Form 10-K dated December 27, 2002

-----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, Eo8P1tBg4gGWqpyhC3QbNpR/aILR3p8pxaIYnEKcJeeUVs/A8RunPuDEugtyoK4Z dci7H1Hvwdwj/ly3Oay1aQ== 0000916641-03-000356.txt : 20030226 0000916641-03-000356.hdr.sgml : 20030226 20030226122153 ACCESSION NUMBER: 0000916641-03-000356 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20021227 FILED AS OF DATE: 20030226 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08022 FILM NUMBER: 03580351 BUSINESS ADDRESS: STREET 1: ONE JAMES CNTR STREET 2: 901 E CARY ST CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 9046331212 MAIL ADDRESS: STREET 1: 301 WEST BAY STREET STREET 2: 21ST FLOOR CITY: JACKSONVILLE STATE: FL ZIP: 32202 10-K 1 d10k.htm FORM 10-K DATED DECEMBER 27, 2002 Form 10-K dated December 27, 2002

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 27, 2002

[ ]

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

incorporation or organization)

(I.R.S. Employer

Identification No.)

500 Water Street, 15^th Floor, Jacksonville, Florida		32202
(Address of principal executive offices)		(Zip Code)

(904) 359-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of exchange 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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )

Exhibit Index can be found on page 13

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes (X) No ( )

On June 28, 2002, the aggregate market value of the Registrant’s voting stock held by non-affiliates was approximately $5.7 billion (based on the New York Stock Exchange closing price on such date).

On January 24, 2003, there were 214,686,566 shares of Common Stock outstanding.

Documents Incorporated by Reference		Portion of Form 10-K into which Documents are Incorporated
1. Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended December 27, 2002 (“Annual Report”)		Part I, II & IV

2. Portions of the Registrant’s Definitive Proxy Statement to be filed with respect to its annual meeting of shareholders scheduled to be held on May 7, 2003 (“Proxy Statement”)		Part III

PART I

ITEM 1. BUSINESS

In response to this Item, the information set forth on page 1 under the caption “Financial Highlights”, page 7 under the caption “CSX Transportation,” page 8 under the caption “CSX Intermodal,” page 8 under the caption “CSX World Terminals,” and page 9 “Other Activities,” and pages 17-29 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report is incorporated herein by reference.

ITEM 2. PROPERTIES

In response to this Item, the information set forth on pages 17-29 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, page 34 under the caption “Properties” and page 41 under the caption “Note 8. Properties.” of the Annual Report is incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS

In response to these Item, the information set forth on page 26 under the caption “Claims Arising out of Sale of International Container-Shipping Assets,” on page 26 under the caption “1. Casualty, Legal and Environmental Reserves,” page 52 under the caption “Claims Arising out of Sale of International Container-Shipping Assets,” page 53 under the captions “Contract Settlement” and “Other Legal Proceedings and Arbitrations.”

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders in the fourth quarter of 2002.

Executive Officers of the Registrant

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.

Name and Age		Business Experience During Past 5 Years

Michael J. Ward, 52		Chairman, President and Chief Executive Officer of CSX since January 2003. Prior to January 2003, Mr. Ward served as CSX President since July 2002. Prior to July 2002, Mr. Ward served as an officer of CSXT as President and Chief Executive Officer since October 2002 and President since November 2000; Executive Vice President—Operations, from April 2000 to November 2000; Executive Vice President—Coal Service Group from August 1999 to April 2000; Executive Vice President—Coal & Merger Planning from October 1998 to August 1999; and prior thereto, as Executive Vice President—Finance and Chief Financial Officer.

Paul R. Goodwin, 60		Vice Chairman and Chief Financial Officer of CSX since April 2000. Prior to April 2000, Mr. Goodwin served as CSX Executive Vice President—Finance and Chief Financial Officer.

Andrew B. Fogarty, 57		Executive Vice President—Corporate Services of CSX since July 2001. Prior to July 2001, Mr. Fogarty served as Senior Vice President—Corporate Services from September 1997 to July 2001, and prior thereto as Senior Vice President—Finance and Planning, Sea-Land.

Ellen M. Fitzsimmons, 42		Senior Vice President—Law since February 2001. Prior to February 2001, Ms. Fitzsimmons served as General Counsel—Corporate.

Lester M. Passa, 49		Senior Vice President—Strategic Planning of CSX since November 2000. Prior to November 2000, Mr. Passa served as President and CEO of CSX Intermodal

Jesse R. Mohorovic, 60		Senior Vice President—Corporate Communications and Investor Relations since July 2001. Prior to July 2001, Mr. Mohorovic served as CSX Group Vice President—Corporate Communications and Investor Relations from April 1998 to July 2001, and prior thereto, as CSX Vice President—Corporate Relations.

Carolyn T. Sizemore, 40		Vice President and Controller of CSX since April 2002. Prior to April 2002, Ms. Sizemore served as Assistant Vice President and Assistant Controller from July 2001 to April 2002; Assistant Vice President Financial Planning from June 1999 to July 2001; and prior thereto, as Senior Director—Financial and Strategic Measurement.

P. Michael Giftos, 56		Executive Vice President and Chief Commercial Officer of CSXT since April 2000. Prior to April 2000, Mr. Giftos served as CSXT Senior Vice President and General Counsel.

Alan F. Crown, 55		Executive Vice President of CSXT since December 2000. Prior to December 2000, Mr. Crown served as an officer of CSXT as Senior Vice President—Transportation from May 2000 to December 2000; Vice President—Central Region from August 1999 to May 2000; and prior thereto, General Manager—C&O Coal Business Unit and Vice President—Coal from October 1997 to August 1999.

Frederick J. Favorite, Jr., 49		Senior Vice President—Finance of CSXT since February 2000. Prior to February 2000, Mr. Favorite served as Vice President—Finance, CSXT, from December 1998 to January 2000; and prior thereto, as Vice President—Planning, CSXT.

Robert J. Grassi, 56		President and Chief Executive Officer of CSX World Terminals since June 1999. Prior to June 1999, Mr. Grassi served as an officer of Sea-Land as Senior Vice President—Finance and Planning.

Charles G. Raymond, 59		President and Chief Executive Officer of CSX Lines since June 1999. Prior to June 1999, Mr. Raymond served as an officer of Sea-Land as Senior Vice President and Chief Transportation Officer.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

In response to this Item, the information set forth on page 58, “Shareholder Information”, and page 59, “Corporate Information”, of the Annual Report is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

In response to this Item, the information set forth on page 1 of the Annual Report under the caption “Financial Highlights” is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

In response to this Item, the information set forth on pages 17-29 of the Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In response to this Item, the information set forth on page 24 of the Annual Report under the caption “Market Risk” is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

In response to this Item, the information set forth on pages 30-56, and page 57 under the caption “Quarterly Financial Data (Unaudited)” of the Annual Report is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement, except for the information regarding the executive officers of the Registrant which is included in Part I of this report under the caption “Executive Officers of the Registrant.”

ITEM 11. EXECUTIVE COMPENSATION

In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement.

The following table summarizes the equity compensation plans under which CSX Corporation common stock may be issued as of December 27, 2002.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (000’s) (a)	Weighted- average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (000’s) (c)
Equity compensation plans approved by security holders	25,482	$40.45	8,587(1)

Equity compensation plans not approved by security holders (2)	670	$44.89	—

Total	25,152		8,587(1)

(1)

The number of shares remaining available for future issuance under plans approved by shareholders includes 1,030,345 shares available for employee purchase pursuant to the 2001 Employee Stock Purchase Plan; 678,411 shares available for stock option grants, payment of director compensation, and stock grants pursuant to the CSX Stock Plan for Directors; and 6,878,033 shares available for grant in the form of stock options, performance units, restricted stock, stock appreciation rights, and stock awards pursuant to the CSX Omnibus Incentive Plan.

(2)

The 1990 Stock Award Plan (“1990 Plan”) is the only CSX equity compensation plan that has not been approved by shareholders. Upon approval of the CSX Omnibus Incentive Plan by shareholders in 2000, the plan was closed to further grants. No options have been granted under the 1990 Plan since 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

As of February 18, 2003, under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of February 18, 2003. There were no significant changes in the Company’s internal controls or in the other factors that could significantly affect those controls subsequent to the date of the evaluation.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)

(1) Financial Statements

The following consolidated financial statements and independent auditor’s report, which appear on pages 30-56 of the Annual Report, are incorporated herein by reference:

Consolidated Statement of Earnings for the Fiscal Years Ended December 27, 2002, December 28, 2001, and December 29, 2000

Consolidated Statement of Cash Flows for the Fiscal Years Ended December 27, 2002, December 28, 2001, and December 29, 2000

Consolidated Statement of Financial Position at December 27, 2002 and December 28, 2001

Consolidated Statement of Changes in Shareholders’ Equity for the Fiscal Years Ended December 27, 2002, December 28, 2001, and December 29, 2000

Notes to Consolidated Financial Statements

Report of Independent Auditors

The following financial statement footnote was not included in the Annual Report:

Note 19. Summarized Consolidating Financial Data – CSX Lines (formerly Sea-Land)

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. The ships were not included in the sale of international liner assets to Maersk in December 1999 and the related debt remains an obligation of CSX Lines. CSX has guaranteed the obligations of CSX Lines 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). As noted in Note 3 of the Annual Report, Divestitures, CSX agreed to convey certain assets of CSX Lines to Horizon Lines LLC. These obligations are not part of this transaction and another CSX entity will become the obligor in 2003. In accordance with SEC disclosure requirements, consolidating summarized financial information for the parent and obligor are as follows (Certain prior year amounts have been reclassified to conform to the 2002 presentation) (In millions):

Consolidating Statement of Earnings

	CSX Corporation			CSX Lines		Other			Eliminations			Consolidated
Fiscal Year Ended December 27, 2002
Operating Income
Operating Revenue	$	—		$	758	$	7,485		$	(91	)	$	8,152
Operating Expense		(241	)		720		6,628			(82	)		7,025

Operating Income(Loss)		241			38		857			(9	)		1,127

Other Income and Expense
Other Income		379			5		103			(446	)		41
Interest Expense		394			7		96			(52	)		445


Earnings
Earnings before Income Taxes		226			36		864			(403	)		723
Income Tax Expense (Benefit)		(52	)		14		294			—			256

Earnings before Cumulative Effect of Accounting Change		278			22		570			(403	)		467
Cumulative Effect on Prior Years of Accounting Change		—			—		(43	)		—			(43	)

Net Earnings	$	278		$	22	$	527		$	(403	)	$	424

Fiscal Year Ended December 28, 2001
Operating Income
Operating Revenue	$	—		$	681	$	7,862		$	(433	)	$	8,110
Operating Expense		(199	)		649		7,128			(425	)		7,153

Operating Income(Loss)		199			32		734			(8	)		957

Other Income and Expense
Other Income		496			9		88			(584	)		9
Interest Expense		469			13		121			(85	)		518

Earnings
Earnings before Income Taxes		226			28		701			(507	)		448
Income Tax Expense (Benefit)		(94	)		11		238			—			155

Net Earnings (Loss)	$	320		$	17	$	463		$	(507	)	$	293

Consolidating Statement of Earnings

	CSX Corporation			CSX Lines			Other		Eliminations			Consolidated
Fiscal Year Ended December 29, 2000
Operating Income
Operating Revenue	$	—		$	666		$	7,546	$	(21	)	$	8,191
Operating Expense		(222	)		666			6,963		(21	)		7,386

Operating Income(Loss)		222			—			583		—			805

Other Income and Expense
Other Income		813			12			185		(988	)		22
Interest Expense		556			20			151		(177	)		550


Earnings
Earnings before Income Taxes		479			(8	)		617		(811	)		277
Income Tax Expense (Benefit)		(107	)		(3	)		201		—			91

Earnings before Discontinued Operations		586			(5	)		416		(811	)		186
Earnings from Discontinued Operations, Net of Tax		—			—			14		—			14
Gain on Sale of Discontinued Operations, Net of Tax		2			—			363		—			365

Net Earnings (Loss)	$	588		$	(5	)	$	793	$	(811	)	$	565

Consolidating Statement of Cash Flows

	CSX Corporation			CSX Lines			Other			Eliminations			Consolidated
Fiscal Year Ended December 27, 2002
Operating Activities
Net Cash Provided (Used) by Operating Activities	$	288		$	15		$	1,041		$	(217	)	$	1,127

Investing Activities
Property Additions		(4	)		(19	)		(1,057	)		—			(1,080	)
Short-term Investments-Net		135			(26	)		241			—			350
Other Investing Activities		(10	)		14			(29	)		(20	)		(45	)

Net Cash Provided (Used) by Investing Activities		121			(31	)		(845	)		(20	)		(775	)

Financing Activities
Short-term Debt-Net		140			—			—			—			140
Long-term Debt Issued		746			—			2			—			748
Long-term Debt Repaid		(950	)		—			(209	)		—			(1,159	)
Dividends Paid		(86	)		—			(209	)		209			(86	)
Other Financing Activities		32			—			(65	)		28			(5	)

Net Cash Provided (Used) by Financing Activities		(118	)		—			(481	)		237			(362	)

Net Increase (Decrease) in Cash and Cash Equivalents		291			(16	)		(285	)		—			(10	)
Cash and Cash Equivalents at Beginning of Period		156			—			(19	)		—			137

Cash and Cash Equivalents at End of Period	$	447		$	(16	)	$	(304	)	$	—		$	127

Consolidating Statement of Cash Flows

	CSX Corporation			CSX Lines			Other			Eliminations			Consolidated
Fiscal Year Ended December 28, 2001
Operating Activities

Net Cash Provided (Used) by Operating Activities	$	(85	)	$	80		$	1,090		$	(258	)	$	827

Investing Activities
Property Additions		—			(11	)		(919	)		—			(930	)
Short-term Investments—Net		169			—			(220	)		—			(51	)
Other Investing Activities		(191	)		1			1,369			(1,163	)		16

Net Cash Provided (Used) by Investing Activities		(22	)		(10	)		230			(1,163	)		(965	)

Financing Activities
Short-term Debt—Net		(524	)		—			—			—			(524	)
Long-term Debt Issued		962			—			—			—			962
Long-term Debt Repaid		(60	)		(21	)		(185	)		—			(266	)
Cash Dividends Paid		(174	)		—			(222	)		225			(171	)
Common Stock Issued		26			—			(160	)		134			—
Common Stock Retired		(1	)		—			1			—			—
Other Financing Activities		(13	)		(49	)		(986	)		1,062			14

Net Cash Provided (Used) by Financing Activities		216			(70	)		(1,552	)		1,421			15

Net Increase (Decrease) in Cash and Cash Equivalents		109			—			(232	)		—			(123	)
Cash and Cash Equivalents at Beginning of Period		47			—			213			—			260

Cash and Cash Equivalents at End of Period	$	156		$	—		$	(19	)	$	—		$	137

Fiscal Year Ended December 29, 2000
Operating Activities
Net Cash Provided (Used) by Operating Activities	$	224		$	(20	)	$	866		$	(360	)	$	710

Investing Activities
Property Additions		—			(16	)		(897	)		—			(913	)
Net Proceeds from Divestitures and Sale of Assets		673			—			(23	)		—			650
Short-term Investments—net		96			—			(181	)		—			(85	)
Other Investing Activities		(104	)		(1	)		(803	)		919			11

Net Cash Provided (Used) by Investing Activities		665			(17	)		(1,904	)		919			(337	)

Financing Activities
Short-term Debt—Net		175			—			(400	)		—			(225	)
Long-term Debt Issued		400			—			188			—			588
Long-term Debt Repaid		(1,054	)		(68	)		371			—			(751	)
Cash Dividends Paid		(267	)		—			(235	)		240			(262	)
Preferred Stock Issued		—			—			396			(396	)		—
Common Stock Issued		94			—			(56	)		(38	)		—
Common Stock Retired		(80	)		—			80			—			—
Common Stock Reacquired		—			—			(42	)		—			(42	)
Other Financing Activities		365			89			(136	)		(365	)		(47	)

Net Cash Provided (Used) by Financing Activities		(367	)		21			166			(559	)		(739	)

Net Increase (Decrease) in Cash and Cash Equivalents		522			(16	)		(872	)		—			(366	)
Cash and Cash Equivalents at Beginning of Year		(475	)		16			1,085			—			626

Cash and Cash Equivalents at End of Year	$	47		$	—		$	213		$	—		$	260

Consolidating Statement of Financial Position

	CSX Corporation			CSX Lines			Other			Eliminations			Consolidated
December 27, 2002
Assets
Cash, Cash Equivalents & Short-term Investments	$	379		$	37		$	(152	)	$	—		$	264
Accounts Receivable—Net		43			—			902			(146	)		799
Materials and Supplies		—			—			180			—			180
Deferred Income Taxes		—			—			128			—			128
Assets Held for Disposition		—			263			—			—			263
Other Current Assets		5			—			287			(137	)		155

Total Current Assets		427			300			1,345			(283	)		1,789

Properties		33			11			18,516			—			18,560
Accumulated Depreciation		(29	)		(2	)		(5,243	)		—			(5,274	)

Properties, net		4			9			13,273			—			13,286

Investment in Conrail		342			—			4,311			—			4,653
Affiliates and Other Companies		—			—			414			(33	)		381
Investment in Consolidated Subsidiaries		12,761			—			396			(13,157	)		—
Other Long-term Assets		1,192			—			273			(623	)		842

Total Assets	$	14,726		$	309		$	20,012		$	(14,096	)	$	20,951

Liabilities
Accounts Payable	$	77		$	20		$	848		$	(143	)	$	802
Labor and Fringe Benefits Payable		49			11			397			—			457
Payable to Affiliates		—			—			137			(137	)		—
Casualty, Environmental and Other Reserves		1			—			245			—			246
Current Maturities of Long-term Debt		150			—			241			—			391
Short-term Debt		140			—			3			—			143
Liabilities Held for Disposition		—			104			—			—			104
Income and Other Taxes Payable		1,458			9			(1,284	)		(39	)		144
Other Current Liabilities		28			4			99			36			167

Total Current Liabilities		1,903			148			686			(283	)		2,454

Casualty, Environmental and Other reserves		4			1			599			—			604
Long-term Debt		5,510			—			1,009			—			6,519
Deferred Income Taxes		—			3			3,564			—			3,567
Long Term Payable to Affiliates		396			—			148			(544	)		—
Other Long-term Liabilities		685			49			925			(93	)		1,566

Total Liabilities		8,498			201			6,931			(920	)		14,710

Shareholders’ Equity
Preferred Stock		—			—			396			(396	)		—
Common Stock		215			—			209			(209	)		215
Other Capital		1,547			73			8,238			(8,311	)		1,547
Retained Earnings		4,797			35			4,225			(4,260	)		4,797
Accumulated Other Comprehensive Loss		(331	)					13			—			(318	)

Total Shareholders’ Equity		6,228			108			13,081			(13,176	)		6,241

Total Liabilities and Shareholders’ Equity	$	14,726		$	309		$	20,012		$	(14,096	)	$	20,951

Consolidating Statement of Financial Position

December 28, 2001	CSX Corporation			CSX Lines			Other			Eliminations			Consolidated
Assets
Current Assets
Cash, Cash Equivalents and Short-term Investments	$	225		$	55		$	339		$	(1	)	$	618
Accounts Receivable, Net		58			—			1,037			(224	)		871
Materials and Supplies		—			—			191			—			191
Deferred Income Taxes		—			—			162			—			162
Assets Held for Disposition		—			244			—			—			244
Other Current Assets		4			24			295			(125	)		198

Total Current Assets		287			323			2,024			(350	)		2,284

Properties		29			62			17,669			—			17,760
Accumulated Depreciation		(27	)		(20	)		(4,866	)		—			(4,913	)

Properties, Net		2			42			12,803			—			12,847

Investment in Conrail		353			—			4,302			—			4,655
Affiliates and Other Companies		2			—			326			(31	)		297
Investment in Consolidated Subsidiaries		12,641			—			396			(13,037	)		—
Other Long-term Assets		985			139			182			(588	)		718

Total Assets	$	14,270		$	504		$	20,033		$	(14,006	)	$	20,801

Liabilities
Current Liabilities
Accounts Payable	$	86		$	20		$	965		$	(166	)	$	905
Labor and Fringe Benefits Payable		17			4			388			—			409
Payable to Affiliates		—			2			123			(125	)		—
Casuality, Environmental and Other Reserves		1			1			246			—			248
Current Maturities of Long-term Debt		850			21			173			—			1,044
Short-term Debt		225			—			—			—			225
Income and Other Taxes Payable		1,296			24			(1,220	)		—			100
Liabilities Held for Disposition		—			92			—			—			92
Other Current Liabilities		38			5			300			(59	)		284

Total Current Liabilities		2,513			169			975			(350	)		3,307

Casualty, Environmental and Other Reserves		4			1			682			—			687
Long-term Debt		4,680			132			1,027			—			5,839
Deferred Income Taxes		—			25			3,596			—			3,621
Long-term Payable to Affiliates		396			—			192			(588	)		—
Other Long-term Liabilities		525			49			683			(30	)		1,227

Total Liabilities		8,118			376			7,155			(968	)		14,681

Shareholder’s Equity
Preferred Stock		—			—			396			(396	)		—
Common Stock		214			—			209			(209	)		214
Other Capital		1,492			125			8,175			(8,300	)		1,492
Retained Earnings		4,459			3			4,130			(4,133	)		4,459
Accumulated Other Comprehensive Loss		(13	)		—			(32	)		—			(45	)

Total Shareholder’s Equity		6,152			128			12,878			(13,038	)		6,120

Total Liabilities and Shareholder’s Equity	$	14,270		$	504		$	20,033		$	(14,006	)	$	20,801

(2) Financial Statement Schedules

The information required by Rule 3-09 is included in the Annual Report in Note 2 to the consolidated financial statements, “Investment in and Integrated Rail Operations with Conrail” and the Audited Consolidated Financial Statements of Conrail Inc., filed herewith as exhibit 99.3. The information required by Schedule II is included in the Annual Report in Note 9 to the consolidated financial statements, “Casualty, Environmental and Other Reserves.” All other financial statement schedules are not applicable.

(3) Exhibits

3.1		Amended and Restated Articles of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 10-Q dated August 4, 2000)
3.2*		Bylaws of the Registrant, amended as of January 31, 2003
4.1		Amended and Restated Articles of Incorporation of the Registrant (see Exhibit 3.1)
4.2		Bylaws of the Registrant, as amended (see Exhibit 3.2)
4.3(a)		Rights Agreement, dated as of May 29, 1998, between the Registrant and Computershare Investor Services, Inc. (successor to Harris Trust Company of New York), as Rights Agent (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration on Form 8-A (File No. 001-8022) filed with the SEC on May 29, 1998)
4.3(b)		Amendment No. 1 to the Rights Agreement, dated as of June 27, 2000, between the Registrant and Computershare Investor Services, Inc. (successor to Harris Trust Company of New York), as Rights Agent, (incorporated by reference to Exhibit 3 to the Registrant’s Registration on Form 8-A/A (File No. 1-8022) filed with the SEC on June 28, 2000)
4.4(a)		Indenture, dated August 1, 1990, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to the Registrant’s Form SE, dated September 7, 1990, filed with the Commission)
4.4(b)		First Supplemental Indenture, dated as of June 15, 1991, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4(c) to the Registrant’s Form SE, dated May 28, 1992, filed with the Commission)
4.4(c)		Second Supplemental Indenture, dated as of May 6, 1997, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-28523) filed with the Commission on June 5, 1997)
4.4(d)		Third Supplemental Indenture, dated as of April 22, 1998, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on May 12, 1998)


4.4(e)		Fourth Supplemental Indenture, dated as of October 30, 2001, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Report on Form 10-Q filed with the Commission on November 7, 2001)

Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments that define the rights of holders of the Registrant’s long-term debt securities, where the long-term debt securities authorized under each such instrument do not exceed 10% of the Registrant’s total assets, have been omitted and will be furnished to the Commission upon request.

10.1		CSX Stock Plan for Directors (as amended through May 1, 2001) (incorporated by reference to Exhibit 10.1 of the Registrant’s Report on Form 10-K dated March 4, 2002)**

10.2		Corporate Director Deferred Compensation Plan (as amended through May 1, 2001) (incorporated by reference to Exhibit 10.2 of the Registrant’s Report on Form 10-K dated March 4, 2002)**

10.3*		CSX Corporation 2002 Corporate Director Deferred Compensation Plan**

10.4		CSX Directors’ Charitable Gift Plan, as amended (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K dated March 4, 1994)**

10.5*		CSX Directors’ Matching Gift Plan, as amended

10.6		Employment and Consulting Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Report on Form 10-Q dated November 7, 2001)**

10.7		Restricted Stock Award Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Report on Form 10-Q dated November 7, 2001)**

10.8		Stock Option Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Report on Form 10-Q dated November 7, 2001)**

10.9		Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K dated March 4, 1994)**

10.10		Employment Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K dated March, 7, 2000)**

10.11		Special Employment Agreement with M. J. Ward (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Report on Form 10-Q dated November 7, 2001)**

10.12		Restricted Stock Award Agreement with M. J. Ward (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Report on Form 10-Q dated November 7, 2001)**

10.13*		Railroad Retirement Benefits Agreement with M. J. Ward**

10.14		Form of Agreement with R.J. Grassi and C.G. Raymond (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K dated March 3, 1995)**

10.15		Form of Amendment to Agreement with R.J. Grassi and C.G. Raymond (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K dated March 14, 1997)**


10.16		Supplement to Agreement with R.J. Grassi (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K dated March 4, 2002)**

10.17	*	Amendment to Supplement to Agreement with R.J. Grassi

10.18	*	Supplement to Agreement with C.G. Raymond

10.19	*	Transaction Incentive Agreement with C.G. Raymond

10.20	*	Amendment to Transaction Incentive Agreement with C.G. Raymond

10.21		Form of Employment Agreement with P. R. Goodwin and M. J. Ward (incorporated by reference to Exhibit 10.16 of the Registrant’s Report on Form 10-K dated February 28, 2001)**

10.22		Form of Stock Option Agreement (incorporated by reference to Exhibit 10.17 of the Registrant’s Report on Form 10-K dated March 4, 2002)**

10.23		CSX Market Value Cash Plan (incorporated herein by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K dated March 3, 1999)**

10.24		Stock Purchase and Loan Plan, as amended (incorporated herein by reference to Exhibit 10. 14 to the Registrant’s Annual Report on Form 10-K dated March 3, 1999)**

10.25	*	1987 Long-Term Performance Stock Plan, as Amended and Restated effective April 25, 1996 (as amended through February 7, 2003)**

10.26		1985 Deferred Compensation Program for Executives of CSX Corporation and Affiliated Companies, as amended (incorporated by reference to Exhibit 10.21 of the Registrant’s Report on Form 10-K dated March 4, 2002)**

10.27	*	2002 Deferred Compensation Plan of CSX Corporation and Affiliated Corporations

10.28	*	Supplementary Savings Plan and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies (as Amended through February 7, 2003)**

10.29		Special Retirement Plan of CSX Corporation and Affiliated Companies, as Amended through February 14, 2001(incorporated by reference to Exhibit 10.23 of the Registrant’s Report on Form 10-K dated March 4, 2002)**

10.30		Supplemental Retirement Benefit Plan of CSX Corporation and Affiliated Companies, as Amended through February 14, 2001(incorporated by reference to Exhibit 10.24 of the Registrant’s Report on Form 10-K dated March 4, 2002)**

10.31		Senior Executive Incentive Compensation Plan (incorporated herein by reference to Appendix B to the Registrant’s Definitive Proxy Statement dated March 17, 2000)**

10.32		CSX Omnibus Incentive Plan, as Amended through February 14, 2001(incorporated by reference to Exhibit 10.26 of the Registrant’s Report on Form 10-K dated March 4, 2002)**

10.33		1990 Stock Award Plan as Amended and Restated Effective February 14, 1996(as Amended through September 8, 1999)(incorporated by reference to Exhibit 10.24 to the Registrants Annual Report on Form 10-K dated March 7, 2000)**

10.34		CSX Long Term Incentive Cash Program (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K dated March 1, 2001)**

10.35		CSX 2000 Stock Reacquisition Plan (incorporated by reference to Exhibit 99 to the Registrant’s Registration Statement on Form S-8 (Registration No. 33-48896) filed with the Commission on October 30, 2000)**


10.36		Amended and Restated Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 4, 1997)

10.37		Transaction Agreement (incorporated herein by reference to Exhibit 10 to the Registrant’s Current Report on Form 8-K filed with the Commission on July 8, 1997)

10.38		Amendment No. 1, dated as of August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC. (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 11, 1999)

10.39		Amendment No. 2, dated as of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings, LLC. (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 11, 1999)

10.40		Amendment No. 3, dated as of August 1, 2000, to the Transaction Agreement by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC. (incorporated herein by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K dated March 1, 2001)

10.41		Operating Agreement, dated as of June 1, 1999, by and between New York Central Lines LLC and CSX Transportation, Inc. (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 11, 1999)

10.42		Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 11, 1999)

10.43		Shared Assets Area Operating Agreement for Southern Jersey/Philadelphia, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 11, 1999)

10.44		Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Corporation, with exhibit thereto (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 11, 1999)

10.45		Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC, and New York Central Lines LLC, with exhibit thereto (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 11, 1999)


10.46*		364-Day, $300 Million Revolving Credit Agreement dated as of May 17, 2002

10.47*		Five-Year Revolving Credit Agreement dated as of June 8, 2001 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Commission on October 29, 2001) [this Agreement was amended by First Amendment, dated as of May 17, 2002]

12*		Computation of Ratio of Earnings to Fixed Charges

13*		Annual Report to Shareholders***

21*		Subsidiaries of the Registrant

23.1*		Consent of Ernst & Young LLP

23.2*		Consent of Ernst & Young LLP and KPMG LLP, Independent Auditors

24*		Powers of Attorney

99.1*		CEO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2*		CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.3*		Audited Consolidated Financial Statements of Conrail Inc. for the Years Ended December 31, 2002, 2001, and 2000

Filed herewith

Management Contract or Compensatory Plan or Arrangement

***

Except for those portions of the Annual Report which are expressly incorporated by reference in this Form 10-K, the Annual Report is furnished for the information of the Securities and Exchange Commission only and is not to be deemed “filed” as part of this Form 10-K.

(b)

Reports on Form 8-K

Form 8-K filed on October 30, 2002 reporting that CSX Corporation had entered into an Underwriting Agreement for the public offering of $200,000,000 aggregate principal amount of the Company’s 4.875% Notes due 2009

SIGNATURES

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.

CSX CORPORATION (Registrant)

By:		/s/ CAROLYN T. SIZEMORE
		Carolyn T. Sizemore Vice President and Controller (Principal Accounting Officer)

Dated: February 25, 2003

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 indicated on February 24, 2003.

Signature		Title

/s/ MICHAEL J. WARD* Michael J. Ward		Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ PAUL R. GOODWIN* Paul R. Goodwin		Executive Vice President-Finance and Chief Financial Officer (Principal Financial Officer)

/s/ ELIZABETH E. BAILEY* Elizabeth E. Bailey		Director

/s/ ROBERT L. BURRUS, JR.* Robert L. Burrus, Jr.		Director

/s/ BRUCE C. GOTTWALD* Bruce C. Gottwald		Director

/s/ JOHN R. HALL* John R. Hall		Director

/s/ EDWARD J. KELLY, III* Edward J. Kelly, III		Director

/s/ ROBERT D. KUNISCH* Robert D. Kunisch		Director

/s/ JAMES W. MCGLOTHLIN* James W. McGlothlin		Director

/s/ SOUTHWOOD J. MORCOTT* Southwood J. Morcott		Director


/s/ DAVID M. RATCLIFFE* David M. Ratcliffe		Director

/s/ CHARLES E. RICE* Charles E. Rice		Director

/s/ WILLIAM C. RICHARDSON* William C. Richardson		Director

/s/ FRANK S. ROYAL, M.D.* Frank S. Royal, M.D		Director

/s/ DONALD J. SHEPARD* Donald J. Shepard		Director

*By:

/s/ ELLEN M. FITZSIMMONS

Ellen M. Fitzsimmons

Attorney-in-Fact

CERTIFICATE OF CHIEF EXECUTIVE OFFICER

I, Michael J. Ward, certify that:

I have reviewed this annual report on Form 10-K of CSX Corporation;

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 25, 2003

/s/ MICHAEL J. WARD

Michael J. Ward

Chairman, President and Chief Executive Officer

CERTIFICATE OF CHIEF FINANCIAL OFFICER

I, Paul R. Goodwin, certify that:

I have reviewed this annual report on Form 10-K of CSX Corporation;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date:

February 25, 2003



		/s/ PAUL R. GOODWIN
		Paul R. Goodwin
		Vice Chairman and Chief Financial Officer

EX-3.2 3 dex32.txt EXHIBIT 3.2 BYLAWS OF THE REGISTRANT Exhibit 3.2 BYLAWS OF CSX CORPORATION (Amended as of January 31, 2003) ____________________ ARTICLE I Shareholders' Meeting SECTION 1. Annual Meeting. The annual meeting of the shareholders of the Corporation shall be held on such date in March, April, May or June as the Board of Directors (hereinafter sometimes the "Board") may designate, either within or without the Commonwealth of Virginia. SECTION 2. Special Meetings. Special meetings of the shareholders may be called from time to time by the Board of Directors or the Chairman of the Board. Special meetings shall be held solely for the purposes specified in the notice of meeting. SECTION 3. Time and Place. The time and place of each meeting of the shareholders shall be stated in the notice of the meeting. SECTION 4. Quorum. The holders of a majority of the votes entitled to be cast on any matter shall constitute a quorum as to that matter at any meeting of the shareholders. Less than a quorum may adjourn the meeting to a fixed time and place, no further notice of any adjourned meeting being required. Unless otherwise provided in the Articles of Incorporation of the Corporation, each shareholder shall be entitled to one vote in person or by proxy for each share entitled to vote then outstanding and registered in his name on the books of the Corporation. SECTION 5. Notice of Meeting and Record Date. Except as otherwise required by the laws of the Commonwealth of Virginia, notice shall be delivered by the Corporation not less than 10 days nor more than 60 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the shareholder at the shareholder's address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Notice of meetings may be waived in accordance with law. Any previously scheduled meeting of the shareholders may be postponed, by resolution of the Board of Directors at any time prior to the time previously scheduled for such meeting of shareholders. The Board of Directors may fix in advance a date to determine shareholders entitled to notice or to vote at any meeting of -1- shareholders, to receive any dividend, or for any other purpose, such date to be not more than 70 days before the meeting or action requiring a determination of shareholders. SECTION 6. Conduct of Meeting. The Chairman of the Board shall preside over all meetings of the shareholders. If he is not present, or if there is none in office, the President shall preside. If the Chairman of the Board and the President are not present, a Vice President shall preside, or, if none be present, a Chairman shall be elected by the meeting. The Corporate Secretary shall act as secretary of the meeting, if he or she is present. If he or she is not present, the Chairman shall appoint a secretary of the meeting. The chairman of the meeting shall appoint one or more inspectors of election who shall determine the qualification of voters, the validity of proxies, and the results of ballots. The chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is a quorum, and may determine the date, time and place that a meeting so adjourned is to reconvene. The chairman of the meeting shall prescribe rules of procedure for the meeting and shall determine the time reasonably allotted to each speaker at the meeting. SECTION 7. Notice of Shareholder Business. At an annual meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who complies with the notice procedures set forth in this Section 7. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Corporate Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days before the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder and (d) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 7. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 7, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. -2- ARTICLE II Board of Directors SECTION 1. Number and Election. The Board of Directors shall be elected at the annual meeting of the shareholders or at any special meeting held in lieu thereof. The number of Directors shall be fourteen. This number may be increased or decreased at any time by amendment of these Bylaws, but shall never be a number less than four. No person shall be eligible for election as a Director, nor shall any Director be eligible for reelection, if he or she shall have reached the age of 70 years at the time of such election or reelection, except that the Board, in its sole discretion, may waive such ineligibility for a period not to exceed one year. Directors who are or have been employees of CSX or its affiliates, including current or former Chief Executive Officers, shall retire from the Board immediately upon leaving active service, or reaching age 65, whichever occurs first, except that the Board, in its sole discretion, may extend the eligibility of the Chairman of the Board to continue as a Director and Chairman of the Board for up to two years after leaving active service. SECTION 2. Notice of Shareholder Nominees. Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 2. Nominations by shareholders shall be made pursuant to timely notice in writing to the Corporate Secretary. To be timely, a shareholder's notice shall be received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a Director shall furnish to the Corporate Secretary the information required to be set forth in the shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in these Bylaws. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in -3- accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3. Quorum. A majority of the Directors shall constitute a quorum. Less than a quorum may adjourn the meeting to a fixed time and place, no further notice of any adjourned meeting being required. SECTION 4. Removal and Vacancies. The shareholders at any meeting called for such purpose, by a vote of the holders of a majority of all the shares of capital stock at the time outstanding and having voting power, may remove any Director and fill any vacancy. Vacancies arising among the Directors, including a vacancy resulting from an increase by the Board of Directors in the number of directors, so long as the increase so created is not more than 30 percent of the number of Directors then authorized to serve on the Board, may be filled by the remaining Directors, though less than a quorum of the Board, unless sooner filled by the shareholders. SECTION 5. Meetings and Notices. Regular meetings of the Board of Directors shall be held on such dates, at such places and at such times as the Board of Directors may from time to time designate. Special meetings of the Board of Directors may be held at any place and at any time upon the call of the Chairman of the Board or of any three members of the Board of Directors. Notice of any meetings shall be given by mailing or delivering such notice to each Director at the Director's residence or business address or by telephone, telegraph, or facsimile. Any such notice shall state the time and place of the meeting. Meetings may be held without notice if all of the Directors are present or those not present waive notice before or after the meeting. Any action required to be taken at a meeting of the Board may be taken without a meeting if a consent in writing setting forth the action to be taken, shall be signed by all the Directors in counterpart or otherwise and filed with the Corporate Secretary. Such consent shall have the same force and effect as a unanimous vote. Any action required to be taken at a meeting of the Board may be taken by means of a conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. ARTICLE III Executive Committee SECTION 1. Designation; Chairman. The Board of Directors may designate an Executive Committee. The Chairman of the Board of Directors shall be the Chairman of the Executive Committee. SECTION 2. Authority and quorum. The Executive Committee shall have and may exercise all the authority of the Board of Directors, except as may be prohibited by Section 13.1-689 of the Code of Virginia, as it may from time to time be amended. A majority of the Committee shall constitute a quorum for the transaction of business, and -4- the affirmative vote of the majority of those present shall be necessary for any action by the Committee. The Committee shall cause to be kept a full and accurate record of its proceedings at each meeting and report the same at the next meeting of the Board. In the absence of the Chairman of the Committee, an acting chairman shall be designated by the Committee to preside at such meeting. SECTION 3. Meetings and Notices. Meetings of the Committee may be called at any time by the Chairman of the Board or by a majority of the members of the Committee and shall be held at such time and place as shall be stated in the notice of the meeting. Notice of any meeting of the Committee shall be given by delivering or mailing such notice to each member at his or her residence or business address or by telephone, telegraph, or facsimile to him or her not less than 24 hours before the meeting. Any such notice shall state the time and place of the meeting. Meetings may be held without notice if all of the members of the Committee are present or those not present waive notice before or after the meeting. Action may be taken by the Executive Committee without a meeting or at a meeting established by means of conference telephone or similar communications equipment in the manner provided by Section 5 of Article II. SECTION 4. Removal. Members of the Committee may be removed as members thereof and replaced at any regular or special meeting of the Board of Directors. ARTICLE IV Committees of the Board (other than the Executive Committee) The Board of Directors may establish such other committees as it deems appropriate, each committee consisting of at least two directors whose designation and terms of office shall be by resolution of the Board. Meetings of a committee may be called at any time by the Chairman of the Board or the Chairman of such committee. Notice of any meeting shall be given by delivering or mailing such notice to each committee member at the member's residence or business address or by telephone, telegraph, or facsimile to the member not less than 24 hours before the meeting. Any such notice shall state the time and place of the meeting. Meetings may be held without notice if all of the members of the committee are present or those not present waive notice before or after the meeting. Action may be taken by a committee without a meeting or at a meeting established by means of conference telephone or similar communications equipment in the manner provided by Section 5 of Article II. -5- ARTICLE V Officers SECTION 1. Elected Officers. The elected officers of the Corporation shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Corporate Secretary, a Treasurer, and such other officers (including, without limitation, a Chief Financial Officer and a Chief Legal Officer) as the Board of Directors from time to time may deem proper. The Chairman of the Board shall be chosen from among the directors. All officers elected by the Board shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article V. Such officers shall also have such powers and duties as from time to time may be conferred by the Board or by any committee thereof or the Chairman of the Board. The Board may from time to time elect, or the Chairman of the Board may appoint, such other officers (including, without limitation, one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents, as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these Bylaws or as may be prescribed by the Board or such committee or by the Chairman of the Board, as the case may be. Any person may be elected to more than one office. SECTION 2. Election and Term of Office. The elected officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after the annual meeting of the shareholders. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified, but any officer may be removed from office at any time by the Board of Directors or, except in the case of any officer or agent elected by the Board, by the Chairman of the Board. Such removal shall be without prejudice to the contractual rights, if any, of the person so removed. SECTION 3. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors and shall be the Chief Executive Officer of the Corporation. The Chairman of the Board shall be responsible for the general management of the affairs of the Corporation and shall perform all duties incidental to his office which may be required by law and all such other duties as are properly required of him by the Board of Directors. He shall make reports to the Board of Directors and the shareholders, and shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. The Chairman, and any person acting in his stead shall, at all times and so long as the Corporation engages in business for which it must qualify as a citizen of the United States under Section 2 of the Shipping Act of 1916, as amended, or any other or successor statutory provision, be a citizen of the United States. SECTION 4. President. The President shall act in a general executive capacity and shall assist the Chairman of the Board in the administration and operation of the Corporation's business and general supervision of its policies and affairs. The -6- President shall, in the absence of or because of the inability to act of the Chairman of the Board, perform all duties of the Chairman of the Board and preside at all meetings of shareholders and of the Board. The President (and any Chief Executive Officer), and any person acting in his stead, shall, at all times and so long as the Corporation engages in business for which it must qualify as a citizen of the United States under Section 2 of the Shipping Act of 1916, as amended, or any other or successor statutory provision, be a citizen of the United States." SECTION 5. Vice Presidents. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him or her by the Chairman of the Board with the approval of the Board. SECTION 6. Treasurer. The Treasurer shall exercise general supervision over the receipt, custody and disbursement of corporate funds. He shall have such further powers and duties and shall be subject to such directions as may be granted or imposed upon him from time to time by the Board of Directors, the Chairman of the Board, or the Chief Financial Officer. SECTION 7. Corporate Secretary. The Corporate Secretary shall attend all meetings of the shareholders, the Board of Directors, and the Executive Committee and record their proceedings, unless a temporary secretary be appointed. He shall give due notice as required of all meetings of the shareholders, Directors, and Executive Committee. He shall keep or cause to be kept at a place or places required by law a record of the shareholders of the Corporation, giving the names and addresses of all shareholders and the number, class, and series of the shares held by each. He shall be custodian of the seal of the Corporation, and of all records, contracts, leases, and other papers and documents of the Corporation, unless otherwise directed by the Board of Directors, and shall perform such other duties as may be assigned to him by the Board of Directors or the Chairman of the Board. In case of the Secretary's absence or incapacity, the Chairman of the Board shall designate an Assistant Secretary or other appropriate officer to perform the duties of the Secretary. SECTION 8. Removal. Any officer elected, or agent appointed, by the Board of Directors may be removed by the Board of Directors whenever, in their judgment, the best interests of the Corporation would be served thereby. Any officer or agent appointed by the Chairman of the Board may be removed by him whenever, in his judgment, the best interests of the Corporation would be served thereby. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of his successor, his death, his resignation or his removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan. SECTION 9. Vacancies. A newly created elected office and a vacancy in any elected office because of death, resignation, or removal may be filled by the Board of Directors or the Chairman of the Board for the unexpired portion of the term. Any vacancy in an office appointed by the Chairman of the Board because of death, resignation, or removal may be filled by the Chairman of the Board. -7- ARTICLE VI Depositaries The money and negotiable instruments of the Corporation shall be kept in such bank or banks as the Chief Financial Officer or Treasurer shall from time to time direct or approve. All checks and other instruments for the disbursement of funds shall be executed manually or by facsimile by such officers or agents of the Corporation as may be authorized by the Board of Directors. ARTICLE VII Seal The seal of the Corporation, of which there may be any number of counterparts, shall be circular in form and shall have inscribed thereon the name of the Corporation, the year of its organization and the words, "Corporate Seal Virginia." The Board may also authorize to be used, as the seal of the Corporation, any facsimile thereof. ARTICLE VIII Fiscal Year The fiscal year of the Corporation shall begin immediately after midnight of the last Friday of December, and shall end at midnight on the last Friday of December of each calendar year. ARTICLE IX Amendments to Bylaws These Bylaws may be amended or repealed at any regular or special meeting of the Board of Directors by the vote of a majority of the Directors present. They may also be repealed or changed, and new Bylaws made, by the Shareholders, provided notice of the proposal to take such action shall have been given in the notice of the meeting. * * * * * * * * * * Richmond, VA January 8, 2003 -8- EX-10.3 4 dex103.txt EXHIBIT 10.3 CSX CORPORATION 2002 CORPORATE DIRECTOR DEFERRED COMPENSATION PLAN CSX CORPORATION 2002 CORPORATE DIRECTOR DEFERRED COMPENSATION PLAN -------------------------------------------------- EFFECTIVE JANUARY 1, 2003 ------------------------- 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. This Plan is not intended to replace or supercede any prior Director's deferral plans. 1. Definitions The following words or terms used herein shall have the following meanings: (a) "Account" or "Accounts" -- means the bookkeeping account(s) maintained for each Participant to record the amount of Director's Fees he has elected to defer, as adjusted pursuant to Section 4. (b) "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. (c) "Benefits Trust Committee" -- means the committee established pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust document. (d) "Board" -- means the Board of Directors of CSX. (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 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; - 2 - (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. (f) "CSX" or "Corporation" -- means CSX Corporation (g) "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. (h) "Deferral Agreement" -- means an agreement between a Participant and CSX under which the Participant agrees to defer Director's Fees under the Plan. The Deferral Agreement shall be on a form prescribed by the Administrator and shall include any amendments, attachments or appendices. (i) "Director's Fees" -- means any compensation, whether for retainer, for Board meetings or for Committee meetings or otherwise, payable either in cash or in stock, earned by a Member for services rendered as a Member. (j) "Distribution Event" -- means any of the events listed in Section 1(e), "Change -of Control," with the following modification: the words "Approval by the shareholders of the Corporation of," in the first line of Sections 1(e)(iii) and 1(e)(iv) are replaced for purposes of this Section 1(j) with the words, "Consummation of, i.e., actual change in ownership of Outstanding Corporation Common Stock, Outstanding Corporation Voting Securities, and/or assets of the Corporation or its principal subsidiary by reason of,". - 3 - (k) "Effective Date" -- means January 1, 2003. (l) "Enrollment Form" -- means the form prescribed by the Administrator that a Member who has previously made deferrals under a prior CSX deferral plan for Directors may file pursuant to Section 4 in order to become a Participant in the Plan. (m) "Form of Payment Election" -- means the election by the Participant of the form of distribution (lump sum or installments) he will receive from his Account pursuant to Section 6. (n) "Member" -- means any person duly elected to the Board. (o) "Partial Distribution Election" -- means a Distribution Election for a portion of a Participant's Account under Section 5. (p) "Participant" -- means any Member who elects to participate in the Plan. (q) "Plan" -- means the CSX Corporation 2002 Corporate Director Deferred Compensation Plan. (r) "Secretary" -- means the Corporate Secretary of CSX. (s) "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 9, CSX is not obligated to make any contribution to the Trust. (t) "Term" -- means the annual term for which a Member is elected to serve on the Board of Directors of CSX. (u) "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. 2. Participation A Member may elect to become a Participant for any Term by filing an initial Deferral Agreement or an Enrollment Form with the Secretary not later than (i) the Effective date or (ii) a date six months prior to the Annual Meeting for the Term for which Director's Fees are to be earned, whichever is - 4 - later. Such Deferral Agreement shall be effective for purposes of deferring Director's Fees only as provided in Section 3. Such Enrollment Form shall be effective for purposes of transferring balances previously deferred under a prior Company deferral plan to the Participant's Accounts only as provided in Section 4. Following a Change -of Control, all Deferral Elections are subject to the approval of the Benefits Trust Committee. 3. Deferral of Director's Fees (a) CSX shall, during any year in which a Participant has a Deferral Election 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 Deferral Election. A Participant may elect to change the amount of Director's Fees he elects to defer, modify a Deferral Agreement or revoke a Deferral Agreement by filing a new Deferral Agreement with the Secretary not later than (i) a date six months prior to the Annual Meeting for the Term for which Director's Fees are to be earned or (ii) November 1 of the calendar year immediately prior to the Annual Meeting for the Term for which Director's Fees are to be earned, whichever is later. (b) Any person who becomes a Member and who was not a Member six months prior to the beginning of his Term as a Member may file a Deferral Election during the first thirty (30) days he is a Member. 4. Participant's Accounts (a) A Participant may elect on a Deferral Agreement to have all or any portion of the eligible deferred Director's Fees credited to an interest-accruing account ("Interest Account") and/or to a CSX Phantom Stock Account ("Phantom Stock Account"). (b) A Participant who is eligible to receive a portion of his Director's Fees in CSX common stock pursuant to the CSX Corporation Stock Plan for Directors may file with the Secretary a Deferral Agreement with respect to such CSX common stock. A Participant's Stock Account ("Stock Account") will be created when he files his initial Deferral Agreement with respect to Director's Fees payable in CSX common stock. (c) Interest shall accrue on the Interest Account from the first day of the month following 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. (d) Credits to the Phantom Stock Account and the Stock Account shall be in full and fractional units based on the average of the high and low price for CSX common stock as reported on the New York Stock Exchange - Composite Listing ("NYSE") on the date the Director's Fees would otherwise have been paid to the Participant. - 5 - (e) Dividends shall be credited in full and fractional units to the Phantom Stock Account based on the number of units in the Account on the record date and calculated based on the average of the high and low price for CSX common stock on the dividend payment date. (f) Dividends shall be credited in full and fractional units to the Stock Account based on the number of units in the Account on the record date and calculated based on (i) the actual purchase price of CSX common stock acquired to the extent shares are actually purchased by the trustee of the Director's Stock Trust or a successor trust, or (ii) the number of units in the Account on the record date and calculated based on the average of the high and low price for CSX common stock on the dividend payment date. (g) A Participant, while a Member, may elect at any time to transfer all or any portion of amounts deferred, including all earnings thereon, between an Interest Account and a Phantom Stock Account. No transfer may be made into or out of a Stock Account. (h) A Member who has previously deferred shares of CSX common stock granted pursuant to the CSX Corporation Stock Plan for Directors ("Stock Plan") may elect to have a Stock Account created for him in the Plan on the Effective Date by filing an Enrollment Form with the Secretary on or before the Effective Date. Filing the Enrollment Form will cause the transfer of such previously deferred share balances to the Participant's Stock Account on the Effective Date, and the Member will enjoy all rights and privileges of a Participant including the ability to file initial Distribution Elections and Form of Payment Elections. A properly filed Enrollment Form will cause all prior elections made with respect to such previously deferred shares to be void immediately, unless otherwise stated in this Section 4. (i) A Member who is a participant in the CSX Corporation Corporate Director Deferred Compensation Plan ("Director Plan") may elect to have an Interest Account or a Phantom Stock Account created for him in the Plan on the Effective Date by filing an Enrollment Form with the Secretary on or before the Effective Date. Filing the Enrollment Form will cause the transfer of balances previously deferred to the Participant's Accounts on the Effective Date, and the Member will enjoy all rights and privileges of a Participant including the ability to file initial Distribution Elections and Form of Payment Elections and to transfer shares between an Interest Account and a Phantom Stock Account. A properly filed Enrollment Form will cause all prior elections made under the Director Plan to be void immediately, unless otherwise stated in this Section 4. (j) With respect to transfers to a Participant's Accounts of amounts previously deferred pursuant to Sections 4(i) and 4(j): (i) No initial Distribution Election made with respect to such previously deferred amounts which designates distribution upon attainment of a designated age under Section 5 that will be attained within 12 months following the Effective Date shall be filed. (ii) No initial Distribution Election made with respect to such previously deferred amounts which designates distribution upon the Participant's retirement from the Board under Section 5 shall be effective if distribution would occur within 12 months following the Effective Date. - 6 - (iii) Any prior election made with respect to such previously deferred amounts which designates distribution upon the Participant's retirement from the Board shall remain in effect for 12 months following the Effective Date, and shall be void thereafter. (k) The value of a Participant's Interest Account shall be the sum of amounts deferred and all interest accrued thereon. The value of a Phantom Stock Account or Stock Account shall be the value of the units in a Participant's Account based on the average of the high and low price for CSX common stock as reported on the NYSE on the last business day prior to the date of any lump sum or installment distribution. The value of a Phantom Stock Account or 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 CSX common stock either at the time of crediting to a Participant's Account or at any time during the distribution period, nor can there be any assurance as to the continuation of dividends. 5. Distribution of Deferred Director's Fees (a) Amounts deferred under the Plan and credited to an Account shall be distributed to a Participant from such Account in a lump sum one year following the date in which a Participant ceases to be a Member, unless he shall file a Distribution Election as provided in this Section 5 or a Form of Payment Election as provided in Section 6. (b) A Participant may file with the Secretary a Distribution Election for the distribution from an Account upon: (i) attainment of a designated age, however, he shall not elect an age that he will attain less than one year subsequent to his Distribution Election; or (ii) retirement from the Board. (c) A Participant may file a Distribution Election or change a Distribution Election at any time prior to: (i) a date that is 30 days subsequent to the date of his retirement from the Board in the case of his initial Distribution Election; or (ii) one year prior to the date distribution is to commence under his Distribution Election then in effect, after which time no Distribution Election shall be filed. (e) A Participant may make a Partial Distribution Election with respect to any portion of a Participant's Account, provided no Distribution Election shall be made for a portion of an Account less than $2,000, as determined as of the date the election is made. No Participant shall have more than two Distribution Elections in effect for an Account at any time. (f) Except in the event of retirement from the board, distribution made pursuant to a Distribution Election shall not commence prior to a date that is three years subsequent to the date the Participant first makes a Deferral under either this Plan or a predecessor plan which provides for the - 7 - deferral of Director's Fees (g) Any Distribution Election made in proper form by a Participant shall be effective and distribution shall commence pursuant to such Distribution Election. Any Distribution Election not made in proper form shall be void. Distributions from a Participant's Stock Account shall be made only in shares of CSX common stock. (h) A Participant may request and receive a withdrawal from his Account at any time without filing a Distribution Election under this Section 5. Any such withdrawal shall result in the forfeiture of an amount equal to the portion of the Participant's Account that is withdrawn, multiplied by the Mid-term Applicable Federal Rate determined as of the Valuation Date upon which the withdrawal is effective. Notwithstanding the preceding, following a Change of Control, any decisions or determinations by the Administrator under this Section 5 shall be subject to the approval of the Benefits Trust Committee. (i) A Participant may make one additional election to defer (but not accelerate) commencement of payment under the Plan at any time six months before payments are to have commenced ("Re-deferral Election). Such Re-deferral Election shall be made in a form prescribed by the Administrator. If such Re-deferral Election is to a designated age the re-deferral shall be for a period not less than one year from the date the Re-deferral Election is made. 6. Form of Payment The Form of Payment Elections provided in this Section 6 shall be made in writing and may be changed at any time prior to a date that is six months prior to the date distribution is to commence, after which time the Form of Payment Election shall be irrevocable. If installment payments are elected for an Account, payments shall be made, as the Participant may elect, for either (a) five years, (b) ten years, or (c) fifteen years. Installments shall be on an annual or quarterly basis as the Participant 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. In the case of installments from a Stock Account, fractional share amounts shall be rounded up to the next highest whole share amount, except in the case of the final installment, in which case a cash payment will be made for any fractional shares. 7. Death of a Participant (a) In the event a Participant shall die while he is a Member, the balance of his Accounts shall be paid in either a lump sum or installments (consistent with the Form of Payment Elections made by the Participant as described in Section 6) to his Designated Beneficiary. Each Participant may file with the Secretary a Designation of Beneficiary for this purpose. - 8 - (b) In the event a Participant shall die after he ceases to be a Member and before he has received complete distribution from his Account, the balance credited to his Account, (including applicable interest) shall be paid to his Designated Beneficiary consistent with the Form of Payment Elections made by the Participant as described in Section 6. (c) 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 Accounts, (including applicable interest) shall be paid in full to his estate not later than the tenth day of the calendar year following his date of death. 8. Obligation of CSX This Plan shall be unfunded and credits to the Accounts 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. 9. Change of Control (a) 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 under 9(b) below (but calculated with respect to the Valuation Date described in this sentence, rather than the date of the applicable Distribution Event) 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 9 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 9(b), below, the amounts which would be payable under such subsection were a Distribution Event 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. (b) In the event a Distribution Event has occurred, the trustee of the Trust shall, within 45days of such Distribution Event, pay to each Participant not making an election under 9(c) 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. - 9 - (c) 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 Distribution Event 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 Distribution Event shall be invalid. (d) Notwithstanding anything in the Plan to the contrary, each Participant who has made an election under Section 9(c), above, may elect within 90 days following a Distribution Event, in a time and manner determined by the Administrator, to receive a lump sum payment calculated under the provisions of 9(c), 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 9(d)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 Distribution Event has occurred, give written notification to each Participant eligible to make an election under this Section 9(d), that a Distribution Event has occurred and informing such Participant of the availability of the election. 10. 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. 11. 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 Phantom Stock Account or 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. 12. 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 Phantom Stock Account or Stock - 10 - 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. 13. 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. 14. 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. 15.Impact of Future Legislation or Regulation (a) This Section 15 shall become operative upon the enactment of any change in applicable statutory law or the promulgation by the Internal Revenue Service of a final regulation or other pronouncement having the force of law, which statutory law, as changed, or final regulation or pronouncement, as promulgated, would cause any Participant to include in his federal gross income amounts accrued by the Participant under the Plan on a date (an "Early Taxation Event") prior to the date on which such amounts are made available to him or her hereunder. (b) Notwithstanding any other Section of this Plan to the contrary (but subject to subsection (c), below), as of an Early Taxation Event, the feature or features of this Plan, or the election by a Participant that would cause the Early Taxation Event shall be null and void, to the extent, and only to the extent, required to prevent the Participant from being required to include in his federal gross income amounts accrued by the Participant under the Plan prior to the date on which such amounts are made available to him hereunder. By way of example, but not by way of limiting the generality of the foregoing, if a statute is enacted that would require a Participant to include in his or her federal gross income amounts accrued by the Participant under the Plan prior to the date on which such amounts are made available to him or her because of the Participant's right to receive a distribution of a portion of his Account under Section 6(h), the right of all Participants to receive distributions under Section 6(h) shall be null and void as of the effective date of that statute. If only a portion of a Participant's Account is impacted by the change in the law, then only such portion shall be subject to this Section, with the remainder of the Account not so affected being subject to such rights and features as if the law were not changed. If the law only impacts Participants who have a certain status with respect to the - 11 - Company, then only such Participants shall be subject to this Section. (c) Notwithstanding Section 15(b) above, if an Early Taxation Event occurs (e.g., if a change in law is retroactive), , the amounts that become taxable on the Early Taxation Event shall be distributed to each Participant as soon as practicable following such Early Taxation Event or if later, the date of enactment or promulgation. - 12 - EX-10.5 5 dex105.txt EXHIBIT 10.5 CSX DIRECTORS' MATCHING GIFT PLAN, AS AMENDED DIRECTORS' MATCHING GIFT PROGRAM CSX Corporation Directors' Matching Gift Program ("Program") reflects CSX's commitment to the communities in which the Company and its subsidiaries operate. As part of its program of corporate philanthropy, the Company contributes through the Program to education, civic, cultural, and health and human service programs. FOR CURRENT DIRECTORS OF THE COMPANY CSX will match Director contributions from a minimum of $25 to an aggregate maximum of $25,000 annually to civic, cultural, educational, and health and human services institutions on a two-for-one basis subject to certain restrictions. The contributions to be matched must be personal gifts from the Director's own funds, paid in cash or securities. Pledges do not qualify for matches. The Program is available to all active Directors of the Company. Individuals who have retired from service as Directors of the Company may participate in this program through the sixth anniversary of their retirement. Gifts by participants may be made jointly with their spouses. ELIGIBLE ORGANIZATIONS Gifts are eligible for match only if they fall within the guidelines for CSX Corporation's charitable contributions. To be eligible to receive a match, an organization or institution must qualify as exempt from taxation pursuant to Section 501(c)(3) of the Internal Revenue Code. Certain restrictions apply to organizations which qualify for the matching gifts. The following do not fall within the CSX Corporation guidelines for charitable contributions: [X] Gifts to organizations which discriminate in violation of the law in provision of benefits on the basis of race, religion, national origin, gender, or physical disability. [X] Gifts to schools below college level. [X] Gifts to educational institutions principally for the support of sports and other non-academic activities. [X] Gifts to organizations whose principal purpose is sectarian in nature or whose beneficiaries are determined on sectarian considerations. [X] Political contributions of any nature. [X] Activities forbidden by law. CSX Corporation reserves the right to determine whether gifts to organizations fall within guidelines for CSX Corporation's charitable contributions. PROGRAM ADMINISTRATION The Program is administered by the CSX Corporation Corporate Secretary and the Board of Directors of CSX Corporation and may be suspended, revoked, terminated or amended at any time. Determination of eligibility of any organization or institution to receive matching funds under this program will be made by CSX Corporation under authority of the Board of Directors. Questions as to interpretation, application, administration or other aspects of the program, including eligibility, should be addressed to: Corporate Secretary CSX Corporation 500 Water Street - J160 Jacksonville, FL 32202 (904) 366-4243 (904) 366-4248 fax INSTRUCTIONS [X] Part A of the Application in this folder should be completed by the Director and the entire folder should accompany the Director's gift to an eligible organization or institution. [X] The qualifying organization or institution, upon receipt of the gift and this folder, should complete Part B of the Application and return the entire original folder to the Administrator of Corporate Contributions at the address below. [X] Upon request, the beneficiary organization or institution will provide evidence of its tax exempt status under Section 501(c)(3) of the Internal Revenue Code. [X] All applications for matching gifts received during any calendar year will be paid when administratively convenient but not less than semi-annually. [X] Additional Matching Gift forms may be secured from the Administrator of Corporate Contributions. Requests for information and all correspondence relating to the Directors' Matching Gift Program should be addressed to: Administrator of Corporate Contributions CSX Corporation 500 Water Street - J420 Jacksonville, FL 32202 Part A - Director's Section (To be completed by Director, who is to send this entire brochure, together with gift, to educational institution.) Date______________ Enclosed is my personal donation of $___________ to_________________________________________ Name of Educational Institution ____________________________________________________________________________________________ Address of Educational Institution I hereby authorize the institution named above to report this gift to the Administrator-Corporate Contributions of CSX Corporation, for the purpose of qualifying for a contribution in accordance with the provisions of the Company's Matching Gift Program. Name __________________________________ Social Security No. _______________________________ Street Address ________________________ City ____________ State __________ Zip ____________ Director's Signature______________________________________

Part B - Beneficiary's Section (To be completed by an appropriate financial officer of the educational institution, and returned to Administrator-Corporate Contributions; CSX Corporation, 500 Water Street - J420, Jacksonville, FL 32202.) I hereby certify that a donation of $___________ was received on ____________________, 20__. from ______________________________________________________ in favor of this institution; Name of Employee Donor And I further certify that this institution meets all the requirements for eligibility as set forth in CSX Corporation's Matching Gift Program. Contributions to the beneficiary institution shown are tax deductible by CSX Corporation pursuant to Section 501(c)(3) of the Internal Revenue Code, and that the beneficiary institution will provide evidence of this status upon request. _____________________________________________ _____________________________________________ Name of Educational Institution Signature _____________________________________________ _____________________________________________ Address of Educational Institution Name (print or type in full) _____________________________________________ Title _______________________________________ _____________________________________________ Date ________________________________________

~~CSX Corporation Directors' Matching Gift Program~~ EX-10.13 6 dex1013.txt EXHIBIT 10.13 RAILROAD RETIREMENT BENEFITS AGREEMENT WITH M.J. WARD Exhibit 10.13 November 8, 2002 Mr. Michael J. Ward Re: Railroad Retirement Benefits Upon your appointment to President of CSX Corporation (the "Company"), you were transferred to the CSX Corporation payroll. Because of this transfer your wages are subject to withholding taxes under the Federal Insurance Contributions Act ("Social Security") and not the Railroad Retirement Tax Act. In general, an employee's government-sponsored retirement benefits under Railroad Retirement exceed those benefits under Social Security because of the additional taxes paid by both the employer and the employee under Tier II of Railroad Retirement. While the CSX Corporation Pension Plan (the "Pension Plan") provides for a benefit to plan participants who are affected by this situation as a result of a transfer out of a position that is covered by Railroad Retirement into a position covered by Social Security (the "Transfer Benefit"), that Transfer Benefit does not provide for a dollar-for-dollar exact replacement. Notwithstanding the foregoing, the Company recognizes that you were requested to transfer your employment and that, absent this request, you would have continued to participate in Railroad Retirement and would have been entitled to additional retirement benefits under Railroad Retirement, which are not entirely replaced by the Transfer Benefit. Additionally, the Company recognizes that since you also continued to maintain a position at CSX Transportation, Inc. ("CSXT"), it is unlikely that the Railroad Retirement Board would find that your employment with CSXT was involuntarily terminated or that you had a "current connection" with CSXT for purposes of Railroad Retirement benefits. Accordingly, by this letter the Company agrees that upon your retirement, the benefits department of CSX will perform a calculation of what your benefits would have been under Railroad Retirement, including spousal benefits, if applicable, as well as a pension calculation pursuant to the terms of the Pension Plan. In the event that the monthly Transfer Benefit is not equal to the amount that the monthly Railroad Retirement benefit would have been absent the transfer of your employment, you or your spouse will receive the balance each month of such amount from the Company's general corporate assets as a make-whole payment. Such amount will be offset by the present value of the Tier II Railroad Retirement Tax you will have saved on account of the transfer, computed in accordance with the appropriate actuarial factors in the Pension Plan at the time of your retirement. This payment will be subject to any applicable tax and withholding requirements. Please indicate your acceptance of this arrangement by signing and returning one copy of this letter. Very truly yours, Andrew B. Fogarty Executive Vice President, Corporate Services Agreed: /s/ MICHAEL J. WARD ________________________________ Michael J. Ward EX-10.17 7 dex1017.txt EXHIBIT 10.17 AMENDMENT TO SUPPLEMENT TO AGREEMENT WITH R.J. GRASSI Exhibit 10.17 [LETTERHEAD OF CSX CORPORATION] Jeff McCutcheon Senior Vice President, Human Resources January 10, 2003 Mr. Bob Grassi President, CSX World Terminals Rexford Road Charlotte, NC Bob; This letter serves to confirm our earlier discussion regarding how CSX will handle the payment of your lump sum benefit resulting from your former employment agreement with CSX dated February 1, 1995, deferred pursuant to a letter from Andy Fogarty to you dated November 1, 1999. Specifically, for purposes of calculating your deferred benefit, the company will define your "Highest Annual Bonus" as the highest annual bonus received in the preceding five years. The SeaLand employment agreement defined the "Highest Annual Bonus" as the highest bonus received in the prior three years. This will ensure that your possible retirement in 2004 will not result in a reduction in benefit. Please let me know if there is any additional clarification necessary. Regards, /s/ JEFF McCUTCHEON cc: pension file EX-10.18 8 dex1018.txt EXHIBIT 10.18 SUPPLEMENT TO AGREEMENT WITH C.G. RAYMOND [LOGO] Andrew B. Fogarty Senior Vice President Corporate Services December 13, 1999 Mr. Charles G. Raymond Sea-Land Service, Inc. 6000 Carnegie Boulevard Charlotte, NC 28209 Dear Chuck: I am writing you concerning your Employment Agreement with CSX Corporation, Dated February 1, 1995 ("Agreement"). Under the Agreement, you would be eligible for the benefits of the Agreement if your employment with CSX terminates within three (3) years of the closing of the Maersk transaction. As we have discussed, you and CSX have agreed to modify the Agreement to: (I) not required your termination of employment within the aforementioned three (3) year period; (ii) protect the Agreements benefits for your estate should you die prior to your receipt of benefits under the Agreement. CSX hereby agrees that whenever you terminate your employment with CSX, whether voluntarily, involuntarily or as a result of your retirement or death, you (or your estate in the event of your death) will be eligible to receive the benefits provided in Section 6a. of the Agreement. [Section 6a. of the Agreement recites the Obligations of the Company upon Termination for Good Reason or Constructive Termination; Other than for Cause, Death or Disability]. Additionally, CSX agrees to loan to you the after-tax amount of your Agreement. In order to accomplish this, you must execute a Promissory Note. I believe that we have addressed the matters you raised for consideration. Please signify your agreement to the terms set forth by signing below. Very truly yours, /s/ CHARLES G. RAYMOND - ------------------------------ Charles G. Raymond o Post Office Box 85629, Richmond, Virginia 23285-5629 o Fax (804) 783-1380 e-mail andrew_fogarty@csx.com o PROMISSORY NOTE Richmond, Virginia December 14, 1999 The undersigned borrower ("Borrower") is entitled to certain benefits pursuant to an Employment Agreement with CSX Corporation, a Virginia corporation ("CSX"), dated February 1, 1995 ("Agreement") which are payable upon Borrower's termination of employment with CSX. The Borrower desires to borrow the after-tax value of such benefits at this time. In order to induce CSX to extend such credit to the Borrower, the Borrower is willing to execute a promissory note in favor of CSX evidencing Borrower's obligations to CSX. Accordingly, the parties hereto agree as follows: FOR VALUE RECEIVED the Borrower promises to pay to the order of CSX the principal sum of One Million Five Hundred Thirty Four Thousand and no/100 ($1,534,000.00) with zero (0) percent interest thereon, said principal being negotiable and payable, without offset, at the offices of CSX Corporation, One James Center, 901 East Cary Street, Richmond, Virginia 23219, Attention: Treasurer, or at such other place as the holder may designate in writing. ARTICLE I THE LOAN Section 1.1 The Loan and the Note. CSX has agreed, upon the terms and subject to the conditions contained in this Promissory Note, to lend to the Borrower certain funds which shall be evidenced by the Borrower's note of even date (the "Promissory Note"). Section 1.2. Term. The principal of the Promissory Note shall be due and payable on the day Borrower's employment with CSX is terminated, as defined in the Agreement. Section 1.3. Prepayment. The principal of the Promissory Note may be prepaid, in whole or in part, without penalty of any time. Section 1.4. Repayment of the Principal. Within ten Business Days after the maturity date of the Promissory Note (whether by acceleration or otherwise), or on the date as of which the Borrower elects to prepay the Promissory Note as provided in Section 1.3 hereof, the Borrower shall repay in full the then unpaid principal balance of the Promissory Note and applicable federal and state withholding taxes and costs. ARTICLE II DEFAULT Section 2.1. Event of Default. Any of the following shall constitute an event of default ("Event of Default"): (i) the failure to pay this Promissory Note when due; (ii) the insolvency of o Post Office Box 85629, Richmond, Virginia 23285-5629 o Fax (804) 783-1380e-mail andrew_fogarty@csx.com o the Borrower, the application for the appointment of a receiver for the Borrower, the filing of a petition under any provision of the federal bankruptcy law by or against the Borrower, or the making of any assignment for the benefit of creditors by the Borrower; or (iii) the breach by the Borrower of any representations, warranties or covenants contained in the Agreement between Borrower and CSX. Upon the happening of an Event of Default the entire unpaid principal balance of this Promissory Note shall, at the option of the holder, immediately become due and payable. Any failure of the holder to exercise such option shall not be deemed a waiver of the right to exercise the same in the event of any subsequent event of default. ARTICLE III COVENANTS Section 3.1. Filing; Further Assurances. The Borrower agrees that so long as any amounts now or hereafter payable by the Borrower to CSX under the Promissory Note (all such indebtedness, obligations and liabilities being herein called the "Obligations") the Borrower will, in such manner and form as CSX may require, execute, deliver, file and record any financing statement, specific assignment or other paper and take any other action that may be necessary or desirable, or that CSX may request, in order to enable CSX to exercise and enforce its rights hereunder. ARTICLE IV GENERAL AUTHORITY Section 4.1. General Authority. The Borrower hereby irrevocably appoints CSX and any officer or agent thereof, with full power of substitution, as his true and lawful attorney-in-fact, in the name of the Borrower or its own name, for the sole use and benefit of CSX, but at the Borrower's expense, at any time and from time to time, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to carry out the terms of this Promissory Note. ARTICLE V MISCELLANEOUS Section 5.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing and shall be given to such party at its address set forth on the signature page hereof or to such other address as such party may hereafter specify for the purpose by notice to the other. Each such notice, request or other communication shall be effective (i) two business days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means, when delivered at the address specified in this Section. Rejection or refusal to accept, or the inability to deliver because of a changed address of which no notice was given shall not affect the validity of notice given in accordance with this Section Section 5.2. Waivers; Non-Exclusive Remedies. No failure on the part of CSX to exercise, no delay in exercising, and no course of dealing with respect to, any right under this Promissory Note shall operate as a waiver thereof; nor shall any single or partial exercise by CSX of any such right preclude any other or further exercise thereof or the exercise of any other right. o Post Office Box 85629, Richmond, Virginia 23285-5629 o Fax (804) 783-1380 e-mail andrew_fogarty@csx.com o The rights of CSX under this Promissory Note are cumulative and are not exclusive of any other remedies provided under other agreements or by law. Section 5.3. Successors and Assigns. This Promissory Note is for the benefit of CSX and its successors and assigns, and in the event of an assignment of all or any of the Obligations, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Promissory Note and rights and obligations hereunder may not be assigned by Borrower. Section 5.4. Amendments and Waivers. Any provision of this Promissory Note may be amended or waived, if, but only if, such amendment or waiver is in writing and is signed by the Borrower and CSX. Section 5.5. Delivery and Virginia Law. Delivery and Virginia Law. This Promissory Note has been delivered in Virginia and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. Any action to collect this Promissory Note or any part hereof may be instituted and maintained in a court having appropriate jurisdiction and located in the City of Richmond, Virginia. Section 5.6. Limitation by Law; Severability. (a) All rights, remedies and powers provided in this Promissory Note may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Promissory Note are intended to be subject to all applicable mandatory provisions of law which may be controlling and be limited to the extent necessary so that they will not render this Promissory Note invalid, unenforceable in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. (b) If any provision hereof is invalid and unenforceable in any jurisdiction, then to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of CSX and in order to carry out the intentions of the parties hereto as nearly as may be possible; and (ii) the invalidity of unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. Section 5.7. Counterparts; Effectiveness. This Promissory Note may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Promissory Note shall become effective when CSX shall have received counterparts hereof signed by itself and the Borrower. Section 5.8. Waiver; Collection Expenses. To the fullest extent permitted by law, Borrower (i) waives presentment, protest and notice of dishonor; (ii) waives the benefit of any exemption as to the debt evidenced by this Promissory Note; (iii) waives any right which the Borrower may have to require the holder to proceed against any other person or assets; (iv) agrees that, without notice, and without affecting the Borrower's liability, the holder may, at any time or times, grant extensions of time for payment, permit the renewal of this Promissory Note and add o Post Office Box 85629, Richmond, Virginia 23285-5629 o Fax (804) 783-1380 e-mail andrew_fogarty@csx.com o or release a party; (v) agrees to pay all collection expense including reasonable attorney" fees and court costs incurred in the collection of this Promissory Note or any part hereof. IN WITNESS WHEREOF, the parties hereto have caused this Promissory Note to be duly executed. ------------------------------ Charles G. Raymond Address: CSX Corporation By: --------------------------- One James Center 901 East Cary Street Richmond, Virginia 23219 o Post Office Box 85629, Richmond, Virginia 23285-5629 o Fax (804) 783-1380 e-mail andrew_fogarty@csx.com o EX-10.19 9 dex1019.txt EXHIBIT 10.19 TRANSACTION INCENTIVE AGREEMENT WITH C.G. RAYMOND Exhibit 10.19 [LETTERHEAD OF CSX CORPORATION] Jeff McCutcheon Senior Vice President Corporate Human Resources January 4, 2002 Mr. Chuck Raymond President CSX Lines, Inc. 2101 Rexford Road Suite 350, West Charlotte, North Carolina 28211 Dear Chuck: As you know, CSX Corporation ("CSX") is considering strategic alternatives for CSX Lines ("CSXL"). You have been identified as one of the executives who is critical to the completion of this effort. In order to encourage you to remain employed during the process leading up to the sale or disposition of CSXL (the "Transaction") and thereafter, you have been designated to participate in a Transaction Incentive Program. This letter sets forth the terms and conditions on which you will be eligible to receive an Incentive Bonus and, potentially, a supplementary CSX Payment. The amount of the Incentive Bonus that you are eligible to earn is $1,500,000. This amount is payable by CSXL, subject to the requirements set forth below. In addition, if the Chairman of CSX, upon the advice of the executive officers of the Chairman's office, determines in his sole discretion that you have given a superlative performance in helping CSX to exceed its objectives for the Transaction, you will receive an additional amount of up to $1,500,000 (the "CSX Payment"). This amount is payable by CSX, and is also subject to the requirements set forth below. The Incentive Bonus will be paid only if there is a Closing of a Transaction by December 31, 2002. For purposes of this letter, a "Closing" means that a transaction to sell or dispose of all, or substantially all, of the assets of CSX Lines must be completed prior to December 31, 2002. If no such Closing occurs by December 31, 2002, this program will expire without payment. Your Incentive Bonus (including any CSX Payment that the Chairman of CSX may authorize for you) will be paid, subject to applicable withholdings, in two equal installments (each a "Payment Date"). The first Payment Date will occur within 30 days after the Closing and the second Payment Date will occur on the first anniversary of the Closing. In order to receive a payment, you must either (i) be employed by the Buyer, CSXL, CSX, or any other affiliate of the Buyer on the Payment Date or (ii) have a "Qualifying Termination" before the Payment Date. A Qualifying Termination means the termination of your employment under any of the following circumstances: . Your employment is involuntarily terminated by CSXL before the Closing because your job is eliminated; . You terminate your own employment at the time of the Closing because the post-Closing position offered to you by the Buyer or CSX requires that you relocate by more than 50 miles from your current employment location or provides you with a base salary or target incentive opportunity that is less than you currently receive; . You are employed by CSXL, the Buyer or one of its other affiliates or by CSX immediately after the Closing, but your employment is involuntarily terminated because your job is eliminated after the Closing; . You are employed by CSXL, the Buyer or one of its other affiliates or by CSX immediately after the Closing, but your employer subsequently requires that you relocate by more than 50 miles from your employment location immediately after the Closing or reduces your base salary or target incentive opportunity below those you receive immediately after the Closing, and as a result you terminate your own employment. In the event that your employment is involuntarily terminated because your employment is eliminated by CSXL in conjunction with or subsequent to a closing of a sale or disposition of less than substantially all of CSXL, your Incentive Bonus and CSX Payment will be paid as follows: . You will receive the $1,500,000 Incentive Bonus in two equal installments, the first within thirty (30) days of the effective date of your termination of employment and the second one (1) year later. . The CSX Payment, if any, will be made on the same terms, and at the same times, as CSX Payments are made to the CSXL management team. Any payment made pursuant to this letter will be paid in lieu of any severance benefits for which you might have been eligible under any applicable severance plan of CSXL or CSX. In addition, at the time of the first payment contemplated herein, you will be asked to sign a release in a form acceptable to CSX. You will also only be entitled to receive your Incentive Bonus if you comply with the following confidentiality requirements. By signing below, you agree to keep confidential (i) the terms of this letter, including its existence, except that you may disclose such information to your legal and tax advisors and immediate family members, and (ii) all secret or confidential information, knowledge or data relating to CSX, CSXL or any of their respective affiliates and businesses (including, without limitation, any proprietary information concerning any processes, methods, trade secrets, research, secret data, costs or names of users or purchasers of their respective products or services, business methods, operating procedures or programs or methods of promotion and sale), unless such information previously became publicly available other than as a result of your violation of this paragraph. For the purposes of this paragraph, information shall not be deemed to be publicly available merely because it is embraced by general disclosures or because individual features or combinations thereof are publicly available. Nothing in this letter shall be construed as an employment contract between you and CSX or CSXL. You specifically acknowledge that you are an at-will employee of CSXL and that either you or CSXL may terminate the employment relationship at any time for any reason. This letter supersedes and replaces any prior understandings, contracts and agreements, whether or not written, that you may have had with CSX and/or CSXL regarding any retention or incentive bonuses related to or arising in connection with any transaction related to the disposition of CSX Lines. However, nothing in this letter is intended to limit or modify the benefits payable to you pursuant to the Employment Agreement between you and CSX dated February 1, 1995, as amended December 13, 1999. Please indicate your agreement with and acceptance of the terms and conditions of this letter, by signing and dating the enclosed copy of this letter in the space provided below. Keep a copy for your records and return the original to me. Sincerely yours, Jeff McCutcheon Agreed to and accepted: /s/ CHUCK RAYMOND _____________________________ Chuck Raymond EX-10.20 10 dex1020.txt EXHIBIT 10.20 AMENDMENT TO TRANSACTION INCENTIVE AGREEMENT WITH C.G. RAYMOND Exhibit 10.20 [LETTERHEAD OF CSX CORPORATION] Jeff McCutcheon Senior Vice President Corporate Human Resources November 18, 2002 Mr. Charles G. Raymond President CSX Lines, Inc. 2101 Rexford Road Suite 350, West Charlotte, North Carolina 28211 Dear Chuck: This letter serves to amend the Transaction Incentive Program for CSX Lines described in a latter I sent you January 4, 2002. In this letter, I stated that an incentive Bonus would only be paid if there was Closing of the Transaction (as defined in the letter) by December 31, 2002. Through this letter, CSX will amend the January 4, 2002 letter by extending the deadline of a closing of the transaction an additional six months. Accordingly, the third paragraph of your January 4, 2002 letter should now read as follows: "The Incentive Bonus will be paid only if there is a Closing of a Transaction by June 30, 2003. For purposes of this letter, a "Closing" means that a transaction to sell or dispose of all, or substantially all, of the assets of CSX Lines must be completed prior to June 30, 2003. If no such Closing occurs by June 30, 2003, this program will expire without payment." All other provisions of the letter remain unchanged. Please indicate your agreement with and acceptance of the terms and conditions of this letter by signing and dating this letter in the space provided below. Keep one original for your records and return the other original to me. Very truly yours, Jeff McCutcheon Agreed to and accepted: /s/ CHARLES G. RAYMOND ______________________________ Charles G. Raymond EX-10.25 11 dex1025.txt EXHIBIT 10.25 1987 LONG-TERM PERFORMANCE STOCK PLAN Exhibit 10.25 CSX CORPORATION 1987 Long-Term Performance Stock Plan as Amended and Restated Effective April 25, 1996 1. Purpose The purpose of the CSX Corporation Long-Term Performance Stock 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. "Board of Directors": The term Board of Directors or Board means the Board of Directors of CSX Corporation. c. "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. d. "Change in Control": The term Change in Control is defined in Section 20. e. "Code": The term Code means the Internal Revenue Code of 1986, as amended. f. "Committee": The term Committee means a committee appointed from time to time by the Board of Directors to administer the Plan. g. "Company": The term Company means CSX Corporation. h. "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. i. "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. j. "Disability": The term Disability means long-term disability as determined under the Company's Salary Continuance and Long-Term Disability Plan. k. "Exchange Act": The term Exchange Act means the Securities Exchange Act of 1934, as amended. l. "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. m. "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. n. "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. o. "Incentive": The term Incentive means any incentive under the Plan described in Section 6. p. "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. q. "Participant": The term Participant means an individual designated by the Committee as a Participant pursuant to Section 5. r. "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 2 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. s. "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. t. "Plan": The term Plan means this CSX Corporation 1987 Long-Term Performance Stock Plan as amended or restated from time to time. u. "Retirement": The term Retirement means termination of employment with immediate commencement of retirement benefits under the Company's defined benefit pension plan. v. "Separation From Employment": The term Separation From Employment means an employee's separation from employment with the Company 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. w. "Trust": The term Trust means the CSX Corporation Executive Stock Trust or such other trust 3 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. 3. Number of Shares Subject to the provisions of Section 16 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 16, 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 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. 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 4 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 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 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 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. 5 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. 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 6 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 422A 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 422A 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 7 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 specified "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; or d. a Change in Control. 8 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. 9 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; or d. a Change in Control." 13. Separation From Employment 10 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. As to PUAs or PSAs, in the event of a Participant's Separation from Employment by Disability or death 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 11 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. 14. 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 15 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. 15. 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. 16. 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. 17. Adjustment of Shares 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 12 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. 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. 18. 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. 19. Termination and Amendment of Plan 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 CompanyOs 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. The Board of Directors, without further approval of the shareholders, may 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 17) the maximum number of shares for which Incentives may be granted under the Plan; (ii) reduce (except in accordance with Section 16) 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. 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. 20. Change in Control 13 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 in Control; 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 20(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: 14 (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 20(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 15 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. If a Change in Control has occurred, the Committee shall cause the Company to contribute to the Trust, within seven (7) days of such Change in Control, a lump sum payment equal to the aggregate value of the amount each Participant deferred pursuant to Sections 10 and 12 (including the Stock Premium under Section 12) to the extent such amounts are not already in the Trust. 21. 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. 22. 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, in the sole discretion of the Company, to the extent permitted by applicable laws including regulations promulgated under the Exchange Act, 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. 23. 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 16 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. 17 EX-10.27 12 dex1027.txt EXHIBIT 10.27 2002 DEFERRED COMPENSATION PLAN OF CSX CORPORATION AND AFFILIATED Exhibit 10.27 2002 Deferred Compensation Plan Of CSX Corporation and Affiliated Corporations 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 ............................................................ 3 1.10 Committee ....................................................... 3 1.11 Company Stock ................................................... 3 1.12 Compensation .................................................... 3 1.13 Corporation ..................................................... 3 1.14 Deferral Agreement .............................................. 3 1.15 Distribution Election ........................................... 3 1.16 Distribution Event .............................................. 3 1.17 Divisive Transaction ............................................ 4 1.18 Effective Date .................................................. 4 1.19 Eligible Executive .............................................. 4 1.20 Enrollment Form ................................................. 5 1.21 Executive Stock Account ......................................... 5 1.22 Form of Payment Election ........................................ 5 1.23 ICP Award ....................................................... 5 1.24 Independent Accountant .......................................... 5 1.25 Matching Credits ................................................ 5 1.26 Member .......................................................... 5 1.27 Partial Distribution Election ................................... 5 1.28 Participating Company ........................................... 5 1.29 Plan ............................................................ 5 1.30 Salary Deferrals ................................................ 5 1.31 Salary Deferral Agreement ....................................... 5 1.32 Stock Award ..................................................... 6 1.33 Subsidiary ...................................................... 6 1.34 Tax Savings Thrift Plan ......................................... 6 1.35 Trust ........................................................... 6 1.36 Valuation Date .................................................. 6 ARTICLE 2. MEMBERSHIP ....................................................... 6 2.1 In General ...................................................... 6 2.2 Termination of Membership; Re-employment ........................ 6 2.3 Change in Status ................................................ 7 2.4 Membership Following a Change in Control ........................ 7
i ARTICLE 3. DEFERRAL AGREEMENTS .............................................. 7 3.1 Deferral Agreements ............................................. 7 3.2 Modification of Deferral Agreement .............................. 7 ARTICLE 4. AWARD DEFERRAL PROGRAM ........................................... 8 4.1 Filing Requirements ............................................. 8 4.2 Amount of Deferral .............................................. 8 4.3 Crediting to Account ............................................ 9 ARTICLE 5. SALARY DEFERRAL PROGRAM .......................................... 9 5.1 Filing Requirements ............................................. 9 5.2 Salary Deferral Agreement ....................................... 9 5.3 Amount of Salary Deferrals ...................................... 10 5.4 Effect of Hardship Withdrawal ................................... 10 5.5 Certain Additional Credits ...................................... 10 ARTICLE 6. EXECUTIVE STOCK DEFERRAL PROGRAM ................................. 11 6.1 Stock Awards .................................................... 11 6.2 Executive Stock Account ......................................... 11 6.3 Dividend Reinvestment ........................................... 12 ARTICLE 7. MAINTENANCE OF ACCOUNTS .......................................... 12 7.1 Creation of Account ............................................. 12 7.2 Adjustment of Account ........................................... 13 7.3 Investment Performance Elections ................................ 13 7.4 Changing Investment Performance Elections ....................... 13 7.5 Vesting of Account .............................................. 14 7.6 Action Following a Change of Control ............................ 14 ARTICLE 8. DISTRIBUTION OF BENEFITS ......................................... 14 8.1 Commencement of Distribution .................................... 14 8.2 Distribution Election ........................................... 15 8.3 Delay of Payment ................................................ 15 8.4 Account Adjustment .............................................. 15 8.5 Hardship Withdrawal, Forfeiture ................................. 15 8.6 Designation of Beneficiary ...................................... 16 8.7 Special Distribution Rules ...................................... 17 8.8 Status of Account Pending Distribution .......................... 17 8.9 One-time Re-deferral Election ................................... 17 8.10 Change of Control ............................................... 17 ARTICLE 9. FORM OF PAYMENT .................................................. 19 9.1 Timing of Distribution .......................................... 19 9.2 Form of Payment Election ........................................ 19 9.3 Installments and Withdrawals Pro-Rata ........................... 19 ARTICLE 10. AMENDMENT OR TERMINATION ........................................ 20 10.1 Right to Terminate .............................................. 20 10.2 Right to Amend .................................................. 20 10.3 Uniform Action .................................................. 20

ii ARTICLE 11. GENERAL PROVISIONS .............................................. 21 11.1 No Funding ...................................................... 21 11.2 Obligation ...................................................... 21 11.3 No Contract of Employment ....................................... 21 11.4 Withholding Taxes ............................................... 21 11.5 Nonalienation ................................................... 21 11.6 Administration .................................................. 21 11.7 Impact of Future Legislation or Regulation ...................... 22 11.8 Construction .................................................... 23

iii INTRODUCTION This 2002 Deferred Compensation Plan of CSX Corporation and Affiliated Companies (the "Plan") was adopted July 9, 2002. 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 the receipt of a portion of their salary, and/or award(s) under the various incentive compensation plans and programs of CSX that may be offered from time to time 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. 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. 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 7. 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 the amount other than salary awarded to an employee of an Affiliated Company under the various incentive compensation plans and programs of CSX that may be offered from time to time, and which has been designated by the Administrator as eligible for deferral under the Plan, including but not limited to ICP Awards, stock awards, stock options and special incentive awards. 1.5 Award Deferral Agreement means a Deferral Agreement filed in accordance with the Award deferral program described in Article 4. 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 1 (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 2 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 Company Stock means the common stock of the Corporation. 1.12 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 5; and (b) any limit on compensation imposed by Section 401(a)(17) of the Code. 1.13 Corporation means CSX Corporation, a Virginia corporation, and any successor thereto by merger, purchase or otherwise. 1.14 Deferral Agreement means an 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. 1.15 Distribution Election means the election by the Member of the event triggering the commencement of distribution under Section 8.2. 1.16 Distribution Event means any of the events listed in Section 1.8, "Change of Control," with the following modification: the words, "Approval by the shareholders of the Corporation of," in the first line of Sections 1.8(c) and 1.8(d) are replaced for purposes of this Section 1.16 with the words, "Consummation of, i.e., actual 3 change in ownership of Outstanding Corporation Common Stock, Outstanding Corporation Voting Stock, and/or assets of the Corporation or its principal subsidiary by reason of,". 1.17 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. 1.18 Effective Date means November 30, 2002 or with respect to the Eligible Executives of a company which adopts the Plan, it means the date such company becomes a Participating Company. 1.19 Eligible Executive means an employee of a Participating Company, provided that: (a) For purposes of the award deferral program described in Article 4: (i) Such employee is employed by a Participating Company in salary band 6 or above as of December 30 of the calendar year for which the Award is made (or in the case of a multiple-year Award, December 30 of the last calendar year for which the Award is made); and (ii) (A) is employed by a Participating Company and is receiving Compensation of one hundred thousand dollars ($100,000) or more per year; or (B) 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. (b) For purposes of the salary deferral program described in Article 5, such employee is: (i) eligible for membership in the Tax Savings Thrift Plan; and (ii) employed in salary band 6 or above; and (iii) receiving Compensation of one hundred thousand dollars ($100,000) or more per year. (c) The Compensation amount set forth in subsections (a)(ii) and (b)(ii) shall be adjusted no more frequently than annually, based on (i) changes in the Consumer Price Index ("CPI"), such adjustment to be made in increments of ten thousand dollars ($10,000) only, rounded to next lowest increment as indicated by the CPI, or (ii) in the discretion of the Chief Executive Officer, a review of data regarding eligibility to participate in this type of program. An employee who is eligible to participate because his Compensation satisfies the requirements of subsection (a)(ii) or (b)(iii) above, and is excluded from participation only because of a subsequent increase in the Compensation requirement shall continue to be eligible to participate. 4 (d) 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, including an employee or former employee who has previously made deferrals under a prior Company deferral plan; 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. 1.20 Enrollment Form means the form prescribed by the Administrator that an Eligible Executive who has previously made deferrals under a prior Company deferral plan may file pursuant to Section 2.1 in order to become a Member and participate in the Plan. 1.21 Executive Stock Account means the bookkeeping account maintained for each Member to record his deferral of Stock Awards pursuant to Article 6. 1.22 Form of Payment Election means the election by the Member of the form of distribution he will receive from his Account or Executive Stock Account pursuant to Section 9.2. 1.23 ICP Award means the Participating Companies' Incentive Compensation Program, including but not limited to the Management Incentive Compensation Program ("MICP") and the Senior Management Incentive Compensation Program ("SMICP"). 1.24 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. 1.25 Matching Credits means amounts credited to the Account of a Member pursuant to Section 5.5. 1.26 Member means, except as otherwise provided in Article 2, each Eligible Executive who has executed an initial Deferral Agreement or Enrollment Form as described in Section 2.1. 1.27 Partial Distribution Election means a Distribution Election for a portion of a Member's Account under Section 8.2(d). 1.28 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 11.6(e). 1.29 Plan means this 2002 Deferred Compensation Plan of CSX Corporation and Affiliated Companies, as amended from time to time. 1.30 Salary Deferrals means the amounts credited to a Member's Account under Section 5.3. 1.31 Salary Deferral Agreement means a Deferral Agreement filed in accordance with the salary deferral program described in Article 5. 5 1.32 Stock Award means an Award that is or will be payable in Company Stock issued pursuant to the CSX Omnibus Incentive Plan ("COIP") or another of the Corporation's stock incentive plans, including but not limited to Performance Shares, nonqualified stock options, Incentive Stock Options, restricted stock and stock appreciation rights. 1.33 Subsidiary means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Corporation. 1.34 Tax Savings Thrift Plan means the Tax Savings Thrift Plan for Employees of CSX Corporation and Affiliated Companies, as amended from time to time. 1.35 Trust means the CSX Corporation and Affiliated Companies Benefits Assurance Trust. 1.36 Valuation Date means the last business day of each calendar month following the Effective Date. ARTICLE 2. MEMBERSHIP 2.1 In General: (a) An Eligible Executive shall become a Member as of the date he files his initial Deferral Agreement or an Enrollment Form with the Administrator. Such Deferral Agreement shall be effective for purposes of deferring an Award or making Salary Deferrals only as provided in Articles 4 and 5. Such Enrollment Form shall be effective for purposes of transferring balances previously deferred under a prior Company deferral plan to the Member's Account or Executive Stock Account only as provided in Articles 6 and 7. (b) As a condition of membership, the Administrator may require such other information as it deems appropriate. 2.2 Termination of Employment; Re-employment: (a) Subject to Section 2.4, membership shall not cease upon a Member's termination of employment. In the event that a Member ceases to be employed by an Affiliated Company, his Salary Deferrals and Matching Credits shall thereupon be suspended until such time as he shall be re-employed as an Eligible Executive by an Affiliated Company. (b) In the event that a Member ceases 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 be re-employed as an Eligible Executive by an Affiliated Company. (c) Upon re-employment as an Eligible Executive a Member may participate in the Plan as follows: 6 (i) in the case of a Member who prior to re-employment received the balance in his Account or Executive Stock Account, by executing a Deferral Agreement or Enrollment Form as provided in Section 2.1 as though for all purposes of the Plan the Affiliated Companies had never employed the Member; (ii) in the case of a Member who prior to re-employment did not receive the balance in his Account or Executive Stock Account, by executing a Deferral Agreement or Enrollment Form as provided in Section 2.1, provided his Distribution Elections and beneficiary designation shall remain in effect. (iii) distributions shall cease if the commencement of distribution was because of the Member's termination of employment (including retirement); (iv) distributions shall continue if the commencement of distribution was because the Member chose a specific date or age for the commencement of benefits and that date or age has been attained. 2.3 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. 2.4 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. DEFERRAL AGREEMENTS 3.1 Deferral Agreement: A Deferral Agreement shall be in a form, including electronic form approved by the Administrator, which shall be the sole judge of the proper completion thereof. Such Agreement shall provide for the deferral of an Award or for Salary Deferrals and may include such other provisions as the Administrator deems appropriate. 3.2 Modification of Deferral Agreement: A Member may elect to change, modify or revoke a Deferral Agreement as follows by filing a new Deferral Agreement: 7 (a) 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 4. (b) A Member may change the rate of his Salary Deferrals or suspend his Salary Deferrals as provided in Article 5. ARTICLE 4. AWARD DEFERRAL PROGRAM 4.1 Filing Requirements: (a) With respect to an ICP Award made for a calendar year or multiple years and determined and paid in the following calendar year, an Eligible Executive may elect, subject to Section 4.2(a) to defer all or a portion of his Award, if any, for that year. Such election shall be made by filing an Award Deferral Agreement with the Administrator on or before the close of business on November 15 of the calendar year (or, in the case of a multiple-year Award, the last calendar year) for which the Award is earned. An election to defer a portion of an Award shall be an integral percentage of such Award. (b) With respect to an ICP Award, notwithstanding Section 4.1(a), an individual who becomes an Eligible Executive after November 15 of 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, subject to Section 4.2(a) to defer all or a portion of that Award in accordance with this Section 4.1(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) With respect to an ICP Award, 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 4.1(a) or 4.1(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) With respect to an Award other than an ICP Award, an Eligible Executive shall be entitled to defer an Award by filing an Award Deferral Agreement with the Administrator on or before the close of business on November 15 of the calendar year immediately prior to the year in which the Award is paid or made available to the Eligible Executive. Such Award Deferral Agreement shall be effective only for the Award in question. (e) The Committee in its sole discretion may require that certain Awards must be deferred, in which case no Award Deferral Agreement shall be required to be filed. 4.2 Amount of Deferral: 8 (a) With respect to an ICP Award, prior to a Change of Control, the Committee in its sole discretion, 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) With respect to an ICP Award there shall be no minimum amount of deferral allowed unless otherwise designated by the Administrator. (c) With respect to an Award other than an ICP Award there shall be neither minimum nor maximum amount of deferral allowed unless otherwise designated by the Administrator. 4.3 Crediting to Account: The amount of Award which an Eligible Executive has elected to defer shall be credited to his Account on the date coincident with or as soon as reasonably practicable following the date the Award would have been paid to the Eligible Executive. ARTICLE 5. SALARY DEFERRAL PROGRAM 5.1 Filing Requirements: (a) An individual who is an Eligible Executive immediately prior to the Effective Date may file a Salary Deferral Agreement or an Enrollment Form 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 5.1(a) and 5.1(b) may file a Salary Deferral Agreement in any subsequent month of December. 5.2 Salary Deferral Agreement: (a) A Member's Salary Deferral Agreement shall authorize a reduction in his base pay with respect to his Salary Deferrals under the Plan. Such salary reduction shall be an integral percentage not in excess of fifty (50%) percent. The Agreement shall be effective for payroll periods beginning on or after the later of: (i) the Effective Date; or (ii) the first day of the month following the date the Salary Deferral Agreement is filed with the Administrator in accordance with Section 5.1. Paychecks applicable to said payroll periods shall be reduced accordingly. 9 (b) A Salary Deferral Agreement shall not be revoked or modified with respect to prior deferrals and shall remain in effect until such time as the Member files with the Administrator a new Salary Deferral Agreement. (c) A Member who is a participant in the Tax Savings Thrift Plan will have his salary deferral election under the Tax Savings Thrift Plan serve as his Salary Deferral Agreement under this Plan, and will not file a separate Salary Deferral Agreement. 5.3 Amount of Salary Deferrals: On each pay date, or as soon as reasonably practicable thereafter, following the effective date of an Eligible Executive's Salary Deferral Agreement, his Account 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, provided, however, that no 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 Salary Deferral is first made, it shall be limited to the excess of the amount otherwise determined for such payroll period under this Section 5.3 over the Eligible Executive's elective deferrals under the Tax Savings Thrift Plan for such payroll period. 5.4 Effect of Hardship Withdrawal: In the event a Member makes a Hardship Withdrawal under Section 8.5 of the Plan, his Salary Deferrals under the Plan will be automatically suspended. The Member 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 Member 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. 5.5 Certain Additional Credits: On each pay date, or as soon as reasonably practicable thereafter, there shall be credited Matching Credits to the Account of a Member determined as follows: the greater of (a) or (b), minus (c), where (a) is the employer matching contributions the Member 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 (b) is the employer matching contributions the Member 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 (c) is the employer matching contributions made on his behalf for the applicable period to the Tax Savings Thrift Plan. 10 ARTICLE 6. EXECUTIVE STOCK DEFERRAL PROGRAM 6.1 Stock Awards: An Eligible Executive who is eligible to receive a Stock Award, the terms of which permit its deferral, may file with the Administrator an Award Deferral Agreement with respect to a Stock Award, pursuant to Article 4. 6.2 Executive Stock Account: (a) A Member's Executive Stock Account will be created when he files his initial Award Deferral Agreement with respect to a Stock Award. An Executive Stock Account will be credited based upon the performance of Company Stock. No Member shall make an Investment Performance Election with respect to his Executive Stock Account. (b) A Member shall be eligible to file Distribution Elections pursuant to Article 8 and Form of Payment Elections pursuant to Article 9 with respect to his Executive Stock Account. If a Member has not filed a Distribution Election distribution of his Executive Stock Account will be made pursuant to Section 8.1. If a Member has not filed a Form of Payment Election distribution of his Executive Stock Account will be made pursuant to Section 9.1. Distributions from a Member's Executive Stock Account shall be made only in shares of Company Stock. (c) An Eligible Executive who has previously deferred shares of Company Stock granted pursuant to the CSX Omnibus Incentive Plan ("COIP") or another of the Corporation's stock incentive plans may elect to have an Executive Stock Account created for him in the Plan on the Effective Date by filing an Enrollment Form with the Administrator on or before the Effective Date. Filing the Enrollment Form will cause the transfer of such previously deferred share balances to the Member's Executive Stock Account on the Effective Date, and the Member will enjoy all rights and privileges of a Member including the ability to file initial Distribution Elections and Form of Payment Elections. A properly filed Enrollment Form will cause all prior elections made with respect to such previously deferred shares to be void immediately, unless otherwise stated in this Section 6.2. (i) No initial Distribution Election made pursuant to this Section 6.2 with respect to such previously deferred shares which designates distribution upon attainment of a designated age under Section 8.2(a)(i) that is within one year after the Effective Date shall be filed. (ii) No initial Distribution Election made pursuant to this Section 6.2 with respect to such previously deferred shares which designates distribution upon the Member's termination of employment with the Affiliated Companies under Section 8.2(a)(ii) shall be effective if distribution would occur within one year after the Effective Date. (iii) Any prior election made with respect to such previously deferred shares which designates distribution upon the Member's termination of employment with the Affiliated Companies shall remain in effect until one year after the Effective Date, and shall be void thereafter. 11 6.3 Dividend Reinvestment: A Member may elect annually, at such time as the Administrator may prescribe prior to the close of business on November 15 in any calendar year, in the form and manner prescribed by the Administrator to receive credit in his Executive Stock Account for dividends paid on Company Stock, in the amount with which such Executive Stock Account would have been credited assuming it had been invested in Company Stock ("Dividend Equivalents"). Absent such an election, Dividend Equivalents will be paid currently to the Member by the Company. ARTICLE 7. MAINTENANCE OF ACCOUNTS 7.1 Creation of Account: (a) A Member's Account will be created when he files his initial Deferral Agreement. (b) An Eligible Executive who is a Member of the Supplementary Savings And Incentive Award Deferral Plan For Eligible Executives Of CSX Corporation And Affiliated Companies (the "SSP") may elect to have an Account created for him in the Plan on the Effective Date by filing an Enrollment Form with the Administrator on or before the Effective Date. Filing the Enrollment Form will cause the transfer of balances previously deferred under the SSP to the Member's Account on the Effective Date, and the Member will enjoy all rights and privileges of a Member including the ability to file initial Investment Performance Elections, Distribution Elections and Form of Payment Elections. A properly filed Enrollment Form will cause all prior elections made under the SSP to be void immediately, unless otherwise stated in this Section 7.1, however the Member's investment fund allocations under the SSP shall remain in effect for transferred balances until such time as the Member reallocates the current balance of his Account pursuant to section 7.4(b). (i) No initial Distribution Election made pursuant to this Section 7.1 with respect to such previously deferred amounts which designates distribution upon attainment of a designated age under Section 8.2(a)(i) that is within one year after the Effective Date shall be filed. (ii) No initial Distribution Election made pursuant to this Section 7.1 with respect to such previously deferred amounts which designates distribution upon the Member's termination of employment with the Affiliated Companies under Section 8.2(a)(ii) shall be effective if distribution would occur within one year after the Effective Date. (iii) Any prior election made under the SSP which designates distribution upon the Member's termination of employment with the Affiliated Companies shall remain in effect until one year after the Effective Date, and shall be void thereafter. (c) A Member shall be eligible to file Distribution Elections pursuant to Article 8 and Form of Payment Elections pursuant to Article 9 with respect to his Account. If a Member has not filed a Distribution Election distribution of his Account will be made pursuant to Section 8.1. If a Member has not filed a Form 12 of Payment Election distribution of his Account will be made pursuant to Section 9.1. 7.2 Adjustment of Account: (a) As of each pay date, or as soon as reasonably practicable thereafter, each Account shall be credited or debited with the amount of earnings or losses with which such 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 elected by the Member, for purposes of measuring the investment performance of his Account. (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' rights under Section 10.2. (c) For purposes of Section 7.2(a), the portion of a Member's Account attributable to Matching Credits shall initially be credited based upon the performance of "Fund E" (CSX Stock Fund) under the Tax Savings Thrift Plan. 7.3 Investment Performance Elections: In the event the Administrator designates more than one investment fund or index of investment performance under Section 7.2, each Member shall file an initial investment performance election with the Administrator with respect to the investment of his Account. 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 Account. The election shall be made within such time period and on such form as the Administrator may prescribe and shall be in integral percentages of the Member's Account balance or deferral. The election shall be effective as of the beginning of the payroll period next following the date the election is filed. In the event a Member does not file an investment performance election, his Account shall be credited with earnings and losses as if the Account had earned the same rate of return as the Stable Value Fund under the Tax Savings Thrift Plan. 7.4 Changing Investment Performance Elections: (a) A Member may change his election in Section 7.3 with respect to his Account 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 may reallocate the current balance of his Account, 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 notice with the Administrator. Such notice shall be effective as soon as administratively practicable following its receipt by the 13 Administrator. A Member may not reallocate the balance of his Executive Stock Account to any investment other than Company Stock. 7.5 Vesting of Account: Each Member shall be fully vested in his Account or Executive Stock Account. 7.6 Action Following a Change of Control: Following a Change of Control, any action taken by the Administrator pursuant to this Article 7 is subject to the approval of the Benefits Trust Committee. ARTICLE 8. DISTRIBUTION OF BENEFITS 8.1 Commencement of Distribution: The distribution of the Member's Account or Executive Stock Account shall commence on the date that is one year following the Member's termination of employment with the Affiliated Companies, or at such time as may be designated by the Member on a Distribution Election pursuant to Section 8.2. 8.2 Distribution Election (a) A Member may file with the Administrator a Distribution Election for the distribution upon: (i) attainment of a designated age not earlier than age 50 nor later than age 70-1/2, however he shall not elect an age less than one year subsequent to his current age; or (ii) termination of employment with the Affiliated Companies. (b) A Member may file with the Administrator a Partial Distribution Election for the distribution on attainment of a designated age for the payment of the expenses directly or indirectly arising from enrollment in a college, university, another post-secondary institution of higher learning or a secondary educational institution 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. (c) A Member may file a Distribution Election or change a Distribution Election at any time prior to: (i) a date that is 30 days subsequent to the date of his termination of employment in the case of his initial Distribution Election; or (ii) one year prior to the date distribution is to commence under his Distribution Election then in effect, 14 after which time no Distribution Election shall be filed. (d) A Member may make a Partial Distribution Election with respect to any portion of his Account or Executive Stock Account, provided no Distribution Election shall be made for a portion of an Account or Executive Stock Account less than $2,000, as determined as of the date the election is made. No Member shall have more than four Distribution Elections in effect at any time. (e) In no event may distribution made pursuant to a Distribution Election commence prior to a date that is three years subsequent to the date the Member first makes a Salary Deferral or Award Deferral under either this Plan, the SSP, the COIP or another of the Corporation's stock incentive plans for which an Executive Stock Account has been established. (f) For purposes of this Plan and particularly this Article 8, if the Member's employer is involved in a Divisive Transaction, the Member will be considered to have terminated his employment with an Affiliated Company on the closing date of the Divisive Transaction, provide the Member's employment with his employer has not otherwise terminated prior to that date. (g) Notwithstanding anything in Section 8.1 or 8.2 to the contrary, upon death of a Member, the balance of his Account or Executive Stock Account shall be distributed to his beneficiary as soon as administratively practicable following the January 1 coincident with or next following his date of death. (h) Any Distribution Election made in proper form by a Member shall be effective and distribution shall commence pursuant to such Distribution Election. Any Distribution Election not made in proper form shall be void. 8.3 Delay of Payment (a) 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. (b) Notwithstanding the preceding, following a Change of Control, the authority to delay payment of a Member's Account or Executive Stock Account rests solely with the Benefits Trust Committee. 8.4 Account Adjustment: The obligations of the Corporation or any of its affiliated corporations and the benefits due any 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. 8.5 Hardship Withdrawal, Forfeiture: 15 (a) While employed by the Participating Companies, a Member may, in the event of a severe financial hardship, request a withdrawal from his Account or Executive Stock Account without filing a Distribution Election under Section 8.2. 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. The Administrator shall consider any requests for payment under this Section 8.5 on a uniform and nondiscriminatory basis and in accordance with the standards of interpretation described in section 457 of the Code and the regulations thereunder. The circumstances that will constitute a severe financial hardship will depend upon the facts of each case, but, in any case, no withdrawal may be made to the extent that such hardship is or may be relieved: (i) through reimbursement or compensation by available insurance or otherwise or (ii) by liquidation of the Member's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship. (b) For purposes of this Section 8.5 severe financial hardship may include any of the following circumstances: (i) illness or injury of the Member or his dependents, (ii) the loss of the Member's home or its contents due to casualty, or (iii) any other extraordinary and unforeseeable circumstances of the Member approved by the Administrator, as long as those circumstances result in a present or impending critical financial need, including the inability to educate the Member's dependent child(ren). (c) Notwithstanding the preceding, a Member may request and receive a withdrawal from his Account or Executive Stock Account at any time without filing a Distribution Election under Section 8.2. Any such withdrawal which is not determined by the Administrator to be a hardship withdrawal under this Section 8.5 shall result in the forfeiture of an amount equal to the portion of the Member's Account or Executive Stock Account, as applicable, that is withdrawn, multiplied by the Mid-term Applicable Federal Rate determined as of the Valuation Date upon which the withdrawal is effective. (d) Notwithstanding the preceding, following a Change of Control, any decisions or determinations by the Administrator under this Section 8.5 shall be subject to the approval of the Benefits Trust Committee. 8.6 Designation of Beneficiary: A 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 estate) to receive any benefits which may be payable under this Plan upon his death. If the Member does not designate a beneficiary or contingent beneficiary, or if the beneficiary and the contingent beneficiaries do not survive the Member, such benefits shall be paid to the Member's estate. A Member may revoke or change any designation made under this Section 8.6 in a time and manner determined by the Administrator. 16 8.7 Special Distribution Rules: Notwithstanding anything to the contrary in this Plan, if (a) a 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 a single sum payment or, in the case of an Executive Stock Account, a distribution in shares of Company Stock equal to the balance in his Account or Executive Stock Account. The single sum payment or distribution of shares shall be made as soon as practicable following the date the 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 under this Plan. 8.8 Status of Account Pending Distribution: (a) Pending distribution, a Member's Account shall continue to be credited with earnings and losses as provided in Section 7.2. The Member shall be entitled to change his investment elections under Section 7.3 or apply for Hardship withdrawals under Section 8.5. In the event of the death of a Member, his Account shall be credited with earnings and losses as if the Account 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' Accounts commencing with the Valuation Date coincident with or next following the Member's date of death. (b) Pending distribution, a Member's Executive Stock Account shall continue to be credited based on the performance of Company Stock as provided in Section 6.2. 8.9 One-time Re-deferral Election: A Member may make one additional election to defer (but not accelerate) commencement of payment under the Plan at any time six months before payments are to have commenced pursuant to Section 8.1 or 8.2 ("Re-deferral Election). Such Re-deferral Election shall be made in a form prescribed by the Administrator. If such Re-deferral Election is to a designated age the re-deferral shall be for a period not less than one year from the date the Re-deferral Election is made. 8.10 Change of Control: (a) A Member shall be eligible to make a separate Distribution Election which shall be effective only in the event of a Change of Control. (b) 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 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 17 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 8.10 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' Accounts or Executive Stock Accounts for which information is readily available. Thereafter, the Independent Accountants shall annually determine as of a Valuation Date for each Member not receiving a lump sum payment pursuant to subsection (c) below the value of each Member's Accounts or Executive Stock 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. (c) In the event a Distribution Event has occurred, the trustee of the Trust shall, within 45 days of such Distribution Event, pay to each Member not making an election under (d) below, a lump sum payment or, in the case of an Executive Stock Account, a distribution in shares of Company Stock equal to the value of the Member's Account or Executive Stock Account (determined under Article 6) as of the Valuation Date coinciding with or next preceding the date of such Distribution Event. The amount of each Member's lump sum payment or Company Stock distribution 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 Account or Executive Stock Account for which information is readily available. (d) Each Member may elect in a time and manner determined by the Administrator, but in no event later than 90 days following the Effective Date, to have amounts and benefits determined and payable under the terms of the Plan as if a Distribution Event 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 Distribution Event had not occurred. A 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 Distribution Event shall be invalid. (e) Notwithstanding anything in the Plan to the contrary, each Member who has made an election under (d) above may elect within 90 days following a Distribution Event, in a time and manner determined by the Benefits Trust Committee, to receive a lump sum payment or, in the case of an Executive Stock Account, a distribution in shares of Company Stock, 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 an amount equal to such calculated amount, multiplied by the Mid-term Applicable Federal Rate determined as of the Valuation Date next preceding such payment and such reduction shall be irrevocably forfeited by the Member. Furthermore, as a result of such election, the Member shall no longer be eligible to participate or otherwise benefit from the Plan. Payments under this subsection (e) shall be made not later 18 than 7 days following receipt by the Corporation of a Member's election. The Benefits Trust Committee shall, no later than 7 days after a Distribution Event has occurred, give written notification to each Member eligible to make an election under this subsection (e), that a Distribution Event has occurred and informing such Member of the availability of the election. ARTICLE 9. FORM OF PAYMENT 9.1 Timing of Distribution: Unless a Form of Payment Election is made pursuant to Section 9.2 below, (a) a Member's Account shall be distributed to him, or in the event of his death to his Beneficiary, in a cash single sum payment as provided in Section 8.1. (b) a Member's Executive Stock Account shall be distributed to him, or in the event of his death to his Beneficiary, in a single distribution of shares as provided in Section 8.1. 9.2 Form of Payment Election (a) A Member may make a Form of Payment Election to receive distribution of his Account or Executive Stock Account in semi-annual installments over a period not to exceed twenty (20) years. Installments shall be determined as of each January 15 and July 15 (or in the case of an Executive Stock Account, December 30 and June 30) and shall be paid as soon as administratively practicable thereafter. The amount of each installment shall equal the balance in the Account or Executive Stock Account as of the Valuation Date of determination, divided by the number of remaining installments (including the installment being determined). If a Member dies before payment of the entire balance of his Account or Executive Stock Account, the remaining balance shall be paid in a single sum to his beneficiary as soon as administratively practicable following his date of death. Lump sum payments shall be determined and paid as soon as administratively practicable following the date the Member incurs the distributable event elected on a Distribution Election under Section 8.2. (b) A Member may make a separate Form of Payment Election with respect to any portion of his Account for which a Partial Distribution Election has been made pursuant to Section 8.2(d). (c) A Member may change his Form of Payment Election at any time prior to a date that is six months prior to the date the distribution is to commence, after which time the Form of Payment Election shall be irrevocable. 9.3 Installments and Withdrawals Pro-Rata: In the event of any payment other than a single lump-sum, such as installment payment, partial distribution or hardship withdrawal, such payment or withdrawal shall be made on a pro-rata basis from the portions of the Member's existing Account balance which are subject to different measures of investment performance. 19 ARTICLE 10. AMENDMENT OR TERMINATION 10.1 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 and Beneficiary shall receive a single sum payment, or, in the case of an Executive Stock Account, a distribution in shares of Company Stock equal to the balance in his Account or Executive Stock 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 or beneficiary under this Plan. 10.2 Right to Amend: Prior to a Change of Control, the Board may, in its sole discretion, amend this Plan and the related Deferral Agreements and Enrollment Forms on 30 days prior notice to the 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 or Enrollment Forms shall adversely affect the rights of a Member, such Member must consent in writing to such amendment prior to its effective date. If such Member does not consent to the amendment, the Plan and related Deferral Agreements and Enrollment Forms shall be deemed to be terminated with respect to such Member and he shall receive a single sum payment of his Account, or, in the case of an Executive Stock Account, a distribution in shares of Company Stock, as soon thereafter as is practicable. Notwithstanding the foregoing, the Administrator's change in any investment funds or investment index under Section 7.2(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 rights. 10.3 Uniform Action: Notwithstanding anything in the Plan to the contrary, any action to amend or terminate the Plan or the Deferral Agreements or Enrollment Forms 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. 20 ARTICLE 11. GENERAL PROVISIONS 11.1 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, 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 or Enrollment Form. 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 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. 11.2 Obligation: To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Plan shall be joint and several. 11.3 No Contract of Employment: The existence of this Plan, a Deferral Agreement or an Enrollment Form 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, a Deferral Agreement or an Enrollment Form. 11.4 Withholding Taxes: All applicable FICA, RRTA or other employment taxes due on deferrals under this Plan shall be withheld from non-deferred salary, Awards or other earnings. All payments under this Plan shall be net of an amount sufficient to satisfy any federal, state or local income tax withholding requirements. 11.5 Nonalienation: The right to receive any benefit under this Plan may not be transferred, assigned, pledged or encumbered by a 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. 11.6 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, 21 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, 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, 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, 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, beneficiary or contingent beneficiary and all other interested persons. All acts and decisions of the Administrator shall be final and binding upon all 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. 11.7 Impact of Future Legislation or Regulation (a) This Section 11.7 shall become operative upon the enactment of any change in applicable statutory law or the promulgation by the Internal Revenue Service of a final regulation or other pronouncement having the force of law, which statutory law, as changed, or final regulation or pronouncement, as promulgated, would cause any Member to include in his or her federal gross income amounts accrued by the Member under the Plan on a date (an "Early Taxation Event") prior to the date on which such amounts are made available to him or her hereunder. (b) Notwithstanding any other Section of this Plan to the contrary (but subject to subsection (c), below), as of an Early Taxation Event, the feature or features of this Plan, or the election by a Member that would cause the Early Taxation Event shall be null and void, to the extent, and only to the extent, required to prevent the Member from being required to include in his federal gross income amounts accrued by the Member under the Plan prior to the date on which such amounts are made available to him hereunder. By way of example, but not by way of limiting the generality of the foregoing, if a statute is enacted that would require a Member to include in his or her federal gross income amounts accrued by the Member under the Plan prior to the date on 22 which such amounts are made available to him or her because of the Member's right to receive a distribution of a portion of his Account under Section 8.5, the right of all Members to receive distributions under Section 8.5 shall be null and void as of the effective date of that statute. If only a portion of a Member's Account is impacted by the change in the law, then only such portion shall be subject to this Section, with the remainder of the Account not so affected being subject to such rights and features as if the law were not changed. If the law only impacts Members who have a certain status with respect to the Company, then only such Members shall be subject to this Section. (c) Notwithstanding Section 11.7(b) above, if an Early Taxation Event occurs (e.g., if a change in law is retroactive), the amounts that become taxable on the Early Taxation Event shall be distributed to each Participant as soon as practicable following such Early Taxation Event or if later, the date or enactment or promulgation. 11.8 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. 23 EX-10.28 13 dex1028.txt EXHIBIT 10.28 SUPPLEMENTARY SAVINGS PLAN AND INCENTIVE AWARD DEFERRAL PLAN 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 February 14, 2001) (As Amended effective May 1, 2002)
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..................................... 2 1.7 Board of Directors........................................... 2 1.8 Change of Control............................................ 2 1.9 Code......................................................... 3 1.10 Committee.................................................... 3 1.11 Compensation................................................. 3 1.12 Corporation.................................................. 3 1.13 Deferral Agreement........................................... 3 1.14 Distribution Option(s)....................................... 4 1.15 Divisive Transaction......................................... 4 1.16 Effective Date............................................... 4 1.17 Eligible Executive........................................... 4 1.18 Independent Accountant....................................... 4 1.19 Matching Credits............................................. 4 1.20 Member....................................................... 4 1.21 MICP......................................................... 4 1.22 Participating Company........................................ 4 1.23 Plan......................................................... 5 1.24 Salary Deferrals............................................. 5 1.25 Salary Deferral Agreement.................................... 5 1.26 Salary Deferral Percentage................................... 5 1.27 SMICP........................................................ 5 1.28 Subsidiary................................................... 5 1.29 Tax Savings Thrift Plan...................................... 5 1.30 Trust........................................................ 5 1.31 Valuation Date............................................... 5 ARTICLE 2. MEMBERSHIP AND DEFERRAL AGREEMENTS............................ 5 2.1 In General................................................... 5 2.2 Modification of Initial Deferral Agreement................... 6 2.3 Termination of Membership; Re-employment..................... 6 2.4 Change in Status............................................. 7 2.5 Membership Following a Change in Control..................... 7 ARTICLE 3. AWARD DEFERRAL PROGRAM........................................ 7 3.1 Filing Requirements.......................................... 7 3.2 Amount of Deferral........................................... 8 3.3 Crediting to Account......................................... 8
-i- ARTICLE 4. SALARY DEFERRAL PROGRAM.......................................... 9 4.1 Filing Requirements............................................. 9 4.2 Salary Deferral Agreement....................................... 9 4.3 Amount of Salary Deferrals...................................... 9 4.4 Changing Salary Deferrals....................................... 10 4.5 Certain Additional Credits...................................... 10 ARTICLE 5. MAINTENANCE OF ACCOUNTS.......................................... 11 5.1 Adjustment of Account........................................... 11 5.2 Investment Performance Elections................................ 12 5.3 Changing Investment Elections................................... 12 5.4 Vesting of Account.............................................. 12 5.5 Individual Accounts............................................. 13 5.6 Action Following a Change of Control............................ 13 ARTICLE 6. PAYMENT OF BENEFITS.............................................. 13 6.1 Commencement of Payment......................................... 13 6.2 Method of Payment............................................... 15 6.3 Applicability................................................... 16 6.4 Hardship Withdrawal............................................. 16 6.5 Designation of Beneficiary...................................... 16 6.6 Special Distribution Rules...................................... 17 6.7 Status of Account Pending Distribution.......................... 17 6.8 Installments and Withdrawals Pro-Rata........................... 17 6.9 Change of Control............................................... 18 ARTICLE 7. AMENDMENT OR TERMINATION......................................... 19 7.1 Right to Terminate.............................................. 19 7.2 Right to Amend.................................................. 19 7.3 Uniform Action.................................................. 20 ARTICLE 8. GENERAL PROVISIONS............................................... 20 8.1 No Funding...................................................... 20 8.2 Obligation...................................................... 20 8.3 No Contract of Employment....................................... 20 8.4 Withholding Taxes............................................... 20 8.5 Nonalienation................................................... 20 8.6 Administration.................................................. 20 8.7 Construction.................................................... 21 ARTICLE 9. POST-SECONDARY EDUCATION SUB-ACCOUNTS............................ 21 9.1 Post-Secondary Education Sub-accounts........................... 21 9.2 Distribution of Post-Secondary Education Sub-accounts........... 22 9.3 Construction.................................................... 23

-ii- 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. In addition to any Retirement Sub-accounts established by the Administrator, an additional Retirement Sub-account known as the Cash Plan Retirement Sub-account shall be established for deferrals of payments from the CSX Market Value Cash Plan. 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 (i) 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 in the succeeding year under the MICP and/or SMICP or other incentive award otherwise payable in cash as determined by the Committee; and (ii) the amount paid from the CSX Market Value Cash Plan with respect to such -1- year and, in the absence of an Award Deferral Agreement with respect to such amount and with respect to such year, payable in cash under the CSX Market Value Cash Plan. 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: -2- (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. -3- 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 Event means any of the events listed in Section 1.8, "Change of Control," with the following modification: the words, "Approval by the shareholders of the Corporation of," in the first line of Sections 1.8(c) and 1.8(d) are replaced for purposes of this Section 1.14 with the words, "Consummation of, i.e., actual change in ownership of Outstanding Corporation Common Stock, Outstanding Corporation Voting Stock, and/or assets of the Corporation or its principal subsidiary by reason of,". 1.15 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. 1.16 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. 1.17 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. 1.18 Eligible Executive means an employee of a Participating Company, provided that: (a) For purposes of the award deferral program described in Article 3: (i) prior to January 1, 1995, 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 (ii) on and after January 1, 1995 and before January 1, 1999, such employee: (A) is employed by a Participating Company and is receiving Compensation of one hundred thousand dollars -4- ($100,000) or more per year; or (B) 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 (iii) on and after January 1, 1999, such employee: (A) is employed by a Participating Company and is receiving compensation of one hundred twenty five thousand dollars ($125,000) or more per year; or (B) 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 twenty five thousand dollars ($125,000) or more per year at the time of such retirement or termination. An employee who, in 1998, was eligible to participate because his Compensation satisfied the requirements of subsection (ii), and is excluded from participation only because of the increase in the Compensation requirement in this subsection (iii), shall continue to be eligible to participate. (b) For purposes of the salary deferral program described in Article 4, such employee is eligible for membership in the Tax Savings Thrift Plan,and; (i) Prior to January 1, 1995, such employee is employed in salary grades 21 through 40 inclusive; or (ii) Compensation of one hundred thousand dollars ($100,000) or more per year; or (iii) on and after January 1, 1999, is receiving Compensation of one hundred twenty five thousand dollars ($125,000) or more per year. An employee who, in 1998, was eligible to participate because his Compensation satisfied the requirements of subsection (ii), but is excluded from participation only because of the increase in the Compensation requirement in this subsection (iii), shall continue to be eligible to participate. (c) After January 1, 1999, the compensation amount set forth in subsections (a)(iii) and (b)(iii) may, in the discretion of the Chief -5- Executive Officer, be adjusted no more frequently than annually, based on a review of data regarding eligibility to participate in this type of program. (d) 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. 1.19 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. 1.20 Matching Credits means amounts credited to the Account of a Member pursuant to Section 4.5. 1.21 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. 1.22 MICP means the Participating Companies' Management Incentive Compensation Program. 1.23 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). 1.24 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. 1.25 Salary Deferrals means the amounts credited to a Member's Account under Section 4.3. 1.26 Salary Deferral Agreement means a Deferral Agreement filed in accordance with the salary deferral program described in Article 4. 1.27 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. 1.28 SMICP means the Participating Companies' Senior Management Incentive Compensation Program. -6- 1.29 Subsidiary means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Corporation. 1.30 Tax Savings Thrift Plan means the Tax Savings Thrift Plan for Employees of CSX Corporation and Affiliated Companies, as amended from time to time. 1.31 Trust means the CSX Corporation and Affiliated Companies Benefits Assurance Trust. 1.32 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. -7- (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. (c) If a former Member is reemployed as an Eligible Executive and becomes a Member again pursuant to (b)(ii): (i) upon notice to the Administrator by the Participant, distributions from a Retirement Sub-account shall cease if the commencement of distribution was because of the Member's termination of employment (including -8- retirement); (ii) distributions from a Retirement Sub-account shall continue if the commencement of distribution was because the Member chose a specific age for the commencement of benefits and that age has been attained. Except for distributions which must continue pursuant to (c)(ii), a reemployed Member may change Distribution Option elections with respect to his Retirement Sub-accounts without penalty so long as such change does not accelerate the timing of any payment to the Member. 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) With respect to an Award identified in Section 1.4(i), 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) With respect to an Award identified in Section 1.4(i), 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. -9- (c) With respect to an Award identified in Section 1.4(i), 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) With respect to an Award identified in Section 1.4(ii), at such time and in accordance with such rules 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 any such Award. Awards identified in Section 1.4(ii) may not be deferred into Education Sub-accounts. (e) 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. (f) 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) With respect to an Award identified in Section 1.4(i), 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) With respect to an Award identified in Section 1.4(i), 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. (c) With respect to an Award identified in Section 1.4(ii), there shall be no minimum nor maximum amount of deferral allowed. 3.3 Crediting to Account: -10- (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: -11- (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. -12- 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 effectiveas 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 -13- 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) 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. Subsequent to the crediting of the Matching Credits, a Member and, if applicable, former Member, may reallocate the current balance of his Matching Credits under Section 5.3 (b), below. (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. -14- 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 Sub-accounts, Education Sub-accounts, or Matching Credits, 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. -15- 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 years subsequent to his current age. If a Member elects to defer an Award identified in Section 1.4(ii) (a payment from the CSX Market Value Cash Plan), such deferral must extend the commencement of distribution beyond December 31, 2004. 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; provided, however, no change in Distribution Option election shall be allowed if it results in changing the deferral of commencement of distribution of an Award identified in Section 1.4(ii) to a time before January 1, 2005. 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 -16- 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 -17- 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 -18- 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. -19- 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. -20- 6.7 Special Distribution Rules: Notwithstanding anything to the contrary in the 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; (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; or (d) is required to divest his or her interest under the Plan under applicable law, regulation or rules, 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. In such event, the single sum payment shall be made as soon as practicable following the date the Member or former Member or is affected by one of the circumstances described in this Section 6.7 and such payment 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. 6.10 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 -21- 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 Distribution Event has occurred, the trustee of the Trust shall, within 45 days of such Distribution Event, 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 Distribution Event. 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 Distribution Event, if earlier, to have amounts and benefits determined and payable under the terms of the Plan as if a Distribution Event 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 daysafter becoming a Member, to have amounts and benefits determined and payable under the terms of the Plan as if a Distribution Event 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 Distribution Event 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 Distribution Event, 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 Distribution Event has occurred, give written notification to each Member or former Member eligible to make an election under this subsection (d), that a Distribution Event has occurred and informing such Member or former Member of the availability of the election. -22- 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. -23- 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 -24- 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: -25- (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 -26- 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. -27- EX-10.46 14 dex1046.txt EXHIBIT 10.46 364-DAY, $300 MILLION REVOLVING CREDIT AGREEMENT Exhibit 10.46 EXECUTION COPY - -------------------------------------------------------------------------------- CSX CORPORATION _________________________ $300,000,000 364-DAY REVOLVING CREDIT AGREEMENT May 17, 2002 _________________________ CITIBANK, N.A. THE BANK OF NOVA SCOTIA as Co-Syndication Agents CREDIT SUISSE FIRST BOSTON MIZUHO CORPORATE BANK, LTD. as Co-Documentation Agents JPMORGAN CHASE BANK as Administrative Agent ___________________ J.P. MORGAN SECURITIES INC., as Sole Advisor, Lead Arranger and Bookrunner - -------------------------------------------------------------------------------- Table of Contents
Page ---- ARTICLE I Definitions....................................................................... 1 SECTION 1.01. Defined Terms...................................................... 1 SECTION 1.02. Classification of Loans and Borrowings............................. 17 SECTION 1.03. Terms Generally.................................................... 17 SECTION 1.04. Accounting Terms; GAAP............................................. 17 ARTICLE II The Credits...................................................................... 17 SECTION 2.01. Commitments........................................................ 17 SECTION 2.02. Loans and Borrowings............................................... 18 SECTION 2.03. Requests for Revolving Borrowings.................................. 18 SECTION 2.04. Competitive Bid Procedure.......................................... 19 SECTION 2.05. Intentionally Omitted.............................................. 21 SECTION 2.06. Funding of Borrowings.............................................. 21 SECTION 2.07. Interest Elections................................................. 21 SECTION 2.08. Expiration, Termination and Reduction of Commitments............... 23 SECTION 2.09. Repayment of Loans; Evidence of Debt............................... 23 SECTION 2.10. Optional and Mandatory Prepayment of Loans......................... 24 SECTION 2.11. Fees............................................................... 25 SECTION 2.12. Interest........................................................... 26 SECTION 2.13. Alternate Rate of Interest......................................... 27 SECTION 2.14. Increased Costs.................................................... 27 SECTION 2.15. Break Funding Payments............................................. 28 SECTION 2.16. Taxes.............................................................. 29 SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs........ 30 SECTION 2.18. Mitigation Obligations; Replacement of Lenders..................... 31 ARTICLE III Representations and Warranties.................................................. 32 SECTION 3.01. Organization; Powers............................................... 32 SECTION 3.02. Authorization; Enforceability...................................... 32 SECTION 3.03. Governmental Approvals; No Conflicts............................... 33 SECTION 3.04. Financial Condition; No Material Adverse Change.................... 33 SECTION 3.05. Properties......................................................... 33 SECTION 3.06. Litigation and Environmental Matters............................... 33 SECTION 3.07. Compliance with Laws and Agreements................................ 34 SECTION 3.08. Investment and Holding Company Status.............................. 34 SECTION 3.09. Taxes.............................................................. 34
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Page ---- SECTION 3.10. ERISA.............................................................. 34 SECTION 3.11. Disclosure......................................................... 34 ARTICLE IV Conditions....................................................................... 35 SECTION 4.01. Closing Date....................................................... 35 SECTION 4.02. Each Credit Event.................................................. 36 ARTICLE V Affirmative Covenants............................................................. 36 SECTION 5.01. Financial Statements and Other Information......................... 36 SECTION 5.02. Notices of Material Events......................................... 37 SECTION 5.03. Existence; Conduct of Business..................................... 38 SECTION 5.04. Payment of Obligations............................................. 38 SECTION 5.05. Maintenance of Properties; Insurance............................... 38 SECTION 5.06. Books and Records; Inspection Rights............................... 38 SECTION 5.07. Compliance with Laws............................................... 39 SECTION 5.08. Use of Proceeds, Commitments....................................... 39 SECTION 5.09. Federal Regulations................................................ 39 ARTICLE VI Negative Covenants............................................................... 39 SECTION 6.01. Limitation on Subsidiary Debt...................................... 39 SECTION 6.02. Liens.............................................................. 40 SECTION 6.03. Limitation on Sale/Leaseback Transactions.......................... 41 SECTION 6.04. Fundamental Changes................................................ 42 SECTION 6.05. Financial Covenant................................................. 42 SECTION 6.06. Ownership of Railroad Subsidiaries................................. 42 SECTION 6.07. Sales of Unrestricted Margin Stock................................. 42 SECTION 6.08. Limitation on Guarantees and Liens of CSX/NS Entities.............. 43 SECTION 6.09. CSX/NS Agreement................................................... 43 SECTION 6.10. Final Asset Division............................................... 43 ARTICLE VII Events of Default............................................................... 43 ARTICLE VIII The Agents..................................................................... 46 ARTICLE IX Miscellaneous.................................................................... 48 SECTION 9.01. Notices............................................................ 48 SECTION 9.02. Waivers; Amendments................................................ 48 SECTION 9.03. Expenses; Indemnity; Damage Waiver................................. 49 SECTION 9.04. Successors and Assigns............................................. 50 SECTION 9.05. Survival........................................................... 52 SECTION 9.06. Counterparts; Integration; Effectiveness........................... 52
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Page SECTION 9.07. Severability....................................................... 52 SECTION 9.08. Right of Setoff.................................................... 52 SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process......... 53 SECTION 9.10. WAIVER OF JURY TRIAL............................................... 53 SECTION 9.11. Headings........................................................... 54 SECTION 9.12. Confidentiality.................................................... 54
SCHEDULES: Schedule 2.01 -- Commitments Schedule 3.06 -- Disclosed Matters Schedule 6.02 -- Certain Transactions EXHIBITS: Exhibit A -- Form of Assignment and Acceptance Exhibit B-1 -- Form of Revolving Loan Note Exhibit B-2 -- Form of Competitive Loan Note Exhibit C -- Form of Opinion of Wachtell, Lipton, Rosen & Katz Exhibit D -- Form of Opinion of General Counsel or an Assistant General Counsel iii Exhibit 10.46 364-DAY REVOLVING CREDIT AGREEMENT, dated as of May 17, 2002, among CSX CORPORATION, a Virginia corporation, as Borrower, the LENDERS parties hereto, CITIBANK, N.A. and THE BANK OF NOVA SCOTIA, as Co-Syndication Agents, CREDIT SUISSE FIRST BOSTON and MIZUHO CORPORATE BANK, LTD., as Co-Documentation Agents, and JPMORGAN CHASE BANK, as Administrative Agent. W I T N E S S E T H : WHEREAS, the Borrower and the Lenders are entering into this Agreement for the purpose of setting forth the terms and conditions on which the Lenders are willing to make extensions of credit to the Borrower as more fully described herein; NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, subject to the satisfaction of the conditions set forth in Section 4.01, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Adjusted LIBO Rate" means, with respect to any Eurodollar Revolving Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Agent" means JPMorgan Chase Bank, in its capacity as administrative agent for the Lenders hereunder. "Administrative Questionnaire" means an administrative questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Agents" means the collective reference to the Administrative Agent, the Co-Syndication Agents and the Co-Documentation Agents. "Aggregate Outstanding Extensions of Credit" means, at any time, an amount equal to the sum of (a) the aggregate Revolving Credit Exposure of the Lenders at such time and 2 (b) the aggregate principal amount of outstanding Competitive Loans of the Lenders at such time. "Agreement" means this 364-Day Revolving Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Allocable CSX/NS Attributable Debt" means the allocable portion of any obligation of any CSX/NS Acquisition Sub Entity which would be "Attributable Debt" of the Borrower and the Subsidiaries if such CSX/NS Acquisition Sub Entity were a Subsidiary of the Borrower, with such allocable portion being equal to a percentage of such obligations equal to the percentage of the capital stock of such CSX/NS Acquisition Sub Entity which is directly or indirectly owned by the Borrower, provided that (a) the Allocable CSX/NS Attributable Debt with respect to any obligations which constitute CSX Conrail Attributable Debt shall be the entire amount of such obligations, (b) the Allocable CSX/NS Attributable Debt with respect to any obligations which constitute NS Conrail Attributable Debt shall be zero and (c) the Allocable CSX/NS Attributable Debt with respect to any obligations of any CSX/NS Acquisition Sub Entity which would be included as "Attributable Debt" of the Borrower and the Subsidiaries if such CSX/NS Acquisition Sub Entity were a Subsidiary of the Borrower and which would be permitted under Sections 6.03(a) and 6.03(b) shall be zero. "Allocable CSX/NS Debt" means the allocable portion of any obligation of any CSX/NS Acquisition Sub Entity which would be included as "Debt" of the Borrower if such CSX/NS Acquisition Sub Entity were a Subsidiary of the Borrower, with such allocable portion being equal to a percentage of such obligations equal to the percentage of the capital stock of such CSX/NS Acquisition Sub Entity which is directly or indirectly owned by the Borrower, provided that (a) the Allocable CSX/NS Debt with respect to any obligations which constitute CSX Conrail Debt shall be the entire amount of such obligations, (b) the Allocable CSX/NS Debt with respect to any obligations which constitute NS Conrail Debt shall be zero and (c) the Allocable CSX/NS Debt with respect to any obligations of any CSX/NS Acquisition Sub Entity which would be included as "Debt" of the Borrower if such CSX/NS Acquisition Sub Entity were a Subsidiary of the Borrower and which would be permitted under Sections 6.01(a), 6.01(b), 6.01(c) and 6.01(d) (assuming all CSX/NS Acquisition Sub Entities were Subsidiaries) shall be zero. "Allocable Railroad Revenues" means a percentage of any Railroad Revenues of any CSX/NS Entity equal to the percentage of the capital stock of such CSX/NS Entity which is directly or indirectly owned by the Borrower, provided that the Allocable Railroad Revenues with respect to the Railroad Revenues of any CSX Conrail Subsidiary shall be the entire amount of such Railroad Revenues. "Alternate Base Rate" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Percentage" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have 3 terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "Applicable Rate" means, for any day, with respect to any Eurodollar Revolving Loan, or with respect to the facility fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption "LIBOR Margin" or "Facility Fee", as the case may be, based upon the ratings by Moody's and S&P, respectively, applicable on such date to the Index Debt:
============================================================================================== Index Debt Ratings Facility Fee LIBOR Margin (basis (S&P/Moody's) (basis points per annum) points per annum) - ---------------------------------------------------------------------------------------------- Category 1 A/A2 or higher 12.5 17.5 - ---------------------------------------------------------------------------------------------- Category 2 A-/A3 12.5 27.5 - ---------------------------------------------------------------------------------------------- Category 3 BBB+/Baa1 12.5 37.5 - ---------------------------------------------------------------------------------------------- Category 4 BBB/Baa2 12.5 50.0 - ---------------------------------------------------------------------------------------------- Category 5 BBB-/Baa3 12.5 62.5 - ---------------------------------------------------------------------------------------------- Category 6 BB+/Bal or lower 12.5 87.5 ==============================================================================================
For purposes of the foregoing, (i) if neither Moody's nor S&P shall have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last two sentences of this definition), then both such rating agencies shall be deemed to have established a rating in Category 6; (ii) if only one of Moody's or S&P shall have in effect a rating for the Index Debt, then the Borrower and the Lenders will negotiate in good faith to agree upon another rating agency to be substituted by an amendment to this Agreement for the rating agency which shall not have a rating in effect, and in the absence of such amendment the Applicable Rate will be determined by reference to the available rating; (iii) if the ratings established or deemed to have been established by Moody's and S&P for the Index Debt shall fall within different Categories, the Applicable Rate shall be based on the higher of the two ratings unless one of the two ratings is two or more Categories lower than the other, in which case the Applicable Rate shall be determined by reference to the Category next below that of the higher of the two ratings; and (iv) if the ratings established or deemed to have been established by Moody's and S&P for the Index Debt shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating or ratings most recently in effect prior to such change or cessation. If both Moody's and S&P shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to agree upon a substitute rating agency and to amend the references to specific ratings in this definition to reflect the ratings used by such substitute rating agency, and in the absence of such amendment then both such rating agencies shall be deemed to have established a rating in Category 6. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by 4 Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent and the Borrower. "Attributable Debt" means, at any date with respect to any Sale/Leaseback Transaction in respect of which the obligations of the Borrower, any Subsidiary or any CSX Conrail Subsidiary do not constitute Capital Lease Obligations, the aggregate amount of rental payments due from the Borrower, such Subsidiary or such CSX Conrail Subsidiary, as the case may be, under the lease entered into in connection with such Sale/Leaseback Transaction during the remaining term of such lease, net of rental payments which have been defeased or secured by deposits, discounted from the respective due dates thereof to such date using a discount rate equal to the discount rate that would then be used to calculate the amount of Capital Lease Obligations with respect to a comparable capital lease. "Availability Period" means the period from and including the Closing Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrower" means CSX Corporation, a Virginia corporation. "Borrowing" means (a) Revolving Loans of the same Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect or (b) a Competitive Loan or group of Competitive Loans of the same Type made on the same date and as to which a single Interest Period is in effect. "Borrowing Request" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Cash Collateral Account" has the meaning assigned to such term in Section 2.10(c). "Change in Control" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 30% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower, (b) occupation of 5 a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated, or (c) the acquisition of direct or indirect Control of the Borrower by any Person or group. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.14(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Class" refers, when used in reference to any Loan or Borrowing, to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Competitive Loans. "Closing Date" means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02), which date shall be no later than June 7, 2002. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Co-Documentation Agents" means the collective reference to Credit Suisse First Boston and Mizuho Corporate Bank, Ltd., in their respective capacities as co-documentation agents hereunder. "Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. "Competitive Bid" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.04. "Competitive Bid Rate" means, with respect to any Competitive Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid. "Competitive Bid Request" means a request by the Borrower for Competitive Bids in accordance with Section 2.04. "Competitive Loan" means a Loan made pursuant to Section 2.04. "Competitive Loan Note" has the meaning assigned to such term in Section 2.09(e). "Conrail" means Conrail Inc., a Pennsylvania corporation. 6 "Conrail Shares" means the collective reference to all of the issued and outstanding shares of common stock of Conrail. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Co-Syndication Agents" means the collective reference to Citibank, N.A. and The Bank of Nova Scotia, in their respective capacities as co-syndication agents hereunder. "CSX Conrail Assets" means any assets of any CSX/NS Acquisition Sub Entity made available for the separate use and benefit of the Borrower and/or any Subsidiary pursuant to the CSX/NS Agreement (or the definitive documentation referred to therein). "CSX Conrail Attributable Debt" means any Attributable Debt of any CSX/NS Acquisition Sub Entity which is to be paid in full directly or indirectly by the Borrower and the Subsidiaries and/or by any CSX Conrail Subsidiaries. "CSX Conrail Debt" means, as to any CSX/NS Acquisition Sub Entity at any date of determination thereof, any obligation of such CSX/NS Acquisition Sub Entity to the extent that (a) such obligation should be reflected in "Short Term Debt" or "Long Term Debt" on a consolidated balance sheet or statement of financial position of such CSX/NS Acquisition Sub Entity at such date in accordance with GAAP and (b) such obligation is to be paid in full directly or indirectly by the Borrower and the Subsidiaries and/or by any CSX Conrail Subsidiaries. "CSX Conrail Railroad Subsidiary" means any CSX/NS Entity which is a Class I common carrier by rail under the rules of the Surface Transportation Board or has Allocable Railroad Revenues for the most recent period of four fiscal quarters of the Borrower that exceed an amount equal to 5% of the sum of, without duplication, (a) the aggregate Railroad Revenues of the Borrower and the Subsidiaries for such period and (b) the aggregate Allocable Railroad Revenues of the CSX/NS Entities for such period. "CSX Conrail Shares" means the Conrail Shares owned directly or indirectly by the Borrower. "CSX Conrail Subsidiary" means any CSX/NS Acquisition Sub Entity whose sole assets consist of CSX Conrail Assets. "CSX/NS Acquisition Sub" means CRR Holdings LLC, a Delaware limited liability company. "CSX/NS Acquisition Sub Entity" means CSX/NS Acquisition Sub or any of its subsidiaries. "CSX/NS Agreement" means the Letter Agreement dated April 8, 1997 between the Borrower and NS providing for the joint acquisition of Conrail. "CSX/NS Entity" means CSX/NS Acquisition Sub or any of its subsidiaries (other than any NS Conrail Subsidiaries). 7 "Debt" means, as to the Borrower, any Subsidiary or any CSX Conrail Subsidiary at any date of determination thereof, any obligation of the Borrower, such Subsidiary or such CSX Conrail Subsidiary, as the case may be, to the extent that such obligation should be reflected in "Short Term Debt" or "Long Term Debt" on a consolidated balance sheet or statement of financial position of the Borrower, such Subsidiaries and such CSX Conrail Subsidiaries at such date in accordance with GAAP and, for such purposes, the amount of any obligation of any CSX Conrail Subsidiary which shall be included as "Debt" of the Borrower shall be equal to the Allocable CSX/NS Debt of such CSX Conrail Subsidiary (except that, for purposes of Section 6.05, the Allocable CSX/NS Debt of any CSX Conrail Subsidiary shall be calculated without giving effect to clause (c) of the proviso to the definition of Allocable CSX/NS Debt). "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06. "dollars" or "$" refers to lawful money of the United States of America. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources or the management, release or threatened release of any Hazardous Material. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower, any Subsidiary or any CSX/NS Entity directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or 8 Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate (or, in the case of a Competitive Loan, the LIBO Rate). "Event of Default" has the meaning assigned to such term in Article VII. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) income and any branch profits taxes imposed as a result of a present or former connection between the Administrative Agent, any Lender or other recipient of such payment and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement) and (b) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.18(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.16(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.16(a). "Existing Credit Agreement" means the 364-Day Revolving Credit Agreement, dated as of June 8, 2001, among CSX Corporation, a Virginia corporation, as borrower, the lenders parties thereto, Citibank, N.A. and The Bank of Nova Scotia, as co-syndication agents, Credit Suisse First Boston and Mizuho Financial Group, as co-documentation agents, and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as administrative agent. "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. 9 "Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower. "Five-Year Credit Agreement" means the Five-Year Revolving Credit Agreement, dated as of June 8, 2001, among CSX Corporation, a Virginia corporation, as borrower, the lenders parties thereto, Citibank, N.A. and The Bank of Nova Scotia, as co-syndication agents, Credit Suisse First Boston and Mizuho Financial Group, as co-documentation agents, and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as administrative agent. "Fixed Rate" means, with respect to any Competitive Loan (other than a Eurodollar Competitive Loan), the fixed rate of interest per annum specified by the Lender making such Competitive Loan in its related Competitive Bid. "Fixed Rate Loan" means a Competitive Loan bearing interest at a Fixed Rate. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than the United States of America, any State thereof or the District of Columbia. "Foreign Subsidiary" means any Subsidiary that is organized under the laws of a jurisdiction other than the United States of America, any State thereof or the District of Columbia. "GAAP" means generally accepted accounting principles in the United States of America. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any collateral security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or 10 petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Indebtedness" of any Person means, without duplication, (a) all payment obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all payment obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all payment obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all payment obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all payment obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all payment obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indemnified Taxes" means Taxes arising directly from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement other than Excluded Taxes and Other Taxes. "Index Debt" means senior, unsecured, long-term indebtedness for borrowed money of the Borrower that is not guaranteed by any other Person or subject to any other credit enhancement. "Information" has the meaning assigned to such term in Section 9.12. "Interest Election Request" means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.07. "Interest Payment Date" means (a) with respect to any ABR Loan, the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period and (c) with respect to any Fixed Rate Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate Borrowing with an Interest Period of more than 90 days' duration (unless otherwise 11 specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days' duration after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Interest Payment Dates with respect to such Borrowing. "Interest Period" means (a) with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect, and (b) with respect to any Fixed Rate Borrowing, the period (which shall not be less than 7 days or more than 360 days) commencing on the date of such Borrowing and ending on the date specified in the applicable Competitive Bid Request; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Lender Affiliate" means (a) with respect to any Lender, (i) an Affiliate of such Lender or (ii) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or an Affiliate of such Lender and (b) with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "Lenders" means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance or pursuant to Section 2.18. "LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London 12 interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" means, (a) with respect to any asset, (i) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, or (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (b) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities (other than with respect to the capital stock of any Foreign Subsidiary, any such option or right granted consistent with the past practice of the Borrower and the Subsidiaries). "Loans" means the loans made by the Lenders to the Borrower pursuant to this Agreement. "Majority Lenders" means, at any time, Lenders having Revolving Credit Exposures and unused Commitments representing at least 51% of the sum of the total Revolving Credit Exposures and unused Commitments at such time; provided that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Credit Exposures in determining the Majority Lenders. "Margin" means, with respect to any Competitive Loan bearing interest at a rate based on the LIBO Rate, the marginal rate of interest, if any, to be added to or subtracted from the LIBO Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid. "Margin Stock" has the meaning assigned to such term in Regulation U (including, so long as the same constitute Margin Stock under Regulation U, the Shares). "Material Adverse Effect" means an adverse effect on the business, assets, operations or condition, financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole, in an aggregate amount in excess of an amount equal to 3% of Total Shareholders' Equity. "Material Indebtedness" means Indebtedness (other than the Loans) of any one or more of the Borrower, the Subsidiaries and the CSX/NS Entities in an aggregate principal amount exceeding $75,000,000. "Maturity Date" means the day which is 364 days after the Closing Date. "Moody's" means Moody's Investors Service, Inc. or any successor to its corporate debt ratings business. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Cash Proceeds" means, with respect to any sale or other disposition of Shares, the cash proceeds (including cash equivalents and any cash payments received by way of 13 deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received) of such sale or other disposition received by the Borrower or any Subsidiary, net of all attorneys' fees, accountants' fees, investment banking fees and other customary fees actually incurred by the Borrower or any Subsidiary and documented in connection therewith and net of taxes paid or reasonably expected to be payable by the Borrower or any Subsidiary as a result thereof. "Notes" means the collective reference to any Competitive Loan Notes and Revolving Loan Notes. "NS" means Norfolk Southern Corporation, a Virginia corporation. "NS Conrail Assets" means any assets of any CSX/NS Acquisition Sub Entity made available for the separate use and benefit of NS or any of its subsidiaries pursuant to the CSX/NS Agreement (or the definitive documentation referred to therein). "NS Conrail Attributable Debt" means any Attributable Debt of any CSX/NS Acquisition Sub Entity which is to be paid in full directly or indirectly by NS and its subsidiaries and/or by any NS Conrail Subsidiaries. "NS Conrail Debt" means, as to any CSX/NS Acquisition Sub Entity at any date of determination thereof, any obligation of such CSX/NS Acquisition Sub Entity to the extent that (a) such obligation should be reflected in "Short Term Debt" or "Long Term Debt" on a consolidated balance sheet or statement of financial position of such CSX/NS Acquisition Sub Entity at such date in accordance with GAAP and (b) such obligation is to be paid in full directly or indirectly by NS and its subsidiaries and/or by any NS Conrail Subsidiaries. "NS Conrail Subsidiary" means any CSX/NS Acquisition Sub Entity whose sole assets consist of NS Conrail Assets. "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising directly from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "Participant" has the meaning assigned to such term in Section 9.04(e). "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business; 14 (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations (other than ERISA); (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; and (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary (or, with respect to any CSX Conrail Assets, any CSX Conrail Subsidiary); provided that the term "Permitted Encumbrances" shall not include any Lien securing Debt. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Prime Rate" means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Railroad Revenues" means, with respect to any Person for any period, all revenues of such Person from third parties which should, in accordance with GAAP, be included in operating revenues of such Person's railroad subsidiaries as reflected in the consolidated financial statements (or in the "Management's Discussion and Analysis" section of the report on Form 10-K or 10-Q related thereto) of such Person for such period. "Railroad Subsidiary" means any Subsidiary that is a Class I common carrier by rail under the rules of the Surface Transportation Board or any other Subsidiary the Railroad Revenues of which for the most recent period of four fiscal quarters of the Borrower exceed an amount equal to 5% of the sum of, without duplication, (a) the aggregate Railroad Revenues of the Borrower and the Subsidiaries for such period and (b) the aggregate Allocable Railroad Revenues of the CSX/NS Entities for such period. "Register" has the meaning assigned to such term in Section 9.04(c). "Regulation G" means Regulation G of the Board. "Regulation U" means Regulation U of the Board. 15 "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Restricted Margin Stock" means Margin Stock owned by the Borrower or any Subsidiary which represents not more than 33-1/3% of the aggregate value (determined in accordance with Regulation U), on a consolidated basis, of the property and assets of the Borrower and the Subsidiaries (other than any Margin Stock) that is subject to the provisions of Article 6 (including Section 6.02). "Revolving Credit Exposure" means, with respect to any Lender at any time the outstanding principal amount of such Lender's Revolving Loans. "Revolving Loan" means a Loan made pursuant to Section 2.03. "Revolving Loan Note" has the meaning assigned to such term in Section 2.09(e). "Sale/Leaseback Transaction" has the meaning assigned to such term in Section 6.03. "S&P" means Standard & Poor's Ratings Group or any successor to its corporate debt ratings business. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission. "Shares" means the issued and outstanding shares of common stock of Conrail and of CSX/NS Acquisition Sub and any subsidiary of CSX/NS Acquisition Sub which directly or indirectly owns the common stock of Conrail. "Significant CSX/NS Entity" means any CSX/NS Entity (other than any CSX Conrail Subsidiary) that, assuming such CSX/NS Entity were a Subsidiary, would be a "significant subsidiary" of the Borrower within the meaning of the SEC's Regulation S-X (based upon the Borrower's direct or indirect proportionate beneficial ownership of the assets and income of such CSX/NS Entity) and any other CSX/NS Entity that the Borrower may from time to time designate as a "Significant CSX/NS Entity" by written notice to such effect to the Administrative Agent. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" of the Borrower within the meaning of the SEC's Regulation S-X, any CSX Conrail Subsidiary that, if such CSX Conrail Subsidiary were a Subsidiary, would be a "significant subsidiary" of the Borrower within the meaning of the SEC's Regulation S-X and any other Subsidiary that the Borrower may from time to time designate as a "Significant Subsidiary" by written notice to such effect to the Administrative Agent. "Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject for eurocurrency funding (currently referred to as "Eurocurrency 16 liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date. "Subsidiary" means any subsidiary of the Borrower, provided that no CSX/NS Acquisition Sub Entity shall be a Subsidiary for purposes of this Agreement. "Successor Corporation" has the meaning assigned to such term in Section 6.04. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Total Capitalization" means, at any date of determination thereof, the sum of Total Debt at such date plus Total Shareholders' Equity at such date. "Total Debt" means, at any date of determination thereof, without duplication, (a) all Debt of the Borrower and the Subsidiaries at such date plus (b) the Allocable CSX/NS Debt of the CSX/NS Acquisition Sub Entities at such date (calculated without giving effect to clause (c) of the proviso to the definition of Allocable CSX/NS Debt). "Total Shareholders' Equity" means, as to the Borrower at any date of determination thereof, (a) the sum of all items which would be included under shareholders' equity on a consolidated balance sheet or statement of financial position of the Borrower at such date in accordance with GAAP plus, without duplication, (b) the excess, if any, of (i) the aggregate purchase price of all CSX Conrail Shares and all Conrail Shares directly or indirectly owned by the Borrower and the Subsidiaries over (ii) the Allocable CSX/NS Debt of the CSX/NS Acquisition Sub Entities at such date (calculated without giving effect to clause (c) of the proviso to the definition of Allocable CSX/NS Debt). In the event that any CSX Conrail Assets become assets of the Borrower or any Subsidiary, Total Shareholders' Equity shall for all purposes of this Agreement continue to be computed as if such assets had not become assets of the Borrower or such Subsidiary. "Transactions" means the execution, delivery and performance by the Borrower of this Agreement and any Notes, the borrowing of Loans and the use of the proceeds thereof. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO Rate or a Fixed Rate. "Unrestricted Margin Stock" means any Margin Stock owned by the Borrower or any Subsidiary which is not Restricted Margin Stock. 17 "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar Revolving Borrowing"). SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "but not limited to". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Majority Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II The Credits SECTION 2.01. Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's 18 Revolving Credit Exposure exceeding such Lender's Commitment or (b) the Aggregate Outstanding Extensions of Credit exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. SECTION 2.02. Loans and Borrowings. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.04. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.13, (i) each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be comprised entirely of Eurodollar Loans or Fixed Rate Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $10,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000; provided that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments. Each Competitive Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of 20 Eurodollar Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. SECTION 2.03. Requests for Revolving Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; 19 (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. Competitive Bid Procedure. (a) Subject to the terms and conditions set forth herein, from time to time during the Availability Period the Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; provided that the Aggregate Outstanding Extensions of Credit at any time shall not exceed the total Commitments at such time. To request Competitive Bids, the Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, four Business Days before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; provided that the Borrower may submit up to (but not more than) three Competitive Bid Requests at the same time on the same day, but a Competitive Bid Request shall not be made within three Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be a Eurodollar Borrowing or a Fixed Rate Borrowing; (iv) the Interest Period to be applicable to such Borrowing, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06. 20 Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be in a form approved by the Administrative Agent and must be received by the Administrative Agent by telecopy, in the case of a Eurodollar Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing and, in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be a minimum of $5,000,000 and an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make, (ii) the Competitive Bid Rate or Rates at which the Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iii) the Interest Period applicable to each such Loan and the last day thereof. (c) The Administrative Agent shall promptly notify the Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Subject only to the provisions of this paragraph, the Borrower may accept or reject any Competitive Bid. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent, whether and to what extent it has decided to accept or reject each Competitive Bid, in the case of a Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the proposed date of the Competitive Borrowing; provided that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, the Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further that, if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall 21 be rounded to integral multiples of $1,000,000 in a manner determined by the Borrower. A notice given by the Borrower pursuant to this paragraph shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. SECTION 2.05. [Intentionally Omitted]. SECTION 2.06. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request or Competitive Bid Request. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing and the Administrative Agent shall promptly return to the Borrower any amount (including interest) paid by the Borrower to the Administrative Agent pursuant to the immediately preceding sentence, together with any interest thereon paid by such Lender for any day not covered by the Borrower's payment. SECTION 2.07. Interest Elections. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different 22 options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Majority Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving 23 Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.08. Expiration, Termination and Reduction of Commitments. (a) Unless previously terminated, the Commitments shall expire on the Maturity Date. (b) Upon any direct or indirect sale or other disposition of Shares (other than Shares constituting Unrestricted Margin Stock) directly or indirectly beneficially owned by the Borrower (other than (i) to the Borrower's direct or indirect Subsidiaries, (ii) to any wholly-owned subsidiary of CSX/NS Acquisition Sub so long as the Borrower's direct or indirect proportionate beneficial ownership of the Shares shall not be reduced as a result thereof, or (iii) to NS or its subsidiaries or any CSX/NS Acquisition Sub Entity in consideration of the acquisition of any assets of Conrail or any of its subsidiaries by the Borrower or any Subsidiary), the Commitments shall be automatically reduced in an amount equal to 100% of the Net Cash Proceeds to the Borrower and the Subsidiaries of any such sale or other disposition of Shares (other than Shares constituting Unrestricted Margin Stock). Each such reduction shall become effective on the fifth Business Day following receipt by the Borrower or any Subsidiary, as the case may be, of any such Net Cash Proceeds. (c) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $10,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.10, the Aggregate Outstanding Extensions of Credit would exceed the total Commitments. (d) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (c) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. (e) The Borrower may elect to extend the maturity of all or any portion of the Revolving Loans outstanding on the Maturity Date to the date which is the first anniversary of the Maturity Date by giving written notice of such election to the Administrative Agent at least 30 days prior to the Maturity Date. SECTION 2.09. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan on the Maturity Date and (ii) to the Administrative Agent for the account of each applicable Lender the then unpaid principal amount of each Competitive Loan on the last day of the Interest Period applicable to such Loan. 24 (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. In case of any discrepancy between the entries made by the Administrative Agent pursuant to this paragraph and the entries made by any Lender pursuant to paragraph (b) of this Section, such Lender's entries shall be considered correct, in the absence of manifest error. (d) In case of any dispute, action or proceeding relating to any Loan, the entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request of the Borrower that (i) Revolving Loans made by it be evidenced by a promissory note, substantially in the form of Exhibit B-1 (a "Revolving Loan Note") and (ii) Competitive Loans made by it be evidenced by a promissory note, substantially in the form of Exhibit B-2 (a "Competitive Loan Note"). In such event, the Borrower shall prepare, execute and deliver to such Lender promissory notes in such forms payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns). Thereafter, the Loans evidenced by such promissory notes and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such forms payable to the order of the payee named therein (or, if any such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.10. Optional and Mandatory Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section; provided that the Borrower shall not have the right to prepay any Competitive Loan without the prior written consent of the Lender thereof. (b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment to be made pursuant to paragraph (a) of this Section (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.08, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with 25 Section 2.08. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by payment of accrued interest to the extent required by Section 2.12. (c) If, following any reduction of the total Commitments in connection with any sale or other disposition of Shares by the Borrower or any Subsidiary, the Aggregate Outstanding Extensions of Credit exceed the total Commitments, the Borrower shall, without notice or demand, immediately repay Revolving Loans in an aggregate principal amount equal to the lesser of (i) the amount of such excess and (ii) the aggregate principal amount of Revolving Loans then outstanding, together with interest accrued to the date of such payment or prepayment on the principal so prepaid and any amounts payable under Section 2.15 in connection therewith. To the extent that after giving effect to any prepayment of Revolving Loans required by the preceding sentence, the Aggregate Outstanding Extensions of Credit still exceed the total Commitments, the Borrower shall, without notice or demand, immediately deposit in a Cash Collateral Account upon terms reasonably satisfactory to the Administrative Agent an amount equal to the amount of such remaining excess. The Administrative Agent shall apply any cash deposited in the Cash Collateral Account (to the extent thereof) to repay the principal of each Competitive Loan on the date such principal becomes due and payable hereunder, provided that the Administrative Agent shall release to the Borrower from time to time such portion of the amount on deposit in the Cash Collateral Account which is equal to the amount by which the total Commitments at such time plus the amount on deposit in the Cash Collateral Account exceeds the Aggregate Outstanding Extensions of Credit at such time. "Cash Collateral Account" means an account, in the name of the Administrative Agent for the benefit of the Lenders, established by the Borrower with the Administrative Agent and over which the Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal for application in accordance with this Section. SECTION 2.11. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the Closing Date to but excluding the date on which such Commitment expires or is terminated; provided that, if such Lender continues to have any Revolving Credit Exposure after its Commitment terminates, then such facility fee shall continue to accrue on the daily amount of such Lender's Revolving Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Revolving Credit Exposure. Accrued facility fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; provided that any facility fees accruing after the date on which the Commitments terminate shall be payable on demand. All facility fees shall be computed on the basis of a year of 365 (or 366 in the case of a leap year) days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a utilization fee, which shall accrue at a rate per annum of 0.125% on the daily 26 amount of such Lender's Revolving Credit Exposure, for any periods during which (i) the sum of (A) the Aggregate Outstanding Extensions of Credit hereunder plus (B) the Aggregate Outstanding Extensions of Credit (as defined in the Five-Year Credit Agreement) under the Five-Year Credit Agreement exceeds (ii) 50% of the sum of (A) the aggregate amount of Commitments hereunder plus (B) the aggregate amount of Commitments (as defined in the Five-Year Credit Agreement) under the Five-Year Credit Agreement. Accrued utilization fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first applicable such date to occur after the date hereof. All utilization fees shall be computed on the basis of a year of 365 (or 366 in the case of a leap year) days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of facility fees and utilization fees, to the Lenders. Fees paid shall not be refundable under any circumstances. SECTION 2.12. Interest. (a) The Loans comprising each ABR Borrowing shall bear interest at a rate per annum equal to the Alternate Base Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at a rate per annum equal to (i) in the case of a Eurodollar Revolving Loan, the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate or (ii) in the case of a Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus (or minus, as applicable) the Margin applicable to such Loan. (c) Each Fixed Rate Loan shall bear interest at a rate per annum equal to the Fixed Rate applicable to such Loan. (d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, from and including the date such amount shall become due, but excluding the date such amount shall be paid in accordance with Section 2.17, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided above. (e) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan; provided that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment, (iii) in the event of any conversion of any Eurodollar Revolving Loan prior to the end of the current Interest Period therefor, accrued interest on such 27 Loan shall be payable on the effective date of such conversion and (iv) all accrued interest shall be payable upon termination of the Commitments. (f) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be presumptively correct absent manifest error. SECTION 2.13. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be presumptively correct, absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or (b) the Administrative Agent is advised by the Majority Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender that is required to make such Loan) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, (ii) if any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any request by the Borrower for a Eurodollar Competitive Borrowing shall be ineffective; provided that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrower for Eurodollar Competitive Borrowings may be made to Lenders that are not affected thereby and (B) if the circumstances giving rise to such notice affect only one Type of Borrowings, then the other Type of Borrowings shall be permitted. SECTION 2.14. Increased Costs. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans or Fixed Rate Loans made by such Lender; 28 and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Lender hereunder in respect of such Loan by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender, to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of a Lender setting forth the amount or amounts (including the basis therefor and the calculation thereof) necessary to compensate such Lender or its holding company as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be presumptively correct absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than three months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the three-month period referred to above shall be extended to include the period of retroactive effect thereof. (e) Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. SECTION 2.15. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.10(b) and is revoked in accordance herewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurodollar Loan or Fixed Rate Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.18, then, in any such event, the Borrower shall compensate each Lender for the loss and the actual cost and 29 expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount reasonably determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBO Rate (in the case of a Eurodollar Revolving Loan) or the LIBO Rate (in the case of a Eurodollar Competitive Loan) for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an Affiliate of such Lender) for dollar deposits from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive (including the basis therefor and the calculation thereof) pursuant to this Section shall be delivered to the Borrower and shall be presumptively correct absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.16. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or each Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent and each Lender, within 30 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto to the extent such penalties, interest and expenses shall not result from any action or inaction on the part of the Administrative Agent or such Lender, as the case may be, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability (including the basis therefor and the calculation thereof) delivered to the Borrower by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be presumptively correct absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental 30 Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Unless after the date any Foreign Lender becomes a Lender hereunder there is a Change in Law which would prevent such Foreign Lender from duly completing and delivering such documentation and such Foreign Lender so advises the Administrative Agent and the Borrower, such Foreign Lender shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit payments made under this Agreement to be made without withholding. (f) If the Borrower determines in good faith that a reasonable basis exists for contesting a Tax, the relevant Lender or the Administrative Agent, as applicable, shall cooperate with the Borrower in challenging such Tax at the Borrower's expense if requested by the Borrower. If any Lender or the Administrative Agent, as applicable, obtains a credit against or receives a refund or reduction (whether by way of direct payment or by offset) of any Tax for which payment has been made pursuant to this Section, which credit, refund or reduction in the good faith judgment of such Lender or the Administrative Agent, as the case may be, (and without any obligation to disclose its tax records) is allocable to such payment made under this Section, the amount of such credit, refund or reduction (together with any interest received thereon) promptly shall be paid to the Borrower to the extent payment has been made in full by the Borrower pursuant to this Section. SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest or fees, or under Section 2.14, 2.15 or 2.16, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except that payments pursuant to Sections 2.14, 2.15, 2.16 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension at the same applicable rate. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its 31 Revolving Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may, subject to Section 9.08, exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.06(b) or 2.17(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.18. Mitigation Obligations; Replacement of Lenders. (a) If any Lender or a Participant in such Lender's Loans requests compensation under Section 2.14, or if the Borrower is required to pay any additional amount to any Lender or a Participant in such Lender's Loans or any Governmental Authority for the account of any Lender or Participant pursuant to Section 2.16, then such Lender or Participant shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or Affiliates, if, in the reasonable judgment of such Lender or Participant, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.14 or 2.16, as the case may be, in the future and (ii) would not subject such Lender or Participant to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender or Participant. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender or Participant in connection with any such designation or assignment. Without limiting the generality of the foregoing, each Lender and Participant shall use all reasonable efforts to mitigate the effect upon the Borrower of 32 any increased capital requirement and shall assess any cost related to such increased capital on a nondiscriminatory basis among the Borrower and other borrowers of such Lender or Participant to which such cost applies and such Lender or Participant shall not be entitled to be compensated for any increased capital requirement unless it is, as a result of such law, regulation, guideline or request, such Lender's or Participant's policy generally to seek to exercise such rights, where available, against other borrowers of such Lender or Participant. (b) If any Lender or a Participant in such Lender's Loans requests compensation under Section 2.14, or if the Borrower is required to pay any additional amount to any Lender or Participant or any Governmental Authority for the account of any Lender or Participant pursuant to Section 2.16, or if any Lender defaults in its obligation to fund Loans hereunder, or if any Lender shall have a credit rating of C/D (or its equivalent) or lower by Thomson BankWatch, Inc. (or any successor thereto), then the Borrower shall have the right, at its sole expense, upon notice to such Lender and the Administrative Agent, to require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, each Issuing Bank) which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans), accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.14 or payments required to be made pursuant to Section 2.16, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. ARTICLE III Representations and Warranties The Borrower represents and warrants to the Lenders that: SECTION 3.01. Organization; Powers. Each of the Borrower and the Significant Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, would not result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. SECTION 3.02. Authorization; Enforceability. The Transactions are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action of the Borrower. This Agreement has been duly executed and delivered by the Borrower and constitutes, and each Note when executed and delivered by the Borrower will constitute, a legal, 33 valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower, any Subsidiary or any CSX/NS Entity or any order of any Governmental Authority, (c) will not violate or result in a default, or give rise to a right to require any material payment, under any indenture, agreement or other instrument binding upon the Borrower, any Subsidiary or any of their respective assets (or, in the case of CSX/NS Acquisition Sub or Conrail or any of its subsidiaries (excluding any NS Conrail Subsidiaries), any indenture, agreement or other instrument a violation, default or required payment under which would result in a Material Adverse Effect), and (d) will not result in the creation or imposition of any Lien on any material asset of the Borrower or any Subsidiary (or, in the case of CSX/NS Acquisition Sub or Conrail or any of its subsidiaries (excluding any NS Conrail Subsidiaries), any Lien on any of its assets if such Lien would result in a Material Adverse Effect). SECTION 3.04. Financial Condition; No Material Adverse Change. (a) The Borrower has heretofore furnished to the Lenders its consolidated statement of financial position, and statements of earnings, changes in shareholders' equity and cash flows (i) as of and for the fiscal year ended December 28, 2001, reported on by Ernst & Young LLP, independent public accountants, and (ii) except for statements of changes in shareholders' equity, as of and for the fiscal quarter ended March 29, 2002, certified by a Financial Officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. (b) Since December 28, 2001, there has been no Material Adverse Effect. SECTION 3.05. Properties. (a) Each of the Borrower and the Subsidiaries has good title to, or valid leasehold interests in or rights to use, all its real and personal property material to its business, except for such irregularities that, individually or in the aggregate, would not result in a Material Adverse Effect. (b) Each of the Borrower and the Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and the Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, would not result in a Material Adverse Effect. SECTION 3.06. Litigation and Environmental Matters. (a) There is no pending litigation or administrative proceeding or other legal or regulatory development that is reasonably likely to result in a Material Adverse Effect or to materially adversely affect the rights and remedies of the Lenders hereunder. 34 (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, would not result in a Material Adverse Effect, neither the Borrower nor any Subsidiary nor any CSX/NS Entity (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. SECTION 3.07. Compliance with Laws and Agreements. Each of the Borrower, the Subsidiaries and the CSX/NS Entities is in compliance with all laws, regulations and orders (other than Environmental Laws) of any Governmental Authority applicable to it or its property (including Regulation U) and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, would not result in a Material Adverse Effect. No Default has occurred and is continuing. SECTION 3.08. Investment and Holding Company Status. Neither the Borrower nor any Subsidiary is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.09. Taxes. Each of the Borrower, the Subsidiaries and the CSX/NS Entities has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower, such Subsidiary or such CSX/NS Entity, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so would not result in a Material Adverse Effect. SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, would result in a Material Adverse Effect. SECTION 3.11. Disclosure. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected or pro forma financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time, it being understood that such pro forma statements or projections are inherently subjective and are subject to significant uncertainties and contingencies many of which are beyond the control of the Borrower and that no assurance can be given that such projections or pro forma financial statements will be realized. 35 ARTICLE IV Conditions SECTION 4.01. Closing Date. This Agreement shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (a) The Administrative Agent (or its counsel) shall have received from the Borrower and the Lenders either (i) counterparts of this Agreement signed on behalf of such parties or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such parties have each signed a counterpart of this Agreement. (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Closing Date) of (i) Wachtell, Lipton, Rosen & Katz, special counsel for the Borrower, substantially in the form of Exhibit C, and (ii) the General Counsel or an Assistant General Counsel of the Borrower, substantially in the form of Exhibit D. The Borrower hereby requests such counsel to deliver such opinions. (c) The Administrative Agent shall have received (i) a certificate of the Borrower, dated the Closing Date, as to the incumbency and signature of the officers of the Borrower executing this Agreement and authorized to execute Notes reasonably satisfactory in form and substance to the Administrative Agent and (ii) true and complete copies of the certificate of incorporation and by-laws of the Borrower, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. (d) The Administrative Agent shall have received a certificate, dated the Closing Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02. (e) The Borrower shall have paid all fees required to be paid, and all expenses required to be paid and for which invoices have been presented, on or before the Closing Date. (f) Concurrently with the effectiveness of this Agreement, (i) the Borrower shall (and does hereby) terminate the commitments under the Existing Credit Agreement and (ii) all principal, interest and fees under the Existing Credit Agreement shall be paid in full. Any advance notice required in connection with such termination or prepayment is hereby waived by the Lenders (to the extent such Lenders are parties to the Existing Credit Agreement). The Administrative Agent shall notify the Borrower and the Lenders of the Closing Date, and such notice shall be conclusive and binding. 36 SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Borrower set forth in this Agreement (other than the representations and warranties set forth in Sections 3.04(b) and 3.06) shall be true and correct on and as of the date of such Borrowing. (b) At the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing. Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Affirmative Covenants Until the Commitments shall have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Lenders that: SECTION 5.01. Financial Statements and Other Information. The Borrower will furnish to each Lender through the Administrative Agent: (a) as soon as available but in any event within 120 days after the end of each fiscal year of the Borrower, its audited consolidated statement of financial position and related statements of earnings, changes in shareholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Ernst & Young LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial position, results of operations and cash flows of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP; provided, however, that the Borrower may deliver, in lieu of the foregoing, the annual report of the Borrower for such fiscal year on Form 10-K filed with the SEC, but only so long as the financial statements contained in such annual report on Form 10-K are substantially the same in content as the financial statements referred to in the preceding provisions of this paragraph (a); (b) as soon as available but in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, its consolidated statement of financial position and related statements of earnings and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial position, results of operations and cash flows of the Borrower and its 37 consolidated Subsidiaries on a consolidated basis in accordance with GAAP, subject to normal year-end audit adjustments and the absence of footnotes; provided, however, that the Borrower may deliver, in lieu of the foregoing, the quarterly report of the Borrower for such fiscal quarter on Form 10-Q filed with the SEC, but only so long as the financial statements contained in such quarterly report on Form 10-Q are substantially the same in content as the financial statements referred to in the preceding provisions of this paragraph (b); (c) concurrently with each delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether, to the best knowledge of such Financial Officer, a Default has occurred and is continuing and, if a Default has occurred and is continuing, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.05 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with each delivery of financial statements under clause (a) above, a letter signed by the accounting firm that reported on such financial statements to the effect that, in the course of the examination upon which their report for such fiscal year was based (but without any special or additional audit procedures for that purpose other than review of the terms and provisions of this Agreement), nothing came to their attention that caused them to believe that there were any Defaults or Events of Default involving accounting matters or, if such accountants became aware of any such Defaults or Events of Default, specifying the nature thereof; (e) promptly after the same become publicly available, copies of all periodic and other reports on Forms 8-K, 10-Q and 10-K and all proxy statements filed by the Borrower or any Subsidiary with the SEC or any other documents distributed by the Borrower to its shareholders generally which contain the equivalent information to that contained in such Forms or proxy statements; (f) upon any sale or other disposition of Shares by the Borrower or any Subsidiary, a certificate of a Financial Officer setting forth in reasonable detail the calculations required to determine the portion of such Shares which constitute Restricted Margin Stock, the portion of such Shares which constitute Unrestricted Margin Stock and the Net Cash Proceeds attributable to each such portion; and (g) promptly following any request therefor, such other information regarding the operations and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. SECTION 5.02. Notices of Material Events. The Borrower will furnish to each Lender through the Administrative Agent prompt written notice of the following: 38 (a) within three Business Days after any Financial Officer obtains knowledge of the occurrence of any Default which is continuing, the occurrence of such Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Subsidiary that would, in the reasonable judgment of the Borrower, result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, would, in the reasonable judgment of the Borrower, result in a Material Adverse Effect; and (d) any other development that results in, or would in the reasonable judgment of the Borrower result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03. Existence; Conduct of Business. The Borrower will, and will cause each Significant Subsidiary to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises it reasonably deems necessary to the conduct of its business; provided that the foregoing shall not prohibit any merger, consolidation or disposition not prohibited under Section 6.04 or prohibit the Borrower or any Significant Subsidiary from discontinuing any business or forfeiting any right, license, permit, privilege or franchise to the extent it reasonably deems appropriate in the ordinary course of its business. SECTION 5.04. Payment of Obligations. The Borrower will, and will cause each Subsidiary and each CSX Conrail Subsidiary to, pay its obligations, including Tax liabilities, that, if not paid, would result in a Material Adverse Effect before the same shall become delinquent or in default, except where the validity or amount thereof is being contested in good faith by appropriate proceedings. SECTION 5.05. Maintenance of Properties; Insurance. The Borrower will, and will cause each Significant Subsidiary to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain insurance with financially sound insurance companies (including captive or affiliated insurance companies) or, to the extent consistent with prudent business practice, programs of self-insurance, in each case in such amounts, with such deductibles and against such risks as are reasonably appropriate. SECTION 5.06. Books and Records; Inspection Rights. The Borrower will, and will cause each Significant Subsidiary to, keep and maintain proper books of record and account in accordance with GAAP. The Borrower will, and will cause each Subsidiary and each CSX Conrail Subsidiary to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice and coordinated with the Administrative Agent, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its 39 affairs, finances and condition with its officers and independent accountants, all during normal business hours and at such reasonable times and as often as reasonably requested. SECTION 5.07. Compliance with Laws. The Borrower will, and will cause each Subsidiary and CSX Conrail Subsidiary to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, would not result in a Material Adverse Effect. SECTION 5.08. Use of Proceeds; Commitments. The proceeds of the Loans may be used for working capital and other general corporate purposes, and a portion of the Commitments may be used to support commercial paper issued by the Borrower. SECTION 5.09. Federal Regulations. No part of the proceeds of any Loan will be used for "purchasing" or "carrying" (within the respective meanings of each of the quoted terms under Regulation G or Regulation U of the Board as now and from time to time hereafter in effect) any Margin Stock in violation of the applicable requirements of such Regulations. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. ARTICLE VI Negative Covenants Until the Commitments shall have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Lenders that: SECTION 6.01. Limitation on Subsidiary Debt. The Borrower will not permit any Subsidiary or any CSX Conrail Subsidiary to create, incur or assume any Debt (other than Debt substantially secured by a Lien or Liens on assets of such Subsidiary or such CSX Conrail Subsidiary permitted under Section 6.02) after the Closing Date, except: (a) extensions, renewals and replacements of any Debt existing on the date hereof that do not increase the outstanding principal amount thereof (other than to finance payments made in connection therewith); (b) Debt of any Subsidiary or CSX Conrail Subsidiary to the Borrower or any other Subsidiary or CSX Conrail Subsidiary; (c) Debt of any Person that becomes a Subsidiary after the date hereof; provided that such Debt exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary; (d) Debt of any Subsidiary or CSX Conrail Subsidiary as an account party in respect of letters of credit; and 40 (e) other Debt; provided that (i) at the time of the creation, incurrence or assumption of such Debt and after giving effect thereto, the aggregate principal amount of all such Debt of the Subsidiaries does not exceed an amount equal to 10% of Total Capitalization at such time and (ii) any Allocable CSX/NS Debt of the CSX/NS Acquisition Sub Entities incurred after the Closing Date shall, without duplication, be treated as "Debt" of a Subsidiary for purposes of clause (i) of this proviso. SECTION 6.02. Liens. The Borrower will not, and will not permit any Subsidiary or CSX Conrail Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it (other than Unrestricted Margin Stock) to secure Debt of the Borrower, any Subsidiary or any CSX Conrail Subsidiary, except: (a) Permitted Encumbrances; (b) any Lien on any property or asset of the Borrower or any Subsidiary or Conrail or any of its subsidiaries existing on the date hereof; provided that (i) such Lien shall not apply to any other property or asset of the Borrower, any Subsidiary or any CSX Conrail Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof (other than to finance payments made in connection therewith); (c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower, any Subsidiary or any CSX/NS Entity or existing on any property or asset of any Person that becomes a Subsidiary or CSX/NS Entity after the date hereof prior to the time such Person becomes a Subsidiary or CSX/NS Entity; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary or CSX/NS Entity, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower, any Subsidiary or any CSX Conrail Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary or CSX/NS Entity, as the case may be, and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof (other than to finance payments made in connection therewith); (d) Liens on railroad locomotives, auto racks, rolling stock, vessels, barges, containers, vehicles, terminals and other fixed or capital assets acquired, constructed, improved or refurbished by or for the Borrower, any Subsidiary or any CSX Conrail Subsidiary; provided that (i) such Liens and the Debt secured thereby are incurred (A) prior to or within three years after such acquisition or the completion of such construction, improvement or refurbishment or (B) with respect to the assets of Conrail or any of its subsidiaries, not later than August 22, 2001, (ii) the Debt secured thereby does not exceed 100% of the cost of acquiring, constructing, improving or refurbishing such assets and (iii) such Liens shall not apply to any other property or assets of the Borrower, any Subsidiary or any CSX Conrail Subsidiary; (e) Liens securing Debt in respect of the transactions described in Schedule 6.02; and 41 (f) Liens not otherwise permitted hereunder; provided that, at the time of the creation, incurrence or assumption of any Debt secured by any such Lien and after giving effect thereto, the aggregate principal amount of Debt of the Borrower and the Subsidiaries secured by Liens permitted under this clause (f), together with, without duplication, the sum of (i) the Attributable Debt then outstanding in respect of Sale/Leaseback Transactions permitted under Section 6.03(c) in respect of which the obligations of the Borrower or any Subsidiary do not constitute Capital Lease Obligations, (ii) the aggregate then outstanding principal amount of Allocable CSX/NS Debt of the CSX/NS Acquisition Sub Entities incurred after the Closing Date then secured by Liens on the assets of any CSX/NS Entity (other than Liens which would be permitted under paragraphs (a) through (e) of this Section assuming the CSX/NS Acquisition Sub Entities were Subsidiaries) and (iii) the aggregate then outstanding Allocable CSX/NS Attributable Debt of the CSX/NS Acquisition Sub Entities incurred after the Closing Date, does not exceed an amount equal to 10% of Total Capitalization at such time. SECTION 6.03. Limitation on Sale/Leaseback Transactions. The Borrower will not, and will not permit any Subsidiary or any CSX Conrail Subsidiary to, enter into any arrangement with any Person providing for the leasing by the Borrower, any Subsidiary or any CSX Conrail Subsidiary of real or personal property (other than Unrestricted Margin Stock) which has been or is to be sold or transferred by the Borrower, such Subsidiary or such CSX Conrail Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower, such Subsidiary or such CSX Conrail Subsidiary (a "Sale/Leaseback Transaction"), except: (a) any Sale/Leaseback Transaction described in Schedule 6.02; (b) any arrangement with respect to any railroad locomotive, auto rack, rolling stock, vessel, barge, container, vehicle, terminal or other fixed or capital asset; provided that such arrangement is entered into (A) prior to or within three years after the acquisition, construction, improvement or refurbishment of such railroad locomotive, auto rack, rolling stock, vessel, barge, container, vehicle, terminal or other fixed or capital asset or (B) with respect to the assets of Conrail or any of its subsidiaries, not later than August 22, 2001; and (c) Sale/Leaseback Transactions not otherwise permitted hereunder; provided that, (i) if the obligations of the Borrower, any Subsidiary or any CSX Conrail Subsidiary in respect of any such Sale/Leaseback Transaction constitute Capital Lease Obligations, the Liens created in respect of such Sale/Leaseback Transactions are permitted under Section 6.02 and (ii) if the obligations of the Borrower, any Subsidiary or any CSX Conrail Subsidiary in respect of any such Sale/Leaseback Transaction do not constitute Capital Lease Obligations, at the time of the creation, incurrence or assumption of any Attributable Debt in connection with such Sale/Leaseback Transaction and after giving effect thereto, the aggregate principal amount of Attributable Debt of the Borrower and the Subsidiaries then outstanding in respect of leases entered into in connection with Sale/Leaseback Transactions permitted under this clause (ii), together with, without duplication, the aggregate principal amount of Debt of the Borrower and the Subsidiaries then secured by Liens permitted under Section 6.02(f), the aggregate principal amount of Allocable CSX/NS Debt of the CSX/NS Acquisition Sub Entities incurred after the 42 Closing Date then secured by Liens on the assets of any CSX/NS Entity (other than Liens which would be permitted under paragraphs (a) through (e) of Section 6.02 assuming the CSX/NS Acquisition Sub Entities were Subsidiaries) and the aggregate then outstanding Allocable CSX/NS Attributable Debt of the CSX/NS Acquisition Sub Entities incurred after the Closing Date, does not exceed an amount equal to 10% of Total Capitalization at such time. SECTION 6.04. Fundamental Changes. The Borrower will not merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), unless (a) the surviving corporation in any such merger or consolidation or the Person which acquires all or substantially all of the assets of the Borrower shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia (the "Successor Corporation") and shall expressly assume, by amendment to this Agreement executed by the Borrower, the Successor Corporation and the Administrative Agent, the due and punctual payment of the principal of and interest on the Loans and all other amounts payable under this Agreement and any Notes and the payment and performance of every covenant hereof on the part of the Borrower to be performed or observed, (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing and (c) the Borrower shall have delivered a certificate of a Financial Officer and a written opinion of counsel reasonably satisfactory to the Administrative Agent (who may be counsel to the Borrower), each stating that such transaction and amendment comply with this Section and that all conditions precedent herein provided for relating to such transaction have been satisfied; provided that the Borrower and the Subsidiaries will be permitted to sell, transfer and otherwise dispose of Unrestricted Margin Stock without regard to the foregoing restrictions. SECTION 6.05. Financial Covenant. The Borrower shall not permit the ratio of Total Debt to Total Capitalization to exceed 0.55 to 1.00. SECTION 6.06. Ownership of Railroad Subsidiaries. The Borrower shall not (a) permit any Railroad Subsidiary to cease to be a wholly-owned Subsidiary of the Borrower or (b) directly or indirectly, sell, transfer or otherwise dispose of any capital stock of any CSX Conrail Railroad Subsidiary; provided that (i) neither the Borrower nor any Subsidiary shall be in any way restricted under this Section from selling or otherwise disposing of Unrestricted Margin Stock and (ii) neither the Borrower nor any Subsidiary shall be prohibited pursuant to clause (b) from transferring the capital stock of any CSX Conrail Railroad Subsidiary (A) to the Borrower's direct or indirect Subsidiaries, (B) to any wholly-owned subsidiary of CSX/NS Acquisition Sub so long as the Borrower's direct or indirect proportionate beneficial ownership of such capital stock shall not be reduced as a result thereof or (C) to NS or its subsidiaries or any CSX/NS Acquisition Sub Entity in consideration of the acquisition of any assets of Conrail or any of its subsidiaries by the Borrower or any Subsidiary. SECTION 6.07. Sales of Unrestricted Margin Stock. The Borrower shall not, and shall not permit any Subsidiary or CSX/NS Entity to, (a) sell or otherwise dispose of any Shares constituting Unrestricted Margin Stock other than in exchange for cash or cash equivalents or (b) fail to maintain the proceeds of any such sale or other disposition as cash, cash equivalents or short-term investments; provided that (i) to the extent that the Borrower shall elect to reduce the Commitments pursuant to Section 2.08(c) at any time after any such sale or other 43 disposition, the requirements of clause (b) above shall cease to apply to the portion of such proceeds as shall be equal to the aggregate amount of any such reductions and (ii) this Section shall not apply to sales or other dispositions of Unrestricted Margin Stock (A) to the Borrower's direct or indirect Subsidiaries, (B) to any wholly-owned subsidiary of CSX/NS Acquisition Sub so long as the Borrower's direct or indirect proportionate beneficial ownership of the Shares shall not be reduced as a result thereof, or (C) to NS or its subsidiaries or any CSX/NS Acquisition Sub Entity in consideration of the acquisition of any assets of Conrail or any of its subsidiaries by the Borrower or any Subsidiary. SECTION 6.08. Limitation on Guarantees and Liens of CSX/NS Entities. The Borrower shall not permit any CSX/NS Entity to create, incur, assume or suffer to exist any Guarantee in respect of, or Liens upon any of the property, assets or revenues, whether now owned or hereafter acquired, of such CSX/NS Entity to secure, Indebtedness of NS or any of its subsidiaries (other than CSX/NS Entities). SECTION 6.09. CSX/NS Agreement . The Borrower shall not agree to any material modification or amendment of any of the terms of the CSX/NS Agreement if, in the reasonable judgment of at least three of the Agents, such modification or amendment would be reasonably likely to result in a Material Adverse Effect. SECTION 6.10. Final Asset Division. Notwithstanding any provision to the contrary in Article VI (but without prejudice to Sections 6.05, 6.08 and 6.09), the Borrower and its Subsidiaries shall be permitted to incur, assume, refinance, replace, guarantee or otherwise assume direct or indirect responsibility for the payment of the Allocable CSX/NS Debt (calculated without giving effect to clause (c) of the proviso to the definition thereof) or Allocable CSX/NS Attributable Debt (calculated without giving effect to clause (c) of the proviso to the definition thereof) of the CSX/NS Acquisition Sub Entities in connection with the final asset division contemplated by the CSX/NS Agreement, either on an unsecured basis or secured by Liens on the assets of any CSX/NS Acquisition Sub Entity (whether such assets remain assets of such CSX/NS Acquisition Sub Entity or are acquired by the Borrower or any of its Subsidiaries) and any resulting Debt, Lien or, to the extent applicable, Sale/Leaseback Transaction of the Borrower or any of its Subsidiaries shall not be included for purposes of determining compliance with the limitations contained in Sections 6.01(e), 6.02(f) and 6.03(c). ARTICLE VII Events of Default If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; provided that, if any such failure shall result from the malfunctioning or shutdown of any wire transfer or other payment system reasonably employed by the Borrower to make such payment or from an inadvertent error of a technical or clerical nature by the Borrower or any bank or other entity reasonably 44 employed by the Borrower to make such payment, no Event of Default shall result under this paragraph (a) during the period (not in excess of two Business Days) required by the Borrower to make alternate payment arrangements; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of ten days; (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with this Agreement or any amendment or modification hereof, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof, shall prove to have been incorrect in any material respect when made or deemed made; (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (c) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent (given at the request of any Lender) to the Borrower; (e) any event of default or similar event or condition occurs (and continues after any applicable grace period) under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Material Indebtedness, whether such Material Indebtedness now exists or shall hereafter be created and shall result in any Material Indebtedness becoming due prior to its scheduled maturity (other than any such event or condition arising solely out of the violation by the Borrower or any Subsidiary of any covenant in any way restricting the Borrower's, or any such Subsidiary's, right or ability to sell, pledge or otherwise dispose of Unrestricted Margin Stock) and such acceleration shall not be rescinded or annulled in accordance with the terms of such mortgage, indenture or investment, as the same case may be; provided that (i) this clause (e) shall not apply to secured Indebtedness that becomes due as a result of the voluntary permitted sale or transfer of the property or assets securing such Indebtedness and (ii) any acceleration of Indebtedness of any CSX/NS Entity (other than a CSX Conrail Subsidiary) shall not be included for purposes of determining if an Event of Default has occurred under this paragraph so long as such acceleration (x) does not result from a breach by the Borrower of its obligations under the CSX/NS Agreement (or the definitive documentation referred to therein) or (y) would not result in a Material Adverse Effect; (f) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Significant Subsidiary or Significant CSX/NS Entity or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Significant Subsidiary or Significant CSX/NS Entity or for a substantial part of its assets, 45 and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (g) the Borrower or any Significant Subsidiary or Significant CSX/NS Entity shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (f) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Significant Subsidiary or Significant CSX/NS Entity or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (h) the Borrower or any Significant Subsidiary or Significant CSX/NS Entity shall become unable, admit in writing or fail generally to pay its debts as they become due; (i) one or more judgments for the payment of money in an aggregate amount (to the extent not covered by insurance) in excess of $75,000,000 shall be rendered against the Borrower, any Subsidiary, any CSX/NS Entity or any combination thereof and the same shall remain unpaid or undischarged for a period of 60 consecutive days during which execution shall not be effectively stayed, provided that any judgment rendered against any CSX/NS Entity (other than a CSX Conrail Subsidiary) shall not be included for purposes of determining if an Event of Default has occurred under this paragraph so long as such judgment (x) does not result from a breach by the Borrower of its obligations under the CSX/NS Agreement (or the definitive documentation referred to therein) or (y) would not result in a Material Adverse Effect; (j) an ERISA Event shall have occurred that, in the reasonable opinion of the Majority Lenders, when taken together with all other ERISA Events that have occurred, would result in a Material Adverse Effect; or (k) a Change in Control shall occur and on the date which is four months after the occurrence of such Change in Control the Applicable Rate shall be determined by reference to Category 6; then, and in every such event (other than an event with respect to the Borrower described in clause (f) or (g) of this Article as a result of which the Administrative Agent and the Lenders shall not be permitted, without special relief, to exercise their rights or remedies under clause (i) or (ii) below), and at any time thereafter during the continuance of such event, the Administrative Agent (with the consent of the Majority Lenders) may, and at the request of the Majority Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other 46 obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (f) or (g) of this Article described above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE VIII The Agents Each of the Lenders hereby irrevocably appoints JPMorgan Chase Bank as its agent and authorizes JPMorgan Chase Bank to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. Each Lender acknowledges that Citibank N.A. and The Bank of Nova Scotia shall be Co-Syndication Agents with respect to this Agreement and that Credit Suisse First Boston and Mizuho Corporate Bank, Ltd. shall be Co-Documentation Agents with respect to this Agreement. Each bank serving as an Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not an Agent hereunder. No Agent shall have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) no Agent shall be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) no Agent shall have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Lenders entitled to so require, and (c) except as expressly set forth herein, no Agent shall have any duty to disclose, nor shall such Agent be liable for the failure to disclose, any information relating to the Borrower or any of the Subsidiaries that is communicated to or obtained by such Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Lenders entitled to so require or in the absence of its own gross negligence or willful misconduct. No Agent shall be deemed to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and no Agent shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made to any Lender in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance by the Borrower of any of the covenants, agreements or other terms or, except as provided in clause (v) below, conditions set forth herein, (iv) with respect to parties other than such Agent, the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or 47 elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it in good faith to be genuine and to have been signed or sent by the proper Person. Each Agent also may rely upon any statement made to it orally or by telephone and believed by it in good faith to be made by the proper Person, and shall not incur any liability for relying thereon. Each Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in good faith in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent and for which it is responsible. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent reasonably selected by the Administrative Agent and to the Related Parties of the Agents and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Majority Lenders shall have the right, with the consent of the Borrower (which consent shall not be required if at the time of such appointment any Default or Event of Default shall have occurred and be continuing), to appoint a successor. If no successor shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a commercial bank with an office in New York, New York and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon any Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender represents that it has not relied upon the Unrestricted Margin Stock in its credit analysis or its decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in 48 taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX Miscellaneous SECTION 9.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower, to it at CSX Corporation, BellSouth Tower, 21/st/ Floor - J220, Jacksonville, FL 32202, Attention of Treasurer (Telecopy No. (904) 633-1139); (b) if to the Administrative Agent, to JPMorgan Chase Bank, Agent Bank Services, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Jesus C. Sang (Telecopy No. (212) 552-5650), with a copy to JPMorgan Chase Bank, 270 Park Avenue, New York, New York 10017, Attention of Julie Long (Telecopy No. (212) 270-5127); and (c) if to any Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02. Waivers; Amendments. (a) No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Majority Lenders or by the Borrower and the Administrative Agent with the consent of the Majority Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal 49 amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.10(c) or change 2.17(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, in either case without the written consent of each Lender, or (v) change any of the provisions of this Section or the definition of "Majority Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement or any Note, including its rights under this Section, or in connection with the Loans made hereunder, including in connection with any workout, restructuring or negotiations in respect thereof. (b) The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence or willful misconduct of such Indemnitee. The foregoing indemnification shall not cover any such claims, damages, losses, liabilities or expenses relating to (i) any Taxes or (ii) any costs or capital requirements (whenever imposed) to any Lender or any corporation controlling such Lender as a result of such Lender's Commitment or its Loans, but in each case without prejudice to Sections 2.14, 2.15, 2.16 and 9.03. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender's Applicable Percentage 50 (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such. (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable promptly after written demand therefor, accompanied by such documentation as the Borrower may reasonably request to evidence the basis for, and calculation of, such amount. SECTION 9.04. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may, at no additional cost to the Borrower, assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender or a Lender Affiliate, each of the Borrower and the Administrative Agent must give its prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or a Lender Affiliate or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment and the amount of its Commitment remaining thereafter (determined in each case as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement (including its Revolving Loans), except that this clause (iii) shall not apply to rights in respect of outstanding Competitive Loans, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; provided further that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (f) or (g) of Article VII has occurred and is continuing. Upon acceptance and recording pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of (but not greater than) the interest assigned by such Assignment and 51 Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.15, 2.16 and 9.03 and be subject to Section 9.12). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be prima facie evidence thereof absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection during normal business hours by the Borrower at any reasonable time and from time to time upon reasonable advance notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of, and at no additional cost to, the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.14, 2.15 and 2.16 to the same (but no greater) extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. 52 (f) A Participant shall not be entitled to receive any greater payment under Section 2.14, 2.15 or 2.16 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any such pledge or assignment to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that any Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.14, 2.15, 2.16, 9.03 and 9.12 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or 53 demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment resulting therefrom, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final and non-appealable judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 54 SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees, representatives and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, or requested by any regulatory authority, but only, except with respect to bank examiners, after the Administrative Agent or the relevant Lender provides such written notice to the Borrower of such proposed disclosure as is reasonable under the circumstances and permitted by law, (c) to any other party to this Agreement, (d) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any Note or the enforcement of rights hereunder or thereunder, (e) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (f) with the consent of the Borrower or (g) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section, (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower (other than a source known to be disclosing such Information in violation of a confidentiality agreement with the Borrower) or (iii) was available to the Administrative Agent or the relevant Lender prior to such Person becoming a Lender. For the purposes of this Section, "Information" means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CSX CORPORATION, as Borrower By: _____________________ Title: JPMORGAN CHASE BANK, as Administrative Agent and as a Lender, By: _____________________ Title: CITIBANK, N.A., as Co-Syndication Agent and as a Lender, By: _____________________ Title: THE BANK OF NOVA SCOTIA, as Co-Syndication Agent and as a Lender, By: _____________________ Title: CREDIT SUISSE FIRST BOSTON, as Co-Documentation Agent and as a Lender, By: _____________________ Title: By: _____________________ Title: MIZUHO CORPORATE BANK, LTD., as Co-Documentation Agent and as a Lender, By: _____________________ Title: PNC BANK, NATIONAL ASSOCIATION By: ____________________ Title: BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: ____________________ Title: THE BANK OF NEW YORK By: ____________________ Title: BANK ONE, NA By: ____________________ Title: WACHOVIA BANK, NATIONAL ASSOCIATION By: ____________________ Title: FLEET NATIONAL BANK By: ____________________ Title: SUNTRUST BANK, A GEORGIA BANK By: ____________________ Title: UBS AG, STAMFORD BRANCH By: ____________________ Title: By: ____________________ Title: DEUTSCHE BANK AG NEW YORK BRANCH By: _____________________ Title: By: _____________________ Title: THE NORTHERN TRUST COMPANY By: _____________________ Title: FIFTH THIRD BANK By: _____________________ Title: UFJ BANK LIMITED By: _____________________ Title: EX-10.47 15 dex1047.txt EXHIBIT 10.47 FIVE-YEAR REVOLVING CREDIT AGREEMENT EXECUTION COPY FIRST AMENDMENT FIRST AMENDMENT, dated as of May 17, 2002 (this "Amendment"), to the FIVE-YEAR REVOLVING CREDIT AGREEMENT, dated as of June 8, 2001 (as amended, supplemented or otherwise modified, the "Credit Agreement"), among CSX CORPORATION, a Virginia corporation, as Borrower, the LENDERS parties thereto, CITIBANK, N.A. and THE BANK OF NOVA SCOTIA, as Co-Syndication Agents, CREDIT SUISSE FIRST BOSTON and MIZUHO FINANCIAL GROUP, as Co-Documentation Agents, and JPMORGAN CHASE BANK (formerly known as THE CHASE MANHATTAN BANK), as Administrative Agent. W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make certain loans and other extensions of credit to the Borrower; and WHEREAS, the Borrower has requested and, upon this Amendment becoming effective, the Lenders have agreed, to amend certain provisions of the Credit Agreement upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given such terms in the Credit Agreement. SECTION 2. AMENDMENTS TO CREDIT AGREEMENT 2.1 Amendment to Section 3.07. Section 3.07 of the Credit Agreement is hereby amended by inserting after the phrase "all laws, regulations and orders" in such Section the parenthetical "(other than Environmental Laws)". 2.2 Amendment of Section 4.02. Section 4.02(a) of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting in lieu thereof a new Section 4.02(a) to read in its entirety as follows: (a) The representations and warranties of the Borrower set forth in this Agreement (other than the representations and warranties set forth in Sections 3.04(b) and 3.06) shall be true and correct on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable. 2.3 New Section 6.10. Article VI of the Credit Agreement is hereby amended by adding at the end of such Article the following new Section 6.10: SECTION 6.10. Final Asset Division. Notwithstanding any provision to the contrary in Article VI (but without prejudice to Sections 6.05, 6.08 and 6.09), the Borrower and its Subsidiaries shall be permitted to incur, assume, refinance, replace, guarantee or otherwise assume direct or indirect responsibility for the payment of the Allocable CSX/NS Debt (calculated without giving effect to clause (c) of the proviso to the definition thereof) or Allocable CSX/NS Attributable Debt (calculated without giving effect to clause (c) of the proviso to the definition thereof) of the CSX/NS Acquisition Sub Entities in connection with the final asset division contemplated by the CSX/NS Agreement, either on an unsecured basis or secured by Liens on the assets of any CSX/NS Acquisition Sub Entity (whether such assets remain assets of such CSX/NS Acquisition Sub Entity or are acquired by the Borrower or any of its Subsidiaries) and any resulting Debt, Lien or, to the extent applicable, Sale/Leaseback Transaction of the Borrower or any of its Subsidiaries shall not be included for purposes of determining compliance with the limitations contained in Sections 6.01(e), 6.02(f) and 6.03(c). SECTION 3. MISCELLANEOUS 3.1 Limited Effect. Except as expressly amended, modified and supplemented hereby, the Credit Agreement is, and shall remain, in full force and effect in accordance with its terms. 3.2 Effectiveness. This Amendment shall become effective as of the date hereof upon (a) receipt by the Administrative Agent of a counterpart hereof duly executed by the Borrower and the Majority Lenders and (b) payment by the Borrower to the Administrative Agent of an amendment fee, for the account of each Lender that executes and delivers a counterpart hereof on or prior to 5:00 p.m., New York City time, on May 17, 2002, in an amount equal to 0.02% of the aggregate amount of each such Lender's Commitment. 3.3 Representations and Warranties. On and as of the date hereof and after giving effect to this Amendment, the Borrower hereby confirms, reaffirms and restates the representations and warranties set forth in Article III of the Credit Agreement mutatis mutandis, except to the extent that such representations and warranties expressly relate to a specific earlier date in which case the Borrower hereby confirms, reaffirms and restates such representations and warranties as of such earlier date. 3.4 Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Amendment signed by all the parties shall be lodged with the Borrower and the Administrative Agent. This Amendment may be delivered by facsimile transmission of the relevant signature pages hereof. 3.5 GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGA- TIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRE- TED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. CSX CORPORATION, as Borrower By: __________________________ Title: JPMORGAN CHASE BANK, as Administrative Agent and as a Lender, By: __________________________ Title: CITIBANK, N.A., as Co-Syndication Agent and as a Lender, By: __________________________ Title: THE BANK OF NOVA SCOTIA, as Co-Syndication Agent and as a Lender, By: __________________________ Title: CREDIT SUISSE FIRST BOSTON, as Co-Documentation Agent and as a Lender, By: __________________________ Title: By: __________________________ Title: MIZUHO CORPORATE BANK, LTD. By: __________________________ Title: PNC BANK, NATIONAL ASSOCIATION By: __________________________ Title: BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: __________________________ Title: THE BANK OF NEW YORK By: __________________________ Title: BANK ONE, NA By: __________________________ Title: WACHOVIA BANK, NATIONAL ASSOCIATION By: __________________________ Title: FLEET NATIONAL BANK By: __________________________ Title: SUNTRUST BANK, A GEORGIA BANK By: __________________________ Title: UBS AG, STAMFORD BRANCH By: __________________________ Title: By: __________________________ Title: DEUTSCHE BANK AG NEW YORK BRANCH By: __________________________ Title: By: __________________________ Title: THE MITSUBISHI TRUST AND BANKING CORPORATION By: __________________________ Title: THE NORTHERN TRUST COMPANY By: __________________________ Title: FIFTH THIRD BANK By: __________________________ Title: UFJ BANK LIMITED By: __________________________ Title: EX-12 16 dex12.txt EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Computation of Earnings to Fixed Charges CSX Corporation Ratio of Earnings to Fixed Charges (Millions of Dollars)
FOR THE FISCAL YEARS ENDED --------------------------------------------------------------------------------- DEC. 27, 2002 DEC. 28, 2001 DEC. 29, 2000 DEC. 31, 1999 DEC. 25, 1998 ------------- ------------- ------------- ------------- --------------- Earnings: Earnings Before Income Taxes $ 723 $ 448 $ 277 $ 104 $ 744 Interest Expense $ 445 $ 518 $ 550 $ 528 $ 513 Amortization of debt discount $ 4 $ - $ 1 $ - $ 1 Interest Portion of Fixed Rent $ 77 $ 88 $ 109 $ 151 $ 183 Undistributed earnings of $ (44) $ (2) $ (18) $ (58) $ (238) unconsolidated subsidiaries ------------- ------------- ------------- ------------- --------------- Earnings, as Adjusted $ 1,205 $ 1,052 $ 919 $ 725 $ 1,203 ------------- ------------- ------------- ------------- --------------- Fixed Charges: Interest Expense $ 445 $ 518 $ 550 $ 528 $ 513 Capitalized Interest $ 3 $ 7 $ 6 $ 8 $ 9 Amortization of Debt Discount $ 4 $ - $ 1 $ - $ 1 Interest Portion of Fixed Rent $ 77 $ 88 $ 109 $ 151 $ 183 ------------- ------------- ------------- ------------- --------------- Fixed Charges $ 529 $ 613 $ 666 $ 687 $ 706 ------------- ------------- ------------- ------------- --------------- --------------------------------------------------------------------------------- Ratio of Earnings to Fixed Charges 2.3 X 1.7 x 1.4 x 1.1 x 1.7 x ---------------------------------------------------------------------------------
EX-13 17 dex13.txt EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS Right Results Right Way [PHOTO APPEARS HERE] 2002 ANNUAL REPORT CSX Tribute to John Snow - ------------------------------------------------------------------------------- On February 3, 2003, CSX Chairman and Chief Executive Officer John W. Snow joined President George W. Bush's cabinet as Secretary of the Treasury. As a result, Mr. Snow has resigned as an officer and board member of CSX Corporation. CSX takes enormous pride in Mr. Snow's appointment. He is serving our country at a critical juncture. He is bringing his immense talents to bear on vital issues and complex problems that directly affect the livelihoods of our citizens and people throughout the world. We know John Snow well here at CSX and have every confidence that he will serve with great honor and distinction. Chairman and chief executive officer since 1991, he changed the strategic course of the company from a multifaceted transportation conglomerate to a much more sharply focused rail industry leader. This transition is proving both timely and judicious. He leaves CSX in a strong position to grow substantially and capitalize on the tremendous opportunities in our core business. We wish John all success and thank him deeply for his leadership, many contributions and for his friendship. - -------------------------------------------------------------------------------- Contents - -------------------------------------------------------------------------------- 1 Financial Highlights 14 Financial Information 2 Chairman's Message 56 Shareholder Information 6 Review of Operations 59 Corporate Information 10 Community 60 Board of Directors and Officers Financial Highlights
(Millions of Dollars, Except Per Share Amounts) - ------------------------------------------------------------------------------------------------------------------- Earnings from Continuing Operations 2002 2001 2000 1999 1998 Operating Revenue $ 8,152 $ 8,110 $ 8,191 $ 10,375 $ 9,490 Operating Expense 7,025 7,153 7,386 9,802 8,359 ----------------------------------------------------------------------- Operating Income $ 1,127 $ 957 $ 805 $ 573 $ 1,131 ----------------------------------------------------------------------- Net Earnings from Continuing Operations $ 424 $ 293 $ 186 $ 32 $ 520 ----------------------------------------------------------------------- Earnings Per Share from Continuing $ 2.00 $ 1.39 $ .88 $ .15 $ 2.47 Operations Earnings Per Share from Continuing Operations, Assuming Dilution $ 1.99 $ 1.38 $ .88 $ .15 $ 2.43 - ------------------------------------------------------------------------------------------------------------------- Financial Position Cash, Cash Equivalents and Short-term $ 264 $ 618 $ 686 $ 974 $ 533 Investments Working Capital Deficit $ (665) $ (1,023) $ (1,231) $ (910) $ (616) Total Assets $ 20,951 $ 20,801 $ 20,548 $ 20,828 $ 20,535 Long-term Debt $ 6,519 $ 5,839 $ 5,896 $ 6,304 $ 6,540 Shareholders' Equity $ 6,241 $ 6,120 $ 6,017 $ 5,756 $ 5,880 - ------------------------------------------------------------------------------------------------------------------- Other Data Per Common Share Cash Dividends $ .40 $ .80 $ 1.20 $ 1.20 $ 1.20 Book Value $ 29.07 $ 28.64 $ 28.28 $ 26.35 $ 27.08 Market Price High $ 41.40 $ 41.30 $ 33.44 $ 53.94 $ 60.75 Low $ 25.09 $ 24.81 $ 19.50 $ 28.81 $ 36.50 - ------------------------------------------------------------------------------------------------------------------- Employees-Annual Averages Rail 33,464 35,014 35,496 31,952 28,358 Other 6,464 6,446 9,955 16,998 17,789 ----------------------------------------------------------------------- Total 39,928 41,460 45,451 48,950 46,147 - -------------------------------------------------------------------------------------------------------------------
See accompanying Consolidated Financial Statements (All periods reflect contract logistics as a discontinued operation). Significant events include the following: 2002- A charge to write-down indefinite lived intangible assets as a cumulative effect of accounting change, which reduced earnings $83 million before tax, $43 million after tax and consideration of minority interest, 20 cents per share (See Note 1, Significant Accounting Policies). 2001- A charge in the fourth quarter of 2001 to account for the settlement of the 1987 New Orleans tank car fire litigation. This charge reduced earnings by $60 million before tax, $37 million after tax, 17 cents per share. 1999- A loss on the sale of international container-shipping assets net of a related benefit from discontinuing depreciation of those assets from the date they were classified as "held for disposition. " The net effect of the loss and the depreciation benefit reduced earnings by $360 million before tax, $271 million after tax, $1.27 per share. - A charge to recognize the cost of a workforce reduction program at the Company's rail and intermodal units that reduced earnings by $55 million before tax, $34 million after tax, 16 cents per share. - A gain on the sale of the Company's Grand Teton Lodge resort subsidiary that increased earnings by $27 million before tax, $17 million after tax, 8 cents per share. 1998- A net investment gain, primarily from the conveyance of American Commercial Lines LLC, the Company's wholly-owned barge subsidiary, to a joint venture. The gain increased earnings by $154 million before tax, $90 million after tax, 42 cents per share. - A restructuring credit to reverse certain separation and labor protection reserves established by the Company's rail unit as part of a 1995 restructuring charge. The restructuring credit increased earnings by $30 million before tax, $19 million after tax, 9 cents per share. CSX 2002 ANNUAL REPORT 1 People make the Difference [PHOTO APPEARS HERE] 2 CSX 2002 ANNUAL REPORT Chairman's Message Meaningful, lasting change in a corporation rarely comes from a single daring act. Rather, it is the product of many steps made possible by the efforts of thousands of people aligned behind shared principles in support of common goals. This is precisely the type of progress CSX Corporation demonstrated in 2002. In a year filled with economic challenges, the nearly 40,000 employees of CSX improved financial results, while continuing to build our corporation's foundation for a promising future. We created an organization with a laser-like focus on serving our customers. We began developing performance measures that reflect how well we are satisfying our customers' needs. At the same time, we recognized that well-trained, highly motivated employees are the cornerstone of a customer-focused culture, and we endeavored to provide them with the support and direction they need to grow in their careers and contribute to the full extent of their talents. As always, safety remains a constant theme in everything we do. Supporting safety at all levels of our organization is the sincerest statement we can make of our commitment to our employees, our customers and our communities. It says that we value our employees as individuals and understand their importance to their families as well as our company. It says that we embrace our commitment to deliver our customers' freight safely and consistently, without mishap or delay. And it says that we appreciate our duty as a corporate citizen to be sensitive to the needs of the communities in which we operate, communities that our employees and customers call home. While infusing our company with these principles in 2002, we also recognized the urgency of improving our financial and operating results, and our employees responded admirably. It was a year in which the performance of our core railroad enterprise continued to improve by every major operating standard. It was a year in which we continued to reshape CSX to sharpen our focus on our primary business, rail transportation. And it was a year in which our corporation was the subject of national attention, when our chairman of 11 years, John W. Snow, was selected by President Bush for one of the nation's most important policy leadership posts, Secretary of the Treasury of the United States. ------------------------------------------------------- As we concentrated on growing revenues and reducing costs in 2002, the people of CSX continued to demonstrate a strong commitment to high ethical standards and integrity. Michael J. Ward Chairman, President and CEO ------------------------------------------------------- 2002: A Solid Year in Uncertain Times CSX delivered a solid financial performance in 2002 despite a weak economy and serious challenges from weather and industry conditions. For the year, CSX net income was $424 million, or $1.99 per share, compared to $293 million, or $1.38 per share in 2001, an increase of 45%. Operating income from all CSX businesses increased to $1.1 billion, from $1.0 billion in 2001, up 18%. In addition, we significantly improved the Company's free cash flow in 2002. Our Surface Transportation business units, CSX Transportation and CSX Intermodal, generated approximately 88% of the corporation's revenue in 2002. Their year's results were limited by an economy that failed to produce the sustained recovery that many were predicting in late 2001. Even with economic weakness, our Surface Transportation units demonstrated the soundness of their growth strategies. Excluding coal, which experienced yearlong depressed demand, CSXT rail revenues were relatively strong. Linehaul revenues for merchandise and automotive business increased year-to-year by $98 million, or 2%. Intermodal business was up $68 million, or 6%. In addition, Surface Transportation operating expenses were down $159 million, or 3%, from 2001. Also in 2002, we continued to strengthen our focus on Surface Transportation. We reached an agreement with The Carlyle Group to convey CSX Lines, the domestic container shipping business, to a newly created venture. CSX will receive $300 million ($240 million in cash and $60 million of securities issued by the venture). The transaction enables us to retain an interest in CSX Lines, a good business with a strong management team, while also generating significant cash for CSX. CSX 2002 ANNUAL REPORT 3 Chairman's Message - -------------------------------------------------------------------------------- CSX Lines, which provides service in domestic lanes to Alaska, Hawaii, Puerto Rico and Guam, was created following the sale of a major portion of Sea-Land Service, an international container-shipping line, in 1999. Also created at that time was CSX World Terminals, which remains a wholly-owned CSX business unit. We continue to be excited about the prospects for CSX World Terminals, which contributed to the corporation's success in 2002 and is in an excellent position to grow as the world economy recovers and trade barriers are relaxed. While CSX's determination to become a more rail-based corporation has enabled us to focus our energies, it has also intensified the railroad's responsibility to generate financial results that will reward our shareholders' confidence in this company. In 2002, a year that began with significant promise, investor confidence was shaken in the third quarter, when we experienced our first year-over-year decline in operating income in eight quarters. Weak demand for coal and higher railroad operating costs were the principal factors. As deeply disappointed as we were by those third-quarter results, we were equally encouraged by the response of the entire CSXT team to turn around our performance in the fourth quarter. Solid revenue gains across most freight classifications more than offset an 8% year-to-year decline in coal, coke and iron ore revenues. At the same time, we lowered costs and increased efficiency, all while continuing to implement long-term service-improvement initiatives. Fourth-quarter performance demonstrated the effectiveness of the business model that we have embraced to generate sustainable, long-term financial success: revenue growth combined with stringent cost control. The Foundation for Revenue Growth For railroads to prosper, they have to attract customers and grow. That is what we are doing at CSXT. This section describes some of the ways we are accomplishing that, but the bottom line is we are getting freight back on the rails where it belongs. Since expanding our rail network, with the Conrail merger, to provide fast, efficient service to the consumer markets, manufacturing centers and ports of the Northeast, CSXT has been working to deliver on the tremendous growth opportunities provided by single-line service to every major rail market east of the Mississippi River. The crucial first step has been to elevate our service to levels that earn the confidence of our customers and deliver their freight with speed and reliability. We believe the transportation products offered by the railroad industry, and CSX specifically, have never been better. But we will not rest on our laurels, we will continue to improve our service. In the almost three years since the current rail management team has been in place, CSXT's train velocity is up 24%; system dwell, the time that rail cars spend in freight yards, is down 30%; cars on line, a general indicator of system fluidity, are down 15%; on-time train departures are up 77%; and on-time train arrivals are up 113%. In addition, CSXT has formed service alliances with Western railroads to create seamless transportation products that increase the efficiency and speed of two-line rail moves. Customers have taken note of these improvements and have rewarded us with their business. We have been increasingly successful in attracting market share from the largest potential source for rail growth, the trucking industry. Transportation economists, community planners and environmentalists have long recognized that railroads are a far safer, cost effective, fuel efficient and environmentally sound mode of freight transportation than trucks. As we have become increasingly truck-like in our timeliness and reliability, migration to rail has begun. In 2001 and 2002, we converted 800,000 truckloads of freight to our railroad. In 2002 alone we attracted 500 new customers. This is just the beginning. In 2002, we developed several new initiatives to grow and improve our service and customer interface which will be implemented in 2003. One of the initiatives, Shipment Management, is shifting our focus from monitoring our train movements to adopting the perspective of customers, whose priority is on-time delivery of their shipments. Another initiative is Event Reporting which uses handheld data transmission devices to provide more timely and accurate data on car movements, improving CSXT's ability to increase efficiency, accuracy, and completeness of data. We also are making it easier for our customers to do business with us. In 2002, we launched a redesigned and feature-rich Web site, ShipCSX, which enables customers to obtain instant pricing information, plan their shipments and conduct e-business transactions quickly and efficiently. We also initiated Zero Defect Management, a program that closely monitors shipments of new customers to ensure they receive the highest-quality service from the very beginning of their rail experience. We are confident these initiatives will succeed, because they have succeeded for others. We have undertaken an extensive benchmarking effort to extract the best ideas from successful companies and put them into action at CSX. Our programs are based on the excellent service of the Canadian National, the customer focus of General Electric, the safety excellence of DuPont, and the data gathering techniques of the Burlington Northern-Santa Fe, Canadian Pacific and Six Sigma. Our goal is to realize the benefits these companies have realized - - and more. Better Service is Cost-effective Service Cost control was a major emphasis for CSX in 2002, and will be for the long term. While the cornerstone of our business strategy is to achieve sustainable financial strength through revenue growth, we recognize that controlling costs is both a cause and an effect of efficient 4 CSX 2002 ANNUAL REPORT Chairman's Message transportation. Doing both well will allow us to better control our destiny. This "better is cheaper" philosophy was evident in many of our measures in 2002, including revenue per employee, which increased to almost $205,000 in 2002, from $181,000 per employee in 2000. Since 2000, our workforce companywide has decreased by more than 5,000 employees. We expect to continue to realize labor savings through attrition and productivity improvements, but also important to our cost structure is the work being done by our employees through Six Sigma. Using fact-based techniques for identifying and eliminating waste by improving processes, we have permanently taken out costs. In addition, as our operating performance improved, effectively increasing the capacity of our assets, we right-sized our locomotive and cars fleets and are reviewing options for right-sizing the rail network. We are also partnering with our suppliers to reduce the cost of purchasing and materials through a new initiative called IMPACT. We continued to invest capital - beyond our normal infrastructure maintenance and improvement programs - in initiatives that showed promise for improving the quality of our product and the efficiency of our operations. Technology was the primary focus of these investments. We introduced remote-control locomotive technology at 48 locations. Those will deliver both safety and productivity improvements. At the same time, we deployed locomotive auxiliary power units (APUs), developed by CSXT to both increase fuel efficiency and reduce emissions. A Company of Quality As we concentrated on growing revenues and reducing costs in 2002, the people of CSX continued to demonstrate a strong commitment to high ethical standards and integrity. Providing a safe working environment for our employees and protecting the public are an important part of our ethical commitment. In 2002, we continued our safety improvement of recent years. By year end, our personal injury frequency rate had dropped 23%, in addition to a 21% reduction in 2001. Similarly, train derailments that are reportable to the Federal Railroad Administration decreased 18% in 2002, in addition to the 39% reduction achieved in 2001. To strengthen our momentum, we implemented a Safety Leadership Process during the year, which we designed following a benchmarking session with DuPont, a worldwide leader in safety performance. We also are a company that celebrates diversity and values the talents of all employees. A strong culture attracts good people, people who actively listen to each other, trust each other, respect each other's contributions and make decisions that take into account all data and perspectives. Only by having the best ideas can we hope to attract and keep customers with the best, most creative service solutions possible. As a testament to our management integrity and the ethical practices, CSX came through the intense scrutiny preceding the confirmation process of our former chairman, John W. Snow, with an endorsement and affirmation of our business practices. The public has no tolerance for corporate misconduct in the wake of recent high-profile scandals, and we are proud of the record that emerged in the examination of CSX. To ensure that we continue to abide by the letter and spirit of corporate governance and securities requirements, we provided more than 900 hours of training to approximately 200 company employees, who have responsibility for accounting, finance, tax, audit and public reporting, on the new requirements of the Sarbanes-Oxley Act of 2002. A Heritage to Build Upon As I conclude my first letter to shareholders as the newly-elected chairman of CSX Corporation, I want to recognize the contributions of John Snow during the 11 years he served as chairman and chief executive officer of CSX. John was a true leader of our corporation and the entire transportation industry. I am honored by the opportunity I have been given to follow a person of the character and vision of John Snow. My promise to him and to every CSX shareholder, customer, community and employee is that I will do my utmost to deliver on the opportunities that he helped create. Today, the CSX companies are positioned better than ever to enter new markets, to convert freight from highways to the rails, and to provide a level of service excellence that will delight our customers and reward our shareholders. Some of our opportunities for revenue growth will be fulfilled this year, other initiatives may take longer. Of this I am confident: by doing what is right for our customers and our employees, we are doing what is right for our shareholders. /s/ Michael J. Ward - --------------------------------------------- Michael J. Ward Chairman, President & Chief Executive Officer CSX 2002 ANNUAL REPORT 5 It Starts wth the Customer [PHOTO APPEARS HERE] 6 CSX 2002 ANNUAL REPORT Review of Operations Surface Transportation Continues Performance Improvement CSX Transportation and CSX Intermodal produced solid operating results despite unfavorable market conditions in 2002, as they positioned CSX's Surface Transportation businesses to generate new opportunities for rail and intermodal and to capitalize on a strengthening economy. With an intense focus on service enhancement and operating efficiency, the rail and intermodal units simultaneously drove down costs and grew revenues while increasing the value of their service products. Surface Transportation accounted for approximately 88% of CSX Corporation revenue and operating income in 2002. CSX Transportation As the largest freight railroad in the Eastern United States, CSX Transportation Inc., ("CSXT") continued to build momentum toward realizing the full potential of its 23,000-mile rail network serving 23 states, the District of Columbia, and two Canadian provinces. Headquartered in Jacksonville, Florida, CSXT made improvements in all of its major operating measurements in 2002, delivering higher-quality customer service and providing a safer environment for employees and the public. The fluidity of the rail network and its terminals continued to increase, which was reflected in improved crew and equipment utilization as well as a higher percentage of on-time train movements. These improvements occurred even as aggressive cost actions were taken to offset the effects of a sluggish economy and weak coal demand. These actions included continued workforce reductions, aggressive management of purchasing and material expenses, and process changes that drove down CSX's overall cost structure. Consolidation benefits were evident in 2002. Modal conversions from truck to rail, enabled by increasingly efficient service, were a significant factor in the railroad's ability to respond to challenging economic conditions throughout the year. Increased operating efficiency had many positive effects on CSXT's cost performance. For example, improved locomotive productivity allowed the company to reduce its fleet of leased locomotives, which produced substantial cost savings. At the same time, improved productivity from the company's fleet of 100,000 railcars further reduced the average expense for each of the 5.0 million loads that moved on the CSXT system in 2002. These efficiencies helped CSXT offset continued slowness in the U.S. economy. They also provided the railroad's team with an increasingly valuable transportation product to offer customers, who responded positively to several key marketing initiatives. Customers shifted 450,000 loads from the nation's strained highway system to the CSXT rail network in 2002. This came from existing customers as well as more than 500 new customers who were introduced to the economic efficiency, convenience and safety of rail freight transportation. Among existing customers, marketing initiatives were particularly successful with retail businesses that receive merchandise in large boxcars. Two of the nation's largest home improvement companies, for example, substantially increased the amount of freight they ship by rail, and the company expects the trend to continue, with the opening of new rail-served warehouses. Another successful marketing initiative in 2002 was continued strengthening of service alliances with the Western railroads for transporting commodities ranging from perishable produce to coal. Initiatives with Union Pacific Railroad, for example, created new opportunities for moving coal from Western mines across the St. Louis gateway into markets in the East. This helped mitigate the effects of the weakened coal market in 2002 and provided a good potential for future revenue growth. The slow coal market masked significant strength in other rail commodities. Excluding coal, CSXT's linehaul revenues increased $98 million, or 2% over 2001. Growth was especially strong in the fourth quarter, when linehaul revenue excluding coal increased 5.2%. While these results provide an encouraging backdrop for the start of 2003, unprecedented winter storms slowed rail operations and created significant resource demands. The strains created by the storms, combined with increased fuel costs, is requiring even more aggressive cost actions and rail efficiency improvements. As a result, CSXT approaches 2003 with a multi-faceted plan for productivity improvement. With strategic investments in new technologies and process improvements driven by Six Sigma, the company started several new initiatives in 2002 - such as remote-control locomotive operation and locomotive auxiliary power units- to lower costs while improving service. Surface Transportation Chart 2002 Split of Revenue Coal, Coke and Iron Ore............ 22% Intermodal......................... 16% Chemicals.......................... 13% Automotive......................... 12% Forest Products.................... 9% Agricultural Products.............. 7% Metals............................. 6% Emerging Markets................... 5% Phosphates & Fertilizer............ 5% Food & Consumer.................... 3% Minerals........................... 2% CBX 2002 ANNUAL REPORT 7 Review of Operations - -------------------------------------------------------------------------------- Event Reporting, an initiative developed in 2002, employs a technology that benefits both railroad operations and customers. Train crews, using handheld touchpads, record every car movement as it occurs in the field. Real-time information is transmitted to CSXT databases over a wireless network. This permits faster decision-making by the railroad to meet service commitments and assist customers with logistics and resource planning. Event Reporting will be implemented systemwide in 2003. In addition to technology innovations, CSXT is transforming the traditional railroad perspective of performance as driven by on-time train movements to one that measures success from the perspective of the customer, consistently meeting shipment delivery commitments. At the same time, the CSXT team also improved safety, continuing the momentum of recent years. Personal injuries declined 23% in 2002, in addition to a 21% reduction in 2001. At the same, CSXT trained 2,400 managers in its Safety Leadership Process in 2002, providing them with the skills and knowledge to effectively convey CSXT's commitment to eliminating injuries. CSX Intermodal With 45 modern terminals and 450 purchased dedicated trains per week, CSX Intermodal Inc., ("CSXI") offers rail transportation for domestic containers and trailers, premium parcel business and international steamship containers. In 2002, the company demonstrated its value to CSX's Surface Transportation business as a powerful source of growth. After a period of strategic capital investments in terminals and equipment that set the stage for growth, CSXI in 2002 achieved impressive success in converting truck freight to North America's premier intermodal service network. For the year, the unit generated 6.1% growth in operating revenue versus 2001, even as it absorbed the impact of the West Coast port shutdown and lower volumes in parcel business stemming from the soft economy. CSXI's operating revenues in 2002 accounted for 16% of the CSX Surface Transportation total. Creative marketing and service initiatives enabled CSXI to provide increasingly "truck-like" service and to realize the full value of that product in the marketplace. The company applied its truck conversion strategy - and leveraged its position as the nation's only rail-based transcontinental intermodal service provider - in offering branded, single-carrier service to and from the West Coast in 53-foot containers. To facilitate the service, CSXI invested in 2,250 53-foot containers, which contributed to a 35% increase in its container business. Another new initiative that helped capture shipments was the expansion of CSXI's Trucking division to service Internet "loadboards," where shippers post freight in search of transportation between specified origin and destination pairs. CSXI reorganized its Trucking division and added resources to capitalize on the opportunity presented by the loadboards. By the end of 2002, the initiative was adding 700 loads per week and had generated $21 million in new revenue. CSXI anticipates that the loadboard business will continue to grow rapidly over the next several years. Operating efficiency was a key component of CSXI's modal conversion strategy. CSXI improved equipment utilization 12%. The increase was driven by proactive positioning of containers at anticipated areas of high demand and by an aggressive maintenance program to ensure that CSXI containers were in good repair and ready to load when needed. For 2003, CSXI plans to expand its strategic successes and increase the pace of growth generated through modal conversions. CSX World Terminals CSX World Terminals LLC, ("CSX World Terminals") is a leader in the development, operation, management and design of marine container terminals. It operates businesses in Asia, Europe, Australia, Latin America and the United States. The company also provides trucking services in Hong Kong and barging operations on the Rhine River in Europe. Despite a sluggish global economy in 2002, difficult conditions in the container-shipping industry, and work stoppages at U.S. West Coast ports, earnings at CSX World Terminals were slightly below 2001 as a result of cost reduction programs, productivity improvements and asset sales. Looking forward, similar initiatives, accompanied by expected growth in global container flows of approximately 6% to 7% annually during the next five years, provide an opportunity for earnings growth. This includes both business expansion through new terminal development and privatization projects, as well as growth in the company's existing businesses. In 2002, CSX World Terminals added new businesses in two rapidly growing economies, South Korea and China. CSX World Terminals acquired a 23.3% equity stake in a company that is building a large, state-of-the-art container terminal in Pusan, South Korea. Pusan is the third largest container port in the world. CSX World Terminals will be the manager and operator of the terminal that is scheduled to commence operations by January 2006. In Shanghai, China, a CSX World Terminals subsidiary established a crane inspection business to capitalize on China's emergence as one of the largest manufacturers of terminal handling equipment. Also in 2002, CSX World Terminals expanded its terminal operations in Germersheim, Germany, permitting more volume and larger barges to be handled at the facility. The operation is the largest private container terminal on the Rhine River handling barge, rail and truck volume. During the year, the company made significant progress on two large terminal development projects. Construction progressed according to schedule on Asia Container Terminals' ("ACT") marine facility at the 8 CSX 2002 ANNUAL REPORT Review of Operations port of Kwai Chung in Hong Kong. CSX World Terminals is an investor in ACT and will operate the terminal at the world's largest container port. The facility, scheduled to open in mid-2004, is well positioned to expand CSX World Terminals's presence in this important market. In the Dominican Republic, CSX World Terminals is a shareholder in a company constructing a large, modern container terminal and free-trade zone facility on the Caucedo peninsula near Santo Domingo. Construction began in 2002, and the terminal is expected to start operations in late 2003, with CSX World Terminals as the terminal operator. The company developed a terminal management and operating system that is being installed at each of the company's new terminal developments in South Korea, Hong Kong and the Dominican Republic. CSX World Terminals management believes the technology will increase the company's ability to operate more efficiently, and enhance its competitiveness in the market place. Other Activities CSX Lines LLC, ("CSX Lines") is the nation's largest domestic container-shipping company, accounting for approximately 37% of the total U.S. marine container shipments from the continental United States to Alaska, Hawaii/Guam or Puerto Rico. The company operates 17 vessels and approximately 21,500 cargo containers of varying size providing door-to-door or port-to-port container transportation services to shippers in these three major shipping lanes. The company operates terminals in Hawaii, Alaska and Puerto Rico, contracts for terminal services in its seven North American ports as well as Guam and has long-term access to terminal facilities in every port that its vessels call. CSX Lines is headquartered in Charlotte, North Carolina, with 17 offices throughout the continental United States, Alaska, Hawaii, Guam and Puerto Rico. In December 2002, CSX Corporation reached an agreement to convey CSX Lines to a venture formed with The Carlyle Group for $300 million ($240 million in cash and $60 million of securities issued by the venture). CSX expects this transaction to close in the first quarter of 2003. In 2002, operating income for CSX Lines reached $38 million, a $6 million year-over year improvement versus 2001. The improvements came primarily from continued expense reductions as well as improvement in revenues in the Hawaii/Guam service and Puerto Rico service. CSX owns the historic Greenbrier resort in White Sulphur Springs, West Virginia. World renowned for its cuisine and culinary programs, luxurious accommodations, impeccable service and conference facilities, The Greenbrier was awarded the coveted AAA Five-Diamond award for the 27th consecutive year in 2002. CSX Real Property Inc. ("RPI") creates shareholder value through the efficient provision of real estate management and real estate services to all CSX companies. RPI manages CSX's real estate assets to maximize risk adjusted total return, and recognize, when financially feasible, the value of the surplus real estate rights and assets. Activities include development, sales, leasing and management of assets ranging from stand-alone properties to surplus railroad corridors. RPI is headquartered in Jacksonville, Florida. CSX Technology provides a wide range of information technology applications. Applications encompass day-to-day processing including freight scheduling, tracking, and monitoring, as well as more comprehensive functions such as data resource management, system architecture and network management. CSX Technology is headquartered in Jacksonville, Florida BridgePoint provides logistics information technology tools to help customers monitor, measure and manage their operations through high-level data quality and connectivity. BridgePoint's headquarters are located in the Research Triangle, North Carolina. CSX 2002 ANNUAL REPORT 9 Safety is a Way of Life [PHOTO APPEARS HERE] 10 CSX 2002 ANNUAL REPORT Community CSX is a company on the move. We're redefining the importance of railroading to American industry - and American communities. As a transportation company, we know the points along the way are every bit as crucial to the journey's success as the destination. That's why we are committed to getting the right results, the right way, in everything we do. For our customers. For our employees. For the communities we serve. Our Commitment to Safety Railroading is a unique industry. Our "plant" is spread over thousands of miles, through countless cities and towns, many of which provide homes to our hard-working employees. That's why safety is a way of life at CSXT, where employees take time every day to remember the importance of working safely for themselves, their families and their communities. In 2002, the railroad's Safety Leadership Process ("SLP") trained 2,400 managers and first-line supervisors so they can achieve continuous safety improvement. SLP is a prevention-based process that emphasizes leadership by example and attaining objectives through measurement, analysis and development of specific action plans. The railroad is extending SLP training to approximately 24,000 contract employees in 2003. Front-line employees continued to embrace safety initiatives in 2002. CSXT's culture that seeks good labor-management relations further enhanced the cooperation. This culture, and the teamwork it creates, has produced innovative programs for injury prevention, centered on education and training. These efforts contributed significantly to safety initiatives at all levels of the railroad that helped drive a 23% decrease in the frequency rate of reportable personal injuries and an 18% decrease in reportable derailments in 2002. Aggressive injury- and train accident-reduction goals were established for 2003, as the railroad reiterated its commitment to continuously driving toward its ultimate goal of zero injuries and zero accidents. An equally strong safety commitment is evident at our other operating units. CSX Intermodal's intense focus on safety awareness in 2002 resulted in a 27% year-over-year reduction in reportable injuries among field employees. At the same time, CSXI took its safety message to trucking companies whose drivers operate in CSXI terminals, and that effort produced a 17% reduction in the number of truck accidents in CSXI terminals in 2002, compared to 2001. To increase safety awareness among terminal employees, the intermodal company placed a heavy emphasis on monthly injury and accident reporting, combined with monthly safety audits. These methods identified deficiencies and resulted in action plans for safety improvement. CSXI also enhanced its efficiency testing program to increase employee awareness of safety rules and conducted weekly safety sessions with employees and monthly safety meetings that include all vendors in a discussion of safety-improvement actions. A primary safety focus at CSXI in 2002 was safe handling of hazardous materials as part of the company's commitment to minimize spillage and prevent the exposure of employees and the environment to hazardous chemicals. Powering Economic Growth It might surprise you to think of a company with 175-year-old roots as a growth enterprise. In fact, CSXT plays a vital role in creating jobs and supporting economic growth in thousands of communities from Miami to Montreal and from New Orleans to New England. In 2002 alone, we were instrumental in securing 117 new industry projects and plant expansions in our service territories - projects such as a Hyundai auto plant in Montgomery, Alabama, and an expanded Toyota manufacturing facility in Princeton, Indiana. In total, the CSX-served industrial development projects announced in 2002 will result in 4,100 new jobs and $1.8 billion in economic investment. Moreover, cost-effective rail transportation and our ability to help existing rail-served industries expand into new markets through the eastern United States and Canada - or even across the country on connecting carriers - enables companies on our 23,000-mile network to compete more vigorously in the global economy and continue to provide employment opportunities. Our continued success in this area is, in part, dependent upon the deregulated market created by the passage of the Staggers Act in 1980. Since the passage of the Staggers Act, rail rates have declined 58% in constant dollars. However, we now have revenue adequacy shortfalls, and no railroad is earning its cost of capital. There is competition in the freight transportation market today. Reregulation would impose unnecessary limitations on our ability to price competitively and would further impede the industry's efforts to achieve revenue adequacy and meet its cost of capital. CSX provides transportation services on privately owned and financed infrastructure, unlike competing transportation modes. As a result, we have an especially acute need to be treated fairly in tax issues that affect the transportation industry. A priority for our public policy team in 2003 will be working with Congress to repeal the discriminatory 4.3 cents per gallon fuel tax. This tax takes $170 million in rail industry revenues every year. Those revenues could be used to enhance service and support economic growth. Especially unfair is that the 4.3 cents per gallon fuel tax paid by airlines and the trucking industry goes directly into the aviation and highway trust funds, which benefit those industries. Railroads receive no direct benefit from this tax, and therefore suffer a serious competitive disadvantage. CSX 2002 ANNUAL REPORT 11 Community - -------------------------------------------------------------------------------- Public policy makers at the federal and state levels can also play critical roles in fostering environments that encourage economic development. There is no better example than New York state's passage of the Rail Infrastructure Investment Act of 2002. This legislation, signed into law by Governor Pataki in early 2003, changes the state's method for assessing railroad property. Prior to the new legislation, New York's rail property tax rate was three times higher than that of any other state where CSXT operated, encouraging the railroad to invest its capital elsewhere. The new law brings New York's tax rate closer in line with other states allowing CSX to invest in the state's rail infrastructure and increase opportunities for economic growth and expansion. Another impediment to the United States' competitiveness is a legal system that encourages a "lawsuit lottery" of liability claims and outrageous awards. This abuse is breaking big and small companies and hurting their customers, their employees and the communities in which they operate. CSX will continue to strongly urge Congress and the states to enact legislation that makes the litigation system fair to companies of all sizes that are trying to create jobs, improve services, develop new products and give back to communities. In 2003, Congress will likely consider legislation to reauthorize the Transportation Equity Act for the 21st Century, or TEA-21. At CSX, we support public policies which promote an overall balance of transportation modes for optimum safety, efficiency and environmental stewardship. The safety and environmental advantages of rail are well documented and should be prominently considered in any public transportation policy debate. The company has joined with the other Class I railroads to push for modifications and clarifications to certain transportation programs contained in TEA-21, as well as carefully targeted tax law changes. These changes would allow railroads to work more effectively with other transportation modes and with transportation planners to find efficient solutions to our nation's transportation problems. Protecting the Public In addition to our intense employee safety focus, CSXT works to educate the public about highway crossing safety and to deter trespassing on railroad property, which often results in tragedy. These efforts were rewarded in 2002 with a 6% decrease in grade-crossing injuries. CSXT cooperated with local law enforcement agencies to enforce grade-crossing and trespassing laws, while continually searching for new engineering solutions for enhanced crossing safety. Public safety is also a driving factor behind our company's position in regard to passenger rail. We support passenger rail operations across our system in many ways, from Amtrak inter-city trains to commuter systems in major metropolitan areas. We believe the separation of rail and passenger operations is the most effective and safest method for preserving the efficiency of the nation's freight rail system while building a passenger rail system that meets public expectations for safety and performance. Where combined systems are existent or proposed, careful planning and execution must be prerequisites to preserving the safety, reliability and efficiency of both freight and passenger operations. Environmental Stewardship Rail transportation is by far the most environmentally efficient choice for moving freight. A gallon of fuel moves nine times more freight by rail than by truck, and locomotives are about three times cleaner than trucks. But at CSX, that's not good enough. We strive continually to improve our environmental performance because that's the right choice for our customers and for our communities. Our leadership in environmental innovation is evident in the Auxiliary Power Unit that CSXT has designed, patented and made available to the rail industry. The APU provides power during idling conditions, allowing a locomotive's main engine to be shut down. In 2002, the company equipped 800 of its more than 2,500 locomotives with APUs. Once the entire fleet is equipped with APUs, the company expects to conserve an estimated 25 to 30 million gallons of fuel annually, compared to today's fuel consumption. For developing the APU, we received the U.S. Environmental Protection Agency's Clean Air Excellence Award. At CSXI, a primary safety focus in 2002 was safe handling of hazardous materials as part of the company's commitment to minimize spillage and prevent the exposure of employees and the environment to hazardous chemicals. During the year, a record number of fire and emergency medical personnel, law enforcement officers, school bus drivers and professional drivers received training and materials on grade crossing safety and hazardous materials handling through CSXT's efforts. Beyond ensuring compliance with environmental laws and regulations, CSXT is committed to promoting excellence in all of its environmental and hazardous materials operations. In 2002, the railroad showed that it is the safest means of transporting hazardous materials. Of the more than 440,000 carloads of hazardous materials transported on CSXT during the year, only eight cars released any portion of their load as a result of a derailment - a 50 percent improvement in hazardous materials safety over 2001. At the same time, CSXT continued to prepare itself and the communities where it operates for the unlikely occurrence of a hazardous materials incident. In 2002, railroad hazardous materials experts trained more than 5,200 local emergency responders and 1,100 railroad supervisors in emergency preparedness. In addition, transportation emergency response plans were developed, bringing the - -------------------------------------------------------------------------------- 12 CSX 2002 ANNUAL REPORT Community total number of terminals with emergency response plans to more than 70. Additionally, thousands of railroad employees participated in the annual environmental training and certification program, while Mechanical Shop Certifications were conducted at locations across the system. As an industry partner in the American Chemistry Council's Responsible Care(R) program, CSXT joined with other railroads in 2002 in developing a plan and model for applying recent amendments to the program. In taking a leadership role, CSXT demonstrated its ongoing commitment to excellence in handling, usage and disposal practices. CSXT's recycling programs, meanwhile, produced outstanding results in 2002, with approximately 2.7 million gallons of used oil, 522,000 pounds of batteries, and 1.7 million used crossties recycled. People, Places...and Progress At CSX, we want every one of the communities in which we operate to be a better place because we're there. We demonstrate our commitment to communities in our safety programs and initiatives, through charitable giving, and sponsorship of community events. But we know, too, that ultimately our success comes down to one thing: people. And we believe we have the best in the business. They show it on the job, and they live it in their communities. From small farming and coal communities to major cities throughout the East, CSX employees are actively volunteering to improve the quality of life for all people, from all walks of life and to share the benefits of their hard work. Countless thousands of volunteer hours are given to programs directly supported by CSX, such as partnering with schools in Jacksonville, Florida, that need a helping hand. In 2002, we entered into a partnership with Sadie Tillis Elementary School, our third partner school in the city, where our employees volunteer to tutor reading and math, read aloud to classes, start pen-pal programs, participate in special events, and host school-wide programs, such as at-home safety. CSX employees also devote countless volunteer hours to performing good works of their choosing. They lead Boy Scout and Girl Scout troops; they build homes for the needy; they provide emergency services; they coach youth sports teams; and they contribute in many other ways. In fact, our employees are vital to the quality of life in many of the communities and neighborhoods where CSX is present. By the very nature of our dispersed business operations, CSX is a diverse company--geographically, culturally and philosophically. But we refuse to take diversity for granted, because we believe it enhances the quality of our workforce. We are a leading sponsor of INROADS, the largest minority internship program in the nation. Our efforts have worked. Recently, we were ranked by Diversity Inc. magazine as one of the top 50 American companies in workplace diversity efforts. Our 10 field-based diversity councils will continue to promote diversity awareness; our managers will continue to receive diversity training, and we will continue to recruit minority candidates for our team. At CSX, we are proud of all of our people and all of the places where we do business. Most of all, we are proud to be a continuing force for progress for business and people. CSX 2002 ANNUAL REPORT 13 Fact-Based [PHOTO APPEARS HERE] 14 CSX 2002 ANNUAL REPORT Financial Information Table of Contents 16 Financial Policy 17 Management's Discussion and Analysis of Financial Condition and Results of Operations 30 Consolidated Statement of Earnings 31 Consolidated Statement of Cash Flows 32 Consolidated Statement of Financial Position 33 Consolidated Statement of Changes in Shareholders' Equity 34 Notes to Consolidated Financial Statements 56 Report of Ernst & Young LLP, Independent Auditors CSX 2002 ANNUAL REPORT 15 Financial Policy - -------------------------------------------------------------------------------- CSX's Financial Principles The management of CSX Corporation ("CSX" or the "Company") reports the Company's financial condition and results of operations in an accurate, timely manner and consistent with accounting principles generally accepted in the United States in order to give shareholders the information necessary to make investment decisions about the Company. In this section of the annual report, financial information is presented to assist in understanding the sources of earnings, the financial resources of the Company and the contributions of the various business units. The Company's key objective is to increase shareholder value by improving the return on invested capital and maximizing free cash flow. To achieve these goals, management uses the following guidelines in conducting the financial activities of the Company: o Capital -- CSX business units plan to earn returns in excess of CSX's cost of capital. The Company's business plans and investments are expected to generate adequate free cash flow to achieve this goal over an appropriate period of time. o Debt Ratings -- CSX strives to maintain its investment grade debt ratings, which allows more cost-effective access to financial markets. The Company will manage its business operations in a manner consistent with meeting this objective, to provide adequate cash to service its debt and fixed charges. o Dividends -- The cash dividend is reviewed regularly in the context of providing the highest value to shareholders. Competitive yield levels, tax efficiency and financial flexibility are among the factors considered in such reviews. Despite its best efforts, CSX cannot guarantee that its goals will be met. For example, revenue and operating expenses are affected by the state of the economy and the industries the Company serves. In addition, changes in regulatory policy can drastically change the cost and feasibility of certain operations. Factors such as these, along with the uncertainty involved in predicting future events, should be kept 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 accounting principles generally accepted in the United States and, accordingly, include certain 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 transactions are properly authorized by management and are recorded in conformity with accounting principles generally accepted in the United States. Controls include accounting tests, written policies and procedures and a code of corporate ethics 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 auditing standards generally accepted in the United States and included a review of internal accounting controls to the extent deemed necessary for the purpose of its report, which appears on page 56. - -------------------------------------------------------------------------------- 16 CSX 2002 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations (All references to earnings per share assume dilution) Description of Business CSX Corporation ("CSX" or the "Company"), operates one of the largest rail networks in the United States and also provides intermodal transportation services across the United States and key markets in Canada and Mexico. Its marine operations include an international terminal services company and a domestic container-shipping company. On December 16, 2002, CSX entered into an agreement to convey most of its interest in its domestic container-shipping company, CSX Lines LLC, for cash and securities of a new venture, Horizon Lines LLC ("Horizon"). The Company expects this transaction to close in the first quarter of 2003. Surface Transportation CSX Transportation Inc. CSX Transportation Inc. ("CSXT") is the largest rail network in the eastern United States, providing rail freight transportation over a network of more than 23,000 route miles in 23 states, the District of Columbia and two Canadian provinces. Headquartered in Jacksonville, Florida, CSXT accounted for 74% of CSX's operating revenue and 76% of operating income in 2002. CSX Intermodal Inc. CSX Intermodal Inc. ("CSXI") is the nation's only transcontinental intermodal transportation service provider, operating a network of dedicated intermodal facilities across North America. The CSXI network runs approximately 450 purchased dedicated trains between its 45 terminals weekly. CSXI accounted for 14% of CSX's operating revenue and 13% of operating income in 2002. Its headquarters are located in Jacksonville, Florida. Marine Services CSX Lines LLC CSX Lines LLC ("CSX Lines") operates a domestic container-shipping business consisting of a fleet of 17 vessels and approximately 21,500 containers serving the trade between the continental United States and Alaska, Hawaii / Guam and Puerto Rico. CSX Lines accounted for 9% of CSX's operating revenues and 3% of operating income in 2002. CSX Lines is headquartered in Charlotte, North Carolina. As stated above, in mid-December CSX entered into an agreement to convey most of its interest in CSX Lines. CSX World Terminals LLC CSX World Terminals LLC ("CSX World Terminals") operates container-freight terminal facilities in Asia, Europe, Australia, Latin America and the United States. CSX World Terminals accounted for 3% of CSX's operating revenues and 6% of operating income in 2002. CSX World Terminals is headquartered in Charlotte, North Carolina. Non-transportation Resort holdings include the AAA Five-Diamond hotel, The Greenbrier, in White Sulphur Springs, West Virginia. CSX Real Property Inc. is responsible for sales, leasing and development of CSX-owned properties, and is headquartered in Jacksonville, Florida. Preparation of the Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates are made for the following areas: 1. Casualty, legal and environmental reserves 2. Pension and postretirement medical plan accounting 3. Depreciation polices for its assets under the group-life method See pages 26-28 for a further discussion of these critical accounting estimates. CSX 2002 ANNUAL REPORT 17 Management's Discussion and Analysis of - -------------------------------------------------------------------------------- Financial Condition and Results of Operations Results of Operations Consolidated Results 2002 vs. 2001 Operating Revenue CSX follows a 52/53-week fiscal reporting calendar. Fiscal years 2002 and 2001 consisted of 52 weeks ending on December 27, 2002 and December 28, 2001, respectively. Operating revenue of $8.2 billion in 2002 was slightly higher than 2001, resulting mainly from an increase in revenues at the Company's domestic container-shipping unit, CSX Lines, which offset a small decrease at the Company's Surface Transportation units. [GRAPHIC APPEARS WITH THE FOLLOWING PLOT POINTS:] Average Return on Assets 1998 1999 2000 2001 2002 - ---- ---- ---- ---- ---- 2.7% 0.0% 2.7% 1.4% 2.0% Operating Expense Operating expense of $7.0 billion in 2002 was 2% lower due mainly to lower fuel and labor costs at the Company's Surface Transportation business. The effect on 2001 of the $60 million New Orleans litigation settlement contributed to the favorable year-to-year comparison. Other Income Other income was up $32 million in 2002 as compared to 2001, due mainly to reduced losses relating to equity investments and other favorable miscellaneous items, offset by lower interest income. Interest Expense Interest expense was reduced by $73 million in 2002 as compared [GRAPHIC APPEARS WITH THE FOLLOWING PLOT POINTS:] Average Return on Equity 1998 1999 2000 2001 2002 - ---- ---- ---- ---- ---- 9.2% 0.0% 9.6% 4.9% 6.9% Operating Income (a)
2002 -------------------------------------------------------------------------------------------- Surface Transportation Marine Services -------------------------------------------------------------------------------------------- Container International Elim./ (millions of dollars) Rail Intermodal Total Shipping Terminals(b) Total Other Total - ------------------------------------------------------------------------------------------------------------------------------------ Operating Revenue $ 6,003 $1,180 $ 7,183 $ 758 $ 236 $ 994 $ (25) $8,152 -------------------------------------------------------------------------------------------- Operating Expense Labor and Fringe 2,541 67 2,608 229 57 286 3 2,897 Materials, Supplies and Other 1,201 179 1,380 244 77 321 12 1,713 Conrail Operating Fees, Rents and Services 322 -- 322 -- -- -- -- 322 Building and Equipment Rent 425 131 556 45 9 54 (9) 601 Inland Transportation (365) 633 268 119 7 126 (24) 370 Depreciation 576 29 605 17 9 26 7 638 Fuel 449 -- 449 66 -- 66 -- 515 Miscellaneous -- -- -- -- 8 8 (39) (31) New Orleans Litigation Provision -- -- -- -- -- -- -- -- -------------------------------------------------------------------------------------------- Total Expense $ 5,149 $1,039 $ 6,188 $ 720 $ 167 $ 887 $ (50) $7,025 -------------------------------------------------------------------------------------------- Operating Income $ 854 $ 141 $ 995 $ 38 $ 69 $ 107 $ 25 $1,127 -------------------------------------------------------------------------------------------- Operating Ratio 85.8% 88.1% 86.1% 95.0% 70.8% 89.2% -------------------------------------------------------------------------------------------- Employment-Annual Averages 33,464 1,093 34,557 1,616 1,261 2,877 Property Additions $ 981 $ 29 $ 1,010 $ 19 $ 11 $ 30
(a) Certain prior year amounts have been reclassified to conform to the 2002 presentation. (b) Marine Services includes minority interest expense which is reclassified to other income in eliminations and other. (c) 2001 includes the New Orleans tank car fire litigation charge of $60 million, which negatively impacted rail and Surface Transportation operating ratios by 1% and .08%, respectively. - -------------------------------------------------------------------------------- 18 CSX 2002 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations to 2001, due to refinancing fixed-rate maturities at lower interest rates, and to a greater percentage of outstanding debt during 2002 bearing a floating rate of interest through the use of interest rate swap agreements. Net Earnings The Company reported net earnings for 2002 of $424 million, $1.99 per share, compared to $293 million, $1.38 per share in 2001. Results for 2002 include the write-down of indefinite lived intangible assets as a cumulative effect of accounting change, which reduced net earnings $43 million after tax, or 20 cents per share. Results for 2001 include a provision to account for the settlement of the New Orleans tank car fire litigation, which reduced net earnings by $37 million after tax, 17 cents per share. Excluding the cumulative effect of the accounting change and the New Orleans litigation provision, net earnings were $467 million for 2002, compared with $330 million for 2001. This increase is the result of increased operating income on a consolidated basis of $110 million (excluding the pretax charge of $60 million in 2001 for the New Orleans litigation provision), higher other income of $32 million and lower interest expense of $73 million. 2001 vs. 2000 Operating Revenue Fiscal years 2001 and 2000 consisted of 52 weeks ending on December 28, 2001 and December 29, 2000, respectively. Operating revenue of $8.1 billion in 2001 was slightly lower than 2000, resulting from decreased volume at the Company's Surface Transportation units associated with the economic downturn. Operating Expense Operating expense of $7.2 billion was 3% lower in 2001, due primarily to cost reductions and lower fuel prices mainly at the Company's Surface Transportation units. Operating expenses for 2001 also included $60 million for the New Orleans litigation settlement. Other Income Other income was down $13 million in 2001 as compared to 2000, due mainly to reduced interest income, increased losses from equity investments and other charges offsetting an increase in real estate gains. Interest Expense Interest expense was down $32 million in 2001 as compared to 2000, primarily from the impact of lower interest rates on floating-rate debt and on fixed-rate maturities refinanced in 2001. Net Earnings The Company reported net earnings for 2001 of $293 million, $1.38 per share, compared to $565 million, $2.67 per share in 2000. Results for 2001 include a provision for the settlement of the New Orleans tank car fire litigation. This charge reduced earnings $37 million after tax, 17 cents per share. Net earnings for 2000 included the results of the Company's wholly-owned logistics subsidiary, CTI Logistx Inc. ("CTI"), which was sold in September 2000 for $650 million. The sale resulted in a gain of $570 million before tax, $365 million after tax, $1.73 per share. CTI contributed $14 million, 6 cents per share to net earnings until it was sold. The contract logistics segment was reported as a discontinued operation in 2000. Excluding the New Orleans litigation provision and the CTI sale, net earnings were $330 million for 2001, compared with $186 million for 2000. The increase resulted from increased operating income resulting from cost cutting measures and lower fuel prices, and a favorable interest rate environment.
2001 - --------------------------------------------------------------------------------------- Surface Transportation Marine Services - --------------------------------------------------------------------------------------- Container International Elim./ Rail Intermodal Total Shipping Terminals(b) Total Other Total - --------------------------------------------------------------------------------------- $ 6,082 $ 1,112 $ 7,194 $ 681 $ 236 $ 917 $ (1) $ 8,110 - --------------------------------------------------------------------------------------- 2,585 65 2,650 213 62 275 9 2,934 1,212 173 1,385 203 70 273 31 1,689 336 -- 336 -- -- -- -- 336 442 123 565 51 9 60 1 626 (371) 616 245 98 7 105 (13) 337 550 31 581 24 8 32 -- 613 525 -- 525 60 -- 60 -- 585 -- -- -- -- 9 9 (36) (27) 60 -- 60 -- -- -- -- 60 - --------------------------------------------------------------------------------------- $ 5,339 $ 1,008 $ 6,347 $ 649 $ 165 $ 814 $ (8) $ 7,153 - --------------------------------------------------------------------------------------- $ 743 $ 104 $ 847 $ 32 $ 71 $ 103 $ 7 $ 957 - --------------------------------------------------------------------------------------- 87.8% 90.6% 88.2% 95.3% 69.9% 88.7% - --------------------------------------------------------------------------------------- 35,014 1,116 36,130 1,602 1,305 2,907 $ 848 $ 12 $ 860 $ 11 $ 19 $ 30

2000 - --------------------------------------------------------------------------------------- Surface Transportation Marine Services - --------------------------------------------------------------------------------------- Container International Elim./ Rail Intermodal Total Shipping Terminals(b) Total Other Total - --------------------------------------------------------------------------------------- $ 6,075 $ 1,168 $ 7,243 $ 666 $ 270 $ 936 $ 12 $ 8,191 - --------------------------------------------------------------------------------------- 2,567 67 2,634 212 61 273 20 2,927 1,266 195 1,461 222 93 315 21 1,797 377 -- 377 -- -- -- -- 377 540 131 671 45 10 55 -- 726 (387) 648 261 95 9 104 (7) 358 520 29 549 20 7 27 -- 576 577 -- 577 72 -- 72 -- 649 -- -- -- -- 19 19 (43) (24) -- -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------- $ 5,460 $ 1,070 $ 6,530 $ 666 $ 199 $ 865 $ (9) $ 7,386 - --------------------------------------------------------------------------------------- $ 615 $ 98 $ 713 -- $ 71 $ 71 $ 21 $ 805 - --------------------------------------------------------------------------------------- 89.9% 91.6% 90.2% 100.0% 73.7% 92.4% - --------------------------------------------------------------------------------------- 35,496 1,230 36,726 1,618 1,336 2,858 $ 822 $ 18 $ 840 $ 16 $ 8 $ 24
CSX 2002 ANNUAL REPORT 19 Management's Discussion and Analysis of - -------------------------------------------------------------------------------- Financial Condition and Results of Operations Rail 2002 vs. 2001 Operating Revenue CSX categorizes rail revenues in three main areas: 1. Merchandise, which includes the following markets: Phosphates and Fertilizer Metals Food and Consumer Agricultural Paper and Forest Chemicals Minerals Emerging Markets 2. Automotive 3. Coal, Coke and Iron Ore Overall rail revenues were down $79 million to $6.0 billion in 2002, with increases in merchandise and automotive revenues being offset by lower coal revenues. CSX's pricing programs and product mix helped overcome a 3% decrease in carloads in 2002. Merchandise Revenue Overall merchandise revenues were up 1%, or $47 million in 2002 over 2001. Improvements in phosphates and fertilizers, chemicals, emerging markets, metals and paper and forest products more than offset decreases in minerals, agricultural products and food and consumer products. Pricing programs and favorable mix helped the Company offset the effect of a small decrease in merchandise carloads in 2002 as compared to 2001. Automotive Revenue Automotive revenues improved 6%, or $51 million in 2002 as a result of yield improvement driven by favorable mix and extended linehauls. Year-over-year volume increases were driven by higher light truck production levels and aggressive manufacturer incentives that stimulated automobile sales during 2002. [GRAPHIC APPEARS WITH THE FOLLOWING PLOT POINTS:] Rail Operating Revenue (millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- $4,956 $5,623 $6,075 $6,082 $6,003 Other Revenue Other revenue decreased $35 million in 2002 as compared to 2001 primarily because there were lower fuel surcharges billed to customers. Coal, Coke and Iron Ore Revenue Coal revenues had a significant impact on the rail segment's 2002 financial results. Coal revenue was down 9%, or $143 million from 2001's strong performance due to reduced volumes. Export carloads were down significantly as a result of the reduced competitive standing of U.S. coal in the international market, while metallurgical and industrial markets were down in the second half of 2002. Operating Expense Total rail operating expenses decreased $190 million, or 4% in Business Segment Results - -------------------------------------------------------------------------------- Surface Transportation Traffic and Revenue(a)
Carloads Revenue (Thousands) (Millions of Dollars) -------------------------------------------------- 2002 2001 2000 2002 2001 2000 - --------------------------------------------------------------------------------------- Rail Merchandise Phosphates and Fertilizer 463 441 486 $ 324 $ 306 $ 316 Metals 319 319 344 401 395 407 Food and Consumer 162 163 157 217 218 206 Paper and Forest 477 478 523 637 633 657 Agricultural 358 372 361 489 501 483 Chemicals 500 499 523 907 883 922 Minerals 88 92 101 135 140 154 Emerging Markets 424 435 430 397 384 368 ----- ----- ---- ------ ----- ------ Total Merchandise 2,791 2,799 2,925 3,507 3,460 3,513 Automotive 538 516 586 845 794 869 Coal, Coke and Iron Ore Coal 1,573 1,722 1,660 1,528 1,671 1,546 Coke 34 39 46 49 46 47 Iron Ore 36 38 49 20 22 30 ----- ----- ---- ------ ----- ------ Total Coal, Coke and Iron Ore 1,643 1,799 1,755 1,597 1,739 1,623 Other Revenue -- -- -- 54 89 70 ----- ----- ---- ------ ----- ------ Total Rail 4,972 5,114 5,266 6,003 6,082 6,075 ----- ----- ---- ------ ----- ------ Intermodal Domestic 982 901 931 696 625 645 International 1,137 1,103 1,121 476 470 492 Other -- -- -- 8 17 31 ----- ----- ---- ------ ----- ------ Total Intermodal 2,119 2,004 2,052 1,180 1,112 1,168 ----- ----- ----- ----- ------ ------ Total Surface Transportation 7,091 7,118 7,318 $7,183 $7,194 $7,243 - ------------------------------------------------------------------------------------ (a) Certain prior year amounts have been reclassified to conform to the 2002 presentation.
- -------------------------------------------------------------------------------- 20 CSX 2002 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations 2002 as compared to 2001. Reductions in most expense categories were somewhat offset by increases in depreciation and lower inland transportation credits. Also, 2001 included $60 million relating to the New Orleans litigation settlement. [GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:] Rail Operating Expense (millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- $3,925 $4,853 $5,460 $5,339 $5,149 Fuel costs decreased $76 million in 2002, of which $69 million is attributable to lower fuel prices. The net impact on operating income of reduced fuel price was $44 million since $25 million of fuel surcharge revenue was discontinued. Labor and fringe costs decreased $44 million year-over-year including savings from reductions in overall employment. These savings were offset by increased labor costs relating to cost of living wage increases. Employee count was approximately 950 lower at the end of 2002 as compared to 2001. Building and equipment costs were down $17 million mainly due to continued reduction in car hire as the railroad took cars offline and ran more efficiently. Conrail operating fees, rents and services decreased $14 million in 2002 as compared to 2001. Decreased costs in operating the shared asset areas, tax settlements, efficiency improvements and adjustments to reflect lower reserve requirements for car hire, overcharges, interline and other claims all reduced this expense. Materials, supplies and other costs at the rail unit were down $11 million in 2002, as compared to 2001, due to reduced transportation costs, fewer accidents as a result of vigorous safety initiatives and adjustments to estimated state and local tax liabilities to reflect actual assessments. These decreases were offset by higher legal fees and maintenance costs, and $40 million in favorable insurance settlements received in 2001 that were not repeated in 2002. Depreciation expense increased $26 million as compared to 2001, as a result of a higher depreciable asset base. Operating Income Rail operating income increased by $111 million to $854 million in 2002 as compared to 2001, due to operating expense decreases noted previously and the New Orleans litigation provision. Excluding the 2001 charge for the New Orleans litigation provision, operating income was up $51 million or 6% for the year. 2001 vs. 2000 Operating Revenue Rail operating revenue was flat at $6.1 billion in 2001 and 2000. Decreases in merchandise and automotive revenues were offset by an increase in coal revenues. Merchandise Revenue Merchandise revenues were lower by $53 million in 2001 as compared to 2000. The economic downturn in 2001 had a negative effect on most merchandise categories. Decreases totaling $99 million in chemicals, paper and forest products, minerals, phosphates and fertilizers and metals reduced total rail revenues. These decreases were offset partially by increases of $46 million in agricultural products, food and consumer products, and emerging markets. Automotive Revenue Automotive revenues were down $75 million in 2001 as compared to 2000, due to reduced production by the automobile industry after a high production year in 2000. Coal, Coke and Iron Ore Revenue Coal revenues were up $125 million in 2001 from volume increases predominantly relating to rebuilding of stockpiles that were drawn down in 2000, and various pricing initiatives. Operating Expense Rail operating expenses decreased 2% in 2001. This decrease resulted from lower costs for materials, supplies and other; Conrail operating fees, rents and services; building and equipment rent; and fuel. These expense reductions were offset by the New Orleans litigation provision, and increases in labor and fringe benefits and depreciation. Building and equipment rent decreased $98 million primarily due to reduced car hire as the railroad took cars offline and ran more efficiently. Materials, supplies and other expenses went down by $54 million in part due to approximately $40 million in favorable insurance settlements received for occupational claims, with the remainder being the result of other cost cutting measures. Fuel expense was $52 million or 9% lower in 2001 as compared to 2000. A 6-cent decrease in the average price per gallon of fuel resulted in $34 million of the decrease with $18 million attributable to lower fuel consumption. Conrail operating fees, rents and services decreased by $41 million due mostly to continued cost savings. Labor and fringe benefits increased $18 million as a result of $45 million of incentive compensation expense in 2001, there being none in 2000. The incentive compensation was partially offset by reduced personnel costs as the railroad continued to reduce employment. Operating Income CSXT earned $743 million of operating income in 2001 vs. $615 million in 2000. Excluding the New Orleans litigation provision of $60 million, operating income for 2001 was $803 million. Intermodal 2002 vs. 2001 Operating Revenue CSXT reported operating revenue of $1.2 billion in 2002, as compared to $1.1 billion in 2001. The increase was primarily due to continued success in efforts to convert truck traffic onto the intermodal network. [GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:] Intermodal Operating Revenue (millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- $648 $959 $1,168 $1,112 $1,180 Operating Expense CSXT operating expense increased $31 million in 2002. This increase was the result of $32 million in higher inland transportation - -------------------------------------------------------------------------------- CSX 2002 ANNUAL REPORT 21 Management's Discussion and Analysis of - -------------------------------------------------------------------------------- Financial Condition and Results of Operations costs due to increased volumes handled during 2002. Also, due to volume increases, building and equipment rent increased $8 million, and materials, supplies and other increased $6 million. The increase was partially offset by a $15 million positive contract settlement. Other costs were relatively flat year-over-year. Operating Income CSXI operating income was up $37 million in 2002 as compared to 2001, due to the $68 million increase in revenues, offset by a $31 million increase in operating expenses. These results were also impacted by the $15 million positive contract settlement noted above. 2001 vs. 2000 Operating Revenue CSXI revenues were $1.1 billion in 2001 vs. $1.2 billion in 2000. In addition to a decrease in volume, shorter haul services and lower supplemental revenue resulted in a reduction in average revenue per load. Operating Expense CSXI operating expenses were $62 million lower in 2001 as compared to 2000. These decreases were mainly the result of lower volumes, which reduced inland transportation charges by $32 million. Cost cutting initiatives contributed to materials, supplies and other expense being down $22 million, and building and equipment rent being down $8 million. Other costs were relatively flat year over year. Operating Income CSXI reported 2001 operating income of $104 million, compared with $98 million in 2000. Improvements were attributed to continued cost reduction initiatives in a reduced revenue environment. International Terminals 2002 vs. 2001 CSX World Terminals' operating revenues were flat at $236 million in 2002 and 2001. Operating expenses were up $2 million in 2002 over 2001 due to lower earnings from equity investees. Miscellaneous operating expenses in 2002 and 2001 include $6 million and $3 million gains, respectively, from transactions relating to equity investments. Operating income was $69 million for 2002, a $2 million decrease from $71 million in 2001. 2001 vs. 2000 CSX World Terminals' operating revenues declined $34 million to $236 million in 2001 from $270 million in 2000. The lower revenue was offset by a decrease in operating expense to $165 million from $199 million. Continued emphasis on aggressive cost cutting and productivity gains resulted in an operating ratio decrease to 69.9% in 2001 from 73.7% in 2000 and operating income of $71 million in both years. Domestic Container-Shipping 2002 vs. 2001 CSX Lines reported an increase in operating revenues, primarily attributable to improvement in Puerto Rico of $77 million to $758 million, as compared to $681 million in 2001. Volume related operating expenses increased $71 million. Operating income was $38 million in 2002, compared with $32 million in 2001. On December 16, 2002, CSX entered into an agreement to convey most of its interest in CSX Lines for cash and securities of a new venture, Horizon Lines LLC ("Horizon"). CSX expects this transaction to close in the first quarter of 2003. Once the transaction closes, CSX will no longer report the domestic container-shipping company as a reporting segment, but will instead have a preferred interest in the new venture. 2001 vs. 2000 CSX Lines reported an increase in operating revenues of $15 million and a decrease in operating expenses of $17 million in 2001 and thus reported operating income of $32 million compared to a breakeven year in 2000. Earnings improved markedly year-over-year due to volume increases resulting from market share improvements, price increases, and cost reductions. Liquidity and Capital Resources Operating Activities Cash provided by operations for 2002 totaled $1.1 billion, as compared to $827 million in 2001, due to higher operating income, lower interest expense and significant cash flow relating to real estate activities. Cash flow for 2002 was negatively impacted by $85 million attributable to the New Orleans tank car fire settlement payment. Cash provided by operations for 2001 totaled $827 million, up $117 million from 2000, due principally to higher net income from operations, which was $293 million in 2001, compared to $186 million in 2000. [GRAPH APPEARS HERE WITH THE FOLLOWING PLOT POINTS:] Cash Provided By Operations (millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- $1,000 $1,071 $710 $827 $1,127 Investing Activities Net cash used by investing activities was $775 million in 2002 compared to $965 million 2001 and $337 million in 2000. The 2002 decrease resulted from approximately $150 million of higher capital spending, offset by reductions in CSXs short-term investment portfolio. Cash used by investing activities in 2001 was higher than 2000 primarily due to cash proceeds, received in September 2000, of $650 million from the sale of the contract logistics segment. [GRAPH APPEARS HERE WITH THE FOLLOWING PLOT POINTS:] Property Additions (millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- $1,479 $1,517 $913 $930 $1,080 Property additions totaled $1.1 billion in 2002, $930 million in 2001 and $913 million in 2000. The 2002 increase primarily relates to greater acquisitions of locomotives in 2002. Consolidated property additions for the coming fiscal year are expected to be approximately $1 billion, reflecting a more normalized spending level on the rail and intermodal networks. Financing Activities Financing activities required cash of $362 million during 2002, - -------------------------------------------------------------------------------- 22 CSX 2002 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations compared to providing $15 million in 2001 and the use of $739 million in 2000. The proceeds from the sale of the international liner business at the end of 1999 and contract logistics segment sale in 2000 were used to pay down debt and other corporate purposes in 2000. Debt Issuances and Credit Facilities During 2002, CSX issued $200 million of 4.88% notes due in 2009 and $400 million of 6.30% notes due in 2012. CSX also increased its borrowings from Conrail by $146 million during 2002 and extended the term to five years. In May 2002, the Company entered into a $300 million, one-year revolving credit agreement, which replaced the $500 million, one-year agreement that expired June 2002. During 2001, CSX issued $500 million of 6.75% notes due in 2011 and $564 million aggregate principal amount at maturity in unsubordinated zero coupon convertible debentures due in 2021 for an initial offering price of approximately $462 million. CSX may be required to repay the debentures at the election of the holders in October 2003. In the event that these debentures are put to CSX in 2003, CSX has the ability and intent to refinance on a long-term basis. The proceeds from these transactions were used to pay off commercial paper balances and other long-term debt. CSX also entered into a five-year, $1 billion line of credit agreement in June 2001. At December 27, 2002, the total revolving credit facilities of the Company totalled $1.3 billion. Any borrowings under the five-year line of credit or the one-year credit agreement would accrue interest at a variable rate based on the London InterBank Offered Rate ("LIBOR"). At December 27, 2002, CSX had commercial paper borrowings supported by these credit facilities of $140 million, and none at the end of 2001. The Company pays annual fees to the participating banks that may range from 0.08% to 0.23% of the total commitment, depending on CSX's credit rating. During 2000, CSX issued $400 million of floating rate notes, bearing interest at rates based on LIBOR and having a two-year maturity. These financings were intended to supplement the Company's existing commercial paper program. [GRAPHIC APPEARS HERE WITH THE FOLLOWING PLOT POINTS:] Fixed Charge Coverage 1998 1999 2000 2001 2002 - ---- ---- ---- ---- ---- 1.7x 1.1x 1.4x 1.7x 2.3x Debt Repayments CSX repaid long-term debt of $1.2 billion in 2002, $266 million in 2001, and $751 million in 2000. In 2002, the primary source for these repayments was cash from operations, cash on hand and approximately $900 million in borrowings and commercial paper issuances. Long-term and short-term debt at December 27, 2002 and December 28, 2001, totaled $7.1 billion. The ratio of debt to total capitalization was 52% at the end of 2002 and 2001. The 2002 ratio is impacted by the $273 million of accumulated other comprehensive earnings recorded as a reduction of shareholders' equity relating to minimum pension liabilities. Working Capital The Company's working capital deficit at December 27, 2002, was $665 million. 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 and maturing debt obligations when they come due, and has sufficient financial capacity to manage its day-to-day cash Schedule of Contractual Obligations and Commercial Commitments (Millions of Dollars) The following table sets forth due dates of the Company's contractual obligations:
Type of Obligations 2003 2004 2005 2006 2007 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------------- Long-Term Debt (see Note 10) $ 391 $ 460 $ 192 $ 429 $ 992 $4,446 $ 6,910 Operating Leases-Net (see Note 17 )/(a)/ 228 225 164 144 164 796 1,721 Agreements with Conrail (see Note 2)/(b)/ 251 253 245 234 227 3,311 4,521 ----------------------------------------------------------------------------------- Total Contractual Obligations $ 870 $ 938 $ 601 $ 807 $1,383 $8,553 $13,152 -----------------------------------------------------------------------------------
The following table illustrates expirations of the Company's commercial commitments:
Type of Commitments 2003 2004 2005 2006 2007 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------- Commercial Commitments (see Note 17)/(c)/ $ 130 $ 132 138 $ 166 $ 171 $2,036 $ 2,773 Unused Lines of Credit (see Note 10) 300 -- -- 1,000 -- -- 1,300 Guarantees (see Note 17 )/(d)/ 71 77 214 75 73 151 661 Other 41 40 40 8 -- -- 129 ----------------------------------------------------------------------------------- Total Commercial Commitments $ 542 $ 249 392 $1,249 $ 244 $2,187 $ 4,863 ----------------------------------------------------------------------------------- (a) CSX has entered into various operating lease agreements primarily for rail transportation. (b) See Footnote 2. The payments reflected above represent commitments to pay Conrail per various agreements and are not reduced by equity in Conrail earnings. (c) Other commercial commitments consists of a $2.8 million maintenance program which expires in 2026 relating to CSX's fleet of locomotives. This program replaced an internal maintenance program. (d) Approximately $511 million of these guarantees relate to certain lease obligations that CSX remains contingently liable for that were assumed by Maersk. CSX believes that Maersk will fulfill its contractual commitments with respect to such leases and that CSX will have no further liabilities relating to these obligations. In addition, CSX has collateral liens on the assets relating to these leases and indemnities provided by Maersk that it will fulfill the commitments. Approximately $150 million relates to a construction guarantee at one of the Company's equity investments.
- -------------------------------------------------------------------------------- CSX 2002 ANNUAL REPORT 23 Management's Discussion and Analysis of - -------------------------------------------------------------------------------- Financial Condition and Results of Operations requirements and any obligations arising from legal, tax and other regulatory rulings. Under the terms of its existing debt agreements, CSX has no significant exposure to default or payment acceleration should the company experience a weakening of its financial performance or a downgrade of its debt ratings. Shelf Registration Statements CSX has $900 million of remaining capacity under a shelf registration that may be used, subject to market conditions, to issue debt or other securities at the Company's discretion. The Company presently intends to use the proceeds from the sale of any securities under its shelf registration statements to finance cash requirements, including refinancing existing debt as it matures. While the Company seeks to give itself flexibility with respect to meeting such needs, there can be no assurance that market conditions would permit the Company to sell such securities on acceptable terms at any given time, or at all. Off-balance Sheet Arrangements CSX sells its receivables to a bankruptcy remote (special purpose) entity (See Note 7, Accounts Receivable). Dividends In mid-year 2001, the board of directors announced that the regular quarterly dividend payable would be reduced to 10 cents per share. CSX had paid a regular quarterly dividend of 30 cents per share since the fourth quarter of 1997 and did so through June of 2001. Dividends paid in 2002, 2001 and 2000 were as follows: Dollars in Millions, except Per Share Amounts 2002 2001 2000 ----------------------------------------------------- Dividend Per Share $0.40 $0.80 $1.20 Total Cash Paid for Dividends $ 86 $ 171 $262 Market Risk CSX addresses its exposure to the market risk of changes in interest rates through a controlled program of risk management that includes the use of interest rate swap agreements on $1.4 billion of fixed-rate obligations. CSX does not hold or issue derivative financial instruments for trading purposes. In the event of a 1% change in the LIBOR interest rate, the interest expense related to these swap agreements would have changed by approximately $14 million in 2002. The Company is exposed to credit loss in the event of non-performance by any counter-party to the interest rate swap agreements. The Company does not anticipate non-performance by such counter-parties, and no material loss would be expected from non-performance. At December 27, 2002 and December 28, 2001, CSX had approximately $709 million and $625 million, respectively, of floating-rate debt outstanding. A 1% change in interest rates would have impacted annual interest expense on floating-rate debt by approximately $7 million in 2002 and $6 million in 2001. The Company is subject to risk relating to changes in the price of diesel fuel. At the end of 2002, the Company had not entered into any long-term commitments for forward fuel purchases. The Company's rail unit average annual fuel consumption is approximately 570 million gallons. A one-cent change in the price per gallon of fuel would impact fuel expense by approximately $6 million. While the Company's international terminals segment does business in several foreign countries, a substantial portion of its revenue and expenses are transacted in U.S. dollars or currencies with little fluctuation against the U.S. Dollar. For this reason, CSX does not believe its foreign currency market risk is significant. A substantial increase in the fair market value of the Company's stock price could negatively impact earnings per share due to the dilutive effect of stock options and convertible debt. Investment In and Integrated Rail Operations with Conrail Background CSX and Norfolk Southern Corporation ("Norfolk Southern") completed the acquisition of Conrail Inc. ("Conrail") in May 1997. Conrail owns the primary freight railroad system serving the Northeastern United States, and its rail network extends throughout several Midwestern states and into Canada. CSX and Norfolk Southern, through a jointly owned acquisition entity, hold economic interests in Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and Norfolk Southern operate over allocated portions of the Conrail lines. The rail subsidiaries of CSX and Norfolk Southern operate their respective portions of the Conrail system pursuant to various operating agreements. Under these agreements, the railroads pay operating fees to Conrail for the use of right-of-way and rent for the use of equipment. Conrail continues to provide rail service in certain shared geographic areas ("Shared Asset Areas") for the joint benefit of CSX and Norfolk Southern for which it is compensated on the basis of usage by the respective railroads. Accounting and Financial Reporting Effects CSX's rail and intermodal operating revenue includes revenue from traffic previously moving on Conrail. Operating expenses include costs incurred to handle that traffic and operate the former Conrail lines. Rail operating expense includes an expense category, "Conrail Operating Fees, Rents and Services," which reflects: 1. Right of way usage fees and equipment rental payments to Conrail 2. Transportation, switching, and terminal service charges provided by Conrail in the Shared Asset Areas that Conrail operates for the joint benefit of CSX and Norfolk Southern 3. Amortization of the fair value write-up arising from the acquisition of Conrail 4. CSX's 42% share of Conrail's net income or loss recognized under the equity method of accounting - -------------------------------------------------------------------------------- 24 CSX 2002 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations Detail of Conrail Operating Fees, Rents and Services Fiscal Years Ended ------------------------- (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------ Rents and Services $ 346 $ 353 $ 383 Purchase Price Amortization and other 52 56 65 Equity in Income of Conrail (76) (73) (71) ------------------------- Total $ 322 $ 336 $ 377 - ------------------------------------------------------------------ Conrail Financial Information Summarized financial information for Contrail is as follows: Years Ended Dec. 31 ------------------------- (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------ Income Statement Information: Revenues $ 893 $ 903 $ 985 Expenses 623 639 749 ------------------------- Operating Income $ 270 $ 264 $ 236 ------------------------- Net Income $ 180 $ 174 $ 170 - ------------------------------------------------------------------ Dec. 31, ----------------- (millions of dollars) 2002 2001 - ------------------------------------------------------------------ Balance Sheet Information: Current Assets $ 300 $ 846 Property and Equipment and Other Assets 7,857 7,236 ----------------- Total Assets $ 8,157 $ 8,082 ----------------- Current Liabilities $ 329 $ 408 Long-term Debt 1,123 1,156 Other Liabilities 2,479 2,413 ----------------- Total Liabilities 3,931 3,977 Stockholders' Equity 4,226 4,105 ----------------- Total Liabilities and Stockholders' Equity $ 8,157 $ 8,082 - ------------------------------------------------------------------ Conrail's Results of Operations 2002 vs. 2001 Conrail reported net income of $180 million in 2002, compared with $174 million in 2001. Operating revenues were down $10 million to $893 million in 2002, while operating expenses were favorable $16 million year-over-year. Lower costs in the Shared Asset Areas, tax settlements and lower reserve requirements for car hire, overcharges, interline and other claims helped improve 2002 results. 2001 vs. 2000 Conrail reported net income of $174 million for 2001, compared with $170 million for 2000. Operating revenues were $903 million for 2001 vs. $985 million for 2000. Conrail 2001 results benefited from lower casualty costs and a favorable tax settlement, while 2000 results benefited from a non-recurring gain on the sale of property of $61 million before tax, $37 million after tax. Operating expense totaled $639 million in 2001, compared with $749 million in 2000. Financial Condition and Liquidity Conrail's operating activities provided cash of $423 million in 2002, compared with $502 million in 2001 and $362 million in 2000. The decrease in cash provided by operations in 2002 compared to 2001 reflected large payments of casualty claims. Cash generated from operations is the principal source of liquidity and is primarily used for debt repayments and capital expenditures. Debt repayments totaled $59 million, $61 million and $318 million in 2002, 2001 and 2000, respectively. Capital expenditures were $23 million, $47 million and $220 million in 2002, 2001 and 2000, respectively. Conrail had a working capital deficit of $29 million at December 27, 2002 and positive working capital of $438 million at December 28, 2001. The reason for the change in working capital position was the reclassification of notes receivable from CSX and Norfolk Southern from current to non-current due to the renegotiation of the notes during the year. A working capital deficit is not an issue for Conrail, as the operating leases with CSX and Norfolk Southern provide Conrail with sufficient cash flow to meet its obligations. Divestitures Potential Conveyance of Domestic Container- Shipping Assets to Joint Venture On December 16, 2002, CSX announced that it had reached an agreement to convey most of its interest in its domestic container-shipping subsidiary, CSX Lines to a new venture, Horizon Lines LLC ("Horizon"), for $300 million ($240 million in cash and $60 million in securities of the new venture). CSX will retain $319 million of vessel and equipment lease obligations that will be subleased to the new entity through 2014. A deferred pretax gain of approximately $137 million as a result of the transaction will be recognized over the 12 year sub-lease term. The $60 million of securities have a term of 7 years and have an annual preferred return of 10%. CSX expects that this transaction will close during the first quarter of 2003, subject to regulatory approval. CSX has a preferred interest in the new venture and will account for the investment under the cost method. The assets and liabilities of CSX Lines that are to be conveyed under this agreement are classified as assets and liabilities held for disposition on the statement of financial position as of December 27, 2002 in accordance with the provisions of SFAS 144 "Accounting for the Impairment or Disposal of Long-lived Assets." Sale of Contract Logistics Segment In September 2000, CSX completed the sale of CTI Logistx Inc., its wholly-owned logistics subsidiary, for $650 million. The contract logistics segment is reported as a discontinued operation. Revenues from the contract logistics segment were $335 million for 2000. CSX recorded a gain of $570 million before tax, $365 million after tax, $1.73 per share, on the sale. - -------------------------------------------------------------------------------- CSX 2002 ANNUAL REPORT 25 Management's Discussion and Analysis of Financial Condition and Results of Operations Other Matters Claims Arising out of Sale of International Container-Shipping Assets CSX has received a claim amounting to approximately $180 million plus interest from Europe Container Terminals ("ECT"), owner of the Rotterdam Container Terminal previously operated by Sea-Land Service Inc. ("Sea-Land"). ECT has claimed that the December 1999 sale of the international liner business to Maersk resulted in a breach of the Sea-Land terminal agreements with ECT. An initial arbitration hearing has been held to establish whether CSX is liable on ECT's claim, and on February 10, 2003 a panel of the Netherlands Arbitration Institute ruled that CSX was in breach of the terminal agreements. The ruling by the panel dealt only with the existence of liability for a breach, and did not address the level of ECT damages, if any, which will be the subject of a second hearing before the same panel sometime in 2003. CSX disputes this claim and believes it does not reflect the mitigating benefits ECT gained from its ability to service other customers at the former Sea-Land facility. Management believes that valid defenses to this claim exist but cannot estimate what, if any, loss may result from this matter. CSX believes that Maersk is responsible for any damages that may result from this dispute and has taken preliminary steps to initiate an arbitration against Maersk under the purchase and sale agreement with Maersk. The purchase and sale agreement with Maersk provides for a postclosing working capital adjustment to the sales price based on the change in working capital, as defined in the agreement, between June 25, 1999, and December 10, 1999. The Company has recorded a receivable of approximately $70 million in connection with the post-closing adjustment and this amount is currently in dispute. This matter, together with other disputed issues relating to the contractual obligations of the Company, have been submitted to arbitration. Although management believes CSX will prevail in some or all of the Maersk and ECT disputes and arbitrations, it can give no assurance in this regard. An adverse outcome could have a material effect on the determination of the final loss on sale of Sea-Land's International Liner business and the financial results and cash flows in future reporting periods. Critical Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates using management judgement are made for the following areas: 1. Casualty, legal and environmental reserves 2. Pension and postretirement medical plan accounting 3. Depreciation polices for its assets under the group-life method These estimates and assumptions are discussed with the Company's Audit Committee of the board of directors on a regular basis. 1. Casualty, Legal and Environmental Reserves Casualty Reserve Management Casualty reserves represent accruals for the uninsured portion of personal injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued is based on the type and severity of the claim, and an estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury and accident claims. Unreported occupational injuries are not subject to reasonable estimation, thus no provision is made for incurred but not reported occupational injuries. Estimates for all of these claims are subject to significant uncertainty relating to the outcomes of negotiated settlements and other developments. As facts and circumstances change, the Company may have to change its estimates, and changes could have a material impact on the Company's financial results. The Company reviews its reserves quarterly and makes adjustments accordingly. Adverse verdicts, catastrophic accidents and legal settlements are events that have caused the Company to revise estimates in the past. Personal injury, occupational injury and accident liabilities amount to $605 million and $661 million at December 27, 2002 and December 28, 2001, respectively. The net decrease of this liability in 2002 is the result of cash payments being greater than expense recorded. See additional information in Note 9, Casualty, Environmental and Other Reserves. Legal Reserves In accordance with SFAS 5, "Accounting for Contingencies," an accrual for a loss contingency is established if information available prior to issuance of the financial statements indicates that it is (1) probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the amount of loss can be reasonably estimated. If no accrual is made for a loss contingency because one or both of these conditions is not met, or if an exposure to loss exists in excess of the amount accrued, disclosure of the contingency is made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The Company evaluates all exposures relating to legal liabilities on an ongoing basis and records reserves when appropriate under the guidance noted above. The Company increased a reserve in 2001 to account for the impact of the negotiated settlement of the New Orleans tank car fire. This negotiation resulted in the Company recording an additional charge of $60 million before tax, $43 million after tax, 17 cents per share in 2001. Environmental Management 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 94 environmentally impaired sites that are, or may be subject to, remedial - -------------------------------------------------------------------------------- 26 CSX 2002 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations 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 clean-up, which could be substantial. CSXT is involved in a number of administrative and judicial proceedings and other clean-up efforts at approximately 230 sites which include the 94 Superfund sites where it is participating in the study or clean-up of alleged environmental contamination. At least once each quarter, CSXT reviews its role, if any, with respect to each such location, giving consideration to a number of factors, including the nature of CSXT's alleged connection to the location (e.g., generator of waste sent to the site, or owner or operator of the site), the extent of CSXT's alleged connection (e.g., 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 viability of other named and unnamed PRPs at the location. Based on the review process, CSXT has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at December 27, 2002 and December 28, 2001, were $35 million and $32 million, respectively. These liabilities, which are undiscounted, include amounts representing CSXT's estimate of unasserted claims, which CSXT believes to be immaterial. The liability includes future costs for all sites where the Company's obligation is (1) deemed probable and (2) 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 December 27, 2002, environmental liability is expected to be paid out over the next seven years, funded by cash generated from operations. 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 on information currently available, however, the Company believes 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 condition. The Company has not had any material changes in estimates relating to environmental reserves in 2002, 2001 or 2000 and has spent $14 million, $10 million and $12 million, respectively, in these years. See additional information at Note 9, Casualty, Environmental and Other Reserves. 2. Pension and Postretirement Medical Plan Accounting 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. 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 postretirement medical plans are contributory (partially funded by retiree), with retiree contributions adjusted annually. The life insurance plan is non-contributory. The benefit obligation for these plans represents the liability of the Company for current and retired employees and is affected primarily by the following: 1. Service cost (benefits attributed to employee service during the period) 2. Interest cost (interest on the liability due to the passage of time) 3. Actuarial gains/losses (experience during the year different from that assumed and changes in plan assumptions) 4. Benefits paid to participants Plan assets are amounts that have been segregated and restricted to provide benefits, and include amounts contributed by the Company and amounts earned from investing contributions, less benefits paid. The pension plans are funded at not less than the minimum funding standards set forth in the Employee Retirement Income Security Act of 1974. Plan assets consist primarily of common stocks, corporate bonds and cash and cash equivalents. The Company funds the cost of the postretirement medical and life insurance benefits on a pay-as-you-go basis. The accounting for these plans is subject to the guidance provided in SFAS No. 87, "Employers Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." Both of these statements require that management make certain assumptions relating to the following: 1. Long-term rate of return of plan assets 2. Discount rates used to measure future obligations and interest expense 3. Salary scale inflation rates 4. Health care cost trend rates and other assumptions. All of these assumptions and estimates can have a significant impact on the Company's accounting for these plans and the amount of expense recorded in a reporting period. These assumptions are made as of the beginning of the year. The Company uses a plan year of Oct. 1 through Sept. 30 to value its pension and postretirement plans on an actuarial basis. As permitted by SFAS 87, the Company has elected to use this fiscal year as it provides for more timely analysis. The Company engages third-party actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects for its plans. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. The effects of such modifications are amortized over future periods in accordance with proper accounting guidance. Long-term Rate of Return on Plan Assets The expected return on the Company's pension plan assets is based on the Company's expectation of the long-term average rate of return on CSX 2002 ANNUAL REPORT 27 Management's Discussion and Analysis of Financial Condition and Results of Operations assets in the pension funds, which is reflective of the current and projected asset mix of the funds. As this estimate is long-term, it is not adjusted as frequently as other assumptions used in pension accounting. However, the impact of the last few years overall market returns did cause CSX to reevaluate the rate used in calculating its liability at September 30, 2002 (the end of the measurement period for 2002) and adjust it from 9.5% to 8.9%. This change will increase the amount of pension expense reported in future periods. CSX will continue to evaluate its performance on an ongoing basis and if appropriate will adjust the long-term rate of return. Discount Rates Discount rates are based on comparable rates for long-term liabilities that reflect a similar time horizon to payments that the Company will make for pension and postretirement medical payments. This assumption is analyzed every year and adjusted accordingly. The discount rate impacts the amount of liability recorded and also the amount of the interest expense component of pension and postretirement expense. CSX's assumed discount rates used in calculating the liability at September 30, 2002 and September 30, 2001, respectively, were 6.5% and 7.25% for the pension liabilities and 5.5% and 7.25% for postretirement medical benefits. The difference between the rate used for pension vs. postretirement is due to the different time horizon of future payments. Salary Scale Inflation Salary scale inflation rates are based on current trends and historical data accumulated by the Company. The Company reviews this assumption on a regular basis and makes adjustments when appropriate. CSX lowered this rate from 4.5% to 3.3% at September 2002 to better reflect actual increases to employee compensation based on historical data. Health Care Cost Trend Rates The health care cost trend rate is based on current trends and historical data. Due to the increasing costs of providing health care benefits, the Company increased the inflation assumption for health care costs for the 2002 year. The current assumed rate is 11 % decreasing gradually until reaching 5% in 2006. Pension Postretirement Benefits Benefits ------------------------------------ 2002 2001 2002 2001 - ---------------------------------------------------------------- Expected Long-term Return on Plan Assets: Benefit Cost for Plan Year 9.50% 9.50% n/a n/a Benefit Obligation at End of Plan Year 8.90% 9.50% n/a n/a Discount Rates: Benefit Cost for Plan Year 7.25% 7.75% 7.25% 7.75% Benefit Obligation at End of Plan Year 6.50% 7.25% 5.50% 7.25% Salary Scale Inflation 3.30% 4.50% 3.30% 4.50% - ---------------------------------------------------------------- Other Assumptions Relating to Pensions and Postretirement Benefits The calculations made by the actuaries also include assumptions relating to mortality rates, turnover, and retirement age. These assumptions are based on historical data and are approved by management. As a result of changes in assumptions for fiscal year 2003, net periodic pension benefit cost is expected to increase approximately $15 million. The postretirement net periodic benefit cost is expected to remain flat due to changes made to benefits provided to retirees. 3. Depreciation Policies Under the Group-Life Method The Company accounts for its rail assets, including main-line track, locomotives and freight cars, using the group-life method. These assets are 94% of the Company's total fixed assets and amount to $12.5 billion on a net basis at December 27, 2002. Under the group-life method, the useful lives of rail assets are determined by the performance of a life-study which includes: o statistical analysis of historical retirements for each group of property o evaluation of the current operations o previous assessment of the condition of the assets and outlook for their continued use o comparison of assets to the same asset groups with other companies. The results of the life study process determine the service lives for each asset group. These studies are conducted by a third party expert and analyzed by the Company's management. Changes in asset lives due to the results of the life studies could significantly impact future periods depreciation expense and thus the Company's results of operations. Events that could cause the Company to change its estimates relating to the lives of its asset groups could be changes in historical results, technological improvements and changes in specific assets. The Company is currently completing life studies on road, track and equipment and will reflect the results in its 2003 financial statements. New Accounting Pronouncements and Change in Accounting Policy New Accounting Pronouncements In 2001, Statement of Financial Accounting Standard ("SFAS") 142, "Goodwill and Other Intangible Assets", was issued. Under the provisions of SFAS 142, goodwill and other indefinite lived intangible assets are no longer amortized, but are reviewed for impairment on a periodic basis. The Company adopted this standard for fiscal 2002, and incurred a pretax charge of $83 million, $43 million after tax and minority interest, or 20 cents per share as a cumulative effect of an accounting change, which represents the difference between book value and the fair value of indefinite lived intangible assets. These indefinite lived intangible assets are permits and licenses that the Company holds relating to a proposed pipeline to transfer natural gas from Alaska's North Slope to the port in Valdez, Alaska. The fair value was determined using a discount method of projected future cash flows relating to these assets. The carrying value of these assets is now approximately $3 million. The adoption of SFAS 142 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. The Company does not have any other indefinite lived intangible assets. - -------------------------------------------------------------------------------- 28 CSX 2002 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations In 2002, SFAS 143, "Accounting for Asset Retirement Obligations" was issued. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. CSX is required to adopt this statement for fiscal year 2003. Under the group-life method the Company accrues removal costs as part of its depreciation expense. This effectively results in establishing a liability in accumulated depreciation in excess of any salvage value for cross ties. The Company is assessing the effect of adopting this statement and expects that it will record a cumulative effect of accounting change to remove any such liability accrued to date in the first quarter of 2003. On an ongoing basis, depreciation expense will be reduced, while materials, supplies and other expense will be increased. The change in operating income is expected to be immaterial. In 2002, SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued. This statement requires that long-lived assets to be disposed of by sale are no longer measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. In addition, this statement modifies the reporting requirements for discontinued operations. Long-lived assets, whether to be held for disposition or held and used, should be measured at the lower of its carrying amount or fair value less cost to dispose. The Company is following this statement relating to the accounting for its wholly-owned subsidiary, CSX Lines, which is being conveyed to a third party (See Note 3, Divestitures). In 2002, the FASB issued Financial Accounting Standard Interpretation ("FASI") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This statement requires that certain guarantees entered into be recorded at fair value on the statement of financial position and additional disclosures be made about guarantees. CSX is required to adopt the accounting provisions of this statement in fiscal year 2003, but meets the disclosure requirements for the year ended December 27, 2002. (See Note 17, Commitments and Contingencies). Change in Accounting Policy Beginning in 2003, the Company will begin accounting for stock-based compensation in accordance with SFAS 123, "Accounting for Stock-Based Compensation," or the fair value method of accounting for future stock awards on a prospective basis. Under SFAS 123, discounts on stock purchase plans and the fair value of restricted stock and options at date of grant are charged to compensation costs over the vesting or performance period. Factors Expected to Influence 2003 Fuel expenses fluctuate and are a significant cost of CSX's transportation businesses. So far in 2003, fuel expenses are significantly higher than in 2002. For the first quarter of 2003, the net effect of fuel expenses is expected to be approximately $35 million above the 2002 first quarter. The full year impact of fuel expenses cannot be estimated with reasonable certainty. Severe winter storms and flooding in the Northeast during January and February caused significant service interruptions for Surface Transportation. While the costs and loss of revenue from these events are still to be determined, they could have a material impact on the Company's first quarter earnings. The conveyance of CSX Lines is expected to close in the first quarter of 2003, whereupon CSX will receive cash proceeds of $240 million. CSX will maintain a preferred interest in the new company. The resignation of John W. Snow, chairman and chief executive officer, was effective on February 3, 2003. Charges associated with his departure, primarily retirement benefits, total approximately $15 million, which will be expensed in the first quarter of 2003. Forward-looking Statements This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to, among other items: projections and estimates of earnings, revenues, cost-savings, expenses, or other financial items; statements of management's plans, strategies and objectives for future operations, and management's expectations as to future performance and operations and the time by which objectives will be achieved; statements concerning proposed new products and services; and statements regarding future economic, industry or market conditions or performance. Forward-looking statements are typically identified by words or phrases such as "believe", "expect", "anticipate", "project", and similar expressions. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, and actual performance or results could differ materially from that anticipated by these forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others: (i) the Company's success in implementing its financial and operational initiatives, (ii) changes in domestic or international economic or business conditions, including those affecting the rail industry (such as the impact of industry competition, conditions, performance and consolidation); (iii) legislative or regulatory changes; and (iv) the outcome of claims and litigation involving or affecting the Company. Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this Annual Report and in the Company's other SEC reports, accessible on the SEC's website at www.sec.gov and the Company's website at www.csx.com. CSX 2002 ANNUAL REPORT 29 Financial Statements --------------------
Consolidated Statement of Earnings (Millions of Dollars, Except Per Share Amounts) Fiscal Years Ended ----------------------------------------------------- Dec. 27, 2002 Dec. 28, 2001 Dec. 29, 2000 ----------------------------------------------------- Operating Income Operating Revenue $ 8,152 $ 8,110 $ 8,191 Operating Expense 7,025 7,153 7,386 ----------------------------------------------------- Operating Income 1,127 957 805 Other Income and Expense Other Income 41 9 22 Interest Expense 445 518 550 ----------------------------------------------------- Earnings Earnings from Continuing Operations Before Income Taxes 723 448 277 Income Tax Expense 256 155 91 ----------------------------------------------------- Earnings before Discontinued Operations and Cumulative Effect of Accounting Change 467 293 186 Earnings from Discontinued Operations, Net of Tax of $10 -- -- 14 Gain on Sale of Discontinued Operations, Net of Tax of $205 -- -- 365 ----------------------------------------------------- Earnings before Cumulative Effect of Accounting Change 467 293 565 Cumulative Effect on Prior Years of Accounting Change for Indefinite Lived Intangible Assets, Net of Tax of $36 (43) -- -- ----------------------------------------------------- Net Earnings $ 424 $ 293 $ 565 Per Common Share Earnings Per Share: Before Discontinued Operations and Cumulative Effect of Accounting Change $ 2.20 $ 1.39 $ .88 Earnings from Discontinued Operations -- -- .07 Gain on Sale of Discontinued Operations -- -- 1.73 Cumulative Effect of Accounting Change (0.20) -- -- ----------------------------------------------------- Including Discontinued Operations and Cumulative Effect of Accounting Change $ 2.00 $ 1.39 $ 2.68 ----------------------------------------------------- Earnings Per Share, Assuming Dilution: Before Discontinued Operations and Cumulative Effect of Accounting Change $ 2.19 $ 1.38 $ .88 Earnings from Discontinued Operations -- -- .06 Gain on Sale of Discontinued Operations -- -- 1.73 Cumulative Effect of Accounting Change (0.20) -- -- ----------------------------------------------------- Including Discontinued Operations and Cumulative Effect of Accounting Change $ 1.99 $ 1.38 $ 2.67 ----------------------------------------------------- Average Common Shares Outstanding (Thousands) 212,729 211,668 210,942 Average Common Shares Outstanding, Assuming Dilution (Thousands) 213,512 212,409 211,314 Cash Dividends Paid Per Common Share $ .40 $ .80 $ 1.20 - ------------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------- 30 CSX 2002 ANNUAL REPORT Financial Statements - -------------------------------------------------------------------------------- Consolidated Statement of Cash Flows - -------------------------------------------------------------------------------- (Millions of Dollars)
Fiscal Years Ended ------------------------------------------------------- Dec. 27, 2002 Dec. 28, 2001 Dec. 29, 2000 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net Earnings $ 424 $ 293 $ 565 Adjustments to Reconcile Net Earnings to Net Cash Provided: Depreciation 649 622 600 Deferred Income Taxes 172 197 152 Cumulative Effect of Accounting Change, Net of Tax 43 -- -- Gain on Sale of Logistics Subsidiary -- -- (365) Equity in Conrail Earnings - Net (23) (17) (4) Other Operating Activities (85) 4 (13) Changes in Operating Assets and Liabilities: Accounts Receivable 30 7 351 Other Current Assets 23 (17) (93) Accounts Payable (83) (51) (114) Other Current Liabilities (23) (211) (369) ------------------------------------------------------- Net Cash Provided by Operating Activities 1,127 827 710 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities Property Additions (1,080) (930) (913) Short-term Investments - Net 350 (51) (85) Net Proceeds from Divestitures and Sale of Assets -- -- 650 Other Investing Activities (45) 16 11 ------------------------------------------------------- Net Cash Used by Investing Activities (775) (965) (337) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities Short-term Debt - Net 140 (524) (225) Long-term Debt Issued 748 962 588 Long-term Debt Repaid (1,159) (266) (751) Dividends Paid (86) (171) (262) Common Stock Reacquired -- -- (42) Other Financing Activities (5) 14 (47) ------------------------------------------------------- Net Cash (Used) Provided by Financing Activities (362) 15 (739) - --------------------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (10) (123) (366) Cash, Cash Equivalents and Short-term Investments Cash and Cash Equivalents at Beginning of Year 137 260 626 ------------------------------------------------------- Cash and Cash Equivalents at End of Year 127 137 260 Short-term Investments at End of Year 137 481 426 ------------------------------------------------------- Cash, Cash Equivalents and Short-term Investments at End of Year $ 264 $ 618 $ 686 - --------------------------------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information Interest Paid - Net of Amounts Capitalized $ 448 $ 509 $ 553 Income Taxes Paid $ 44 $ 250 $ 14 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- CSX 2002 ANNUAL REPORT 31 Financial Statements - -------------------------------------------------------------------------------- Consolidated Statement of Financial Position (Millions of Dollars)
Dec. 27, 2002 Dec. 28, 2001 - -------------------------------------------------------------------------------------------- Assets Current Assets Cash, Cash Equivalents and Short-term Investments $ 264 $ 618 Accounts Receivable - Net 799 871 Materials and Supplies 180 191 Deferred Income Taxes 128 162 Assets Held for Disposition 263 244 Other Current Assets 155 198 ------------------------------- Total Current Assets 1,789 2,284 ------------------------------- Properties 18,560 17,760 Accumulated Depreciation 5,274 4,913 ------------------------------- Properties - Net 13,286 12,847 ------------------------------- Investment in Conrail 4,653 4,655 Affiliates and Other Companies 381 297 Other Long-term Assets 842 718 ------------------------------- Total Assets $ 20,951 $ 20,801 - -------------------------------------------------------------------------------------------- Liabilities Current Liabilities Accounts Payable $ 802 $ 905 Labor and Fringe Benefits Payable 457 409 Casualty, Environmental and Other Reserves 246 248 Current Maturities of Long-term Debt 391 1,044 Short-term Debt 143 225 Income and Other Taxes Payable 144 100 Liabilities Held for Disposition 104 92 Other Current Liabilities 167 284 ------------------------------- Total Current Liabilities 2,454 3,307 ------------------------------- Casualty, Environmental and Other Reserves 604 687 Long-term Debt 6,519 5,839 Deferred Income Taxes 3,567 3,621 Other Long-term Liabilities 1,566 1,227 ------------------------------- Total Liabilities 14,710 14,681 - -------------------------------------------------------------------------------------------- Shareholders' Equity Common Stock, $1 Par Value 215 214 Other Capital 1,547 1,492 Retained Earnings 4,797 4,459 Accumulated Other Comprehensive Loss (318) (45) ------------------------------- Total Shareholders' Equity 6,241 6,120 ------------------------------- Total Liabilities and Shareholders' Equity $ 20,951 $ 20,801 - --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
~~- --------------------------------------------------------------------------------------------~~
32 CSX 2002 ANNUAL REPORT Financial Statements Consolidated Statement of Changes in Shareholders' Equity (Millions of Dollars)
Accumulated Common Stock Other Outstanding Common Other Retained Comprehensive (Thousands) Stock Capital Earnings Loss Total - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 31, 1999 218,444 $ 218 $ 1,525 $ 4,034 $ (21) $ 5,756 Comprehensive Earnings: Net Earnings - - - 565 - 565 Adjustment of Minimum Pension Liability, Net of $8 Income Taxes - - - - 15 15 Other - Net - - - - 6 6 --------- Comprehensive Earnings 586 --------- Dividends - - - (262) - (262) Stock Purchase and Loan Plan Exchange (5,505) (5) (29) - - (34) Common Stock Issued (Repurchased) - Net (201) - (29) - - (29) - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 29, 2000 212,738 213 1,467 4,337 - 6,017 Comprehensive Earnings: Net Earnings - - - 293 - 293 Adjustment of Minimum Pension Liability, Net of $10 Income Taxes - - - - (45) (45) --------- Comprehensive Earnings 248 --------- Dividends - - - (171) - (171) Common Stock Issued (Repurchased) - Net 950 1 25 - - 26 - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 28, 2001 213,688 214 1,492 4,459 (45) 6,120 Comprehensive Earnings: Net Earnings - - - 424 - 424 Adjustment of Minimum Pension Liability, Net of $152 Income Taxes - - - - (273) (273) --------- Comprehensive Earnings 151 --------- Dividends - - - (86) - (86) Common Stock Issued (Repurchased) - Net 999 1 55 - - 56 - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 27, 2002 214,687 $ 215 $ 1,547 $ 4,797 $(318) $ 6,241
See accompanying Notes to Consolidated Financial Statements. CSX 2002 ANNUAL REPORT 33 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note I. Significant Accounting Policies Nature of Operations CSX Corporation, including its majority-owned subsidiaries (collectively, "CSX" or "Company"), is a freight transportation company with principal business units providing rail, intermodal, international terminal and domestic container-shipping services. o Rail transportation services are provided principally throughout the Eastern United States and accounted for 74% of the Company's 2002 operating revenue. o Intermodal services are provided through a dedicated network of terminals and facilities across North America and accounted for 14% of operating revenue in 2002. o International terminal operations are located in Asia, Europe, Australia, Latin America and the United States and accounted for 3% of operating revenues in 2002. o Domestic container-shipping services trade between ports on the United States mainland and Alaska, Hawaii/Guam and Puerto Rico and accounted for 9% of operating revenues in 2002. On December 16, 2002, CSX entered into an agreement to convey most of its interest in its domestic container-shipping company, CSX Lines LLC for cash and securities of a new venture, Horizon Lines LLC ("Horizon") (See Note 3, Divestitures). The Company expects this transaction to close in the first quarter of 2003. Rail shipments include merchandise, automotive products and coal, coke and iron ore. Shipments as a percent of rail revenue are as follows: Fiscal Years Ended -------------------- 2002 2001 ------------------------------------------------------ Merchandise 58% 57% Automotive 14% 13% Coal, Coke and Iron Ore 27% 29% Other 1% 1% --------------------- Total 100% 100% ------------------------------------------------------ Merchandise traffic includes the following markets: Phosphates and Fertilizer Metals Food and Consumer Agricultural Paper and Forest Chemicals Minerals Emerging Markets Coal shipments originate mainly from mining locations in the Eastern United States and primarily supply domestic utility and export markets. 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 cost (if less than 20% owned and the Company has no significant influence) or equity (if the Company has significant influence). Fiscal Year CSX follows a 52/53 week fiscal reporting calendar. Fiscal years 2002, 2001 and 2000 consisted of 52 weeks. A 52-week fiscal year has four 13-week quarters. A 53-week year occurs periodically with the next one occurring in 2004. Fiscal years 2002, 2001 and 2000 ended on: o December 27, 2002 o December 28, 2001 o December 29, 2000 Earnings Per Share Basic earnings per share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Earnings per share, assuming dilution, starts with the basic calculation described above and adjusts the denominator for the effect of potential dilution of common shares during the period, mainly from employee stock options. This difference increases the denominator for the additional common shares that would have been outstanding if these shares had been issued. Potentially dilutive common shares at CSX include stock options and awards, and shares that would be issued relating to convertible long-term debt. References to earnings per share in the Notes to Consolidated Financial Statements assume dilution. Cash, Cash Equivalents and Short-term Investments On a daily basis, cash in excess of current operating requirements is invested in various highly liquid investments having a maturity of three months or less at the date of acquisition. These investments are carried at cost, which approximates market value, and are classified as cash equivalents. At December 28, 2001, short-term investments included $220 million of deposits relating to the New Orleans litigation settlement that was paid in 2002. Materials and Supplies Materials and supplies consist primarily of fuel and items for replacement and maintenance of track and equipment, and are carried at average cost. Properties All properties are stated at cost less an allowance for accumulated depreciation. Rail assets, including main-line track, locomotives and freight cars are depreciated using the group-life method. This method pools similar assets by road and equipment type and then depreciates each group as a whole. Approximately 94% of the Company's total - ------------------------------------------------------------------------------ 34 C S X 2002 ANNUAL REPORT Notes to Consolidated Financial Statements property is accounted for under the group life method. The majority of other property is depreciated using the straight-line method on a per asset basis. 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. Road assets, including main-line track, have estimated service lives ranging from 7 to 81 years. Equipment assets, including locomotives and freight cars, have estimated service lives ranging from 5 to 28 years. For retirements or disposals of depreciable rail assets that occur in the ordinary course of business, the asset cost (net of salvage value or sales proceeds) is charged to accumulated depreciation and no gain or loss is recognized. For retirements or disposals of non-rail depreciable assets, infrequent disposal of rail assets outside the normal course of business and for all dispositions of land, the resulting gains or losses are recognized at the time of disposal. 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. 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, and their carrying amount is reduced to fair value based on discounted net cash flows or other estimates of fair value. Revenue and Expense Recognition Surface Transportation (rail and intermodal) revenue and expense are recognized proportionately as freight moves from origin to destination. Marine transportation (container-shipping) revenue, and a corresponding accrual for the estimated cost to complete delivery, are recorded when cargo first sails from its port of origin. All other revenue is recorded upon completion of service. Environmental Costs The Company incurs costs for environmental corrective efforts, such as the study and clean-up of environmental contamination. Environmental costs are charged to expense when they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. Liabilities for environmental corrective efforts are recorded when CSX's responsibility is (1) deemed probable and (2) the amount 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. Environmental reserves at December 27, 2002 and December 28, 2001 were $35 million and $666 million, respectively. Casualty Reserves Casualty reserves represent accruals for the uninsured portion of personal injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued is based on the type and severity of the claim and an estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury and accident claims. Unreported occupational injuries are not subject to reasonable estimation, thus no provision is made for incurred but not reported occupational injuries. Personal injury, occupational injury and accident liabilities amount to $605 million and $666 million at December 27, 2002 and December 28, 2001, respectively. 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 Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for StockBased Compensation," are presented in Note 14 - Stock Plans. CSX will adopt the full provisions of SFAS 123 effective with fiscal year 2003. The impact of adopting this standard is that the Company will record expense over the vesting period for the issuance of future stock awards. The amount of expense will be the fair value of the awards using the BlackScholes valuation method. Comprehensive Earnings CSX reports comprehensive earnings (loss) in accordance with SFAS 130, "Reporting Comprehensive Income," in the Consolidated Statement of Changes in Shareholders' Equity. Comprehensive earnings is defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (i.e., issuance of equity securities and dividends). Accumulated other comprehensive loss at December 27, 2002 and December 28, 2001 consists primarily of minimum pension liabilities of $318 million and $45 million, respectively which includes $55 million and $30 million, respectively of the minimum pension liability at Conrail. This is included in CSX's shareholders' equity as required by APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." Derivative Financial Instruments The Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. CSX 2002 ANNUAL REPORT 35 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The Company has entered into several interest rate swaps to hedge interest rate risk exposure. CSX's interest rate swaps are designated and qualify as fair value hedges under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." For derivative instruments that are designated and qualify as a fair value hedge, the gains and losses on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings during the period of change in fair values. If the change in the value of the hedging instrument offsets the change in the value of the hedged item, the hedge is considered perfectly effective. The accounting for hedge effectiveness is measured at least quarterly based on the relative change in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness, the amount by which the change in the value of the hedge does not exactly offset the change in the value of the hedged item, is recognized immediately in earnings. The company's interest rate swaps qualify as perfectly effective fair value hedges. As such, there is no ineffective portion to the hedge recognized in earnings. Adjustments to the fair value of the interest rate swap agreements are recorded in other assets and other liabilities. The differential to be paid or received under these agreements is accrued consistently with the terms of the agreements and is recognized in interest expense over the term of the related debt. The related amounts payable to or receivable from counterparties are included in other liabilities or assets. Cash flows related to interest rate swap agreements are classified as "Operating activities" in the Consolidated Statements of Cash Flows. New Accounting Pronouncements In 2001, SFAS 142, "Goodwill and Other Intangible Assets," was issued. Under the provisions of SFAS 142, goodwill and other indefinite lived intangible assets are no longer amortized, but are reviewed for impairment on a periodic basis. The Company adopted this standard for fiscal 2002, and incurred a pretax charge of $83 million, $43 million after tax and minority interest, or 20 cents per share as a cumulative effect of an accounting change, which represents the difference between book value and the fair value of indefinite lived intangible assets. These indefinite lived intangible assets are permits and licenses that the Company holds relating to a proposed pipeline to transfer natural gas from Alaska's North Slope to the port in Valdez, Alaska. The fair value was determined using a discount method of projected future cash flows relating to these assets. The carrying value of these assets is now approximately $3 million. The adoption of SFAS 142 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. The Company does not have any other indefinite lived intangible assets. In 2002, SFAS 143, "Accounting for Asset Retirement Obligations," was issued. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. CSX is required to adopt this statement for fiscal year 2003. Under the group-life method, the Company accrues removal costs as part of its depreciation expense. This effectively results in establishing a liability in accumulated depreciation in excess of any salvage value for cross ties. The Company is assessing the effect of adopting this statement and expects that it will record a cumulative effect of accounting change to remove any such liability accrued to date in the first quarter of 2003. On an ongoing basis, depreciation expense will be reduced, while materials, supplies and other expense will be increased. The change in operating income is expected to be immaterial. In 2002, SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. This statement requires that long-lived assets to be disposed of by sale are no longer measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. In addition, this statement modifies the reporting requirements for discontinued operations. Long-lived assets, whether to be held for disposition or held and used, should be measured at the lower of its carrying amount or fair value less cost to dispose. The Company is following this statement relating to the accounting for its wholly-owned subsidiary, CSX Lines, which is being conveyed to a third party (See Note 3, Divestitures). In 2002, the FASB issued Financial Accounting Standard Interpretation ("FAST") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This statement requires that certain guarantees be recorded at fair value on the statement of financial position and additional disclosures be made about guarantees. CSX is required to adopt the accounting provisions of this statement in fiscal year 2003, but meets the disclosure requirements for the year ended December 27, 2002 (See Note 17, Commitments and Contingencies). Prior-year Data Certain prior-year data has been reclassified to conform to the 2002 presentation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates using management judgement are - ------------------------------------------------------------------------------- 36 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements made for the following areas: 1. Casualty, legal and environmental reserves 2. Pension and postretirement medical plan accounting 3. Depreciation polices for its assets under the group-life method Note 2. Investment In and Integrated Rail Operations with Conrail Background CSX and Norfolk Southern Corporation ("Norfolk Southern") completed the acquisition of Conrail Inc. ("Conrail") in May 1997. Conrail owns the primary freight railroad system serving the Northeastern United States, and its rail network extends throughout several Midwestern states and into Canada. CSX and Norfolk Southern, through a jointly owned acquisition entity, hold economic interests in Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and Norfolk Southern operate over allocated portions of the Conrail lines. The rail subsidiaries of CSX and Norfolk Southern operate their respective portions of the Conrail system pursuant to various operating agreements. Under these agreements, the railroads pay operating fees to Conrail for the use of right-of-way and rent for the use of equipment. Conrail continues to provide rail service in certain shared geographic areas ("Shared Asset Areas") for the joint benefit of CSX and Norfolk Southern, for which it is compensated on the basis of usage by the respective railroads. Accounting and Financial Reporting Effects CSX's rail and intermodal operating revenue includes revenue from traffic previously moving on Conrail. Operating expenses include costs incurred to handle that traffic and operate the former Conrail lines. Rail operating expense includes an expense category, "Conrail Operating Fees, Rents and Services," which reflects: 1. Right of way usage fees and equipment rental payments to Conrail 2. Transportation, switching, and terminal service charges provided by Conrail in the Shared Asset Areas that Conrail operates for the joint benefit of CSX and Norfolk Southern 3. Amortization of the fair value write-up arising from the acquisition of Conrail 4. CSX's 42% share of Conrail's net income or loss recognized under the equity method of accounting. Detail of Conrail Operating Fees, Rents and Services Fiscal Years Ended ------------------------------- (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------ Rents and Services $ 346 $ 353 $ 383 Purchase Price Amortization and other 52 56 65 Equity in Income of Conrail (76) (73) (71) ------------------------------- Total $ 322 $ 336 $ 377 - ------------------------------------------------------------------ Conrail Financial Information Summarized financial information for Conrail as follows: Years Ended Dec. 31, ------------------------------ (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------ Income Statement Information: Revenues $893 $903 $985 Expenses 623 639 749 ------------------------------- Operating Income $270 $264 $236 ------------------------------- Net Income $180 $174 $170 - ------------------------------------------------------------------ Dec.31, ----------------- (millions of dollars) 2002 2001 - ------------------------------------------------------------------ Balance Sheet Information: Current Assets $ 300 $ 846 Property and Equipment and Other Assets 7,857 7,236 ---------------- Total Assets $8,157 $8,082 ---------------- Current Liabilities $ 329 $ 408 Long-term Debt 1,123 1,156 Other Liabilities 2,479 2,413 ---------------- Total Liabilities 3,931 3,977 Stockholders' Equity 4,226 4,105 ---------------- Total Liabilities and Stockholders' Equity $8,157 $8,082 - ------------------------------------------------------------------ Conrail's 2002 Results Conrail reported net income of $180 million in 2002, compared with $174 million in 2001. Operating revenues were down $10 million to $893 million in 2002 while operating expenses were favorable $16 million year-over-year. Lower costs in the Shared Asset Areas, tax settlements and lower reserve requirements for car hire, overcharges, interline and other claims helped improve 2002 results. CSX 2002 ANNUAL REPORT 37 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Transactions with Conrail As listed below, CSX has amounts payable to Conrail, representing expenses incurred under the operating, equipment and shared area agreements with Conrail. Also, Conrail advances its available cash balances to CSX and Norfolk Southern under variable-rate notes, with CSX's note maturing on March 28, 2007. Dec. 27, Dec. 28, (millions of dollars) 2002 2001 - -------------------------------------------------------------------------------- CSX Payable to Conrail $ 69 $ 88 Conrail Advances to CSX $371 $225 Interest Rates on Conrail Advances to CSX 1.82% 2.50% - -------------------------------------------------------------------------------- Fiscal Years Ended ------------------------------- (millions of dollars) 2002 2001 2000 - -------------------------------------------------------------------------------- Interest Expense Related To Conrail Advances $ 8 $ 5 $ 4 - -------------------------------------------------------------------------------- The agreement under which CSXT operates is allocated portion of the Conrail route system has an initial term of 25 years and may be renewed at CSXT's option for two five-year terms. Operating fees paid to Conrail under the agreement are subject to adjustment every six years based on the fair value of the underlying system. Lease agreements for the Conrail equipment operated by CSXT cover varying terms. CSXT is responsible for all costs of operating, maintaining, and improving the routes and equipment under these agreements. On December 27, 2002, future minimum payments to Conrail under the operating, equipment and shared area agreements were as follows: (millions of dollars) Future Minimum Payments - ------------------------------------------------------------------------ 2003 $ 251 2004 253 2005 245 2006 234 2007 227 Thereafter 3,311 ------------------------ Total $4,521 - ------------------------------------------------------------------------ Note 3. Divestitures Potential Conveyance of Domestic Container- Shipping Assets to Joint Venture On December 16, 2002, CSX announced that it had reached an agreement to convey most of its interest in its domestic container-shipping subsidiary, CSX Lines to a new venture, Horizon Lines LLC ("Horizon"), for $300 million ($240 million in cash and $60 million in securities of the new venture). CSX will retain $319 million of vessel and equipment lease obligations that will be subleased to the new entity through 2014. A deferred pretax gain of approximately $137 million as a result of the transaction will be recognized over the 12 year sub-lease term. The $60 million of securities have a term of 7 years and have an annual preferred return of 10%. CSX expects that this transaction will close during the first quarter of 2003, subject to regulatory approval. CSX has a preferred interest in the new venture and will account for the investment under the cost method. The assets and liabilities of CSX Lines that are to be conveyed under this agreement are classified as assets and liabilities held for disposition on the statement of financial position as of December 27, 2002 in accordance with the provisions of SFAS 144 "Accounting for the Impairment or Disposal of Long-lived Assets." Major categories of assets and liabilities held for disposition are as follows: Dec. 27, Dec. 28, (millions of dollars) 2002 2001 - ----------------------------------------------------------------------- Accounts Receivable - Net $ 106 $ 91 Property and Equipment - Net 114 125 Other Assets 43 28 ------------------------ Total Assets Held for Disposition $ 263 $ 244 ------------------------ Accounts Payable $ 67 $ 61 Other Liabilities 37 31 ------------------------ Total Liabilities Held for Disposition $ 104 $ 92 ------------------------ Net Assets Held for Disposition $ 159 $ 152 - ----------------------------------------------------------------------- Sale of Contract Logistics Segment In September 2000, CSX completed the sale of CTI Logistx Inc., its wholly-owned logistics subsidiary, for $650 million. The contract logistics segment is reported as a discontinued operation. Revenues from the contract logistics segment were $335 million for 2000. CSX recorded a gain of $570 million before tax, $365 million after tax, $1.73 per share, on the sale. Note 4. Operating Expense Operating expense consists of the following: Fiscal Years Ended ------------------------------- (millions of dollars) 2002 2001 2000 - --------------------------------------------------------------------------- Labor and Fringe $2,897 $2,934 $2,927 Materials, Supplies and Other 1,682 1,662 1,773 Conrail Operating Fees, Rents and Services 322 336 377 Building and Equipment Rent 601 626 726 Inland Transportation 370 337 358 Depreciation 638 613 576 Fuel 515 585 649 New Orleans Litigation Provision -- 60 -- ------------------------------- Total $7,025 $7,153 $7,386 - --------------------------------------------------------------------------- Selling, General and Administrative Expenses $ 657 $ 708 $ 612 - --------------------------------------------------------------------------- 38 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements Note 5. Other Income Other income (expense) consists of the following: Fiscal Years Ended ---------------------------- (millions of dollars) 2002 2001 2000 - ---------------------------------------------------------------------------- Interest Income $ 27 $ 47 $ 60 Income from Real Estate and Resort Operations 108 101 60 Discount on Sales of Accounts Receivable (26) (34) (28) Minority Interest (42) (39) (42) Equity Losses of Other Affiliates (3) (27) (7) Miscellaneous Expense (23) (39) (21) ---- ---- ---- Total $ 41 $ 9 $ 22 - ----------------------------------------------------------------------------- Gross Revenue from Real Estate and Resort Operations $ 261 $ 254 $ 191 - ----------------------------------------------------------------------------- Note 6. Income Taxes Earnings from domestic and foreign operations and related income tax expense are as follows: Fiscal Years Ended --------------------- (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------------------ Net Earnings from Continuing Operations Before Income Taxes: Domestic $ 648 $ 379 $ 191 Foreign 75 69 86 ----------------------------------------------------------------------------- Net Earnings from Continuing Operations before Income Taxes $ 723 $ 448 $ 277 - -------------------------------------------------------------------------------- The significant components of deferred tax assets and liabilities include: Dec. 27, 2002 Dec. 28, 2001 (millions of dollars) Assets Liabilities Assets Liabilities - ------------------------------------------------------------------------------ Productivity/Restructuring Charges $ 52 $ -- $ 60 $ -- Employee Benefit Plans 445 -- 248 -- Accelerated Depreciation -- 3,812 -- 3,630 Other 741 865 721 858 ------------------------------------- Total $1,238 $4,677 1,029 $4,488 -------------------------------------- Net Deferred Tax Liabilities $3,439 $3,459 - ----------------------------------------------------------------------------- The primary factors in the change in year-end net deferred income tax liability balances include: o Annual provision for deferred income tax expense o Minimum pension liability o In 2002, cumulative effect of accounting change The Company has not recorded domestic deferred or additional foreign income taxes related to undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested. These earnings amounted to $341 million, $291 million and $229 million at December 27, 2002, December 28, 2001 and December 29, 2000, respectively. These amounts may become taxable upon their remittance as dividends or upon the sale or liquidation of these foreign subsidiaries. It is not practical 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 1993. Tax returns for 1994 through 1998 currently are under examination. Management believes adequate provision has been made for any adjustments that might be assessed. The breakdown of income tax expense (benefit) between current and deferred is as follows: Fiscal Years Ended ------------------------------------ (millions of dollars) 2002 2001 2000 - ---------------------------------------------------------------------------- Income Tax Expense (Benefit): Current: Federal $ 50 $ (64) $ (53) Foreign 16 15 13 State 17 3 20 ------------------------------------ Total Current $ 83 $ (46) $ (20) Deferred: Federal $ 154 $ 176 $ 111 Foreign -- 10 (1) State 19 15 1 ------------------------------------ Total Deferred $ 173 $ 201 $ 111 ------------------------------------ Total $ 256 $ 155 $ 91 - ---------------------------------------------------------------------------- Income tax expense reconciled to the tax computed at statutory rates is as follows: Fiscal Years Ended --------------------------------------- (millions of dollars) 2002 2001 2000 - ----------------------------------------------------------------------------- Tax at Statutory Rates $253 35% $157 35% $ 97 35% State Income Taxes 23 3% 12 3% 8 3% Equity in Conrail Earnings (12) (2)% (10) (2)% (6) (2)% Foreign Operations (9) (1)% (1) --% (11) (4)% Other Items 1 --% (3) (1)% 3 1% ------------------------------------------- Income Tax Expense/Rate $ 256 35% $155 35% $ 91 33% - ------------------------------------------------------------------------------ 39 Notes to Consolidated Financial Statements ------------------------------------------ Note 7. Accounts Receivable Sale of Accounts Receivable CSXT sells, generally without recourse, a revolving pool of accounts receivable to CSX Trade Receivables Corporation ("CTRC"), a bankruptcy-remote (special purpose) entity wholly-owned by CSX Corporation. CTRC transfers the accounts receivable to a master trust and causes the trust to issue certificates representing undivided interests in the receivables, which are sold to investors for proceeds. Two series of certificates issued by the trust were outstanding as of December 27, 2002. One series issued in 1998 for $300 million to the public matures in June 2003 and bears interest payable to the investors at 6% annually. A second series in the amount of $200 million was issued to a private special purpose entity in 2000 that funded its purchase through a bank-supported commercial paper program. This second series of certificates was issued for a one-year maturity, and as currently amended matures in June 2003 as well. The private series of certificates bears interest at a floating rate based upon the program's commercial paper rates. The yield on the private certificates at December 27, 2002 was 1.46%. The outstanding amount of the private series was reduced from $200 million to $80 million in 2002. (millions of dollars) Dec. 27, 2002 Dec. 28, 2001 - ------------------------------------------------------------------------- Amount Sold under: Public Series of Certificates $ 300 $ 300 Private Series of Certificates 80 200 --------------------------------- Total $ 380 $ 500 --------------------------------- Retained Interest in Master Trust $ 534 $ 466 - ------------------------------------------------------------------------- The fair value of retained interests approximates book value as the receivables are collected in approximately one month. Fiscal Years Ended - ------------------------------------------------------------------------ (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------------ Discount on Sales of Accounts Receivables $ 26 $ 34 $ 28 - ------------------------------------------------------------------------ CSXT has retained responsibility for servicing the accounts receivables held by the master trust. The average servicing period is less than one month. No servicing asset or liability has been recorded since the fees CSXT receives approximate its related costs. The accounts receivable program is accounted for in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Accounts receivable have been reduced by the amount of the certificates issued by the trust. "Discount on Sales of Accounts Receivable" is reported as an expense item in other income." Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts based on the expected collectibility of all accounts receivable, including receivables transferred to the master trust that could be subsequently sold to outside parties with recourse. This amount is included in the statement of position as follows: (millions of dollars) Dec. 27, 2002 Dec. 28, 2001 - -------------------------------------------------------------------------- Allowance for Doubtful Accounts $ 125 $ 100 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 40 CSX 2000 ANNUAL REPORT Notes to Consolidated Financial Statements Note 8. Properties Properties consist of the following:
Dec. 27, 2002 Dec. 28, 2001 ----------------------------------------------------------------------- Accumulated Accumulated (millions of dollars) Cost Depreciation Net Cost Depreciation Net - -------------------------------------------------------------------------------------------------------------------------- Rail Road $11,541 $2,498 $ 9,043 $11,035 $ 2,343 $ 8,692 Equipment 5,671 2,225 3,446 5,467 2,077 3,390 ----------------------------------------------------------------------- Total Rail 17,212 4,723 12,489 16,502 4,420 12,082 Intermodal 442 173 269 399 145 254 ----------------------------------------------------------------------- Total Surface Transportation 17,654 4,896 12,758 16,901 4,565 12,336 Other 906 378 528 859 348 511 ----------------------------------------------------------------------- Total Properties $18,560 $5,274 $13,286 $17,760 $ 4,913 $12,847 - --------------------------------------------------------------------------------------------------------------------------
Note 9. Casualty, Environmental and Other Reserves Activity related to casualty, environmental and other reserves is as follows:
Casualty and Separation Environmental (millions of dollars) Other Reserves Liabilities Reserves Total - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 31, 1999 $ 708 $ 270 $ 53 $ 1,031 Charged to Expense 275 - - 275 Payments (285) (14) (12) (311) - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 29, 2000 698 256 41 995 Charged to Expense 234 - 1 235 Payments (271) (14) (10) (295) - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 28, 2001 661 242 32 935 Charged to Expense 231 - 17 248 Payments (287) (32) (14) (333) - -------------------------------------------------------------------------------------------------------------------------- Balance Dec. 27, 2002 $ 605 $ 210 $ 35 $ 850 - --------------------------------------------------------------------------------------------------------------------------
Reserve balances are as follows:
(millions of dollars) Dec. 27, 2002 Dec. 28, 2001 - -------------------------------------------------------------------------------------- Current Reserves: Casualty and Other $ 216 $ 218 Separation 15 15 Environmental 15 15 ------------------------- Total Current Reserves 246 248 Long-term Casualty, Environmental and Other Reserves 604 687 ------------------------- Total Casualty, Environmental and Other Reserves $ 850 $ 935 - --------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Casualty Reserves Casualty reserves represent accruals for the uninsured portion of personal injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued is based on the type and severity of the claim, and an estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury and accident claims. Unreported occupational injuries are not subject to reasonable estimation, thus no provision is made for incurred but not reported occupational injuries. Separation Liability Separation liabilities at December 27, 2002, relate to productivity charges recorded in 1991 and 1992 to provide for the estimated costs of implementing workforce reductions, improvements in productivity and other cost reductions at the Company's major transportation units. The remaining separation liabilities are expected to be paid out over the next 15 to 20 years. Environmental Reserves 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 94 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 clean-up, which could be substantial. CSXT is involved in a number of administrative and judicial proceedings and other clean-up efforts at approximately 230 sites which include the 94 Superfund sites noted above where it is participating in the study or clean-up of alleged environmental contamination. At least once each quarter, CSXT reviews its role, if any, with respect to each such location, giving consideration to a number of factors, including the nature of CSXT's alleged connection to the location (e.g., generator of waste sent to the site, or owner or operator of the site), the extent of CSXT's alleged connection (e.g., 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 viability of other named and unnamed PRPs at the location. Based on the review process, CSXT has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at December 27, 2002 and December 28, 2001, were $35 million and $32 million, respectively. These liabilities, which are undiscounted, include amounts representing CSXT's estimate of unasserted claims, which CSXT believes to be immaterial. The liability includes future costs for all sites where the Company's obligation is (1) deemed probable and (2) 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 December 27, 2002, environmental liability is expected to be paid out over seven years, funded by cash generated from operations. 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 on information currently available, however, the Company believes 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 condition. - -------------------------------------------------------------------------------- 42 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements Note 10. Debt and Credit Agreements Total long-term debt is as follows:
Average Interest Rates (millions of dollars) Maturity at Dec. 27, 2002 2002 2001 - --------------------------------------------------------------------------------------------------------------------- Convertible Debentures, net of $97 and $101 discount, 2021 1.00% $ 467 $ 463 respectively Notes 2003-2032 6.77% 5,285 5,289 Equipment Obligations 2003-2015 7.12% 855 950 Mortgage Bonds 2003 3.16% 55 55 Other Obligations, including Capital Leases 2003-2010 4.85% 248 126 ---------------------- Total 6,910 6,883 ---------------------- Less Debt Due Within One Year 391 1,044 ---------------------- Long Term Debt $6,519 $5,839 - ---------------------------------------------------------------------------------------------------------------------
Debt Issuances During the year ended December 27, 2002 CSX issued $200 million of 4.88% notes due in 2009, and $400 million of 6.30% notes due in 2012. During the year ended December 28, 2001, the Company issued $500 million of 6.75% notes due in 2011. Credit Facilities In May 2002, CSX entered into a $300 million, one-year revolving credit agreement, which replaced the $500 million, one-year agreement that expired June 2002. In June 2001, CSX entered into a five-year, $1 billion line of credit agreement. Any borrowings under these credit agreements would accrue interest at a variable rate based on the London InterBank Offered Rate("LIBOR"). CSX pays annual fees to the participating banks that may range from 0.08% to 0.23% of total commitment, depending on its credit rating. At December 27, 2002, CSX had commercial paper borrowings supported by these credit facilities of $140 million, all classified as short-term debt. At December 28, 2001, there were no commercial paper borrowings. Convertible Debentures On October 24, 2001, CSX issued $564 million aggregate principal amount at maturity in unsubordinated zero coupon convertible debentures due October 30, 2021 for an initial offering price of approximately $463 million. At December 27, 2002, these debentures are included in long-term debt, at a carrying value of $467 million. These debentures will accrete in value at a yield to maturity of 1 % per year, which may be reset on October 30, 2007, October 30, 2011, and October 30, 2016 to a rate based on five-year United States Treasury Notes minus 2.8%. In no event, however, will the yield to maturity be reset below 1 % or above 3% per annum. Accretion in value on the debentures is recorded for each period, but will not be paid prior to maturity. CSX may redeem the debentures for cash at any time on or after October 30, 2008, at a redemption price equal to the accreted value of the debentures. Similarly, holders may require the Company to purchase their debentures on October 30, 2003, October 30, 2006, October 30, 2008, October 30, 2011, and October 30, 2016, at a purchase price equal to the accreted value of the debentures. CSX has classified the debentures as long-term because in the event the Company is required to repay the debentures in October 2003, CSX has the intent and ability to refinance on a long-term basis. On the first three purchase dates, CSX may elect to pay the purchase price in cash and/or shares of common stock, while CSX may pay the purchase price only in cash on the last two purchase dates. Holders may convert debentures into common stock if certain requirements defined in the debentures and the related indenture are met. Holders may convert if the closing sale price of CSX common stock for at least 20 of the 30 preceding trading days is more than the applicable percentage (which is initially 120% and will decline over the life of the debentures to 110%) of the accreted conversion price per share of the Company's common stock. The "accreted conversion price" per share of common stock is the quotient of the accreted value of a debenture divided by the number of shares of common stock issuable upon conversion of that debenture. Holders may also convert if the Company's senior long-term unsecured credit ratings are downgraded by Moody's Investors Service Inc. to below Ba1 and by Standard & Poor's Rating Services to below BB+, if the debentures have been called for redemption, if the Company makes specified distributions to holders of CSX common stock, or if the company is a party to specified consolidations, mergers, or transfers or leases of all or substantially all of the Company's assets. For each debenture surrendered for conversion, a holder will initially receive 17.75 shares of CSX common stock, which is equivalent to an initial conversion price of $46.16 per share. The initial conversion rate will be adjusted for reasons specified in the indenture, but will not be adjusted for accretion. Instead, accretion on the debentures will be deemed paid by the common stock received by the holder on conversion. Shelf Registration Statements CSX has $900 million of remaining capacity under a shelf registration that may be used, subject to market conditions, to issue debt or other securities at the Company's discretion. The Company presently intends to use the proceeds from the sale of any securities under its shelf registration statements to finance cash requirements, including refinancing existing debt as it matures. While the Company seeks to give itself flexibility with respect to meeting such needs, there can be no CSX 2002 ANNUAL REPORT 43 Notes to Consolidated Financial Statements ------------------------------------------ assurance that market conditions would permit the Company to sell such securities on acceptable terms at any given time, or at all. Short-term Debt Balance and Rates Dec. 27, Dec. 28, (millions of dollars) 2002 2001 - ----------------------------------------------------------- Short-term Debt $ 143 $ 225 Weighted Average Interest Rates 1.46% 2.45% - ----------------------------------------------------------- Long Term Debt Maturities (millions of dollars) ------------------------------------------------ 2003 $ 391 2004 460 2005 192 2006 429 2007 992 2008 and Thereafter 4,446 ------ Total $6,910 ------------------------------------------------ Certain of CSX's rail unit properties are pledged as security for various rail-related long-term debt issues. In addition, the Company has approximately $132 million in assets which are specifically designated to fund an equal amount of long-term debt. Note 11. Derivative Financial Instruments CSX has entered into various interest rate swap agreements on the following fixed rate notes: Notional Fixed Variable Rate Amount Interest Rate Dec. 27, 2002 - ----------------------------------------------------------------- May 1, 2007 $ 450 7.45% 4.82% May 1, 2004 300 7.25% 4.31% August 15, 2006 300 9.00% 6.65% December 1, 2003 150 5.85% 2.96% May 1, 2032 150 8.30% 3.30% June 22, 2005 50 6.46% 3.26% ------- Total/Average Rate $ 1,400 7.62% 4.68% - ----------------------------------------------------------------- These agreements were entered for interest rate risk exposure management purposes and mature at the time the related notes are due. Under these agreements, the Company will pay variable interest based on LIBOR in exchange for a fixed rate, effectively transforming the debentures to floating rate obligations. Accordingly, the instruments qualify, and are designated, as fair value hedges. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, in this case long-term fixed rate notes, attributable to the hedged risk, are recognized in current earnings during the period of change in fair values. The accounting for hedge effectiveness is measured at least quarterly based on the relative change in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized immediately in earnings. The Company's interest rate swaps qualify as perfectly effective fair value hedges, as defined by SFAS No. 133. As such, there was no ineffective portion to the hedge recognized in earnings during the period. Long-term debt has been increased $78 million and decreased $26 million for the fair market value of the interest rate swap agreements at December 27, 2002 and December 28, 2001, respectively. The differential to be paid or received under these agreements is accrued based on the terms of agreements and is recognized in interest expense over the term of the related debt. The related amounts payable to, or receivable from counterparties are included in other liabilities or assets. Cash flows related to interest rate swap agreements are classified as "Operating Activities" in the Consolidated Statements of Cash Flows. In 2002 and 2001, the Company reduced interest expense by approximately $34 million and $5 million, respectively, as a result of the interest rate swap agreements that were in place during that period. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparties. Note 12. Common and Preferred Stock Common and Preferred Stock consists of (in thousands): Common Stock, $1 Par Value Dec. 27, 2002 - -------------------------------------------------------------------------------- Common Shares Authorized 300,000 Common Shares Issued and Outstanding 214,687 Additional Potential Shares: Stock Options 26,022 Convertible Debt 10,000 - -------------------------------------------------------------------------------- Preferred Stock Dec. 27, 2002 - -------------------------------------------------------------------------------- Preferred Shares Authorized 25,000 Preferred Shares Outstanding -- Series A, reserved for issuance per the Shareholder Rights Plan 250 Series B, reserved for issuance per the Shareholders Rights Plan 3,000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 44 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements Holders of Common Stock are entitled to one vote on all matters requiring a vote for each share held. Preferred Stock is senior to common stock for dividends and liquidation. On May 29, 1998, the board of directors adopted a Shareholder Rights Plan ("Plan") which was amended on June 27, 2000. The Plan allows each outstanding share of common stock to be traded for one preferred share purchase right ("right"). A right entitles shareholders to purchase one one-hundredth of a share of Series B preferred stock at an exercise price of $180 under the conditions specified in the Plan. Under certain circumstances, a right may also be exchanged for additional shares of common stock. The rights will expire on June 8, 2008, unless earlier redeemed by the Company or extended. The rights would become exercisable within 10 business days following the public announcement of the acquisition of 10% 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 acquisition of shares or the tender/exchange offer must result in the ownership of outstanding common stock of greater than 10%. The Company's 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 13. Earnings Per Share The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:
(millions of dollars) 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Numerator: Net Earnings from Continuing Operations $ 424 $ 293 $ 186 Denominator (thousands): Average Common Shares Outstanding 212,729 211,668 210,942 Effect of Potentially Dilutive Common Shares, Mainly Employee Stock Options 783 741 372 -------------------------------------- Average Common Shares Outstanding, Assuming Dilution 213,512 212,409 211,314 -------------------------------------- Earnings Per Share, from Continuing Operations $ 2.00 $ 1.39 $ .88 -------------------------------------- Earnings Per Share from Continuing Operations, Assuming Dilution $ 1.99 $ 1.38 $ .88 - ----------------------------------------------------------------------------------------------------------------------
Earnings per share are based on the weighted average number of common shares outstanding. Earnings per share, assuming dilution, are based on the weighted average number of common shares outstanding adjusted for the effect of potential common shares outstanding during the period, mainly arising from the exercise of employee stock options. Potential common shares at CSX include stock options and awards and shares that would be issued relating to convertible long-term debt. During the years ended December 27, 2002 and December 28, 2001, 1.0 million and 0.8 million shares, respectively, were issued for options exercised. Certain potential common shares for all three years shown were not included in the computation of earnings per share, assuming dilution, since their exercise or conversion prices were greater than the average market price of the common shares during the period and, therefore, their effect is antidilutive. These potential common shares were as follows: Fiscal Year --------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------- Number of Shares (thousands) 33,800 29,900 18,600 Average Exercise/Conversion Price $ 46.31 $ 47.26 $ 42.23 - ---------------------------------------------------------------------------- A substantial increase in the fair market value of the Company's stock price could negatively impact earnings per share due to the dilutive effect of stock options and convertible debt. CSX 2002 ANNUAL REPORT 45 Notes to Consolidated Financial Statements ------------------------------------------ Note 14. 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. Expense for stock-based compensation under these plans is based on the intrinsic value accounted for under the principles of APB Opinion No. 25 and related Interpretations. The Company recognized compensation expense of $6 million in 2002, $9 million in 2001 and $12 million in 2000. Had compensation expense been determined based upon fair values at the date of grant, consistent with the methods of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: (millions of dollars) 2002 2001 2000 - -------------------------------------------------------------------------------- Net Earnings -- As Reported $ 424 $ 293 $ 565 -- Pro Forma $ 399 $ 280 $ 545 Earnings Per Share -- As Reported $2.00 $1.39 $2.68 -- Pro Forma $1.87 $1.32 $2.58 Earnings Per Share, Assuming Dilution -- As Reported $1.99 $1.38 $2.67 -- Pro Forma $1.86 $1.32 $2.58 - -------------------------------------------------------------------------------- Beginning in 2003, the Company will account for stock-based compensation in accordance with on SFAS 123 or the fair value method of accounting for future stock awards on a prospective basis. Under SFAS 123, discounts on stock purchase plans and the fair value of restricted stock and options at date of grant are charged to compensation costs over the vesting or performance period. Stock Options and Awards CSX has various stock option and award plans. These plans currently provide awards primarily in (1) stock options and (2) restricted stock awards ("RSAs"), but have previously also awarded Performance Share Awards ("PSA") and Stock Appreciation Rights ("SARs") to eligible officers and employees. Awards granted under the various plans are determined by the board of directors based on financial performance of the Company. At December 27, 2002, there were 3,565 current or former employees with grants outstanding under the various plans. A total of approximately 29.8 million shares were reserved for issuance under the plans of which 6.9 were available for new grants. The remaining shares are assigned to outstanding stock options and stock awards. The fair value of options granted in 2002, 2001 and 2000 was estimated as of the dates of grant using the Black-Scholes option model. Fiscal Year -------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------- Black-Scholes Assumptions: Expected Dividend Yield 1.10% 2.30% 3.20% Risk-free Interest Rate 4.30% 5.00% 6.60% Expected Stock Volatility 27% 27% 27% Expected Term Until Exercise 6 years 6 years 6 years Average Fair Value of Stock Options Granted $11.76 $10.71 $6.36 - -------------------------------------------------------------------------------- 1. Stock Options The majority of stock options have been granted with 10-year terms. Options outstanding at December 27, 2002, are generally exercisable three to nine years after date of grant. 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 - -------------------------------------------------------------------------------- 46 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements stock option activity and related information for the fiscal years ended December 27, 2002, December 28, 2001 and December 29, 2000 follows:
2002 2001 2000 ---------------------------------------------------------------------------------- Shares Weighted-average Shares Weighted-average Shares Weighted-average (000s) Exercise Price (000s) Exercise Price (000s) Exercise Price - -------------------------------------------------------------------------------------------------------------------------- Outstanding at Beginning of Year 23,650 $39.49 20,126 $38.69 18,310 $42.57 Granted 3,438 $38.14 5,041 $39.42 2,742 $23.57 Exchanged, Canceled or Expired (46) $44.89 (737) $40.25 (469) $41.16 Exercised (1,020) $31.45 (780) $25.16 (457) $18.47 - -------------------------------------------------------------------------------------------------------------------------- Outstanding at End of Year 26,022 $40.45 23,650 $39.49 20,126 $38.69 - -------------------------------------------------------------------------------------------------------------------------- Exercisable at End of Year 8,513 $41.58 8,426 $40.00 9,405 $38.82 - --------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 27, 2002:
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------------------------- Number Weighted-average Number Outstanding Remaining Weighted-average Exercisable Weighted-average Exercise Price (000s) Contractual Life(Years) Exercise Price (000s) Exercise Price - -------------------------------------------------------------------------------------------------------------------- $20 to $29 2,601 7.3 $23.49 -- -- $30 to $39 11,462 6.6 $38.45 3,127 $37.23 $40 to $49 8,747 4.7 $43.66 4,838 $43.28 $50 to $57 3,212 4.1 $53.82 549 $51.43 ------------------------------------------------------------------------------------------------- Total 26,022 5.7 $40.60 8,514 $41.59 - --------------------------------------------------------------------------------------------------------------------
2. Restricted Stock Awards ("RSAs") At December 27, 2002 and December 28, 2001, 469,500 and 675,500 RSAs were outstanding. The RSA's outstanding at December 27, 2002, vest over a three- to five-year employment period. The weighted-average fair value of RSAs was $34.53 as of the date of grant. Stock Purchase and Loan Plan The Stock Purchase and Loan Plan provided for the purchase of common stock and related rights by eligible officers and key employees of the Company and entitled them to obtain loans with respect to the shares purchased. There were no shares issued under the Stock Purchase and Loan Plan in 2002, 2001 or 2000. In November 2000, substantially all participants of the Stock Purchase and Loan Plan exchanged their share balances in this plan for forgiveness of their loan balances and certain participants were issued shares relating to the equity in their respective accounts. No shares were withdrawn, exchanged or cancelled in 2002 or 2001. Approximately 6.7 million shares were withdrawn or cancelled in 2000 and approximately 0.6 million shares were issued in exchange for the equity in participant accounts. In conjunction with this transaction, the deferred tax benefits of approximately $34 million were charged to paid-in-capital. As of fiscal year end 2002, 2001 and 2000, approximately 70,000 shares were outstanding under this program. Stock Purchase and Dividend Reinvestment Plans 1. Stock Purchase Plan In May 2001, CSX shareholders approved the 2001 Employee Stock Purchase Plan ("ESPP"), which allows eligible employees to purchase CSX common stock at a discount. Specifically, participating employees are able to purchase CSX stock at the lower of 85% of fair market value on December 1 (beginning of the annual offering period) or 85% of fair market value on November 30 of the following year (end of the annual offering period). In effect, employees receive a 12-month stock option to purchase Company stock. Once purchased, the shares are unrestricted and may generally be sold or transferred at any time. There are approximately 570,000 shares subscribed at a market price of $23.49 at December 27, 2002, and approximately 460,000 remaining shares available for issuance under this plan. Approximately 570,000 shares were purchased by employees under the terms of this plan during 2002. The ESPP replaced the 1991 Employee Stock Purchase and Dividend Reinvestment Plans. Under the 1991 Employee Stock Purchase and Dividend Reinvestment Plan, eligible employees received a 17.65% matching payment on their contributions in the form of additional stock purchased by the CSX 2002 ANNUAL REPORT 47 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Company. Each matching payment of stock was subject to a two-year holding period. Sales of stock prior to the completion of the holding period resulted in forfeiture of the matching stock purchase. Officers and key employees who qualified for the Stock Purchase and Loan Plan were not eligible to participate in this Plan. Employees purchased 25,565 shares in 2001 and 43,857 shares in 2000, under the plan at weighted-average market prices of $30.43 and $23.46 for 2001 and 2000, respectively. 2. Dividend Reinvestment Plan The Company maintains the Shareholder Dividend Reinvestment Plan under which shareholders may purchase additional shares of stock. At December 27, 2002, there were 4,626,035 shares available for issuance under this plan. 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 awards of stock or stock options. In 2002, 45,195 shares of stock were issued to the directors resulting in $1 million of expense. In 2001, 52,000 stock options were granted with an exercise price of $35.08. In 2000, 52,000 stock options were granted with an exercise price of $26.40. 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 December 27, 2002, there were 678,411 shares of common stock reserved for issuance under this Plan. Note 15. 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 fair values significantly different from their carrying amounts. At December 27, 2002, the fair value of longterm debt, including current maturities, was $7.4 billion, compared with a carrying amount of $6.9 billion. At December 28, 2001, the fair value of long-term debt, including current maturities, was $7.2 billion, compared with a carrying amount of $6.9 billion. The fair value of longterm debt has been estimated using discounted cash flow analysis based upon the Company's current incremental borrowing rates for similar types of financing arrangements. The Company's interest rate swap agreements at December 27, 2002 and December 28, 2001 had a positive value of $78 and a negative value of $26 million, respectively. Note 16. Employee Benefit 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. 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 postretirement medical plans are contributory (partially funded by retiree), with retiree contributions adjusted annually. The life insurance plan is non-contributory. The benefit obligation for these plans represents the liability of the Company for current and retired employees and is affected primarily by the following: 1. Service cost (benefits attributed to employee service during the period) 2. Interest cost (interest on the liability due to the passage of time) 3. Actuarial gains/losses (experience during the year different from that assumed and changes in plan assumptions) 4. Benefits paid to participants Plan assets are amounts that have been segregated and restricted to provide benefits, and include amounts contributed by the Company and amounts earned from investing contributions, less benefits paid. The pension plans are funded at not less than the minimum funding standards set forth in the Employee Retirement Income Security Act of 1974. Plan assets consist primarily of common stocks, corporate bonds and cash and cash equivalents. The Company funds the cost of the postretirement medical and life insurance benefits on a pay-as-you-go basis. The Company uses a plan year of October 1 through September 30 to value its pension and postretirement plans on an actuarial basis. - -------------------------------------------------------------------------------- 48 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements The change in benefit obligation and plan assets of the plans is as follows:
Pension Benefits Postretirement Benefits -------------------------------------------- (millions of dollars) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit Obligation at Beginning of Plan Year $ 1,700 $ 1,610 $ 420 $ 354 Service Cost 40 41 11 9 Interest Cost 119 121 29 26 Impact of Plan Changes/Business Dispositions -- 28 -- -- Plan Participants' Contributions -- -- 10 7 Actuarial Loss 84 55 70 68 Benefits Paid (137) (155) (41) (44) -------------------------------------------- Benefit Obligation at End of Plan Year $ 1,806 $ 1,700 $ 499 $ 420 -------------------------------------------- Change in Plan Assets: Fair Value of Plan Assets at Beginning of Plan Year $ 1,493 $ 1,619 $ -- $ -- Actual Return on Plan Assets (48) (13) -- -- Employer Contributions 16 42 31 37 Plan Participants' Contributions -- -- 10 7 Benefits Paid (137) (155) (41) (44) -------------------------------------------- Fair Value of Plan Assets at End of Plan Year $ 1,324 $ 1,493 $ -- $ -- -------------------------------------------- -------------------------------------------- Funded Status $ (482) $ (207) $ (499) $ (420) --------------------------------------------
The funded status, or amount by which the benefit obligation exceeds the fair value of plan assets, represents a liability. For plans with a projected benefit obligation in excess of plan assets at December 27, 2002, the aggregate projected benefit obligation was $1.8 billion and the aggregate fair value of plan assets was $1.3 billion. For plans with an accumulated benefit obligation in excess of plan assets at December 27, 2002, the aggregate accumulated benefit obligation was $1.7 million and the aggregate fair value of plan assets was $1.3 million. The following table shows the reconciliation of the funded status of the plan with the amount recorded in the statement of financial position:
Pension Benefits Postretirement Benefits (millions of dollars) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------- Funded Status $(482) $(207) $(499) $(420) Unrecognized Actuarial Loss 474 181 190 128 Unrecognized Prior Service Cost 40 44 -- (1) Fourth Quarter Activity: Employer Contributions to Pension Plans 3 3 -- -- Net Postretirement Benefits Paid -- -- 8 9 ----------------------------------------- Net Amount Recognized in Statement of Financial Position $ 35 $ 21 $(301) $(284) -----------------------------------------
CSX 2002 ANNUAL REPORT 49 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- A liability is recognized if net periodic pension cost (cost of a pension plan for a period, including service cost, interest cost, actual return on plan assets, gain or loss, amortization of unrecognized prior service cost) recognized exceeds amounts the employer has contributed to the plan. An asset is recognized if net periodic pension cost is less than amounts the employer has contributed to the plan. The amount recognized in the statement of financial position consists of:
Pension Benefits Postretirement Benefits ------------------------------------------------------- (millions of dollars) 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- Prepaid Benefit Cost $ - $ 224 $ - $ - Accrued Benefit Liability (430) (243) (301) (284) Intangible Asset 40 15 - - Accumulated Other Comprehensive Loss 425 25 - - ------------------------------------------------------- Net Amount Recognized in Statement of Financial Position $ 35 $ 21 $(301) $(284) - ----------------------------------------------------------------------------------------------------------------------------
Components of net periodic pension cost are as follows:
Pension Benefits Postretirement Benefits ---------------------------------------------------------- (millions of dollars) 2002 2001 2000 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Service Cost $ 40 $ 41 $ 40 $ 11 $ 9 $ 8 Interest Cost 119 121 119 29 26 23 Expected Return on Plan Assets (152) (150) (145) - - - Amortization of Prior Service Cost 5 3 2 - (1) (1) Recognized Net Actuarial (Gain) Loss (9) (11) (9) 8 3 - ---------------------------------------------------------- Net Periodic Benefit Cost 3 4 7 48 37 30 Special Termination Benefits - Workforce Reduction Program/Curtailments - 10 2 - - 6 ---------------------------------------------------------- Net Periodic Benefit Cost Including Special Termination Benefits $ 3 $ 14 $ 9 $ 48 $ 37 $36 - ----------------------------------------------------------------------------------------------------------------------------
During 2002 and 2001, CSX recorded changes in its minimum pension liability. These changes did not affect net earnings, but are a component of accumulated other comprehensive loss on an after-tax basis. In 2002, the minimum pension liability increased by $398 million, reducing accumulated other comprehensive income by $248 million after tax. In 2001, the minimum pension liability increased by $25 million, reducing accumulated other comprehensive income by $15 million after tax. The Company also recorded a $25 million and $30 million after tax effect to accumulated other comprehensive income, relating to Conrail's minimum pension liability for December 27, 2002 and December 28, 2001, respectively. Weighted-average assumptions used in accounting for the plans are as follows:
Pension Benefits Postretirement Benefits ------------------------------------------------------- 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- Expected Long-term Return on Plan Assets: Benefit Cost for Plan Year 9.50% 9.50% n/a n/a Benefit Obligation at End of Plan Year 8.90% 9.50% n/a n/a Discount Rates: Benefit Cost for Plan Year 7.25% 7.75% 7.25% 7.75% Benefit Obligation at End of Plan Year 6.50% 7.25% 5.50% 7.25% Salary Scale Inflation 3.30% 4.50% 3.30% 4.50% - ----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 50 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements The net postretirement benefit obligation was determined using the assumption that the health care cost trend rate for medical plans was 11% and 12% for 2002 and 2001, respectively, decreasing gradually to 5% by 2006 and remaining at that level thereafter. A 1% change in the assumed health care cost trend rate would have the following effects:
1% 1% (millions of dollars) Increase Decrease - ------------------------------------------------------------------------------------------------------------- Effect on postretirement benefits service and interest cost $ 3 $ (3) Effect on postretirement benefit obligation 34 (30) - -------------------------------------------------------------------------------------------------------------
Other Plans The Company maintains savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining agreements. Expense associated with these plans was $15 million, $16 million and $14 million for 2002, 2001 and 2000, respectively. Under collective bargaining agreements, the Company participates in a number of union-sponsored, multi-employer 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. Total contributions of $315 million, $292 million and $250 million were made to these plans in 2002, 2001 and 2000, respectively. Note 17. Commitments and Contingencies Lease Commitments The Company has various lease agreements with other parties with terms up to 29 years. Non-cancelable, long-term leases generally include provisions for maintenance, options to purchase at fair value and options to extend the terms. Lease arrangements allow the Company to efficiently gain the use of equipment which it does not wish to own. At December 27, 2002, minimum building and equipment rentals under these operating leases are as follows:
(millions of dollars) Operating Leases Sublease Income Net Lease Commitments - ------------------------------------------------------------------------------------------------------------------------- 2003 $ 260 $ 32 $ 228 2004 257 32 225 2005 189 25 164 2006 169 25 144 2007 181 17 164 Thereafter 816 20 796 -------------------------------------------------------------- Total $1,872 $ 151 $1,721 - ------------------------------------------------------------------------------------------------------------------------
Rent expense on operating leases totaled $605 million in 2002, $629 million in 2001 and $730 million in 2000. These amounts include net daily rental charges on railroad operating equipment of $295 million, $289 million, and $369 million in 2002, 2001 and 2000, respectively which are not long-term commitments. In addition to these commitments, the Company also has agreements covering routes and equipment leased from Conrail. See Note 2, Investment In and Integrated Rail Operations with Conrail, for a description of these commitments. As discussed in Note 3, Divestitures, the Company is conveying most of its interest in CSX Lines to Horizon. Once this transaction closes, $126 million of operating lease commitments included in the above will be assumed by Horizon. Another $319 million of leases will be subleased to Horizon, thus increasing sublease income by this amount. The effect of the lease assumptions and subleases will be a $445 million reduction in CSX's net lease obligation. CSX will continue to provide a guarantee of approximately $47 million relating to the leases assumed by Horizon. CSX 2002 ANNUAL REPORT 51 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Purchase Commitments The Company has a commitment under a long-term maintenance program for approximately 40% of CSXT's fleet of locomotives. The agreement expires in 2026 and totals $2.8 billion. Minimum payments under this agreement are as follows: Minimum (millions of dollars) Payments - ------------------------------------------------------ 2003 $130 2004 132 2005 138 2006 166 2007 171 Thereafter 2,036 - ------------------------------------------------------ Total $2,773 - ------------------------------------------------------ The long-term maintenance program assures CSX access to efficient, high-quality locomotive maintenance services at settled price levels through the term of the program. Under the program, CSX paid $124 million, $126 million and $121 million in fiscal years 2002, 2001 and 2000, respectively. Guarantees The Company and its subsidiaries are contingently liable individually and jointly with others as guarantors of obligations principally relating to leased equipment, joint ventures and joint facilities used by CSX in its business operations. Utilizing a CSX guarantee for these obligations allows CSX to take advantage of lower interest rates and obtain other favorable terms when negotiating leases or financing debt. Guarantees are contingent commitments issued by the Company that could require CSX to make payment to the guaranteed party based on another entity's failure to perform. CSX's guarantees can be segregated into three main categories: 1. Guarantees of approximately $511 million of lease commitments assumed by A.P. Moller-Maersk ("Maersk") for which the Company is contingently liable. CSX believes that Maersk will fulfill its contractual commitments with respect to such leases and that CSX will have no further liabilities for those obligations. 2. Guarantees of approximately $150 million relating to a construction guarantee at one of the Company's international terminals segment's locations. The non-performance of one of its partners or cost overruns could cause the Company to have to perform under this guarantee. The maximum amount of future payments the Company could be required to make under these guarantees is the amount of the guarantees themselves. After the close of the conveyance of CSX Lines to Horizon, there will be approximately $47 million of guarantees relating to leases assumed by Horizon that CSX will be contingently liable for. Self-Insurance The Company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damage. Reasonable levels of risk (up to $35 million for property and $25 million for liability per occurrence) are also retained on a self-insurance basis. Using a combination of third party and self-insurance allows the Company to realize savings on insurance premium costs and preserves flexibility in achieving the best insurance solutions for various categories of risks. Claims Arising out of Sale of International Container-Shipping Assets CSX has received a claim amounting to approximately $180 million plus interest from Europe Container Terminals ("ECT"), owner of the Rotterdam Container Terminal previously operated by Sea-Land Service Inc. ("Sea-Land"). ECT has claimed that the December 1999 sale of the international liner business to Maersk resulted in a breach of the Sea-Land terminal agreements with ECT. An initial arbitration hearing has been held to establish whether CSX is liable on ECT's claim, and on February 10, 2003 a panel of the Netherlands Arbitration Institute ruled that CSX was in breach of the terminal agreements. The ruling by the panel dealt only with the existence of liability for a breach, and did not address the level of ECT damages, if any, which will be the subject of a second hearing before the same panel sometime in 2003. CSX disputes this claim and believes it does not reflect the mitigating benefits ECT gained from its ability to service other customers at the former Sea-Land facility. Management believes that valid defenses to this claim exist but cannot estimate what, if any, loss may result from this matter. CSX believes that Maersk is responsible for any damages that may result from this dispute and has taken preliminary steps to initiate an arbitration against Maersk under the purchase and sale agreement with Maersk. The purchase and sale agreement with Maersk provides for a postclosing working capital adjustment to the sales price based on the change in working capital, as defined in the agreement, between June 25, 1999, and December 10, 1999. The Company has recorded a receivable of approximately $70 million in connection with the post-closing adjustment and this amount is currently in dispute. This matter, together with other disputed issues relating to the contractual obligations of the Company, has been submitted to arbitration. Although management believes CSX will prevail in some or all of the Maersk and ECT disputes and arbitrations, it can give no assurance in this regard. An adverse outcome could have a material effect on the - -------------------------------------------------------------------------------- 52 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements determination of the final loss on sale of Sea-Land's International Liner business and the financial results and cash flows in future reporting periods. Contract Settlement In July 2002, the Company received $44 million as the first of two payments to settle a contract dispute. During 2002, the Company recognized approximately $7 million of the first payment in other income as this amount related to prior periods. The remaining $37 million will be recognized over the contract period, which ends in 2020. The second payment of $23 million was received on January 2, 2003 and will be recognized over the contract period which ends in 2020. The results of this settlement will provide approximately $3 million in annual pretax earnings through 2020. Other Legal Proceedings and Arbitrations A number of other legal actions are pending against CSX and certain subsidiaries in which claims are made in substantial amounts. While the ultimate results of these legal actions cannot be predicted with certainty, management does not currently expect that resolution of these matters will have a material adverse effect on CSX's consolidated financial position, results of operations or cash flows. The Company is also party to a number of actions, the resolution of which could result in gain realization in amounts that could be material to results of operations in the quarter received. For information regarding environmental proceedings see Note 9, Casualty, Environmental and Other Reserves. Note 18. Business Segments The Company operates in four business segments: rail, intermodal, domestic container-shipping, and international terminals. The rail segment provides rail freight transportation over a network of more than 23,000 route miles in 23 states, the District of Columbia and two Canadian provinces. The intermodal segment provides transcontinental intermodal transportation services and operates a network of dedicated intermodal facilities across North America. The domestic container shipping segment consists of a fleet of 17 ocean vessels and approximately 21,500 containers serving the trade between ports on the United States mainland and Alaska, Hawaii/Guam and Puerto Rico. The international terminals segment operates container freight terminal facilities in Asia, Europe, Australia, Latin America and the United States. The Company's segments are strategic business units that offer different services and are managed separately based on the differences in these services. Because of their close interrelationship, the rail and intermodal segments are viewed on a combined basis as Surface Transportation operations and the domestic container-shipping and international terminals segments are viewed on a combined basis as Marine Services operations. The Company evaluates performance and allocates resources based on several factors, of which the main financial measure is business segment operating income, defined as income from operations, excluding the effects of non-recurring charges and gains. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1), except that for segment reporting purposes, CSX includes minority interest expense on the international terminals segment's joint venture businesses in operating expense. These amounts are reclassified through eliminations in CSX's consolidated financial statements to other income. Intersegment sales and transfers are generally accounted for as if the sales or transfers were to third parties, that is, at current market prices. CSX 2002 ANNUAL REPORT 53 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Business segment information for fiscal years 2002, 2001 and 2000 is as follows:
Surface Transportation Marine Services ----------------------------------------------------------------------------- Domestic Container International (millions of dollars) Rail Intermodal Total Shipping Terminals Total Total - ---------------------------------------------------------------------------------------------------------------------- 2002 Revenue from External Customers $ 6,003 $ 1,156 $ 7,159 $ 758 $ 235 $ 993 $ 8,152 Intersegment Revenues - 24 24 - 1 1 25 Segment Operating Income 854 141 995 38 69 107 1,102 Assets 12,738 537 13,275 309 959 1,268 14,543 Depreciation Expense 576 29 605 17 9 26 631 Property Additions 981 29 1,010 19 11 30 1,040 2001 Revenue from External Customers $ 6,082 $ 1,092 $ 7,174 $ 681 $ 234 $ 915 $ 8,089 Intersegment Revenues - 20 20 - 2 2 22 Segment Operating Income 803 104 907 32 71 103 1,010 Assets 12,948 432 13,380 504 880 1,384 14,764 Depreciation Expense 550 31 581 24 8 32 613 Property Additions 848 12 860 11 19 30 890 2000 Revenue from External Customers $ 6,075 $ 1,148 $ 7,223 $ 666 $ 267 $ 933 $ 8,156 Intersegment Revenues - 20 20 - 3 3 23 Segment Operating Income 615 98 713 - 71 71 784 Assets 12,945 423 13,368 540 781 1,321 14,689 Depreciation Expense 520 29 549 20 7 27 576 Property Additions 822 18 840 16 8 24 864
A reconciliation of the totals reported for the business segments to the applicable line items in the consolidated financial statements is as follows:
Fiscal Years Ended -------------------------------------- (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Revenue Total External Revenues for Business Segments $ 8,152 $ 8,089 $ 8,156 Intersegment Revenues for Business Segments 25 22 23 Elimination of Intersegment Revenue (25) (22) (23) Other - 21 35 -------------------------------------- Total Consolidated Revenue $ 8,152 $ 8,110 $ 8,191 - ------------------------------------------------------------------------------------------------------------------------ Operating Income Total Operating Income for Business Segments $ 1,102 $ 1,010 $ 784 Reclassification of Minority Interest Expense for International Terminals Segment(a) 39 36 42 Other Unallocated Expenses (14) (29) (21) New Orleans Litigation Provision - (60) - -------------------------------------- Total Consolidated Operating Income $ 1,127 $ 957 $ 805
- -------------------------------------------------------------------------------- 54 CSX 2002 ANNUAL REPORT Notes to Consolidated Financial Statements - --------------------------------------------------------------------------------
Fiscal Years Ended -------------------------------------- (millions of dollars) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Assets Assets for Business Segments $14,543 $14,764 $14,689 Investment in Conrail 4,653 4,655 4,668 Elimination of Intercompany Receivables (128) (185) (186) Non-segment Assets (b) 1,883 1,567 1,377 ----------------------------------- Total Consolidated Assets $20,951 $20,801 $20,548 - ------------------------------------------------------------------------------------------------------------------------ Depreciation Expense Depreciation Expense for Business Segments $ 631 $ 613 $ 576 Non-segment Depreciation (b) 18 9 24 ----------------------------------- Total Consolidated Depreciation Expense $ 649 $ 622 $ 600 - ------------------------------------------------------------------------------------------------------------------------ Property Additions Property Additions for Business Segments $ 1,040 $ 890 $ 864 Non-segment Property Additions (b) 40 40 49 ----------------------------------- Total Consolidated Property Additions $ 1,080 $ 930 $ 913 - ------------------------------------------------------------------------------------------------------------------------
(a) Marine Services includes minority interest expense which is reclassified to other income in consolidation. (b) Non-segment assets include corporate cash and cash equivalents and assets of non-transportation businesses and discontinued operations. Non-segment depreciation and property additions are primarily attributable to non-transportation businesses and discontinued operations. Principal non-transportation businesses include real estate and resort operations and information technology subsidiaries serving multiple segments. Revenues in the United States comprise more than 95% of total consolidated revenues. More than 95% of the Company's long-lived assets are located in the United States. The Company does not have a single external customer that represents 10% or more of its consolidated revenue. CSX 2002 ANNUAL REPORT 55 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 27, 2002 and December 28, 2001, 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 27, 2002. 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 auditing standards generally accepted in the United States. 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 present fairly, in all material respects, the consolidated financial position of CSX Corporation and subsidiaries at December 27, 2002 and December 28, 2001 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 27, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the Consolidated Financial Statements, in 2002 the Company changed its method of accounting for indefinite lived intangible assets. /s/ Ernst & Young LLP Jacksonville, Florida February 11, 2003 - -------------------------------------------------------------------------------- 56 CSX 2002 ANNUAL REPORT Quarterly Financial Data (Unaudited)(a)
2002 2001 ---------------------------------------------------------------------------- Year Quarter 1st(b) 2nd 3rd 4th 1st 2nd 3rd 4th(c) - ------------------------------------------------------------------------------------------------------------------------- Operating Revenue $1,964 $2,073 $2,055 $2,060 $2,025 $2,057 $2,019 $2,009 Operating Expense 1,752 1,752 1,779 1,742 1,836 1,792 1,737 1,788 ----------------------------------------------------------------------- Operating Income 212 321 276 318 189 265 282 221 Other Income (Expense) 9 4 28 - (29) 37 4 (3) Interest Expense 114 116 108 107 133 135 129 121 ----------------------------------------------------------------------- Earnings Before Income Taxes and Cumulative Effect of Accounting Change 107 209 196 211 27 167 157 97 Income Tax Expense 39 74 69 74 7 59 57 32 ----------------------------------------------------------------------- Earnings before Cumulative Effect of Accounting Change 68 135 127 137 20 108 100 65 Cumulative Effect of Accounting Change, Net of Tax (43) - - - - - - - ----------------------------------------------------------------------- Net Earnings $ 25 $ 135 $ 127 $ 137 $ 20 $ 108 $ 100 $ 65 - ------------------------------------------------------------------------------------------------------------------------- Per Common Share Earnings Per Share: Before Cumulative Effect of Accounting Change $ .32 $ .63 $ .60 $ .65 $ .10 $ .51 $ .47 $ .31 Cumulative Effect of Accounting Change (.20) - - - - - - - ----------------------------------------------------------------------- Including Cumulative Effect of Accounting Change $ .12 $ .63 $ .60 $ .64 $ .10 $ .51 $ .47 $ .31 ----------------------------------------------------------------------- Earnings Per Share, Assuming Dilution: Before Cumulative Effect of Accounting Change $ .32 $ .63 $ .60 $ .64 $ .10 $ .51 $ .47 $ .31 Cumulative Effect of Accounting Change (.20) - - - - - - - Including Cumulative Effect of Accounting Change $ .12 $ .63 $ .60 $ .64 $ .10 $ .51 $ .47 $ .31 ----------------------------------------------------------------------- Dividends Per Share $ .10 $ .10 $ .10 $ .10 $ .30 $ .30 $ .10 $ .10 ----------------------------------------------------------------------- Market Price High $41.40 $37.90 $36.77 $30.12 $34.11 $40.20 $41.30 $38.20 Low $34.81 $32.41 $25.75 $25.09 $24.81 $31.60 $25.44 $29.37
(a) Periods presented are 13-week quarters. (b) Included in the first quarter of 2002 is a charge to write-down indefinite lived intangible assets as a cumulative effect of accounting change, which reduced earnings $83 million before tax, $43 million after tax and minority interest, 20 cents per share. (c) Included in the fourth quarter of 2001 is a provision to account for the settlement of the 1987 New Orleans tank car fire litigation. This charge reduced earnings by $60 million before tax, $37 million after tax, 17 cents per share. Shares Outstanding as of January 24, 2003: 214,686,566 Common Stock Shareholders as of January 24, 2003: 58,819 CSX 2002 ANNUAL REPORT 57 Shareholder Information - -------------------------------------------------------------------------------- Shareholder Services Shareholders with questions about their accounts should contact the transfer agent at the address or telephone number shown below. Transfer Agent, Registrar and Dividend Disbursing Agent Computershare Investor Services LLC Attn: Shareholder Communications 2 North LaSalle Street P.O. Box A3504 Chicago, IL 60690-3504 (800) 521-5571 e-mail: web.queries@computershare.com General Questions General questions about CSX or information contained in company publications should be directed to Corporate Communications at the address or telephone number shown below. Daniel J. Murphy, Director-Corporate Communications CSX Transportation 500 Water Street, J420 Jacksonville, FL 32202 (904) 359-1469 e-mail: Dan Murphy@csx.com Investor Relations Security analysts, portfolio managers or other investment community representatives should contact Investor Relations at the address or telephone number shown below. Fredrik J. Eliasson, Managing Director-Investor Relations CSX Corporation 500 Water Street, C170 Jacksonville, FL 32202 (904) 359-3305 e-mail: Fred Eliasson@csx.com Shareholder Services Ines C. Murray, Shareholder Services CSX Corporation 500 Water Street, C160 Jacksonville, FL 32202 (904) 366-4242 e-mail: Ines_Murray@csx.com Direct Stock Purchase and Dividend Reinvestment CSX provides dividend reinvestment and stock purchase plans for shareholders and potential shareholders as a convenient method of acquiring CSX shares through direct purchase, dividend reinvestment and optional cash payments. CSXDirectInvest(SM) permits the purchase and sale of shares directly though Computershare, our transfer agent. 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. You do not need to own shares of CSX stock to enroll in this plan. However, if you are a current shareholder, the initial investment and enrollment fee are waived. Other benefits of CSXDirectInvest(SM) include the ability to: o Reinvest dividends automatically 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. o Make optional cash investments with as little as $50 per month, or up to $10,000 per month, without any charges or commissions. o Make gifts of CSX shares to others through the plan, and present them with a gift memento if desired. To obtain a prospectus or other information regarding CSXDirectInvest(SM), please call or write the Computershare Dividend Reinvestment Department at the phone number or address below. Or, if you prefer, please visit the web site at www.computershare.com. CSXDirectInvest(sm) P. 0. Box A3309 Chicago, IL 60690-3309 (800) 521-5571 e-mail: web.queries@computershare.com 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 shareholders holding stock in this manner. We know only that a broker holds a certain number of shares that may be for any number of customers. Any stock held in a street-name account is not eligible to participate in CSXDirectInvest(SM) (see above). For shares held in a street-name account, you will receive dividend payments, annual reports and proxy materials through your broker. Please notify your broker, not Computershare, if you wish to eliminate unwanted, duplicate mailings. Lost or Stolen Stock Certificates If your stock certificates are lost, stolen or in some way destroyed, notify Computershare 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. Consolidating Accounts If you want to consolidate separate accounts into one account, contact Computershare 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 offers direct deposit of dividends to shareholders that request it. If you are interested, please contact Computershare at the address or phone number shown above. 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, notify Computershare so payment can be stopped and a replacement check issued. - -------------------------------------------------------------------------------- 58 CSX 2002 ANNUAL REPORT Corporate Information Headquarters 500 Water Street, 15th floor Jacksonville, Florida 32202 (904) 359-3100 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 are authorized, of which 214,686,566 shares were outstanding as of Dec. 27, 2002. Each share is entitled to one vote in all matters requiring a vote of shareholders. There are no pre-emptive rights. At Dec. 27, 2002, there were 59,085 registered common stock shareholders. A total of 25 million shares of preferred stock are 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 when the rights distributed to holders of common stock under the Shareholder Rights Plan adopted by CSX on May 29, 1998, become exercisable. Annual Shareholder Meeting 10 a.m., Wednesday, May 7, 2003 The Radisson Airport Hotel & Conference Center 1375 North Cassady Avenue Columbus, Ohio 1-800-333-3333 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 2003 are scheduled for: Easter -- April 17-20 Independence Day -- July 3-6 Labor Day -- August 29-September 1 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 email, The_Greenbrier@greenbrier.com. Again in 2003, The Greenbrier is pleased to extend to all shareholders a 10 percent discount on its 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. Form 10-K A copy of the company's annual report to the Securities and Exchange Commission (Form 10-K) will be furnished without charge to any shareholder upon written request to Corporate Communications, CSX Corporation, 500 Water Street, J420, Jacksonville, FL 32202. The Form 10-K also is available on the company's web site at www.csx.com. CSX 2002 ANNUAL REPORT 59 Board of Directors and Officers - -------------------------------------------------------------------------------- Board of Directors Elizabeth E. Bailey (1,2,6) John C. Hower Professor of Public Policy and Management, The Wharton School, University of Pennsylvania, Philadelphia, Pa. Robert L. Burrus Jr. (1,4,5) Partner and Chairman, McGuireWoods LLP, Richmond, Va. Bruce C. Gottwald (1,2,6) Chairman, Ethyl Corporation, Richmond, Va. John R. Hall (2,3) Former Chairman of Arch Coal, Inc. and Retired Chairman and CEO Ashland Inc., Ashland, Ky. Edward J. Kelly III (2,4) President and CEO, Mercantile Bankshares Corporation, Baltimore, Md. Robert D. Kunisch (1,3,6) Special Partner ABS Capital Partners Inc. and Adviser and Former Vice Chairman, Cendant Corporation, Hunt Valley, Md. James W. McGlothlin (4,5) Chairman and CEO, The United Company, Bristol, Va. Southwood J. Morcott (4,6) Retired Chairman and CEO, Dana Corporation, Toledo, Ohio David M. Ratcliffe (5,6) President and CEO, Georgia Power Company and Executive Vice President, Southern Company, Atlanta, Ga. Charles E. Rice (4,6) Chairman, Mayport Venture Partners LLC and Retired Vice Chairman Corporate Development, Bank of America, Jacksonville, Fla. William C. Richardson (2,3) President and CEO, W.K. Kellogg Foundation, Battle Creek, Mich. Frank S. Royal M.D. (1,3,5) Physician and Health Care Authority, Richmond, Va. Donald J. Shepard (2,4) Chairman, Executive Board and CEO, AEGON N.V., Netherlands Michael J. Ward (1) Chairman, President and CEO, CSX Corporation Jacksonville, Fla. Corporate Officers Michael J. Ward* Chairman, President and CEO Paul R. Goodwin* Vice Chairman and Chief Financial Officer Andrew B. Fogarty* Executive Vice President-Corporate Services Ellen M. Fitzsimmons* Senior Vice President-Law Robert J. Haulter Senior Vice President-Human Resources Arnold I. Havens Senior Vice President-Government Affairs Lester M. Passa* Senior Vice President-Strategic Planning Peter J. Shudtz Senior Vice President-Regulatory Affairs and Washington Counsel David A. Boor Vice President and Treasurer Asok K. Chaudhuri Vice President-Financial Planning Michael A. Hollingsworth Vice President-Corporate Communations Stephen R. Larson Vice President-General Counsel and Corporate Secretary Jeffrey C. McCutcheon Vice President-Corporate Human Resources William F. Miller Vice President-Audit and Advisory Services James P. Peter Vice President-Taxes Michael J. Ruehling Vice President-State Relations Carolyn T. Sizemore* Vice President and Controller * Executive officers of the corporation. Unit Officers CSX Transportation Inc. Alan F. Crown* Executive Vice President-Transportation P Michael Giftos* Executive Vice President and Chief Commercial Officer W. Michael Cantrell Senior Vice President-Mechanical and Engineering James W. Fallon Senior Vice President-Transportation Frederick J. Favorite Jr.* Senior Vice President-Finance Clarence W. Gooden Senior Vice President-Merchandise Service Group Christopher P. Jenkins Senior Vice President-Coal Service Group Howard J. Levy Senior Vice President-Procurement Franklin E. Pursley Senior Vice President-Service Design Kenneth R. Peifer Vice President-Labor Relations CSX Intermodal Inc. Alan P Blumenfeld, President CSX Lines LLC Charles G. Raymond*, President and CEO CSX World Terminals LLC Robert J. Grassi*, President and CEO CSX Technology Inc. Charles J. 0. Wodehouse Jr., President The Greenbrier Ted J. Kleisner President and Managing Director * Executive officers of the corporation. -------------------------------- Key to committees of the Board 1-Executive 2-Audit 3-Compensation 4-Finance 5-Nominating and Organization 6-Public Affairs -------------------------------- - -------------------------------------------------------------------------------- 60 CSX 2002 ANNUAL REPORT CSX Corporation 500 Water Street, 15th floor Jacksonville, FL 32202 904/359-3200 www.csx.com CSX Transportation Inc. 500 Water Street Jacksonville, FL 32202 904/359-3100 www.csxt.com CSX Intermodal Inc. 301 West Bay Street Jacksonville, FL 32202 904/633-1000 www.csxi.com CSX Lines LLC 2101 Rexford Road Suite 350 West Charlotte, NC 28211 704/973-7000 www.csxlines.com CSX World Terminals LLC 2101 Rexford Road Suite 250 West Charlotte, NC 28211 704/973-7200 www.csxworldterminals.com The Greenbrier 300 West Main Street White Sulphur Springs, WV 24986 304/536-1110 www.greenbrier.com CSX 500 Water Street Jacksonville, FL 32202 WWW.CSX.COM EX-21 18 dex21.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Subsidiaries of the Registrant Exhibit 21 As of December 27, 2002, the Registrant was the beneficial owner of 100% of the common stock of the following significant subsidiaries: CSX Transportation Inc. (a Virginia corporation), CSX World Terminals, LLC (a Delaware corporation) CSX Rail Holding Corporation (a Delaware corporation) As of December 27, 2002, the other subsidiaries included in the Registrant's consolidated financial statements, both individually and in the aggregate, did not constitute a significant subsidiary. EX-23.1 19 dex231.txt EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of CSX Corporation and subsidiaries (CSX) of our report dated February 11, 2003, included in the 2002 Annual Report to Shareholders of CSX. We also consent to the incorporation by reference in each Form S-3 Registration Statement or Post-Effective Amendment thereto (Registration Nos. 33-2084, 333-60134, 333-84016 and 333-84016-01) and in each Form S-8 Registration Statement or Post-Effective Amendment thereto (Registration Nos. 33-16230, 33-25537, 33-29136, 33-37449, 33-41498, 33-41499, 33-41735, 33-57029, 333-09213, 333-73429, 333-32008, 333-43382, 333-48896 and 333-66604) of our report dated February 11, 2003, with respect to the consolidated financial statements of CSX incorporated by reference in this Annual Report (Form 10-K) for the fiscal year ended December 27, 2002. Our audits also included Note 19 to the consolidated financial statements of CSX listed in Item 15(a). Note 19 is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, Note 19 to the consolidated financial statements referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Jacksonville, Florida February 24, 2003 EX-23.2 20 dex232.txt EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP AND KPMG LLP EXHIBIT 23.2 Consent of Independent Auditors We consent to the use of our report dated January 28, 2003, with respect to the consolidated financial statements of Conrail Inc. and subsidiaries as of December 31, 2002 in this Annual Report (Form 10-K) of CSX Corporation and subsidiaries (CSX). We also consent to the incorporation by reference in each Form S-3 Registration Statement or Post-Effective Amendment thereto (Registration Nos. 33-2084, 333-60134, 333-84016 and 333-84016-01) and in each Form S-8 Registration Statement or Post-Effective Amendment thereto (Registration Nos. 33-16230, 33-25537, 33-29136, 33-37449, 33-41498, 33-41499, 33-41735, 33-57029, 333-09213, 333-73429, 333-32008, 333-43382, 333-48896 and 333-66604) of our report dated January 11, 2003, with respect to the consolidated financial statements of Conrail Inc. and subsidiaries as of December 31, 2002 included in this Annual Report (Form 10-K) of CSX for the fiscal year ended December 27, 2002. /s/ Ernst & Young LLP /s/ KPMG LLP Jacksonville, Florida Norfolk, Virginia February 24, 2003 February 24, 2003 EX-24 21 dex24.txt EXHIBIT 24 POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of CSX CORPORATION, a Virginia Corporation, which is to file with the Securities and Exchange Commission, Washington, D. C., a Form 10-K (Annual Report), hereby constitutes and appoints Paul R. Goodwin and Ellen M. Fitzsimmons his true and lawful attorneys-in-fact and agents, for him and in his name, place and stead to sign said Form 10-K, and any and all amendments thereto, with power where appropriate to affix the corporate seal of CSX Corporation thereto and to attest said seal, and to file said Form 10-K, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 25th day of February, 2003 /s/ Elizabeth E. Bailey /s/ David M. Ratcliffe - ------------------------------------ ------------------------------------ Elizabeth E. Bailey David M. Ratcliffe /s/ Robert L. Burrus, Jr. /s/ Charles E. Rice - ------------------------------------ ------------------------------------ Robert L. Burrus, Jr. Charles E. Rice /s/ Bruce C. Gottwald /s/ William C. Richardson - ------------------------------------ ------------------------------------ Bruce C. Gottwald William C. Richardson /s/ John R. Hall /s/ Frank S. Royal - ------------------------------------ ------------------------------------ John R. Hall Frank S. Royal /s/ Edward J. Kelly, III /s/ Michael J. Ward - ------------------------------------ ------------------------------------ Edward J. Kelly, III Michael J. Ward /s/ Robert D. Kunisch /s/ Paul R. Goodwin - ------------------------------------ ------------------------------------ Robert D. Kunisch Paul R. Goodwin /s/ James W. McGlothlin /s/ Carolyn T. Sizemore - ------------------------------------ ------------------------------------ James W. McGlothlin Carolyn T. Sizemore /s/ Southwood J. Morcott - ------------------------------------ Southwood J. Morcott EX-99.1 22 dex991.txt EXHIBIT 99.1 CEO CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of CSX Corporation on Form 10-K for the period ending December 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Ward, Chief Executive Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the registrant. Date: February 25, 2003 /s/ MICHAEL J. WARD ------------------------------------- Michael J. Ward Chairman and Chief Executive Officer EX-99.2 23 dex992.txt EXHIBIT 99.2 CFO CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of CSX Corporation on Form 10-K for the period ending December 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul R. Goodwin, Chief Financial Officer of the registrant, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the registrant. Date: February 25, 2002 /s/ PAUL R. GOODWIN ---------------------- Paul R. Goodwin Vice Chairman and Chief Financial Officer EX-99.3 24 dex993.txt EXHIBIT 99.3 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CONRAIL INC. Exhibit 99.3 REPORT OF MANAGEMENT The Stockholders Conrail Inc. Management is responsible for the preparation, integrity and objectivity of the Company's consolidated financial statements. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management's best estimates and judgment. The Company maintains a system of internal accounting controls and procedures, which is continually reviewed and supported by written policies and guidelines and supplemented by internal audit services. The system provides reasonable assurance that assets are safeguarded against loss from unauthorized use and that the books and records reflect the transactions of the Company and are reliable for the preparation of financial statements. The concept of reasonable assurance recognizes that the cost of a system of internal accounting controls should not exceed the benefits derived and also recognizes that the evaluation of these factors necessarily requires estimates and judgments by management. The Company's consolidated financial statements are audited by its independent accountants. Their audit is conducted in accordance with auditing standards generally accepted in the United States of America and includes a study and evaluation of the Company's system of internal accounting controls to determine the nature, timing and extent of the auditing procedures required for expressing an opinion on the Company's financial statements. The Company's Board of Directors, which is comprised of an equal number of directors from Norfolk Southern Corporation ("NSC") and CSX Corporation ("CSX"), pursues its oversight responsibilities for the consolidated financial statements and corporate conduct through periodic meetings with and written reports from the Company's management. Gregory R. Weber President and Chief Executive Officer Patrick F. Rogers Assistant Vice President- Accounting and Tax January 28, 2003 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Conrail Inc.: We have audited the accompanying consolidated balance sheets of Conrail Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These 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 present fairly, in all material respects, the financial position of Conrail Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Ernst & Young LLP Norfolk, Virginia Jacksonville, Florida January 28, 2003 -2- CONRAIL INC. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, ------------------------ ($ In Millions) 2002 2001 2000 ------ ------ ----- Revenues - NSC/CSX (Note 2) $ 813 $ 823 $ 886 Revenues - Third parties 80 80 99 ------ ------ ----- Total operating revenues 893 903 985 ------ ------ ----- Operating expenses (Note 3) Compensation and benefits 151 158 195 Fuel 6 7 10 Material, services and rents 125 143 162 Depreciation and amortization 322 325 331 Casualties and insurance 2 (13) 33 Other 17 19 18 ------ ------ ----- Total operating expenses 623 639 749 ------ ------ ----- Income from operations 270 264 236 Interest expense (104) (109) (124) Other income, net (Note 10) 94 103 155 ------ ------ ----- Income before income taxes 260 258 267 Income taxes (Note 7) 80 84 97 ------ ------ ----- Net income $ 180 $ 174 $ 170 ====== ====== ===== See accompanying notes to the consolidated financial statements. -3- CONRAIL INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------ ($ In Millions) 2002 2001 ------ ------ ASSETS Current assets Cash and cash equivalents $ 23 $ 34 Accounts receivable, net 35 32 Due from NSR/CSXT (Note 2) 158 172 Notes receivable from NSC/CSX (Note 2) - 515 Material and supplies 8 9 Deferred tax assets (Note 7) 65 76 Other current assets 11 8 ------ ------ Total current assets 300 846 Property and equipment, net (Note 4) 6,382 6,688 Notes receivable from NSC/CSX (Note 2) 892 - Other assets 583 548 ------ ------ Total assets $8,157 $8,082 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt (Note 6) 57 60 Accounts payable 33 41 Due to NSC/CSX (Note 2) 9 12 Wages and employee benefits 31 37 Casualty reserves 69 101 Accrued and other current liabilities (Note 5) 130 157 ------ ------ Total current liabilities 329 408 Long-term debt (Note 6) 1,123 1,156 Casualty reserves 119 134 Deferred income taxes (Note 7) 1,822 1,833 Other liabilities 538 446 ------ ------ Total liabilities 3,931 3,977 ------ ------ Commitments and contingencies (Note 11) Stockholders' equity (Notes 3 and 9) Common stock ($1 par value; 100 shares authorized, issued and outstanding) - - Additional paid-in capital 2,221 2,221 Retained earnings 2,134 1,954 Accumulated other comprehensive loss (129) (70) ------ ------ Total stockholders' equity 4,226 4,105 ------ ------ Total liabilities and stockholders' equity $8,157 $8,082 ====== ======
See accompanying notes to the consolidated financial statements. -4- CONRAIL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY $ in Millions
Accumulated Additional Unearned Other Paid-In ESOP Retained Comprehensive Capital Compensation Earnings Loss Total -------------- ---------------- ------------ ----------------- ---------- Balance, January 1, 2000 $2,229 $(20) $1,610 $ - $3,819 Net Income - - 170 - 170 Other (7) - - - (7) -------------- ---------------- ------------ ----------------- ---------- Balance, December 31, 2000 2,222 (20) 1,780 - 3,982 Comprehensive income - 2001 Net Income - - 174 - 174 Minimum pension liability, net of $45 million income taxes (Note 8) - - - (70) (70) ---------- Total comprehensive income 104 ---------- Allocation of unearned ESOP compensation (1) 20 - - 19 -------------- ---------------- ------------ ----------------- ---------- Balance, December 31, 2001 2,221 - 1,954 (70) 4,105 Comprehensive income - 2002 Net Income - - 180 - 180 Minimum pension liability, net of $39 million income taxes (Note 8) - - - (59) (59) ---------- Total comprehensive income 121 ---------- -------------- ---------------- ------------ ----------------- ---------- Balance, December 31, 2002 $2,221 $ - $2,134 ($129) $4,226 ============== ================ ============ ================= ==========
See accompanying notes to the consolidated financial statements. -5- CONRAIL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ---------------------------- ($ In Millions) 2002 2001 2000 ------ ------ ------ Cash flows from operating activities Net income $ 180 $ 174 $ 170 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 322 325 331 Deferred income taxes (9) (18) 101 Gains from sales of property (3) (2) (70) Pension credit (17) (19) (12) Dividends from affiliated companies - - 55 Changes in: Accounts receivable (3) 1 18 Accounts and wages payable (14) (32) 8 Due from NSR/CSXT 14 60 (36) Due to NSC/CSX (3) (19) (128) Other (44) 32 (75) ------ ------ ------ Net cash provided by operating activities 423 502 362 ------ ------ ------ Cash flows from investing activities Property and equipment acquisitions (23) (47) (220) Notes receivable from NSC/CSX (377) (424) 125 Proceeds from disposal of property and equipment 14 14 86 Other 11 - (7) ------ ------ ------ Net cash used in investing activities (375) (457) (16) ------ ------ ------ Cash flows from financing activities Payment of long-term debt (59) (61) (318) ------ ------ ------ Net cash used in financing activities (59) (61) (318) ------ ------ ------ Increase(decrease) in cash and cash equivalents (11) (16) 28 Cash and cash equivalents Beginning of year 34 50 22 ------ ------ ------ End of year $ 23 $ 34 $ 50 ====== ====== ======
See accompanying notes to the consolidated financial statements. -6- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Description of Business Conrail Inc. ("Conrail") is a holding company whose principal subsidiary is Consolidated Rail Corporation ("CRC"), the major freight railroad in the Northeast. Norfolk Southern Corporation ("NSC") and CSX Corporation ("CSX"), the major railroads in the Southeast, jointly control Conrail through their ownership interests in CRR Holdings LLC ("CRR"), whose primary subsidiary is Green Acquisition Corporation ("Green Acquisition"), which owns Conrail. NSC and CSX have equity interests in CRR of 58% and 42%, respectively, and voting interests of 50% each. Under operating and lease agreements, NSC and CSX operate a substantial portion of the Conrail properties through their railroad subsidiaries, Norfolk Southern Railway Company ("NSR") and CSX Transportation, Inc. ("CSXT")(Note 2). 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 of maintenance material valued at the lower of cost or market. Property and Equipment Property and equipment are recorded at cost. Depreciation is provided using the composite straight-line method over estimated service lives. Expenditures, including those on leased assets that extend an asset's useful life or increase its utility, are capitalized. Maintenance expense is recognized when repairs are performed. 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. In 2002, the overall depreciation rate averaged 3.6% for all roadway and equipment. The Company is finalizing a study to update the estimated useful lives of its roadway and equipment property and the associated accumulated depreciation reserves. Based on this review, the Company anticipates a pretax increase in overall depreciation expense in the range of $20-$25 million in 2003. -7- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In August 2001, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." This standard which is effective for the Corporation's fiscal year beginning January 1, 2003, addresses the accounting and reporting of legal obligations associated with the retirement of tangible long-lived assets. The Company is currently evaluating the impact the new rules may have on its consolidated financial statements. 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. The adoption of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which was effective January 1, 2002, did not have a material effect on the Company's consolidated financial statements. Revenue Recognition The Company's major sources of revenues are from NSC and CSX, primarily in the form of rental revenues and operating fees, which are recognized when earned (Note 2). Conrail also has third party revenues, which are recognized when earned, related to the operations of Indiana Harbor Belt Railroad Company, a 51% owned terminal railroad subsidiary. 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, the 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. Management reviews its estimates, including those related to the recoverability and useful lives of assets as well as liabilities for litigation, environmental remediation, casualty claims, income taxes and pension and postretirement benefits. Changes in facts and circumstances may result in revised estimates. 2. Related Parties Transactions -8- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Background On May 23, 1997, NSC and CSX completed their joint acquisition of Conrail stock. On June 17, 1997, NSC and CSX executed an agreement that generally outlines the methods of governing and operating Conrail and its subsidiaries ("Transaction Agreement"). On July 23, 1998, the Surface Transportation Board ("STB") issued a written opinion that permitted NSC and CSX to exercise operating control of Conrail beginning August 22, 1998. On June 1, 1999, NSC and CSX began to operate over certain Conrail lines. Operations by NSR and CSXT The majority of CRC's routes and assets are segregated into separate subsidiaries of CRC, Pennsylvania Lines LLC ("PRR") and New York Central Lines LLC ("NYC"). PRR and NYC have separate but identical operating and lease agreements with NSR and CSXT, respectively, (the "Operating Agreements") which govern substantially all nonequipment assets to be used by NSR and CSXT and have initial 25-year terms, renewable at the options of NSR and CSXT for two 5-year terms. Payments made under the Operating Agreements are based on appraised values that are subject to adjustment every six years. NSR and CSXT have also leased or subleased certain equipment assets at rentals based on appraised values for varying term lengths from PRR and NYC, respectively, as well as from CRC. NSC and CSX also have agreements with CRC governing other Conrail properties that continue to be owned and operated by Conrail ("the Shared Assets Areas"). NSR and CSXT pay CRC a fee for joint and exclusive access to the Shared Assets Areas. In addition, NSR and CSXT pay, based on usage, the costs incurred by CRC to operate the Shared Assets Areas plus a profit factor. Payments made by NSR to Conrail under the Shared Assets agreements were $115 million and $168 million during 2002 and 2001, respectively, of which $23 million and $27 million, were minimum rents. Payments made by CSXT to Conrail under the Shared Assets agreements were $92 million and $140 million during 2002 and 2001, respectively, of which $17 million and $19 million, were minimum rents. Payments from NSR under the Operating Agreements to PRR amounted to $339 million and $331 million during 2002 and 2001, respectively. Payments from CSXT under the Operating Agreements to NYC amounted to $248 million and $241 million during 2002 and 2001, respectively. In addition, costs necessary to operate and maintain the related assets under these agreements, including leasehold improvements, are borne by NSR and CSXT. -9- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Future minimum lease payments to be received from NSR/CSXT are as follows: $ in Millions NSR NSR CSXT CSXT --- --- ---- ---- To PRR To CRC To NYC To CRC Total ------ ------ ------ ------ ----- 2003 $ 333 $ 30 $ 230 $ 21 $ 614 2004 332 32 230 23 617 2005 320 33 221 24 598 2006 306 34 210 24 574 2007 294 34 203 24 555 2008 and Beyond 4,414 585 2,909 402 8,310 ------------------------------------------------- Total $5,999 $748 $4,003 $518 $11,268 ------------------------------------------------- Related Party Balances and Transactions "Due from NSR/CSXT" at December 31, 2002 and 2001, is primarily comprised of amounts due for the above-described operating and rental activities. PRR and NYC have interest-bearing notes receivable due from NSC and CSX. Previously, these notes were payable on demand and classified as current. However during the first quarter of 2002, they were exchanged for new longer-term notes. As of December 31, 2002, the notes receivable due from NSC and CSX included in noncurrent assets were $513 million and $379 million, respectively. At December 31, 2001, the notes receivable balances from NSC and CSX under the previous demand note totaled $301 million and $214 million, respectively. The interest rates on the notes receivable from NSC and CSX are variable and were both 1.82% at December 31, 2002. Interest income related to the PRR and NYC notes receivable was $18 million in 2002, $13 million in 2001 and $10 million in 2000. "Due to NSC/CSX" includes amounts payable for property and equipment rentals, as well as amounts related to service provider agreements with both NSC and CSX to provide certain general and administrative support to CRC. A summary of the "Due to NSC and CSX" activity for the services described above follows: -10- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) $ in Millions
Payments Payments to NSC to CSX ----------------- --------------- 2002 2001 2002 2001 Service Provider Agreements $ 5 $ 6 $ - $ - Material purchases 20 31 - - Rental of locomotives, equipment and facilities 5 8 4 6 Capital Project activities - 17 - 3 ----------------- --------------- Total payments $30 $62 $ 4 $ 9 ----------------- --------------- 2002 2001 2002 2001 ----------------- --------------- Due to "NSC and CSX" at December 31 $ 7 $ 9 $ 2 $ 3
From time to time, NSC and CSX, as the indirect owners of Conrail, may need to provide some of Conrail's cash requirements through capital contributions, loans or advances. Through December 31, 2002 there have been no transactions under these arrangements. 3. Transition, Acquisition-Related and Other Items During the first quarter of 2002 and the fourth quarter of 2001, the Company received cash proceeds totaling $4 million and $42 million respectively, from several London-based insurance carriers as settlement for current and future exposures related to personal injury, occupational, environmental and other claims. The Company recognized pretax gains of $4 million and $14 million, respectively, which is included in the "Casualties and insurance" line item of the income statement for 2002 and 2001. During 2002, accrued termination payments totaling $1 million were made to 6 non-union employees whose non-executive positions were eliminated as a result of the joint acquisition of Conrail. Most of these termination payments have been made in the form of supplemental retirement benefits from the Company's pension plan. During 2001 and 2000 accrued termination payments of $15 million and $50 million respectively, were made. The remaining amount of this liability is less than $1 million and is expected to be paid out within the next year. During the second quarter of 2001, the Company received a $50 million cash payment for transferring to a third party certain of its rights -11- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) to license, manage and market signboard advertising on the Company's property for 25 years. The payment is being recognized into other income on a straight-line basis over the 25 year contract period. Also during 2001, the Company made final settlement of a long-term liability related to the non-union Employee Stock Ownership (ESOP) termination, which did not require use of the Company's cash for settlement. The liability, the balance of which was $20 million at December 31, 2000, was settled as the remaining cash proceeds held by the ESOP as a result of selling its ESOP preferred stock in conjunction with the joint acquisition, were allocated to eligible participants. During the first quarter of 2000, the Company completed a significant property sale and recognized a gain of $61 million on the sale ($37 million after income taxes), which is included in "Other income, net" (Note 10). The Company has a long-term liability in connection with employment "change in control" agreements with certain current and former executives, which became operative as a result of the joint acquisition of Conrail. In 2002 and 2001, payments of $1 million and $9 million respectively, were made primarily from the Company's pension plan. The remaining amount, $24 million at December 31, 2002, will be paid out at the discretion of the participants in the program. 4. Property and Equipment December 31, --------------- 2002 2001 ------ ------ (In Millions) Roadway $ 7,476 $ 7,496 Equipment 1,511 1,519 Less: Accumulated depreciation (2,828) (2,570) ------- ------- 6,159 6,445 ------- ------- Capital leases (primarily equipment) 496 616 Accumulated amortization (273) (373) ------- ------- 223 243 ------- ------- $ 6,382 $ 6,688 ======= ======= Substantially all assets are leased to NSR or CSXT (Note 2). -12- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. Accrued and Other Current Liabilities December 31, --------------- 2002 2001 ------ ------ (In Millions) Operating leases $ 47 $ 45 Property and corporate taxes 43 37 Income taxes payable 4 27 Other 36 48 ---- ---- $130 $157 ==== ==== 6. Long-Term Debt and Leases Long-term debt Long-term debt outstanding, including the weighted average interest rates at December 31, 2002, is composed of the following: December 31, ------------ 2002 2001 ------ ------- (In Millions) Capital leases $ 192 $ 208 Debentures payable,7.88%,due 2043 250 250 Debentures payable,9.75%,due 2020 550 550 Equipment and other obligations,6.95% 188 208 ------ ------- 1,180 1,216 Less current portion (57) (60) ------ ------- $1,123 $1,156 ====== ======= Interest payments were $105 million in 2002, $113 million in 2001 and $121 million in 2000. Equipment and other obligations mature in 2003 through 2043 and are collateralized by assets with a net book value of $222 million at December 31, 2002. Maturities of long-term debt other than capital leases are $20 million in 2003, $21 million in 2004, $20 million in 2005, $21 million in 2006, $43 million in 2007 and $863 million in total from 2008 through 2043. Leases The Company's noncancelable long-term leases generally include options to purchase at fair value and to extend the terms. Certain lease obligations are payable in Japanese yen, which require the maintenance of yen-denominated deposits sufficient to satisfy the yen-denominated obligation. These deposits are included in the "Other assets" line item of the balance sheet and totaled $45 million and $35 million at December 31, 2002 and December 31, 2001, respectively. 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 $223 million at December 31, 2002. -13- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Minimum commitments, exclusive of executory costs borne by the Company, are: Capital Operating Leases Leases ------- --------- (In Millions) 2003 $ 51 $ 56 2004 53 56 2005 38 55 2006 24 54 2007 28 53 2008 - 2025 52 289 ----- ---- Total 246 $563 ==== Less interest portion (54) ----- Present value $ 192 ===== Operating lease rent expense was $62 million in 2002, $70 million in 2001 and $75 million in 2000. 7. Income Taxes The provisions for income taxes are composed of the following: 2002 2001 2000 ---- ---- ----- (In Millions) Current Federal $ 81 $ 77 $ (5) State 8 25 1 ---- ---- ---- 89 102 (4) ---- ---- ---- Deferred Federal (20) (22) 81 State 11 4 20 ---- ---- ---- (9) (18) 101 ---- ---- ---- $ 80 $ 84 $ 97 ==== ==== ==== Reconciliation of the U.S. statutory tax rates with the effective tax rates is as follows: 2002 2001 2000 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.2 4.2 4.2 Settlement of IRS audit (5.6) - - Settlement of state tax issues - (3.5) - Other (2.8) (3.1) (2.9) ---- ---- ---- Effective tax rate 30.8% 32.6% 36.3% ==== ==== ==== -14- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company has reached final settlements with the Internal Revenue Service ("IRS") related to all of the audits of the Company's consolidated federal income tax returns through the fiscal year May 23,1997. As a result of the settlement Conrail received tax refunds of $24 million and reduced tax expense by $14 million during 2002. Federal and state income tax payments were $113 million in 2002, $86 million in 2001 and $3 million in 2000. Significant components of the Company's deferred income tax liabilities (assets) are as follows: December 31, ------------------------- 2002 2001 ------ ------ (In Millions) Current assets $ (5) $ 57 Current liabilities (60) (125) Miscellaneous - (8) ------ ------ Current deferred tax asset, net $ (65) $ (76) ====== ====== Noncurrent liabilities: Property and equipment 2,000 2,008 Other 112 191 ------ ----- 2,112 2,199 ------ ------ Noncurrent assets: Nondeductible reserves and other liabilities (290) (366) ------ ------ Deferred income tax liabilities, net $1,822 $1,833 ====== ====== The Company has reviewed its deferred income tax assets and believes a valuation allowance is not necessary. 8. Pension and Postretirement Benefits The Company and its subsidiaries sponsor several qualified and nonqualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ending December 31, 2002, and a statement of the funded status as of December 31 of both years: -15- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other Postretirement Pension Benefits Benefits ---------------- -------------------- (In Millions) 2002 2001 2002 2001 ----- ----- ---- ---- Change in benefit obligation Net benefit obligation at beginning of year $ 662 $ 687 $ 36 $ 37 Service cost 1 2 - - Interest cost 44 45 3 3 Plan participant's contributions - - 6 5 Actuarial losses 5 16 2 - Benefits paid (66) (88) (10) (9) ----- ----- ----- ----- Net benefit obligation at end of year $ 646 $ 662 $ 37 $ 36 Change in plan assets Fair value of plan assets at beginning of year $ 613 $ 720 $ 8 $ 8 Actual return on plan assets (28) (20) 1 1 Employer contributions 3 1 2 3 Plan participant's contributions - - 6 5 Benefits paid (66) (88) (10) (9) ----- ----- ----- ----- Fair value of plan assets at end of year $ 522 $ 613 $ 7 $ 8 Funded status at end of year $(124) $ (49) $ (30) $ (28) Unrecognized prior service cost 8 8 (1) (1) Unrecognized actuarial (gains)losses 206 111 (9) (11) ----- ----- ----- ----- Net amount recognized at year end $ 90 $ 70 $ (40) $ (40) ===== ===== ===== ===== -16- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following amounts have been recognized in the balance sheets as of December 31: Other Postretirement Pension Benefits Benefits ----------------- -------------------- (In Millions) 2002 2001 2002 2001 ---- ---- ---- ---- Prepaid pension cost $ 126 $ 110 - - Accrued benefit cost (257) (163) $ (40) $ (40) Intangible asset 8 8 - - Accumulated other comprehensive loss 213 115 - - ----- ----- ----- ----- $ 90 $ 70 $ (40) $ (40) ===== ===== ===== ===== All of the Company's plans for postretirement benefits other than pensions have no plan assets except for the retiree life insurance plan, which has $7 million and $8 million of assets in 2002 and 2001, respectively. The aggregate benefit obligation for the postretirement plans other than pensions was $37 million and $36 million at December 31, 2002 and 2001, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $639 million, $635 million and $514 million, respectively, as of December 31, 2002 and $656 million, $655 million and $605 million, respectively as of December 31, 2001. As required by Statement of Financial Accounting Standard No. 87 "Employers'Accounting for Pensions", the Company has recorded an additional minimum liability of $220 million and $123 million at December 31, 2002 and December 31, 2001, respectively. The additional liability was partially offset by an intangible asset to the extent of previously unrecognized prior service costs of $7 million and $8 million at December 31, 2002 and December 31, 2001, respectively. The remaining amounts are recorded as a component of stockholders' equity, net of related tax benefits as "Accumulated Other Comprehensive Loss". The assumptions used in the measurement of the Company's benefit obligation are as follows: Other Postretirement Pension Benefits Benefits ---------------- -------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Discount rate 6.75% 7.25% 6.75% 7.25% Expected return on plan assets 9.00% 9.00% 8.00% 8.00% Rate of compensation increase 5.00% 5.00% 5.00% 5.00% A 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003, gradually decreasing to 5% by the -17- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) year 2007. Assumed health care cost trend rates affect amounts reported for the health care plans. The effect of a one percentage point increase and (decrease) in the assumed health care cost trend rate on the accumulated postretirement benefit obligation is $1 million and $(1) million, respectively. The components of the Company's net periodic benefit cost for the plans are as follows: Other Postretirement Pension Benefits Benefits ----------------- -------------------- (In Millions) 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- Service cost $ 1 $ 2 $ 4 $ - $ - $ - Interest cost 44 45 51 3 3 3 Expected return on assets (62) (66) (70) (1) (1) (1) Amortization of: Transition asset - (1) (1) - - - Prior service cost 1 1 1 - - - Actuarial (gain)loss (1) (1) 1 (1) (1) ---- ---- ---- ---- ---- ---- $(17) $(20) $(14) $ 2 $ 1 $ 1 ==== ==== ==== ==== ==== ==== Savings Plans The Company and certain subsidiaries provide 401(k) savings plans for union and non-union employees. Under the Company's current non-union savings plan, 50% of employee contributions are matched for the first 6% of a participating employee's base pay and 25% of employee contributions are matched in excess of 10% of a participating employee's base pay. Savings plan expense related to the current non-union savings plan was $1 million in each of the years 2002, 2001 and 2000. There is no Company match provision under the union employee plan except for certain unions, which negotiated a Company match as part of their contract provisions. Incentive Compensation Plans The Company has an incentive compensation plan for all non-union employees in which employees receive targeted cash awards upon attainment of certain performance criteria established by the Company's Board of Directors. Compensation expense under this plan was $3 million in 2002, $2 million in 2001 and $5 million in 2000. The Company also has a long-term incentive plan under which phantom stock options are granted to officers and other key non-union employees. The option price for the phantom shares is equal to the blended fair market value of NSC and CSX common stock at the date of grant. Options will vest one year after grant date and the option term may not exceed ten years. Upon exercise, eligible participants will -18- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) receive cash payments equal to the appreciation on the composite NSC and CSX common stock fair values. Compensation expense for this plan was less than $1 million in 2002 and 2000 and $2 million in 2001. 9. Stockholders' equity Common Stock On May 23, 1997, the NSC/CSX joint tender offer for the remaining outstanding shares of Conrail's common and preferred stock was concluded, and on June 2, 1997, Conrail became the surviving corporation in a merger with Green Merger Corp. and remained the only subsidiary of Green Acquisition, an entity jointly-owned by NSC and CSX. As a result, the remaining outstanding capital stock of Conrail was acquired by NSC and CSX and Green Acquisition was issued 100 shares of Conrail's common stock. Undistributed Earnings of Equity Investees "Retained earnings" includes undistributed earnings of equity investees of $199 million, $180 million and $157 million at December 31, 2002, 2001 and 2000, respectively. 10. Other Income, Net 2002 2001 2000 ---- ---- ---- (In Millions) Interest income $ 23 $ 21 $ 21 Rental income 45 47 45 Property sales 3 2 70 Equity in earnings of affiliates 20 24 24 Other, net 3 9 (5) ---- ---- ---- $ 94 $103 $155 ==== ==== ==== 11. Commitments and Contingencies Environmental The Company is subject to various federal, state and local laws and regulations regarding environmental matters. CRC is a party to various proceedings brought by both regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other -19- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) potential environmental issues. At December 31, 2002, 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 35 locations. Due to the number of parties involved at many of these sites, the wide range of costs of possible remediation alternatives, the changing technology and the length of time over which these matters develop, it is often not possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. Although the Company's operating results and liquidity could be significantly affected in any quarterly or annual reporting period if CRC were held principally liable in certain of these actions, at December 31, 2002, the Company had accrued $66 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 anticipates that much of this liability will be paid out over five years; however some costs will be paid out over a longer period. The Company believes the ultimate liability for these matters will not materially affect its consolidated financial condition. The Company spent $6 million in 2002, $10 million in 2001 and $9 million in 2000 for environmental remediation and related costs. In addition, the Company's capital expenditures for environmental control and abatement projects were less than $1 million in both 2002 and 2001 and approximately $1 million in 2000. Casualty The Company is involved in various legal actions, principally relating to occupational health claims, personal injuries, casualties and property damage. The casualty claim liability is determined actuarially, based upon claims filed and an estimate of claims incurred but not yet reported. The Company is generally self-insured for casualty claims. Claims in excess of self-insurance levels are insured up to excess coverage limits. While the ultimate amounts of claims incurred are dependent upon future developments, in management's opinion, the recorded liability is adequate to cover expected probable payments. During both 2002 and 2001, the Company, based on favorable claims development, recognized actuarial determined gains of approximately $16 million and $12 million respectively, which is included in the "Casualties and insurance" line item of the income statement. Labor CRC had 1,415 employees at December 31, 2002; approximately 89% of whom are represented by 11 different labor organizations and are covered by -20- CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16 separate collective bargaining agreements. The Company was engaged in collective bargaining at December 31, 2002 with labor organizations representing approximately 54% of its labor force. Guarantees CRC currently guarantees the principal and interest payments in the amount of $30 million on Equipment Trust Certificates for Locomotive Management Services, a general partnership of which CRC holds a fifty percent non-controlling interest. In addition, CRC is also contingently liable as guarantor with respect to $7 million of indebtedness for an affiliate company, Triple Crown Services. No liability has been recorded related to these guarantees. Also the Company may be contingently liable under indemnification provisions related to the sale of tax benefits. This liability is recorded in the "Other liability" line item of the balance sheet and totaled $13 million at both December 31, 2002, and December 31, 2001. 12. Fair Values of Financial Instruments The fair values of "Cash and cash equivalents," "Accounts receivable," "Notes receivable from NSC/CSX" and "Accounts payable" approximate the carrying values of these financial instruments at December 31, 2002 and 2001. 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 $1,254 million and $1,204 million at December 31, 2002 and 2001, respectively, compared with carrying values of $988 million and $1,008 million at December 31, 2002 and 2001. -21- ~~-----END PRIVACY-ENHANCED MESSAGE-----~~