-----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, QNyy6xpYyPNKeQT01h26dWqEmzbjtzbxz9fDL3qJzZd2lHb+8B+X/GV+IE2441A3 TFwsST69C1gWP8ppUJl9pQ== 0000897732-97-000002.txt : 19970326 0000897732-97-000002.hdr.sgml : 19970326 ACCESSION NUMBER: 0000897732-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONRAIL INC CENTRAL INDEX KEY: 0000897732 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 232728514 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12184 FILM NUMBER: 97562129 BUSINESS ADDRESS: STREET 1: TWO COMMERCE SQ STREET 2: P O BOX 41417 CITY: PHILADELPHIA STATE: PA ZIP: 19101-1417 BUSINESS PHONE: 2152094434 MAIL ADDRESS: STREET 1: P.O. BOX 41429 STREET 2: 2001 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19101-1429 10-K 1 CONRAIL INC BODY SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition Period from _________________ to ____________________ Commission File No. 1-12184 CONRAIL INC. ------------ (Exact name of registrant as specified in its charter) Pennsylvania 23 2728514 - --------------------------------- ------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 2001 Market Street, Two Commerce Square Philadelphia, Pennsylvania 19101-1417 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 209-4000 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Conrail Inc. New York Stock Exchange Common Stock (Par Value $1.00) Philadelphia Stock Exchange and Common Stock Purchase Rights --------------------------- - -------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates of the Registrant (as of March 3, 1997): $9,260,302,728 Shares of Common Stock outstanding (as of March 3, 1997): 83,144,397 DOCUMENTS INCORPORATED BY REFERENCE: None TABLE OF CONTENTS Item Page Part I 1. Business...................................... 1 2. Properties.................................... 1 3. Legal Proceedings............................. 17 4. Submission of Matters to a Vote of Security Holders.................................... 23 Executive Officers of the Registrant........... 23 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 28 6. Selected Financial Data........................ 28 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 31 8. Financial Statements and Supplementary Data.... 41 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 65 Part III 10. Directors and Executive Officers of the Registrant.................................. 66 11. Executive Compensation......................... 69 12. Security Ownership of Certain Beneficial Owners and Management....................... 77 13. Certain Relationships and Related Transactions. 79 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 80 Power of Attorney............................................. 86 Signatures.................................................... 86 Exhibit Index................................................. 88 i PART I Item 1. Business. - ------ -------- and Item 2. Properties. - ------ ---------- GENERAL. Conrail Inc. was incorporated in Pennsylvania on ------- February 12, 1993 and on July 1, 1993 became the holding company of Consolidated Rail Corporation. Consolidated Rail Corporation is Conrail Inc.'s only significant subsidiary and primary asset. Conrail Inc.'s common stock is listed on the New York and Philadelphia Stock Exchanges. Consolidated Rail Corporation is a Pennsylvania corporation incorporated on February 10, 1976 to acquire, pursuant to the Regional Rail Reorganization Act of 1973, the rail properties of many of the railroads in the northeast and midwest region of the United States which had gone bankrupt during the early 1970's, the largest of which was the Penn Central Transportation Company ("Penn Central"). Reports on Form 10-K for years prior to 1993 were filed by Consolidated Rail Corporation, and historic data presented herein and therein reflect the results of Consolidated Rail Corporation for those time periods. Unless otherwise indicated, references to Conrail prior to July 1, 1993 denote Consolidated Rail Corporation and its consolidated subsidiaries, and references to Conrail after July 1, 1993 denote Conrail Inc. and its consolidated subsidiaries. PROPOSED MERGER. On October 14, 1996, Conrail, CSX Corporation --------------- ("CSX") and a subsidiary of CSX entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement"), pursuant to which Conrail was to be merged with a subsidiary of CSX in a merger-of-equals transaction. On October 24, 1996, Norfolk Southern Corporation ("Norfolk") commenced an unsolicited tender offer for all outstanding Conrail voting stock at $100 per share in cash. Norfolk has since increased its offer to $115 per share in cash. On November 20, 1996, CSX concluded its first tender offer and purchased approximately 19.9% of Conrail's outstanding shares for $110 per share. On December 18, 1996, CSX and Conrail entered into a second amendment to the Merger Agreement (the "Second Amendment") that would, among other things, (i) increase the consideration payable pursuant to the merger, (ii) accelerate the consummation of the merger to immediately following the receipt of applicable shareholder approvals and prior to the Surface Transportation Board ("STB") approval and (iii) extend until December 31, 1998 an exclusivity period during which the Conrail Board agreed not to withdraw or modify its recommendations of the CSX transactions, approve or recommend any takeover proposal or cause Conrail to enter into any agreement related to any takeover proposal. On January 13, 1997, Norfolk issued a press release announcing that it would offer to purchase shares representing 9.9% of the outstanding shares for $115 per share, in the event that Conrail shareholders did not approve a proposal to opt out of a Pennsylvania statute (the "Opt Out Proposal") at the meeting of shareholders to be held on January 17, 1997 (the "Special Shareholders Meeting"). On January 17, 1997, Conrail shareholders voted at the Special Shareholders Meeting against the Opt Out Proposal. On February 4, 1997, the amended Norfolk tender offer expired, and Norfolk subsequently purchased approximately 8.2 million Shares pursuant thereto. On March 7, 1997, Conrail and CSX entered into a Third Amendment (the "Third Amendment") to the Merger Agreement. Pursuant to the Third Amendment, (i) the price per share has been increased from $110 to $115, and the number of shares to be purchased in the tender offer has been increased to all outstanding shares. The tender offer is scheduled to close April 18, 1997 (subject to extension by CSX to June 2, 1997 whether or not the conditions have been satisfied), (ii) the consideration paid per share in the merger for all remaining outstanding shares following consummation of the offer has been increased to $115 in cash and (iii) the conditions to the offer relating to certain provisions of Pennsylvania law becoming inapplicable to Conrail and relating pending governmental actions or proceedings have been deleted. The Third Amendment also provides that CSX will have sole control over the regulatory approval process and will be free to conduct by itself discussions with other railroads, including Norfolk, relating to competitive issues raised by the CSX transactions, and to enter into any resulting agreement. It is anticipated that CSX and Norfolk will negotiate an appropriate division of Conrail's assets; however, neither the pending CSX tender offer nor the merger is conditioned on CSX's reaching an agreement with Norfolk. Pursuant to the Third Amendment, three members of Conrail's Board of Directors approved by CSX shall be invited to join the CSX Board of Directors and a transition team will be established, the leadership of which will include senior executive officers of CSX and Conrail to ensure the orderly operation of Conrail during the regulatory approval process and an orderly transition thereafter. Under the Third Amendment, Conrail and CSX agreed to reduce from December 31, 1998 to December 31, 1997 the period of time during which the Conrail Board is prohibited from (i) withdrawing or modifying, or 2 publicly proposing to withdraw or modify, its approval or recommendation of the CSX transactions, in a manner adverse to CSX, (ii) approving or recommending, or publicly proposing to approve or recommend, any competing proposal or (iii) causing Conrail to enter into any agreement related to any such competing proposal. Under the Merger Agreement as amended, Conrail may terminate the Merger Agreement in the event that after June 2, 1997, CSX fails to consummate the tender offer for any reason other than the non- occurrence of any condition to the tender offer. In the event that CSX fails to consummate the tender offer under such circumstances, Conrail will be entitled to exercise any additional remedies it may have. The full terms and conditions of the CSX and Norfolk offers and Conrail's position with respect to the CSX and Norfolk offers are set forth in documents filed by Conrail with the Securities and Exchange Commission. RAIL OPERATIONS. Conrail, through its wholly-owned subsidiary --------------- Consolidated Rail Corporation, provides freight transportation services within the northeast and midwest United States. Conrail interchanges freight with other United States and Canadian railroads for transport to destinations within and outside Conrail's service region. Conrail operates no significant line of business other than the freight railroad business and does not provide common carrier passenger or commuter train service. Conrail serves a heavily industrial region that is marked by dense population centers which constitute a substantial market for consumer durable and non-durable goods, and a market for raw materials used in manufacturing and by electric utilities. Conrail's traffic levels and, as a result, its financial performance are substantially affected by its ability to compete with trucks and other railroads, the economic strength of the industries and metropolitan areas that produce and consume the freight Conrail hauls and the traffic generated by Conrail's connecting railroads. Conrail remains dependent on non-bulk traffic, which tends to generate higher revenues than bulk commodities, but also involves higher costs and is more vulnerable to truck competition. The Service Group System. Beginning in 1994, Conrail's ------------------------ Marketing and Sales Department and related segments of its Operating Department were organized into four service groups: CORE Service, Intermodal Service, Unit Train Service and Automotive Service. Petrochemicals and Minerals, food and agriculture products, forest and manufactured products, and metals are handled by the CORE Service Group. The Intermodal Service Group handles intermodal trailers and containers. The Unit Train Service Group handles coal and ore traffic. The Automotive Service Group handles automotive parts and finished vehicles. Each of these groups controls the integrated 3 planning, pricing and operating functions that will enable them to tailor services, develop products and make capital investments directed toward the special requirements of their respective customers. Revenues for the Service Groups for 1992 through 1996, together with total annual traffic volumes, are set forth in the following tables. SERVICE GROUPS - REVENUES ($ in Millions) Years ended December 31, --------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ CORE Service Group(1) Revenues(2) $1,542 $1,557 $1,587 $1,514 $1,468 Percent of total 43.9% 44.5% 44.5% 45.9% 46.0% Intermodal Service Group Revenues(2) 747 701 742 647 597 Percent of total 21.3% 20.0% 20.8% 19.6% 18.7% Unit Train Service Group Revenues(2) 666 659 631 583 673 Percent of total 19.0% 18.8% 17.7% 17.7% 21.1% Automotive Service Group Revenues(2) 543 549 558 505 443 Percent of total 15.5% 15.7% 15.7% 15.3% 13.9% Total Unassigned Revenue(2) 11 36 46 48 10 0.3% 1.0% 1.3% 1.5% 0.3% Total line haul revenue $3,509 $3,502 $3,564 $3,297 $3,191 Miscellaneous revenue(3) 205 184 169 156 154 ------ ------ ------ ------ ------ Total freight revenue $3,714 $3,686 $3,733 $3,453 $3,345 ====== ====== ====== ====== ======
- ---------------------- (1) Petrochemicals and Minerals $ 582 $ 584 $ 603 $ 565 $ 541 Food and Agriculture 335 353 361 351 347 Forest and Mfg. Products 318 329 326 308 315 Metals 307 291 297 290 265 ------ ------ ------ ------ ------ Total CORE Srv. Grp. $1,542 $1,557 $1,587 $1,514 $1,468 ====== ====== ====== ====== ====== (2) Revenues for the years 1992 through 1994 have been reclassified to exclude unassigned revenue from Service Group totals to provide more accurate comparisons to the current period. (3) Includes switching, demurrage and other miscellaneous revenues. 4 SERVICE GROUPS - VOLUME IN UNITS (FREIGHT CARS AND INTERMODAL TRAILERS AND CONTAINERS) (In Thousands) Years ended December 31, ------------------------------------------- 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- CORE Service Group (1) 1,235 1,254 1,321 1,302 1,213 Intermodal Service Group 1,584 1,473 1,589 1,355 1,220 Unit Train Service Group 862 862 912 878 964 Automotive Service Group 392 399 396 360 319 ----- ----- ----- ----- ----- Total Volume 4,073 3,988 4,218 3,895 3,716 ===== ===== ===== ===== =====
__________________________ (1) Petrochemicals and Minerals 350 358 376 374 360 Food and Agriculture 257 265 289 295 284 Forest and Mfg. Products 290 306 318 309 290 Metals 338 325 338 324 279 ----- ----- ----- ----- ----- Total CORE Srv. Grp. 1,235 1,254 1,321 1,302 1,213 ===== ===== ===== ===== ===== CORE Service Group: ------------------ In 1996, revenues and volume for this service group declined 1% and 1.6%, respectively, from 1995. Revenue in each of the business units comprising the CORE Service Group declined in 1996, except in the Metals Business Group which experienced revenue growth of 5.4% over 1995. Petrochemicals and Minerals: This commodity group consists of a --------------------------- wide variety of commodities, including agricultural and organic chemicals, plastic pellets, soda ash, construction minerals, petroleum products and waste. The majority of traffic is joint-line and the primary flows are between Louisiana and Texas, (as originating sources), and Delaware, New Jersey, and Pennsylvania (as destination points). This commodity group's customer base and origin/destination pair mix are both large and diverse, with none occupying a dominant position in terms of Conrail's traffic volume or revenues. Conrail's traffic in this commodity group increased in 1992 and 1993, leveled off in 1994, and declined slightly in 1995 and 1996, with revenue and volume down 0.3% and 2.5% respectively. Revenues from mineral products, which accounted for one-fourth of this group's volume in 1996, declined approximately 5% as the result of several plant closings. The largest component of this business is chemical traffic, accounting for approximately 44% of the revenue and 38% of the volume in 1996. This traffic includes chlorine, smaller volumes of other hazardous chemicals and non-hazardous substances which, if spilled or released into the atmosphere, could be dangerous and could result in significant liability to Conrail. Under catastrophic circumstances, 5 such liability could exceed Conrail's $300 million in insurance coverage for such accidents. It is impossible to eliminate the risk of such liability; however, Conrail has not experienced any significant liability as a result of an accident involving chlorine or any other such substance. Furthermore, Conrail has safety procedures designed to prevent the occurrence of such accidents, or limit their impact should they occur, and works in concert with chemical manufacturers to reduce the risks in transporting these commodities, subscribing to the policies and procedures defined under Responsible Care partnerships. The year 1996 marked Conrail's first complete year as a Responsible Care partner. Increasing regulation by federal, state and local governments of the transportation and handling of hazardous and non-hazardous substances and waste has increased the administrative burden and costs of transporting certain commodities in this group. Food and Agriculture: This commodity group includes fresh and --------------------- processed food products moving primarily in boxcars, grain, grain products and agricultural chemicals moving in covered hopper and tank cars. Conrail's revenue declined by 5.1% and units declined by 2.8% in 1996 from 1995 levels. In the food commodities area, market share declines of several large customers account for the difference in volume and revenue from 1995 levels. Agriculture volume declined as record grain prices caused domestic users to reduce their use of grain and grain products. The 13.8% revenue decline in grain and grain products is primarily attributable to an increase in grain shippers' use of private cars. Forest and Manufactured Products: This commodity group includes --------------------------------- paper and wood products moving in boxcars, certain lumber and related products moving on flatcars, and general manufactured commodities moving in boxcars. Paper products account for 57% of 1996 revenue for this group, followed by wood products (30%), and manufactured products (13%). A 5.3% volume decline was partially offset by increases in revenue per unit, which yielded a net revenue decrease of 3.3%. High inventories and product prices drove paper receivers to work off existing inventories, reducing rail volume. Most of the inventory adjustments have taken place and shipments are expected to return to normal for 1997. Metals: This commodity group includes scrap ferrous products and ------- semi-finished, finished and sheet steel. In 1995, this group experienced decreases in revenue and volume due to increased truck competition and selective price increases on low margin business. In 1996, volume increased 4% and revenues grew 5.4% over 1995. Market share gains from new mini-mills located on Conrail, capacity increases due to the acquisition of new coil cars and aggressive business development activity contributed to the year over year growth. 6 Intermodal Service Group ------------------------ Conrail continues to be one of the rail industry's leaders in handling intermodal traffic. Volume and revenue increased 7.6% and 6.6%, respectively, in 1996 from 1995. Conrail handled nearly 1.6 million units of intermodal traffic in 1996. Conrail's intermodal traffic consists of three segments. The first segment is Conrail's parcel/package traffic, which principally involves shipments for the U.S. Postal Service, United Parcel Service and less-than-truck-load companies. Revenue in this segment increased by 7.3% in 1996. The second segment is domestic traffic, which includes a variety of commodities and customers. Revenue in this segment increased by 7.8% in 1996. Traffic from major truckload companies continued to increase, as did traffic from intermodal marketing companies (or third party freight consolidators and brokers). International container traffic constitutes the third segment of Conrail's intermodal traffic. International container traffic chiefly involves goods produced in the Pacific Basin and shipped by rail from west coast ports to east coast markets. Conrail and its western railroad connections are able to participate in this traffic because they have established superior transit time compared with the all- water route through the Panama Canal. Conrail also participates in traffic moving through Atlantic ports for import and export trade with European and Mediterranean markets. Revenue from Conrail's international intermodal traffic increased 4.6% in 1996. In 1996, Conrail opened a new intermodal terminal in Pittsburgh, PA, initiated service from the Ameriport terminal in Philadelphia and reopened its intermodal terminal in Buffalo. Unit Train Service Group ------------------------ In 1996, revenues for this service group increased by approximately 1.1%, despite no increase in traffic volume. Utility coal traffic, which makes up the majority of Conrail's coal business, increased 10.4% with a 13.5% increase in revenue in 1996. Utility coal moves from mines located on and off Conrail's system to electric utilities located on Conrail. Annual traffic volumes fluctuate with the inventory practices of the electric utilities, their use of alternative sources of energy and the weather. The 1996 increase reflects a very cold winter with lower utilization of nuclear units in Conrail's service area. The utility industry is undergoing a process of deregulation which is changing the competitive environment in this key Conrail 7 market. Deregulation will increase the downward pressure on utility coal transportation rates and increase service requirements as utilities strive to reduce their costs to remain competitive. Deregulation, coupled with more stringent sulfur dioxide emission limits, should help Conrail's lower cost and lower sulfur coal sources in southwestern Pennsylvania and northern West Virginia to remain competitive. Shipments of Conrail-served coal from these areas increased 7.0% in 1996 over 1995. Export, industrial/cogeneration and metallurgical coal represent the three remaining segments of Conrail's coal traffic, with export coal volumes being one-third greater than industrial/cogeneration volumes and more than twice as great as metallurgical coal volumes. Export coal traffic volume declined 6% in 1996, after having increased 58% in 1995, due to strong domestic demand for coal which reduced the amount of coal available for the export market. Conrail's traffic volume and revenue for industrial/cogeneration coal was essentially unchanged from 1995. Conrail's traffic volume and revenue from metallurgical coal continues to decline, having decreased 38% in 1996 after a decline of 9% in 1995. Revenue in 1996 was down approximately 44%. The large decline in 1996 volume and revenue was due to the loss of a significant customer in the first half of the year. Sixty percent of this business was recovered in June of 1996, although at significantly lower rates. Conrail serves directly, or via short line switching carriers, many of the nation's largest active integrated steel production facilities. Although a significant portion of the active domestic steel industry is along the Cleveland-Chicago corridor on Conrail's system, the traditional domestic steel industry (using integrated steel production facilities) continues to eliminate inefficient production capacity, which in past years has adversely affected the volume of raw materials for steel production handled by Conrail, and could continue to do so. Volume in this segment is expected to continue to decline in 1997. This trend is continuing as iron ore and coke volume declined 12% in 1996, while revenues declined 3.5%. Automotive Service Group ------------------------ Conrail's Automotive Service Group experienced a slight decrease in volume and revenue in 1996, despite continued slow growth in North American Light Vehicle Production, which increased 1% in 1996 over 1995. As a whole, the Automotive Service Group's revenues decreased 1.1%. Finished vehicles revenue increased 1%, and Autoparts experienced a 4% revenue reduction. 8 General Motors' strike in the Fall of 1996 was the major factor contributing to the group's overall decline in volume and revenue, with a particularly negative impact on the autoparts business. Continued strong production by the foreign-based domestic manufacturers, and the shift of import traffic from East coast ports to cross-country landbridge shipments, resulted in an increase in finished vehicles traffic, despite the mid-year closing of General Motors' Tarrytown, NY plant and Chrysler's Newark, DE plant. 9 Certain Statistics. The following tables provide various ------------------ measurements relating to Conrail's rail operations from 1992 through 1996: PRODUCTIVITY DATA Years ended December 31, ------------------------------------- 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Operating ratio (1)................... 83.8% 87.6% 83.8% 82.9% 84.0% Compensation and benefits ratio....... 32.5% 33.9% 33.7% 35.6% 37.0% Employees (average)................... 21,280 23,510 24,833 25,406 25,380 Gross ton miles per freight employee hour worked (2)(3)................. 4,634 4,352 4,135 3,805 3,746 Gross ton miles per freight train hour (thousands) (2)(3)............ 113.4 118.7 113.0 119.0 122.1 Gross ton miles per locomotive in service (millions) (2)(3)........... 114.2 110.1 104.8 102.4 107.1 Gross ton miles per gallon of fuel (2) 773 774 749 745 770
(1) The 1996 operating ratio (operating expenses as a percent of revenues) includes the effect of a one-time $135 million charge for non-union voluntary separation programs and related losses on certain non-cancelable leases. Without this charge, Conrail's operating ratio would have been 79.7%. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the Consolidated Financial Statements elsewhere in this Annual Report. Without the $285 million special charge in 1995, Conrail's operating ratio would have been 79.9%. See Note 10 to the Consolidated Financial Statements elsewhere in this Annual Report. Without the $84 million special charge in 1994, Conrail's operating ratio would have been 81.5%. See Note 11 to the Consolidated Financial Statements elsewhere in this Annual Report. (2) Excluding subsidiaries, except Consolidated Rail Corporation. (3) Locomotive weight not included. QUALITY OF SERVICE DATA(1) Years ended December 31, ------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Miles of track under slow order....... 12 43 49 62 73 Locomotive out of service ratio....... 9.4% 9.1% 8.7% 8.3% 8.8% Freight cars requiring heavy repairs.. 5.6% 5.6% 4.9% 4.7% 4.0% Reportable train accidents ........... 180 141 160 155 148 Cost of loss and damage incidents as a percent of revenue............ .52% .47% .48% .39% .39%
(1) Excluding subsidiaries, except Consolidated Rail Corporation. 10 COMPETITION. Conrail's rail services face significant ----------- competition from trucks, from other railroads, and from the availability of the same or substitute goods produced at points not served by Conrail. The trucking industry is especially competitive in Conrail's service area because, among other reasons, freight in this region is moved shorter distances than in the West, and the cost characteristics of the railroad and trucking industries generally make trucks more competitive over shorter distances. Price and service competition from trucks, while present for all commodities, is especially evident in the movement of intermodal freight, auto parts, and finished steel. Competition from trucks has been increased by the passage of legislation removing certain barriers to entry into the trucking business and allowing the use of wider, longer, and heavier trailers and multiple trailer combinations. Larger trailers and multiple trailer combinations have substantially increased productivity in the trucking industry, and any future legislation permitting further increases in truck capacity could have a substantial adverse effect on the competitiveness of railroads. Conrail is also subject to competition from other railroads. In most of Conrail's service territory, one or more other railroads can serve customers directly. Elsewhere, the ability to provide joint service with the many short lines whose operations have proliferated throughout the east, and/or in partnership with trucks (for pick-up, delivery, and draying services) allows rail competitors whose tracks do not reach given customers or points to constrain Conrail prices and to compete effectively for movement of the freight. In addition, recent changes in the nature of rail service offerings and in technology have expanded the scope of rail service beyond the physical limitations of lines, which has resulted in increased railroad competition. An important influence on Conrail's competitive position is regulation by the Federal government. Prior to 1980, regulation significantly inhibited the ability of railroads to respond to increasing customer demands, overall logistics needs, and changing transportation markets. The Staggers Rail Act of 1980 ("Staggers Act") substantially reduced the restrictions of regulation. In particular, railroads were given more opportunity to reduce costs and more freedom to adjust prices and service offerings, which enabled them to compete more effectively. Under the Staggers Act, the former Interstate Commerce Commission ("ICC") deregulated a significant amount of railroad traffic, including intermodal and most boxcar traffic, finished vehicles and numerous other commodities moving in other types of equipment. The Staggers Act further enhanced railroads' competitive options by permitting the use of railroad-shipper contracts for traffic still regulated, under which the parties can negotiate customer-specific prices, service standards and terms. These contracts generally 11 provide prices lower than tariff rates and many do not guarantee that any given amount of freight will be shipped during their term. As of December 31, 1996, Conrail was a party to 3,362 such contracts for regulated traffic, which Conrail estimates accounted for 29% of its line-haul revenues in 1996. Although some contracts have a term longer than one year, most contracts are for one year or less. The majority of Conrail's multi-year contracts are subject to cost-related adjustments that provide for flat percentage increases. The cost- based provisions in certain of these contracts are tied to indices formerly under the jurisdiction of the ICC. Action to adjust these indices for productivity gains by the railroads has had an adverse impact on Conrail's ability to recover costs under such contracts, which accounted for less than 2% of Conrail's line haul revenues in 1996. Effective January 1, 1996, pursuant to the ICC Termination Act of 1995, the authority of the ICC to regulate railroads was transferred to the Department of Transportation ("DOT") to be administered by the Surface Transportation Board. The prior regulatory scheme remains substantially intact, with the following significant changes: (1) access to freight railroad tracks by rail operators (both freight and passenger) operating on behalf of local governmental authorities has been eased; (2) some types of abandonments may take appreciably longer; (3) tariffs and most contracts will no longer be filed (other mechanisms are required for advising customers of rates and rate changes); (4) minimum rate levels will no longer be regulated; and (5) DOT will not regulate railroad issuances of securities or assumptions of debt. Other changes will require development of new regulations and/or of a body of precedent before their impact can be fully assessed. PROPERTY. Conrail directly holds no real property. The only -------- significant property holdings are those of Consolidated Rail Corporation. As of December 31, 1996, Consolidated Rail Corporation (excluding its subsidiaries) maintained 16,970 miles of track including track for crossovers, turnouts, second main, other main, passing and switch track, on its 10,543 mile route system. Of total route miles, 8,459 are owned, 87 are leased or operated under contract and 1,997 are operated under trackage rights, including approximately 300 miles operated pursuant to an easement over Amtrak's Northeast Corridor. As of December 31, 1996, virtually all track over which at least 10 million gross tons moved annually (5,923 track miles) was heavy-weight rail of at least 127 pounds per yard, and 100% of such track had continuous welded rail. Continuous welded rail reduces track maintenance costs and, in general, permits trains to travel at higher speeds. As of December 31, 1996, Conrail had 8,804 miles of continuous welded rail on track it maintained. 12 As of December 31, 1996, 83% of the 3,814 track miles maintained for fast freight traffic had a maximum operating speed of 50 MPH or more, and 70% had a maximum operating speed of at least 60 MPH. As of December 31, 1996, approximately 96% of the track over which at least 10 million gross tons moved annually was governed by automatic signal systems. In all, as of December 31, 1996, 7,656 miles of track were controlled by automatic signal systems. Conrail is engaged in an ongoing process to identify certain under-utilized rail lines and other underperforming assets to avoid future capital costs and to improve its return on assets. Conrail recorded a $285 million charge in 1995 to cover the expected losses upon disposition of approximately 1,800 miles of lines and other assets not required to support Conrail's service. See Note 10 to the Consolidated Financial Statements elsewhere in this Annual Report. The following table indicates the number of locomotives and freight cars owned (or subject to capitalized leases) and includes 21,435 freight cars used by Conrail under operating leases. These total figures are as of December 31, 1996, and include stored or surplus units, but exclude subsidiaries other than Consolidated Rail Corporation, which have an immaterial number of locomotives and freight cars: LOCOMOTIVES AND FREIGHT CARS Number of Units ---------------------- Total Stored(1) ------ --------- LOCOMOTIVES........................ 2,006 122 ------ ----- Road............................. 1,834 78 Switching........................ 172 44 Total Surplus(2) ------ ---------- FREIGHT CARS....................... 45,988 6,333 ------ ----- Box.............................. 7,855 1,661 Covered Hopper................... 3,400 315 Open Hopper...................... 11,464 3,265 Gondola.......................... 4,459 638 Coil Steel....................... 11,294 0 Multi-Level...................... 6,005 165 Flat and Other................... 1,511 289
- ----------------- (1) Serviceable locomotives not required for current operations on December 31, 1996. (2) Freight cars which did not move during the seven days immediately preceding December 31, 1996 and which were available for loading. The number of surplus freight cars during 1996 fluctuated due to variations in traffic and fleet adjustments. 13 On December 31, 1996, the average age of Conrail's road locomotives, not including stored-serviceable units, was 11.1 years. The average age of the total locomotive fleet was 15.6 years, and the average age of the total freight car fleet was 22 years. CAPITAL EXPENDITURES. The following tables provide information -------------------- concerning capital expenditures from 1992 through 1996: CAPITAL EXPENDITURES (In Millions) Years ended December 31, ------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Track rehabilitation...... $203 $206 $221 $207 $275 Rolling stock and transportation equipment.. 139 170 139 314 57 Other(1).................. 136 118 148 129 159 ---- ---- ---- ---- ---- Total..................... $478 $494 $508 $650 $491 ==== ==== ==== ==== ==== Subsidiaries of Consolidated Rail Corporation (included in Total).................... $ 5 $ 4 $ 3 $ 4 $ 12
(1) Includes communications and signals, bridges and tunnels, computers and telecommunications, and other improvements. TRACK REHABILITATION Years ended December 31, ____________________________________ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Track miles surfaced...... 4,685 3,162 2,749 3,154 3,671 Track miles of rail laid.. 241 255 207 201 312 Ties installed (millions). 0.9 1.1 1.1 1.0 1.4
EMPLOYEES AND LABOR. Including subsidiaries, Conrail's average ------------------- number of employees for 1996 was 21,280. Consolidated Rail Corporation (excluding subsidiaries) averaged 20,761 employees in 1996, 87% of whom are represented by a total of 14 labor organizations and are covered by 22 separate collective bargaining agreements. Conrail has concluded collective bargaining agreements with organizations representing approximately 66% of its total employees. These agreements contain moratorium clauses providing that they may 14 not be reopened prior to January 1, 2000. However, certain issues remain outstanding with one of the above-mentioned organizations, the Transportation Communications International Union, representing approximately 2,250 Conrail employees. The parties are currently in mediation under the auspices of the National Mediation Board (NMB). In addition, the United Transportation Union, which represents approximately 4,100 Conrail employees, contends that certain issues remain outstanding. The Company disputes this contention and the parties are in mediation. Conrail is currently in negotiations with organizations representing approximately 22% of its employees. The negotiations with the largest of these organizations, a coalition of the Brotherhood of Railroad Carmen and the Transport Workers Union, are currently in mediation. The outcome of these negotiations cannot be predicted at this time. If the NMB eventually concludes that its efforts to resolve the dispute will not be successful, it will proffer binding arbitration. If either side refuses to arbitrate, there is a 30-day "cooling-off" period during which the NMB may make a finding that the dispute threatens "substantially to interrupt interstate commerce to a degree such as to deprive any section of the country of essential transportation service." Such finding is then presented to the President of the United States who has the option of appointing an Emergency Board to investigate the dispute. If the President does not appoint an Emergency Board, the parties are free to resort to self help at the conclusion of the above-mentioned cooling-off period. If the President does appoint an Emergency Board, the Board has 30 days to investigate the dispute and report its findings. The Emergency Board's findings are non-binding. Although the parties must maintain the status quo for a period of 30 days following the issuance of the Board's report, any party which rejects the Board's findings may thereafter resort to self help. In the event of a strike, Congress has the power to resolve the dispute by enacting legislation, including legislation imposing a labor contract in accordance with the findings of the Emergency Board. In Conrail's negotiations with four other organizations representing approximately 4% of its employees, the parties have not invoked mediation. Under a decision by the United States Supreme Court on April 28, 1987, rail unions have the right, under the Railway Labor Act and other federal laws, to engage in secondary picketing against any railroad. As a result, a labor dispute between one railroad and a union can cause a strike to spread to any other railroad, or to all other railroads, whether or not the union has a collective bargaining agreement or a dispute with such other railroads. There is also the potential that railroads may be subject to secondary picketing in the event of a strike in the airline industry, which, like the railroad industry, is subject to the Railway Labor Act. 15 Should Conrail or its subsidiaries be the subject of a strike or secondary picketing, Conrail's rail operations could be stopped or severely curtailed. GOVERNMENT REGULATION. Conrail is subject to environmental, --------------------- safety, and other regulations generally applicable to all businesses, and its rail operations are also regulated by the DOT, the Federal Railroad Administration ("FRA"), state Departments of Transportation and some state and local regulatory agencies. The DOT has jurisdiction over, among other things, rates charged for certain traffic movements, service levels and freight car rents. It also has jurisdiction over the situations and terms under which one railroad may gain access to another railroad's traffic or facilities, extension or abandonment of rail lines, consolidation, merger, or acquisition of control of rail common carriers and of other carriers by rail common carriers, and labor protection provisions in connection with the foregoing. Under the Staggers Act, federal regulation of rates and services was reduced. The regulatory scheme, now administered by the Surface Transportation Board, continues the ICC's prior deregulation of rates for intermodal traffic, most boxcar traffic and a series of miscellaneous commodities, including steel and automobiles. In addition, railroads are free to negotiate contracts with shippers setting rates, service standards and the terms for movements of other kinds of traffic. As a result, railroads have greater flexibility in adjusting rates and services to meet revenue needs and competitive conditions. For further discussion of the abolition of the ICC and the effect of the transfer of its regulatory authority to DOT, see "Competition." The FRA has jurisdiction over safety and railroad equipment standards. Conrail's rail operations are also subject to a variety of governmental laws and regulations relating to the protection of the environment. In addition to being involved as a potentially responsible party at numerous Superfund sites (see Item 3 - "Legal Proceedings"), Consolidated Rail Corporation is subject to increasing regulation of its transportation and handling of certain hazardous and non-hazardous commodities and waste which has resulted in additional administrative and operating costs. Also, on February 11, 1997, the United States Environmental Protection Agency published in the Federal Register Proposed Rule "Emission Standards for Locomotives and Locomotive Engines". According to the Proposed Rule, locomotive engines (other than those defined as new or remanufactured) may be regulated by the states. Additional investments will likely be required to bring other than new locomotives into compliance, although the timing and amount of the investments will not be determinable until the Rule is adopted. Compliance with existing laws and 16 regulations relating to the protection of the environment has not had a material effect on Conrail's capital expenditures, earnings or competitive condition. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters," and Note 13 to the Consolidated Financial Statements included elsewhere in this Annual Report.) Item 3. Legal Proceedings. References to Conrail in "Item 3. Legal - ------ ----------------- Proceedings" shall denote Consolidated Rail Corporation unless otherwise expressly noted. Occupational Disease Litigation. Conrail has been named as a ------------------------------- defendant in lawsuits filed pursuant to the provisions of the Federal Employers' Liability Act ("FELA") by persons alleging (1) personal injury or death caused by exposure to asbestos in connection with railroad employment; (2) complete or partial loss of hearing caused by exposure to excessive noise in the course of railroad employment; (3) repetitive motion injury in connection with railroad employment; and (4) personal injury or death caused by exposure to deleterious substances (mixed dusts, fumes, chemicals, etc.). As of December 31, 1996, Conrail was a defendant in 559 pending asbestos suits, 545 pending hearing loss suits, 1,318 repetitive motion injury suits and 374 pending deleterious substance suits, and had notice of 1,293 potential asbestosis claims, 2,734 potential hearing loss claims, 2,112 potential repetitive motion injury claims and 56 deleterious substance claims. Conrail expects to be named as a defendant in a significant number of occupational disease cases in the future. Norfolk Southern Corp., et al. v. Conrail Inc. On October 23, 1996, --------------------------------------------- Norfolk filed a Complaint for Declaratory and Injunctive Relief (as amended on October 30, 1996, the "Complaint"), with respect to the transactions contemplated by the Merger Agreement, in the United States District Court for the Eastern District of Pennsylvania. Norfolk named CSX, Conrail and certain directors of Conrail as defendants. The Complaint in its currently amended form alleges, among other things, violations of: (1) fiduciary duties by the Conrail Board; (2) Conrail's Articles of Incorporation and By-Laws; and (3) Pennsylvania statutory law. In addition, Norfolk alleges that the CSX tender offer is coercive and unfair to Conrail shareholders; that certain provisions in the Merger Agreement prohibiting Conrail from changing its recommendation of the transaction or agreeing to a competing transaction, is ultra vires and a breach of the Conrail Board's fiduciary duties; and that Conrail and CSX violated disclosure provisions of the federal securities laws relating to tender offers and proxy solicitations through the misrepresentation and omission of material facts. 17 Norfolk has requested preliminary and permanent injunctive and declaratory relief including, without limitation, an injunction to prevent defendants from: (1) continuing a tender offer for the Conrail shares, (2) taking any action to enforce certain provisions of the Merger Agreement, and (3) failing to take actions necessary to exempt Norfolk's proposal to acquire Conrail from certain provisions of Pennsylvania statutory law. Conrail believes that the claims set forth by Norfolk are entirely without merit, and on November 12, 1996, Conrail filed a motion to dismiss Norfolk's complaint in its entirety. The Federal District Court and the Third Circuit Court of Appeals have denied Norfolk's requests for the preliminary injunctions. Punitive Damage Awards in Ohio Crossing Accident Cases. ------------------------------------------------------ Consolidated Rail Corporation has recently received adverse jury verdicts in three separate crossing accident cases in Ohio: Garrett and Gollihue v. Consolidated Rail Corp.; Wightman v. Consolidated Rail Corp.; and Moore, et al. v. Consolidated Rail Corp. In each case, the jury awarded substantial punitive damages in connection with property damage resulting from the accidents. Collectively, the total punitive damage awards total approximately $30 million, based on property damage that totals less than $5,000. Conrail believes that, ultimately, these awards should not be sustainable due to their failure to bear a reasonable relationship to the amount of physical property damage involved, and has appealed. Ohio law prohibits the award of punitive damages in connection with a wrongful death action. Structure and Crossing Removal Disputes in Connection With Lines ---------------------------------------------------------------- Abandoned Under NERSA. Conrail may be responsible, in whole or in - --------------------- part, for the costs of removal of several hundred overhead and underpass crossings located on railroad lines it has abandoned under NERSA (and, in some instances, responsible for the removal of the lines of railroad themselves as well as appurtenant structures). Conrail's liability for the removal of such lines, crossings and structures will be determined on a case-by-case basis, and is dependent upon the circumstances under which each was constructed, the nature of Conrail's property interest with respect to such structures, the existence of contracts pertaining to such crossings and structures, and applicable federal and state law. Some states have imposed upon Conrail the obligation to remove certain crossings. 18 Engelhart v. Conrail. In connection with the Special Voluntary -------------------- Retirement Program offered to certain employees in late 1989 and early 1990, Conrail used surplus funds in its over-funded Supplemental Pension Plan ("Plan") to fund certain aspects of that program. In December 1992, certain former Conrail employees brought suit challenging the use of surplus Plan funds (a) to pay administrative Plan expenses previously paid by Conrail, (b) to fund the Special Voluntary Retirement Program, and (c) to pay life insurance and medical insurance premiums of former employees as improper and unlawful, and alleging that employees who have made contributions to the Plan or its predecessor plans are entitled to share in the surplus assets of the Plan. In August, 1993, the court granted Conrail's Motion to Dismiss the majority of the counts in the complaint, but refused to dismiss the issue of Conrail's use of Plan assets to pay administrative expenses of the Plan, which are estimated to be approximately $40 million at December 31, 1996. Conrail believes that the use of surplus Plan assets for this purpose was lawful and proper. On September 16, 1996, the Judge granted Conrail's motion for summary judgment on all of the claims except for one individual participant claim. Plaintiffs have appealed those claims as to which they received an adverse ruling. Environmental Litigation. Conrail is subject to various federal, ------------------------ state and local laws and regulations regarding environmental matters. In certain instances, Conrail has received notices of violations of such laws and regulations and either has taken or plans to take appropriate steps to address the problems cited or to contest the allegations of violation. As of December 31, 1996, Conrail had received inquiries from governmental agencies or had been identified, together with other companies, as a potentially responsible party for cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 135 locations throughout the country. However, Conrail, through its own investigations and assessments, believes it may have some potential responsibility at only 61 of these sites. The amounts Conrail has accrued with respect to the proceedings listed below are included in its $55 million accrual for estimated future environmental expenses. (See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters" and Note 13 to the Consolidated Financial Statements included elsewhere in this Annual Report.) The significant environmental proceedings, including Superfund sites, are discussed below. United States v. Southeastern Pennsylvania Transportation --------------------------------------------------------- Authority ("SEPTA"), National Railroad Passenger Corporation - ------------------------------------------------------------ ("Amtrak"), and Consolidated Rail Corporation. In March 1986, the - --------------------------------------------- United States Environmental Protection Agency ("EPA") filed an action in the United States District Court for the Eastern District of Pennsylvania for cost recovery, injunctive relief, and a declaratory judgment against the Company, Southeastern Pennsylvania Transportation Authority ("SEPTA") and National Railroad Passenger Corp. ("Amtrak") 19 under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA" or "Superfund Law"), as amended. In 1990, the Pennsylvania Department of Environmental Resources intervened as a plaintiff. Suit is based on the release or threatened release at the Paoli Railroad Yard, Paoli, Chester County, Pennsylvania, of polychlorinated biphenyls ("PCBs"), a listed hazardous substance under CERCLA. Pursuant to a series of partial preliminary consent decrees, defendants have performed a series of cleanup actions both on and off- site and have conducted a Remedial Investigation/Feasibility Study ("RI/FS"). Those costs have been shared equally among the three defendants but are subject to reallocation. The estimated cost of the Company's portion of a remedy proposed by the parties was included in the 1991 special charge and subsequent adjustments to accruals. EPA and the railroad parties have entered into a tentative settlement agreement regarding EPA's claim for past costs, as well as federal and state natural resource damages. As part of the settlement, Amtrak, SEPTA and Conrail have committed to perform the on-site remedy for the rail yard. United States v. Conrail. The EPA has listed Conrail's Elkhart ------------------------ Yard on the National Priorities List. The EPA contends that chemicals have migrated from the yard and contaminated drinking wells in the area. On February 14, 1990, EPA filed a civil action against Conrail in the U.S. District Court for the Northern District of Indiana seeking recovery of approximately $345,000 for costs incurred in protecting the water supply. In addition, EPA seeks a declaratory judgment against Conrail for all future costs incurred in responding to the release or threatened release of hazardous substances from the site. Conrail believes it is not the sole source and may not be a contributing source to the contamination alleged by EPA. Conrail filed a third-party action joining Penn Central as a defendant. Conrail and Penn Central have negotiated an interim cost sharing arrangement for the cost of implementing the EPA's 1992 interim record of decision, which is substantially complete. On May 15, 1995 EPA issued an Administrative Order to Conrail and Penn Central requiring the extension of public water hook-up to an additional 700 - 1,000 residences and businesses in the site area. Conrail and Penn Central have agreed that each company would comply with the Order. The cost for providing public water to the remaining residences is estimated to be in excess of $6 million, which will be apportioned between Penn Central and Conrail according to the interim cost sharing arrangement that has been negotiated. Conrail and Penn Central are attempting to negotiate a final settlement with EPA of the matter. United States v. Consolidated Rail Corp., et al (Berks Superfund ---------------------------------------------------------------- Site). Conrail has been identified as the fifth largest generator of - ----- 20 waste oil at the Berks Associates Superfund site in Douglasville, Pennsylvania. In addition, Conrail has become aware that it and its predecessor, Penn Central, owned a small portion of land that was leased to the operator of the Berks site. As such, Conrail's liability could increase due to its questionable status as both an owner and a generator. In August 1991, the EPA issued an administrative order against Conrail and thirty-five other entities mandating the implementation of an approximately $2 million partial remedy and filed a complaint in the U.S. District Court for the recovery of approximately $8 million in costs incurred by the government. The parties have negotiated an administrative order with the EPA and have filed an answer to the civil action. A group of potentially responsible parties (including Conrail) undertook compliance with the administrative order. Conrail and the 35 other defendants have filed a third-party complaint against approximately 630 entities seeking contribution for the costs of the remedy and government costs. Conrail, along with other defendants, is negotiating a settlement with the EPA. On June 30, 1993, the EPA issued another administrative order against Conrail and 33 other entities, mandating the remediation of the southern portion of the site. The EPA has requested a feasibility study for the implementation of a less expensive remedy for the southern portion of the site, which remedy would range from approximately $10-$12 million. Conrail's share of such a remedy has not yet been determined. In addition, the PADER has filed a complaint for the recovery of natural resource damages. United Scrap Lead - Troy, OH. Conrail is a potentially ---------------------------- responsible party, along with more than 50 other parties, in the United Scrap Lead federal Superfund action in Troy, Ohio, where substantial quantities of batteries were disposed of over a period of several years. EPA sued Conrail and nine other parties in August 1991 for the recovery of approximately $2,000,000 in past costs. Conrail and other PRP's have commissioned treatability studies. The parties are negotiating over the nature of the remediation to be undertaken at the site. EPA has selected a preferred alternative with an estimated total cost of $33 million, which the PRP group is challenging. Conrail's estimated share of any remedial costs is 8%. Commonwealth of Massachusetts v. Conrail (Locomotive Emission). -------------------------------------------------------------- On April 21, 1992, the Massachusetts Attorney General filed suit in state court alleging Conrail's violation of the Massachusetts Clean Air Act by allowing diesel engines to idle unnecessarily and/or in excess of thirty (30) minutes. On May 4, 1992, the court entered a preliminary injunction, the terms of which are substantially those embodied in Conrail's existing idling policy. The Attorney General has filed a complaint alleging Conrail's violation of the preliminary injunction. On February 2, 1993, the parties entered into a partial settlement agreement; however, the Attorney General has alleged that Conrail has failed to comply with certain provisions of the 21 settlement. Conrail continues to attempt to settle the matter with the Attorney General's office. New York State Department of Environmental Conservation Order On ---------------------------------------------------------------- Consent (Selkirk Yard). On July 31, 1996, the New York State - ---------------------- Department of Environmental Conservation (NYSDEC) served Conrail with a revised draft Order on Consent requiring the payment of a penalty of $250,000 in connection with its inspection of Selkirk Yard. A revised Order was received by Conrail on August 6, 1996, requiring the payment of fines in connection with the 1991 inspection and mandates assessment and remediation of the facility. Conrail is negotiating the terms of the order with NYSDEC. New York State Department of Environmental Conservation Order on ---------------------------------------------------------------- Consent (DeWitt Yard). On November 3, 1994, NYSDEC served Conrail - --------------------- with a Consent Order in connection with the alleged discharge of waste water from DeWitt Yard, Onondaga County, New York into New York state waters. On June 17, 1996, a revised Consent Order was issued to Conrail which added American Financial Group (Penn Central Corp.) as a named responsible party for the payment of penalties and preparation of a Site Assessment and Remediation Plan. Conrail and American Financial Group are negotiating the terms of the Order with NYSDEC. In the Matter of Conrail, Ashtabula, OH. On September 21, 1994, --------------------------------------- the EPA filed an Administrative Complaint against Conrail seeking civil penalties of $125,000 for certain alleged violations of its National Pollutants Discharge Emissions System permit. On November 27, 1995, EPA filed a separate Administrative Complaint seeking civil penalties for alleged violations of regulatory requirements pertaining to on-site petroleum storage. Conrail has reached agreement with EPA to jointly settle these matters for $150,000. Conway Yard, Pittsburgh. In 1991, Conrail received Notices of ----------------------- Violation ("NOV") from the Pennsylvania DER ("PADER") alleging violations of the Clean Streams Act for discharges of oil into the Ohio River. In September 1993, PADER sent to Conrail a draft Consent Order and Agreement requiring a comprehensive site remediation for soil, ground water, surface waters and sediments at the Conway Railyard and requiring the payment of civil fines in connection with violations at the yard. Conrail and PADER continue to negotiate the extent of the investigation and remediation to be undertaken at the yard. Other. In addition to the above proceedings, Conrail has been ----- named in various legal proceedings arising out of its activities as an employer and as an operator of a freight railroad, including personal injury actions brought by its employees under FELA, as well as administrative proceedings with and investigation by government agencies. 22 In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly in certain matters described above in which substantial damages are or may be sought, Conrail cannot state what the eventual outcomes of such legal proceedings will be. Certain of these matters, if determined adversely to Conrail, could result in the imposition of substantial damage awards against, or increased costs to, Conrail that could have a material adverse effect on Conrail's results of operations and financial position. Conrail's management believes, however, based on current knowledge, that such legal proceedings will not have a material adverse effect on Conrail's financial position. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of 1996. Executive Officers of the Registrant. - ------------------------------------ Conrail's officers are elected annually by the Board of Directors at its first meeting held after the meeting of shareholders at which directors are elected, and they hold office until their successors are elected. There are no family relationships among the officers or directors, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, as of March 1, 1997, relating to the executive officers of Conrail and Consolidated Rail Corporation. An asterisk (*) indicates that such individual is an officer of Consolidated Rail Corporation only: Name, Age, Present Position Business Experience During Past 5 - --------------------------- ------------------------------------ Years ----- David M. LeVan, 51, Chairman, Present position since May 1996. President and Chief Executive Served as President and Chief Officer Executive Officer between March 1995 and May 1996. Served as President and Chief Operating Officer between September 1994 and March 1995. Served as Executive Vice President between November 1993 and September 1994. Served as Senior Vice President - Operations between July 1992 and November 1993. Served as Senior Vice President-Operating Systems and Strategies between November 1991 and July 1992. 23 Cynthia A. Archer, 43, Senior Present position since May 1995. Vice President - Intermodal Served as General Manager - Service Group Transportation and Customer Service of the Harrisburg Division between February 1994 and May 1995. Served as Assistant Vice President - Food and Agriculture between September 1993 and January 1994. Served as Director - Intermodal Business Development between September 1991 and August 1993. Ronald J. Conway, 53, Senior Present position since November Vice President - Operations 1994. Served as Vice President - Operations between September 1994 and November 1994. Served as Vice President - Transportation between July 1994 and September 1994. Served as Vice President - Intermodal Service Group between November 1993 and July 1994. Served as Assistant Vice President - Petrochemicals and Minerals between April 1992 and November 1993. Timothy P. Dwyer, 47, Senior Present position since November Vice President - Unit Train 1994. Served as Vice President - Service Group Unit Train Service Group between November 1993 and November 1994. Served as General Manager - Philadelphia Division between April 1992 and November 1993. John A. McKelvey, 45, Senior Present position since February Vice President - Finance 1997. Served as Vice President- Service Delivery between January 1996 and February 1997. Served as Vice President - Materials and Purchasing between April 1994 and January 1996. Served as Vice President - Controller between May 1993 and March 1994. Served as Vice President - Treasurer between 1988 and May 1993. 24 Frank H. Nichols, 50, Senior Present position since May 1995. Vice President - Served as Vice President - Human Organizational Performance Resources between February 1993 and May 1995. Served as Assistant Vice President - Finance between November 1988 and February 1993. Timothy T. O'Toole, 41, Senior Present position since February Vice President - Law and 1997. Served as Senior Vice Government Affairs President-Finance between April 1996 and February 1997. Served as Vice President and Treasurer between April 1994 and April 1996. Served as Vice President and General Counsel between May 1989 and April 1994. Lester M. Passa, 43, Senior Present position since February Vice President - Automotive 1997. Served as Vice President- Service Group Logistics and Corporate Strategy between March 1995 and February 1997. Served as Assistant Vice President - Corporate Strategy between February 1993 and March 1995. Served as Director - Intermodal Planning between October 1991 and January 1993. John P. Sammon, 46, Senior Vice Present position since November President - CORE Service 1994. Served as Vice President - Group Intermodal between July 1994 and November 1994. Served as Assistant Vice President- Intermodal between January 1988 and July 1994. George P. Turner, 55, Senior Present position since February Vice President - Merger 1997. Served as Senior Vice Transition President-Automotive Service Group between November 1994 and February 1997. Served as Vice President - Automotive Service Group between November 1993 and November 1994. Served as Assistant Vice President - Automotive between April 1992 and November 1993. 25 Bruce B. Wilson, 61, Senior Present position since February Vice President - Merger 1997. Served as Senior Vice President - Law between April 1987 and February 1997. Lucy S.L. Amerman, 46, Vice Present position since July 1994. President - Risk Management* Served as Assistant Vice President - Claims and Litigation between April 1994 and July 1994. Served as General Counsel - Litigation between March 1990 and March 1994. Dennis A. Arouca, 45, Vice Present position since May 1994. President - Labor Relations* Served as Partner in the law firm of Pepper Hamilton & Scheetz between February 1986 and May 1994. Gerald T. Gates, 43, Vice Present position since January 1996. President - Customer Support* Served as Vice President - Transportation between November 1994 and January 1996. Served as Vice President - Mechanical between December 1993 and November 1994. Served as Assistant Vice President - Operations Planning and Administration between July 1992 and November 1993. Served as General Manager - Indianapolis Division between September 1990 and July 1992. Hugh J. Kiley, 44, Vice Present position since January 1996. President - Service Design Served as Assistant Vice President - & Planning* Performance and Process Management between November 1994 and January 1996. Served as Assistant Vice President - Program Management between May 1994 and November 1994. Served as General Manager - National Customer Service Center between November 1990 and May 1994. Craig R. MacQueen, 44, Vice Present position since June 1995. President - Corporate Served as Assistant Vice President - Communications* Public Affairs between September 1992 and June 1995. Served as Executive Director - Public Affairs between November 1990 and August 1992. 26 Donald W. Mattson, 54, Vice Present position since April 1994. President - Controller Served as Vice President - Treasurer between May 1993 and April 1994. Served as Vice President - Controller between August 1988 and May 1993. Thomas J. McFadden, 42, Present position since May 1996. Treasurer* Served as Assistant Treasurer - Investor Relations and Finance between June 1994 and May 1996. Served as Director - Project Financing between July 1990 and June 1994. James D. McGeehan, 48, Present position since May 1996. Corporate Secretary Served as Assistant Corporate Secretary between December 1980 and May 1996. William B. Newman, Jr., 46, Present position since 1981. Vice President and Washington Counsel* Albert M. Polinsky, 50, Vice Present position since April 1994. President - Information Served as Assistant Vice President - Systems* Program Management between December 1993 and March 1994. Served as Assistant Vice President - Marketing Services between April 1992 and December 1993. John M. Samuels, 53, Vice Present position since January 1996. President - Operating Assets* Served as Vice President - Mechanical between November 1994 and January 1996. Served as Vice President - Engineering between April 1992 and November 1994. Gary M. Spiegel, 46, Vice Present position since February President - Service Delivery* 1997. Served as Assistant-Vice President - Train Operations between August 1994 and February 1997. Served as General Manager- Transportation and Customer Service between April 1992 and August 1994. 27 PART II Item 5. Market for Registrant's Common Equity - ------ ------------------------------------- and Related Stockholder Matters. ------------------------------- Conrail's common stock is listed for trading on the New York Stock Exchange and the Philadelphia Stock Exchange. The number of holders of record of Conrail common stock on March 1, 1997 was 18,377. For the high and low sales prices of Conrail's common stock on the New York Stock Exchange and the frequency and amount of cash dividends for 1996 and 1995, see Note 14 to the Consolidated Financial Statements included elsewhere in this Annual Report. Item 6. Selected Financial Data. - ------ ----------------------- The selected consolidated financial data included in the following tables have been derived from Conrail's Consolidated Financial Statements. The consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996 and the consolidated balance sheets as of December 31, 1996 and 1995 appear elsewhere in this Annual Report and have been audited by the Company's independent accountants, as indicated in their report thereon. For purposes of the following selected consolidated financial data, references to Conrail reflect the consolidated entities of Consolidated Rail Corporation for periods prior to July 1, 1993 and Conrail Inc. for subsequent periods. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related notes and other financial information included elsewhere in this Annual Report. 28 Years ended December 31, ----------------------------------------- 1996 1995 1994 1993(4) 1992 ---- ---- ---- ---- ---- (In Millions Except Per Share Amounts) STATEMENT OF INCOME DATA: Revenues $3,714 $3,686 $3,733 $3,453 $3,345 Operating expenses (before one-time charges)(1) 2,978 2,945 3,043 2,862 2,811 One-time charges (1),(2) and (3) 135 285 84 ------ ------ ------ ------ ------ Income from operations 601 456 606 591 534 Interest expense (182) (194) (192) (185) (172) Loss on disposition of subsidiary (5) (80) Other income, net 112 130 118 114 98 ------ ------ ------ ------ ------ Income before income taxes and the cumulative effect of changes in accounting principles 531 392 532 440 460 Income taxes (2) 189 128 208 206 178 ------ ------ ------ ------ ------ Income before the cumulative effect of changes in accounting principles 342 264 324 234 282 Cumulative effect of changes in accounting principles (74) ------ ------ ------ ------ ------ Net income $ 342 $ 264 $ 324 $ 160 $ 282 ====== ====== ====== ====== ====== Income per common share before the cumulative effect of changes in accounting principles Primary $ 4.25 $ 3.19 $ 3.90 $ 2.74 $ 3.28 Fully diluted 3.89 2.94 3.56 2.51 2.99 Cumulative effect of changes in accounting principles Primary (.92) Fully diluted (.81) Net income per common share (6) Primary 4.25 3.19 3.90 1.82 3.28 Fully diluted 3.89 2.94 3.56 1.70 2.99 Dividends per common share (6) 1.80 1.60 1.40 1.20 1.00
Years ended December 31, ---------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In Millions) BALANCE SHEET DATA: Cash, cash equivalents and temporary cash investments $ 30 $ 73 $ 43 $ 38 $ 40 Working capital (deficit) 25 36 (76) (13) (489) Total assets 8,402 8,424 8,322 7,948 7,315 Other noncurrent liabilities (net of current maturities of debt) 2,379 2,444 2,480 2,433 2,075 Deferred income taxes 1,478 1,393 1,203 1,081 644 Special income tax obligation 346 440 513 575 569 Stockholders' equity 3,107 2,977 2,925 2,784 2,748
29 NOTES TO SELECTED FINANCIAL DATA 1. Included in 1996 operating expenses is a charge of $135 million (before tax benefits of $52 million) consisting of $102 million in termination benefits to be paid to non-union employees participating in the voluntary retirement and separation programs ("voluntary separation programs") and losses of $33 million on non-cancelable leases for office space no longer required as a result of the reduction in the Company's workforce. Over 840 applications were accepted from eligible employees under both programs. Approximately $90 million of the termination benefits are being paid from the Company's overfunded pension plan. Also included in 1996 operating expenses are expenses of $16 million (before tax benefits of $6 million) incurred by Conrail as a result of the proposed merger with CSX Corporation. Without these items, net income for 1996 would have been $435 million ($5.45 per share, primary and $4.96 per share, fully diluted). (See Notes 3 and 2, respectively to the Consolidated Financial Statements included elsewhere in this Annual Report.) 2. Included in 1995 operating expenses is an asset disposition charge of $285 million, which reduced net income by $176 million. The asset disposition charge resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically support current and expected operations. The Company identified and has committed to sell 1,800 miles of rail lines that are expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value. Also, in 1995, as a result of a decrease in a state income tax rate enacted during the second quarter of 1995, income tax expense was reduced by $21 million representing the effect of adjustment for the rate decrease as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Without these items, net income for 1995 would have been $419 million ($5.16 per share, primary and $4.69 per share, fully diluted). (See Notes 10 and 7, respectively, to the Consolidated Financial Statements included elsewhere in this Annual Report.) 3. In 1994, Conrail recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary early retirement program and related costs. The majority of the cost of the early retirement program is being paid from Conrail's overfunded pension plan. Without this one-time charge, net income would have been $375 million ($4.54 per share, primary and $4.13 per share, fully diluted). (See Note 11 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 4. Conrail adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and SFAS 109 effective January 1, 1993. As a result, in the first quarter of 1993, Conrail recorded cumulative after-tax charges of $22 million and $52 million, respectively. In addition, as a result of the increase in the federal corporate income tax rate from 34% to 35%, effective January 1, 1993, income tax expense includes $34 million of a retroactive nature, primarily for the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required under SFAS 109. 5. In 1993, Conrail committed to a plan for disposition of its investment in Concord Resources Group, Inc. ("Concord"). Pursuant to this plan, Conrail recorded an estimated loss of $80 million for the disposition of its investment, including $19 million for operating losses expected to be incurred during the phase-out period and disposition costs. Conrail also recorded estimated federal tax benefits of $30 million relating to the disposition. In June 1995, the Company completed the disposition of the last two major waste disposal facilities of Concord. The disposition had no financial statement impact. 6. Net income and dividends per common share include the effects of a 1992 two-for-one common stock split. The calculations of income per common share for 1996, 1995 and 1994 are shown in Exhibit 11, Part IV included elsewhere in this Annual Report. 30 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. ----------------------------------- Overview - -------- Conrail's net income for 1996 was $342 million, compared with $264 million for 1995 and $324 million for 1994. Results for 1996 include a one-time charge of $83 million (net of $52 million of tax benefits) related to voluntary separation programs and related costs and merger-related expenses of $10 million (net of $6 million of tax benefits) incurred in connection with the proposed merger with CSX Corporation ("CSX") (see Notes 3 and 2, respectively, to the Consolidated Financial Statements included elsewhere in this Annual Report). Without these charges, net income for 1996 would have been $435 million. The results for 1995 include the effects of a $285 million asset disposition charge ($176 million after income taxes) and the recognition of a $21 million reduction in income taxes related to a decrease in a state tax rate (see Notes 10 and 7, respectively, to the Consolidated Financial Statements included elsewhere in this Annual Report). Results for 1994 include a one-time charge of $51 million (net of tax benefits of $33 million) for a non-union early retirement program and related costs (see Note 11 to the Consolidated Financial Statements included elsewhere in this Annual Report). Absent the one-time items, Conrail's net income for 1995 and 1994 would have been $419 million and $375 million, respectively. Traffic volumes and operating revenues increased 2.1% and .8%, respectively, in 1996 compared with 1995. Lower than anticipated revenue growth and higher than expected operating expenses resulted in an operating ratio (operating expenses as a percent of revenues) of 83.8%. Excluding the voluntary separation programs charge and merger-related costs, Conrail's operating ratio was 79.7% compared with the Company's 1996 operating ratio goal of 77.5%. The difficult operating conditions caused by severe weather experienced over most of the Company's service area during the first quarter of 1996, higher fuel prices and declines in equipment utilization all contributed to the increase in operating expenses in 1996 as compared with those that were planned for 1996. The 1995 operating ratio, excluding the asset disposition charge, was 79.9%. For 1995 versus 1994, traffic volume and operating revenues decreased 5.4% and 1.3%, respectively, while operating expenses, excluding one-time charges, decreased 3.2%. Proposed Merger - ---------------- On October 14, 1996, Conrail, CSX Corporation ("CSX") and a subsidiary of CSX entered into an Agreement and Plan of Merger (as amended, the "Merger 31 Agreement"), pursuant to which Conrail was to be merged with a subsidiary of CSX in a merger-of-equals transaction. On October 24, 1996, Norfolk Southern Corporation ("Norfolk") commenced an unsolicited tender offer for all outstanding Conrail voting stock at $100 per share in cash. Norfolk has since increased its offer to $115 per share in cash. On November 20, 1996, CSX concluded its first tender offer and purchased approximately 19.9% of Conrail's outstanding shares for $110 per share. On December 18, 1996, CSX and Conrail entered into a second amendment to the Merger Agreement (the "Second Amendment") that would, among other things, (i) increase the consideration payable pursuant to the merger, (ii) accelerate the consummation of the merger to immediately following the receipt of applicable shareholder approvals and prior to the Surface Transportation Board ("STB") approval and (iii) extend until December 31, 1998 an exclusivity period during which the Conrail Board agreed not to withdraw or modify its recommendations of the CSX transactions, approve or recommend any takeover proposal or cause Conrail to enter into any agreement related to any takeover proposal. On January 13, 1997, Norfolk issued a press release announcing that it would offer to purchase shares representing 9.9% of the outstanding Shares for $115 per share, in the event that Conrail shareholders did not approve a proposal to opt out of a Pennsylvania statute (the "Opt Out Proposal") at the meeting of shareholders to be held on January 17, 1997 (the "Special Shareholders Meeting"). On January 17, 1997, Conrail shareholders voted at the Special Shareholders Meeting against the Opt Out Proposal. On February 4, 1997, the amended Norfolk tender offer expired, and Norfolk subsequently purchased approximately 8.2 million Shares pursuant thereto. On March 7, 1997, Conrail and CSX entered into a Third Amendment (the "Third Amendment") to the Merger Agreement. Pursuant to the Third Amendment, (i) the price per share has been increased from $110 to $115, and the number of shares to be purchased in the tender offer has been increased to all outstanding shares. The tender offer is scheduled to close April 18, 1997 (subject to extension by CSX to June 2, 1997 whether or not the conditions have been satisfied), (ii) the consideration paid per share in the merger for all remaining outstanding shares following consummation of the offer has been increased to $115 in cash and (iii) the conditions to the offer relating to certain provisions of Pennsylvania law becoming inapplicable to Conrail and relating pending governmental actions or proceedings have been deleted. 32 The Third Amendment also provides that CSX will have sole control over the regulatory approval process and will be free to conduct by itself discussions with other railroads, including Norfolk, relating to competitive issues raised by the CSX transactions, and to enter into any resulting agreement. It is anticipated that CSX and Norfolk will negotiate an appropriate division of Conrail's assets; however, neither the pending CSX tender offer nor the merger is conditioned on CSX's reaching an agreement with Norfolk. Pursuant to the Third Amendment, three members of Conrail's Board of Directors approved by CSX shall be invited to join the CSX Board of Directors and a transition team will be established, the leadership of which will include senior executive officers of CSX and Conrail to ensure the orderly operation of Conrail during the regulatory approval process and an orderly transition thereafter. Under the Third Amendment, Conrail and CSX agreed to reduce from December 31, 1998 to December 31, 1997 the period of time during which the Conrail Board is prohibited from (i) withdrawing or modifying, or publicly proposing to withdraw or modify, its approval or recommendation of the CSX transactions, in a manner adverse to CSX, (ii) approving or recommending, or publicly proposing to approve or recommend, any competing proposal or (iii) causing Conrail to enter into any agreement related to any such competing proposal. Under the Merger Agreement as amended, Conrail may terminate the Merger Agreement in the event that after June 2, 1997, CSX fails to consummate the tender offer for any reason other than the non-occurrence of any condition to the tender offer. In the event that CSX fails to consummate the tender offer under such circumstances, Conrail will be entitled to exercise any additional remedies it may have. The full terms and conditions of the CSX and Norfolk offers and Conrail's position with respect to the CSX and Norfolk offers are set forth in documents filed by Conrail with the Securities and Exchange Commission. 1997 Outlook - ------------ Conrail expects the economy to grow in 1997 at about the same growth rate experienced in 1996. Conrail's 1997 plans are based on assumptions of 2.2% growth in real gross domestic product and 3.4% growth in industrial production. Conrail's outlook for 1997 includes line haul revenue growth of between 2.5% and 3.5%. Conrail's operating ratio goal for 1997 is 78.5%. Voluntary Separation Programs - ----------------------------- During the second quarter of 1996, the Company recorded a charge of $135 million (before tax benefits of $52 million) consisting of $102 million 33 in termination benefits to be paid to non-union employees participating in the voluntary retirement and separation programs ("voluntary separation programs") and losses of $33 million on non-cancelable leases for office space no longer required as a result of the reduction in the Company's workforce. Over 840 applications were accepted from eligible employees under the voluntary separation programs. Approximately $90 million of the termination benefits are being paid from the Company's overfunded pension plan. Results of Operations - --------------------- 1996 Compared with 1995 Net income for 1996 was $342 million ($4.25 per share, primary and $3.89 per share, fully diluted) compared with 1995 net income of $264 million ($3.19 per share, primary and $2.94 per share, fully diluted). Excluding the unusual items (see "Overview") in both years, Conrail's net income would have been $435 million ($5.45 per share, primary and $4.96 per share, fully diluted) for 1996 and $419 million ($5.16 per share, primary and $4.69 per share, fully diluted) for 1995. Operating revenues (primarily freight line haul revenues, but also including switching, demurrage and incidental revenue) increased $28 million, or .8%, to $3,714 million in 1996 from $3,686 million in 1995. A 2.1% increase in traffic volume in units (freight cars and intermodal trailers and containers) resulted in a $74 million increase in revenues. Average revenue per unit decreased revenues by $42 million due to an unfavorable traffic mix. A traffic volume increase of 7.6% was experienced by the Intermodal Service Group while traffic volume for the Unit Train Service Group remained unchanged. The Automotive and CORE Service Groups experienced traffic volume declines of 1.7% and 1.6%, respectively. Within the CORE Service Group, traffic volume declines were experienced by three of the four commodity groups: Forest and Manufactured Products, 5.3%; Food and Agriculture, 2.8%; and Petrochemicals, 2.5%. Metals experienced a traffic increase of 4.0%. 34 Operating expenses (including one-time charges and merger-related costs in 1996 and the asset disposition charge in 1995) decreased $117 million, or 3.6%, from $3,230 million in 1995 to $3,113 million in 1996. The following table sets forth the operating expenses for the two years: Increase (In Millions) 1996 1995 (Decrease) ------ ------ --------- Compensation and benefits $1,206 $1,249 $ (43) Fuel 202 168 34 Material and supplies 175 167 8 Equipment rents 382 355 27 Depreciation and amortization 283 293 (10) Casualties and insurance 176 175 1 Other 554 538 16 Voluntary separation programs 135 135 Asset disposition charge 285 (285) ------ ----- ----- $3,113 $3,230 $(117) ====== ====== ===== Compensation and benefits decreased $43 million, or 3.4%, as a result of reductions in employment levels and other employee-related costs. These decreases were partially offset by increased wage rates due to new labor agreements, increased train crew costs and overtime caused by adverse weather conditions experienced during the first quarter of 1996. Compensation and benefits as a percent of revenues was 32.5% in 1996 as compared with 33.9% in 1995. Fuel costs increased $34 million, or 20.2%, due mostly to higher fuel prices. Equipment rents increased $27 million, or 7.6%, primarily as a result of declines in equipment utilization and increased car hire rates. Other operating expenses increased $16 million, or 3.0%, primarily due to $16 million of costs incurred in connection with the proposed merger with CSX (see Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail recorded a one-time pre-tax charge of $135 million in 1996 for the voluntary separation programs and related costs (see Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report) and an asset disposition charge of $285 million in 1995 (see Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail's operating ratio was 83.8% for 1996, compared with 87.6% for 1995. Without the one-time charges recorded in 1996 and 1995 and the merger- related costs incurred in 1996, the operating ratios would have been 79.7% and 79.9%, respectively. 35 Other income decreased $18 million, or 13.8%, from $130 million in 1995 to $112 million in 1996 primarily due to decreases in rental income and lesser gains from sales of property. The Company's effective income tax rate for 1996 was 35.6% compared with 32.7% for 1995. The lower effective rate in 1995 is primarily caused by a $21 million reduction in income taxes as a result of a decrease in state income taxes (see Note 7 to the Consolidated Financial Statements included elsewhere in this Annual Report). 1995 Compared with 1994 Net income for 1995 was $264 million ($3.19 per share, primary and $2.94 per share, fully diluted) compared with 1994 net income of $324 million ($3.90 per share, primary and $3.56 per share, fully diluted). Excluding the one-time charges (see "Overview") in both years and the one-time tax benefit in 1995, Conrail's net income would have been $419 million ($5.16 per share, primary and $4.69 per share, fully diluted) for 1995 and $375 million ($4.54 per share, primary and $4.13 per share, fully diluted) for 1994. Operating revenues decreased $47 million, or 1.3%, from $3,733 million in 1994 to $3,686 million in 1995. A 5.4% decrease in traffic volume in units resulted in a $191 million decrease in revenues which was partially offset by an increase in average revenue per unit that increased revenues by $140 million. The improvement in average revenue per unit resulted from increases in average rates, $117 million, and a favorable traffic mix, $23 million. Traffic volume decreases were experienced by three of the four service groups, with only Automotive showing a slight volume increase of .8%. Traffic volume declines for the other service groups were as follows: Intermodal, 7.3%; Unit Train, 5.4%; and CORE, 5.1%. Within the CORE Service Group, traffic volume declines were also experienced by each of the commodity groups: Food and Agriculture, 8.2%; Petrochemicals, 4.6%; Metals, 4.0%; and Forest and Manufactured Products, 3.9%. 36 Operating expenses increased $103 million, or 3.3%, from $3,127 million in 1994 to $3,230 million in 1995. The following table sets forth the operating expenses for the two years: Increase (In Millions) 1995 1994 (Decrease) ------ ------ --------- Compensation and benefits $1,249 $1,260 $(11) Fuel 168 188 (20) Material and supplies 167 203 (36) Equipment rents 355 381 (26) Depreciation and amortization 293 278 15 Casualties and insurance 175 184 (9) Other 538 549 (11) Asset disposition charge 285 285 Early retirement program 84 (84) ------ ------ ---- $3,230 $3,127 $103 ====== ====== ==== Compensation and benefits costs decreased $11 million, or .9%, as a result of a 5.3% reduction in employment levels, which exceeded the increases in wage rates and fringe benefit costs. Compensation and benefits as a percent of revenues was 33.9% in 1995 compared with 33.7% in 1994. Fuel costs decreased $20 million, or 10.6%, as a result of greater use of newer fuel efficient locomotives, lower average fuel prices and lower traffic volume. The decrease of $36 million, or 17.7%, in material and supplies costs was primarily attributable to a lower level of repair and maintenance expenditures related to lower traffic volume. Equipment rents decreased $26 million, or 6.8%, primarily as a result of fewer foreign cars on Conrail's lines and improved equipment utilization, partially offset by the increased costs associated with new operating leases for equipment. Depreciation and amortization increased $15 million, or 5.4%, due to asset additions and increased depreciation rates for track structure as a result of a depreciation study required by the former Interstate Commerce Commission. Conrail recorded an asset disposition charge of $285 million in 1995 (see Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report) and a one-time pre-tax charge of $84 million in 1994 for the non-union voluntary early retirement program and related costs (see Note 11 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail's operating ratio was 87.6% for 1995, compared with 83.8% for 1994. Without the $285 million asset disposition charge in 1995 and the $84 37 million charge for the early retirement program in 1994, the operating ratios for 1995 and 1994 would have been 79.9% and 81.5%, respectively. Other income, net, increased $12 million, or 10.2%, primarily due to an $8 million gain from a property sale completed during the second quarter of 1995. The Company's effective income tax rate for 1995 was 32.7% compared with 39.1% for 1994. The lower rate reflects the effect of a $21 million reduction in income taxes resulting from a decrease in a state income tax rate enacted during the second quarter of 1995 (see Note 7 to the Consolidated Financial Statements included elsewhere in this Annual Report). Liquidity and Capital Resources - ------------------------------- Conrail's cash and cash equivalents decreased $43 million, from $73 million at December 31, 1995 to $30 million at December 31, 1996. Cash generated from operations, principally from its wholly-owned subsidiary, Consolidated Rail Corporation ("CRC"), and borrowings are Conrail's principal sources of liquidity and are used primarily for capital expenditures, debt service, and dividends. Operating activities provided cash of $669 million in 1996, compared with $773 million in 1995 and $697 million in 1994. In 1996, loans from and redemptions of insurance policies provided cash of $95 million and issuance of long-term debt provided cash of $26 million. The principal uses of cash in 1996 were for property and equipment acquisitions, $387 million, payment of long-term debt including capital lease and equipment obligations, $184 million, cash dividends on preferred and common stock, $171 million, and the repurchase of common stock, $156 million. Working capital (current assets less current liabilities)of $25 million existed at December 31, 1996, compared with $36 million at December 31, 1995. Management believes that Conrail's financial position allows it sufficient access to credit sources on investment grade terms, and, if necessary, additional intermediate or long-term debt could be issued for additional working capital requirements. In April 1995, the Company's Board of Directors approved a $250 million multi-year stock repurchase program. During 1996, the Company acquired 2,225,738 shares for $156 million under this program. As a result of the proposed merger agreement with CSX (see Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report), the Company will not make any additional stock repurchases under this program. During 1996, CRC issued an additional $139 million of commercial paper and repaid $129 million. Of the $199 million outstanding at December 31, 1996, $100 million is classified as long-term debt since it is expected to be refinanced through subsequent issuances of commercial paper and is 38 supported by the $500 million uncollateralized bank credit agreement. At December 31, 1996, $312 million remains available to Conrail and CRC under a 1993 shelf registration statement whereby CRC can issue debt securities and Conrail can issue both convertible debt and equity securities. In April 1996, CRC issued $50 million of Pass-Through Certificates at a rate of 6.96% to finance equipment. Although the certificates are not direct obligations of, or guaranteed by CRC, amounts payable under related capital leases will be sufficient to pay principal and interest on the certificates. In July 1996, CRC issued $26 million of 1996 Equipment Trust Certificates, Series A, with interest rates ranging from 6.0% to 7.48%, maturing annually from 1997 to 2011. The certificates were issued to finance approximately 85% of the purchase price of twenty locomotives. In June 1996, CRC borrowed $69 million against the cash surrender value of the company-owned life insurance policies which it maintains on certain of its non-union employees. The Company also redeemed the remaining excess cash surrender value of $26 million. Both transactions resulted in an increase of $95 million in cash in 1996. Capital Expenditures - -------------------- Capital expenditures totaled $478 million, $494 million and $508 million in 1996, 1995 and 1994, respectively. Of these totals, Conrail directly financed $108 million in 1996, $126 million in 1995 and $57 million in 1994. Capital expenditures for 1997 are expected to be approximately $550 million. Inflation - --------- Generally accepted accounting principles require the use of historical costs in preparing financial statements. This approach does not consider the effects of inflation on the costs of replacing assets. The replacement cost of Conrail's property and equipment is substantially higher than its historical cost basis. Similarly, depreciation expense on a replacement cost basis would be substantially in excess of the amount recorded under generally accepted accounting principles. Environmental Matters - --------------------- Conrail's operations and property are subject to various federal, state and local laws regulating the environment. CRC is a party to numerous 39 proceedings brought by regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other potential environmental issues. As of December 31, 1996, CRC had received, together with other companies, notices of its involvement as a potentially responsible party or requests for information under the Superfund laws with respect to cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 135 locations throughout the country. However, based on currently available information, Conrail believes CRC may have some potential responsibility at only 61 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of the possible remediation alternatives, changing technology and the length of time over which these matters develop, it is not always possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. At December 31, 1996, Conrail had accrued $55 million for estimated future environmental expenses. Although Conrail's operating results and liquidity could be significantly affected in any quarterly or annual reporting period in which CRC was held principally liable in certain of these actions, Conrail believes the ultimate liability for these matters will not materially affect its financial condition. (See Note 13 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail spent $11 million, $14 million and $8 million in 1996, 1995 and 1994, respectively, for environmental remediation and related costs and anticipates spending an amount comparable to that spent in 1996 during 1997. In addition, Conrail's capital expenditures for environmental control and abatement projects were approximately $6 million in 1996 and 1995, and $5 million in 1994, and are anticipated to be approximately $10 million in 1997. Conrail has an Environmental Quality Department, the mission of which is to institute and promote compliance with environmentally sound operating practices and to monitor and assess the status of sites where liability under environmental laws may exist. Other Matters - ------------- Except for the historical information contained herein, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that may cause actual results to differ, including but not limited to the effect of economic conditions, competition, regulation and weather on Conrail's operations, customers, service and prices, and other factors discussed elsewhere in this report and, from time to time, in other reports filed with the Securities and Exchange Commission. 40 Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS The Stockholders and Board of Directors Conrail Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a) 1. and 2. present fairly, in all material respects, the financial position of Conrail Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 January 21, 1997, except as to Note 2, which is as of March 7, 1997 41 CONRAIL INC. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, --------------------------- ($ In Millions Except Per Share Data) 1996 1995 1994 ------ ------ ------ Revenues $3,714 $3,686 $3,733 ------ ------ ------ Operating expenses Way and structures 462 485 499 Equipment 803 766 815 Transportation 1,385 1,324 1,379 General and administrative 328 370 350 Voluntary separation programs (Note 3) 135 Asset disposition charge (Note 10) 285 Early retirement program (Note 11) 84 ------ ------ ------ Total operating expenses 3,113 3,230 3,127 ------ ------ ------ Income from operations 601 456 606 Interest expense (182) (194) (192) Other income, net (Note 12) 112 130 118 ------ ------ ------ Income before income taxes 531 392 532 Income taxes (Note 7) 189 128 208 ------ ------ ------ Net income $ 342 $ 264 $ 324 ====== ====== ====== Net income per common share (Note 1) Primary $ 4.25 $ 3.19 $ 3.90 Fully diluted 3.89 2.94 3.56 Ratio of earnings to fixed charges (Note 1) 3.19x 2.51x 3.19x
See accompanying notes. 42 CONRAIL INC. CONSOLIDATED BALANCE SHEETS December 31, ---------------- ($ In Millions) 1996 1995 ------ ------ ASSETS Current assets Cash and cash equivalents $ 30 $ 73 Accounts receivable 630 614 Deferred tax assets (Note 7) 293 333 Material and supplies 139 158 Other current assets 25 28 ------ ------ Total current assets 1,117 1,206 Property and equipment, net (Note 4) 6,590 6,408 Other assets 695 810 ------ ------ Total assets $8,402 $8,424 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings 99 89 Current maturities of long-term debt (Note 6) 130 181 Accounts payable 135 113 Wages and employee benefits 143 183 Casualty reserves 141 110 Accrued and other current liabilities (Note 5) 444 494 ------ ------ Total current liabilities 1,092 1,170 Long-term debt (Note 6) 1,876 1,911 Casualty reserves 190 217 Deferred income taxes (Note 7) 1,478 1,393 Special income tax obligation (Note 7) 346 440 Other liabilities 313 316 ------ ------ Total liabilities 5,295 5,447 ------ ------ Commitments and contingencies (Note 13) Stockholders' equity (Notes 2 and 9) Preferred stock (no par value; 15,000,000 shares authorized; no shares issued) Series A ESOP convertible junior preferred stock (no par value; 10,000,000 shares authorized; 7,303,920 and 9,770,993 shares issued and outstanding, respectively) 211 282 Unearned ESOP compensation (222) (233) Common stock ($1 par value; 250,000,000 shares authorized; 87,768,428 and 85,392,392 shares issued, respectively; 82,244,973 and 82,094,675 shares outstanding, respectively) 88 85 Additional paid-in capital 2,404 2,187 Employee benefits trust, at market (3,394,988 and 4,706,665 shares, respectively) (384) (329) Retained earnings 1,357 1,176 ------ ------ 3,454 3,168 Treasury stock, at cost (5,523,455 and 3,297,717 shares, respectively) (347) (191) ------ ------ Total stockholders' equity 3,107 2,977 ------ ------ Total liabilities and stockholders' equity $8,402 $8,424 ====== ======
See accompanying notes. 43 CONRAIL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Series A Unearned Additional Employee Preferred ESOP Common Paid-in Benefits Retained Treasury ($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock --------- ------------ ------ ---------- -------- -------- -------- Balance, January 1, 1994 $286 $(253) $80 $1,819 $ 857 $ (5) Amortization 10 Net income 324 Common dividends, $1.40 per share (111) Preferred dividends, $2.165 per share (21) Common shares acquired (94) Exercise of stock options 14 Other (3) 15 7 ------ ------ ------ ------ ------ ------ ------ Balance, December 31, 1994 283 (243) 80 1,848 1,056 (99) Amortization 10 Net income 264 Common dividends, $1.60 per share (129) Preferred dividends, $2.165 per share (21) Common shares acquired (92) Exercise of stock options 6 Establishment of employee benefits trust 5 245 $(250) Employee benefits trust transactions, net 84 (79) Other (1) 4 6 ------ ------ ------ ------ ------ ------ ------ Balance, December 31, 1995 282 (233) 85 2,187 (329) 1,176 (191) Amortization 11 Net income 342 Common dividends, $1.80 per share (146) Preferred dividends, $2.165 per share (20) Common shares acquired (156) Exercise of stock options 29 53 Employee benefits trust transactions, net 128 (116) Effects of voluntary separation programs (8) 8 Effects of CSX tender offer (Note 2) (63) 3 60 Other 5 ------ ------ ------ ------ ------ ------ ------ Balance, December 31, 1996 $211 $(222) $88 $2,404 $(384) $1,357 $(347) ====== ====== ====== ====== ====== ====== ======
See accompanying notes. 44 CONRAIL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, ------------------------ ($ In Millions) 1996 1995 1994 ----- ----- ----- Cash flows from operating activities Net income $ 342 $ 264 $ 324 Adjustments to reconcile net income to net cash provided by operating activities: Voluntary separation programs 135 Asset disposition charge 285 Early retirement program 84 Depreciation and amortization 283 293 278 Deferred income taxes 183 108 150 Special income tax obligation (94) (73) (62) Gains from sales of property (24) (27) (18) Pension credit (46) (43) (46) Changes in: Accounts receivable (16) 32 (2) Accounts and wages payable (18) 8 41 Settlement of tax audit (39) Other (37) (74) (52) ----- ----- ----- Net cash provided by operating activities 669 773 697 ----- ----- ----- Cash flows from investing activities Property and equipment acquisitions (387) (415) (490) Proceeds from disposals of properties 34 38 32 Other (46) (59) (23) ----- ------ ----- Net cash used in investing activities (399) (436) (481) ----- ----- ----- Cash flows from financing activities Repurchase of common stock (156) (92) (94) Net proceeds from (repayments of) short-term borrowings 10 (23) 33 Proceeds from long-term debt 26 85 114 Payment of long-term debt (184) (134) (158) Loans from and redemptions of insurance policies 95 Dividends on common stock (146) (129) (111) Dividends on Series A preferred stock (25) (21) (16) Proceeds from stock options and other 67 7 21 ----- ----- ----- Net cash used in financing activities (313) (307) (211) ----- ----- ----- Increase (decrease) in cash and cash equivalents (43) 30 5 Cash and cash equivalents Beginning of year 73 43 38 ----- ----- ----- End of year $ 30 $ 73 $ 43 ===== ===== =====
See accompanying notes. 45 CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ Industry -------- Conrail Inc. ("Conrail") is a holding company of which the principal subsidiary is Consolidated Rail Corporation ("CRC"), a freight railroad which operates within the northeast and midwest United States and the Province of Quebec. Principles of Consolidation --------------------------- The consolidated financial statements include Conrail and majority- owned subsidiaries. Investments in 20% to 50% owned companies are accounted for by the equity method. Cash Equivalents ---------------- Cash equivalents consist of commercial paper, certificates of deposit and other liquid securities purchased with a maturity of three months or less, and are stated at cost which approximates market value. Material and Supplies --------------------- Material and supplies consist mainly of fuel oil and items for maintenance of property and equipment, and are valued at the lower of cost, principally weighted average, or market. Property and Equipment ---------------------- Property and equipment are recorded at cost. Depreciation is provided using the composite straight-line method. The cost (net of salvage) of depreciable property retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. Asset Impairment ---------------- Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Expected future cash flows from the use and disposition of long-lived assets are compared to the current carrying amounts to determine the potential impairment loss. Revenue Recognition ------------------- Revenue is recognized proportionally as a shipment moves on the Conrail system from origin to destination. Earnings Per Share ------------------ Primary earnings per share are based on net income adjusted for the effects of preferred dividends net of income tax benefits, divided by the weighted average number of shares outstanding during the period, including the dilutive effect of stock options. Fully diluted 46 earnings per share assume conversion of Series A ESOP Convertible Junior Preferred Stock ("ESOP Stock") into Conrail common stock. Net income amounts applicable to fully diluted earnings per share have been adjusted by the increase, net of income tax benefits, in ESOP-related expenses assuming conversion of all ESOP Stock to common stock. 46 Shares in the Conrail Employee Benefits Trust are not considered outstanding for computing earnings per share. The weighted average number of shares of common stock outstanding during each of the most recent three years are as follows: 1996 1995 1994 ---------- ---------- ---------- Primary weighted average shares 77,628,825 78,733,947 79,674,781 Fully diluted weighted average shares 87,325,575 88,702,712 89,562,721 Ratio of Earnings to Fixed Charges ---------------------------------- Earnings used in computing the ratio of earnings to fixed charges represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. New Accounting Standards ------------------------ During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) and SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which are both effective in 1996. The Company has decided to adopt only the disclosure provisions of SFAS 123 in 1996 and continues to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its stock-based compensation plans. The Company adopted SFAS 121 in the first quarter of 1996 and determined that it did not have a material effect on its financial statements. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 47 2. Proposed Merger --------------- On October 14, 1996, Conrail, CSX Corporation ("CSX") and a subsidiary of CSX entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement"), pursuant to which Conrail was to be merged with a subsidiary of CSX in a merger-of-equals transaction. On October 24, 1996, Norfolk Southern Corporation ("Norfolk") commenced an unsolicited tender offer for all outstanding Conrail voting stock at $100 per share in cash. Norfolk has since increased its offer to $115 per share in cash. On November 20, 1996, CSX concluded its first tender offer and purchased approximately 19.9% of Conrail's outstanding shares for $110 per share. On December 18, 1996, CSX and Conrail entered into a second amendment to the Merger Agreement (the "Second Amendment") that would, among other things, (i) increase the consideration payable pursuant to the merger, (ii) accelerate the consummation of the merger to immediately following the receipt of applicable shareholder approvals and prior to the Surface Transportation Board ("STB") approval and (iii) extend until December 31, 1998 an exclusivity period during which the Conrail Board agreed not to withdraw or modify its recommendations of the CSX transactions, approve or recommend any takeover proposal or cause Conrail to enter into any agreement related to any takeover proposal. On January 13, 1997, Norfolk issued a press release announcing that it would offer to purchase shares representing 9.9% of the outstanding shares for $115 per share, in the event that Conrail shareholders did not approve a proposal to opt out of a Pennsylvania statute (the "Opt Out Proposal") at the meeting of shareholders to be held on January 17, 1997 (the "Special Shareholders Meeting"). On January 17, 1997, Conrail shareholders voted at the Special Shareholders Meeting against the Opt Out Proposal. On February 4, 1997, the amended Norfolk tender offer expired, and Norfolk subsequently purchased approximately 8.2 million shares pursuant thereto. On March 7, 1997, Conrail and CSX entered into a Third Amendment (the "Third Amendment") to the Merger Agreement. Pursuant to the Third Amendment, (i) the price per share has been increased from $110 to $115, and the number of shares to be purchased in the tender offer has been increased to all outstanding shares. The tender offer is scheduled to close April 18, 1997 (subject to extension by CSX to June 2, 1997 whether or not the conditions have been satisfied), (ii) the consideration paid per share in the merger for all remaining outstanding shares following consummation of the offer has been increased to $115 in cash and (iii) the conditions to the offer 48 relating to certain provisions of Pennsylvania law becoming inapplicable to Conrail and relating pending governmental actions or proceedings have been deleted. The Third Amendment also provides that CSX will have sole control over the regulatory approval process and will be free to conduct by itself discussions with other railroads, including Norfolk, relating to competitive issues raised by the CSX transactions, and to enter into any resulting agreement. It is anticipated that CSX and Norfolk will negotiate an appropriate division of Conrail's assets; however, neither the pending CSX tender offer nor the merger is conditioned on CSX's reaching an agreement with Norfolk. Pursuant to the Third Amendment, three members of Conrail's Board of Directors approved by CSX shall be invited to join the CSX Board of Directors and a transition team will be established, the leadership of which will include senior executive officers of CSX and Conrail to ensure the orderly operation of Conrail during the regulatory approval process and an orderly transition thereafter. Under the Third Amendment, Conrail and CSX agreed to reduce from December 31, 1998 to December 31, 1997 the period of time during which the Conrail Board is prohibited from (i) withdrawing or modifying, or publicly proposing to withdraw or modify, its approval or recommendation of the CSX transactions, in a manner adverse to CSX, (ii) approving or recommending, or publicly proposing to approve or recommend, any competing proposal or (iii) causing Conrail to enter into any agreement related to any such competing proposal. Under the Merger Agreement as amended, Conrail may terminate the Merger Agreement in the event that after June 2, 1997, CSX fails to consummate the tender offer for any reason other than the non-occurrence of any condition to the tender offer. In the event that CSX fails to consummate the tender offer under such circumstances, Conrail will be entitled to exercise any additional remedies it may have. The full terms and conditions of the CSX and Norfolk offers and Conrail's position with respect to the CSX and Norfolk offers are set forth in documents filed by Conrail with the Securities and Exchange Commission. Pending approval by the Surface Transportation Board ("STB"), 100% of Conrail's voting stock will be held by CSX in a voting trust. The combination of the railroad operations of the two companies is contingent upon the approval of the merger by the STB. 49 3. Voluntary Separation Programs ----------------------------- During the second quarter of 1996, the Company recorded a charge of $135 million (before tax benefits of $52 million) consisting of $102 million in termination benefits to be paid to non-union employees participating in the voluntary retirement and separation programs ("voluntary separation programs") and losses of $33 million on non- cancelable leases for office space no longer required as a result of the reduction in the Company's workforce. Over 840 applications were accepted from eligible employees under the voluntary separation programs. Approximately $90 million of the termination benefits are being paid from the Company's overfunded pension plan. 4. Property and Equipment ---------------------- December 31, ----------------- 1996 1995 ------- ------- (In Millions) Roadway $ 7,021 $ 6,828 Equipment 1,231 1,213 Less: Accumulated depreciation (1,654) (1,572) Allowance for disposition (408) (439) ------- ------- 6,190 6,030 ------- ------- Capital leases (primarily equipment) 908 908 Accumulated amortization (508) (530) ------- ------- 400 378 ------- ------- $ 6,590 $ 6,408 ======= ======= Conrail acquired equipment and incurred related long-term debt under various capital leases of $82 million in 1996, $71 million in 1995 and $8 million in 1994. In 1995 (Note 10) and 1991, the Company recorded allowances for disposition for the sale or abandonment of certain under-utilized rail lines and other facilities. 5. Accrued and Other Current Liabilities ------------------------------------- December 31, -------------- 1996 1995 ---- ---- (In Millions) Freight settlements due others $ 48 $ 54 Equipment rents (primarily car hire) 74 71 Unearned freight revenue 79 56 Property and corporate taxes 49 66 Other 194 247 ---- ---- $444 $494 ==== ==== 50 6. Long-Term Debt -------------- Long-term debt outstanding, including the weighted average interest rates at December 31, 1996, is composed of the following: December 31, ------------------ 1996 1995 ------ ------ (In Millions) Capital leases $ 491 $ 489 Medium-term notes payable, 6.70%, due 1997 to 1999 109 208 Notes payable, 9.75%, due 2000 250 250 Debentures payable, 7.88%, due 2043 250 250 Debentures payable, 9.75%, due 2020 544 544 Equipment and other obligations, 6.55% 262 251 Commercial paper, 5.53% 100 100 ------ ------ 2,006 2,092 Less current portion (130) (181) ------ ------ $1,876 $1,911 ====== ====== Using current market prices when available, or a valuation based on the yield to maturity of comparable debt instruments having similar characteristics, credit rating and maturity, the total fair value of the Company's long-term debt, including the current portion, but excluding capital leases, is $1,685 million and $1,870 million at December 31, 1996 and 1995, respectively, compared with carrying values of $1,515 million and $1,603 million at December 31, 1996 and 1995, respectively. The Company's noncancelable long-term leases generally include options to purchase at fair value and to extend the terms. Capital leases have been discounted at rates ranging from 3.09% to 14.26% and are collateralized by assets with a net book value of $400 million at December 31, 1996. Minimum commitments, exclusive of executory costs borne by the Company, are: Capital Operating Leases Leases ------- --------- (In Millions) 1997 $ 107 $115 1998 96 104 1999 86 87 2000 64 76 2001 57 68 2002 - 2017 273 523 ----- ------ Total 683 $973 ====== Less interest portion (192) ----- Present value $ 491 ===== 51 Operating lease rent expense was $127 million in 1996, $130 million in 1995 and $118 million in 1994. In June 1993, the Company and CRC filed a shelf registration statement on Form S-3 to enable CRC to issue up to $500 million in debt securities or the Company to issue up to $500 million in convertible debt and equity securities. The remaining balance under this shelf registration was $312 million at December 31, 1996. In April 1996, CRC issued $50 million of Pass-Through Certificates at a rate of 6.96% to finance equipment. Although the certificates are not direct obligations of, or guaranteed by CRC, amounts payable under related capital leases will be sufficient to pay principal and interest on the certificates. In July 1996, CRC issued $26 million of 1996 Equipment Trust Certificates, Series A, with interest rates ranging from 6.0% to 7.48%, maturing annually from 1997 to 2011. The certificates were used to finance approximately 85% of the purchase price of twenty locomotives. In June 1996, CRC borrowed $69 million against the cash surrender value of the company-owned life insurance policies which it maintains on certain of its non-union employees. Equipment and other obligations mature in 1997 through 2043 and are collateralized by assets with a net book value of $253 million at December 31, 1996. Maturities of long-term debt other than capital leases and commercial paper are $65 million in 1997, $46 million in 1998, $46 million in 1999, $266 million in 2000, $17 million in 2001 and $975 million in total from 2002 through 2043. CRC had $199 million of commercial paper outstanding at December 31, 1996. Of the total amount outstanding, $100 million is classified as long-term since it is expected to be refinanced through subsequent issuances of commercial paper and is supported by the long-term credit facility mentioned below. CRC maintains a $500 million uncollateralized bank credit agreement with a group of banks which is used for general corporate purposes and to support CRC's commercial paper program. The agreement matures in 2000 and requires interest to be paid on amounts borrowed at rates based on various defined short-term rates and an annual maximum fee of .125% of the facility amounts. The agreement contains, among other conditions, restrictive covenants relating to a debt ratio and consolidated tangible net worth. During 1996, CRC had no borrowings under this agreement. Interest payments were $170 million in 1996, $177 million in 1995 and $174 million in 1994. 52 7. Income Taxes ------------ The provisions for income taxes are composed of the following: 1996 1995 1994 ---- ---- ----- (In Millions) Current Federal $ 90 $ 78 $104 State 10 15 16 ---- ---- ---- 100 93 120 ---- ---- ---- Deferred Federal 151 110 125 State 32 (2) 25 ---- ---- ---- 183 108 150 ---- ---- ---- Special income tax obligation Federal (80) (61) (53) State (14) (12) (9) ---- ---- ---- (94) (73) (62) ---- ---- ---- $189 $128 $208 ==== ==== ==== In conjunction with the public sale in 1987 of the 85% of the Company's common stock then owned by the U.S. Government, federal legislation was enacted which resulted in a reduction of the tax basis of certain of the Company's assets, particularly property and equipment, thereby substantially decreasing tax depreciation deductions and increasing future federal income tax payments. Also, net operating loss and investment tax credit carryforwards were canceled. As a result of the sale-related transactions, a special income tax obligation was recorded in 1987 based on an estimated effective federal and state income tax rate of 37.0%. As a result of a decrease in a state income tax rate enacted during 1995, income tax expense for that year was reduced by $21 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate decrease as required by SFAS 109, "Accounting for Income Taxes". In November 1996, the Company reached a settlement with the Internal Revenue Service related to the audit of the Company's consolidated federal income tax returns for the fiscal years 1990 through 1992. The Company made a payment of $39 million pending resolution of the final interest determination related to the settlement. Federal and state income tax payments were $145 million in 1996 (excluding tax settlement), $109 million in 1995 and $80 million in 1994. 53 Reconciliations of the U.S. statutory tax rates with the effective tax rates are as follows: 1996 1995 1994 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.4 3.5 3.9 Effect of state tax decrease on deferred taxes (5.3) Other (2.8) (.5) .2 ---- ---- ---- Effective tax rate 35.6% 32.7% 39.1% ==== ==== ==== Significant components of the Company's special income tax obligation and deferred income tax liabilities and (assets) are as follows: December 31, ----------------- 1996 1995 ------ ------ (In Millions) Current assets (primarily accounts receivable) $ (9) $ (27) Current liabilities (primarily accrued liabilities and casualty reserves) (245) (265) Tax benefits related to disposition of subsidiary (30) (30) Net operating loss carryforwards (9) (11) ------ ------ Current deferred tax asset, net $ (293) $ (333) ====== ====== Noncurrent liabilities: Property and equipment 1,939 1,936 Other long-term assets (primarily prepaid pension asset) 92 67 Miscellaneous 98 66 ------ ------ 2,129 2,069 ------ ------ Noncurrent assets: Nondeductible reserves and other liabilities (174) (144) Tax benefit transfer receivable (36) (33) Alternative minimum tax credits (38) Miscellaneous (95) (21) ------ ------ (305) (236) ------ ------ Special income tax obligation and deferred income tax liabilities, net $1,824 $1,833 ====== ====== 54 8. Employee Benefits ----------------- Pension Plans ------------- The Company and certain subsidiaries maintain defined benefit pension plans which are noncontributory for all non-union employees and generally contributory for participating union employees. Benefits are based primarily on credited years of service and the level of compensation near retirement. Funding is based on the minimum amount required by the Employee Retirement Income Security Act of 1974. Pension credits include the following components: 1996 1995 1994 ----- ---- ---- (In Millions) Service cost - benefits earned during the period $ 9 $ 8 $ 8 Interest cost on projected benefit obligation 51 51 48 Return on plan assets - actual (138) (254) (10) - deferred 47 167 (77) Net amortization and deferral (15) (15) (15) ----- ---- ---- $ (46) $(43) $(46) ===== ==== ==== The funded status of the pension plans and the amounts reflected in the balance sheets are as follows: 1996 1995 ------ ----- (In Millions) Accumulated benefit obligation ($655 million and $603 million vested, respectively) $ 661 $ 609 ===== ===== Market value of plan assets 1,187 1,168 Projected benefit obligation (734) (726) ------ ----- Plan assets in excess of projected benefit obligation 453 442 Unrecognized prior service cost 36 50 Unrecognized transition net asset (90) (120) Unrecognized net gain (231) (157) ------ ----- Net prepaid pension cost $ 168 $ 215 ====== ===== The assumed weighted average discount rates used in 1996 and 1995 are 7.5% and 7.0%, respectively, and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation as of December 31, 1996 and 1995 is 6.0%. The expected long-term rate of return on plan assets (primarily equity securities) in 1996 and 1995 is 9.0%. 55 Savings Plans ------------- The Company and certain subsidiaries provide 401(k) savings plans for union and non-union employees. Under the Non-union ESOP, 100% of employee contributions are matched in the form of ESOP Stock for the first 6% of a participating employee's base pay. There is no Company match provision under the union employee plan. Savings plan expense was $4 million in 1996 and 1995, and $5 million in 1994. In connection with the Non-union ESOP, the Company issued 9,979,562 of the authorized 10 million shares of its ESOP Stock to the Non-union ESOP in exchange for a 20 year promissory note with interest at 9.55% from the Non-union ESOP in the principal amount of $288 million. In addition, unearned ESOP compensation of $288 million was recognized as a charge to stockholders' equity coincident with the Non-union ESOP's issuance of its $288 million promissory note to the Company. The debt of the Non-union ESOP was recorded by the Company and offset against the promissory note from the Non-union ESOP. Unearned ESOP compensation is charged to expense as shares of ESOP Stock are allocated to participants. Approximately 2.7 million ESOP shares have been cumulatively allocated to participants through December 31, 1996, and a portion of these shares have been tendered to CSX (Note 2). An amount equivalent to the preferred dividends declared on the ESOP Stock partially offsets compensation and interest expense related to the Non-union ESOP. In 1994, the ESOP's promissory note to the Company was refinanced. As part of the refinancing, the interest rate was decreased to 8.0%, from the original 9.55%, and accrued interest of $21 million was capitalized as part of the principal balance of the promissory note. The Company is obligated to make dividend payments at a rate of 7.51% on the ESOP Stock and additional contributions in an aggregate amount sufficient to enable the Non-union ESOP to make the required interest and principal payments on its note to the Company. Interest expense incurred by the Non-union ESOP on its debt to the Company was $24 million in 1996 and 1995, and $30 million in 1994. Compensation expense related to the Non-union ESOP was $11 million in 1996, and $10 million in 1995 and 1994. Preferred dividends of $20 million were declared in 1996, and $21 million in 1995 and 1994. Preferred dividend payments of $25 million, $21 million and $16 million were made in 1996, 1995 and 1994, respectively. The Company received debt service payments from the Non-union ESOP of $40 million in 1996, $31 million in 1995 and $21 million in 1994. 56 Postretirement Benefits Other Than Pensions ------------------------------------------- The Company provides health and life insurance benefits to certain retired non-union employees. Certain non-union employees are eligible for retiree medical benefits, while substantially all non-union employees are eligible for retiree life insurance benefits. Generally, company-provided health care benefits terminate when individuals reach age 65. Retiree life insurance plan assets consist of a retiree life insurance reserve held in the Company's group life insurance policy. There are no plan assets for the retiree health benefits plan. The following sets forth the plans' funded status reconciled with amounts reported in the Company's balance sheets: 1996 1995 ----------------- ----------------- Life Life Medical Insurance Medical Insurance Plan Plan Plan Plan (In Millions) Accumulated postretirement benefit obligation: Retirees $44 $20 $38 $19 Fully eligible active plan participants 1 5 1 Other active plan participants 3 5 --- --- --- --- Accumulated benefit obligation 45 23 43 25 Market value of plan assets (10) (7) --- --- --- --- Accumulated benefit obligation in excess of plan assets 45 13 43 18 Unrecognized gains and (losses) (1) 2 1 (1) Accrued benefit cost recognized in the Consolidated Balance --- --- --- --- Sheet $44 $15 $44 $17 === === === === Net periodic postretirement benefit cost, primarily interest cost $ 3 $ 1 $ 4 $ 1 === === === === An 8 percent rate of increase in per capita costs of covered health care benefits was assumed for 1997, gradually decreasing to 6 percent by the year 2007. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $2 million and would have an immaterial effect on the net periodic postretirement benefit cost for 1996. Discount rates of 7.5% and 7.0% were used to determine the accumulated postretirement benefit obligations for both the medical and life insurance plans in 1996 and 1995, respectively. The assumed rate of compensation increase was 6.0% in 1996 and 5.0% in 1995. 57 Retiree medical benefits are funded by a combination of Company and retiree contributions. Retiree life insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. 9. Capital Stock ------------- Preferred Stock --------------- The Company is authorized to issue 25 million shares of preferred stock with no par value. The Board of Directors has the authority to divide the preferred stock into series and to determine the rights and preferences of each. The Company cannot pay dividends on its common stock unless full cumulative dividends have been paid on its ESOP Stock, and no distributions can be made to the holders of common stock upon liquidation or dissolution of the Company unless the holders of the ESOP Stock have received a cash liquidation payment of $28.84375 per share, plus unpaid dividends up to the date of such payment. The ESOP Stock is convertible into an equivalent number of shares of common stock based on their respective market values at the date of conversion. The ESOP Stock is entitled to one vote per share, voting together as a single class with common stock on all matters. As a result of the CSX tender offer related to the proposed merger (Note 2), 2.2 million shares of ESOP Stock have been converted to common shares as a result of being removed from the Non-union ESOP 401(k) savings plan. Employee Benefits Trust ----------------------- In 1995, the Company issued approximately 4.7 million shares of its common stock to the Conrail Employee Benefits Trust (the "Trust") in exchange for a promissory note of $250 million at an interest rate of 6.9%. The Trust is being used to fund certain employee benefits and other forms of compensation over its fifteen-year term. The amount representing unearned employee benefits is recorded as a deduction from stockholders' equity and is reduced as benefits and compensation are paid through the release of shares from the Trust. The shares owned by the Trust are valued at the closing market price as of the end of each reporting period, with corresponding changes in the balance of the Trust reflected in additional paid-in capital. The Trust has sold shares of Conrail common stock in connection with the CSX and Norfolk tender offers (Note 2) and has used the proceeds to repurchase shares of Conrail common stock in the open market. Shares held by the Trust are not considered outstanding for earnings per share computations until released by the Trust, but do have voting and dividend rights. Common Stock Repurchase Program ------------------------------- In April 1995, the Board of Directors approved a $250 million multi- year stock repurchase program. During 1996, the Company acquired 2,225,738 shares for approximately $156 million under this program. 58 At December 31, 1996, approximately $93 million remained available from this authorization; however, as a result of the proposed merger with CSX Corporation (Note 2), the Company will not make any additional stock repurchases under this program. The activity and status of treasury stock follow: 1996 1995 1994 ---------- --------- --------- Shares, beginning of year 3,297,717 1,789,164 83,745 Acquired 2,225,738 1,508,553 1,705,419 ---------- --------- ---------- Shares, end of year 5,523,455 3,297,717 1,789,164 ========== ========= ========== Stock Plans ----------- The Company's stock-based compensation plans as of December 31, 1996 are described below. The Company applies APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. SFAS 123 was issued in 1995 and, if fully adopted, would change the method of recognition of costs on plans similar to those of the Company. Adoption of SFAS 123 is optional; however, the required pro forma disclosures as if the Company had adopted the cost recognition requirements under SFAS 123 in 1996 and 1995 are presented below. The Company's 1987 and 1991 Long-Term Incentive Plans authorize the granting to officers and key employees of up to 4 million and 6.6 million shares of common stock, respectively, through stock options, stock appreciation rights, phantom stock and awards of restricted or performance shares. A stock option is exercisable for a specified term commencing after grant at a price not less than the fair market value of the stock on the date of grant. The vesting of awards made pursuant to these plans is contingent upon one or more of the following: continued employment, passage of time or financial and other performance goals. Effective November 1996, the Company's Board of Directors authorized the automatic vesting of all unvested stock options outstanding in connection with the Merger Agreement between CSX and the Company (Note 2). 59 The activity and status of stock options under the incentive plans follow: Non-qualified Stock Options ----------------------------------- Option Price Shares Per Share Under Option ----------------- ------------ Balance, January 1, 1994 $14.000 - $60.500 1,966,321 Granted $52.188 - $66.938 23,988 Exercised $14.000 - $51.375 (507,450) Canceled $42.625 - $60.500 (118,904) ------------ Balance, December 31, 1994 $14.000 - $66.938 1,363,955 Granted $50.688 - $68.563 516,757 Exercised $14.000 - $53.875 (200,940) Canceled $42.625 - $53.875 (123,560) ------------ Balance, December 31, 1995 $14.000 - $68.563 1,556,212 Granted $68.563 - $96.063 551,038 Exercised $14.000 - $73.250 (1,268,085) Canceled $42.625 - $70.031 (3,984) ------------ Balance, December 31, 1996 $14.000 - $96.063 835,181 ============ Exercisable, December 31, 1996 $14.000 - $74.188 831,481 ============ Available for future grants December 31, 1995 1,188,193 ============ December 31, 1996 3,969,317 ============ The weighted average exercise prices of options granted during 1996 and 1995 are $70.130 per share and $51.204 per share, respectively. The weighted average exercise prices of options exercised during 1996 and 1995 are $48.32 per share and $31.16 per share, respectively. The average remaining maximum terms of options is not considered meaningful given the events that have occurred as a result of the proposed merger with CSX (Note 2). The fair value of each option granted during 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (1) dividend yield of 2.43%, (2) expected volatility of 25.25%, (3) risk-free interest rate of 5.51%, and (4) expected life of 4 years. The weighted average fair value of options granted during 1996 and 1995 is $16.00 per share and $13.12 per share, respectively. Had the compensation cost for the Company's 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income, primary earnings per share and fully diluted earnings per share for 1996 and 1995 would approximate the pro forma 60 amounts below ($ in millions except per share data): 1996 1995 ----- ----- Net income as reported $ 342 $ 264 Net income pro forma 335 262 Primary earnings per share $4.25 $3.19 Primary earnings per share pro forma 4.16 3.16 Fully diluted earnings per share $3.89 $2.94 Fully diluted earnings per share pro forma 3.81 2.92 The Company has granted phantom shares and restricted stock under its non-union employee bonus plans to eligible employees who elect to defer all or a portion of their annual bonus in a given year. The number of shares granted depends on the length of the deferral period. Grants are made at the market price of the Company's common stock at the date of grant. The Company has granted 148,749 shares and 337,329 shares of phantom and restricted stock, respectively, under its non-union employee bonus plans through December 31, 1996. The Company has also granted 73,344 performance shares under its 1991 Long-Term Incentive Plan through December 31, 1996. Compensation expense related to these plans was $2 million in 1996 and $3 million in 1995. The weighted-average fair value for the phantom shares and restricted stock granted during 1996 and 1995 was $68.02 per share and $52.88 per share, respectively. Stock Rights ------------ In 1989, the Company declared a dividend of one common share purchase right (the "Right") on each outstanding share of common stock. The Rights are not exercisable or transferable apart from the common stock until the occurrence of certain events arising out of an actual or potential acquisition of 10% or more of the Company's common stock, and would at such time provide the holder with certain additional entitlements. However, under the terms of the Merger Agreement (Note 2) the CSX tender offer does not constitute an event that would result in the Rights becoming exercisable. In 1995, a dividend of one Right for each share of ESOP Stock was declared and paid. The exercise price of the Rights is $205. The Rights may be redeemed by the Company prior to becoming exercisable at one-half cent ($.005) per Right and have no voting or dividend rights. 61 10. Asset Disposition Charge ------------------------ Included in 1995 operating expenses is an asset disposition charge of $285 million, which reduced net income by $176 million. The asset disposition charge resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically supported current and expected operations. The Company identified and has committed to sell 1,800 miles of rail lines that are expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition were written down to estimated net realizable value (See Note 1 "Asset Impairment"). 11. 1994 Early Retirement Program ----------------------------- During 1994, the Company recorded a charge of $84 million, which reduced net income by $51 million, for a non-union employee voluntary early retirement program and related costs. The majority of the cost of the early retirement program is being paid from the Company's overfunded pension plan. 12. Other Income, Net ----------------- 1996 1995 1994 ---- ---- ---- (In Millions) Interest income $ 29 $ 33 $ 34 Rental income 50 57 53 Property sales 23 27 18 Other, net 10 13 13 ---- ---- ---- $112 $130 $118 ==== ==== ==== 13. Commitments and Contingencies ----------------------------- Environmental ------------- The Company is subject to various federal, state and local laws and regulations regarding environmental matters. CRC is a party to various proceedings brought by both regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other potential environmental issues. At December 31, 1996, CRC has received, together with other companies, notices of its involvement as a potentially responsible party or requests for information under the Superfund laws with respect to cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 135 locations. However, based on currently available information, the Company believes CRC may have some potential responsibility at only 61 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of possible remediation alternatives, the changing technology and the length of time over which these matters develop, it is often not possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. 62 Although the Company's operating results and liquidity could be significantly affected in any quarterly or annual reporting period if CRC were held principally liable in certain of these actions, at December 31, 1996, the Company had accrued $55 million, an amount it believes is sufficient to cover the probable liability and remediation costs that will be incurred at Superfund sites and other sites based on known information and using various estimating techniques. The Company believes the ultimate liability for these matters will not materially affect its consolidated financial condition. The Company spent $11 million in 1996, $14 million in 1995 and $8 million in 1994 for environmental remediation and related costs and anticipates spending an amount comparable to that spent in 1996 during 1997. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $6 million in 1996 and 1995, and $5 million in 1994, and are anticipated to be approximately $10 million in 1997. The Environmental Quality Department is charged with promoting the Company's compliance with laws and regulations affecting the environment and instituting environmentally sound operating practices. The department monitors the status of the sites where the Company is alleged to have liability and continually reviews the information available and assesses the adequacy of the recorded liability. Other ----- The Company is involved in various legal actions, principally relating to occupational health claims, personal injuries, casualties, property damage and damage to lading. The Company has recorded liabilities on its balance sheet for amounts sufficient to cover the expected payments for such actions. The Company may be contingently liable for approximately $63 million at December 31, 1996 under indemnification provisions related to sales of tax benefits. CRC had an average of 20,761 employees in 1996, approximately 87% of whom are represented by 14 different labor organizations and are covered by 22 separate collective bargaining agreements. The Company was engaged in collective bargaining at December 31, 1996 with labor organizations representing approximately 22% of its labor force. In 1994, Locomotive Management Services, a general partnership of which CRC holds a fifty percent interest, issued $96 million of Equipment Trust Certificates to fund the purchase price of 60 new locomotives. While principal and interest payments on certificates will be fully guaranteed by CRC, through a sharing agreement with its partner, CRC's portion of the guarantee is reduced to approximately $48 million, effective January 1, 1997, with the Company's purchase of twenty of the locomotives. 63 CRC has received three adverse jury verdicts related to railroad crossing accidents in Ohio that include significant punitive damage awards that collectively approximate $30 million. CRC believes the punitive damage awards in those cases are improper and that it has meritorious defenses, which it plans to pursue on appeal. The Company is not presently able to reasonably estimate the ultimate outcome of these cases, and accordingly, no expense for such awards has been recorded as of December 31, 1996. As part of the Merger Agreement (Note 2), the Company may be a party to certain stock purchase options or, under certain circumstances, be required to pay substantial termination fees. 14. Condensed Quarterly Data (Unaudited) ----------------------------------- First Second Third Fourth ------------ ----------- ----------- ------------ 1996 1995 1996 1995 1996 1995 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- ($ In Millions Except Per Share) Revenues $889 $889 $949 $923 $933 $923 $943 $951 Income (loss) from operations 69 114 54 180 235 208 243 (46) Net income (loss) 31 55 26 123 138 116 147 (30) Net income (loss) per common share: Primary .36 .66 .30 1.52 1.74 1.44 1.86 (.43) Fully diluted .35 .61 .29 1.37 1.58 1.31 1.70 (.43) Ratio of earnings to fixed charges 1.75x 2.39x 1.57x 3.42x 4.77x 4.02x 4.91x - Dividends per common share .425 .375 .425 .375 .475 .425 .475 .425 Market prices per common share (New York Stock Exchange) High 77 1/4 57 5/8 73 1/4 56 1/4 74 5/8 70 1/4 100 7/8 74 3/8 Low 67 5/8 50 1/2 66 1/4 51 1/8 63 3/4 55 1/8 68 1/2 65 1/2
During the second quarter of 1996, the Company recorded a one-time charge of $135 million for the non-union employee voluntary early retirement and separation programs and related costs, which reduced net income by $83 million (Note 3). Without this charge, net income would have been $109 million for the quarter ($1.37 and $1.25 per share, primary and fully diluted, respectively). As a result of a decrease in a state income tax rate enacted during the second quarter of 1995, income tax expense was reduced by $21 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate decrease as required under SFAS 109 (Note 7). Without this one-time tax benefit, the Company's net income for the quarter would have been $102 million ($1.25 and $1.14 per share, primary and fully diluted, respectively). During the fourth quarter of 1995, an asset disposition charge reduced income from operations by $285 million and adversely affected the quarter's net income by $176 million (Note 10). Without the asset disposition charge, net income would have been $146 million ($1.82 and $1.65 per share, primary and fully diluted, respectively) for the fourth quarter of 1995. After the asset disposition charge, earnings were insufficient by $58 million to cover fixed charges for the quarter. 64 Item 9. Changes in and Disagreements with Accountants - ------ --------------------------------------------- on Accounting and Financial Disclosure. -------------------------------------- None. 65 PART III Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I under "Executive Officers of the Registrant." CLASS I DIRECTORS - TERM EXPIRING 1997: Name, Business Experience Prior Service As and Other Directorships Conrail Director ------------------------- ---------------- H. Furlong Baldwin Since 1988 Chairman and Chief Executive Officer of Mercantile Bankshares Corporation since prior to January 1991. Director, Mercantile Bankshares Corporation, Baltimore Gas & Electric Company, GRC International, Inc. and USF&G Corporation. Age 65. David M. LeVan Since 1994 Chairman, President and Chief Executive Officer of Conrail since May 1996. Served as President and Chief Executive Officer between March 1995 and May 1996. President and Chief Operating Officer of Conrail between September 1994 and March 1995. Executive Vice President between November 1993 and September 1994. Senior Vice President - Operations between July 1992 and November 1993. Senior Vice President - Operating Systems and Strategies between November 1991 and June 1992. Age 51. Gail J. McGovern Since 1996 Executive Vice President, Consumer Markets of AT&T since January 1997. Executive Vice President, Business Markets of AT&T between November 1995 and January 1997. Vice President, Business Services of AT&T between April 1994 and November 1995. Vice President, Strategy of AT&T between August 1993 and April 1994. Vice President, 800 Service of AT&T between January 1992 and August 1993. Age 45. 66 Name, Business Experience Prior Service As and Other Directorships Conrail Director ------------------------- ---------------- David H. Swanson Since 1989 President and Chief Executive Officer of Countrymark Cooperative, Inc., a farm supply and marketing cooperative, since December 1995. Chairman, President and Chief Executive Officer of Explorer Nutritional Group, an animal nutrition company, and Chairman of Premiere Agri- Technologies, Inc., an international agricultural business, between January 1995 and December 1995. Chief Executive Officer of Premiere Agri-Technologies, Inc. between January 1994 and January 1995. Chairman, President and Chief Executive Officer of Central Soya Company, Inc. between 1986 and January 1994. Director, Fiduciary Trust International. Age 54. CLASS II DIRECTORS - TERM EXPIRING 1998: Kathleen Foley Feldstein Since 1993 President of Economics Studies, Inc., a private consulting firm, since prior to January 1, 1991. Director, Bank America Corporation, Digital Equipment Corporation and John Hancock Mutual Life Insurance Company. Age 56. David B. Lewis Since 1989 Chairman of Lewis, Clay & Munday, P.C., a law firm, since prior to January 1991. Director, LG&E Energy Corp., Comerica Bank, and TRW, Inc. Lewis, Clay & Munday provided legal services to Conrail in 1996. Age 52. John C. Marous Since 1991 Retired in July 1990 from Westinghouse Electric Corporation where he held the position of Chairman and Chief Executive Officer between January 1988 and July 1990. Director, Mellon Bank, N.A. Age 71. Raymond T. Schuler Since 1981 Retired in September 1990 from the Business Council of New York State, Inc., where he held the positions of Vice Chairman, President and Chief Executive Officer. Director, Oneida, Ltd., Northeast Savings and NAMICVSA. Age 67. 67 CLASS III DIRECTORS - TERM EXPIRING 1999: Name, Business Experience Prior Service As and Other Directorships Conrail Director ------------------------- ---------------- Claude S. Brinegar Since 1990 Vice Chairman of Unocal Corp., a high technology earth resources company, from August 1989 to June 1995. Retired from Unocal Corp. in May 1992, where he held the position of Executive Vice President - Administration and Planning, since 1989. Director, Maxicare Health Plans, Inc., and a visiting scholar at Stanford University. Age 70. Daniel B. Burke 1981 to 1986 and Chairman and Owner, Portland, Maine since 1987 Baseball Inc., 1994 to present. Retired in February 1994 from Capital Cities/ABC, Inc. where he held the positions of President and Chief Executive Officer since June 1990. Director, Capital Cities/ABC, Inc., Rohm and Haas Co., Avon Products, Inc., Morgan Stanley Group Incorporated and Darden Restaurants. Age 68. Roger S. Hillas Since 1981 Retired in January 1993 from Meritor Savings Bank where he held the positions of Chairman and Chief Executive Officer between July 1988 and December 1992. Director, P.H. Glatfelter Company, Toll Bros., Inc., The Bon-Ton Stores, Inc. and VF Corporation. Age 69. E. Bradley Jones Since 1987 Retired in December 1984 from LTV Steel Company where he held the positions of Chairman and Chief Executive Officer and Group Vice President of LTV Corporation. Director, TRW, Inc., Cleveland-Cliffs, Inc., Birmingham Steel Corporation and RPM, Inc.; Trustee, First Union Real Estate Equity and Mortgage Investments and Trustee, Fidelity Group of Funds. Age 69. 68 Item 11. Executive Compensation. - ------- ---------------------- COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS Directors' Compensation. Directors who are not officers of Conrail receive an annual fee of $25,000 and a fee of $1,000 for each Board and Board committee meeting they attend. Each such director who is a chairman of a Board Committee receives an additional annual fee of $2,000, except the chairman of the Audit Committee who receives an additional annual fee of $2,500. Directors who are officers of Conrail are not paid any fees for service on the Board or on any Board Committees. Conrail maintains a Retirement Plan for Non-Employee Directors that provides each director who is not an employee or former employee of Conrail with a retirement benefit equal to the product of (1) one-twelfth of his or her annual retainer fee from Conrail in effect at the time the director ceases to serve as a member of the Board and (2) the number of full months, up to 120, he or she served on the Board, including service on the Board of Consolidated Rail Corporation prior to July 1, 1993. Benefits are payable in cash, from Conrail's general assets, in equal monthly installments over the ten-year period beginning with the month following the later of (1) the month in which the director ceases to serve on the Board or (2) the month in which the director attains age 65. Notwithstanding the foregoing, (1) the benefits of directors who cease to serve on the Board on account of disability commence with the month following the month in which the director ceases to serve on the Board, and (2) after a director's death, his or her benefits shall be paid to the director's designated beneficiary, or in the absence of a written designation, to the director's estate, in a lump sum, as soon as practicable following the director's death. Benefits are forfeited in the event the director, before he or she attains age 65, is removed from the Board for cause or voluntarily resigns from the Board, unless the resignation is approved by the Board on account of a conflict between the interests of the director and the interests of Conrail. Conrail also maintains a Board of Directors Charitable Contributions Program pursuant to which Conrail has purchased life insurance policies of $1 million on the life of each director. Upon the death of an individual director, Conrail will donate $1 million in five annual installments of $200,000 each to one or more qualifying educational or charitable organizations designated by the director, and will be reimbursed by the life insurance proceeds. Individual directors derive no financial benefit from the program; all charitable deductions accrue solely to Conrail. In 1996, a donation of $200,000 was made under the program on behalf of the late Ann F. Friedlaender. 69 Compensation of Executive Officers. The following table provides certain summary information concerning compensation awarded to, earned by or paid in 1996 to Conrail's Chairman, President and Chief Executive Officer, David M. LeVan, and each of the four other most highly compensated executive officers of Conrail (determined as of the end of the last fiscal year (December 31, 1996) and hereafter referred to as the "named executive officers") for all services rendered in all capacities to Conrail and its subsidiaries during the fiscal years ended December 31, 1994, 1995 and 1996. SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards ------------------- --------------------------- (a) (b) (c) (d) (f) (g) (i) Restricted Securities Name and Stock Underlying All Other Principal Salary Bonus Award(s) Options/SARS Compensation Position Year ($) ($) ($) (#) ($)(1) - ----------- ---- ------ ----- ---------- ------------ ------------ D. M. LeVan 1996 594,522 0 0(2) 33,000 9,000 Chairman, President 1995 514,519 24,759 509,976(3) 30,746 9,000 & CEO R. J. Conway 1996 257,031 0 0(2) 9,000 9,000 Sr. Vice President- 1995 223,889 101,367 27,425(3) 9,000 9,000 Operations 1994 166,940 88,023 0 9,000 B. B. Wilson 1996 251,840 0 0(2) 9,000 9,000 Sr. Vice President- 1995 253,026 114,792 27,425(3) 9,000 9,000 Merger 1994 245,040 122,500 0 9,000 J.P. Sammon 1996 217,720 0 0(2) 9,000 9,000 Sr. Vice President- 1995 198,334 90,104 27,425(3) 9,000 9,000 CORE Service Group 1994 135,187 54,207 0 9,000 T.P. Dwyer 1996 197,819 0 0(2) 9,000 9,000 Sr. Vice President- 1995 198,882 33,736 106,340(3) 9,000 9,000 Unit Train Service 1994 150,446 65,178 0 9,000 Group
(1) These amounts represent Conrail's matching contribution in the form of Conrail Preferred Stock of amounts deferred by the named executive officers through a 401(k) plan during 1996, 1995 and 1994. The shares are allocated based on the per share price set at the time the shares were purchased by the plan. (2) As of December 31, 1996, Messrs. LeVan, Conway, Wilson, Sammon and Dwyer held, respectively, 15,273, 2,061, 1,230, 0 and 2,212 restricted shares of Conrail Common Stock worth $940,411, $146,513, $122,539, $0 and $124,473, respectively, net of the payments which such officers would have been entitled to receive absent their elections to take restricted shares instead of cash bonuses. Valuation is based on the closing price of Conrail Common Stock on December 31, 1996 ($99.625). 70 (3) This figure represents the following: (i) full market value as of the January 31, 1996 grant date of restricted shares of Conrail Common Stock awarded to the named executive officer as a result of a 1995 bonus deferral, and is composed of the amount of the 1995 bonus which such officer elected to defer ($277,546 and $56,368 for Messrs. LeVan and Dwyer, respectively) plus a matching contribution by Conrail in the amount of 50%; and (ii) the value of shares of Conrail Common Stock awarded on January 22, 1996 in settlement of performance shares granted on January 1, 1995 based on Conrail's having met certain predetermined financial performance goals (computed at a fair market value of $68.5625). The number of shares of restricted stock was determined by the fair market value of Conrail Common Stock on January 31, 1996 ($70.3125). Dividends are paid on all restricted shares. 71 The following table contains information concerning the grant of stock options made to the named executive officers during the fiscal year ended December 31, 1996. Option/SAR Grants in Last Fiscal Year Individual Grant Grant Date Value (a) (b) (c) (d) (e) (f) - ------------------------------------------------------------------------------------------------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Grant Date Options/SARs Employees in Base Price Present Value Name Granted (#) Fiscal Year ($/sh) Expiration Date ($) (2) D. M. LeVan 33,000(1) 6.9% $70.0313 January 1, 2006 521,730 R.J. Conway 9,000(1) 1.9% $70.0313 January 1, 2006 142,290 B.B. Wilson 9,000(1) 1.9% $70.0313 January 1, 2006 142,290 J.P. Sammon 9,000(1) 1.9% $70.0313 January 1, 2006 142,290 T.P. Dwyer 9,000(1) 1.9% $70.0313 January 1, 2006 142,290
(1) Exerciseable as of November, 1996. (2) Based on modified Black-Scholes Option Pricing Model assuming a four year term and that dividends are compounded quarterly and risk-free rates are compounded continuously over the expected option term. Dividend yield for the options is 2.43%, and the risk free rate of return is 5.34%, using daily volatility rates of 25.30%. 72 The following table provides information concerning the exercise of stock options during the fiscal year ended December 31, 1996, by each of the named executive officers and the value of unexercised stock options held by each such officer as of December 31, 1996. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) at FY-End ($) Shares Acquired Exercisable/ Exercisable/ Name On Exercise (#) Value Realized ($) Unexercisable Unexercisable(1) - ---- --------------- ------------------ ------------- ---------------- D. M. LeVan 0 0 E 98,896 E 4,357,479 U 0 U 0 R. J. Conway 0 0 E 27,375 E 1,242,867 U 0 U 0 B. B. Wilson 65,716 3,654,824 E 0 E 0 U 0 U 0 J.P. Sammon 17,375 562,867 E 18,125 E 739,226 U 0 U 0 T.P. Dwyer 30,500 1,314,437 E 0 E 0 U 0 U 0
(1) This valuation is based on the fair market value of Conrail Common Stock on December 31, 1996 ($99.6875). 73 Long-Term Incentive Plans ---Awards in Last Fiscal Year Estimated Future Payouts under Non-Stock Price-Based Plans --------------------------------- (a) (b) (c) (d) (e) (f) Performance Number of or Other Shares, Units Period Until or Other Maturation Name Rights (#)(1) or Payout Threshold (#) Target (#) Maximum(#) D. M. LeVan 4,400 January 1999 3,960 4,400 4,400 R. J. Conway 1,200 January 1999 1,080 1,200 1,200 B. B. Wilson 1,200 January 1999 1,080 1,200 1,200 J.P. Sammon 1,200 January 1999 1,080 1,200 1,200 T.P. Dwyer 1,200 January 1999 1,080 1,200 1,200
(1) Represents performance shares granted to the named executive officers in 1996. Shares will vest proportionately in January 1999 if Conrail has met 90% or more of a three-year, cumulative cash flow goal. 74 Pension Plan Table and Related Disclosure The following table shows estimated annual retirement benefits payable under the Supplemental Pension Plan of Consolidated Rail Corporation. Years of Service - ---------------------------------------------------------------------------- Remuneration 15 YRS 20 YRS 25 YRS 30 YRS 35 YRS - ------------ ------- ------- ------- ------- ------- $ 125,000 $ 20,928 $ 27,905 $ 34,881 $ 41,857 $ 48,833 150,000 26,178 34,905 43,631 52,357 61,083 175,000 31,428 41,905 52,381 62,857 73,333 200,000 36,678 48,905 61,131 73,357 85,583 225,000 41,928 55,905 69,881 83,857 97,833 250,000 47,178 62,905 78,631 94,357 110,083 300,000 57,678 76,905 96,131 115,357 134,583 400,000 78,678 104,905 131,631 157,357 183,583 450,000 89,178 118,905 148,631 178,357 208,083 500,000 99,678 132,905 166,131 199,357 232,583 600,000 120,678 160,905 201,131 241,357 281,583 700,000 141,678 188,905 236,131 283,357 330,583 750,000 152,178 202,905 253,631 304,357 355,083 1,250,000 257,178 342,905 428,631 514,357 600,083 1,500,000 309,678 412,905 516,131 619,357 722,583 Messrs. LeVan, Conway, Wilson, Sammon and Dwyer have 18, 27, 17, 17 and 24 years of credited service, respectively. Compensation covered by the Pension Plan consists of an employee's wages for federal income tax purposes (see column (c) to the Summary Compensation Table plus any bonus paid in 1996; column (d) reflects bonuses earned in the stated year, but not paid in such year), excluding reimbursements, fringe benefits, gains from the exercise of employee stock options, and contributions to deferred compensation plans other than employee deferrals under Conrail's Matched Savings Plan. In 1996, the covered compensation of Messrs. LeVan, Conway, Wilson, Sammon and Dwyer was $625,826, $260,636, $308,554, $210,455, and $233,707, respectively. The table above shows estimated annual retirement benefits, after application of the Pension Plan's railroad retirement offset, payable to participants as a straight life annuity under the Pension Plan upon normal retirement at age 65 based upon final average compensation and years of Conrail service. The table does not reflect statutory limits on benefits under tax-qualified plans. 75 Employment Agreements and Termination of Employment and Change in Control Arrangements To ensure that Conrail would have the continued dedicated service of certain executives notwithstanding the possibility, threat or occurrence of changes in control, in 1995, Conrail entered into severance agreements with its officers and certain key employees, including the officers named in the Summary Compensation Table ("Change of Control Contracts"). The agreements generally provide that if the executive is Terminated other than for Cause within three years after a Change in Control, or within two years of regulatory approval of such Change in Control, each as defined in the agreement, such executive is entitled to receive severance benefits. Such benefits would be equal to a lump sum payment equal to all previously accrued cash compensation, three times the sum of the then-current base salary and highest annual bonus earned within the previous three calendar years, together with certain other payments and benefits, including continuation of employee welfare benefits and an additional payment to compensate the executive for certain excise taxes imposed upon payments under such agreements. In addition, such Termination would result in the acceleration of vesting or lapse of restricted periods on previously granted stock-based incentive awards. In connection with the proposed merger with CSX Corporation, CSX has agreed to pay to Mr. LeVan, in lieu of any stay bonus and severance or termination benefits, a lump sum equal to the economic value of the employment agreement (as reasonably determined by the parties in good faith) which CSX and Mr. LeVan had entered into in connection with the Conrail-CSX merger as originally proposed. Company executives (other than Mr. LeVan) will be paid the value of their Change of Control Contracts in accordance with the terms thereof if their employment is terminated under certain specified circumstances or if they remain employed until May 31, 1998. CSX Corporation has agreed to honor all obligations under employment agreements and employee benefit plans, programs and policies and arrangements of Conrail in accordance with the terms of the Merger Agreement and to provide benefits to those employees of Conrail transferred to CSX or another entity. Severance or supplemental retirement benefits will be provided to non-union employees (other than executive level employees) who are terminated within three years following the regulatory approval of the merger, equal to between six months and 24 months of salary (depending upon an employee's service). Medical coverage will also be continued for these employees for specified periods. A stay bonus program will also be established that provides a lump sum cash payment to non-union employees who remain employed until regulatory approval of the merger with additional payments made to those employees who remain employed for up to six months thereafter. 76 Item 12. Security Ownership of Certain Beneficial - ------- ---------------------------------------- Owners and Management. --------------------- Outstanding Shares. As of the close of business on March 3, 1997, there were issued and outstanding 83,144,397 shares of Conrail Common Stock and 6,358,470 shares of Conrail Preferred Stock. To Conrail's knowledge, the only persons (or "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) who, as of March 3, 1997, owned beneficially more than 5% of any class of Conrail's voting securities are listed in the following table: Name and Address Amount and Nature of Percent Title of Class of Beneficial Owner Beneficial Ownership of Class - -------------- ------------------- -------------------- -------- Conrail Common Green Acquisition Corp., 17,775,124 (of which: sole 21.4% Stock a wholly- owned subsidiary of voting power - 17,775,124; CSX Corp. shared voting power - 0; sole One James Center dispositive power -17,775,124; 901 E. Cary Street shared dispositive power - 0) (1) Richmond, VA 23219 Conrail Common Alantic Acquisition Corp., 8,200,100 (of which: sole 9.9% Stock a wholly-owned subsidiary of voting power - 8,200,100; Norfolk Southrn Corp. shared voting power - 0; sole Three Commercial Place dispositive power - 8,200,100; Norfolk, VA 23510 shared dispositive power - 0) (2) Conrail Preferred Fidelity Management Trust Co. 4,825,000 shares,not individually, 75.9% Stock 82 Devonshire Street but solely in its capacity Boston, MA 02109 as Trustee of the ESOP (3)
1. Held in trust by Deposit Guaranty National Bank, One Deposit Guaranty Plaza, Jackson, Mississippi. These shares represent 19.9% of Conrail's total voting securities (Common Stock and Preferred Stock voting as one class). CSX also beneficially owns an additional 15,955,477 shares of Conrail Common Stock pursuant to a Conrail Stock Option Agreement dated as of October 14, 1996 between Conrail and CSX, pursuant to which CSX currently has the right to purchase up to that number of additional shares at a price of $92.50 per share. These option shares, together with the 17,775,124 shares referred to above, represent approximately 37.7% of Conrail's total voting securities. 2. Held in trust by First American National Bank, 300 Union Street, Nashville, Tennessee. These shares represent 9.2% of Conrail's total voting securities. 3. Shares of Conrail Preferred Stock are convertible into shares of Conrail Common Stock at any time on a share-for-share basis, subject to certain antidilution adjustments. As a result, ownership of shares of Conrail Preferred Stock is deemed to be ownership of an equal number of shares of Conrail Common Stock. These 4,825,000 shares of Conrail Preferred Stock represent 5.4% of Conrail's total voting securities. Ownership by Management of Equity Securities. The following table sets forth the beneficial ownership, as of March 3, 1997, of Conrail Common 77 Stock and Conrail Preferred Stock of each director and nominee, each of the executive officers named in the Summary Compensation Table and all directors and executive officers as a group. Unless otherwise indicated, each such person has sole voting and investment power with respect to such shares of Conrail Common Stock and sole voting power with respect to such shares of Conrail Preferred Stock. The ESOP Trustee holds sole investment power with respect to all shares of Conrail Preferred Stock. As of March 3, 1997, all Conrail directors and officers as a group owned less than one percent (1%) of the aggregate outstanding Conrail Common Stock and Conrail Preferred Stock. Amount and Nature Name and Title of Beneficial Title of Class of Beneficial Owner Ownership - -------------- ------------------- ----------------- Conrail Common Stock H. Furlong Baldwin 2,000 Director Claude S. Brinegar Director 1,000 Daniel B. Burke Director 2,000 Kathleen Foley Feldstein Director 700 Roger S. Hillas Director 2,362 E. Bradley Jones Director 1,000 David B. Lewis Director 919 John C. Marous Director 612 Gail J. McGovern Director 0 Raymond T. Schuler Director 6,070 David H. Swanson Director 452 David M. LeVan Director, Chairman, President and Chief Executive Officer 138,896(1) 78 Bruce B. Wilson Senior Vice President - Merger 28,166(1) Ronald J. Conway Senior Vice President - Operations 33,481(1) John P. Sammon Senior Vice President - CORE Service Group 23,839(1) Timothy P. Dwyer Senior Vice President - Unit Train Service Group 12,252(1) All Directors and Executive Officers 577,760 as a group(2) (1) For Messrs. LeVan, Wilson, Conway, Sammon and Dwyer, respectively, includes options exercisable within 60 days to acquire 98,896, 0, 27,375, 18,125 and 0 shares of Conrail Common Stock and 1,968, 1,700, 1,903, 1,673 and 1,665 shares of Conrail Preferred Stock allocated to the accounts of the named officers pursuant to the ESOP. Shares of Conrail Preferred Stock are convertible into shares of Conrail Common Stock at any time on a share-for-share basis, subject to certain antidilution adjustments. As a result, ownership of shares of Conrail Preferred Stock is deemed to be ownership of an equal number of shares of Conrail Common Stock. (2) Includes options exercisable within 60 days to acquire 356,560 shares of Conrail Common Stock and 35,842 shares of Conrail Preferred Stock allocated to the accounts of individual officers pursuant to the ESOP. This number also includes shares held by all officers of Consolidated Rail Corporation. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE - ------------------------------------------------------- Section 16(a) of the Exchange Act and the rules and regulations promulgated thereunder require that certain officers, directors and 10% beneficial owners of Conrail Common Stock file with the Securities and Exchange Commission, within specified time periods, reports concerning transactions in Conrail securities. Based on its review of the filed forms or written representations that, in certain instances, no filing is required, Conrail believes that all Section 16(a) filing requirements during 1996 were complied with, except that, due to administrative error, one timely-filed report of each of Bruce B. Wilson, Senior Vice President-Merger, and Lucy S.L. Amerman, Vice President-Risk Management, disclosed an incorrect number of shares sold in a tender offer and stock options granted, respectively. and Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- None except as disclosed in Item 10. 79 PART IV Item 14. Exhibits, Financial Statement - ------- ----------------------------- Schedules, and Reports on Form 8-K. ---------------------------------- (a) The following documents are filed as a part of this report: 1. Financial Statements: Page ---- Report of Independent Accountants...................... 41 Consolidated Statements of Income for each of the three years in the period ended December 31, 1996. 42 Consolidated Balance Sheets at December 31, 1996 and 1995 ......................................... 43 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1996.................... 44 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 .............................. 45 Notes to Consolidated Financial Statements............. 46 2. Financial Statement Schedules: The following financial statement schedules should be read in connection with the financial statements listed in Item 14(a)1 above. Index to Financial Statement Schedules -------------------------------------- Page ---- Schedule II Valuation and Qualifying Accounts....... S-1 Schedules other than those listed above are omitted for reasons that they are not required, are not applicable, or the information is included in the financial statements or related notes. 80 3. Exhibits: Exhibit No. ---------- 2.1 Agreement and Plan of Merger among Consolidated Rail Corporation, Conrail Inc. and Conrail Subsidiary Corporation dated as of February 17, 1993, filed as Appendix A to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 2.2 Agreement and Plan of Merger dated October 14, 1996 among Conrail Inc., CSX Corporation and Green Acquisition Corp. (the "Merger Agreement") (incorporated by reference to Exhibit (c)(1) to the Solicitation/Recommendation Statement on Schedule 14D-1, originally filed with the Securities and Exchange Commission ("SEC") on October 16, 1996 (the "CSX 14D-1")). 2.3 First Amendment to the Merger Agreement, dated as of November 5, 1996 (incorporated by reference to Exhibit (c)(7) to the CSX 14D-1). 2.4 Second Amendment to the Merger Agreement, dated as of December 18, 1996 (the "Second Amendment") (incorporated by reference to Exhibit (c)(10) to the CSX 14D-1). 2.5 Third Amendment to the Merger Agreement, dated as of March 7, 1997 (the "Third Amendment") (incorporated by reference to Exhibit (c)(12) to the CSX 14D-1). 3.1 Articles of Incorporation of the Registrant filed as Appendix B to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 3.2 Amended and Restated Bylaws of the Registrant filed as Exhibit 3 to the Registrant's Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by reference. 4.1 Articles of Incorporation of the Registrant filed as Appendix B to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 4.2 Form of Certificate of Common Stock, par value $1.00 per share, of the Registrant, filed as Exhibit 3.4(i)(c) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 81 4.3 Form of Certificate of Series A ESOP Convertible Junior Preferred Stock, no par value, of the Registrant filed as Exhibit 3.4(i)(d) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.4 Rights Agreement dated as of July 19, 1989, between Consolidated Rail Corporation and First Chicago Trust Company of New York, together with Form of Right Certificate and Summary of Rights to Purchase Common Shares as exhibits thereto, filed as Exhibit 1 to Consolidated Rail Corporation's Form 8-K dated July 31, 1989 and incorporated herein by reference. 4.5 Amendment to Rights Agreement dated as of March 21, 1990, filed as Exhibit 4.5 to Consolidated Rail Corporation's Report on Form 8-K dated March 27, 1990 and incorporated herein by reference. 4.6 Amendment, Assignment and Assumption Agreement, dated as of February 17, 1993, with respect to the Rights Agreement, filed as Exhibit 3.4(i)(g) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.7 Amendment to Rights Agreement dated as of October 19, 1994 filed as Exhibit 4.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. 4.8 Amendment to Rights Agreement of the Registrant dated as of September 20, 1995, filed as Exhibit 3.4(i)(i) to the Registrant's Form 8-B/A dated as of September 25, 1995 and incorporated herein by reference. 4.9 Form of Indenture between Consolidated Rail Corporation and The First National Bank of Chicago, as Trustee, with respect to the issuance of up to $1.25 billion aggregate principal amount of Consolidated Rail Corporation's debt securities, filed as Exhibit 4 to Consolidated Rail Corporation's Registration Statement on Form S-3 (Registration No. 33- 34040) and incorporated herein by reference. In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of instruments of the Registrant and its subsidiaries with respect to the rights of holders of certain long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. 10.1 Second Amended and Restated Northeast Corridor Freight Operating Agreement dated October 1, 1986 between National Railroad Passenger Corporation and Consolidated Rail 82 Corporation, filed as Exhibit 10.1 to Consolidated Rail Corporation's Registration Statement on Form S-1 (Registration No. 33-11995) and incorporated herein by reference. 10.2 Letter agreements dated September 30, 1982 and July 19, 1986 between Consolidated Rail Corporation and The Penn Central Corporation, filed as Exhibit 10.5 to Consolidated Rail Corporation's Registration Statement on Form S-1 (Registration No. 33-11995) and incorporated herein by reference. 10.3 Letter agreement dated March 16, 1988 between Consolidated Rail Corporation and Penn Central Corporation relating to hearing loss litigation, filed as Exhibit 19.1 to Consolidated Rail Corporation's Quarterly Report on Form 10- Q for the quarter ended March 31, 1988 and incorporated herein by reference. 10.4 Conrail Stock Option Agreement, dated as of October 14, 1996 (incorporated by reference to Exhibit (c)(2) of the CSX 14D- 1). Management Compensation Plans and Contracts ------------------------------------------- 10.5 Consolidated Rail Corporation 1993 Annual Performance Achievement Reward Plan, filed as Exhibit 3.10(v) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 10.6 Consolidated Rail Corporation 1994 Annual Performance Achievement Reward Plan for Officers, filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.7 Consolidated Rail Corporation 1995 Annual Performance Achievement Reward Plan for Officers, filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.8 Consolidated Rail Corporation 1996 Annual Performance Achievement Reward Plan for Officers. 10.9 Retirement Plan for Non-employee Directors, as amended February 21, 1990, filed as Exhibit 10.10 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and included herein by reference. 83 10.10 Conrail 1987 Long-Term Incentive Plan, filed as Exhibit 4.4 to Consolidated Rail Corporation's Registration Statement on Form S-8 (Registration No. 33-19155) and incorporated herein by reference. 10.11 Conrail 1991 Long-Term Incentive Plan, amended and restated as of May 15, 1996, filed as Appendix A to the Registrant's Proxy Statement dated April 3, 1996 and incorporated herein by reference. 10.12 Conrail Senior Executive Performance Plan, filed as Appendix A to the Registrant's Proxy Statement for the 1995 Annual Meeting of Shareholders, dated April 3, 1995, and incorporated herein by reference. 10.13 Form of Severance Agreement between the Registrant and each of the officers of Consolidated Rail Corporation, dated as of August 1, 1995, filed as Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference. 11 Statement of earnings per share computations. 12 Computation of the ratio of earnings to fixed charges. 21 Subsidiaries of the Registrant, filed as Exhibit 21 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 23 Consent of Independent Accountants. 24 Each of the officers and directors signing this Annual Report on Form 10-K has signed a power of attorney, contained on page 86 hereof, with respect to amendments to this Annual Report. 27 Financial Data Schedule. (b) Reports on Form 8-K. ------------------- October 22, 1996, in connection with Merger Agreement between CSX Corporation and Consolidated Rail Corporation. 84 (c) Exhibits. -------- The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed herewith or incorporated herein by reference. (d) Financial Statement Schedules. ----------------------------- Financial statement schedules and separate financial statements specified by this Item are included in Item 14(a)2 or are otherwise omitted for reasons that they are not required or are not applicable. 85 POWER OF ATTORNEY ----------------- Each person whose signature appears below under "SIGNATURES" hereby authorizes Timothy T. O'Toole and John A. McKelvey, or either of them, to execute in the name of each such person, and to file, any amendment to this report and hereby appoints Timothy T. O'Toole and John A. McKelvey, or either of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file any and all amendments to this report. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act 1934, Conrail Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONRAIL INC. Date: March 19, 1997 By /s/ David M. LeVan ---------------------- David M. LeVan Chairman, President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 19th day of March, 1997, by the following persons on behalf of Conrail Inc. and in the capacities indicated. Signature Title /s/ David M. LeVan - ------------------ Chairman, President and Chief David M. LeVan Executive Officer and Director (Principal Executive Officer) /s/ John A. McKelvey - ------------------- Senior Vice President-Finance John A. McKelvey (Principal Financial Officer) /s/ Donald W. Mattson - --------------------- Vice President-Controller Donald W. Mattson (Principal Accounting Officer) 86 /s/ H. Furlong Baldwin Director - ---------------------- H. Furlong Baldwin /s/ Claude S. Brinegar Director - ---------------------- Claude S. Brinegar Director - ------------------- Daniel B. Burke /s/ Kathleen Foley Feldstein Director - ---------------------------- Kathleen Foley Feldstein /s/ Roger S. Hillas Director - ------------------- Roger S. Hillas /s/ E. Bradley Jones Director - -------------------- E. Bradley Jones /s/ David B. Lewis Director - ------------------ David B. Lewis /s/ John C. Marous Director - ------------------ John C. Marous /s/ Gail J. McGovern Director - -------------------- Gail J. McGovern /s/ Raymond T. Schuler Director - ---------------------- Raymond T. Schuler Director - -------------------- David H. Swanson 87 E-1 EXHIBIT INDEX Exhibit No. - ---------- 10.8 Consolidated Rail Corporation 1996 Annual Performance Achievement Reward Plan for Officers 11 Statement of earnings per share computations 12 Computation of the ratio of earnings to fixed charges 23 Consent of Independent Accountants 27 Financial Data Schedule Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 3.1, 3.2, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.9, 10.10, 10.11, 10.12, 10.13 and 21 are incorporated herein by reference. Powers of attorney with respect to amendments to this Annual Report are contained on page 86. 88
EX-10 2 Exhibit 10.8 ------------ CONSOLIDATED RAIL CORPORATION ANNUAL PERFORMANCE ACHIEVEMENT REWARD PLAN FOR 1996 FOR OFFICERS 1. Definitions ----------- When used in this document, the following terms shall have the meanings set forth below: Board means the Board of Directors of Conrail. ----- Conrail means the Consolidated Rail Corporation. ------- The Company means Conrail Inc. ----------- Operating Ratio means the percentage determined by di- --------------- viding (a) operating expenses by (b) revenues, as shown on Conrail's consolidated financial statements. Cost of Risk Ratio means the percentage determined by ------------------ dividing (a) the sum of the cost of risk elements (as designated by the Risk Management Department) by (b) Conrail's railroad operating revenues. Participant means an officer of Conrail who participates ----------- in the Plan in accordance with Section 3. Phantom Shares means shares credited to a Participant's --------------- account each of which shall be deemed equivalent to the promise to convert one phantom share to one share of Conrail Inc. common stock. Plan means the Consolidated Rail Corporation Annual ---- Performance Achievement Reward Plan for 1996, as set forth in this document and as may be amended from time to time. Salary means the salary earned by a Participant in 1996 ------ from employment with Conrail. For purposes of this Plan, Salary shall include salary earned pursuant to any holiday, vacation, or sick leave policy of Conrail, salary deferred pursuant to the Consolidated Rail Corporation Matched Savings Plan, and salary contributed pursuant to the Consolidated Rail Corporation Flexible Benefits Plan. Except as otherwise provided in the preceding sentence, Salary shall not include any amount payable pursuant to receipt of a Spot Award or a 1995 Selective Cash Award paid in 1996 or to an employee bene fit or incentive compensation plan. 2. Introduction ------------ The Board has approved the implementation of this Plan. The Board expects that the Plan will provide an incentive for enhanced individual and corporate performance and aid Conrail in attracting and retaining capable employees. 3. Eligibility ----------- Each officer of Conrail, who is employed during 1996, shall participate in the Plan. 4. Prerequisite for Award ---------------------- Anything in this Plan to the contrary notwithstanding, no award shall be payable under the Plan in the event actual operating income for 1996, as shown on Conrail's consolidated financial statements, is less than $690 million. 5. Amount of Award --------------- (a) Under the Plan, a Participant may earn an award equal to a percentage (or percentages) of his/her Salary. This award may consist of two parts, the Annual Performance Achievement Reward ("APAR") and the Annual Performance Achievement Reward Plus ("APAR Plus"). The APAR percentage(s) shall depend upon the position held by the Participant and/or the performance of Conrail, measured by the relationship of (i) the Operating Ratio for 1996, to (ii) the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan and the relationship of (iii) the Cost of Risk Ratio for 1996 to (iv) the Cost of Risk Ratio goal set by the Board (or its delegate) for purposes of the Plan, both as certified by Conrail's chief financial officer, after taking into account any amounts payable pursuant to the Plan that are not taken into account in the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan. The percentage(s) shall be determined in accordance with one of three schedules. The APAR Plus percentage shall depend upon the performance of Conrail, as measured by the relationship of (i) the Operating Ratio for 1996 to (ii) the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan. Conrail shall furnish each Participant with a copy of the schedule(s) of awards applicable to him/her. - 2 - (b) A Participant's award shall be pro-rated, as provided in Section 8, in the event he/she participates in the Plan for less than all of 1996 or moves into a position cov ered under a different schedule of awards. The Participant's award shall equal the sum of the partial awards computed by multiplying (i) the Salary earned by the Participant while covered under a schedule of awards by (ii) the percentage of Salary determined in accordance with such schedule. (c) Anything to the contrary in this Section 5 not withstanding, a Participant's award may be reduced by up to 50 percent by Conrail's President and Chief Executive Officer (or his delegate(s)) on the basis of individual or group performance. 6. Election to Defer Awards ------------------------ (a) Each Participant shall be entitled to elect irrevocably to defer, for a period of one, two, three, four, or five years, all or a portion of any APAR award payable to him/her pursuant to this Plan. The minimum deferral permitted is 10 percent and a deferral may be made in any percentage above this minimum. The opportunity to defer any APAR award is available only to Participants who reside in the United States and are subject to U.S. federal income tax withholding. A Participant who elects to defer his/her APAR award shall be credited with Phantom Shares in an account maintained for each Participant. Such elections must be made no later than July 27, 1996, on forms provided by Conrail's Assistant Vice President-Compensation and Benefits for this purpose. (b) A Participant who elects to defer an APAR award in Phantom Shares shall be credited with such shares equal in value to the amount of his/her deferred award (the "Deferred Shares"), plus additional Phantom Shares equal in value to 10 percent (10%) of his/her deferred award times the period of deferral selected, up to a maximum of fifty percent (50%) (the "Bonus Shares"). The number of Phantom Shares so awarded shall be determined as of the date the non-deferred portions of awards are or would have been paid. (c) The dividend equivalents paid on such Deferred Shares and Bonus Shares shall be re-invested as additional Phantom Shares for the Participant or paid in cash based upon the Participant's election included in the election form noted in Section 6.(a) above. The Deferred and Bonus Shares of a Participant shall not be entitled to voting rights. (d) The APAR Plus award shall not be eligible for defer ral. 7. Time and Form of Payments ------------------------- (a) In the case of a Participant who has made an election to defer, the Deferred Shares and the Participant's Bonus Shares shall be paid in the form of Conrail Inc. common stock, recorded in electronic book entry at First Chicago Trust Company of New York, the Company's transfer agent, as soon as practicable after expiration of the deferral period chosen by the Participant. Such stock may be issued from Conrail Inc.'s Stock Employee Compensation Trust or from the Company's authorized but unissued shares. Any portion of an APAR award not deferred by a Participant shall be paid to him/her in cash during the first quarter of 1997. - 3 - (b) In the case of a Participant who has made no election to defer, the Participant's award shall be paid to him/her in cash in a single installment during the first quarter of 1997. 8. Special Payment Rules --------------------- Anything in this Plan to the contrary notwithstanding, a Participant who is dismissed for cause prior to receipt of any portion of his/her award shall forfeit such portion of the award. A Participant who resigns from Conrail during 1996 shall receive a prorated portion of his/her APAR and APAR Plus awards. The amount of the prorated award shall be determined by applying a fraction to the Participant's Salary determined up until his/her date of termination. The numerator of this fraction is the number of days of the year until the termination occurred and the denominator is 366, the number of days in the year. A Participant who resigns from Conrail after December 31, 1996, but before the date in the first quarter of 1997 on which payments are made under the Plan, shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his/her award, such election is void and the prorated or full award will be paid in cash in the first quarter of 1997. A Participant who defers his/her award and resigns from Conrail during the deferral period shall receive a payment of his/her APAR award in cash. Such payment shall be equal to the lesser of the amount of his/her deferred award made in the first quarter of 1997 or the number of phantom shares times the fair market value of Conrail Inc. common stock on the date of his/her termination. Any shares accumulated through the election to reinvest dividend equivalents will be paid in cash at the fair market value of Conrail Inc. common stock on the date of his/her termination. Such Participant shall forfeit all Bonus Shares. If a Participant who has elected to defer all or a portion of his/her APAR award in the form of Deferred and Bonus Shares retires with the right to an immediate pension under the Supplemental Pension Plan of Consolidated Rail Corpo ration (the "Pension Plan") prior to receipt of the deferred award, the Participant shall receive shares of Conrail Inc. common stock representing the Participant's deferred APAR award recorded in electronic book entry at First Chicago Trust Company of New York. The matching or Bonus Shares shall be prorated on the basis of a fraction, the denominator of which shall be the number of days from the date of the award through the end of the elected deferral period and the numerator shall be the number of days from the date of the award through the last day of employment. This proration factor shall be multiplied by the number of Bonus Shares and the resulting number of Bonus Shares shall be distributed to the Participant. The balance of the Bonus Shares shall be forfeited on the last day of the Participant's employment. If during 1996, a Participant is force reduced, moves from a non-agreement position to an agreement position, goes on a leave of absence, becomes disabled or dies, such - 4 - Participant's award shall be prorated and paid in the first quarter of 1997 on the basis of a fraction applied to the Participant's Salary, the numerator of which is the number of days of the year until the event occurred and the denominator of which is 366, the number of days in the year. The amount of the award shall be paid in cash. A Participant who is force reduced, moves from a non- agreement position to an agreement position or goes on a leave of absence after the end of 1996, but before payments under the Plan are made shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his or her APAR award, the election is void and the APAR award is payable in cash. A Participant who becomes disabled or dies after the end of 1996, but before payments under the Plan are made shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his/her APAR award, such award will be paid in cash when the award is made to the Participant or his/her beneficiary(ies) or estate. If, after the APAR award is made in the first quarter of 1997, a Participant is force reduced, becomes disabled or dies, his/her Deferred and Bonus Shares shall be distributed in full to him/her or to his/her beneficiary(ies) or estate in the form of Conrail Inc. common stock recorded in electronic book entry at First Chicago Trust Company of New York. If after the APAR award is made in the first quarter of 1997 a Participant goes on a leave of absence or to an agreement position, his/her Deferred and Bonus shares shall be retained in his/her account and distributed in the form of Conrail Inc. common stock recorded in electronic book entry at First Chicago Trust Company of New York at the end of the deferral period selected by the Participant; unless he/she is dismissed for cause, in which case such shares shall be forfeited. 9. Acceleration of Awards Upon a Change of Control ----------------------------------------------- Notwithstanding any provision of the Plan to the contrary, upon the occurrence of a Change of Control, as defined below, all terms and conditions with respect to Phantom Stock then outstanding shall be deemed satisfied as of the date of the Change of Control for all purposes hereunder, and Conrail Inc. common stock issued in settlement of such Phantom Stock shall be payable to Participants as soon as practicable following such change of control. A Change of Control hereunder shall be deemed to have occurred on the earliest of the following dates: (i) the date any entity, person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than the Company or any of its Subsidiaries or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its - 5 - Subsidiaries, shall have become the beneficial owner of, or shall have obtained voting control over, outstanding securities issued by the Company entitled to cast 20% or more of the votes which all outstanding securities issued by the Company are entitled to cast in an election of directors of the Company; (ii) the date the shareholders of the Company and the shareholders of the other constituent corporations have approved a definitive agreement to merge or consolidate the Company with or into another corporation other than in either case, a merger or consolidation of the Company in which holders of shares of common stock of Conrail Inc. immediately prior to the merger or consolidation have at least 80% of the ownership of common stock of the surviving corporation immediately after the merger or consolidation, which common stock is then held in the same proportion as such holders' ownership of Common Stock of Conrail Inc. immediately before the merger or consolidation; (iii) the date the shareholders of the Company approve a definitive agreement to sell or otherwise dispose of substantially all the assets of the Company; or (iv) the date there shall have been a change in the composition of the Company's Board such that a majority of the Company's Board shall have been members thereof for less than twelve (12) months, unless the nomination for election of each new director who was not a director at the beginning of such twelve (12) month period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. To the extent a Participant hereunder is a party to an agreement with the Company as authorized by its Board on June 21, 1995, awards hereunder shall be subject to the terms of such agreement, in addition to the foregoing provisions of this Section 9. In resolving any conflict between the terms of such agreement and the terms of the Plan, the provisions which are most favorable to the Participant shall prevail. 10. Withholding for Taxes --------------------- Payments pursuant to this Plan shall be reduced by amounts sufficient to satisfy any Federal, state, and/or local tax withholding requirements. With respect to payments in the form of stock, an amount of stock shall be withheld from the award that is sufficient to enable Conrail to satisfy any Federal, state, and/or local tax withholding requirements. 11. Designation of Beneficiary A Participant may designate a beneficiary(ies) to receive any payment pursuant to the Plan that has not been made prior to the Participant's death. Such designation must be submitted to Conrail's Assistant Vice President-Compensation and Benefits, on a form provided for this purpose. Such form is available upon request from the Administrator-APAR, 18-B 2001 Market Street, Philadelphia, PA 19101-1418. In the ab sence of such a designation, a Participant's most recent designation of beneficiary(ies) pursuant to a prior annual performance achievement reward plan maintained by Conrail shall be treated as his/her designation for purposes of this Plan. - 6 - 12. Duration, Amendment, and Termination of Plan -------------------------------------------- The Plan shall take effect on January 1, 1996. Conrail, by action of the Board, may amend or terminate the Plan at any time. In addition, Conrail's President and Chief Executive Officer may amend the eligibility requirements and/or the schedules of awards under the Plan, in connection with a re- assessment of positions or changes in organization or staffing. The Plan shall terminate automatically as of January 1, 1997, unless terminated earlier by Conrail; provided, however, that such termination shall not preclude the subsequent payment of awards earned under the Plan. - 7 - EX-11 3 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- [CAPTION] ($ In Millions Except Per Share) Years ended December 31, ------------------------ 1996 1995 1994 [S] ---- ---- ---- Primary [C] [C] [C] - ------- Net income $342 $264 $324 Dividends declared on Series A ESOP convertible junior preferred stock (ESOP Stock), net of tax benefits (12) (13) (13) ---- ---- ---- Adjusted net income $330 $251 $311 ==== ==== ==== Fully Diluted - ------------- Net income 342 264 324 Nondiscretionary adjustment (1) (2) (3) (5) ---- ---- ---- Adjusted net income $340 $261 $319 ==== ==== ==== Page 1 of 3 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- [CAPTION] ($ In Millions Except Per Share) Years ended December 31, ----------------------------------- 1996 1995 1994 ---------- ----------- ---------- [S] [C] [C] [C] Weighted average number of shares (2) Primary Weighted average number of common shares outstanding 76,903,665 78,144,694 79,089,464 Effect of shares issuable under employee stock compensation plans 725,160 589,253 585,317 ---------- ---------- ---------- 77,628,825 78,733,947 79,674,781 ========== ========== ========== Fully diluted Weighted average number of common shares outstanding 76,903,665 78,144,694 79,089,464 ESOP Stock 9,393,275 9,799,611 9,887,940 Effect of shares issuable under employee stock compensation plans 1,028,635 758,407 585,317 ---------- --------- ---------- 87,325,575 88,702,712 89,562,721 ========== ========== ========== Net income per common share Primary $4.25 $3.19 $3.90 Fully diluted 3.89 2.94 3.56 Page 2 of 3 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- Notes: 1. Represents the increase, net of income tax benefits, in ESOP-related expenses assuming conversion of all ESOP Stock to common stock. 2. Shares held by the Employee Benefits Trust (the "Trust") are not considered outstanding for earnings per share computations until issued by the Trust. Page 3 of 3 EX-12 4 Exhibit 12 ---------- CONRAIL INC. ----------- COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES -------------------------------------------------------- [CAPTION] ($ In Millions) Quarters Ended Quarters Ended Quarters Ended Quarters Ended Years Ended March 31, June 30, September 30, December 31, December 31, -------------- -------------- -------------- -------------- ----------------- 1996 1995 1996 1995 1996 1995 1996 1995(1) 1996 1995 1994 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Earnings - -------- Pre-tax income (loss) $ 50 $ 91 $38 $165 $216 $188 $227 $(52) $531 $392 $532 Add: Interest expense 47 48 46 50 44 49 45 47 182 194 192 Rental expense interest factor 14 14 14 16 12 12 11 11 51 53 42 Less equity in undistributed earnings of 20-50% owned companies (4) (5) (4) (5) (5) (4) (8) (6) (21) (20) (17) ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings available for fixed charges $107 $148 $94 $226 $267 $245 $275 $ - $743 $619 $749 ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Fixed Charges - ------------- Interest expense 47 48 46 50 44 49 45 47 182 194 192 Rental expense interest factor 14 14 14 16 12 12 11 11 51 53 42 Capitalized interest 1 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Fixed charges $ 61 $ 62 $60 $ 66 $ 56 $ 61 $ 56 $ 58 $233 $247 $235 ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Ratio of earnings to fixed charges 1.75x 2.39x 1.57x 3.42x 4.77x 4.02x 4.91x - 3.19x 2.51x 3.19x ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Note: For the purpose of computing the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. (1) In the fourth quarter of 1995, the Company recorded an asset disposition charge of $176 million (after tax benefits of $109 million). After this charge, earnings were insufficient by $58 million to cover fixed charges for the quarter.
EX-23 5 Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-64670 and 33-62929) and in the Registration Statements on Form S-8 (Nos. 33-19155, 33- 44140, 33-57717, 33-60445 and 333-6513) of Conrail Inc. and subsidiaries of our report dated January 21, 1997, except as to Note 2, which is as of March 7, 1997, included in this Form 10-K. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, PA 19103 March 24, 1997 EX-27 6
5 Exhibit 27 ---------- CONRAIL INC. FINANCIAL DATA SCHEDULE ($ In Millions Except Per Share)
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 1,000,000 DEC-31-1996 JAN-01-1996 DEC-31-1996 12-MOS 30 0 630 0 139 1,117 6,590 0 8,402 1,092 1,876 0 211 88 2,808 8,402 0 3,714 0 3,113 0 0 182 531 189 342 0 0 0 342 4.25 3.89
EX-99 7 Schedule II CONRAIL, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, [CAPTION] (In Millions) Additions ---------------------- Balance at Charged to Charged Balance Beginning Costs and to Other At End Description of Period Expenses Accounts Deductions of Period - ----------- ----------- ----------- --------- ---------- ---------- (1) 1994 Casualty reserves Current............... $ 93 $(10) (2) $103 Noncurrent............ 132 $172 $ 12 104 (3) 212 Allowance for disposition of property and equipment (4)........... 256 15 241 1995 Casualty reserves Current............... 103 3 (4) (2) 110 Noncurrent............ 212 171 14 180 (3) 217 Allowance for disposition of property and equipment (4) (5)....... 241 261 63 439 1996 Casualty reserves Current............... 110 (31) (2) 141 Noncurrent............ 217 165 11 203 (3) 190 Allowance for disposition of property and equipment (4)............ 439 31 408 (1) Includes charges to property accounts in connection with construction projects and the recording of receivables from third parties. (2) Includes net transfers from noncurrent. (3) Transfers to current. (4) Deductions of $15 million, $63 million and $31 million in 1994, 1995 and 1996, respectively, represent net losses on asset dispositions. (5) In 1995, the Company recorded an asset disposition charge, which resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically support current and expected operations. The Company identified and has committed to sell 1,800 miles of rail lines that are expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value. S-1
-----END PRIVACY-ENHANCED MESSAGE-----