-----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, HkiHAY+uIjC2UCqtlFIgCOdkiGiEHvp7t4Gio1qC99asnOMYcJVE+M3s025QO0qe /tBquIphSc0U9sgTQ/kW9g== 0000897732-97-000005.txt : 19970513 0000897732-97-000005.hdr.sgml : 19970513 ACCESSION NUMBER: 0000897732-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12184 FILM NUMBER: 97600695 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-Q 1 10Q -BODY SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 1997 -------------- or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ----- ----- Commission file number 1-12184 ------- CONRAIL INC. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2728514 - ------------------------------------ ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Market Street, Philadelphia, Pennsylvania 19101 - ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (215) 209-4000 - ---------------------------------------------------------------------- (Registrant's telephone number, including area code) - ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of common stock outstanding (as of April 30, 1997) 83,344,079 CONRAIL INC. INDEX Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Statements of Income - Quarters ended March 31, 1997 and 1996 3 Condensed Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 4 Condensed Consolidated Statements of Cash Flows - Quarters ended March 31, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Report of Independent Accountants 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 - 2 - PART I. FINANCIAL INFORMATION CONRAIL INC. Item 1. Financial Statements. -------------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($ In Millions Except Per Share Data) Quarters ended March 31, ------------------- 1997 1996 ---- ---- Revenues $906 $889 ---- ---- Operating expenses Way and structures 124 140 Equipment 202 219 Transportation 354 362 General and administrative 110 99 ---- ---- Total operating expenses 790 820 ---- ---- Income from operations 116 69 Interest expense (45) (47) Other income, net 27 28 ---- ---- Income before income taxes 98 50 Income taxes 37 19 ---- ---- Net income $ 61 $ 31 ==== ==== Net income per common share Primary $ .74 $ .36 Fully diluted .70 .35 Dividends per common share $.475 $.425 Weighted average number of shares used in computing earnings per share (thousands) Primary 80,025 78,002 Fully diluted 86,842 87,759 Ratio of earnings to fixed charges 2.52x 1.75x See accompanying notes. - 3 - CONRAIL INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ($ In Millions) March 31, December 31, 1997 1996 --------- ------------ ASSETS Current assets Cash and cash equivalents $ 32 $ 30 Accounts receivable 662 630 Deferred tax assets 293 293 Material and supplies 141 139 Other current assets 34 25 ------ ------ Total current assets 1,162 1,117 Property and equipment, net 6,599 6,590 Other assets 709 695 ------ ------ Total assets $8,470 $8,402 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings 65 99 Current maturities of long-term debt 82 130 Accounts payable 148 135 Wages and employee benefits 167 143 Casualty reserves 140 141 Accrued and other current liabilities 476 444 ------ ------ Total current liabilities 1,078 1,092 Long-term debt 1,889 1,876 Casualty reserves 195 190 Deferred income taxes 1,520 1,478 Special income tax obligation 330 346 Other liabilities 306 313 ------ ------ Total liabilities 5,318 5,295 ------ ------ Stockholders' equity Series A ESOP convertible junior preferred stock 183 211 Unearned ESOP compensation (221) (222) Common stock 89 88 Additional paid-in capital 2,430 2,404 Employee benefits trust (357) (384) Retained earnings 1,376 1,357 ------ ------ 3,500 3,454 Treasury stock (348) (347) ------ ------ Total stockholders' equity 3,152 3,107 ------ ------ Total liabilities and stockholders' equity $8,470 $8,402 ====== ====== See accompanying notes. - 4 - CONRAIL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ($ In Millions) Quarters ended March 31, ------------------ 1997 1996 ----- ---- Cash flows from operating activities $170 $ 121 ---- ----- Cash flows from investing activities Property and equipment acquisitions (41) (18) Other (4) (16) ---- ----- Net cash used in investing activities (45) (34) ---- ----- Cash flows from financing activities Net proceeds from (repayment of) short-term borrowings (34) 45 Payment of long-term debt (63) (97) Repurchase of common stock - (41) Dividends paid on common stock (40) (35) Dividends paid on preferred stock (3) (10) Other 17 5 ---- ----- Net cash used in financing activities (123) (133) ---- ----- Increase (decrease) in cash and cash equivalents 2 (46) Cash and cash equivalents Beginning of period 30 73 ---- ----- End of period $ 32 $ 27 ==== ===== See accompanying notes. - 5 - CONRAIL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The unaudited financial statements contained herein present the consolidated financial position of Conrail Inc. (the "Company") as of March 31, 1997 and December 31, 1996, and the consolidated results of operations and cash flows for the three- month periods ended March 31, 1997 and 1996. In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results for the interim periods included. The rules and regulations of the Securities and Exchange Commission permit certain information and footnote disclosures, ordinarily required by generally accepted accounting principles, to be condensed or omitted from interim financial reports. Accordingly, the financial statements included herein should be read in conjunction with the audited financial statements and notes for the year ended December 31, 1996, presented in the Company's Annual Report on Form 10-K. 2. In January 1997, Consolidated Rail Corporation ("CRC") assumed $31 million of Equipment Trust Certificates, at an interest rate of 8.31%, due 2012, to finance the lease buyout of 20 locomotives from Locomotive Management Services, a general partnership of which CRC holds a fifty percent interest. 3. Effective April 1, 1997, the Company's Board of Directors authorized the vesting of all stock options and performance shares outstanding in connection with the proposed acquisition of the Company by CSX Corporation and Norfolk Southern Corporation. The vesting of the performance shares will result in an $18 million charge to operating expenses in April 1997, while the vesting of stock options will not have an income statement effect. 4. During February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which establishes new standards for computing and presenting earnings per share ("EPS"). SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with a complex capital structure. This Statement is effective for financial statements issued for periods ending after December 15, 1997, with earlier application not permitted. The EPS included in the Company's financial statements is computed in accordance with APB Opinion No. 15, "Earnings per Share". However, had the Company adopted the provisions of SFAS 128 in the first quarter of 1997, basic EPS and diluted EPS would be approximately the same as the current computations of primary EPS and fully diluted EPS, respectively, included in the Company's financial statements. - 6 - 5. Information regarding contingent liabilities and litigation was included in Note 13 to Consolidated Financial Statements and Part I, Item 3 - Legal Proceedings in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. There have been no material developments with respect to these matters during the first three months of 1997, except as disclosed in the Annual Report on Form 10-K or elsewhere herein. - 7 - REPORT OF INDEPENDENT ACCOUNTANTS The Stockholders and Board of Directors of Conrail Inc. We have reviewed the accompanying condensed consolidated balance sheet of Conrail Inc. and its subsidiaries (the "Company") as of March 31, 1997 and the related condensed consolidated statements of income and cash flows for the three months ended March 31, 1997 and March 31, 1996. This financial information is the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial informa tion for it to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1996, and the related consolidated statements of income, of stockholders' equity and of cash flows for the year then ended (not presented herein), and in our report dated January 21, 1997, except as to Note 2 to the consolidated financial statements, which is as of March 7, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, PA 19103 April 16, 1997 - 8 - CONRAIL INC. Item 2. Management's Discussion and Analysis of Financial ------------------------------------------------- Condition and Results of Operations. ----------------------------------- Results of Operations --------------------- Overview -------- Net income for Conrail Inc. ("Conrail" or "the Company") for the first quarter of 1997 was $61 million ($.74 per share, primary and $.70 per share, fully diluted basis) compared with net income of $31 million ($.36 per share, primary and $.35 per share, fully diluted basis) for the first quarter of 1996. Included in net income for the first quarter of 1997 were merger-related costs of $14 million (net of $8 million of tax benefits). Without these costs, net income would have been $75 million ($.91 and $.86 per share, primary and fully diluted, respectively). Traffic volume and revenues for the first quarter of 1997 increased 4.9% and 1.9%, respectively, as compared with the first quarter of 1996. Operating expenses, excluding merger- related costs of $22 million, decreased $52 million, or 6.3%, for the first three months of 1997 as compared with the comparable period for 1996. The Company's operating expenses for the first quarter of 1996 were unfavorably affected by difficult operating conditions caused by severe weather experienced over most of the Company's service area. The increase in revenues and decrease in operating expenses resulted in an operating ratio (operating expenses as a percent of revenues) of 87.2% (84.7% excluding merger-related costs) for the first quarter of 1997 as compared with 92.3% for the first quarter of 1996. Proposed Merger --------------- On April 8, 1997, Conrail and CSX Corporation ("CSX") entered into the Fourth Amendment (the "Fourth Amendment") to the Merger Agreement (as amended through the Fourth Amendment, the "Merger Agreement") which facilitated CSX and Norfolk Southern Corporation ("NSC") entering into an agreement with respect to their joint acquisition of the Company as contemplated by the Third Amendment to the Merger Agreement, dated as of March 7, 1997. The terms of the CSX-NSC Agreement are embodied in a letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter Agreement"). The CSX/NSC Letter Agreement provides, among other things, (i) for the termination of the NSC's outstanding offer to purchase Conrail shares and the dismissal of litigation between CSX and NSC, (ii) that the Company will, after the effective time of its merger into a wholly-owned subsidiary of CSX, become a direct or indirect jointly-owned subsidiary of CSX and NSC, (iii) that CSX and NSC will jointly acquire, for $115 in cash, all Conrail shares not already owned by CSX and NSC through a tender offer - 9 - scheduled to close on May 23, 1997 and subsequent merger, and (iv) that the Company is expected to continue to be managed by its existing Board of Directors until the requisite approval of the Surface Transportation Board is obtained, at which time CSX and NSC will be separately allocated certain of the Company's railroad assets and will jointly operate certain other railroad operations of the Company. The Fourth Amendment also provides that, following April 8, 1997, the Company's Board of Directors will not declare, and the Company will not pay, any dividend on the Company's capital stock with a record date on or prior to May 30, 1997. In light of the pending acquisition of Conrail by CSX and NSC, Standard & Poor's rating agency has downgraded Consolidated Rail Corporation's ("CRC") long-term unsecured debt to BBB and its secured equipment trust certificates to A, while affirming CRC's A1 commercial paper rating. Moody's Investors Service has rated CRC's long-term unsecured debt as Baa2, its secured equipment trust certificates as A1 and its commercial paper as P-2. First Quarter 1997 compared with First Quarter 1996 --------------------------------------------------- Net income for the first quarter of 1997 was $61 million as compared with net income for the first quarter of 1996 of $31 million. Operating revenues (primarily freight and line-haul revenues, but also including switching, demurrage and incidental revenues) increased $17 million, or 1.9%, from $889 million in the first quarter of 1996 to $906 million in the first quarter of 1997. A 4.9% increase in traffic volume in units (freight cars and intermodal trailers and containers) resulted in a $41 million increase in revenues. However, a decline in average revenue per unit decreased revenues by $22 million for the quarter, due to decreases in average rates, $14 million, and an unfavorable traffic mix, $8 million. - 10 - Operating expenses decreased $30 million, or 3.7%, from $820 million in the first quarter of 1996 to $790 million in the first quarter of 1997. The following table sets forth the operating expenses for the two periods: First Quarter ------------- Increase ($ In Millions) 1997 1996 (Decrease) ---- ---- ---------- Compensation and benefits $313 $344 $(31) Fuel 57 50 7 Material and supplies 49 60 (11) Equipment rents 92 98 (6) Depreciation and amortization 73 71 2 Casualties and insurance 39 48 (9) Other 167 149 18 ---- ---- ----- $790 $820 $(30) ==== ==== ===== Compensation and benefits decreased $31 million, or 9.0%, primarily as a result of reductions in employment levels and other employee-related costs, as well as lower accruals for wage increases and less weather-related overtime costs occurring during the first quarter of 1997 as compared with the same period of 1996. Compensation and benefits as a percent of revenues was 34.6% in the first quarter of 1997 as compared with 38.7% in the first quarter of 1996. Fuel costs increased $7 million, or 14.0%, as a result of higher average fuel prices during the first quarter of 1997 as compared with the same quarter of 1996. Fuel prices are expected to decline during the remainder of 1997. The decline in material and supplies costs of $11 million, or 18.3%, was mostly attributable to a higher level of expenditures for repairs and maintenance of locomotives and freight cars in the first quarter of 1996 due to adverse weather conditions and an increase in the allocation of material used in capital vs. maintenance projects in the first quarter of 1997. Casualties and insurance costs decreased $9 million, or 18.8%, primarily due to reductions in employee injuries and loss and damage claims. Other expenses increased $18 million, or 12.1%, primarily as a result of merger-related costs of $22 million incurred in connection with the proposed acquisition of the Company by CSX and NSC. The Company's operating ratio was 87.2% for the first quarter of 1997 compared with 92.3% for the first quarter of 1996. Excluding the merger-related costs, the operating ratio for the first quarter of 1997 would have been 84.7%. - 11 - Liquidity and Capital Resources ------------------------------- The Company's cash and cash equivalents increased $2 million in the first quarter of 1997, from $30 million at December 31, 1996 to $32 million at March 31, 1997. Cash generated from operations, primarily from its wholly-owned subsidiary, CRC, and borrowings have been the Company's principal sources of liquidity and are used primarily for capital expenditures, debt service and dividends. In the first quarter of 1997, operating activities provided cash of $170 million. The principal uses of cash during the quarter were for: property and equipment acquisitions, $41 million; payment of long-term debt, $63 million; and cash dividends on common and preferred stock, $43 million. Working capital (current assets less current liabilities) of $84 million existed at March 31, 1997 as compared with $25 million at December 31, 1996. During the first quarter of 1997, CRC issued $45 million of commercial paper and repaid $79 million. At March 31, 1997, $165 million of commercial paper remained outstanding, of which $100 million is classified as long-term debt since it is expected to be refinanced through subsequent issuances of commercial paper and is supported by a long-term credit facility. In January 1997, CRC assumed $31 million of Equipment Trust Certificates, at an interest rate of 8.31%, due 2012, to finance the lease buyout of 20 locomotives from Locomotive Management Services, a general partnership of which CRC holds a fifty percent interest. 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. - 12 - PART II. OTHER INFORMATION CONRAIL INC. Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits 11 Statement of earnings per share computations. 12 Computations of the ratio of earnings to fixed charges. 15 Letter re unaudited interim financial information from Price Waterhouse LLP. 27 Financial data schedule. (b) Reports on Form 8-K None - 13 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONRAIL INC. Registrant /s/ Timothy T. O'Toole ----------------------- Timothy T. O'Toole Senior Vice President - Law /s/ John A. McKelvey ----------------------- John A. McKelvey Senior Vice President - Finance (Principal Financial Officer) Date: May 9, 1997 - 14 - EXHIBIT INDEX ------------- Exhibit No. ------- 11 Statement of earnings per share computations. 12 Computations of the ratio of earnings to fixed charges. 15 Letter re unaudited interim financial information from Price Waterhouse LLP. 27 Financial data schedule. EX-11 2 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- ($ In Millions Except Per Share) Quarters ended March 31, ------------------------ 1997 1996 ---- ---- Net income ---------- Primary Net income $61 $31 Dividends declared on Series A ESOP convertible junior preferred stock (ESOP Stock), net of tax benefits (2) (3) --- --- $59 $28 === === Fully diluted Net income 61 31 Nondiscretionary adjustment (1) - (1) --- --- $61 $30 === === Weighted average number of shares (2) --------------------------------- Primary Weighted average number of common shares outstanding 79,586,743 77,286,233 Effect of shares issuable under employee stock compensation plans 437,758 716,213 ---------- ---------- 80,024,501 78,002,446 ========== ========== Fully diluted Weighted average number of common shares outstanding 79,586,743 77,286,233 ESOP Stock 6,782,269 9,756,470 Effect of shares issuable under employee stock compensation plans 473,088 716,213 ---------- ---------- 86,842,100 87,758,916 =========== ========== Net income per common share Primary $.74 $.36 Fully diluted .70 .35 Page 1 of 2 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- Notes: 1. Represents the increase, net of income tax benefits, in ESOP-related expenses assuming conversion of all ESOP Stock to common stock. 2. Shares held by the Employee Benefits Trust (the "Trust") are not considered outstanding for earnings per share computations until issued by the Trust. Page 2 of 2 EX-12 3 EX-12 Exhibit 12 ---------- CONRAIL INC. ------------ COMPUTATIONS OF THE RATIO OF EARNINGS TO FIXED CHARGES ------------------------------------------------------ ($ In Millions) Quarters ended March 31, ----------------- 1997 1996 ---- ---- Earnings -------- Pre-tax income $ 98 $ 50 Add: Interest expense 45 47 Rental expense interest factor 16 14 Less equity in undistributed earnings of 20-50% owned companies (5) (4) ---- ---- Earnings available for fixed charges $154 $107 ==== ==== Fixed charges ------------- Interest expense 45 47 Rental expense interest factor 16 14 ---- ---- Fixed charges $ 61 $ 61 ==== ==== Ratio of earnings to fixed charges 2.52x 1.75x For purposes 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. EX-15 4 EX-15 Exhibit 15 ---------- May 9, 1997 Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Dear Sirs: We are aware that Conrail Inc. has incorporated by reference our report dated April 16, 1997 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in the following documents: * Registration Statement on Form S-8 No. 33-19155 * Registration Statement on Form S-8 No. 33-44140 * Registration Statement on Form S-8 No. 33-57717 * Registration Statement on Form S-8 No. 33-60445 * Registration Statement on Form S-8 No. 333-6513 * Prospectus constituting part of Registration Statement on Form S-3 No. 33-64670 * Prospectus constituting part of Registration Statement on Form S-3 No. 33-62929. We are also aware of our responsibilities under the Securities Act of 1933 and that pursuant to Rule 436(c) our report dated April 16, 1997 shall not be considered part of a registration statement prepared or certified by us or a report prepared or certified by us within the meaning of Sections 7 and 11 of the Securities Act of 1933. Yours very truly, PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, PA 19103 EX-27 5 EX-27
5 Exhibit 27 ---------- CONRAIL INC. FINANCIAL DATA SCHEDULE ($ In Millions Except Per Share) THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000,000 DEC-31-1997 JAN-01-1997 MAR-31-1997 3-MOS 32 0 662 0 141 1,162 6,599 0 8,470 1,078 1,889 0 183 89 2,880 8,470 0 906 0 790 0 0 45 98 37 61 0 0 0 61 .74 .70
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