive Officer of CSX Corporation ("Chief Executive Officer") prior to age 55 with 10 years of continuous service shall be entitled to the additional creditable service accrued after December 31, 1991. (d) Prior to a Change of Control, in no event shall a Participant be eligible to receive a payment in respect of any benefits granted under Section V, Subsections 3(a), 3(b) or 4(d) of this Special Plan before such date as the Participant attains the earliest retirement age specified in the particular Pension Plan in which the Participant also participates, unless an earlier payment from the Special Plan is specifically authorized by the Compensation Committee. The Compensation Committee shall have full authority and sole discretion to interpret and administer the foregoing rules, and any decision made by the Compensation Committee shall be final and binding. Following a Change of Control, the same rules apply except that the Benefits Trust Committee shall have full authority and sole discretion to interpret and administer the foregoing rules. Any such decision made by the Benefits Trust Committee shall be final and binding. (e) In the event of a Change of Control, as defined in Section XI, the age 55 and length of service requirements contained in Section III, Subsection (2)(c), shall be waived for those Participants who are employed by the Company at the time of the Change of Control. Section IV - COMPENSATION AND AVERAGE COMPENSATION Compensation and average compensation under the Special Plan shall have the same meanings and apply in the same manner as those terms do under the Pension Plans, except as provided in Section V, Subsection 3(b); provided, however, that amounts deferred under the Company's Deferred Compensation Program, Supplementary Savings and Incentive Award Deferral Plan, and any other amounts of compensation deferred under any other arrangement approved by the Compensation Committee shall be included in the determination of compensation and average compensation; and further provided, that compensation and average compensation hereunder shall not be limited to the amount of $150,000, or such other amount as adjusted by regulation, as imposed by Sections 401(a)(17) and 415(d) of the Internal Revenue Code. Section V - SPECIAL RETIREMENT ALLOWANCES 1. All of the provisions, conditions, and requirements set forth in the Pension Plans with respect to the granting and payment of retirement benefits thereunder shall be equally applicable to the granting of the special retirement allowances hereunder to Participants in the Special Plan and to the payment thereof from the Company's general assets or from the Benefits Assurance Trust. Except as otherwise may be provided in this Special Plan, whenever a Participant's rights under the Special Plan are to be determined, appropriate reference shall be made to the particular Pension Plan in which such person is also a participant. Notwithstanding the preceding sentence, if a special retirement allowance under the Special Plan shall be paid to a surviving spouse in conformance with the provisions of the Pension Plans, the final installment payment hereunder shall be made only to the estate of such surviving spouse and shall not be otherwise paid, regardless of any different provision for such payment which may be prescribed in the Pension Plans. 2. All special retirement allowances being paid on March 1, 1983, under the Former Plans as they existed immediately prior to such date shall be continued and be paid hereunder, and, persons participating under the Former Plans shall continue to participate hereunder in accordance with the terms and conditions of the Former Plans and any applicable provisions of this Special Plan. 3. The Compensation Committee, upon the recommendation of the Chief Executive Officer, may grant to an officer of the Company the following benefits under the Special Plan: (a) Additional creditable service, pensions or benefits hereunder other than as provided in the Pension Plan, in recognition of previous service deemed to be of special value to the Company. (b) A pension supplement hereunder in a particular instance as determined by the Compensation Committee, to be calculated on the basis of specific instructions which may depart only for such purpose from any of the terms, conditions or requirements of the Pension Plans, notwithstanding the provisions of Section I, Subsection 5, and Section V, Subsection 1, hereof. 4. The following additional creditable service under the Special Plan shall be granted by the Company at retirement under the Pension Plans: (a) To those Participants of the "Former Plans," creditable service equal to that accrued under Section V, Subsection 4 of The Employees' Special Plan of The Chesapeake and Ohio Railway Company or under paragraphs 1, 2 and 3 of the Plan for Additional Annuities for Qualifying Members Under the Supplemental Pension Plan of the Baltimore and Ohio Railroad Company, provided that, effective upon a Participant's retirement on or after March 1, 1983, creditable service under the Special Plan and Pension Plans shall not exceed 44 years. (b) To those Participants in the Special Plan who are listed in Appendix I, and who are also participants in the Pension Plans, additional creditable service under the Special Plan will be granted as indicated for each individual as shown in Appendix I, provided that additional creditable service under the Special Plan and credited service under the Pension Plans at retirement shall not exceed 44 years. (c) On and after March 1, 1983, new admissions into the class of persons who may become Participants in the Special Plan to receive additional creditable service hereunder shall only include participants in the Pension Plans who are appointed by the Chief Executive Officer or his designee. (d) In addition to the additional creditable service granted to Participants under (a) or (b) above, beginning March 1, 1983, one year of additional creditable service shall be granted for each year of actual service (with allowances for months less than twelve) between ages 45 and 65 during which a person is a Participant. Those who become qualified as provided in (c) above shall have one year of additional credited service granted, beginning no earlier than the date they are both a Participant and at least age 45, for each year of actual service (with allowances made for months less than twelve) during which they remain a Participant, but only up to age 65. Additional creditable service granted under the Special Plan shall be combined with credited service under the Pension Plan (but only if credited service under the Pension Plans does not exceed 44 years), to result in total credited service and additional creditable service under the Pension Plans and the Special Plan which shall not exceed a maximum of 44 years. The position, compensation, and other conditions upon which a non-contract employee's participation herein is based shall be determined from time to time in the absolute discretion of the Compensation Committee. Effective December 31, 1993, there shall be no new admissions into the class of persons who may receive additional benefits pursuant to this subsection 4(d); provided, however, the Chief Executive Officer may, by express agreement, offer the additional benefits pursuant to this subsection 4(d) to selected individuals. (e) Anything to the contrary notwithstanding, any Participant in the Special Plan receiving additional creditable service under this Subsection 4, and whose responsibilities and compensation are reduced, may, in the discretion of the Compensation Committee or the Chief Executive Officer, cease to receive any further additional creditable service hereunder. (f) A Participant's accrual of additional creditable service as provided herein shall not be subject to termination except as provided in subparagraph (e) above, or upon retirement or termination of employment. (g) Prior to January 1, 1992, a Participant who receives benefits under a Salary Continuance and Long-Term Disability Plan of the Company shall continue to accrue additional creditable service hereunder subject to the same rules that are applicable in such instances under the Pension Plans. (h) It is the intent of this Section V that, for the purpose of the Special Plan, the additional creditable service provided hereunder when added to credited service under the Pension Plans or otherwise, shall not in any case exceed 44 years in the aggregate. (i) To those Participants who become qualified as provided in (a), (b) or (c) above, a special retirement allowance shall be payable under the Special Plan to such Participants or their surviving spouses equal to any amount due under the Pension Plans which is not paid in full under the Pension Plans. (j) Notwithstanding the preceding, following a Change of Control, any additional service or benefits granted under Article V, Subsection 4 shall be subject to the approval of the Benefits Trust Committee. 5. The Company shall accrue and pay under this Special Plan as an additional supplemental benefit any annual pension benefits that would have been payable under the Pension Plans as in effect on September 1, 1974, or thereafter, if Sections 415(b) and 401(a)(17) of the Internal Revenue Code, and any other relevant provisions of law that impose limitations or have the effect of limiting the accrual of benefits under the Pension Plans, had not been enacted into law, unless such additional supplemental benefit is provided by the Company through another plan created for that purpose. 6. The Company shall accrue reserves to the credit of the Special Plan in advance to cover the costs of any additional creditable service, pensions or benefits granted under Subsections 3 and 4 hereof, and such pensions or benefits or special retirement allowances reflecting such credit shall be paid under the Special Plan. Where additional creditable service is granted, upon retirement in accordance with the provisions of the Pension Plans, the Participant shall receive a special retirement allowance equal to the difference between the retirement allowance computed under the Pension Plans and the amount which would be payable if the additional credit granted hereunder had been included with the actual credited service in the computation of the retirement allowance payable under the Pension Plans. Where a pension or other benefit is granted to a Participant, such pension or benefit shall be payable as a special retirement allowance from the Special Plan. 7. In the event any Participant in the Special Plan receives as a participant in the Pension Plans, a pension or retirement benefit payable in a form other than a straight life annuity in accordance with the provisions of the Pension Plans, his special retirement allowance under this Section V shall also be payable in a similar form. 8. The Company shall accrue and pay under this Special Plan any annual pension benefit which otherwise would have been payable under the Pension Plans but for the Participant's deferral of compensation under the Company's Deferred Compensation Program, Supplementary Savings and Incentive Award Deferral Plan, or under any other deferred compensation arrangement approved by the Compensation Committee. 9. The obligations of the Company or any of its affiliated corporations and the benefit due any Participant, surviving spouse or beneficiary under this Plan shall be reduced by any amount received in regard thereto under the Benefits Assurance Trust or any similar trust or other vehicle. Section VI - FUNDING METHOD 1. The benefits provided under the Special Plan shall be financed by the Company and no contribution shall be required of Participants. The Company shall accrue reserves on its books as follows: (a) As of March 1, 1983, an amount shall be calculated with respect to the Former Plans which shall be the actuarially determined present value as of that date of all special retirement allowances payable under the Former Plans and, under a schedule approved by the Company's Independent Accountant, the reserve previously accrued will be adjusted. (b) As of March 1, 1983, the actuarially determined present value as of that date of all special retirement allowances payable under Section V, Subsection 4(b) shall be calculated and, under a schedule approved by the Company's Independent Accountant, a reserve equal to that amount established. (c) During the year 1983, there shall be accrued the amount required to allow regular interest on the adjusted reserve provided in (a) and (b) above. Each year thereafter there shall be accrued the amount required to allow regular interest on the average reserves standing to the credit of the Special Plan during the preceding year. (d) Each year the reserves shall be adjusted to reflect the payment of special retirement allowances during the year. (e) Such additional reserves shall be accrued from time to time as may be required in accordance with Section V, Subsections 3 and 4, on account of grants thereunder made after March 1, 1983. (f) There shall be accrued from time to time, as required, additional reserves on account of benefits pursuant to Section V, Subsection 6. (g) At such times as the Plan Administrator shall recommend, the reserves accrued to the credit of the Special Plan shall be adjusted on the basis of actuarial valuations to reflect the experience under the Special Plan, or amendments thereto, or changes in the rate of regular interest, or any other actuarial assumptions. 2. The Company shall provide all funds required for the administration expenses of the Special Plan. 3. The Company has established the CSX Corporation and Affiliated Companies Benefits Assurance Trust ("Trust"). Except as provided in Section XI, the Company is not obligated to make any contribution to the Trust. 4. The Special Plan is intended to be unfunded for tax purposes and for purposes of Title I of ERISA. Participants in the Special Plan have the status of general unsecured creditors of the Company, and the Special Plan constitutes a mere promise by the participating employer to make benefit payments in the future. 5. To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Special Plan shall be joint and several. Section VII - ADMINISTRATION OF SPECIAL PLAN 1. Prior to a Change of Control, the Plan Administrator for the CSX Pension Plan shall be responsible for the general administration of the Special Plan and for carrying out its provisions. 2. Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Plan Administrator as to the Special Plan. Additionally, following a Change of Control, any and all benefits determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefit claims under this Special Plan shall rest with the Benefits Trust Committee or its delegate in its sole and absolute discretion. Section VIII - MODIFICATION, AMENDMENT AND TERMINATION 1. The Special Plan represents a contractual obligation heretofore entered into by the Company in consideration of services rendered and to be rendered by Participants covered under the Special Plan. Prior to a Change of Control, the Company reserves the right at any time and from time to time to modify or amend in whole or in part any or all of the provisions of this Special Plan, or to terminate this Special Plan; provided, however, prior to December 1, 1991, no modification or amendment shall be made to this Special Plan unless there have been modifications or amendments to correlative provisions of the Pension Plans, and any modifications or amendments to this Special Plan shall coincide with the modifications or amendments of the Pension Plans (except nonconforming revisions to administrative provisions shall be permitted); and provided, further, that this Special Plan shall only be terminated if the Pension Plans are terminated, subject to the following limitations: (a) In the event any modification or amendment adversely affects the benefits to be received by a retired Participant and the designated surviving spouse of a retired Participant, they shall be entitled to receive for life the special retirement allowance they would have received had the Special Plan not been modified or amended, and each designated surviving spouse of a retired Participant shall become entitled to receive for life the special retirement allowance that such designated surviving spouse would have received had the Special Plan not been modified or amended. (b) In the event of the termination of this Special Plan, each retired Participant and designated surviving spouse of a retired Participant shall be entitled to receive for life the special retirement allowance they would have received had the Special Plan not been terminated, and each designated surviving spouse of a retired Participant shall become entitled to receive for life the special retirement allowance that such designated surviving spouse would have received had the Special Plan not been terminated. (c) In the event any modification or amendment adversely affects the benefit which an active Participant would have been entitled to receive if such amendment or modification had not been made, such active Participant shall, so long as he remains in the active service of the Company, only continue to accrue creditable service and benefits prospectively in accordance with the provisions of the Special Plan as so modified or amended, unless the Participant shall earlier cease to receive any additional creditable service as provided in Section V, Subsection 4(e). (d) In the event this Special Plan is terminated, each active Participant, in consideration of his continued service to the Company until the date of his termination from active employment by retirement or otherwise, shall be entitled to retain his accrued additional service, or pension or benefits as granted hereunder to such Participant, in accordance with the provisions of this Special Plan in effect on the day prior to the date of termination, unless the Participant shall earlier cease to receive any additional creditable service as provided in Section V, Subsection 4(e). (e) In lieu of paying special retirement allowances in accordance with the foregoing provisions, the Plan Administrator, at its election, may direct the discharge of all obligations to retired Participants, designated spouses of retired Participants, and active Participants by cash payments of equivalent actuarial value or through the provision of immediate or deferred annuities or other periodic payments of equivalent actuarial value, as it shall in its sole discretion determine, provided that following a Change of Control, the authority to make such decisions shall rest solely with the Benefits Trust Committee. 2. Following a Change of Control, this Special Plan may not be amended or terminated without the approval of the Benefits Trust Committee. Section IX - NON-ALIENATION OF BENEFITS 1. No benefit under the Special Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so shall be void, except as specifically provided in the Special Plan, nor shall any benefit be in any manner liable for or subject to the debt, contracts, liabilities, engagements, or torts of the person entitled to such benefit; and in the event that the Plan Administrator shall find that any active or retired Participant or designated spouse or spouse under the Special Plan has become bankrupt or that any attempt has been made to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any of his benefits under the Special Plan, except as specifically provided in the Special Plan, then such benefits shall cease to accrue and shall be determined, and in that event, the Plan Administrator shall hold or apply the same to or for the benefit of such active or retired Participant or spouse, in such manner as the Plan Administrator may deem proper. 2. Notwithstanding the preceding, following a Change of Control, the Plan Administrator shall not implement such action without the consent of the Benefits Trust Committee. Section X - MISCELLANEOUS PROVISIONS 1. Anything in the Special Plan to the contrary notwithstanding, prior to a Change of Control, if the Plan Administrator finds that any retired Participant or spouse is engaged in acts detrimental to the Company or is engaged or employed in any occupation which is in competition with the Company, and if after due notice such retired Participant or spouse continues to be so engaged or employed, the Plan Administrator shall suspend the special retirement allowance of such person, which suspension shall continue until removed by notice from the Plan Administrator; provided, however, that if such suspension has continued for one year, the Plan Administrator shall forthwith cancel such Participant's or spouse's special retirement allowance. Furthermore, if the Plan Administrator finds that any Participant has been discharged for having performed acts detrimental to the Company, then regardless of any other provision in the Special Plan, no benefit shall be payable to or on account of any such Participant's coverage under this Special Plan. Notwithstanding the preceding, following a Change of Control, the Plan Administrator shall not implement such action or make such determination without the consent of the Benefits Trust Committee. 2. The establishment of the Special Plan shall not be construed as conferring any legal rights upon any employee for a continuation of employment, nor shall it interfere with the rights of the Company to discharge any employee and to treat him without regard to the effect which such treatment might have upon him as a Participant in the Special Plan. Section XI - CHANGE OF CONTROL 1. If a Change of Control has occurred, the Company shall contribute to the Trust within 7 days of such Change of Control, a lump sum contribution equal to the greatest of: (a) the aggregate value of the amount each Participant would be eligible to receive under subsection (2), below; (b) the present value of accumulated Plan benefits based on the assumptions the Company's independent actuary deems reasonable for this purpose, as of a Valuation Date, as defined in subsection (6), below, coinciding with or next preceding the date of Change of Control, to the extent such amounts are not already in the Trust. The aggregate value of the amount of the lump sum to be contributed to the Trust pursuant to this Section XI shall be determined by the Company's independent actuaries. Thereafter, the Company's independent actuaries shall annually determine as of a Valuation Date for each Participant not receiving a lump sum payment pursuant to subsection (2), below, the greater of: (i) the amount such Participant would have received under subsection (2) had such Participant not made the election under subsection (3), below, if applicable; and (ii) the present value of accumulated benefits based on assumptions the actuary deems reasonable for this purpose. To the extent that the value of the assets held in the Trust relating to this Special Plan does not equal the amount described in the preceding sentence, at the time of the valuation, the Company shall make a lump sum contribution to the Trust equal to the difference; or (c) the amount determined under Section 1(h) of the Benefits Assurance Trust attributable to liabilities relating to this Plan. 2. In the event a Change of Control has occurred, the trustee of the Benefits Assurance Trust shall, within 45 days of such Change of Control, pay to each Participant not making an election under subsection (3), a lump sum payment equal to the actuarial present value of the aggregate special retirement allowance each Participant (or any beneficiary of a Participant) has accrued as of the Valuation Date preceding the date of such Change of Control pursuant to the terms of Section V of this Special Plan. If a Participant's benefit has not commenced as of such date, such lump sum shall be determined assuming that: (a) The Participant's benefit would commence at the earliest date he would qualify for early or normal retirement under the Plan, were his employment with the Company to continue, but in no event earlier than the later of age 55 or the date of such Change on Control. (b) The Participant would qualify for an early (or normal) retirement benefit as of the date determined in (a). (c) If married, the Participant would receive his benefit under the 50% Joint and Survivor form of payment with the spouse as beneficiary; if not married, the benefit would be payable in the form of a single life annuity. The actuarial present value shall be determined on the basis of the UP 1984 Mortality Table, set back one year, and a discount rate equal to the interest rate promulgated by the Pension Benefit Guaranty Corporation for use in determining the sufficiency of single employer defined benefit pension plans terminating on the date of such Change in Control. 3. Each Participant may elect in a time and manner determined by the Compensation Committee, but in no event later than December 31, 1996, or the occurrence of a Change of Control, if earlier, to have amounts and benefits determined and payable under the terms of this Special Plan as if a Change of Control had not occurred. New Participants in the Plan may elect in a time and manner determined by the Compensation Committee, but in no event later than 90 days after becoming a Participant, to have amounts and benefits determined and payable under the terms of this Special Plan as if a Change of Control had not occurred. A Participant who has made an election, as set forth in the two preceding sentences, may, at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change of Control shall be invalid. 4. Notwithstanding anything in this Special Plan to the contrary, each Participant who has made an election under subsection (3), above, may elect within 90 days following a Change of Control, in a time and manner determined by the Compensation Committee, to receive a lump sum payment calculated under the provisions of subsection (2), above, determined as of the Valuation Date next preceding such payment, except that such amount shall be reduced by 5% and such reduction shall be irrevocably forfeited to the Company by the Participant. Furthermore, as a result of such election, the Participant shall no longer be eligible to participate or otherwise benefit under the Special Plan. Payments under this subsection (4) shall be made not later than 7 days following receipt by the Company of the Participant's election. The Compensation Committee shall, no later than 7 days after a Change of Control has occurred, cause written notification to be given to each Participant eligible to make an election under this subsection (4), that a Change of Control has occurred and informing such Participant of the availability of the election. 5. As used in this Plan the term "Change of Control" shall mean: (a) Stock Acquisition. The acquisition, by any individual, -------------------- entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection -------- ------- (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company; (ii) any acquisition by the Company; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section XI(5); or (b) Board Composition. Individuals who, as of the date hereof, ------------------ constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) Business Combination. Approval by the shareholders of the --------------------- Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal subsidiary or all or substantially all of the assets of the Company or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (iii)at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (d) Regulated Business Combination. Approval by the shareholders of the Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (i), (ii) and (iii) of subsection (c) of this Section XI(5); or (e) Liquidation or Dissolution. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company or its principal subsidiary. 6. For purposes of this Section XI, the term "Valuation Date" means the last day of each calendar year and such other dates as the Plan Administrator deems necessary or appropriate to value the Participant's benefits under this Special Plan, except that following a Change of Control, the Benefits Trust Committee shall have final approval of any date selected other than the last day of each calendar year. Section XII - Construction The special Plan and the rights and obligations of the parties hereunder shall be construed in accordance with the laws of the Commonwealth of Virginia. APPENDIX I PARTICIPANT'S GRANTED ADDITIONAL CREDITABLE SERVICE PURSUANT TO SECTION V(4)(b) EX-10.19 11 Exhibit 10.19 Supplemental Retirement Benefit Plan of CSX Corporation and Affiliated Corporations As Amended and Restated January 1, 1995 (As Amended through December 31, 1997) Section I - INTRODUCTION 1. The purpose of this plan, hereinafter called the "Supplemental Plan", is to provide benefit payments to individuals who are participants (or members, as the case may be) in funded, tax-qualified defined benefit pension plans maintained by CSX Corporation (the "Company") and certain of its affiliated corporations (whose participation in the Supplemental Plan is approved by the Compensation Committee of the Board of Directors of the Company ("Compensation Committee") and which adopts this Supplemental Plan by action of its board of directors and whose benefits would otherwise be reduced by Section 415 of the Internal Revenue Code ("Code") of 1986, as amended ("Code") which imposes limitations on benefits which may be accrued under such plans ("Code Limitations"). Notwithstanding the preceding, following a Change of Control, an affiliated corporation may not become a participating employer in this Supplemental Plan without the approval of the Benefits Trust Committee. 2. This Supplemental Plan preserves and continues in effect all provisions for accruals based upon limitations of benefits imposed by Code Limitations, heretofore credited to Participants under Section V, paragraph (subsection) 5, of the Special Retirement Plan of CSX Corporation and Affiliated Corporations ("Special Plan"), the Supplemental Benefits Plan of Sea-Land Corporation and Participating Companies, and the American Commercial Lines Benefit Restoration Plan ("Predecessor Plans"). Section II - DEFINITIONS 1. Supplemental Benefit means the benefit described in Section IV of this Supplemental Plan. 2. The Supplemental Plan shall, where appropriate, refer to and have meanings consistent with all of the relevant terms of the CSX Pension Plan and any other regularly maintained funded, tax-qualified defined benefit pension plan of any other corporation affiliated with the Company whose participation in the Supplemental Plan as a participating employer is approved by the board of directors of any such affiliated corporation and by the Compensation Committee. Such existing regularly maintained defined benefit pension plans which provided benefits for employees of the Company or its affiliates prior to the Effective Date of this Supplemental Plan document, or those which may be established hereafter, as amended from time to time, shall be referred to herein as the "Pension Plan." 3. Regardless of formal differences which may exist between the Supplemental Plan and the Pension Plan or the Predecessor Plans in the use of terminology, the definitions and principles which are set forth in the Pension Plan or the Predecessor Plans with respect to compensation, average compensation, credited service and similar terms shall be construed and applied hereunder in a manner consistent with the purposes of this Supplemental Plan and the Pension Plan or the Predecessor Plans. In any instance in which the male gender is used herein, it shall also include persons of the female gender in appropriate circumstances. 4. "Benefits Trust Committee" means the committee created pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust Agreement (the "Benefits Assurance Trust"). 5. Any reference to the "Company's independent actuary", "independent actuaries", "actuary" or "Actuary" means the independent actuary engaged by 'CSX Corporation and, if selected or changed following a Change of Control, approved by the Benefits Trust Committee. Section III - MEMBERSHIP 1. Every person who previously participated in a Predecessor Plan shall automatically be a Participant in this Supplemental Plan on and after the Effective Date. 2. Each employee who is a Participant in a Pension Plan on or after the Effective Date shall participate in this Supplemental Plan to the extent of the benefits provided herein. 3. A Participant's participation in this Supplemental Plan shall terminate coincident with the termination of such individual's participation in the Pension Plans; provided, however, in the event that the Participant shall be reassigned or transferred into the employ of the Company or any of its affiliates which also is a participating employer in this Supplemental Plan, the Participant's participation shall be continued. Section IV - SUPPLEMENTAL BENEFITS 1. All of the provisions, conditions and requirements set forth in the applicable Pension Plan with respect to the granting and payment of retirement benefits thereunder shall be equally applicable to the payment of supplemental benefits hereunder to affected Participants in the Supplemental Plan and to the payment thereof from the employer's general assets. Whenever an individual Participant's rights under the Supplemental Plan are to be determined, appropriate reference shall be made to the particular Pension Plan in which such person is also a participant. Notwithstanding the preceding sentence, if a supplemental benefit under this Supplemental Plan shall be paid to a surviving spouse or other surviving designated beneficiary in conformance with the provisions of the Pension Plans, the final installment payment hereunder shall be made to the estate of the surviving spouse or other surviving designated beneficiary. 2. Each Participant shall receive a Supplemental Benefit under this Supplemental Plan in an amount equal to the difference, if any, between (i) the Participant's monthly retirement income benefit under the provisions of the particular Pension Plan in which such person is also a participant calculated before the application of any Code Limitations and (ii) the Participant's monthly retirement income benefit determined after application of the Code Limitations. 3. Notwithstanding any other provision of this Supplemental Plan to the contrary, a Supplemental Benefit shall not be determined or paid which would duplicate a payment of benefit provided to a Participant under the Pension Plan, the Predecessor Plans or any other unfunded or funded retirement plan of the Company or any of its affiliated corporations. Further, the obligations of the Company or any of its affiliated companies and the benefit plan due any Participant, surviving spouse or beneficiary hereunder shall be reduced by any amount received in regard thereto from the Benefits Assurance Trust or any similar trust or other vehicle. 4. A Supplemental Benefit payable under the provisions of this Supplemental Plan shall be paid in such forms and at such times as shall be consistent with the payment of the Participant's retirement income benefit under the particular Pension Plan in which such person is also a participant. Notwithstanding the foregoing, prior to a Change of Control, the Company may delay payment of a Supplemental Benefit under the Supplemental Plan to any Participant who is determined to be among the top five most highly paid executives for the year that the Supplemental Benefit payment would otherwise be paid; provided, however, if a Participant's payment is delayed, it shall not decrease the total Supplemental Benefit to which he is entitled. Notwithstanding the preceding, following a Change of Control, the authority to delay payment of a Supplemental Benefit rests solely with the Benefits Trust Committee. Section V - FUNDING METHOD 1. The Supplemental Benefit shall be paid exclusively from the general assets of the applicable employers participating in the Supplemental Plan or from the Benefits Assurance Trust which has been established to secure the payment of the obligations created herein. No Participant or other person shall have any rights or claims against the assets of the employers or against the Benefits Assurance Trust which are superior to or different from the right or claim of a general, unsecured creditor of any participating employer. 2. The Supplemental Plan is intended to be unfunded for tax purposes and for purposes of Title I of ERISA, and constitutes a mere promise by the participating employers to make benefit payments in the future. 3. The employers participating in the Supplemental Plan shall provide all funds required to pay benefits accrued and to administer this Supplemental Plan. 4. To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Supplemental Plan shall be joint and several. Section VI - ADMINISTRATION OF PLAN 1. Prior to a Change of Control, the Plan Administrator of the CSX Pension Plan shall be the "Plan Administrator" of this Supplemental Plan and shall be responsible for the general administration of the Supplemental Plan, claims review and for carrying out its provisions. Administration of this Supplemental Plan shall be carried out consistent with the terms and conditions of the Pension Plan and the Supplemental Plan. 2. Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Plan Administrator. 3. The Plan Administrator shall have sole and absolute discretion to interpret the Plan, determine eligibility for an benefits due hereunder. Decisions of the Plan Administrator regarding participation in and the calculation of benefits under this Supplemental Plan, shall at all times be binding and conclusive on Participants, their beneficiaries, heirs and assigns. 4. Notwithstanding Subsection 3 above, following a Change of Control, final benefit determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefit claims under this Supplemental Plan shall rest with the Benefits Trust Committee or its delegate in its sole and absolute discretion. Section VII - CERTAIN RIGHTS AND OBLIGATIONS 1. (a) Prior to a Change of Control the Compensation Committee may terminate the Supplemental Plan upon the termination of one or more of the Pension Plans. Prior to a Change of Control the Board of Directors of CSX Corporation may terminate the Plan at any time for any reason in any manner not prohibited by law. Following a Change of Control, this Supplemental Plan may not be terminated without the approval of the Benefits Trust Committee. (b) Prior to a Change of Control, the Board of Directors of the Company may terminate an affiliated corporation's participation as a participating employer in this Supplemental Plan for any reason at any time. Following a Change of Control, an affiliated corporation may not be terminated from participation as a participating employer without the consent of the Benefits Trust Committee. (c) Prior to a Change of Control, an affiliated corporation's board of directors may terminate that affiliated corporation's participation as a participating employer for any reason at any time. Following a Change of Control, an affiliated corporation's participation as a participating employer may not be terminated without the consent of the Benefits Trust Committee. 2. The participating employers agree in the event that the Supplemental Plan is terminated: (a) Each retired Participant, surviving spouse of a retired Participant or surviving designated beneficiary of a retired Participant shall be entitled to receive the Supplemental Benefit they would have received had the Supplemental Plan not been terminated, and each surviving spouse or surviving designated beneficiary of a deceased Participant shall become entitled to receive for life the Supplemental Benefit that such surviving spouse or surviving designated beneficiary would have received had the Supplemental Plan not been terminated; and (b) Each active Participant shall be entitled to receive for life the Supplemental Benefit he or she would have received had the Supplemental Plan not been terminated, calculated on the basis of the Supplemental Benefit which had accrued at the time of termination; provided, however, that the Participant shall become entitled to such Supplemental Benefit only at the time and in accordance with the provisions of the Supplemental Plan had it continued in effect. (c) In lieu of paying a Supplemental Benefit in accordance with the foregoing provisions, the Plan Administrator, at its election, may direct the discharge of all obligations to retired Participants, surviving spouses or surviving designated beneficiaries of deceased Participants, and active Participants by cash payment of equivalent actuarial value or through the provision of immediate or deferred annuities or such other periodic payments of equivalent actuarial value, as it shall in its sole discretion determine. Notwithstanding the preceding, any such action taken by the Plan Administrator following a Change of Control is subject to the approval of the Benefits Trust Committee. 3. Anything in the Supplemental Plan to the contrary notwithstanding, if the Plan Administrator finds that any Participant, retired Participant or spouse is engaged in acts detrimental to the Company or any of its affiliated corporations, and if after due notice such Participant, the retired Participant or spouse continues to be so engaged or employed, the Plan Administrator shall suspend the Supplemental Benefit of such person, which suspension shall continue until removed by notice from the Plan Administrator; provided, however, that if such suspension has continued for one year, the Plan Administrator shall forthwith cancel such Participant's or spouse's Supplemental Benefit. Furthermore, if the Plan Administrator finds that any Participant had been discharged for having performed acts detrimental to the Company or any of its affiliated corporations, then regardless of any other provision in the Pension Plan or the Supplemental Plan, no benefit shall be payable to or on account of any such Participant's coverage under this Supplemental Plan. Notwithstanding the preceding, following a Change of Control, the Plan Administrator shall not implement such action without the consent of the Benefits Trust Committee. 4. The establishment of the Supplemental Plan shall not be construed as conferring any legal rights upon any employee for a continuation of employment, nor shall it interfere with the rights of an employing corporation to discharge any employee and to treat him without regard to the effect which such treatment might have upon him as a Participant in the Supplemental Plan. Section VIII - NON-ALIENATION OF BENEFITS To the extent permitted by applicable law, no benefit under the Supplemental Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt so to do shall be void, except as specifically provided in the Supplemental Plan, nor shall any benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the person entitled to such benefits; and in the event that the Plan Administrator shall find that any active or retired Participant, surviving spouse or surviving designated beneficiary under the Supplemental Plan has become bankrupt or that any attempt has been made to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any of his benefits under the Supplemental Plan, expect as specifically provided in the Supplemental Plan, then such benefits shall cease, and in that event, the Plan Administrator shall hold or apply the same to or for the benefit of such active or retired Participant, surviving spouse or surviving designated beneficiary, in such manner as the Plan Administrator may deem proper. Notwithstanding the preceding, following a Change of Control, the Plan Administrator shall not implement such action without the consent of the Benefits Trust Committee. Section IX - AMENDMENTS The Supplemental Plan represents a contractual obligation entered into by a participating employer in consideration of services rendered and to be rendered by Participants covered under the Supplemental Plan, and 1. Any Participant in this Supplemental Plan who remains in the active service of a participating employer shall not be deprived of his or her participation or benefit which shall accrue under the Supplemental Plan except as provided hereunder. 2. No modification or amendment may be made which shall deprive any Participant, the surviving spouse of a Participant or the surviving designated beneficiary of a Participant, without the consent of such Participant, surviving spouse of a Participant or the surviving designated beneficiary of a Participant, of any Supplemental Benefit under the Supplemental Plan to which he or she would otherwise be entitled by reason of the Supplemental Benefit standing to his or her credit to the date of such modification or amendment, and in the event of any modification or amendment which adversely affects such Supplemental Benefit, the amount of all reserves required to be accrued on the books of a participating employer shall thereupon be determined and accrued, if the same has not already been done, and such Supplemental Benefit shall become and remain a fixed liability of the participating employers for the payment of such benefits accrued to the date of such modification or amendments. 3. Subject to the foregoing, prior to a Change of Control, the Board of Directors of the Company on the recommendation of the Compensation Committee, reserves the right at any time and from time to time to modify or amend in whole or in part any or all of the Supplemental Plan. Following a Change of Control, all amendments to this Supplemental Plan are subject to the approval of the Benefits Trust Committee. Section X - CHANGE OF CONTROL 1. If a Change of Control has occurred, the Company and its participating affiliates shall contribute to the Benefits Assurance Trust within 7 days of such Change of Control, a lump sum contribution equal to the greatest of: (a) the aggregate value of the amount each Participant would be eligible to receive, under Subsection (2), below; (b) the present value of accumulated Plan benefits based on the assumptions the Company's independent actuary deems reasonable for this purpose, as of the Valuation Date, as defined in subsection (6), below, coinciding with or next preceding the date of Change of Control, to the extent such amounts are not already in the Benefits Assurance Trust. The aggregate value of the amount of the lump sum to be contributed to the Benefits Assurance Trust pursuant to this Section X shall be determined by the Company's independent actuaries. Thereafter, the Company's independent actuaries shall annually determine as of a Valuation Date for each Participant not receiving a lump sum payment pursuant to subsection (2), below, the greater of: (i) the amount such Participant would have received under subsection (2) had such Participant not made the election under subsection (3), below, if applicable; and (ii) the present value of accumulated benefits based on assumptions the actuary deems reasonable for this purpose. To the extent that the value of the assets held in the Benefits Assurance Trust relating to this Supplemental Plan does not equal the amount described in the preceding sentence, (and the value of other liabilities held in the applicable segregated account of the Benefits Assurance Trust), at the time of the valuation, the Company shall make a lump sum contribution to the Benefits Assurance Trust equal to the difference. (c) the amount determined under Section 1(h) of the Benefits Assurance Trust attributable to liabilities relating to this Supplemental Plan. 2. In the event a Change of Control has occurred, the trustee of the Benefits Assurance Trust shall, within 45 days of such Change of Control, page to each Participant not making an election under subsection (3), a lump sum payment equal to the actuarial present value of the aggregate supplemental benefit each Participant (or any beneficiary of a Participant) has accrued as of the Valuation Date preceding the date of such Change of Control. If a Participant's benefit has not commenced as of such date, such lump sum shall be determined assuming that: (a) The Participant's benefit would commence at the earliest date he would qualify for early or normal retirement under the Plan, were his employment with the Company to continue, but in no event earlier than the later of age 55 or the date of such Change of Control. (b) The Participant would qualify for an early (or normal) retirement benefit as of the date determined in (a). (c) If married, the Participant would receive his benefit under the 50% Joint and Survivor form of payment with the spouse as beneficiary; if not married, the benefit would be payable in the form of a single life annuity. The actuarial present value shall be determined on the basis of the UP 1984 Mortality Table, set back one year, and a discount rate equal to the interest rate promulgated by the Pension Benefit Guaranty Corporation for use in determining the sufficiency of single employer defined benefit pension plans terminating on the date of such Change in Control. 3. Each Participant may elect in a time and manner determined by the Compensation Committee but, in no event later than December 31, 1996, or the occurrence of a Change of Control, if earlier, to have amounts and benefits determined and payable under the terms of this Supplemental Plan as if a Change of Control had not occurred. New Participants in the Plan may elect in a time and manner determined by the Compensation Committee, (or, after a Change of Control, the Benefits Trust Committee) but in no event later than 90 days after becoming a Participant, to have amounts and benefits determined and payable under the terms of this Supplemental Plan as if a Change of Control had not occurred. A Participant who has made an election, as set forth in the two preceding sentences, may, at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change of Control shall be invalid. 4. Notwithstanding anything in this Supplemental Plan to the contrary, each Participant who has made an election under subsection (3), above, may elect within 90 days following a Change of Control, in a time and manner determined by the Benefits Trust Committee, to receive a lump sum payment calculated under the provisions of subsection (2), above, determined as of the Valuation Date next preceding such payment, except that such amount shall be reduced by 5% and such reduction shall be irrevocably forfeited to the Company or the applicable participating employer by the Participant. Furthermore, as a result of such election, the Participant shall no longer be eligible to participate or otherwise benefit under the Supplemental Plan. Payments under this subsection (4) shall be made not later than 7 days following receipt by the Benefits Trust Committee of the Participant's election. The Benefits Trust Committee shall, no later than 7 days after a Change of Control has occurred, cause written notification to be given to each Participant eligible to make an election under this subsection (4), that a Change of Control has occurred and informing such Participant of the availability of the election. 5. As used in this Section X, a "Change of Control" shall mean: (a) Stock Acquisition. The acquisition by any individual, entity or ----------------- group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company; (ii) any acquisition by the Company; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section X(5); or (b) Board Composition. Individuals who, as of the date hereof, ------------------ constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individuals whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) Business Combination. Approval by the shareholders of the Company of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal subsidiary or all or substantially all of the assets of the Company or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (iii)at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors providing for such Business Combination; or (d) Regulated Business Combination. Approval by the shareholders of ------------------------------- the Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (i), (ii) and (iii) of subsection (c) of this Section X(5); or (e) Liquidation or Dissolution. Approval by the shareholders of the -------------------------- Company of a complete liquidation or dissolution of the Company or its principal subsidiary. 6. For purposes of this Section X, the term "Valuation Date" means the last day of each calendar year and such other dates as the Plan Administrator deems necessary or appropriate to value the Participants' benefits under this Supplemental Plan. Following a Change of Control, the selection of a date other than the last day of the calendar year is subject to the approval of the Benefits Trust Committee. Section XI - CONSTRUCTION The Supplemental Plan and the rights and obligations of the parties hereunder shall be construed in accordance with the laws of the Commonwealth of Virginia. Section XII - EFFECTIVE DATE The Effective Date of this Supplemental Benefit Plan shall be January 1, 1989. EX-21 12 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT As of Dec. 26, 1997, Registrant was the beneficial owner of 100% of the common stock the following significant subsidiaries: CSX Transportation Inc. (a Virginia corporation), Sea-Land Service Inc. (a Delaware corporation), CSX Intermodal Inc. (a Delaware corporation) and American Commercial Lines Inc. (a Delaware corporation). As of Dec. 26, 1997, the other subsidiaries included in registrant's consolidated financial statements, and all other subsidiaries considered in the aggregate as a single subsidiary, did not constitute a significant subsidiary. EX-23.1 13 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the following Registration Statements of our report dated January 30, 1998, with respect to the consolidated financial statements of CSX Corporation and subsidiaries included in its Annual Report (Form 10-K) for the fiscal year ended December 26, 1997: Registration Statement Number Description - ------------ ------------------------------------------ 33-2083 Post-Effective Amendment No. 1 to Form S-3 33-2084 Post-Effective Amendment No. 3 to Form S-3 33-16230 Form S-8 33-25537 Form S-8 33-29136 Form S-8 33-37449 Form S-8 33-41236 Form S-3 33-41498 Form S-8 33-41499 Form S-8 33-41735 Form S-8 33-41736 Form S-8 33-48841 Form S-3 33-49767 Form S-8 33-57029 Form S-8 333-09213 Form S-8 333-19523 Form S-4 333-28523 Form S-4 /s/ Ernst & Young LLP ----------------- Ernst & Young LLP Richmond, Virginia February 17, 1998 EX-23.2 14 Exhibit 23.2 CONSENT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-2083, 33-2084, 33-41236, and 33-48841), in the Prospectuses constituting part of the Registration Statements on Form S-4 (Nos. 333-19523 and 333-28523), and in the Registration Statements on Form S-8 (Nos. 33-16230, 33-25537, 33-29136, 33-37449, 33-41498, 33-41499, 33-41735, 33-41736, 33-49767, 33-57029, and 333-09213) of CSX Corporation of our report dated January 19, 1998 on the consolidated financial statements of Conrail Inc. and subsidiaries for the year ended December 31, 1997, which appears in the Annual Report on Form 10-K of CSX Corporation filed as of February 18, 1998. /s/ Price Waterhouse LLP -------------------- Price Waterhouse LLP Philadelphia, PA February 18, 1998 EX-27 15 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-26-1997 DEC-26-1997 690 0 987 86 227 2,175 18,270 5,864 19,957 2,707 6,416 0 0 218 5,548 19,957 0 10,621 0 9,038 0 0 451 1,183 384 799 0 0 0 799 3.67 3.62
EX-99.1 16 AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE OF CONRAIL INC. FOR THE YEARS ENDED DEC. 31, 1997, 1996 AND 1995 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Our audits of the consolidated financial statements of Conrail Inc. and subsidiaries also included an audit of the Financial Statement Schedule, Schedule II - Valuation and Qualifying Accounts. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP -------------------- Price Waterhouse LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 January 19, 1998 - 1 - CONRAIL INC. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, --------------------------- ($ In Millions Except Per Share Data) 1997 1996 1995 ------ ------ ------ Revenues $3,765 $3,714 $3,686 ------ ------ ------ Operating expenses Way and structures 458 462 485 Equipment 776 803 766 Transportation 1,388 1,385 1,324 General and administrative 313 312 370 ESOP termination charge (Note 3) 221 Merger-related compensation costs (Note 3) 222 Merger costs (Note 3) 65 16 Voluntary separation programs (Note 10) 135 Asset disposition charge (Note 11) 285 ------ ------ ------ Total operating expenses 3,443 3,113 3,230 ------ ------ ------ Income from operations 322 601 456 Interest expense (170) (182) (194) Other income, net (Note 12) 83 112 130 ------ ------ ------ Income before income taxes 235 531 392 Income taxes (Note 7) 228 189 128 ------ ------ ------ Net income $ 7 $ 342 $ 264 ====== ====== ====== Net income per common share (Note 1) Basic $ - $ 4.29 $ 3.21 Diluted - 3.91 2.94 Ratio of earnings to fixed charges (Note 1) 1.98x 3.19x 2.51x See accompanying notes. - 2 - CONRAIL INC. CONSOLIDATED BALANCE SHEETS December 31, ---------------- ($ In Millions) 1997 1996 ------ ------ ASSETS Current assets Cash and cash equivalents $ 97 $ 30 Accounts receivable 623 630 Deferred tax assets (Note 7) 115 293 Material and supplies 104 139 Other current assets 15 25 ------ ------ Total current assets 954 1,117 Property and equipment, net (Note 4) 6,830 6,590 Other assets 700 695 ------ ------ Total assets $8,484 $8,402 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings - 99 Current maturities of long-term debt (Note 6) 112 130 Accounts payable 113 135 Wages and employee benefits 366 143 Casualty reserves 141 141 Accrued and other current liabilities (Note 5) 476 444 ------ ------ Total current liabilities 1,208 1,092 Long-term debt (Note 6) 1,732 1,876 Casualty reserves 198 190 Deferred income taxes (Note 7) 1,453 1,478 Special income tax obligation (Note 7) 283 346 Other liabilities 445 313 ------ ------ Total liabilities 5,319 5,295 ------ ------ Commitments and contingencies (Note 13) Stockholders' equity (Notes 2, 3 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; 0 and 7,303,920 shares issued and outstanding, respectively) - 211 Unearned ESOP compensation (155) (222) Common stock ($1 par value; 250,000,000 shares authorized; 6,320,349 and 87,768,428 shares issued, respectively; 100 and 82,244,973 shares outstanding, respectively) 6 88 Additional paid-in capital 3,006 2,404 Employee benefits trust (0 and 3,394,988 shares, respectively) (274) (384) Retained earnings 1,324 1,357 ------ ------ 3,907 3,454 Treasury stock, at cost (742) (347) ------ ------ Total stockholders' equity 3,165 3,107 ------ ------ Total liabilities and stockholders' equity $8,484 $8,402 ====== ====== See accompanying notes. - 3 - CONRAIL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Unearned Additional Employee Preferred ESOP Common Paid-in Benefits Retained Treasury ($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock --------- ------------ ------ ---------- -------- -------- -------- Balance, January 1, 1995 $ 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 (63) 3 60 Other 5 ----- ---- --- ------ ----- ------ ----- Balance, December 31, 1996 211 (222) 88 2,404 (384) 1,357 (347) Amortization 2 Net income 7 Common dividends, $.475 per share (40) Preferred dividends, $.541 per share (3) Exercise of stock options 2 11 Employee benefits trust transactions, net (5) 9 Effects of Conrail acquisition, net (Notes 2 and 3) (209) (82) 594 90 (393) Allocation of unearned ESOP compensation 65 Other (2) 11 3 (2) ----- ----- --- ------ ----- ------ ----- Balance, December 31, 1997 $ - $(155) $ 6 $3,006 $(274) $1,324 $(742) ===== ===== === ====== ===== ====== =====
See accompanying notes. - 4 - CONRAIL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, ------------------------ ($ In Millions) 1997 1996 1995 ----- ----- ----- Cash flows from operating activities Net income $ 7 $ 342 $ 264 Adjustments to reconcile net income to net cash provided by operating activities: ESOP termination charge 221 Merger-related compensation costs 159 Voluntary separation programs 135 Asset disposition charge 285 Depreciation and amortization 293 283 293 Deferred income taxes 152 183 108 Special income tax obligation (63) (94) (73) Gains from sales of property (23) (24) (27) Pension credit (61) (46) (43) Changes in: Accounts receivable 7 (16) 32 Accounts and wages payable 42 (18) 8 Deferred tax assets 178 40 (84) Settlement of tax audit 6 (39) Other (34) (77) 10 ----- ----- ----- Net cash provided by operating activities 884 669 773 ----- ----- ----- Cash flows from investing activities Property and equipment acquisitions (439) (387) (415) Proceeds from disposals of properties 25 34 38 Other (31) (46) (59) ----- ----- ----- Net cash used in investing activities (445) (399) (436) ----- ----- ----- Cash flows from financing activities Repurchase of common stock (156) (92) Net proceeds from (repayments of) short-term borrowings (99) 10 (23) Proceeds from long-term debt 26 85 Payment of long-term debt (238) (184) (134) Loans from and redemptions of insurance policies 95 Dividends on common stock (40) (146) (129) Dividends on Series A preferred stock (3) (25) (21) Proceeds from stock options and other 8 67 7 ----- ----- ----- Net cash used in financing activities (372) (313) (307) ----- ----- ----- Increase(decrease) in cash and cash equivalents 67 (43) 30 Cash and cash equivalents Beginning of year 30 73 43 ----- ----- ----- End of year $ 97 $ 30 $ 73 ===== ===== ===== See accompanying notes. - 5 - 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. Conrail has been acquired by CSX Corporation ("CSX") and Norfolk Southern Corporation ("NSC"), however, the transaction is pending the approval of the Surface Transportation Board ("STB") (Notes 2 and 3). Principles of Consolidation --------------------------- The consolidated financial statements include 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. - 6 - Earnings Per Share ------------------ Earnings per share are not presented for 1997 as a result of the acquisition of the Company's common stock which was completed on May 23, 1997 (Notes 2 and 3). Following that acquisition, the Company's common stock was delisted from the New York Stock Exchange and deregistered with the Securities and Exchange Commission. The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" (SFAS 128) to be effective for periods ending after December 15, 1997. SFAS 128 requires all prior- period earnings per share data presented to be restated to conform with the provisions of this pronouncement. SFAS 128 replaces primary earnings per share with the presentation of basic earnings per share and fully diluted earnings per share with diluted earnings per share. The earnings per share amounts resulting from the application of SFAS 128 are not materially different than those previously presented by the Company for 1996 and 1995. For 1996 and 1995, basic 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. Diluted earnings per share assume conversion of Series A ESOP Convertible Junior Preferred Stock ("ESOP Stock") to Conrail common stock and the dilutive effects of stock options. Net income amounts applicable to 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 two years ended December 31, 1996 are as follows: 1996 1995 ---------- ---------- Basic weighted average shares 76,903,665 78,144,694 Diluted weighted average shares 87,022,413 88,533,558 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. - 7 - New Accounting Standards ------------------------ During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company has determined that adoption of these statements will not impact its consolidated financial position, results of operations or cash flows. Both pronouncements are effective for fiscal years beginning after December 15, 1997. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification of Prior-Year Data ----------------------------------- Certain amounts have been reclassified in the consolidated financial statements to conform to the current year presentation. 2. Acquisition of Conrail Inc. -------------------------- On April 8, 1997, Conrail and CSX entered into the Fourth Amendment (the "Fourth Amendment") to the Agreement and Plan of Merger (as amended through the Fourth Amendment, the "Merger Agreement") which facilitated CSX and NSC entering into an agreement with respect to their joint acquisition of Conrail as contemplated by the Third Amendment to the Merger Agreement, dated as of March 7, 1997. The terms of the CSX-NSC Agreement are embodied in a letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter Agreement") and the Transaction Agreement dated as of June 10, 1997 among Conrail, CSX and NSC. The CSX/NSC Letter Agreement provided, among other things, (i) for the termination of the NSC's outstanding offer to purchase Conrail shares and the dismissal of litigation between CSX and NSC, (ii) that Conrail would, after the effective time of its merger into a wholly-owned subsidiary of CSX, become a direct or indirect jointly-owned subsidiary of CSX and NSC, (iii) that CSX and NSC would jointly acquire, for $115 in cash, all Conrail shares not already owned by CSX and NSC through a tender offer that closed on May 23, 1997 and subsequent merger, and (iv) that Conrail would continue to be managed by its existing Board of Directors until the requisite approval of the STB is obtained, at which time CSX and NSC will be separately allocated certain of Conrail's railroad assets and will jointly operate certain other railroad activities of Conrail. The Fourth Amendment also provided that, following April 8, 1997, Conrail's Board of Directors would not declare, and - 8 - Conrail would not pay, any dividend on Conrail's capital stock with a record date on or prior to May 30, 1997. On May 23, 1997, the CSX-NSC joint tender offer for the remaining outstanding shares of Conrail's common and ESOP Stock was concluded, with 53.4 million shares having been tendered. On June 2, 1997, Conrail became the surviving corporation in a merger with Green Acquisition Corp., a jointly-owned, indirect subsidiary of CSX and NSC, as a result of which the remaining outstanding capital stock of Conrail was acquired by NSC and CSX. Simultaneous with the merger, Conrail's common stock was delisted from the New York Stock Exchange and, through the filing of a Form 15, deregistered with the Securities and Exchange Commission. The Conrail stock acquired by NSC and CSX is being held in a voting trust pending approval of the joint acquisition by the STB, which is expected to occur in the third quarter of 1998. In the course of normal business, the Company interchanges freight with both NSC and CSX for transport to destinations both within and outside of Conrail's service region. The Company shares ownership interests with either one or both railroads in various transportation-related entities, all of which are immaterial to the Company's operating results and financial position. 3. Merger-Related Costs -------------------- In connection with its joint acquisition by NSC and CSX, the Company has incurred pre-tax merger-related costs totaling $65 million ($41 million after income taxes) during 1997. Merger costs of $16 million ($10 million after income taxes) were incurred during 1996 related to the previously proposed merger of Conrail with CSX. Merger costs incurred during both years are composed primarily of fees for investment banking, legal and consulting services. In the second quarter of 1997, the Company recorded a charge of $221 million (no related income tax effect) for the termination of its Non-union Employee Stock Ownership Plan ("ESOP") as a result of the repayment of the ESOP note payable of $291 million and related accrued interest to the Company. The Company had recorded a long-term liability of $221 million related to the ESOP termination charge, which is not expected to require future use of the Company's cash for settlement. Such liability is being reduced as the cash proceeds, which the ESOP currently holds as a result of selling its ESOP Stock in the joint tender offer, are allocated to eligible ESOP participants. During the second quarter of 1997, the Company recorded a charge of $110 million ($103 million after income taxes) in connection with employment agreements with certain executives, which became operative upon a change in control as defined in such agreements. The agreement with CSX permits Conrail to enter into new agreements with executives to pay some or all of these benefits upon the earlier of the STB's approval or disapproval - 9 - of the transaction or May 31, 1998, if the executives are employed on that date. Severance benefits to be paid to other Company employees will be determined and accrued when the employees adversely affected by the transaction are identified, which is expected to occur near the time of the STB decision. During 1997, the Company recorded cumulative charges totaling $49 million ($31 million after income taxes) representing a portion of an amount to be paid to certain non-union employees as an incentive to continue their employment with the Company through the effective date of the requisite STB approval of the transaction and subsequent transition period. The total amount of these incentive payments is expected to be approximately $125 million and will continue to be accrued ratably through the fourth quarter of 1998. The Company has recorded a short-term liability of $159 million included in "wages and employee benefits" on the 1997 balance sheet related to the above- mentioned merger-related compensation costs through December 31, 1997, however, such liability is not expected to require future use of the Company's cash for settlement as funding is expected from other sources, including the Employee Benefits Trust. Also, as a result of the acquisition of Conrail, all outstanding performance shares and all outstanding unvested stock options, restricted shares and phantom shares vested during the second quarter of 1997. The Company paid all of the amounts due employees under these arrangements and recorded a $63 million charge ($39 million after income taxes). 4. Property and Equipment ---------------------- December 31, ----------------- 1997 1996 ------- ------- (In Millions) Roadway $ 7,167 $ 7,021 Equipment 1,398 1,231 Less: Accumulated depreciation (1,736) (1,654) Allowance for disposition (392) (408) ------- ------- 6,437 6,190 ------- ------- Capital leases (primarily equipment) 869 908 Accumulated amortization (476) (508) ------- ------- 393 400 ------- ------- $ 6,830 $ 6,590 ======= ======= Conrail acquired equipment and incurred related long-term debt under various capital leases of $79 million in 1997, $82 million in 1996 and $71 million in 1995. In 1995 (Note 11) and 1991, the Company recorded allowances for disposition for the sale or abandonment of certain under-utilized rail lines and other facilities. - 10 - 5. Accrued and Other Current Liabilities ------------------------------------- December 31, ----------------- 1997 1996 ---- ---- (In Millions) Freight settlements due others $ 43 $ 48 Equipment rents (primarily car hire) 74 74 Unearned freight revenue 77 79 Property and corporate taxes 55 49 Other 227 194 ---- ---- $476 $444 ==== ==== 6. Long-Term Debt -------------- Long-term debt outstanding, including the weighted average interest rates at December 31, 1997, is composed of the following: December 31, ------------------ 1997 1996 ------ ------ (In Millions) Capital leases $ 465 $ 491 Medium-term notes payable, 7.50%, due 1998 to 1999 60 109 Notes payable, 9.75%, due 2000 250 250 Debentures payable, 7.88%, due 2043 250 250 Debentures payable, 9.75%, due 2020 544 544 Equipment and other obligations, 6.66% 275 262 Commercial paper - 100 ------ ------ 1,844 2,006 Less current portion (112) (130) ------ ------ $1,732 $1,876 ====== ====== Using current market prices when available, or a valuation based on the yield to maturity of comparable debt instruments having similar characteristics, credit rating and maturity, the total fair value of the Company's long-term debt, including the current portion, but excluding capital leases, is $1,607 million and $1,685 million at December 31, 1997 and 1996, respectively, compared with carrying values of $1,379 million and $1,515 million at December 31, 1997 and 1996, respectively. The Company's noncancelable long-term leases generally include options to purchase at fair value and to extend the terms. Capital leases have been discounted at rates ranging from 3.09% to 14.26% and are collateralized by assets with a net book value of $393 million at December 31, 1997. - 11 - Minimum commitments, exclusive of executory costs borne by the Company, are: Capital Operating Leases Leases ------- --------- (In Millions) 1998 $ 107 $119 1999 99 94 2000 76 83 2001 60 74 2002 57 68 2003 - 2017 239 476 ----- ---- Total 638 $914 ==== Less interest portion (173) ----- Present value $ 465 ===== Operating lease rent expense was $122 million in 1997, $127 million in 1996 and $130 million in 1995. 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, 1997, although restrictions arising from the Company's acquisition may prevent its use. In January 1997, CRC assumed $31 million of Equipment Trust Certificates, at an interest rate of 8.31%, due 2012, to finance the lease buyout of 20 locomotives from Locomotive Management Services, a general partnership of which the Company holds a fifty percent interest. Equipment and other obligations mature in 1998 through 2043 and are collateralized by assets with a net book value of $266 million at December 31, 1997. Maturities of long-term debt other than capital leases are $48 million in 1998, $48 million in 1999, $268 million in 2000, $19 million in 2001, $18 million in 2002 and $978 million in total from 2003 through 2043. During 1997, CRC repaid all of its commercial paper, and no commercial paper remains outstanding at December 31, 1997. CRC maintains a $440 million uncollateralized bank credit agree- ment 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 .110% of the facility amounts. - 12 - The agreement contains, among other conditions, restrictive covenants relating to a debt ratio and consolidated tangible net worth. During 1997, CRC had no borrowings under this agreement. Interest payments were $163 million in 1997, $170 million in 1996 and $177 million in 1995. 7. Income Taxes ------------ The provisions for income taxes are composed of the following: 1997 1996 1995 ---- ---- ----- (In Millions) Current Federal $122 $ 90 $ 78 State 17 10 15 ---- ---- ---- 139 100 93 ---- ---- ---- Deferred Federal 115 151 110 State 37 32 (2) ---- ---- ---- 152 183 108 ---- ---- ---- Special income tax obligation Federal (54) (80) (61) State (9) (14) (12) ---- ---- ---- (63) (94) (73) ---- ---- ---- $228 $189 $128 ==== ==== ==== In conjunction with the public sale in 1987 of the 85% of the Company's common stock then owned by the U.S. Government, federal legislation was enacted which resulted in a reduction of the tax basis of certain of the Company's assets, particularly property and equipment, thereby substantially decreasing tax depreciation deductions and increasing future federal income tax payments. Also, net operating loss and investment tax credit carryforwards were canceled. As a result of the sale-related transactions, a special income tax obligation was recorded in 1987 based on an estimated effective federal and state income tax rate of 37.0%. The nondeductibility of the ESOP termination charge and certain merger-related compensation costs for federal and state income tax purposes, has resulted in a significant difference between the Company's statutory and effective tax rates for 1997 (Note 3). - 13 - A tax law was enacted during the third quarter of 1997 by a state in which CRC operates which changed the Company's method of computing taxes and resulted in a tax rate increase. Income tax expense for 1997 was increased by $22 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required by SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). As a result of a decrease in a state income tax rate enacted during 1995, income tax expense for that year was reduced by $21 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate decrease as required by SFAS 109. Reconciliations of the U.S. statutory tax rates with the effective tax rates are as follows: 1997 1996 1995 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.2 3.4 3.5 ESOP termination charge 36.3 Nondeductible merger-related compensation costs 14.9 Effect of state tax increase (decrease) on deferred taxes 9.3 (5.3) Other (1.7) (2.8) (.5) ---- ---- ---- Effective tax rate 97.0% 35.6% 32.7% ==== ==== ==== In 1996, the Company reached a settlement with the Internal Revenue Service ("IRS") related to the audit of the Company's consolidated federal income tax returns for the fiscal years 1990 through 1992. The Company made a payment of $39 million pending resolution of the final interest determination related to the settlement, of which $6 million was refunded to the Company in 1997. The Company's consolidated federal income tax returns for fiscal years 1993 through 1995 are currently being examined by the IRS. Federal and state income tax payments were $120 million in 1997, $145 million in 1996 (excluding tax settlement) and $109 million in 1995. - 14 - Significant components of the Company's special income tax obligation and deferred income tax liabilities (assets) are as follows: December 31, ----------------- 1997 1996 ------ ------ (In Millions) Current assets $ (10) $ (9) Current liabilities (97) (245) Miscellaneous (8) (39) ------ ------ Current deferred tax asset, net $ (115) $ (293) ====== ====== Noncurrent liabilities: Property and equipment 1,877 1,939 Other long-term assets (primarily prepaid pension asset) 90 92 Miscellaneous 130 98 ------ ------ 2,097 2,129 ------ ------ Noncurrent assets: Nondeductible reserves and other liabilities (200) (174) Tax benefit transfer receivable (36) (36) Miscellaneous (125) (95) ------ ------ (361) (305) ------ ------ Special income tax obligation and deferred income tax liabilities, net $1,736 $1,824 ====== ====== 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. - 15 - Pension credits include the following components: 1997 1996 1995 ----- ---- ---- (In Millions) Service cost - benefits earned during the period $ 8 $ 9 $ 8 Interest cost on projected benefit obligation 50 51 51 Return on plan assets - actual (197) (138) (254) - deferred 99 47 167 Net amortization and deferral (21) (15) (15) ----- ---- ---- $ (61) $(46) $(43) ===== ==== ==== The funded status of the pension plans and the amounts reflected in the balance sheets are as follows: 1997 1996 ------ ----- (In Millions) Accumulated benefit obligation ($605 million and $655 million vested, respectively) $ 610 $ 661 ====== ====== Market value of plan assets 1,308 1,187 Projected benefit obligation (699) (734) ------ ------ Plan assets in excess of projected benefit obligation 609 453 Unrecognized prior service cost 33 36 Unrecognized transition net asset (72) (90) Unrecognized net gain (343) (231) ------ ------ Net prepaid pension cost $ 227 $ 168 ====== ====== The assumed weighted average discount rates used in 1997 and 1996 are 7.0% and 7.5%, respectively, and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation as of December 31, 1997 and 1996 is 6.0%. The expected long-term rate of return on plan assets (primarily equity securities) in 1997 and 1996 is 9.0%. Savings Plans ------------- The Company and certain subsidiaries provide 401(k) savings plans for union and non-union employees. However, in connection with the close of the CSX-NSC joint tender offer for Conrail, the Company's Non-union ESOP was terminated with the repayment of the ESOP note payable of $291 million and related accrued interest in the second quarter of 1997, resulting in a charge of $221 million (no related income tax effect) (Notes 2 and 3). Under the Non- union ESOP, 100% of employee contributions were matched in the form of ESOP Stock for the first 6% of a participating employee's base pay. There is no Company match provision under the union employee plan except for three unions which negotiated a Company - 16 - match as part of their new contract provisions. Savings plan expense was $1 million in 1997 and $4 million in 1996 and 1995. In connection with the formation of the Non-union ESOP in 1990, the Company issued 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 from the Non-union ESOP in the principal amount of approximately $290 million. In addition, unearned ESOP compensation in the same amount was recognized as a charge to stockholders' equity coincident with the Non-union ESOP's issuance of its 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. The Company received debt service payments from the Non-union ESOP of $11 million in 1997, $40 million in 1996 and $31 million in 1995. Prior to the close of the joint tender offer (Notes 2 and 3), unearned ESOP compensation was charged to expense as shares of ESOP Stock were allocated to participants. An amount equivalent to the preferred dividends declared on the ESOP Stock had partially offset compensation and interest expense related to the Non-union ESOP through the close of the joint tender offer. Interest expense incurred by the Non-union ESOP on its debt to the Company was $9 million in 1997 and $24 million in 1996 and 1995. Compensation expense related to the Non-union ESOP was $2 million in 1997, $11 million in 1996 and $10 million in 1995. Prior to its acquisition, the Company made 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. Preferred dividends declared were $3 million in 1997, $20 million in 1996 and $21 million in 1995. Preferred dividend payments of $3 million, $25 million and $21 million were made in 1997, 1996 and 1995, respectively. 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 in- surance reserve held in the Company's group life insurance policy. There are no plan assets for the retiree health benefits plan. - 17 - The following sets forth the plans' funded status reconciled with amounts reported in the Company's balance sheets: 1997 1996 ----------------- ----------------- Life Life Medical Insurance Medical Insurance Plan Plan Plan Plan (In Millions) Accumulated postretirement benefit obligation: Retirees $28 $20 $44 $20 Fully eligible active plan participants 1 1 Other active plan participants 5 3 --- --- --- --- Accumulated benefit obligation 29 25 45 23 Market value of plan assets (10) (10) --- --- --- --- Accumulated benefit obligation in excess of plan assets 29 15 45 13 Unrecognized gains and (losses) 9 1 (1) 2 Accrued benefit cost recognized in the Consolidated Balance --- --- --- --- Sheet $38 $16 $44 $15 === === === === Net periodic postretirement benefit cost, primarily interest cost $ 1 $ 1 $ 3 $ 1 === === === === An 8% percent rate of increase in per capita costs of covered health care benefits was assumed for 1998, gradually decreasing to 6% percent by the year 2007. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $2 million and would have an immaterial effect on the net periodic postretirement benefit cost for 1997. Discount rates of 7.0% and 7.5% were used to determine the accumulated postretirement benefit obligations for both the medical and life insurance plans in 1997 and 1996, respectively. The assumed rate of compensation increase was 6% in both 1997 1996. Retiree medical benefits are funded by a combination of Company and retiree contributions. Retiree life insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. 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 - 18 - the authority to divide the preferred stock into series and to determine the rights and preferences of each. All of the Company's shares of ESOP Stock were converted to common shares when tendered as part of the joint acquisition of the Company's common stock (Notes 2 and 3). 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%. As a result of the joint tender offer (Notes 2 and 3) for the Company's common stock, the Trust repaid $90 million of the promissory loan with proceeds it received from the sale of a portion of the common stock it held. The Trust is expected to fund the payment of employee benefits with the remaining proceeds it currently holds. The Trust was intended 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, including future severance benefits, are paid from the Trust. Before the close of the joint tender offer for the Company's common stock, the shares owned by the Trust were 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. Shares held by the Trust were not considered outstanding for earnings per share computations until released by the Trust, but did have voting and dividend rights. Treasury Stock -------------- As a result of the acquisition of Conrail, the Company's common stock repurchase program was terminated in the fourth quarter of 1996. The activity for 1997 is related to the repurchase of common stock in connection with the repayment of $90 million of the Trust promissory loan described above. The activity and status of treasury stock follow: 1997 1996 1995 ---------- --------- --------- Shares, beginning of year 5,523,455 3,297,717 1,789,164 Acquired 2,225,738 1,508,553 Effects of Conrail acquisition 796,794 ---------- --------- ---------- Shares, end of year 6,320,249 5,523,455 3,297,717 ========== ========= ========== Stock Plans ----------- The Company has applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for the Conrail plans. Accordingly, no compensation cost was recognized for the Conrail fixed stock option plans prior to Conrail's acquisition. However, in connection with the acquisition of Conrail, all outstanding performance shares and - 19 - all outstanding unvested stock options, restricted shares and phantom shares vested during the second quarter of 1997. The Company paid all of the amounts due under these arrangements and recorded a $63 million charge ($39 million after income taxes) for the related compensation expense. The Company's 1987 and 1991 Long-Term Incentive Plans authorized the granting to officers and other key employees of up to 4 million and 6.6 million shares of common stock, respectively, through stock options, stock appreciation rights, phantom stock and awards of restricted or performance shares. A stock option was exercisable for a specified term commencing after grant at a price not less than the fair market value of the stock on the date of grant. The vesting of awards made pursuant to these plans was contingent upon one or more of the following: continued employment, passage of time or financial and other performance goals. The activity and status of stock options under the incentive plans follow: Non-qualified Stock Options ----------------------------------- Option Price Shares Per Share Under Option ----------------- ------------ Balance, January 1, 1995 $14.000 - $ 66.938 1,363,955 Granted $50.688 - $ 68.563 516,757 Exercised $14.000 - $ 53.875 (200,940) Canceled $42.625 - $ 53.875 (123,560) ------------ Balance, December 31, 1995 $14.000 - $ 68.563 1,556,212 Granted $68.563 - $ 96.063 551,038 Exercised $14.000 - $ 73.250 (1,268,085) Canceled $42.625 - $ 70.031 (3,984) ------------ Balance, December 31, 1996 $14.000 - $ 96.063 835,181 Granted $42.625 - $104.438 416,190 Exercised $14.000 - $104.438 (267,294) Canceled $42.625 - $ 50.688 (6,625) Purchased due to Conrail acquisition $14.000 - $104.438 (977,452) ------------ Balance, December 31, 1997 - ============ Available for future grants December 31, 1996 3,969,317 ============ December 31, 1997 - ============ The weighted average exercise prices of options granted during 1996 and 1995 were $70.130 per share and $51.204 per share, respectively. The weighted average exercise prices of options exercised during 1996 and 1995 were $48.32 per share and $31.16 per share, respectively. - 20 - Pro forma disclosures of net income and earnings per share as if the Company had adopted the cost recognition requirements under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) in 1996 and 1995 are presented below ($ in millions except per share data): 1996 1995 ----- ----- Net income as reported $ 342 $ 264 Net income pro forma 335 262 Basic earnings per share $4.29 $3.21 Basic earnings per share pro forma 4.20 3.19 Diluted earnings per share $3.91 $2.94 Diluted earnings per share pro forma 3.82 2.92 The fair value of each option granted during 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (1) dividend yield of 2.43%, (2) expected volatility of 25.25%, (3) risk-free interest rate of 5.51%, and (4) expected life of 4 years. The weighted average fair value of options granted during 1996 and 1995 was $16.00 per share and $13.12 per share, respectively. Prior to its acquisition, the Company had granted phantom shares and restricted stock under its non-union employee bonus plans to eligible employees who elected to defer all or a portion of their annual bonus in a given year. The number of shares granted depended on the length of the deferral period. Grants were made at the market price of the Company's common stock at the date of grant. The Company had granted 148,749 shares and 337,329 shares of phantom and restricted stock, respectively, under its non-union employee bonus plans through its acquisition date of May 23, 1997. The Company had also granted 201,945 performance shares under its 1991 Long-Term Incentive Plan through its acquisition date. Compensation expense related to these plans was $2 million in 1996 and $3 million in 1995. The weighted-average fair value for the phantom shares and restricted stock granted during 1996 and 1995 was $68.02 per share and $52.88 per share, respectively. As a result of its acquisition, the Company paid all of the amounts due to employees under stock-related compensation arrangements during the second quarter of 1997 (Note 3). 10. Voluntary Separation Programs ----------------------------- During 1996, the Company recorded a charge of $135 million (before tax benefits of $52 million) consisting of $102 million in termination benefits to be paid to non-union employees participating in the voluntary retirement and separation programs ("voluntary separation programs") and losses of $33 - 21 - 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 in benefits are being paid from the Company's overfunded pension plan. 11. 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 planned to sell 1,800 miles of rail lines that were expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition were written down to estimated net realizable value (See Note 1 "Asset Impairment"). Currently, the asset disposition program is under review as a result of the Conrail acquisition (Note 2). 12. Other Income, Net ----------------- 1997 1996 1995 ---- ---- ---- (In Millions) Interest income $13 $ 29 $ 33 Rental income 41 50 57 Property sales 23 23 27 Other, net 6 10 13 --- ---- ---- $83 $112 $130 === ==== ==== 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 govern- mental agencies with respect to other potential environmental issues. At December 31, 1997, 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 60 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of possible remediation alternatives, the changing technology and the length of time over which these matters develop, it is often - 22 - 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, 1997, the Company had accrued $48 million, an amount it believes is sufficient to cover the probable liability and remediation costs that will be incurred at Superfund sites and other sites based on known information and using various estimating techniques. The Company believes the ultimate liability for these matters will not materially affect its consolidated financial condition. The Company spent $9 million in 1997, $11 million in 1996 and $14 million in 1995 for environmental remediation and related costs and anticipates spending an amount comparable to that spent in 1997 during 1998. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $7 million in 1997 and $6 million in 1996 and 1995, and are anticipated to be approximately $11 million in 1998. The Environmental Quality Department is charged with promoting the Company's compliance with laws and regulations affecting the environment and instituting environmentally sound operating practices. The department monitors the status of the sites where the Company is alleged to have liability and continually reviews the information available and assesses the adequacy of the recorded liability. Other ----- The Company is involved in various legal actions, principally relating to occupational health claims, personal injuries, casualties, property damage and damage to lading. The Company has recorded liabilities for amounts sufficient to cover the expected payments for such actions. The Company may be contingently liable for approximately $50 million at December 31, 1997 under indemnification provisions related to sales of tax benefits. CRC had an average of 19,802 employees in 1997, approximately 86% of whom are represented by 14 different labor organizations and are covered by 21 separate collective bargaining agreements. The Company was not engaged in any collective bargaining at December 31, 1997. CRC currently guarantees the principal and interest payments in the amount of $48 million on Equipment Trust Certificates for Locomotive Management Services, a general partnership of which CRC holds a fifty percent interest. - 23 - CRC has received an adverse jury verdict related to a railroad crossing accident in Ohio that includes a significant punitive damage award that approximates $15 million. CRC believes the punitive damage award in this case is improper and that it has meritorious defenses, which it is pursuing on appeal. The Company, currently, has not taken actions to resolve anticipated year 2000 issues related to its computer systems since it believes that such issues will be resolved in connection with the proposed integration of its systems with those of CSX and NSC following the requisite STB approval of the Conrail acquisition. In the event that the STB does not approve the sale of Conrail, the Company is developing a contingency plan to enable it to continue to operate into the year 2000 and beyond. While it is not possible, at this time, to quantify the overall cost of implementing this contingency plan, the Company believes that it would be material to its results of operations during the implementation period. In addition, were the STB to disapprove the sale of Conrail, the Company believes that failure to develop and implement such a plan could result in a material financial risk and serious disruption in its operations. 14. Condensed Quarterly Data (Unaudited) -----------------------------------
First Second Third Fourth -------------- -------------- --------------- --------------- 1997 1996 1997 1996 1997 1996 1997 1996 ------ ------ ------ ------ ------ ------ ------ ------ ($ In Millions Except Per Share) Revenues $906 $889 $ 937 $949 $944 $933 $978 $943 Income (loss) from operations 116 69 (231) 54 218 235 219 243 Net income (loss) 61 31 (273) 26 101 138 118 147 Net income (loss) per common share: Basic .74 .36 - .30 - 1.76 - 1.87 Diluted .70 .35 - .29 - 1.58 - 1.70 Ratio of earnings to fixed charges 2.52x 1.75x - 1.57x 4.82x 4.77x 4.76x 4.91x Dividends per common share .475 .425 - .425 - .475 - .475 Market prices per common share (New York Stock Exchange) High 113 1/4 77 1/4 - 73 1/4 - 74 5/8 - 100 7/8 Low 98 1/2 67 5/8 - 66 1/4 - 63 3/4 - 68 1/2
Due to the acquisition of Conrail (Notes 2 and 3), per share data are not presented for periods subsequent to the first quarter of 1997. The Company recorded pre-tax merger-related costs of $22 million ($14 million after income taxes), $440 million ($390 million after income taxes), $23 million ($16 million after income taxes) and $23 million ($15 million after income taxes) during the - 24 - first, second, third and fourth quarters of 1997, respectively. A $221 million ESOP termination charge (no income tax effect) is included in the second quarter of 1997 merger-related costs (Note 3). After the merger-related costs were recognized during the second quarter of 1997, earnings available for fixed charges were inadequate by $259 million. A tax law was enacted during the third quarter of 1997 by a state in which the Company operates which changed the Company's method of computing taxes and resulted in a tax rate increase. Income tax expense for the third quarter was increased by $22 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required by SFAS 109 (Note 7). 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 10). During the fourth quarter of 1996, the Company recorded merger-related costs of $16 million ($10 million after income taxes) (Note 3). - 25 - Schedule II CONRAIL INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, (In Millions)
Additions ---------------------- Balance at Charged to Charged Balance Beginning Costs and to Other At End Description of Period Expenses Accounts Deductions of Period - ----------- ------------ ---------- --------- ------------ ----------- (1) 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 1997 Casualty reserves Current............... 141 1 1 (2) 141 Noncurrent............ 190 127 14 133 (3) 198 Allowance for disposition of property and equipment (4)............ 408 16 392
(1) Includes charges to property accounts in connection with construction projects and the recording of receivables from third parties. (2) Includes net transfers from noncurrent. (3) Includes net transfers to current. (4) Deductions of $63 million, $31 million and $16 million in 1995, 1996 and 1997, respectively, represent net losses on asset dispositions. (5) In 1995, the Company recorded an asset disposition charge, which resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically support current and expected operations. The Company identified and planned to sell 1,800 miles of rail lines that were expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value.(See Note 11 to the Consolidated Financial Statements.) -----END PRIVACY-ENHANCED MESSAGE-----