Item 1. Business
Background
Illinois Central Corporation (the "Company") was incorporated under the laws of Delaware on January 27, 1989. The principal executive office of the Company is located at 455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504 and its telephone number is (312) 755-7500.
The Company, through its wholly-owned subsidiary, Illinois Central Railroad Company ("ICR"), traces its origin to 1851, when ICR was incorporated as the nation's first land-grant railroad. ICR, a Class I freight railroad, operates 2,600 miles of main-line track between Chicago and the Gulf of Mexico, primarily transporting chemicals, coal, paper, grain and grain products, and intermodal trailers and containers. In 1997, ICR accounted for 90% of the Company's total revenues.
In June 1996, the Company acquired in a purchase transaction CCP Holdings, Inc. ("CCPH"). CCPH has two principal operating subsidiaries - the Chicago, Central and Pacific Railroad Company ("CCPR") and the Cedar River Railroad Company ("CRR") - which together comprise a Class II freight railroad system operating 850 miles of track primarily transporting grain, milled grain and coal. CCPR operates from Chicago to Omaha, Nebraska, with connecting lines to Cedar Rapids and Sioux City, Iowa. CRR runs from Waterloo, Iowa, to Albert Lea, Minnesota. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on the 1996 acquisition of CCPH.
While ICR, CCPR and CRR (jointly, the "Railroads" or the "IC system") are legally separate railroads, they operate as a single rail system, with centralized marketing, administration, and dispatching control.
In addition to ICR and CCPH, the Company's other wholly-owned subsidiary, IC Financial Services Corporation ("IC Financial"), functions as the investment vehicle by which non-rail related activities are conducted. Initially, IC Financial was formed to finance, through various special purpose subsidiaries, the acquisition of locomotives and freight cars which are leased to ICR. More recently, IC Financial has invested in two terminals located south of Baton Rouge, Louisiana. See Item 1. "Business - Terminal Operations"
Planned Growth
In the fall of 1997, the Company developed and announced a four-year growth plan for the years 1998-2001. The plan, called "Beyond 2000," is designed to position the Company for the next century. The plan anticipates the Company's revenues, comprised of the existing franchise of ICR, CCPH, and IC Financial, will be in a range of $925 million to $955 million by year-end 2001. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -Significant Developments" and "Outlook", for additional information which may effect the Company's growth plans.
Railroad Commodities and Customers
The Railroads' customers are engaged in a wide variety of businesses and ship a number of different products that can be classified into these seven primary commodity groupings:
-- organic, inorganic, agricultural and other chemicals -- grain, milled grain such as corn syrup and soybean meal, and other agricultural/food products -- paper, lumber, and other forest products -- coal -- intermodal, comprising a wide variety of primarily consumer products shipped in containers or truck trailers on specially designed cars -- metals, metal products such as coiled steel, and scrap metal -- bulk commodities such as sand, stone, coke, and ores
In 1997, two customers each accounted for approximately 6% of revenues. The ten largest customers accounted for approximately 34% of revenues.
Contributions to Total Revenues by Commodity Group
Data for 1997 is not comparable to prior years because the Company acquired CCPH in June 1996. Consequently, 1993 through 1995 data is ICR only.
The respective percentage contributions by principal commodity group to the Company's revenues during the past five years are set forth below:
Contributions to Total Revenues by Commodity Group Commodity Group 1997 1996(1) 1995 1994 1993 --------- ---- ----- ---- ---- ---- Chemicals................... 25.1% 25.4% 25.2% 24.8% 24.7% Grain, mill & food products. 21.3 19.9 21.9 18.7 23.2 Paper....& forest products.. 15.6 16.3 16.9 18.1 18.6 Coal........................ 12.1 13.8 12.9 15.2 12.7 Intermodal.................. 8.1 7.9 7.3 6.6 4.8 All other................... 17.8 16.7 15.8 16.6 16.0 ---- ------ ----- ----- ----- Total....................... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
1 Includes CCPH since June 13, 1996.
Terminal Operations
The Company currently has a number of facilities or terminal operations which contribute to revenues and enhance the flow of rail traffic across the IC system. Most of these facilities have been developed since 1994. Following are descriptions of the four most significant terminals.
In December 1996, IC Financial acquired an existing liquid-bulk storage and distribution terminal on the Mississippi River south of Baton Rouge. IC Omnimodal Terminal Company ("ICOM") has been serving the petroleum and petrochemical industries for more than 15 years. Since acquisition, ICOM secured three new contracts requiring $7.1 million for the construction of new pipelines and additional tank storage. These contracts and new facilities enhance the long-term revenue streams from this facility.
In 1996, a subsidiary of IC Financial, IC RailMarine Terminal Company, began construction of an import/export, dry-bulk handling terminal on the Mississippi River near Convent, Louisiana. The majority of the construction was completed when this terminal began operation in December 1997. Initially this facility will handle coal, iron ore and refined iron pellets. The terminal's primary customer, American Iron Reduction, constructed a plant adjacent to the terminal.
In 1996, ICR constructed a 75-acre intermodal terminal for the exclusive use of the Canadian National Railway (CN). The facility has an annual capacity of 250,000 intermodal "lifts." An intermodal "lift" is the placement of a container or truck trailer on or off a railcar. ICR owns the facility and operates it on CN's behalf. ICR is compensated through fees paid for each lift.
In 1994, ICR constructed a transload facility in Harvey, Illinois. This facility stores primarily railcars of plastic pellets. These pellets are subsequently loaded into tanker trucks ("transloaded") for distribution to smaller, non-rail-served manufacturers. The Company spent $1.0 million to double the capacity of this terminal in 1997.
Operating Statistics
Data for 1997 is not comparable to prior years because the Company acquired CCPH in June 1996. Consequently, 1993 through 1996 data is ICR only.
1997 1996 1995 1994 1993 ---- ---- ---- ---- ----
Carloads (in thousands) 1,031 927 957 915 848 Freight train miles (in thousands)1............. 9,167 7,950 7,758 7,179 5,659 Revenue ton miles of freight traffic (in millions)2 3.... 23,843 22,511 23,773 20,582 20,080 Revenue tons per carload 78.7 71.7 74.7 76.3 79.1 Average length of haul (in miles).................. 307 309 328 286 293 Gross freight revenue per ton mile3 4................. $.026 $.026 $ .026 $ .028 $ .028 Net freight ton miles per average route mile (in millions)............... 6.9 8.2 9.0 7.6 7.4 Gallons per ton mile5......... .00256 .00236 .00234 .00248 .00251 Active locomotives............ 358 331 333 328 322 Track resurfacing (miles) 1,457 1,360 1,360 1,397 1,293 Percent resurfaced............ 28.7% 33.7% 32.2% 33.0% 29.8% Ties laid in replacement (including switch ties)..... 413,713 425,999 408,760 346,994 323,764 Slow order miles.............. 285.28 100.00 209.76 275.79 152.32
1 Freight train miles equals the total number of miles traveled by all trains in the movement of freight. 2 Revenue ton miles of freight traffic equals the product of the weight in tons of freight carried for hire and the distance in miles between origin and destination. 3 Prior years have been restated to eliminate non-revenue ton miles. 4 Revenue per ton mile equals gross freight revenue divided by revenue ton miles of freight traffic. 5 Gallons per ton mile equals the amount of fuel required to move one ton of freight one mile.
The following table summarizes operating expense-to-revenue ratios of the Company for each of the past five years. The table analyzes the various components of operating expenses based on the line items appearing on the income statements. The ratio is generally used within the railroad industry as a measure of operating efficiency; the Company has had the lowest ratio among major railroads in the U.S. and Canada in each of the last eight years.
Ratio1 1997 1996 1995 1994 1993 ---- ---- ---- ---- ----
Operating2..................... 62.3% 63.3% 64.3% 66.4% 68.2% Labor and fringe benefits...... 29.2 29.2 30.2 31.0 31.1 Leases and car hire............ 5.9 6.8 7.2 8.2 11.9 Diesel fuel.................... 5.6 5.8 5.1 5.3 5.4 Materials and supplies......... 5.2 5.0 5.4 6.0 6.2 Depreciation and amortization.. 6.1 6.0 5.3 4.6 4.2 Casualty, insurance and losses. 2.3 1.8 2.7 4.0 3.8 Other taxes.................... 3.0 2.8 2.8 3.0 2.9 Other.......................... 5.0 5.9 5.6 4.3 2.8
1 1996 includes CCPH for six months; 1995-1993 is ICR only. 2 Operating ratio means the ratio of operating expenses before special charge over operating revenues.
Employees; Labor Relations
Labor relations in the railroad industry are subject to extensive governmental regulation under the Railway Labor Act. Employees in the railroad industry are covered by the Railroad Retirement System instead of Social Security. Employer contribution rates under the Railroad Retirement System are currently more than double those in other industries and may rise further as the proportion of retired employees receiving benefits increases relative to the number of working employees. Also, railroad employees are covered by the Federal Employer's Liability Act ("FELA") rather than by state no-fault workmen's compensation systems. FELA is a fault-based system, with compensation for injuries determined by individual negotiation or litigation.
Approximately 90% of all employees are represented by one of eleven unions. The general approach to labor negotiations by Class I railroads is to bargain on a collective national basis. For several years now, one of the Company's guiding principles is that local -- rather than national, industry-wide -- negotiations will result in labor agreements that better address both employees' concerns and preferences and the Company's actual operating environment. Therefore, beginning in late 1994, ICR began negotiating separate distinct agreements with each of its eleven unions. To date, all of ICR's eleven bargaining units have ratified local agreements that resolve wage and work-rule issues through 1999 for shop crafts and through the year 2000 for engineers and trainmen. At CCPH, labor negotiations are local as well and are being renegotiated; until new agreements are reached, cost-of-living allowance provisions and other terms in previous agreements will continue.
There are risks associated with negotiating locally. Presidents and Congress have repeatedly demonstrated they will step in to avoid national strikes, while a local dispute may not generate
federal intervention, making an extended work stoppage potentially more likely. The Company's management believes the potential mutual benefits of local bargaining outweigh the risk.
The following table shows the average annual employment levels for the last five years:
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ICR 3,295 3,238 3,268 3,250 3,306 CCPH 322 379 N/A N/A N/A ------ ------ ------ ------ ------ Total 3,617 3,617 3,268 3,250 3,306 ===== ===== ===== ===== =====
N/A = Not Available
Management believes that over the next several years attrition and retirements will be the primary source of declines in employment levels. Increases in employment levels, particularly in train operations, are possible in response to growth of business in accordance with the Company's growth plan.
Regulatory Matters; Freight Rates; Environmental Considerations
The Railroads, particularly ICR as a Class I railroad, are subject to significant governmental regulation by the Surface Transportation Board ("STB") and other federal, state and local regulatory authorities with respect to rates, service, safety and operations.
The jurisdiction of the STB encompasses, among other things, rates charged for certain transportation services, assumption of certain liabilities by railroads, mergers or the acquisition of control of one carrier by another carrier and extension or abandonment of rail lines or services.
The Federal Railroad Administration, the Occupational Safety and Health Administration and certain state transportation agencies have jurisdiction over railroad safety matters. These agencies prescribe and enforce regulations concerning car and locomotive safety equipment, track safety standards, employee work conditions and other operating practices.
ICR currently transports Southern Illinois coal which will not meet the environmental standards of Phase II of the Clean Air Act unless blended with lower-sulfur coal or users of the coal install air scrubbers. As a result, this source of traffic may decline in advance of or consistent with Phase II implementation in the year 2000. On the other hand, ICR is participating in movements of Western coal (lower-sulfur) and certain Southern Illinois coal which is being blended to comply with Phase II. ICR anticipates these sources of traffic may increase. Additionally, the Company has constructed an import/export terminal to handle the export of coal (see Item 1. "Business -Terminal Operations"). Overall, management believes that implementation of Phase II of the Clean Air Act is unlikely to have a material adverse effect on the results of the Company.
Currently, the utility industry is undergoing deregulation creating enormous pressures for change, innovation, and cost control. In the face of increased competition caused by deregulation, utilities are attempting to reduce costs, including rail transportation costs. Methods being investigated include "power wheeling", "coal-by-wire", and for those utilities served by a single railroad, re-regulation of rail rates. Some analysts have suggested that utility deregulation may significantly reduce rail revenues through a shift in the pattern of coal movements forcing lower rail rates. At this point, there are too many variables to know if utility deregulation will have a neutral,
modestly positive or modestly negative effect on the Company in the long-term. However, management believes that the Company will not be materially, adversely affected because it already provides its utility customers highly competitive rates and service as determined through competitive bids against other railroads and river options.
Inherent in the operations and real estate activities of the Company and other railroads is the risk of environmental liabilities. The Company is subject to extensive regulation under environmental laws and regulations concerning, among other things, discharges into the environment and the handling, storage, transportation and disposal of waste and hazardous materials. See Item 2.
Item 2. Properties
Physical Plant and Equipment
System. As of December 31, 1997, ICR's total system consisted of approximately 4,500 miles of track comprised of 2,600 miles of main line, 200 miles of secondary main line and 1,700 miles of passing, yard and switching track. ICR owns all of the track except for 190 miles owned by other railroads. ICR operates over this track by separate agreements. CCPH's total system consisted of approximately 1,100 miles of track.
Track and Structures. The following amounts have been spent during the five years ended December 31, 1997, on track and structure to construct and maintain rail lines and related signal equipment, and other facilities ($ in millions):
Capital Expenditures Maintenance Total
1997.......................... $107.4 $21.1 $128.5 19961......................... 95.4 25.6 121.0 19952......................... 66.9 33.5 100.4 19942......................... 63.2 29.1 92.3 19932......................... 50.3 25.1 75.4
Total.............. $383.2 $134.4 $517.6
1 Includes CCPH from June 13, 1996, $4.2 million, $1.9 million, $6.1 million, respectively. 2 ICR only.
These expenditures have concentrated primarily on the routine maintenance of the track roadway and bridges. Approximately 1,400 miles of roadway ballast was resurfaced in each of the last three years. In 1996, a total of $20.1 million was spent to construct an intermodal terminal facility for the Canadian National Railway ("CN Terminal"). Other large projects include a total of $11.4 million to complete the conversion of 198 miles of track, known as the Yazoo District, to a single track with centralized traffic control in 1993 and 1994 and a total of $11.4 million to construct new or expanded intermodal facilities in Chicago and Memphis in 1992 and 1994. Some of the projects at CCPH were performed with grants from the Iowa Department of Transportation. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of future capital expenditures.
Terminal Operations. In 1997, $43.8 million was spent on the expansion and construction of two terminals in Louisiana. (See Item 1. "Business-Terminal Operations")
Locomotives and Freight Cars. The Company's fleet has undergone significant rationalization and modernization since 1985 when locomotives and cars were at their peak of 862 and 28,616, respectively. Over the last four years purchases of 61 used SD-40-2's and 20 new SD-70's have enabled ICR to replace older, lower horsepower and less efficient locomotives. (The 20 SD-70's replaced 31 older, smaller locomotives.)
IC Financial acquired the SD-70's in 1995 and leases them to ICR. Management has rationalized CCPH's locomotive fleet and instituted revised maintenance, fueling and train assignment practices. Less-efficient, high-maintenance locomotives are being stored, sold or scrapped.
Locomotive modernization and acquisition were part of a change in operational philosophy concerning equipment which resulted in adoption of an equipment ownership program in 1993. The program included lease conversions whereby equipment was acquired outright or leased under more favorable lease terms by the Company. Through 1996, lease conversions involved 118 locomotives
and 4,228 freight cars. As a result of the new lease terms, $4.3 million, $7.1 million and $24.7 million of capital leases were recorded in 1997, 1995 and 1994, respectively. Most of these leases contain fixed price options whereby the equipment can be acquired at or below fair market value at some point during the lease term.
Approximately 1,840 of the cars owned by IC Financial are leased to ICR. The remaining cars are leased to a non-affiliated company.
The equipment program also included a significant upgrade of the highway trailer fleet used in intermodal service. In 1992, the entire fleet of old leased trailers, approximately 880, was replaced with 800 brand new trailers. Expanding intermodal volume necessitated the addition of another 100 trailers in 1994.
During 1994 ICR repaired and reconditioned approximately 173 cars at a cost of $2.9 million. This equipment is being leased on a short-term basis to other carriers until ICR anticipates it will need the equipment.
In 1996, ICR began a covered hopper fleet program under which existing equipment was either modernized or replaced. Over the last two years, approximately 800 cars, operated under short-term car hire arrangements and various leases, were returned and replaced with 900 new high capacity hoppers which are being leased under an operating lease from an unrelated third party.
The following is the overall fleet at December 31:
Total Units: 1997 1996 1995 1994 1993 - ------------ ---- ---- ---- ---- ---- Locomotives1......... 405 435 397 417 468 Freight cars......... 17,128 16,619 15,872 16,498 16,634 Work equipment....... 696 655 654 625 745 Highway trailers..... 888 889 898 898 898
1 Approximately 27 locomotives need repair before they can be returned to service. This equipment is either repaired, if needed on an ongoing basis, or sold. ICR sold 32, 6, 40, 48 and 23 surplus locomotives in 1997, 1996, 1995, 1994 and 1993, respectively. The active fleet is 358 as of December 31, 1997. Also, 15 locomotives are being subleased and 5 will be returned to active service after repainting.
The components of the fleet by subsidiary and in total for 1997 and in total for 1996 are shown below:
ICR CCPH IC Financial 1997 1996 Description1 Total(2)(3) Total Total Total Total
Locomotives: Multipurpose 221 38 79 338 351 Switching 65 2 - 67 84 ------- ----- -------- ---- ------ Total 286 40 79 405 435 ====== ==== ====== === =====
Freight Cars: Box (general service) 310 16 1,120 1,446 1,444 Box (special purpose) 2,417 145 389 2,951 2,941 Gondola 1,538 105 - 1,643 1,615 Hopper (open top) 3,407 269 434 4,110 4,263 Hopper (covered) 4,124 1,105 - 5,229 4,470 Flat 579 - - 579 610 Other 1,160 10 - 1,170 1,276 ------- ------- -------- ------- ------- Total 13,535 1,650 1,943 17,128 16,619 ====== ===== ===== ====== ====== Work Equipment 696 696 655 ======== ======== ======== Highway trailers 888 250 1,138 889 ======== ====== ======= ========
1 In addition, approximately 1,634 freight cars were being used by the Railroads under short-term car hire agreements. 2 Includes 53 locomotives and 1,494 freight cars under capital leases. 3 Excludes equipment listed under IC Financial.
Environmental Conditions
ICR faces potential environmental cleanup costs associated with approximately 23 contaminated sites and various fueling facilities for which a total of $9.9 million has been reserved as of December 31, 1997. The most significant of those sites are described below.
Mobile, Alabama
ICR owned property in Mobile prior to 1976 upon which a lessee conducted creosoting operations. The Alabama Department of Environmental Management has determined that the soil and groundwater are contaminated with creosote, pentachlorophenol and possibly dioxins. ICR has been participating in joint clean-up efforts with the current owner and ICR's former lessee. See Item 3.
Item 3. Legal Proceedings
Proposed settlement of purported class actions brought on behalf of stockholders of the Company (the "Actions") filed in the Delaware Court of Chancery (Civil Action Nos. 16184-NC, 16191-NC and 16188-NC) and the Circuit Court of Cook County, Illinois (Civil Action No. 98CH01972), challenging,inter alia, the offer and the transactions contemplated in the Merger Agreement. (See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Developments - Canadian National Tender Offer")
On March 2, 1998, the parties to the Actions entered into a Memorandum of Understanding (the "Memorandum of Understanding") which was signed by counsel for the Company and its directors and attorneys from certain law firms representing the plaintiffs in those Actions. The Memorandum of Understanding sets forth the parties' agreement-in-principle concerning a proposed settlement of those actions.
Among other things, the Memorandum of Understanding provides that upon, and only upon, final court approval of the proposed settlement and other conditions summarized below, the Merger Agreement will be modified as follows: (i) the definition of "CN Average Closing Price" set forth in Section 2.02(c) of the Merger Agreement will be amended to provide that if such average closing price is less than $41.50 then the CN Average Closing Price for purposes of determing the exchange ratio shall be $41.50; and (ii) Parent shall agree that, if the STB shall have issued written notice disapproving the acquisition of control of the Company by CN or advised CN of such a determination or imposed unacceptable conditions upon such acquisition of control, and there is a subsequent disposition of the Shares in the Voting Trust, CN shall distribute, or cause to be distributed, to stockholders of the Company who receive payment for their Shares pursuant to the Offer and to record holders at the Effective Time, their pro rata share of one-third of any net profits realized upon any disposition of Shares by or out of the Voting Trust (after deducting, inter alia, fees and expenses, including legal and advisory fees and expenses, associated with the acquisition and disposition of such Shares, the cost of carrying the Shares between the acquisition and disposition of such Shares and certain taxes relating to the acquisition, ownership and disposition of such Shares). As defined in the Memorandum of Understanding, final court approval of the proposed settlement means that the Delaware Court of Chancery has entered an order approving the settlement and that such order is finally affirmed on appeal or is no longer subject to appeal and the time for any petition for reargument, appeal or review, by certiorari or otherwise, has expired.
The Memorandum of Understanding also provides for, among other things, (i) the dissemination to the record holders of the Company of certain supplemental disclosure materials, (ii) the certification, for settlement purposes only, of a mandatory non-opt-class, (iii) the complete discharge and dismissal with prejudice of any claims that were, or could have been, or in the future might have been asserted in the Actions, (iv) the release of the defendants and others and (v) the defendants' agreement that they will not oppose an application by plaintiffs' counsel for an award of fees not to exceed, in the aggregate, $925,000 and of expenses not to exceed, in the aggregate $25,000. The Memorandum of Understanding shall be null and void and of no force and effect if plaintiffs' counsel in the Actions determine that the settlement is not fair and reasonable.
The parties to the Memorandum of Understanding contemplate submitting filings to the Delaware Court of Chancery seeking certification of a settlement class, final approval of the terms of the settlement upon notice in form approved by that Court, and dismissal with prejudice of the Actions. The agreements-in-principle in the Memorandum of Understanding are subject to a number of conditions including, among others, (i) 50.1% of the Shares (on a fully diluted basis) having been acquired by Parent and placed into the Voting Trust, (ii) the dismissal of the Illinois Action, (iii) drafting and execution of definitive settlement documents and the other agreements necessary to effectuate the terms of the proposed settlement, (iv) completion by plaintiffs of appropriate discovery in the Actions, and (v) final court approval.
GATX Tank Car Explosion September 9, 1987 at New Orleans (Civil District Court, Parish of Orleans, Louisiana No. 87-16374)
ICR is one of several defendants in a New Orleans class action in which a jury has returned a verdict against the ICR for $125 million in punitive damages as a result of a tank car fire. The Louisiana Supreme Court has vacated the judgment for technical reasons and remanded the case to the trial court for further proceedings. The Company believes the plaintiff's claims have no basis and intends to continue to challenge them vigorously.
State of Alabama, et al. v. Alabama Wood Treating Corporation, Inc., et al., S.D. Ala. No. 85-0642-C
The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985 seeking damages for alleged pollution of land in Mobile, Alabama, stemming from creosoting operations over several decades. Defendants include ICR, which owned the land until 1976, Alabama Wood Treating Corporation, Inc., and Reilly Industries, Inc. ("RII"), which leased the land from ICR and conducted creosote operations on the site. In December 1976, ICR sold the premises to ASD. The complaint sought payment for the clean-up cost together with punitive and other damages.
In 1986, ASD, RII and ICR agreed to form a joint technical committee to clean the site, sharing equally the cost of clean-up, and in October 1986 the court stayed further proceedings in the suit. Under the agreement the joint technical committee has spent approximately $6.8 million and has been authorized to expend up to a total of $6.9 million. ICR has contributed $2.3 million. Further clean-up activities are anticipated, the cost of which could range from $1.8 million to $5.6 million depending upon the clean-up standards and remediation methods ultimately required and utilized.
ASD terminated the Joint Tech Agreement on August 27, 1997 and has threatened to reinstate the 1985 litigation - IC expects its share of remaining clean-up cost to range between $0.6 million and $1.8 million.
In the Matter of Illinois Central Railroad Company, et al., Tennessee Division of Superfund No. 94-0187
The Tennessee Department of Environment and Conservation, on June 6, 1994, issued a Remedial Order requiring clean-up by ICR and the current owners of a site in Jackson, Tennessee. ICR operated a rail yard and locomotive repair facility at the site. Trichloroethane ("TCE") has been found in several municipal water wells near the site. TCE is a common component of solvents similar to those believed to have been used at the shop. In addition, concentrations of metals and organic chemicals have been identified on the surface of the site. A remedial investigation study has been completed which indicates the TCE in the water wells came from an adjacent municipal dump
and not from operations on this site. Exclusive of ground-water clean-up, ICR estimates total clean-up costs between $1.0 million and $7.6 million and expects another PRP to share in the expense.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during fourth quarter.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stock- holder Matters
The Common Stock is listed on the New York Stock Exchange, Inc. under the symbol "IC."
The following table sets forth, for the periods indicated, (i) the high and low sale prices of the Common Stock as reported on the New York Stock Exchange Composite Tape and (ii) the per share amount of dividends paid. The following table has been restated to give effect to a 3-for-2 stock split declared in January 1996.
Stock Price Dividends Paid High Low Per Share First Quarter........ $23.500 $20.500 $ .17 Second Quarter....... 23.750 21.833 .17 Third Quarter........ 28.000 23.000 .17 Fourth Quarter....... 28.667 24.500 .17
First Quarter........ $28.750 $23.667 $ .20 Second Quarter....... 30.750 27.000 .20 Third Quarter........ 31.875 26.875 .20 Fourth Quarter....... 34.375 29.500 .20
First Quarter........ $36.125 $30.500 $ .23 Second Quarter....... 37.625 30.875 .23 Third Quarter........ 37.250 33.250 .23 Fourth Quarter....... 39.000 32.438 .23
First Quarter (through February 27, 1998) $38.875 $31.125 $ .23
As of February 27, 1998, there were approximately 35,000 stockholders based on estimates of beneficial ownership. The closing price of the Common Stock as reported on the New York Stock Exchange Composite Tape on February 27, 1998 was $38.8125 per share.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated financial data of the Company for the five years ended December 31, 1997, all derived from the consolidated financial statements of the Company which were audited by Arthur Andersen LLP. This summary should be read in conjunction with the consolidated financial statements included elsewhere in this Report and the schedules and notes thereto. The selected financial data for 1996 includes the results of CCPH for the period June 13, 1996 (date of acquisition) to December 31, 1996. Therefore, data for 1996 is not directly comparable to 1997, and 1997 and 1996 are not comparable to pre-1996 data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Significant Developments
Canadian National Tender Offer
On February 10, 1998, the Company and Canadian National Railway Company ("CN") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a wholly owned subsidiary of CN, commenced a tender offer (the "Offer") to purchase approximately 75% of the outstanding shares of the Company's Common Stock (the "Shares") at a price of $39.00 per share. Following completion of the Offer and subject to satisfaction of customary conditions, the Purchaser will be merged with and into the Company (the "Merger") and each Share not purchased in the Offer will be converted into the right to receive an amount of CN common stock equal to the fraction obtained by dividing (1) $39.00 by (2) the average closing price of the CN common stock (the "Average Closing Price") over the 20 day trading period ending two trading days prior to the effective time of the Merger; provided that if such Average Closing Price is less than $43.00, then the Average Closing Price will be deemed to be $43.00 and if such Average Closing Price is greater than $64.50, then the Average Closing Price will be deemed to be $64.50. Pursuant to the Merger Agreement, if less than 75% of the shares are tendered, the Shares outstanding prior to the Merger will be converted into the right to receive a prorated amount of stock and cash in order to ensure that the overall aggregate consideration consists of 75% cash and 25% stock.
Simultaneously with the purchase of shares pursuant to the Offer, the shares purchased will be deposited in an independent, irrevocable voting trust while CN and the Company await review of the transaction by the STB.
Pursuant to the Merger Agreement, subject to consultations with the Company and after giving good faith consideration to the views of the Company, CN shall have final authority over the development, presentation and conduct of the STB case, including over decisions as to whether to agree to or acquiesce in conditions. The Company shall take no regulatory or legal action in connection with the STB without CN's consent. The STB could impose conditions or restrictions as it relates to CN's acquisition of control of the Company. If the STB does not approve CN's acquisition of control of the Company or CN deems any conditions imposed by the STB unacceptable, CN would have the obligation to sell all the Company common shares held by the voting trust. Neither the acquisition of the Company shares pursuant to the tender offer nor the merger will be subject to STB approval of the combination.
The Company's Board of Directors has unanimously approved the Merger Agreement and the transactions contemplated and recommended that stockholders accept the Offer and tender their shares. See Item 3. "Legal Proceedings" for actions related to the Offer and Merger Agreement.
The Offer was successfully concluded on March 13, 1998 when the Purchaser received tenders for in excess of 75% of outstanding shares. The actual percentage of outstanding shares purchases has not been determined as of the date of this filing.
Under change in control provisions of various compensation plans, including Incentive 2000 Plan and Employment Security Agreements, the Company will be required to make payments to certain employees under certain conditions. The change in control payment under Incentive 2000 Plan is approximately $11 million. The amount that may be paid under Employment Security Agreements, if any, is not determinable at the time of filing.
With the change in control the Employee Stock Purchase Plan and the Management Employee Discounted Stock Purchase Plan were terminated.
Results of Operations
1997 Compared to 1996
The discussion below takes into account the financial condition and results of operations of the Company for the years presented in the consolidated financial statements and includes CCPH since June 13, 1996 (date of acquisition).
Total revenues for 1997 increased from the prior year by $42 million or 6.4% to $700 million, reflecting full year operations of CCPH, which was acquired June 13, 1996. The respective amounts and percentage contributions by commodity group for carloads, ton miles and carloads for 1997 and 1996 are set forth below:
Year Ended December 31,
1997 19961 1997 19961 1997 19961 ---- ----- ---- ----- ---- ----- Carloads Ton-Miles Revenue (In Thousands) (In Millions)
Chemicals 159 143 4,106 3,682 $176 $167 Grain, mill & food products 177 173 7,479 6,640 149 131 Paper & forest products 146 143 3,255 3,067 109 107 Coal 240 230 5,284 5,686 85 91 Intermodal 200 198 1,454 1,421 57 52 Metals 33 34 923 1,107 29 33 Bulk 57 56 1,197 1,295 41 42 All Other 19 19 145 148 54 34 ------- ---- ------- -------- ----- ----- Total 1,031 996 28,843 23,046 $700 $657
1 Includes CCPH since June 13, 1996.
Chemicals accounted for 16% of carloads and 17% of ton-miles in 1997. Compared with 1996, loads and ton-miles were up 11% while revenues were up 5%. Strength which began in the latter part of 1996 continued as expected into 1997. Strength was across the board among most chemicals, and rail rates were strong. Chemical loadings and revenues benefitted from a service agreement with the Burlington Northern Santa Fe Railroad ("BNSF"). The Company believes that the future annual benefit of the agreement will grow although it is taking longer than expected for BNSF to penetrate the Union Pacific/Southern Pacific ("UPSP") markets to which it gained access through the UPSP merger case.
Grain and grain mill accounted for 17% of carloads and 31% of ton-miles in 1997. Against 1996, carloads, ton-miles and revenues were up 2%, 13% and 14%, respectively, primarily reflecting inclusion of CCP for the full year. Weak export demand for U.S. grains throughout 1997 curtailed the Company's 1997 revenue growth. Very strong demand for grain in 1996, coupled with meager supply particularly of corn, resulted in abnormally high prices paid for grain in 1996 which in turn
stimulated abnormally high plantings of grains by other countries. Consequently, while the 1996 harvests of corn and soybeans in Illinois and Iowa were good, export demand for U.S. grains was abnormally low (including wheat for which ICR is a residual carrier) as global buyers turned to other countries' bumper crops and lower prices. In January 1997, management lowered its grain expectations and cautioned that weak export grain markets were likely to curtail the Company's 1997 revenue growth.
Paper and Forest Products were 14% of 1997 carloads and 14% of ton-miles. Total carloads, ton-miles and revenues were up 2%, 6% and 2%, respectively, versus 1996. Paper and forest products are economically sensitive commodities that respond to industrial production, housing starts and other basic economic indicators. Fiber and pulpboard were depressed all year as that industry found its capacity outstripping demand following the addition of significant new capacity in 1995/96. However, according to major manufacturers, capacity was brought into balance with demand in the summer, leading to a stronger second half of the year. Additionally, a plant conversion by a major ICR producer from short-log to long-log input took several months longer than their original expectations, resulting in less rail service than planned.
Coal accounted for 23% of carloads and 22% of ton-miles in 1997. Against 1996, carloads, ton-miles and revenues were up 4% and down 7% and 6%, respectively. Coal performed as expected. However, a mid-year mine fire of a major coal producer/shipper on ICR's line and, separately, severe rail congestion in the western U.S., which disrupted the movement of coal, resulted in ICR losing about 18,000 loads of coal it might otherwise have carried. Underlying demand for coal remains strong.
Intermodal accounted for 19% of the railroads' loads and 6% of ton-miles. Versus 1996, carloads, ton-miles and revenues were up 1%, 2% and 9%, respectively. Base intermodal business, particularly trailer business, was very strong throughout the year. However, a major intermodal customer UPSP, discontinued some of their business with ICR in September. There was also some negative impact from an approximate two-week strike against another major intermodal customer.
Metals accounted for 3% of total carloads and 4% of ton-miles in 1997. Versus 1996, carloads, ton-miles and revenues were down 5%, 17% and 10%, respectively. As expected, traffic of this commodity group fell short of 1996 all-time record year which mirrored exceptional strength in the steel industry and included some large non-recurring spot moves. Also, as expected, a major shipper took its plant down for several months in order to effectively double its productive capacity, which resulted in near-term loss of business for ICR but sets the stage for future growth with this customer. Birmingham Steel completed construction of its new mill in Memphis in the fourth quarter of 1997 and began to take inbound product.
Bulk Commodities contributed 5% of carloads and ton-miles in 1997. Carloads were up 2% while ton-miles and revenues were down 8% and 2% respectively from the 1996 level. Bulk commodities are primarily stone and other construction materials and are closely tied to state highway projects. This smaller commodity group fluctuates with the timing of projects as well as the availability of freight cars for this lower-margin business.
Operating expenses overall increased $19.6 million or 4.7% in 1997. Of the total $435.9 million in 1997, $50.2 million was incurred at CCPH compared to $28.3 million for the period June 13, 1996 to December 31, 1996. Increased labor and fringe costs reflect contract increases at ICR and the inclusion of CCPH for the full year, partially offset by operational efficiencies experienced at both ICR and CCPH. Leases and car hire decreased $3.9 million or 8.7% in 1997 reflecting a return to more normal operating levels and lower export grain movements. Fuel expense reflects the increase in usage (7.7%) from including a full year of CCPH activity offset by the lower cost (4.2%). Increases in depreciation, materials and supplies, casualty, insurance and other tax expense results from including a full year CCPH activity. Other expense reflects the recovery of prior period expenses in relation to costs related to a derailment.
Operating income for 1997 increased $22.7 million or 9.4% to $263.9 million for the reasons cited above.
Other income (expense), net, in 1997 includes a $3.7 million pre-tax gain related to the grant of a permanent easement for the marketing of outdoor advertising on ICR and CCPH rights-of-way. On October 3, 1996, ICR sold its investments in an industry-captive insurance company, RAIL, which resulted in a one-time gain, recorded as other income (expense), net, of approximately $7.0 million.
Net interest expense of $40.0 million for 1997 increased 17.3% compared to $34.1 million in 1996 caused by higher debt levels year to year.
Provision for income taxes of $79.7 million for 1997 included a $4.3 million benefit from the donation of property.
1996 Compared to 1995
The discussion below takes into account the financial condition and results of operations of the Company for the years presented in the consolidated financial statements and includes CCPH since June 13, 1996 (date of acquisition).
Total revenues for 1996 increased from the prior year by $12.2 million or 1.9% to $657 million, due to the CCPH acquisition which contributed $40 million to revenues.
Year Ended December 31,
19961 1995 19961 1995 19961 1995 ---- ---- ----- ---- ---- ---- Carloads Ton-Miles Revenue (In Thousands) (In Millions)
Chemicals 143 138 3,682 3,617 $167 $163 Grain, mill & food products 173 185 6,640 8,577 131 141 Paper & forest products 143 148 3,067 3,126 107 109 Coal 230 215 5,686 4,686 91 83 Intermodal 198 175 1,421 1,279 52 47 Metals 34 30 1,107 892 33 27 Bulk 56 50 1,295 1,271 42 39 All Other 19 16 148 146 34 36 ---- ---- -------- -------- ----- ----- Total 996 957 23,046 23,773 $657 $645
1 Includes CCPH since June 13, 1996
Chemicals accounted for 15% of the Company's carloads and 16% of ton-miles in 1996. Compared with 1995, ton-miles were up 2% while carloads and revenues were up 3%. Rail rates, under pressure in the earlier months of the year, firmed in the second half. The softness observed in the economy, especially in the first two quarters was reflected in the building of chemical
manufacturers' inventories and softness in our customers' pricing. Our customers' markets firmed in the latter half of the year. CCPH contributed $5 million to 1996 chemical revenue.
Grain and grain mill accounted for 17% of ICR's carloads and 29% of ton-miles in 1996. Against 1995, carloads, ton-miles and revenues were down 7%, 23% and 7% respectively. Grain was clearly the primary cause of the 1996 revenue shortfall. Even though the CCPH acquisition contributed $20 million to 1996 grain and grain mill revenues the comparisons were particularly difficult against a record grain carloading year in 1995. Illinois' 1995 corn and soybean harvest was abnormally small so that by the third quarter 1996 grain elevators were essentially depleted and the new harvest was still weeks away. Rail rates were higher on average 1996 versus 1995; demand for grain was strong; the product was just not available to move. The smaller crop also affected grain mill since domestic processors were forced to cut back on their usual production.
Paper and Forest Products at the Company were 14% of 1996 carloads and 13% of ton- miles. Total carloads were down 4% while ton-miles and revenues were down 2% versus 1995. Rail rates held up reasonably well throughout the year. Paper and forest products are economically sensitive commodities that respond to industrial production, housing starts and other basic economic indicators. Fiber and pulpboard were depressed all year. CCPH contributed $2 million to 1996 paper and forest products revenue.
Coal accounted for 23% of the Company's carloads and 25% of ton-miles in 1996. Against 1995, carloads, ton-miles and revenues were up 17%, up 6% and 9%, respectively. A large coal contract for 25,000 annual carloads was not renewed in July 1995 as a large customer wanted more aggressive pricing and went elsewhere. For a second year in a row, coal margins, and the return on the assets involved, improved. CCPH contributed $8 million to 1996 coal revenues.
Intermodal accounted for 20% of the Company's loads and 6% of ton-miles. Versus 1995, carloads were up 13%, with ton-miles and revenues up 11%. These 1996 results were achieved in an industry that saw trailer rate weakness earlier in the year and some weakness in automotive parts traffic later in the year. CCPH contributed $1 million to 1996 intermodal revenue.
Metals accounted for 3% of the Company's carloads and 5% of ton-miles in 1996. For 1996, versus 1995, carloads, ton-miles and revenues were up 15%, 24% and 19%, respectively. The steel industry had another strong year, and ICR set another record for metals loads and revenues. CCPH contributed $2 million to 1996 metals revenue.
Bulk commodities contributed 6% of carloads and ton-miles in 1996 for ICR. This represents carload and revenue growth of approximately 4% while ton-miles were down slightly from the 1995 level. Bulk commodities are primarily stone and other construction materials and are closely tied to state highway projects. This smaller commodity group fluctuates with the timing of projects as well as the availability of freight cars for this lower-margin business. CCPH contributed $2 million to 1996 bulk commodity revenue.
Operating expenses overall increased $1.5 million or 0.4% in 1996. Of the total $416.3 million, $28.3 million was incurred at CCPH. Labor and fringe costs include the wage increases of 3% negotiated with nine of the ICR's unions and costs for CCPH for the last half of 1996. The decline in this category is primarily the result of lower traffic levels, particularly grain, and the elimination of the high overtime caused by the congestion experienced in 1995. Leases and car hire also benefitted from the elimination of congestion to return to more normal operating levels. In 1995, favorable one-time adjustments on several capital leases were recorded. Fuel expense reflects the increase in cost per gallon (13.8%) partially offset by decreased usage (9.4%). Increased depreciation is a result of the acquisition of CCPH. The decrease in casualty, insurance and losses reflects the emphasis on safety and improved claims experience. Other expenses reflect the one-time reversal of non-revenue related accruals to actual ($2.5 million) and favorable performance payments in joint facilities that congestion in 1995 prevented the Company from receiving ($.7 million).
Operating income for 1996 increased by $10.7 million or 4.6% to $241.2 million for the reasons cited above.
On October 3, 1996, ICR sold its investments in an industry-captive insurance company, RAIL, which resulted in a one-time gain, recorded as other income expense, net, of approximately $7 million.
Net interest expense of $34.1 million for 1996 increased 15.6% compared to $29.5 million in 1995. The 1996 expense includes $3.6 million from increased borrowings to support the $109.9 million transferred from ICR in June 1996 in connection with the acquisition of CCPH. In 1996, average borrowings have been greater than 1995 and interest rates have been lower.
On June 12, 1996, ICR used proceeds it received from the issuance of Commercial Paper to pay a $50.0 million dividend to the Company and to loan $59.9 million (5.625% per annum) to the Company. The Company used the $109.9 million and its bank credit lines to acquire CCPH. The transaction closed June 13, 1996, following the effective date of the approval order issued by the STB. The purchase price was $147.2 million in cash, the assumption of approximately $2.5 million in debt and approximately $17.3 million of capitalized lease obligations existing on the acquisition date.
On January 25, 1996, the Board declared a 3-for-2 stock split in the form of a stock dividend to holders of record on February 14, 1996. New certificates were issued March 14, 1996. Fractional shares were settled in cash at a rate of $25.94 per share. When certificates were issued, the approximate 41.0 million shares outstanding increased to approximately 61.4 million. All share counts, options outstanding, option prices and per share information presented in this annual report have been restated to reflect the 3-for-2 split as if it had occurred at the beginning of the earliest period presented.
Outlook
-NOTE-
This section is intended to provide an understanding of factors that will impact the Company in 1998 and beyond. This discussion contains "forward looking statements" within the meaning of the federal securities laws including statements of expectations, beliefs, plans, and similar expressions concerning matters that are not historical facts. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. These risks and uncertainties affecting the Company are discussed in greater detail in EXHIBIT 99 to the Company's Form 10-K for 1997.
Illinois Central Corporation is now an operationally integrated holding company of freight railroads and terminals which are coordinated by operating and marketing initiatives to originate, direct and control traffic over our service areas. The Company's principal subsidiary remains the ICR, which in 1997 accounted for 90% of the Company's revenues. See Item 1. "Business - Background" for a more detailed description of corporate structure. Also, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Developments - Canadian National Tender Offer" in this section.
On a commodity basis:
CHEMICALS: Solid growth is expected in this commodity group for 1998 as expansions of ICR's Harvey transload facility and of some existing plants on ICR's system begin to produce greater volumes. Also, the Company's liquid-bulk terminal should contribute increased revenues from new pipeline and tank capacity which will be constructed in 1998 to serve new long-term contracts secured in 1997.
GRAIN: 1997 corn and soybean harvests in both Illinois and Iowa were good to excellent although export demand for these products has been weak since the harvest. Weakness in export demand has continued into early 1998 and grain harvests are affected by vagaries in the weather. The Company has instituted domestic and export grain programs for the 1997/98 season (September 1997 through August 1998) which are intended to assure more efficient train scheduling and smoother demand for rail service over the course of the season. Per-car revenues from these programs are expected to be lower than prior years (adjusting for changes in mix of short-haul and long-haul traffic), however, unit costs of providing the service are expected to be lower also. Major shippers have committed to 'super grain trains' which turns historically on-demand rail service into scheduled service, improving management's ability to plan and utilize manpower and locomotive resources at lower cost.
ICR and CCPH run through some of the richest and most productive farmland in the country. Management believes the fundamental grain outlook over the next several years is positive for us, even as we recognize the vagaries of the weather and that export demand for U.S. grains, from year-to-year, will always be more volatile than domestic demand and subject to the expansions and contractions of world supply as well as international agricultural and trade policies.
PAPER AND FOREST PRODUCTS: In the second half of 1997 this commodity group benefitted from the reduction in excess production capacity in its industry. This firming of traffic and the opening of several new lumber ("reload") centers should result in modest growth for these products in 1998.
COAL AND BULK: Based on our current projections, dependent on stockpiles and weather in the service territories of the utilities we serve, the Company expects to move more utility-coal loads in 1998 versus 1997. The Company is marketing the newly-constructed dry-bulk terminal to potential importers/exporters of coal and other bulk commodities and expects to see a gradual increase of this activity as contracts are secured. Also, see Item 1. "Business - Regulatory Matters; Freight Rates; Environmental Considerations" for discussion of utility deregulation; at this point, there are too many variables to know if utility deregulation will have a neutral, modestly positive or modestly negative effect on the Company long-term.
INTERMODAL: This class of traffic is expected to continue its growth in 1998 through expanded market share of truck traffic and as a service agreement with the BNSF grows.
METALS: We expect metals volumes and revenues to set new Company records in 1998 as a result of the opening of a new Birmingham Steel mill in Memphis, which is supplied with refined iron pellets from a plant adjacent to IC Financial's dry-bulk facility in Louisiana.
Other Issues:
CONSOLIDATIONS: The American railroad system has seen accelerated consolidation in the last few years and pending transactions suggest the trend will continue. Each rail merger presents a risk that rail traffic will be diverted around the Company's railroads. In the aggregate rail mergers could have a material adverse impact on revenues. Management expects to continue to monitor developments and take actions to mitigate the impact of rail consolidations. Of course, no assurances can be given that such consolidations will not have a material adverse affect on the Company.
FUTURE INVESTMENTS: The Company continually considers a variety of investment opportunities including acquisition of rail and other properties, such as its announced interest in the Mexican government's privatization of its rail system. (See "Liquidity and Capital Resources- Investment in Mexico").
The Company's Growth Plans
In the fall of 1997, the Company announced a four-year growth plan for the years 1998-2001. The plan, called "Beyond 2000," is designed to position the Company for the next century. The plan anticipates the Company's revenues, comprised of the existing franchise of ICR, CCPH, and two terminals located south of Baton Rouge, will be in a range of $925 million to $955 million by year-end 2001. It is also assumed the operating ratio will fall below 60% by year-end 1999.
Following are basic assumptions supporting revenue growth through 2001:
(a) Management believes incremental growth from increased market share, rate increases, and U.S. industrial growth will increase the Company's base business of existing customers at a compounded annual growth rate of about 2.5% from a 1996 base year.
(b) Management believes additional growth will occur from new plants locating along the IC system as well as expansions of existing plants. The plan includes industrial development projects that have a reasonably high probability of commencing operations within the 2001 time frame.
(c) The plan is also dependent on no economic downturn occurring through 2001.
The growth plan as described does not assume a recession in the 1998-2001 timeframe because, in the fall of 1997 when the plan was formulated and announced, the timing, depth and duration of a possible business downturn was highly uncertain. The plan does assume we will lose some business along the way, for example, through traffic diversion following proposed acquisition of Conrail by the Norfolk Southern and CSX railroads. On the other hand, the plan does not include initiatives outside the existing franchise, such as the CN tender offer and "Investment in Mexico" see below, which, if consummated, could be additive to the plan.
Liquidity and Capital Resources
Operating Data ($ in millions): 1997 1996 1995 ---- ---- ---- Cash flows provided by (used for): Operating activities.................. $221.5 $183.9 $177.4 Investing activities.................. (135.9) (300.6) (127.0) Financing activities.................. (110.7) 170.9 (69.6) ------- ------ --------- Net change in cash and temporary cash investments..................... $(25.1) $ 54.2 $ (19.2) ======= ======= ========
Cash from operating activities in 1997, 1996 and 1995 was primarily net income before depreciation, deferred taxes and extraordinary item.
Investing Data
Additions to property were as follows ($ in millions):
1997 1996 1995 ---- ---- ----
Communications and signals.. $ 16.5 $ 12.2 $ 10.7 Equipment/rolling stock..... 20.8 29.4 61.5 Track and bridges........... 73.6 57.8 47.0 Bulk transfer facility...... 43.8 - - Other....................... 13.5 25.4 9.6 ------ ------ ------ Total... ....... $168.2 $124.8 $128.8 ====== ====== ======
Expenditures for CN Terminal were $2.0 million included in other for 1997 and $3.3 million and $16.8 million included in track and bridges, and other, respectively, in 1996. In 1995, Equipment includes $25.9 million for 20 new SD-70 locomotives placed in service in the fourth quarter. In 1996 and 1995 capital expenditures exceeded original estimates as several opportunities to acquire equipment were acted upon in accordance with the Company's strategy of owning more of its equipment. Property retirements and removals generated proceeds of $4.9 million, $6.9 million, and $5.4 million in 1997, 1996 and 1995, respectively.
The Company anticipates that capital expenditures for 1998 will be approximately $116 million. Replacement expenditures of $92 million will concentrate on track maintenance, bridges and freight car upgrades. Productivity and expansion expenditures will total $24 million. These expenditures are expected to be met from current operations or other available sources.
In June 1996, following the effectiveness of the order by the STB, the Company acquired the stock of CCPH. (See Note 18 to the Consolidated Financial Statements.) The Company used its own bank credit lines and funds received from ICR (a loan of $59.9 million and a $50 million dividend) to complete the $147 million transaction. The acquisition was treated as a purchase.
Financing Activities
The Company has a $50 million 364-day floating-rate revolving loan agreement which expires in August 1998. In June 1996, the Company borrowed $40 million under this agreement to acquire CCPH (see Note 18). The $40 million was repaid in June 1996 with proceeds from borrowings under CCPH's $50 million revolving credit facility (see below). At December 31, 1997, no amounts were drawn under the Company's revolving loan agreement. IC Financial leases equipment to ICR and has approximately $1.8 million in long-term borrowing agreements which were used to acquire locomotives during 1993. IC Financial lease revenue and corresponding expense at ICR, which is eliminated in consolidation, was $14.7 million for 1997.
For the three years ended December 31, 1997, the Company has paid $147.2 million in cash dividends on its common stock. Dividends from ICR ($63.0 million in 1997, $103.2 million in 1996 and $107.7 million in 1995) were used to fund these payments to stockholders, the acquisition of CCPH, and the $60 million stock repurchase in 1995. (See "Long-Term Equity Enhancement Program below.") Included in the 1996 dividends to the Company is the March 1996 transfer by ICR of its ownership in the Chicago Intermodal Company ("CIC") via a dividend of CIC stock. The book value of the CIC investment was $5.7 million.
In June 1996, CCPH entered into a revolving credit agreement with its bank lending group for an unsecured $50 million revolving credit facility, (the "CCPH Revolver"). The CCPH Revolver has a $5 million sublimit for letters of credit and expires in 2001. The revolver can be used for general corporate purposes. The annual commitment fee is 25 basis points and borrowings are at the Eurodollar offered rate plus 62.5 basis points. The credit agreement contains various financial covenants including minimum consolidated tangible net worth, minimum interest coverage and maximum leverage ratio. CCPH does not anticipate any difficulty in maintaining compliance with such covenants. At December 31, 1997 this facility was undrawn. At December 31, 1996 $15.5 million of CCPH's Revolver was outstanding. In 1996, CCPH used $5 million to repay amounts outstanding under a predecessor revolver which was then canceled.
ICR has a commercial paper program whereby a total of $200 million can be issued and outstanding at any one time. The program is supported by the $250 million ICR Revolver (see below). At December 31, 1997, Standard & Poor's Corporation ("S&P"), Moody's Investor Services ("Moody's") and Fitch Investors Service ("Fitch") have rated the commercial paper A2, P2 and, respectively. At December 31, 1997, no amounts were outstanding. The average interest rate on commercial paper outstanding for the year ended December 31, 1997, was 5.68% with a range of 5.68% to 5.69%. ICR's public debt is rated BBB by S&P and Baa2 by Moody's. Each of S&P, Moody's and Fitch have placed ICR's debt on credit watch negative as a result of the recently announced merger of the Company and Canadian National Railway. (See Item 7. "Managements Discussion and Analysis of financial conditions and Results of Operations - Significant Developments-Canadian National Tender Offer")
In 1994, ICR entered into a revolving agreement to sell undivided percentage interests in certain of its accounts receivable, with recourse, to a financial institution. This agreement was terminated on January 8, 1998. At December 31, 1997, $45 million had been sold pursuant to the agreement. Costs related to the agreement fluctuated with changes in prevailing interest rates. These costs, which are included in other income (expense), net, were $3.0 million, $2.9 million and $3.2 million for the years ended December 31, 1997, 1996 and 1995, respectively.
ICR has a $250 million revolver ("ICR Revolver") with its bank lending group which expires in 2001. Fees and borrowing spreads are predicated on ICR's long-term credit ratings. Currently, the annual facility fee is 15 basis points and borrowings under this agreement are at Eurodollar offered rate plus 22.5 basis points. The Revolver is used primarily for backup for ICR's commercial paper program but can be used for general corporate purposes. The available amount is reduced by the outstanding amount of commercial paper borrowings and any letters of credit issued on behalf of ICR under the facility. At December 31, 1997, there were no borrowings or letters of credit issued under the ICR Revolver.
Certain covenants of ICR's debt agreements and CCPH's Revolver require specific levels of tangible net worth but not a specific dividend restriction. At December 31, 1997, ICR and CCPH exceeded their tangible net worth covenants by $32.0 million and $29.6 million, respectively. Both ICR and CCPH were in compliance with all covenants at December 31, 1997, and do not contemplate any difficulty maintaining such compliance.
Throughout 1996 and 1995, ICR was active in the public debt market, issuing bonds and medium-term notes ("MTN's"). In December 1996, ICR issued $125 million aggregate amount of 100-year 7.7% debentures, due September 15, 2096. These bonds may not be redeemed until 2026 and then only at a premium which declines to par in 2056. In 1995, $100 million 7.75% non-callable 10-year notes due May 2005 ("2005 Notes") were issued. (See below.) A total of $230 million in MTN's were issued over the two years as follows ($ in millions):
Principal Year Amount Coupon Issued Matures
$20 6.27% 1995 1998 30 6.83 1995 2000 50 6.98 1996 2007 50 7.12 1996 2001 30 6.85 1996 1999 50 6.72 1996 2001
ICR has a shelf registration from 1996 which can be used to issue an additional $70 million in MTN's or other debt until 2000. Currently, there are no plans to issue additional debt but replacing maturing MTN's, capital investments in the terminal facilities and other ventures could necessitate use.
In 1995, ICR prepaid the holders of its $160 million Senior Notes at face value plus accrued interest and a prepayment penalty. The monies used to fund the prepayment were provided by commercial paper, the net proceeds of the 2005 Notes and $40 million from existing lines of credit. The prepayment resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax ($.18 per share). The line of credit borrowings were replaced with the proceeds of MTN's.
The Company believes that its available cash, cash generated by its operations and cash available from the facilities described above will be sufficient to meet foreseeable liquidity requirements. Additionally, the Company believes it has access to the public debt market if needed.
Investment in Mexico
The Company and two Mexican partners have formed a joint venture to bid on the Ferrocarril del Sureste rail line (the "Southeast Line"). The Southeast Line is one of the last segments of rail line being privatized by the Mexican government. The Southeast Line stretches from Mexico City to the port cities of Veracruz and Coatzacoalcos. The Company's participation in the partnership will not exceed forty-nine percent.
To date the amount spent has been immaterial. The auction process began February 1998, and bids are currently due June 11, 1998. The Mexican transport ministry is expected to announce the successful bidder within 30 days of the close of the auction period. If the joint venture is awarded the Southeast Line, the Company has sufficient financing resources available to support its investment.
Year 2000 Conversion
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Many of the Company's computer programs that have date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be required to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue can be mitigated. However, if such modifications and conversions are not made, or are delayed, the Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. There can be no guarantee that the systems of other companies on which the Company's systems rely will be converted on a timely basis, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have material adverse effect on the Company.
In October 1997, the Company entered into an agreement to replace approximately 40 percent of its non-Year 2000 compliant programs with new software and will utilize both internal and external resources to replace and test the software for Year 2000 modifications. The Company began converting its remaining computer systems with internal resources in 1997. The Company expects to spend approximately $8.5 million to $10.0 million from 1997 through 1999 to modify and replace its computer systems. Of the total project cost, approximately $3.0 million is attributable to the purchase of new software. The Company plans to complete conversion of non-Year 2000 compliant programs during 1998. However, user acceptance testing will continue into 1999. Installation of new software programs should be completed during the first quarter of 1999. The total cost of the project is being funded through operating cash flows. Maintenance or modification costs will be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life. Accordingly, the Company does not expect the amounts required to be expensed over the next two years to have a material effect on its financial position or results of operations. The amount of spending in 1997 was approximately $2.3 million.
The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
Miscellaneous
ICR has entered into various diesel fuel collar agreements designed to mitigate significant changes in fuel prices. As a result, approximately 50% of the Railroad's short-term diesel fuel requirements through June 1998 are protected against significant price changes.
The Company has paid approximately $3 million in 1996 and $6 million in each of 1995 and 1994 for severance, lump sum signing awards and other costs associated with various labor agreements. Under the terms of local bargaining agreements, wages will rise 3%-4% per year.
In October 1996, the Brotherhood of Maintenance of Way Employees membership ratified a new agreement which settles wage and work rules through 1999. In February and May 1997, the United Transportation Union ("UTU") and Brotherhood of Locomotive Engineers, respectively, ratified new agreements which settle wage and work rule issues through 2000. The agreements are similar to the nationally negotiated agreements in effect with other Class I carriers. The main distinction is timing of the various lump sum payouts and scheduled wage increases.
Long-Term Equity Enhancement Program
The Company declared its twenty-fifth consecutive quarterly cash dividend on February 20, 1998, payable on March 25, 1998 to shareholders of record on March 6, 1998. The Board believes quarterly dividends are an integral part of its announced Long-Term Equity Enhancement Program designed to increase stockholder value through dividend payments and stock repurchases. Actual dividends are declared by the Board of Directors based on profitability, capital expenditure requirements, debt service and other factors, including the CN tender offer. (See Item 7. "Significant Developments - Canadian National Tender Offer".)
During 1995, the Company completed a $60 million stock repurchase program acquiring 2,475,000 shares in open market transactions. While intended to be an annual component of the Long-Term Equity Enhancement Program, the Board concluded that alternative funding needs, most notably the acquisition of CCPH, the expansion of the intermodal facility in Chicago and the construction of a bulk transfer facility in Louisiana warranted the suspension of share repurchases under the program for 1997 and 1996.
Environmental Liabilities
The Company's operations are subject to comprehensive environmental regulation by federal, state and local authorities. Compliance with such regulation requires the Company to modify its operations and expend substantial manpower and financial resources.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("Superfund"), and similar state and federal laws, the Company is potentially liable for the cost of clean-up of various contaminated sites. The Company generally participates in the clean-up at sites where other substantial parties share responsibility through cost-sharing arrangements, but under Superfund and other similar laws the Company can be held jointly and severally liable for all environmental costs associated with such sites.
The Company is aware of approximately 23 contaminated sites at which it is probably liable for some portion of any required clean-up. Of these, 15 involve contamination primarily by diesel fuel which can be remediated without material cost. Five other sites are expected to require more than $1 million in clean-up costs. At three of these sites other parties are expected to contribute the majority of the costs incurred. The Company paid approximately $.6 million toward the investigation and remediation at all sites in 1997, and anticipates similar expenditures annually.
For all known sites of environmental contamination where Company loss or liability is probable, the Company has recorded an estimated liability at the time when a reasonable estimate of remediation cost and Company liability can first be determined. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. Estimates of the Company`s potential financial exposure for environmental claims or incidents are necessarily imprecise because of the difficulty of determining in advance the nature and extent of contamination, the varying costs of alternative methods of remediation, the regulatory clean-up standards which will be applied, and the appropriate allocation of liability among multiple responsible parties. At December 31, 1997, the Company estimated the probable range of its liability to be $9.9 million to $45 million, and in accordance with the provisions of SFAS No. 5 had a reserve of $9.9 million for environmental contingencies. This amount is not reduced for potential insurance recoveries or third-party contributions.
The risk of incurring environmental liability in connection with both past and current activities is inherent in railroad operations. Decades-old railroad housekeeping practices were not always consistent with contemporary standards, historically the Company leased substantial amounts of property to industrial tenants, and ICR continues to haul hazardous materials which are subject to occasional accidental release. Because the ultimate cost of known contaminated sites cannot be definitively established and because additional contaminated sites yet unknown may be discovered or future operations may result in accidental releases, no assurance can be given that the Company will not incur material environmental liabilities in the future. However, based on its assessments of the facts and circumstances now known, management believes that it has recorded adequate reserves for known liabilities and does not expect future environmental charges or expenditures, based on these known facts and circumstances, to have a material adverse effect on the Company`s financial position, results of operations, cash flow or liquidity.
Litigation
ICR is one of several defendants in a New Orleans class action in which a jury has returned a verdict against the ICR for $125 million in punitive damages as a result of a tank car fire. The Louisiana Supreme Court has vacated the judgment for technical reasons and remanded the case to the trial court for further proceedings. (See Part I. Item 3 - Legal Proceedings). The Company believes the verdict has no basis and intends to continue to challenge it vigorously.
While the final outcome of this proceeding cannot be determined, in the opinion of management, based on present information, the ultimate resolution of this case will not have a material adverse effect on the Company's financial position, results of operations, cash flow or liquidity.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". The new statement is effective for fiscal years beginning after December 15, 1997. When adopted, SFAS No. 130 will require restatement of prior years' statements to report any applicable comprehensive income.
In June 1997, the FASB released SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The new statement is effective for fiscal years beginning after December 15, 1997. When adopted, SFAS No. 131 will require presentation of any applicable segment information for each year that is reported.
In February 1998, the FASB released SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The new statement is effective for fiscal years beginning after December 15, 1997. When adopted, SFAS No. 132 will require restatement of disclosures for each year that is reported.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on page 60 of this Report.
Item 9.
Item 9. Changes in and Disagreement with Accountants in Accounting Financial Disclosures NONE
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors
The directors of the Company are identified in the table below.
Name Age
Gilbert H. Lamphere 45 E. Hunter Harrison 53 George D. Gould 70 William B. Johnson 79 Alexander P. Lynch 45 Samuel F. Pryor IV 42 F. Jay Taylor 74 John V. Tunney 63 Alan H. Washkowitz 57
Biographical Information
Gilbert H. Lamphere, 45, has been a director of the Company and ICR since 1989. He has been Chairman of the Board since 1993, and Chairman of the Executive Committee of the Board since 1990. Mr. Lamphere is Managing Director of the Fremont Group, a diversified investment company. He was Co-Chairman and Chief Executive Officer of Noel, from 1991 until 1994 and was the Chairman and Chief Executive Officer of Prospect until 1994, for which he had served in various capacities since becoming a director in 1983. Mr. Lamphere also is a director and Chairman of Prospect. He serves as a director of the Fremont Group and Sequois. Mr. Lamphere is the brother-in-law of another director, Mr. Lynch. Committee: Executive (Chairman).
E. Hunter Harrison, 53, has been a director of the Company and ICR since 1993 and has served as President and Chief Executive Officer of the Corporation and the Railroad since February 1993. Mr. Harrison joined the Company and the ICR as Vice President and Chief Transportation Officer in 1989, was elected Senior Vice President-Transportation in 1991 and was elected Senior Vice President-Operations in July 1992. Mr. Harrison also is a director of Wabash National Corporation, a manufacturer of truck trailers. Committee: Executive.
George D. Gould, 70, has been a director of the Company since 1990. He has been Vice Chairman of Klingenstein, Fields & Co., L.P., a money management firm, since 1989. Mr. Gould is Chairman of the Hungarian American Enterprise Fund. He previously served as Undersecretary of the United States Treasury for Finance from 1985 to 1988. Mr. Gould also serves as a director of the Federal Home Loan Mortgage Corporation, TIG Holdings, and the Needham Growth Fund. Committees: Audit, Compensation (Chairman) and Finance.
William B. Johnson, 79, has been a director of the Company since 1989. He previously served as a director, Chairman and Chief Executive Officer of IC Industries, Inc. (now known as Whitman Corporation). Until 1989, Whitman owned ICR. Mr. Johnson was employed by the Company as Advisor to the Chairman in 1990 and 1991. Mr. Johnson serves as a director of Webster Broadcasting, is a Trustee of the University of Chicago and the University of Pennsylvania Law School and is a member of the Board of Governors of Washington College, Chestertown, Maryland. Committees: Audit and Executive.
Alexander P. Lynch, 45, has been a director of the Company since 1991. He is a general partner of The Beacon Group Capital Services, LLC, a private investment and strategic advisory firm. From 1995 until 1997, he was Co-Chief Executive Officer and Co-President of The Bridgeford Group, a financial advisory firm. From 1991 until 1995 he was a Senior Managing Director of Bridgeford. From 1985 until 1991, Mr. Lynch was a Managing Director of Lehman Brothers or its predecessors. Mr. Lynch also serves as a director of Lincoln Snacks Company and Patina Oil and Gas Corporation. Mr. Lynch is the brother-in-law of another director, Mr. Lamphere. Committees: Audit (Chairman) and Finance.
Samuel F. Pryor, IV, 42, has been a director of the Company since 1989. Mr. Pryor is President of Brazil Rail Partners, LLC. He was Managing Director of The Noel Group, Inc. ("Noel"), a diversified company from 1991 until 1997. He was President of The Prospect Group, Inc. ("Prospect") until 1997, for which he has served in various capacities since 1986. Committees: Audit, Compensation and Finance (Chairman).
F. Jay Taylor, 74, has been a director of the Company since 1994. Dr. Taylor is a Labor- Management Arbitrator in both the public and private sectors. He served as President of Louisiana Tech University from 1962 to 1987, and currently serves as President Emeritus of the University. Dr. Taylor is a member of the Board of Directors of Michael's Stores, Inc. and Pizza Inn, Inc. and a member of the National Academy of Arbitrators and Society of Professionals in Dispute Resolution. Committees: Audit and Compensation.
John V. Tunney, 63, has been a director of the Company since 1990. He has been Chairman of the Board of Cloverleaf Group, Inc., a real estate development firm, since 1980. Mr. Tunney served as United States Senator from the State of California from 1971 to 1977 and as a member of the United States House of Representatives from 1965 to 1971. Mr. Tunney is a director of Foamex International, a manufacturer and fabricator of polyurethane foam and Swiss Army Brands. Committees: Audit and Compensation.
Alan H. Washkowitz, 57, has been a director of the Company since 1991. He has been a Managing Director of Lehman Brothers or its predecessors since 1978. Mr. Washkowitz also serves as a director of K&F Industries, Inc., a manufacturer of aircraft wheels and brakes, McBrides, Ltd., a manufacturer of private label household and personal care products and L3 Communications, a merchant supplier of secure communications systems. Committees: Compensation and Finance.
The executive officers of the Company are identified in the table below. Each executive officer of the Company currently holds an identical position with ICR and CCPH. Executive officers of the Company, ICR and CCPH serve at the pleasure of the respective Boards of Directors.
Executive Officers
Name Age Position(s)
E. Hunter Harrison 53 President and Chief Executive Officer, Director John D. McPherson 51 Senior Vice President - Operations Donald H. Skelton 54 Senior Vice President - Marketing and Sales James M. Harrell 45 Vice President - Human Resources David C. Kelly 53 Vice President - Maintenance Ronald A. Lane 47 Vice President and General Counsel and Secretary John V. Mulvaney 47 Vice President and Chief Financial Officer Douglas A. Koman 48 Controller
Biographical Information
The following sets forth the periods during which the executive officers of the Company have served as such and a brief account of the business experience of such persons during the past five years. Unless otherwise stated each individual holds a similar position at ICR and CCPH.
E. Hunter Harrison, 53, has been a director of the Company and ICR since 1993 and has served as President and Chief Executive Officer of the Corporation and the Railroad since February 1993. Mr. Harrison joined the Company and the ICR as Vice President and Chief Transportation Officer in 1989, was elected Senior Vice President-Transportation in 1991 and was elected Senior Vice President-Operations in July 1992. Mr. Harrison also is a director of Wabash National Corporation, a manufacturer of truck trailers. Committee: Executive.
Mr. McPherson joined the Company in July 1993. He was named Senior Vice President Operations in 1994. He also serves as a Director of ICR, and since June 1996 of CCPH. Mr. McPherson is also a director of the Peoria & Pekin Union Railroad. Prior to joining the Company he held various positions with the Atchison, Topeka and Santa Fe Railway Company from 1966 to 1993, most recently as Assistant Vice President - Safety.
Mr. Skelton was elected Senior Vice President-Marketing and Sales of the Company in January 1996. He serves as a director of ICR, and since June 1996 of CCPH. He joined the Company as Vice President Marketing and Sales in October 1994. He was previously employed by Mark VII Transportation and as an independent consulting specialist in international transportation. From 1987 to 1993 he was employed by the Atchison, Topeka and Santa Fe Railway Company holding various executive positions including Vice President Marketing and Sales and Vice President International/Domestic Customer Development.
Mr. Harrell joined the Company in his current position in 1992. He served as Director of Labor Relations for The Atchison, Topeka and Santa Fe Railway Company from 1989 to 1992.
Mr. Kelly joined the Company as Vice President and Chief Engineer in 1989. In January 1994, he was appointed Vice President - Maintenance.
Mr. Lane joined the Company as Vice President and General Counsel and Secretary in 1990. He also serves as a Director of ICR, and since June 1996 of CCPH.
Mr. Mulvaney was appointed to his present position in the Company in November 1997. He also serves as a director of ICR, CCPH, and Peoria & Pekin Union Railroad. He joined the Company as Controller in June 1990.
Mr. Koman was appointed to his present position in the Company in November 1997. He joined the Company in 1971 and served as Assistant Treasurer from 1990 to 1991 and Treasurer from 1991 to 1997.
No family relationship exists among the officers of the Company, ICR or CCPH.
Pursuant to Item 405 of Regulation S-K, Mr. A. P. Lynch's Form 4 for August 1997 reflecting the sale of 20,000 shares was filed February 17, 1998, 160 days late.
Item 11.
Item 11. Executive Compensation
All of the cash compensation received by the Company's executive officers during fiscal years 1997, 1996 and 1995 was paid or accrued by ICR; no compensation was paid by the Company. The following table sets forth information concerning the Chief Executive Officer and the four other most highly compensated executive officers for the year ended December 31, 1997. The table has been restated to give affect to a 3-for-2 stock split declared in January 1996. Any deferred compensation has been added back in the table.
Options/Grants Table
During 1997 following stock options awards under the Executive Performance Compensation Program were awarded.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
Pension and Retirement Plans
Executive Account Balance Plan. ICR's Executive Account Balance Plan provides for a sum equivalent to 10% of an executive's combined salary and performance awards in excess of a wage offset factor to be accrued annually (but not funded), and is payable upon the retirement from the ICR or termination of employment. The wage offset factor is adjusted annually by the percentage increase in the social security wage base. For 1997, the wage offset factor was $109,000. Amounts accrued earn interest in accordance with the plan.
Defined Contribution Plan. All management employees of the Railroad are eligible to participate in a defined contribution plan to which the ICR contributes 2% of each participant's earnings (as defined in the plan). All contributions are fully vested upon contribution and are invested in various investment funds as selected by the employees. Contributions are designated as Employer Contributions in the Savings Plan.
Supplemental Retirement and Savings Plans. All management employees of the ICR are eligible to participate in the Supplemental Retirement and Savings Plan (the "Savings Plan"), which is a qualified salary reduction 401(k) plan. Eligible employees may make "pre-tax" contributions to the Savings Plan of up to 15% of their salary subject to limitations imposed by the Internal Revenue Code. Those contributions are partially matched by the ICR. The matching contribution is limited to 50% of the first 6% of an employee's pre-tax salary (i.e., the matching contribution is limited to 3% of his or her salary). All contributions are fully vested upon contribution and are invested in various investment funds as selected by the employees.
Excess Benefit Plan. Under the ICR's Excess Benefit Plan, amounts are accrued for each executive officer on an unfunded basis to offset the limitations imposed by the Internal Revenue Code with respect to certain benefit plans as a result of the level of the recipient's compensation. Currently, the Excess Benefit Plan provides for the accrual of a sum equivalent to the employer matching contribution under the Supplemental Retirement and Savings Plan which is restricted by the limits of Section 402(g) of the Internal Revenue Code. The amounts accrued will be distributed at the same time and on the same terms as the amounts paid under the Savings Plan.
Executive Deferred Compensation Plan. The Company established the Illinois Central Corporation Executive Deferred Compensation Plan effective as of January 1, 1994. The plan is available to all officers of the ICR and such management employees as specified from time to time by the ICR. Eligible employees may elect to defer up to 50% of base salary and 100% of annual bonus. Participants' account balances are fully vested and earn interest at a specified, variable rate. Distributions under the plan will be made in a lump sum or installments after the participant's retirement or other termination of employment. Subject to a penalty, a participant may elect to withdraw all or a portion of his or her account under the plan in the event of an unforeseen financial emergency.
Supplemental Executive Retirement Plan. The Company has no tax-qualified defined benefit retirement plan for employees. However, the Company established the Illinois Central Corporation Supplemental Executive Retirement Plan effective as of January 1, 1994 (the "SERP"). The SERP covers all officers of the ICR and such other management employees as specified from time to time by the Company. The monthly benefit payable pursuant to the SERP is equal to a maximum of 35% of the participant's final average compensation (defined as the average annual compensation paid for the highest 36 consecutive months out of the last 60 months prior to retirement) offset by the amount of annual annuity that could be purchased with the sum of: (i) the portion of the participant's account in the Savings Plan which is attributable solely to Employer contributions and the earnings thereon; (ii) the participant's account in the Excess Benefit Plan; and (iii) the participant's account balance in the Executive Account Balance Plan. Participants vest after
five years of participation in the SERP. The following table shows benefits payable to those executives who are eligible for early retirement at age 55 or above with 10 years of credited service, or upon normal retirement at age 65.
Pension Plan Table Average Estimated Annual Benefit for Years of Credited Service Final ------------------------------------------------------ Earnings 5 10 15 20 25 -------- - -- -- -- --
$100,000 $ 17,500 $ 35,000 $ 35,000 $ 35,000 $ 35,000 200,000 35,000 70,000 70,000 70,000 70,000 300,000 52,500 105,000 105,000 105,000 105,000 400,000 70,000 140,000 140,000 140,000 140,000 500,000 87,500 175,000 175,000 175,000 175,000 600,000 105,000 210,000 210,000 210,000 210,000 700,000 122,500 245,000 245,000 245,000 245,000 800,000 140,000 280,000 280,000 280,000 280,000 900,000 157,500 315,000 315,000 315,000 315,000
The above table sets forth the estimated annual benefits payable on a single-life annuity basis if participant does not have a spouse at the time payment is to commence and a joint and 50% survivor annuity basis in the event the participant has a spouse at the time of commencement.
The number of years of credited service as of December 31, 1997, is four (4) years for each of Messrs. Harrison, McPherson, Lane, Harrell and Phillips. Mr. Skelton has three (3) years of credited service at December 31, 1997.
Directors' Compensation
Under the compensation program for Outside Directors the annual retainer for the Chairman is $170,000 and the annual retainer for other Board members is $20,000. A supplemental annual retainer of $3,000 is paid each committee chairman. Each director receives $2,000 for each board or committee meeting attended and is reimbursed for expenses incurred in attending those meetings. No director fees are paid to Mr. Harrison since he is an employee. A Directors Deferral Plan permits directors to defer up to 100% of their cash compensation until they terminate their services as directors.
Through 1997 the Outside Directors also received an annual grant ofstock options to purchase 2,250 shares at the fair market value on the date of grant which was the date of each Annual Meeting. Such options are exercisable in full six months following their grant date and expire 10 years following grant date or if earlier, one year after termination of service as a director for any reason other than death or disability.
For 1998, as a result of the Merger, the annual grant of stock options has been replaced by the Black Scholes equivalent of such a grant. Thus, in 1998, the Directors are expected to receive approximately $25,000 each in lieu of a grant of stock options.
In March 1996, each Outside Director received an option to purchase 37,500 shares which will vest on April 1, 2001 if specified Company performance objectives are achieved in the year 2000. See "Directors Incentive 2000 Option Plan" below.
The Company has an Indemnification Agreement with each of the directors.
Employment Contracts and Termination of Employment and Change in Control Arrangements
The Company has entered into Employment Security Agreements with approximately 29 senior officers which provide stated benefits in the event they are terminated without cause or terminate their employment for good reason within two years after a change in control. Following a covered termination, the officer will be entitled to two or three years' base salary (depending on salary grade) and target incentive payment for one year plus a proration of the current year. Two or three years' credit will be granted toward the Supplementary Executive Retirement Plan and fringe benefits will be extended. However, payment under these agreements will be limited to 2.99 times average last five years W-2 earnings. The Merger will constitute a change of control as defined by the Employment Security Agreements ("ESA"). Terms of the Merger Agreement provide for amendments to the ESA's whereby if payments under the ESA's exceed 105% of the 2.99 limit the full amount will be paid and the participant will be "grossed up" for any excise taxes owed. In addition any unvested stock options and restricted stock granted to participants will vest upon a Change in Control.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
The following independent directors are members of the Company's Compensation Committee: George D. Gould (Chairman), Samuel F. Pryor, IV, John V. Tunney and Alan H. Washkowitz. No executive officer serves as a director of any entity whose executive officers serve on the Company's Compensation Committee.
Compensation Committee Report on Executive Compensation
Executive Compensation Philosophy
The Compensation Committee of the Board of Directors (the "Committee") has adopted a philosophy that compensation for the management of the Company and its subsidiaries should be tied directly to the Company's stated business objectives and to the sustained creation of stockholder value. The Committee believes that stockholder interests and the Company's compensation programs should be closely aligned and integrated. Therefore, the Company's compensation program reflects both a performance and long-term orientation. Further, the performance measures used to determine compensation levels are the primary, sustainable drivers of stockholder value among transportation companies specifically and other publicly-held companies generally. As a result, the Company's total compensation program is designed to be highly sensitive to the Company's performance, defined in terms of stockholder value creation.
Performance Compensation Program
The Company's Performance Compensation Program consists of four components: (1) Base Salary, (2) Performance Awards, (3) Stock Options and (4) Incentive 2000 Plan Awards. The program is designed to emphasize risk-based compensation which rewards Company and individual performance. Each of these components and its respective role in total direct compensation, as well as the basis for determining the compensation of the President and Chief Executive Officer ("CEO"), Mr. Harrison, are described below:
(1) Base Salary
Salary levels are determined by several factors, including: the Company's performance, the individual's contribution to that performance, the individual's position within his/her salary grade and competitive pay levels. In 1997, the Committee reviewed the salary and compensation levels of all management employees to ensure a consistent and competitive compensation program with the Company's peer groups. The Committee reviews the salary of the CEO and all other officers annually.
(2) Performance Awards and Bonuses
Approximately 500 management employees participate in the Company's annual incentive program. Each participant is assigned a target Performance Award according to the individual's level of responsibility (salary grade). Target award levels range from 10% to 75% of annual base salary. Actual award levels vary depending upon the Corporation's performance relative to predetermined objectives for annual revenue growth and return on total capital ("ROTC"), and range from 0% to 150% of target awards. Award levels are weighted two-thirds on ROTC and one-third on revenue growth. Performance awards under the program for management employees other than the CEO and four other most highly compensated officers contain a second component for individual performance for the year as well as Company performance. The individual component of performance awards vary from 0% to 50% of the target award.
The Company performance objectives are the same for all management employees and relate directly to those measures which drive stockholder value -- annual return on average total capital, calculated on an after-award after-tax basis, and annual revenue growth. Specific performance objectives are set by the Committee annually in relation to the Company's fiscal budget after it has been reviewed and approved by the Board. Except as to the CEO and the four other most highly compensated individuals, the Committee has the ability to adjust the Company payout through a discretionary factor of plus or minus 20% of target award by evaluating other business measures (e.g., safety, operating ratio, earnings per share, or other measures). For the CEO and the four other most highly compensated officers, only Company performance, subject to potential reduction by the Committee, determines the Performance Award.
The CEO's target award is 75% of base salary and the targets for the other four most highly compensated officers range from 60% to 65%. To comply with IRS regulations limiting the deductibility of executive compensation, the CEO and the four other most highly compensated officers are not eligible to receive any performance award based on individual performance. The Committee also cannot adjust upward the Company performance award for these individuals. However, the Committee has retained the discretion to award cash bonuses (which are subject to the deductibility cap) to those individuals.
(3) Stock Options
The Company maintains a long-term stock option program for approximately 90 senior managers to provide an equity-like interest in the Company. This program is intended to motivate senior management to improve the long-term performance of the Company's stock price and total return to stockholders.
The number of stock options available for grant in any given year to all eligible employees will vary between .3% and .9% of common shares outstanding, depending on Company performance. Company performance is determined based upon three measures: the Company's 3-year total stockholder return relative to the S&P Midcap 400 index, its 3-year ROTC relative to Class I railroads and its annual compound revenue growth over a 3-year period relative to Class I railroads. The measures are weighted 50% on comparative stockholder return, 25% on ROTC and 25% on revenue growth. Stock options are granted at fair market value on the date of grant and vest 25% each year over four years. Actual awards to individual participants are based upon Company performance, individual performance and individual responsibility (salary grade) within the Company. The maximum award which can be made in one year to a participant under this program is options on 150,000 shares.
(4) Incentive 2000 Plan Awards
In May 1996, the stockholders approved the Illinois Central Railroad Incentive 2000 Plan ("Incentive 2000 Plan") for key management employees. The Incentive 2000 Plan is intended to focus senior managers on the goals of (a) increasing operating revenue to $800 million in the year 1999 while (b) achieving an operating ratio (operating expense divided by operating revenue) under 60%, (c) a return on total capital of 14% and (d) earnings per share of $4.00 for the year 2000. The Committee determined that providing significant cash incentives to management conditioned on achieving financial measures linked to these goals will promote the long-term interests of the Company and its stockholders.
Employees in the Company's top ten salary grades are eligible to receive awards under the Incentive 2000 Plan. As of March 12, 1998, approximately 90 employees were eligible to participate in the Incentive 2000 Plan.
In connection with the merger between CN and IC, the change of control provisions of Incentive 2000 Plan will be triggered. Therefore, upon consummation of the Offer, the target awards under Incentive 2000 will be paid out on a pro-rata basis in accordance with the terms of the plan.
Directors Incentive 2000 Option Plan
In May 1996 the Stockholders also approved the Illinois Central Corporation Directors Incentive 2000 Option Plan (the "Directors Option Plan"). The Directors Option Plan is intended to complement the senior management's Incentive 2000 Plan and to link compensation of directors who are not employees of the Company or its subsidiaries ("Outside Directors") to the same goals of Plan 2000 and the stockholders' interests in the creation of stock value. Each of the eight eligible Outside Directors, as of May 1996, received a one-time grant of options to purchase 37,500 shares of Common Stock. The exercise price for each option is $37.875, which is equal to 150% of the closing sales price of the Common Stock on the New York Stock Exchange on March 8, 1996, the date of grant (adjusted to reflect the 3-for-2 stock split of the Common Stock effective March 14, 1996).
As with Incentive Plan 2000, the Merger of CN and IC will accelerate the vesting of options in the Director Option Plan. The proratios will be based on the number of months prior to the change of control divided by 62 (the total months during which the plan was to be in existence.)
Results for 1997
Actual results for 1997 were below threshold for the ROTC objective of 10.5% and above the revenue growth objective of 5.0%. Actual 1997 ROTC was 10.3% and revenue was 6.4%. However, there were significant capital expenditures during 1997 for which associated returns were not yet realized. Considering the impact of these investments, the committee determined that 1997 ROTC would have been approximately 10.5% and accordingly approved incentive payouts for ROTC at the threshold level (i.e., 50% of target). No incentive payout for revenue growth was approved since revenue growth is only considered when ROTC is at or above target. In aggregate, approximately $4.5 million in bonuses were paid to all management employees for 1997.
The Company's stockholder return for the three years ending December 31, 1997 was 27% compared to 21% for the S&P Midcap 400 index. ROTC for the three years ending 1997 was 10.8% compared to 7.1% for all Class I railroads. The annual compound revenue growth for those years was 5.6% compared to 3.5% for Class I railroads. Accordingly, the Committee determined that options for a maximum of 552,600 shares, or .90% of shares outstanding on grant date, should be awarded pursuant to the senior management stock option plan with respect to 1997 performance. These options will be awarded in 1998.
Based on the 1998 Budget and the Company's strategic plans, including Plan 2000, the Committee established the Company's 1998 ROTC target at 10.4% and the annual revenue growth target at 6.0%.
CEO Compensation
Mr. Harrison was the highest compensated officer of the Company in 1997. Mr. Harrison's salary for 1997 was $500,000. Pursuant to the Performance Compensation Plan, based on Company performance in 1997 and considerations cited above, Mr. Harrison received a Performance Award of $203,595.
The Committee awarded Mr. Harrison a cash bonus of $191,405 with respect to his individual performance in 1997 in guiding the Company through an extremely soft export grain market and traffic congestion resulting from the UPSP merger while improving the operating ratio by one percentage point. In determining the amount of this bonus, the Committee considered Mr. Harrison's individual contribution toward the achievement of significant corporate objectives including, among others, negotiation of labor contracts, of important growth opportunities and his participation in analysis of several strategic opportunities, including negotiations with CN, and the southeast rail concession in Mexico. Additionally, consideration was given to the magnitude of Mr. Harrison's personal award in relation to other employees. Finally, the Committee noted that since Mr. Harrison did not receive a salary increase for 1995, 1996 or 1997 and that his total direct compensation (salary plus cash bonus) was below comparable compensation for CEO's of Class I railroads on a size-adjusted basis the Committee increased Mr. Harrison's annual compensation to $625,000 for 1998.
Employment Security Agreements
In January 1997, the Board of Directors approved extending Employment Security Agreements to senior management employees in recognition of the extensive restructuring underway in the railroad industry. To retain the Company's management and promote alignment of management's interests with the stockholders' interests, the Company entered into Employment Security Agreements with approximately 29 senior officers which provide stated benefits in the event they are terminated without cause or terminate their employment for good reason within two years after a change of control. Following a covered termination, the officer will be entitled to two or three years base salary (depending on salary grade) and incentive payment target for one year plus a proration of the current year. Two or three years credit, respectively, will be granted toward the Supplemental Executive Retirement Plan and fringe benefits will be extended. However, payments under these agreements will be limited to 2.99 times average last five year W-2 wages to preclude triggering "Excess Parachute Payment" excise taxes. The Merger will constitute a change of control as defined by the Employment Security Agreements ("ESA"). Terms of the Merger Agreement provide for amendments to the ESA's whereby if payments under the ESA's exceed 105% of the 2.99 limit the full amount will be paid and the participant will be "grossed up" for any excise taxes owed.
Nondeductible Compensation
The Committee does not currently anticipate that any executive officer's nonperformance- based compensation will exceed $1 million. For 1997, no executive officer received nonperformance-based compensation which exceeded $1 million. It is anticipated that all executive compensation to be paid in 1998 will be fully deductible as well. However, the Committee and the Board of Directors retain the discretion to grant nondeductible compensation if that would be in the best interests of the Company and stockholders under the circumstances.
Respectfully submitted,
Mr. George D. Gould, Chairman Mr. Samuel F. Pryor, IV Dr. F. Jay Taylor Mr. John V. Tunney Mr. Alan H. Washkowitz
Performance Graph
The following performance graph compares the Corporation's change in total stockholder return on its Common Stock since December 31, 1992 with the S&P Midcap Index in which the Corporation is included and the S&P Railroad Index which includes other Class I railroads but not the Railroad. Dividend reinvestment has been assumed.
Stock Performance Table S & P
Period IC Stock Midcap 400 Railroads ------ -------- ---------- -----------
12-92 100 100 100 12-93 150 114 124 12-94 132 110 107 12-95 169 144 157 12-96 218 171 195 12-97 238 227 220
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
OWNERSHIP TABLE
The following table sets forth certain information with respect to persons known by the Company to beneficially own (as defined by the Securities Exchange Act of 1934) as of March 4, 1998, five percent or more of Common Stock, and with respect to each director and named executive officer of the Company and all directors and executive officers of the Company as a group.
Name and Address Amount and Percentage of (if applicable) of Nature of Common Stock Beneficial Owner Beneficial Ownership1 Outstanding1
AMVESCAP PLC, et al. 11 Devonshire Square London, EC2M 4YR England............... 6,343,9352 10.31%
MacKay Shields Financial Corporation 9 West 57th Street New York, New York 10019.............. 3,427,3253 5.57%
George D. Gould........................ 51,000 * William B. Johnson..................... 82,7184 * Gilbert H. Lamphere ................... 897,8355 1.46% Alexander P. Lynch .................... 408,2956 * Samuel F. Pryor, IV ................... 390,5407 * F. Jay Taylor ......................... 74,9988 * John V. Tunney ........................ 55,7439 * Alan H. Washkowitz .................... 96,00010 * E. Hunter Harrison .................... 725,983 1.17% Ronald A. Lane ........................ 235,532 * John D. McPherson ..................... 166,705 * James M. Harrell...................... 105,470 * Donald H. Skelton...................... 105,217 * Dale W. Phillips**.................... 746 -
All directors and executive officers of the Company as a group (16 persons).......................... 3,760,63611 5.94%
* under 1% ** Mr. Phillips resigned as an officer of the Company on October 31, 1997.
Notes to Ownership Table
1 Based on 61,518,172 shares of Common Stock outstanding on March 4, 1998. Shares issuable currently or upon exercise of options are treated as outstanding for the purposes of stating the amount of beneficial ownership and computing the percentage of beneficial ownership of shares by such person (or of the group). No adjustment for the pro-rata reduction of options issued to directors under the Incentive 2000 Plan has been made. As of March 4, 1998, such reduction would be approximately 22,380 per director and 179,040 in total.
2 According to a Schedule 13G dated February 9, 1998, AMVESCAP PLC and or its United Kingdom or U.S. subsidiaries (known in US as INVESCO) have shared voting and dispositive power for 6,343,935 shares in its capacity as an investment advisor to several investment funds.
3 According to a Schedule 13G dated February 13, 1998, MacKay Shields Financial Corporation, in its capacity as an investment manager for various clients, has shared voting and shared disposition power for 3,427,325 shares.
4 Includes 225 shares held by Mr. Johnson's spouse. Mr. Johnson disclaims beneficial ownership of these shares.
5 Excludes 209,112 shares held by a trust for the benefit of Mr. Lamphere's descendants, of which Messrs. Alexander P. Lynch and Richard G. Woolworth, Jr. are co-trustees. Mr. Lamphere disclaims beneficial ownership of these shares. Includes 69,831 shares held by a trust for benefit of Mr. Pryor's children, of which Mr. Lamphere is a co-trustee.
6 Includes 209,112 shares held by a trust for the benefit of Mr. Lamphere's descendants, of which Messrs. Alexander P. Lynch and Richard G. Woolworth, Jr. are co-trustees.
7 Excludes 69,831 shares held by a trust for the benefit of Mr. Pryor's children, of which Mr. Lamphere and Mr. Samuel F. Pryor, III, Mr. Pryor's father, are trustees. Mr. Pryor disclaims beneficial ownership of these shares.
8 Includes 1,500 shares held by Dr. Taylor's spouse. Dr. Taylor disclaims beneficial ownership of these shares.
9 Includes 4,500 shares held in trust for Mr. Tunney's mother, for which Mr. Tunney is Trustee.
10 Under an arrangement with Lehman Brothers, Mr. Washkowitz must remit to Lehman Brothers any gain upon exercise of the options for 24,750 shares of the total.
11 See Notes (4) - (10) above.
Item 13.
Item 13. Certain Relationships and Related Transactions
Lehman Brothers Inc.
Mr. Washkowitz has been a Managing Director of Lehman Brothers or its predecessors since 1978. Lehman Brothers has provided services to the Company and ICR in the past and is expected to do so in the future. Lehman Brothers managed (i) the public debt offerings of ICR in 1996 and 1995, (ii) the debt tender offer and public debt offering of ICR in 1993 and (iii) is one of the designated dealer's for ICR's commercial paper program which started in November 1993.
The Bridgeford Group
Mr. Lynch is a general partner of Beacon Group Capital Services, LLC ("Beacon") and until 1997 was Co-Chief Executive Officer and Co-President of The Bridgeford Group and served as a Senior Managing Director there from 1991 until 1995. Beacon and The Bridgeford Group have provided services to the Company and ICR in the past and is expected to do so in the future. Beacon Group assisted in various strategies studies in 1997, including negotiations with Canadian National Railway. The Bridgeford Group assisted in the evaluation of and negotiations with Kansas City Southern Industries in 1994 and the evaluation of and negotiations with CCP Holdings, Inc. in 1995 and 1996. During 1997, approximately $.4 million was paid to the Bridgeford Group for services rendered.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements on page 60 of this Report.
2. Financial Statement Schedules:
See Index to Financial Statement Schedules on page of this Report.
3. Exhibits:
See items marked with "*" on the Exhibit Index beginning on page E-1 of this Report. Items so marked identify management contracts or compensatory plans or arrangements as required by Item 14.
(b) 1. Reports on Form 8-K:
None
(c) Exhibits:
The response to this portion of Item 14 is submitted as a separate section of this Report. See Exhibit Index beginning on page E-1.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a separate section of this Report.
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, there unto duly authorized.
ILLINOIS CENTRAL CORPORATION
By: /s/ JOHN V. MULVANEY John V. Mulvaney Vice President and Chief Financial Officer Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ GILBERT H. LAMPHERE Chairman of the Board and Director March 16, 1998 - --------------------------- Gilbert H. Lamphere
/s/ E. HUNTER HARRISON President and Chief Executive Officer March 16, 1998 E. Hunter Harrison (principal executive officer), Director
/s/ JOHN V. MULVANEY Vice President March 16, 1998 - -------------------------- and Chief Financial Officer John V. Mulvaney (principal financial officer)
/s/ DOUGLAS A. KOMAN Controller March 16, 1998 - -------------------------- (principal accounting officer) Douglas A. Koman
/s/ GEORGE D. GOULD Director March 16, 1998 - -------------------------- George D. Gould
/s/ WILLIAM B. JOHNSON Director March 16, 1998 - ----------------------- William B. Johnson
/s/ ALEXANDER P. LYNCH Director March 16, 1998 - ----------------------- Alexander P. Lynch
/s/ SAMUEL F. PRYOR, IV Director March 16, 1998 - ----------------------- Samuel F. Pryor, IV
/s/ F. JAY TAYLOR Director March 16, 1998 - ----------------------- F. Jay Taylor
/s/ JOHN V. TUNNEY Director March 16, 1998 - ----------------------- John V. Tunney
/s/ ALAN H. WASHKOWITZ Director March 16, 1998 - ----------------------- Alan H. Washkowitz
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENTS
SUBMITTED IN RESPONSE TO ITEM 8
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Public Accountants.......................
Consolidated Statements of Income for the three years ended December 31, 1997............................................
Consolidated Balance Sheets at December 31, 1997 and 1996......
Consolidated Statements of Cash Flows for the three years ended December 31, 1997............................................
Consolidated Statements of Stockholders' Equity and Retained Income for the three years ended December 31, 1997...........
Notes to Consolidated Financial Statements for the three years ended December 31, 1997......................................
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Illinois Central Corporation:
We have audited the accompanying consolidated balance sheets of Illinois Central Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and stockholders' equity and retained income for each of the three years in the period ended December 31, 1997. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Illinois Central Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to Financial Statement Schedules herein are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois January 19, 1998 (except with respect to the matter discussed in Note 2, as to which the date is February 10, 1998)
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income ($ in millions, except share data)
Years Ended December 31, 1997 1996 1995 Revenues $ 699.8 $ 657.5 $ 645.3
Operating expenses: Labor and fringe benefits 204.3 192.0 194.8 Leases and car hire 41.0 45.0 46.5 Diesel fuel 39.1 38.4 33.2 Materials and supplies 36.1 32.9 35.0 Depreciation and amortization 43.0 39.3 33.9 Casualty, insurance and losses 16.4 12.1 17.4 Other taxes 21.2 18.2 18.2 Other 34.8 38.4 35.8 Operating expenses 435.9 416.3 414.8
Operating income 263.9 241.2 230.5
Other income (expense), net 6.0 8.6 (0.2) Interest expense, net (40.0) (34.1) (29.5)
Income before income taxes and extraordinary item 229.9 215.7 200.8 Provision for income taxes 79.7 79.1 71.0
Income before extraordinary item 150.2 136.6 129.8 Extraordinary item, net - - (11.4)
Net income $ 150.2 $ 136.6 $ 118.4
Basic EPS: Before extraordinary item $ 2.45 $ 2.22 $ 2.07
Extraordinary item, net - - (0.18) Net income per share $ 2.45 $ 2.22 $ 1.89
Weighted average number of shares of common stock 61,408,637 61,417,769 62,608,274
Diluted EPS: Before extraordinary item $ 2.42 $ 2.20 $ 2.06
Extraordinary item, net - - (0.18) Net income per share $ 2.42 $ 2.20 $ 1.88
Weighted average number of shares of common stock and dilutive potential common shares 62,107,316 61,978,391 62,968,622
The following notes are an integral part of the consolidated financial statements.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets ($ in millions)
ASSETS December 31, 1997 December 31, 1996 Current assets: Cash and temporary cash investments $ 34.1 $ 59.2 Receivables, net of allowance for doubtful accounts of $1.2 in 1997 and $1.3 in 1996 122.7 107.0 Secured financing receivable - 32.6 Materials and supplies, at average cost 15.4 17.3 Assets held for disposition 1.3 1.6 Deferred income taxes - current 18.3 20.3 Other current assets 7.4 10.6 Total current assets 199.2 248.6
Investments 12.1 17.5
Properties: Transportation: Road and structures, including land 1,526.4 1,375.0 Equipment 270.8 261.2 Other, principally land 41.3 41.5 Total properties 1,838.5 1,677.7 Accumulated depreciation (69.7) (53.6) Net properties 1,768.8 1,624.1
Other assets 29.3 21.2 Total assets $2,009.4 $ 1,911.4 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 24.5 $ 6.3 Accounts payable 65.5 60.4 Dividends payable 14.1 14.1 Income taxes payable - 1.1 Casualty and freight claims 13.0 21.1 Employee compensation and vacations 21.5 21.4 Taxes other than income taxes 19.1 17.4 Accrued redundancy reserve 3.9 4.9 Other accrued expenses 93.5 85.3 Total current liabilities 255.1 232.0
Long-term debt 572.2 633.7 Deferred income taxes 409.2 356.6 Other liabilities and reserves 130.1 133.6
Contingencies and commitments (Note 15)
Stockholders' equity: Common stock, par value $.001, authorized 100,000,000 shares, 64,622,956 shares issued and 61,402,347 shares outstanding 0.1 0.1
Additional paid-in capital 172.7 167.1 Retained income 547.4 453.8 Treasury stock (3,220,609 shares) (77.4) (65.5) Total stockholders' equity 642.8 555.5 Total liabilities and stockholders' equity $ 2,009.4 $ 1,911.4
The following notes are an integral part of the consolidated financial statements.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in millions)
Years Ended December 31, 1997 1996 1995 Cash flows from operating activities : Net income $ 150.2 $ 136.6 $ 118.4 Reconciliation of net income to net cash provided by (used for) operating activities : Extraordinary item, net - - 11.4 Depreciation and amortization 43.0 39.3 33.9 Deferred income taxes 47.5 36.4 30.7 Equity in undistributed earnings of affiliates, net of dividends received (1.0) (0.5) (0.8) Net gains on sales of real estate (0.6) (1.6) (0.1) Cash changes in working capital (8.5) (15.0) (8.0) Changes in other assets (3.1) (6.1) (1.7) Changes in other liabilities and reserves (6.0) (5.2) (6.4) Net cash provided by operating activities 221.5 183.9 177.4
Cash flows from investing activities : Additions to properties (168.2) (124.8) (128.8) Acquisitions - (152.9) - Proceeds from sales of real estate 2.4 3.0 2.5 Proceeds from equipment sales 2.5 3.9 2.9 Proceeds from sales of investments 0.6 2.3 0.8 Secured financing 32.6 (32.6) - Other (5.8) 0.5 (4.4) Net cash (used for) investing activities (135.9) (300.6) (127.0)
Cash flows from financing activities : Proceeds from issuance of debt 0.9 335.5 250.0 Principal payments on debt (28.5) (77.4) (259.8) Net proceeds (payments) - Commercial Paper (20.0) (37.0) 42.0 Dividends paid (56.6) (48.7) (41.9) Stock repurchases (11.9) (1.0) (59.8) Proceeds from exercise of stock options and warrants 5.4 0.2 0.1 Purchase of subsidiary's common stock - (0.7) (0.2) Net cash provided by (used for) financing activities (110.7) 170.9 (69.6) Changes in cash and temporary cash investments (25.1) 54.2 (19.2) Cash and temporary cash investments at beginning of year 59.2 5.0 24.2 Cash and temporary cash investments at end of year $ 34.1 $ 59.2 $ 5.0 Supplemental disclosure of cash flow information : Cash paid during the year for: Interest (net of amount capitalized) $ 40.5 $ 31.6 $ 32.1 Income taxes $ 32.9 $ 50.9 $ 31.0
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Retained Income
Shares (000's) Equity ($ in millions) Additional Total Stock- Common Common Paid-in Retained Treasury holders' Stock Stock Capital Income Stock Equity
Balance December 31, 1994 63,915 $ 0.1 $ 165.0 $ 293.0 $(4.0)$ 454.1
Issuance of Common Stock:
Exercise stock option 4 - - -
Restricted stock awards - - 1.3 1.3
Stock repurchased/ forfeited (2,494) (60.5) (60.5)
Dividends (43.2) (43.2)
Net income 118.4 118.4
Balance December 31, 1995 61,425 0.1 166.3 368.2 (64.5) 470.1
Issuance of Common Stock:
Exercise stock options 13 - 0.2 0.2
Restricted stock awards - - 0.6 0.6
Stock repurchased (31) (1.0) (1.0)
Dividends (51.0) (51.0)
Net income 136.6 136.6
Balance December 31, 1996 61,407 0.1 167.1 453.8 (65.5) 555.5
Issuance of Common Stock:
Exercise stock options 325 - 5.4 5.4
Restricted stock awards (5) - 0.2 0.2
Stock repurchased (325) (11.9) (11.9)
Dividends (56.6) (56.6)
Net income 150.2 150.2
Balance December 31, 1997 61,402 $ 0.1 $172.7 $ 547.4 $(77.4)$ 642.8
The following notes are an integral part of the consolidated financial statements.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
1. The Company
Illinois Central Corporation (the "Company"), a holding company, was incorporated under the laws of Delaware. The Company, through its wholly-owned subsidiaries, Illinois Central Railroad Company ("ICR") and CCP Holdings, Inc. ("CCPH"), is principally engaged in the rail freight transportation business. ICR operates 2,600 miles of main line track between Chicago and the Gulf of Mexico, primarily transporting chemicals, grain and milled grain, coal, paper and intermodal commodities. CCPH has two principal operating subsidiaries - the Chicago Central and Pacific Railroad ("CCPR") and the Cedar River Railroad ("CRR") - which together comprise a Class II railroad system operating 850 miles of track. CCPR operates from Chicago to Omaha, Nebraska, with connecting lines to Cedar Rapids and Sioux City, Iowa. CRR runs from Waterloo, Iowa to Albert Lea, Minnesota. IC Financial Services ("IC Financial"), the Company's remaining direct subsidiary, conducts financing operations for railroad equipment and is the investment vehicle for non-rail related activities including terminal operations.
2. Subsequent Event
On February 10, 1998, the Company and Canadian National Railway Company ("CN") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a wholly owned subsidiary of CN, commenced a tender offer (the "Offer") to purchase approximately 75% of the outstanding shares of the Company's Common Stock (the "Shares") at a price of $39.00 per share. Following completion of the Offer and subject to satisfaction of customary conditions, the Purchaser will be merged with and into the Company (the "Merger") and each Share not purchased in the Offer will be converted into the right to receive an amount of CN common stock equal to the fraction obtained by dividing (1) $39.00 by (2) the average closing price of the CN common stock (the "Average Closing Price") over the 20 day trading period ending two trading days prior to the effective time of the Merger; provided that if such Average Closing Price is less than $43.00, then the Average Closing Price will be deemed to be $43.00 and if such Average Closing Price is greater than $64.50, then the Average Closing Price will be deemed to be $64.50. Pursuant to the Merger Agreement, if less than 75% of the shares are tendered, the Shares outstanding prior to the Merger will be converted into the right to receive a prorated amount of stock and cash in order to ensure that the overall aggregate consideration consists of 75% cash and 25% stock.
Simultaneously with the purchase of shares pursuant to the Offer, the shares purchased will be deposited in an independent, irrevocable voting trust while CN and the Company await review of the transaction by the STB.
Pursuant to the Merger Agreement, subject to consultations with the Company and after giving good faith consideration to the views of the Company, CN shall have final authority over the development, presentation and conduct of the STB case, including over decisions as to whether to agree to or acquiesce in conditions. The Company shall take no regulatory or legal action in connection with the STB without CN's consent. The STB could impose conditions or restrictions as it relates to CN's acquisition of control of the Company. If the STB does not approve CN's acquisition of control of the Company or CN deems any conditions imposed by the STB unacceptable, CN would have the obligation to sell all the Company common shares held by the voting trust. Neither the acquisition of the Company shares pursuant to the tender offer nor the merger will be subject to STB approval of the combination.
The Company's Board of Directors has unanimously approved the Merger Agreement and the transactions contemplated and recommended that stockholders accept the Offer and tender their shares.
The Offer was successfully concluded on March 13, 1998 when the Purchaser received tenders for in excess of 75% of outstanding shares. The actual percentage of outstanding shares purchases has not been determined as of the date of this filing.
Under change in control provisions of various compensation plans, including Incentive 2000 Plan and Employment Security Agreements, the Company will be required to make payments to certain employees under certain conditions. The change in control payment under Incentive 2000 Plan is approximately $11 million. The amount that may be paid under Employment Security Agreements, if any, is not determinable at the time of filing.
With the change in control the Employee Stock Purchase Plan and the Management Employee Discounted Stock Purchase Plan were terminated.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant investments in affiliated companies are accounted for by the equity method. Transactions between consolidated companies have been eliminated in the accompanying consolidated financial statements. Results for 1996 include CCPH from June 13, 1996 (date of acquisition). See Note 18.
Properties
Depreciation is computed by the straight-line method and includes depreciation on properties under capital leases. The depreciation rates for the equipment owned by the Company's finance subsidiary are based on estimated useful life and anticipated salvage value. Lives used range from 18 to 20 years. The operating subsidiaries use the composite method of depreciation for track structure, other road property, and equipment. In the case of routine retirements, removal costs less salvage recovery are charged to accumulated depreciation. Expenditures for maintenance and repairs are charged to operating expense.
The approximate ranges of annual depreciation rates for major property classifications for the Railroads are as follows:
Road properties............................. 1%-8% Transportation equipment.................... 2%-5%
The rates were approved by the predecessor of the Surface Transportation Board ("STB"), an independent agency of the Department of Transportation.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Revenues
Revenues are recognized based on services performed and include estimated amounts relating to movements in progress for which the settlement process is not complete. Estimated revenue amounts for movements in progress are not significant.
Income Taxes
Deferred income taxes are accounted for on the asset and liability method by applying enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The resulting deferred tax liabilities and assets represent taxes to be paid or collected in the future when the related assets and liabilities are recovered and settled, respectively.
Cash and Temporary Cash Investments
Cash in excess of operating requirements is invested in certain funds having original maturities of three months or less. These investments are stated at cost, which approximates market value.
Income Per Share
Income per common share of the Company is calculated in accordance with Statement of Financial Accounting Standard No. 128, "Earnings per Share," (SFAS No. 128). In accordance with SFAS No. 128, basic income per share is based on the weighted average number of common stock outstanding and diluted income per share is based on the weighted average number of shares of common stock and dilutive potential common shares for the period. See Note 14.
Derivative Financial Instruments
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company has entered into various diesel fuel collar agreements with the objective of mitigating significant fluctuations in fuel prices. Premiums paid for the purchase of these agreements are amortized to fuel expense over the terms of the agreements. Unamortized premiums are included in Other Assets in the Consolidated Balance Sheets. Amounts receivable or payable under the collar agreements are accrued as increases or decreases to Diesel Fuel Expense. See Note 8.
Casualty Claims
The Company accrues for injury and damage claims based on actuarially determined estimates of the ultimate costs associated with asserted claims and claims incurred but not reported.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Stock-Based Compensation
The Company has elected to adopt SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), for disclosure purposes only. The Company accounts for compensation under its Long-Term Incentive Plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 15.
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.
Reclassifications
Certain items relating to prior years have been reclassified to conform to the presentation in the current year.
4. Stock Repurchase Program
In 1994, the Board of Directors authorized a plan for the annual repurchase of Common Stock. For 1995, the Board authorized the purchase of $60 million of Common Stock. Purchases in 1994 and 1995 under the program, 2,475,000 shares of Common Stock, were funded by a special $60 million dividend from ICR which was declared in 1994 and paid in 1995. The Board determined that various capital needs such as the acquisition of CCPH in 1996 (see Note 18) precluded stock repurchases under the program for 1997 and 1996. However, open market purchases, in conjunction with option exercises, did occur in 1997 and 1996.
5. Extraordinary Item
In 1995, ICR prepaid the holders of its $160 million Senior Notes at face value plus accrued interest and a prepayment penalty. The prepayment resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The loss resulted from the premium paid, the write-off of unamortized financing fees and costs associated with the prepayment. See Note 10.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
6. Other Income (Expense), Net
Other income (expense), net consisted of the following ($ in millions):
Years Ended December 31, 1997 1996 1995 ---- ---- ----
Rental income, net.............................. $3.4 $2.9 $3.5 Net gains (losses) on sales of real estate..... .6 1.6 (.1) Equity in undistributed earnings of affiliates....................... 1.6 .8 .9 Sales of accounts receivable (see Note 11).... (3.0) (2.9) (3.2) Grant of permanent easement (see below)......... 3.7 - - Sale of RAIL (see below)........................ - 7.3 - Other, net...................................... (.3) (1.1) (1.3) ----- ---- ------ Other income (expense), net.................. $6.0 $8.6 $ (.2) ===== ===== ======
On September 30, 1997, ICR, CCPR and CRR granted a permanent easement for development of right of way property for signboard use. On October 3, 1996, ICR sold its investment in an industry captive insurance company which resulted in a one-time gain of approximately $.07 per share.
7. Supplemental Cash Flow Information
Cash changes in components of working capital, exclusive of current maturities of long-term debt, included in the Consolidated Statements of Cash Flows were as follows ($ in millions):
Years Ended December 31, 1997 1996 1995 ---- ---- ----
Receivables, net..................... $(16.6) $ (5.1) $(17.6) Materials and supplies............... 1.9 1.0 .8 Other current assets................. 3.7 (7.5) .7 Accounts payable..................... 5.1 (12.2) 2.2 Income taxes payable................. (1.6) (8.1) 11.1 Accrued redundancy reserve........... (1.0) .6 (2.5) Other current liabilities............ - 16.3 (2.7) ------- ------ ------- Cash changes in working capital.. $ (8.5) $(15.0) $ (8.0) ======= ======= =======
ICR recorded capital leases of $4.3 million and $7.1 million covering 40 locomotives and 328 freight cars in 1997 and 1995, respectively. See Note 9 for the present value of the minimum lease payments.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
8. Materials and Supplies
Materials and supplies, valued using the average cost method, primarily consist of track material, switches, car and locomotive parts and fuel.
As of December 31, 1997, ICR was party to three diesel fuel collar agreements under which the Company receives or makes monthly payments based on the monthly average price for Heating Oil Gulf Coast (Pipeline) Platt's Oilgram("Contract Price"), which was $.482 per gallon for December 1997. Under the agreement, ICR receives or makes monthly payments on 3,000,000 notional gallons based on the excess of the Contract Price over $.60 per gallon or the deficiency of the Contract Price under $.4825 to .4690 per gallon.
9. Leases
As of December 31, 1997, the Company leased 6,316 and 53 of its freight cars and locomotives, respectively. These leases expire between 1998 and 2007. Under the terms of many of its lease agreements, the Company has the right of first refusal to purchase, at the end of the lease term, certain cars and locomotives at or below fair market value. The Company also leases office facilities, computer equipment and vehicles.
Net obligations under capital leases at December 31, 1997 and 1996, included in the Consolidated Balance Sheets were $33.8 million and $34.5 million, respectively. The gross assets under capitalized leases were $39.9 million and $37.4 million at December 31, 1997 and 1996, respectively, and are included in properties in the Consolidated Balance Sheets.
At December 31, 1997, minimum rental payments under capital and operating leases that have initial or remaining noncancellable terms in excess of one year were as follows ($ in millions):
Capital Operating Leases Leases
1998...................................... $ 6.6 $ 24.5 1999...................................... 7.0 23.3 2000...................................... 5.9 16.6 2001...................................... 7.0 14.9 2002...................................... 4.3 13.3 Thereafter................................ 13.3 74.2 ------ -------- Total minimum lease payments.......... $44.1 $166.8 ======
Less: Imputed interest.................... 10.3 ------ Present value of minimum payments..... $33.8 ======
Total rent expense applicable to noncancellable operating leases amounted to $26.4 million in 1997, $26.7 million in 1996 and $19.9 million in 1995. Most of the leases provide that the Company pay taxes, maintenance, insurance and certain other operating expenses.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
10. Long-Term Debt and Interest Expense
Long-term debt at December 31, consisted of the following ($ in millions):
1997 1996
Equipment obligations, due annually to 2007, 6.11% to 7.7%.... 2.0 $ 7.8 Debentures and other debt, due 1998 to 2056, 4.5% to 5.0%..... 11.9 27.6 Debentures, due 2096, 7.7%.................................... 125.0 125.0 Commercial paper, at average interest rate 5.68 in 1997 and 5.61% in 1996 - 20.0 Notes, due 2003, 6.75%........................................ 100.0 100.0 Notes, due 2005, 7.75%........................................ 100.0 100.0 Medium term notes, due 1998 to 2007, 6.72% to 7.12%........... 210.0 230.0 Capitalized leases (see Note 9)............................... 30.1 30.4 Unamortized discount, net .................................... (6.8) (7.1) ------ ------
Total long-term debt............................ $572.2 $633.7 ====== ======
At December 31, 1997, the aggregate annual maturities and sinking fund requirements for debt payments for 1998 through 2003 and thereafter were $24.5 million, $35.4 million, $34.5 million, $105.8 million, $3.6 million, $104.2 million and $288.7 million, respectively. The weighted-average interest rate for 1997 and 1996 on total debt excluding the effect of discounts, premiums and related amortization was 7.1% and 7.2%, respectively.
In December 1996, ICR issued $125 million aggregate amount of 100-year, 7.7% debentures due September 15, 2096. These bonds may not be redeemed until 2026 and then only at a premium which declines to par in 2056.
In 1995, ICR prepaid the holders of its $160 million Senior Notes at face value plus accrued interest and a prepayment penalty. The monies used to fund the prepayment were provided by commercial paper, the net proceeds of the $100 million 7.75% 10-year notes due May 2005 and $40 million from existing lines of credit.
ICR has a commercial paper program whereby a total of $200 million can be issued and outstanding at any one time. The program is supported by a $250 million Revolver. (the "ICR Revolver"). See below.
The $250 million ICR Revolver expires in 2001. ICR pays an annual fee of 15 basis points on the ICR Revolver and the Eurodollar offered rate plus 22.5 basis points for any borrowings. The ICR Revolver may be used as backup for commercial paper and for general corporate purposes. The available amount is reduced by the outstanding amount of commercial paper borrowings and any letters of credit issued on behalf of ICR under the facility. As of December 31, 1997, no amounts were drawn under the ICR Revolver and no letters of credit were issued.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
CCPH has a floating rate revolving loan agreement for an unsecured $50 million (the "CCPH Revolver"). The CCPH Revolver has a $5 million sublimit for letters of credit and expires in 2001. The CCPH Revolver can be used for general corporate purposes. The annual commitment fee is 25 basis points and borrowings are at the Eurodollar offered rate plus 62.5 basis points. At December 31, 1997, the CCPH Revolver was undrawn.
The Company has a $50 million 364-day floating-rate revolving loan agreement which expires in August 1998. In June 1996, the Company borrowed $40 million under this agreement to acquire CCPH (see Note 18). The $40 million was repaid in June 1996 with proceeds from borrowings under the CCPH Revolver. At December 31, 1997, no amounts were drawn under this agreement. IC Financial has approximately $1.8 million in long-term borrowing agreements for which the original proceeds were used to acquire a total of 17 locomotives in 1993. Such borrowings are secured by the locomotives which are leased to ICR and mature in 2000. IC Financial lease revenue and corresponding expense at ICR, which is eliminated in consolidation, was $14.7 million and $14.4 million in 1997 and 1996, respectively.
Various borrowings of the Company's subsidiaries are governed by agreements which contain certain affirmative and negative covenants customary for facilities of this nature including restrictions on additional indebtedness, investments, guarantees, liens, distributions, sales and leasebacks, and sales of assets and capital stock. Some also require satisfaction of certain financial tests, including a leverage ratio, an earnings before interest and taxes to interest charges ratio, and minimum consolidated tangible net worth requirements. See Note 14.
Interest Expense, Net consisted of the following ($ in millions):
Years Ended December 31, 1997 1996 1995 ---- ---- ----
Interest expense........................ $45.9 $37.4 $32.2 Less: Interest capitalized ................ 1.9 1.7 1.3 Interest income...................... 4.0 1.6 1.4 ------- ------- ------- Interest Expense, Net................... $40.0 $34.1 $29.5 ===== ===== =====
11. Receivables
ICR had entered into a revolving agreement, which was terminated on January 8, 1998, to sell undivided percentage interests in certain of its accounts receivable, with recourse, to a financial institution. The agreement allowed for sales of accounts receivable up to a maximum of $50 million at any one time. At December 31, 1997, $45 million had been sold pursuant to the agreement. Costs related to the agreement fluctuated with changes in prevailing interest rates. These costs, which are included in other income (expense), net, were $3.0 million, $2.9 million and $3.2 million for 1997, 1996 and 1995 respectively.
At December 31, 1996, the Company had a $32.6 million receivable in connection with the secured financing of freight equipment acquired by an unrelated third party. This amount was repaid on January 3, 1997.
12. Benefit Plans
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
All employees of ICR and CCPH are covered under the Railroad Retirement System instead of Social Security. Additionally, various retirement plans, postemployment benefits and postretirement benefits are provided.
Retirement Plans.
ICR has two qualified plans permitting participants to make "pre-tax" contributions of their salary up to Internal Revenue Code limitations and each contains a company match provision. The ICR union plan, which started in mid-1995, allows union employees covered by local contracts to participate. ICR matches 25% of the first 4% of salary deferral. There is no CCPH union plan in effect. The management employee plan matches 50% of the first 6% of salary deferral. The management plan also contains a separate defined contribution portion of 2% of each employee's salary. Expenses related to both plans were $1.5 million, $1.2 million, and $1.1 million in 1997, 1996 and 1995, respectively. All ICR contributions are fully vested upon contribution.
ICR also has a supplemental executive retirement plan ("SERP") which covers officers and certain other management employees. The SERP provides for a monthly benefit equal to 35% of a participant's final average compensation as defined in the plan. The monthly benefit is subject to offsets such as employer contributions to the 401(k) plan. The plan was adopted in 1994. The cost was not material in the three years ended December 31, 1997.
The Company's former Chairman, President and Chief Executive Officer is covered by a non-qualified, unfunded supplemental retirement benefit agreement which provides for a defined benefit payable annually, in the amount of $250,000 per year, until the year 2008.
The Company's non-employee directors are covered by a non-qualified, unfunded retirement plan. This plan provides an annual payment equal to the annual retainer at the time of the director's retirement and is paid for the number of years the director served up to a maximum of ten years. The 1997, 1996 and 1995 expenses for the plan were $.4 million, $.8 million and $.9 million, respectively.
Salary Deferral Plans. In addition to the 401(k) plan, all officers and certain other management employees may elect to defer up to 50% of base salary and 100% of annual bonus. Participant deferrals are fully vested and earn interest at a specified, variable rate. Approximately $.3 million, $1.1 million and $.5 million were deferred in 1997, 1996 and 1995, respectively.
Beginning in 1995, the Company's non-employee directors may also defer their annual retainer and meeting fees. All deferrals are 100% vested and earn interest at a specified, variable rate. Approximately $.4 million was deferred in 1997. Deferrals were not material for the two years ended December 31, 1996 and 1995.
Unfunded Plan. ICR has an unfunded plan whereby 10% of an officer's combined salary and bonus in excess of a wage offset factor ($109,000 in 1997) is accrued and earns interest at a specified, variable rate. Amounts accrued are paid when the employee leaves the Company, normally at retirement. Expenses for this plan were $.4 million in each of 1997, 1996 and 1995.
Postemployment Benefit Plans. The Company provides certain postemployment benefits such as long-term salary continuation and waiver of medical and life insurance co-payments while on long-term disability.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Postretirement Plans. In addition to retirement plans, ICR has three benefit plans which provide some postretirement benefits to most former full-time salaried employees and selected former union- represented employees. The medical plan for salaried retirees is contributory, with retiree contributions adjusted annually if expected medical cost inflation rate exceeds 9.5%, and contains other cost sharing features such as deductibles and co-payments. ICR's contribution will be fixed at the 1999 year end rate for all subsequent years. Salaried retirees are covered by a life insurance plan which provides a nominal death benefit and is non-contributory. The medical plan for locomotive engineers who retired under a special early retirement program in 1987 provides non-contributory coverage until age 65. All benefits under this plan terminate in 1998. There are no plan assets and ICR funds these benefits as claims are paid.
CCPH provides to employees of CCPR postretirement medical benefits to age 65 if the employee attained age 60, worked for CCPR's previous owner, worked for CCPR since it commenced operations and between the two employers rendered at least 30 years continuous service. These benefits are subject to deductibles, co-insurance provisions and other limitations. CCPH may amend or change the plan periodically subject to its union labor agreements. There are no plan assets and CCPH funds these benefits as claims are paid.
The accumulated postretirement benefit obligations ("APBO") of the postretirement plans were as follows ($ in millions):
December 31, 1997 1996 ----------------------- ------ Medical Life Total Total Accumulated postretirement benefit obligation: Retirees...................................... $13.2 $2.1 $15.3 $15.5 Fully eligible active plan participants ........................ .7 - .7 1.0 Other active plan participants................ 4.7 - 4.7 5.1 ----- -- ----- ------- Total APBO.......................... $18.6 $2.1 20.7 21.6 ===== ====
Unrecognized net gain........................ 17.6 18.3 ----- Accrued liability for postretirement benefits....................... $38.3 $39.9 ===== =====
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% at December 31, 1996. As a result of the change in general interest rates on high quality fixed rate investments in 1997, the Company decreased the weighted-average discount rate to 7.25% as of December 31, 1997. The change in rates resulted in approximately $.7 million actuarial loss. The actuarial gains and losses along with actual experience gains, primarily fewer claims and lower medical rate inflation, resulted in a total $17.6 million unrecognized net gain as of December 31, 1997. In accordance with SFAS No. 106, the excess gain is subject to $1.2 million annual amortization based on an amortization period of approximately 13 years. The components of the net periodic postretirement benefits cost were as follows ($ in millions):
Years Ending December 31, 1997 1996 ----- ----- Service costs..................................... $ .2 $ .2 Interest costs.................................... 1.4 1.5 Net amortization of excess gain................... (1.2) (1.2) ------ ------ Net periodic postretirement benefit costs................................... $ .4 $ .5 ===== =======
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (e.g., health care cost trend rate) for the medical plans is 10.0% for 1998 and is assumed to decrease gradually to 6.25% by 2002 and remain at that level thereafter. The health care cost trend rate assumption normally has a significant effect on the amounts reported; however, the plan limits annual inflation for ICR's portion of such costs to 9.5% each year and caps ICR's contribution at the actual 1999 level. Therefore, an increase in the assumed health care cost trend rates by one percentage point in each year would have no impact on the Company's accumulated postretirement benefit obligation for the medical plans as of December 31, 1997, or the aggregate of the service and interest cost components of net periodic postretirement benefit expense in future years.
13. Provision for Income Taxes
The Provision for Income Taxes for continuing operations consisted of the following ($ in millions):
Years Ended December 31, 1997 1996 1995 ---- ---- ---- Current income tax: Federal................... $28.3 $38.1 $35.8 State..................... 3.9 4.6 4.5 Deferred income taxes....... 47.5 36.4 30.7 ------ ------ ------ Provision for income taxes.. $79.7 $79.1 $71.0 ===== ===== =====
The effective income tax rates for the years ended December 31, 1997, 1996 and 1995, were 35%, 37% and 35%, respectively. See Note 5 for the tax benefits associated with the 1995 extraordinary loss.
At December 31, 1997, the Company had no Federal net operating loss carryovers for tax or financial reporting purposes.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
In 1996 and 1995 tax benefits of $1.8 million and $4.3 million, respectively, were recorded to reflect the favorable resolution of prior-period tax issues.
The items which gave rise to differences between the income taxes provided for continuing operations in the Consolidated Statements of Income and the income taxes computed at the statutory rate are summarized below ($ in millions):
Years Ended December 31, 1997 1996 1995 ---------- ------------- ------------- Expected tax expense computed at statutory rate.............. $80.5 35% $75.5 35% $70.3 35% Dividends received exclusion.... (.2) - (.2) - (.1) - State income taxes, net of federal tax effect.......... 6.5 3 6.1 3 5.4 2 Charitable contribution of property....................... (4.1) (2) - - - - Favorable resolution of prior period tax issues........ - - (1.8) (1) (4.3) (2) Other items, net................ (3.0) (1) (.5) - ( .3) - ------ ---- ----- ---- ---- ----
Provision for income taxes...... $79.7 35% $79.1 37% $71.0 35% ===== === ===== ==== ===== ===
Temporary differences between book and tax income arise because the tax laws require that certain items of income and expense be treated differently than under generally accepted accounting principles. As a result, the book provisions for taxes differ from the actual taxes reported on the income tax returns. The net results of such differences are included in deferred income taxes in the Consolidated Balance Sheets.
Deferred income taxes consisted of the following ($ in millions): December 31, 1997 1996 ---- ----
Deferred tax assets...................... $ 72.0 $ 77.6 Less: Valuation allowance................ (1.5) (1.5) --------- --------- Deferred tax assets, net of valuation allowance........... 70.5 76.1 Deferred tax liabilities................. (461.5) (412.4) --------- -------- Deferred income taxes.................... $ (391.0) $(336.3) ======== ========
The valuation allowance is comprised of the portion of state tax net operating loss carryforwards expected to expire before they are utilized and non-deductible expenses incurred with the previous merger of wholly-owned subsidiaries.
Major types of deferred tax assets are: reserves not yet deducted for tax purposes ($60.5 million) and safe harbor leases ($10.2 million). Major types of deferred tax liabilities are: accelerated depreciation ($427.2 million), land basis differences ($16.9 million) and debt marked to market ($2.1 million).
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
The Company and its subsidiaries have a tax sharing agreement whereby each subsidiary's federal income tax and state income tax liabilities are determined on a separate company income tax basis as if it were not a member of the Company's consolidated group, with no benefit for net operating losses or credit carryovers from prior years.
14. Common Stock and Dividends
The Company is authorized to issue 100,000,000 shares of Common Stock, par value $.001. At December 31, 1997, there were 61,402,347 shares of Common Stock outstanding. Each holder of Common Stock is entitled to one vote per share in the election of directors and on all matters submitted to a vote of stockholders. Subject to the rights and preferences of redeemable preferred stock, if any, each share of Common Stock is entitled to receive dividends as may be declared by the Board of Directors out of funds legally available and to share ratably in all assets available for distribution to stockholders upon dissolution or liquidation. No holder of Common Stock has any preemptive right to subscribe for any securities of the Company. No shares of preferred stock were outstanding at December 31, 1997 and 1996.
On January 25, 1996, the Board of Directors declared a three-for-two stock split on Common Stock. The split was effected in the form of a stock dividend and was paid March 14, 1996. Approximately 21 million shares were issued from declared but unissued shares. Fractional shares were settled in cash. The effects of the stock split are presented herein as if it took place as of the earliest period shown. In 1992, the Board of Directors also authorized a three-for-two stock split on Common Stock.
The Board of Directors has a policy of quarterly dividends on the Common Stock of the Company. Future dividends may be dependent on the ability of its subsidiaries to pay dividends to the Company. Covenants of ICR's Revolver and CCPH's Revolver require specified levels of tangible net worth. At December 31, 1997, ICR exceeded its tangible net worth covenant by $32.0 million and CCPH exceeded its tangible net worth covenant by $29.6 million.
See Note 15 for discussion of a restricted stock award in 1994.
See Note 2 for discussion of Canadian National Tender offer.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
The following table presents a reconciliation of the shares used in the calculations of basic and diluted income per share in accordance with SFAS No. 128:
1997 1996 1995 ---- ---- ----
Weighted average number of common shares out- standing - Basic shares 61,408,637 61,417,769 62,608,274
Plus: Effect of shares issuable under stock options 698,679 560,622 360,348 ------------ ------------ ------------
Equals: Dilutive potential common shares 62,107,316 61,978,391 62,968,622
15. Stock Based Compensation
The Company grants stock options to employees and directors under the 1990 Long-Term Incentive Plan and has two employee stock purchase plans. The Company accounts for the stock option plans under APB Opinion 25 under which no compensation cost has been recognized.
Long-Term Incentive Plan. Under the Company's 1990 Long-Term Incentive Plan (the "Long- Term Incentive Plan") 3,101,028 shares of Common Stock are reserved for issuance upon the exercise of incentive options that may be awarded by the Compensation Committee to directors and selected salaried employees of the Company and its affiliates under the Executive Compensation Plan and to certain other individuals who possess the potential to contribute to the future success of the Company. This amount includes 300,000 shares added following the approval of Incentive 2000 for Outside Directors at the 1996 Annual Meeting of Stockholders. The Compensation Committee also has the authority under the Long-Term Incentive Plan to award stock appreciation rights, restricted stock and restricted stock units, dividend equivalents and other stock-based awards, and to determine the consideration to be paid by the participant for any awards, any limits on transfer of awards, and, within certain limits, other terms of awards. In the case of options (other than options granted to directors who are not full-time employees of the Company ("Outside Directors"), as described below) granted under the Long-Term Incentive Plan, the Compensation Committee has the power to determine the exercise price of the option (which cannot be less than 50% of the fair market value on the date of grant of the shares subject to the option), the term of the option, the time and method of exercise and whether the options are intended to qualify as "incentive stock options" pursuant to Section 422A of the Internal Revenue Code. Under the Executive Compensation Plan the grant price is limited to fair market value. The Compensation Committee awarded stock options to employees under the Long-Term Incentive Plan for the first time in 1993. Awards, all at the closing market price on date of grant, vest ratably over four years and expire 10 years from date of grant.
Outside Directors also participate in the Long-Term Incentive Plan. On the date of each Annual Meeting, each Outside Director who serves immediately prior to such date and who will continue to serve after such date (whether as a result of such director's re-election or by reason of the continuation of such director's term) is granted an option to purchase 2,250 shares of Common Stock. Options granted to Outside Directors entitle such persons to purchase Common Stock at the fair market value of such Common Stock on the date the option was granted. Options held by Outside Directors expire 10 years from the date of grant, or, if earlier, one year following termination of service as a director for any reason other than death or disability. Such options become exercisable in full six months after their date of grant. Options for 37,500 shares granted in connection with the Incentive 2000 Plan are exercisable after December 31, 1999, if the Company's stock price is at least $43.000 for twenty consecutive days from January 1, 2000 until April 30, 2001.
The Committee awarded 22,500 shares of restricted stock to an eligible employee of ICR in 1994. No cash payments are required by the employee. Shares awarded may not be sold, transferred, or used as collateral until the shares become free of the restrictions. Restrictions lapse over a four-year period. All shares still subject to restrictions will be forfeited and returned to the plan if the employee's relationship with ICR is terminated. No shares were forfeited in 1997 or 1996. A total of 4,125 shares were forfeited in 1995. If the employee becomes disabled, or dies, or a change in control occurs during the vesting period, the restrictions lapse at that time. In connection with early retirements, 43 and 7,632 shares vested in 1996 and 1995, respectively. The compensation expense resulting from the award of restricted stock is valued at the closing market price of the Company's Common Stock on the date of the award, recorded as a reduction of Stockholders' Equity, and charged to expense evenly over the vesting period. Compensation expense was $.2 million, $.8 million and $1.1 million in 1997, 1996 and 1995, respectively.
Stock Purchase Programs. The Company has two stock purchase programs. The basic program is open to all employees and permits employees to acquire Company common stock via payroll deductions. The other plan is the Discounted Stock Purchase Plan ("Discounted Plan"). A total of 1.2 million shares are registered for both plans. All purchases are made by the trustee in the open market and no purchases are made directly from the Company. Only management employees are eligible to participate in the Discounted Plan which provides for the investment of up to 15% of an eligible employee's salary in the common stock of the Company at a 15% discount. A participant must continue employment with the Company or its subsidiaries for two years to retain the 15% discount, and, during that period, the shares will be held by the plan's administrator. If the employee withdraws shares or directs the sale of shares within two years, the discount must be repaid in cash or relinquished shares. No such repayment is required in the event of death, retirement, disability or change of control of the Company. Costs associated with these programs have been immaterial to date.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
The following table summarizes changes in shares under options, after giving effect to the 3- for-2 stock split declared in January 1996:
Weighted Weighted Average Fair Average Value On Exercisable Exercise Options Price Grant Date At Year End Price
Outstanding 12-31-94 1,063,500 $16.822 478,500 $14.417 ======= ======= Granted 535,274 23.158 $ 9.105 ======== Exercised (a) (4,500) 16.834 Forfeited (a) (11,250) 20.833 --------- Outstanding 12-31-95 1,583,024 18.936 812,381 $17.007 ======= ======= Granted 848,250 29.803 $ 8.247 ======== Exercised (b) (13,125) 22.367 Forfeited (c) (3,375) 22.389 ----------- Outstanding 12-31-96 2,414,774 22.730 1,269,355 $18.873 ========= ======= Granted 494,050 34.148 $12.900 ======= Exercised (d) (325,122) 16.675 Forfeited (19,200) 24.713 ----------- ------ Outstanding 12-31-97 2,564,502 1,527,872 $21.593 ========= ========= =======
(a) Pre-1995 option awards (b) Includes 7,875 pre-1995 option awards (c) Includes 1,125 pre-1995 option awards (d) Includes 277,498 pre-1995 option awards
The last date exercisable for options granted to Outside Directors is May 7, 2007, and March 13, 2007, for those granted to employees.
Had the Company adopted the compensation cost recognition methods outlined in FASB Statement No. 123 "Accounting for Stock-Based Compensation " ("SFAS 123"), the Company's 1997, 1996 and 1995 net income and earnings per share diluted would have been as follows - on a pro forma basis - ($ in millions, except share data):
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
1997 1996 1995 ---- ---- ---- Pro Forma As Pro As Pro Pro Unaudited Reported Forma Reported Forma Actual Forma --------- ----- ----- ------ ------ ------ -----
Income before extra- ordinary item 150.2 $147.6 $136.6 $135.0 $129.8 $129.3 Net income 150.2 $147.6 $136.6 $135.0 $118.4 $117.9 EPS before extraordinary item - diluted $2.42 $2 .39 $ 2.20 $ 2.17 $ 2.06 $ 2.06 EPS - net income - diluted $2.42 $2 .39 $ 2.20 $ 2.17 $ 1.88 $ 1.88
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
Of the options outstanding at December 31, 1997, 1,527,872 have exercise prices between $5.333 and $34.750, with a weighted average exercise price of $21.593, a weighted average remaining contractual life of 8 years and all are exercisable. The remaining 1,036,030 options, that are not exercisable, have exercise prices between $23.167 and $37.875 with a weighted average price of $31.709 and a weighted average remaining contractual life of 8 years.
The fair value of each option is estimated on the grant date using the Black Scholes option pricing models with the following weighted-average assumptions:
1997 1996 1995 ---- ---- ----
Risk-free interest rate(s) 6.7% 6.7% and 7.0% 7.2% and 7.3% Dividend yields 2.7% and 2.6% 3.2% and 2.7% 2.9% and 3.0% Days to expiration 3652 3652 3652 Volatility 30.18% and 30.01% 31.4% 33.1% and 32.9%
16. Contingencies, Commitments and Concentration of Risks
The Company has unconditionally guaranteed IC Financial's $1.8 million obligations via a pledge of stock of a subsidiary of IC Financial.
The Company is self-insured for the first $5 million of each loss. The Company carries $245 million of liability insurance per occurrence, subject to an annual cap of $385 million in the aggregate for all losses. This coverage is considered by the Company's management to be adequate in light of the Company's safety record and claims experience.
The Company has guaranteed repayment of certain indebtedness of a jointly owned company aggregating $7.8 million. The Company's share of the guarantee is $1.0 million; the remainder is the obligation of other unrelated owner companies.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
ICR is one of several defendants in a New Orleans class action in which a jury has returned a verdict against the ICR for $125 million in punitive damages as a result of a tank car fire. The Louisiana Supreme Court has vacated the judgment and remanded the case to the trial court for further proceedings. The Company believes the verdict has no basis and intends to continue to challenge it vigorously. While the final outcome of this proceeding cannot be determined, in the opinion of management, based on present information, the ultimate resolution of this case will not have a material adverse effect on ICR's financial position, results of operations, cash flow or liquidity.
There are other various regulatory proceedings, claims and litigation pending against the Company. While the ultimate amount of liability that may result cannot be determined, in the opinion of the Company's management, based on present information, adequate provisions for liabilities have been recorded.
Environmental Contingencies. The Company is aware of approximately 23 contaminated sites at which it is probably liable for some portion of any required clean up. Of these, 15 involve contamination primarily by diesel fuel which can be remediated without material cost. Five sites are expected to require more than $1 million in clean-up costs. At three of these sites other parties are expected to contribute the majority of the remediation costs incurred.
For all known sites of environmental contamination where Company loss or liability is probable, the Company has recorded an estimated liability at the time when a reasonable estimate of remediation cost and Company liability can first be determined. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. Estimates of the Company`s potential financial exposure for environmental claims or incidents are necessarily imprecise because of the difficulty of determining in advance the nature and extent of contamination, the varying costs of alternative methods of remediation, the regulatory clean-up standards which will be applied, and the appropriate allocation of liability among multiple responsible parties. At December 31, 1997, the Company estimated the probable range of its liability to be $9.9 million to $45 million, and in accordance with the provisions of SFAS No. 5 had a reserve of $9.9 million for environmental contingencies. This amount is not reduced for potential insurance recoveries or third-party contributions.
The risk of incurring environmental liability in connection with both past and current activities is inherent in railroad operations. Decades-old railroad housekeeping practices were not always consistent with contemporary standards. Historically the Company leased substantial amounts of property to industrial tenants, and ICR continues to haul hazardous materials which are subject to occasional accidental release. Because the ultimate cost of known contaminated sites cannot be definitively established and because additional contaminated sites yet unknown may be discovered or future operations may result in accidental releases, no assurance can be given that the Company will not incur material environmental liabilities in the future. However, based on its assessments of the facts and circumstances now known, management believes that it has recorded adequate reserves for known liabilities and does not expect future environmental charges or expenditures, based on these known facts and circumstances, to have a material adverse effect on the Company`s financial position, results of operations, cash flow or liquidity.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
17. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Temporary Cash Investments. The carrying amount approximates fair value because of the short maturity of those instruments. Investments in U.S. corporate demand notes of $30.1 million and $52.8 million included in cash and temporary cash investments as of December 31, 1997 and 1996, respectively, have been classified and accounted for as held to maturity securities.
Investments. The Company has investments of $5.2 million in 1997 and $11.7 million in 1996 for which there are no quoted market prices. These investments are in joint railroad facilities, railroad terminal associations, switching railroads and other transportation companies. For these investments, the carrying amount is a reasonable estimate of fair value. The Company's remaining investments ($6.9 million in 1997 and $5.8 million in 1996) are accounted for by the equity method.
Long-Term Debt. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Derivative Financial Instruments. The fair value of diesel fuel collar agreements is the estimated amount that the Company would receive or pay to terminate the agreements as of year end, taking into account the current credit worthiness of the agreement counterparties.
The estimated fair values of the Company's financial instruments are as follows ($ in millions):
December 31, 1997 1996 ----------------- -----------------
Carrying Fair Carrying Fair Amount Value Amount Value
Cash and temporary cash investments $ 34.1 $ 34.1 $ 59.2 $ 59.2 Investments........................... 5.2 5.2 11.7 11.7 Fuel Hedge.......................... - (.5) - .1 Debt................................ (596.7) (626.0) (640.0) (634.2)
18. Acquisition of CCP Holdings, Inc.
On June 12, 1996, ICR used proceeds it received from the issuance of Commercial Paper (average interest rate 5.52% and average maturity 30 days) to pay a $50.0 million dividend to the Company and to loan $59.9 million (5.625% per annum) to the Company. The Company used the $109.9 million and its bank credit lines to acquire CCPH. The transaction closed June 13, 1996,
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
following the effective date of the approval order issued by the STB. The purchase price was $147.1 million in cash and the assumption of approximately $2.5 million in debt and approximately $17.3 million of capitalized lease obligations existing on acquisition date. The acquisition has been accounted for under the purchase method of accounting. Accordingly, the Company has allocated the purchase cost to CCPH's assets and liabilities as of June 13, 1996.
A summary of the CCPH assets acquired and liabilities assumed at June 13, 1996, after reflecting the final purchase accounting allocations, is set forth below ($ in millions):
Cash and Cash Equivalents $ 4.9 Accounts Payable $(16.8) Accounts Receivable 14.5 Other Current Liabilities (12.2) Other Current Assets 11.2 Long-Term Debt (21.3) Properties 264.6 Deferred Income Taxes (84.6) Other Liabilities and Reserves (13.3)
The following unaudited pro-forma results of the Company are presented to reflect the Company's results of operations for the years ended December 31, 1996 and 1995, as if CCPH had been acquired on January 1, 1996, and January 1, 1995, respectively ($ in millions, except share data):
Years Ended December 31, 1996 1995 (Unaudited)
Revenues $697.3 $719.8 Operating income 255.5 251.5 ------- ------- Income before extraordinary item 143.2 135.5 ------- ------- Net income 143.2 124.1 ======= =======
Basic income per share: - Before extraordinary item $ 2.33 $ 2.16 - Net income $ 2.33 $ 1.98
Diluted income per share: - - Before extraordinary item $ 2.31 $ 2.15 - - Net income $ 2.31 $ 1.97
19. Selected Quarterly Financial Data - (Unaudited) ($ in millions, except share data):
First Second Third Fourth 1997 Quarter Quarter Quarter Quarter - ---- ------- ------- ------- -------
Revenues....................... $172.1 $165.6 $173.6 $188.5 Operating income............... 64.5 63.2 62.0 74.2 Net income..................... 33.9 35.0 34.6 46.7
Basic income per share......... $ .55 $ .57 $ .56 $ .76 ======== ====== ======= ======= Diluted income per share....... $ .55 $ .56 $ .56 $ .75 ======== ====== ======= =======
Revenues....................... $162.6 $153.4 $167.9 $173.6 Operating income............... 60.3 56.4 61.5 63.0 Net income..................... 33.1 31.4 32.1 40.0
Basic income share ..... $ .54 $ .51 $ .52 $ .65 ======== ====== ======= ======= Diluted income per share....... $ .53 $ .51 $ .52 $ .65 ======== ====== ======= =======
Revenues....................... $167.9 $156.6 $161.3 $159.5 Operating income............... 62.5 55.9 53.1 59.0 Income before extraordinary item, net..................... 34.3 29.6 29.2 36.7 Net income..................... 34.3 18.2 29.2 36.7
Basic income per share: Before extraordinary item...... $ .54 $ .47 $ .47 $ .60 Extraordinary item............. - (.18) - - --------- ------ ------- ------- Basic income per share......... $ .54 $ .29 $ .47 $ .60 ======= ====== ======= =======
Diluted income per share: Before extraordinary item...... $ .54 $ .47 $ .47 $ .59 Extraordinary item............. - (.18) - - --------- ------- ------- -------- Diluted income per share....... $ .54 $ .29 $ .47 $ .59 ======= ======= ======= =======
Per share amounts have been restated to reflect the 3-for-2 stock split that was declared in January 1996.
Information for 1996 includes results of CCPH for the period June 13, 1996 (date of acquisition) to December 31, 1996.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
I N D E X
T O FINANCIAL STATEMENT SCHEDULES SUBMITTED IN RESPONSE TO ITEM 14(a)
Schedules for the three years ended December 31, 1997:
I-Condensed financial information.............................F-30 II-Valuation and qualifying accounts...........................F-33
Pursuant to Rule 5.04 of General Rules of Regulation S-X, all other schedules are omitted because they are not required or because the required information is set forth in the financial statements or related notes thereto.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Statements of Income ($ in millions, except share data)
Years Ended December 31, 1997 1996 1995 Operating expenses....................... $ 0.4 $ 0.3 $ 0.7 Operating (loss)............................. (0.4) (0.3) (0.7)
Other income (expense), net.................. (0.6) (1.9) (2.8) Interest income (expense), net............... (9.7) (3.2) (0.5) (Loss) before taxes and earnings of subsidiaries.......................... (10.7) (5.4) (4.0) Earnings of subsidiaries..................... 153.6 137.7 120.9 Provision (benefit) for income taxes......... (7.3) (4.3) (1.5)
Net income............................... $ 150.2 $ 136.6 $ 118.4 Income per share-Basic................... $ 2.45 $ 2.22 $ 1.89
Weighted average number of shares of common stock (thousands)...............61,408.6 61,417,8 62,608.3
Income per share-Diluted................. $ 2.42 $ 2.20 $ 1.88
Weighted average number of shares of common stock and dilutive potential common shares (thousands).....62,107.3 61,978.4 62,968.6
The Notes to Consolidated Financial Statements beginning on page are an integral part of this schedule.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Balance Sheets ($ in millions)
December 31, 1997 1996 ASSETS Current assets: Cash and temporary cash investments.......... $ 0.3 $ 0.9 Receivables...................................... 12.1 49.1 Other current assets............................. 0.9 0.5 Total current assets.......................... 13.3 50.5
Investments in subsidiaries......................... 719.5 627.8
Loan to affiliate................................... 89.1 17.1
Deferred income taxes............................... 0.2 1.4
Other assets........................................ 1.0 0.2 Total assets.............................. $ 823.1 $ 697.0 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................. $ 5.8 $ 56.8 Dividends payable................................ 14.1 14.1 Total current liabilities..................... 19.9 70.9
Intercompany debt................................... 156.3 67.0
Other liabilities and reserves...................... 4.1 3.6
Contingencies and commitments
Stockholders' equity: Common stock, par value $.001 authorized 100,000,000 shares, 64,622,956 shares issued and 61,402,347 shares 0.1 0.1 Additional paid-in capital....................... 172.7 167.1 Retained income.............................. 547.4 453.8 Treasury stock (3,220,609 shares)............ (77.4) (65.5) Total stockholders' equity.................... 642.8 555.5
Total liabilities and stockholders' equity $ 823.1 $ 697.0
The Notes to Consolidated Financial Statements beginning on page are an integral part of this schedule.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Statements of Cash Flows ($ in millions)
Years Ended December 31, 1997 1996 1995 Cash flows from operating activities: Net income............................... $ 150.2 $ 136.6 $ 118.4 Reconciliation of net income to net cash provided by (used for) operating activities: Deferred income taxes..................... 1.2 (0.9) (1.5) Earnings of subsidiaries..................(153.6) (137.7) (120.9) Cash changes in working capital: Receivables............................ 37.0 (42.6) (4.1) Other current assets................... (0.4) (0.5) 0.1 Accounts payable....................... (51.0) 40.0 7.9 Income taxes payable................... - - (0.4) Changes in other assets................... (0.8) 0.1 0.1 Changes in other liabilities and reserves. 0.5 2.3 2.2 Net cash provided by (used for) operating activities (16.9) (2.7) 1.8
Cash flows from investing activities: Acquisitions ................................ - (152.9) - Loan to subsidiaries......................... (72.0) - (17.1) Loan from subsidiaries....................... 89.3 67.0 - Capital contribution to subsidiaries......... (0.8) (6.2) (0.4) Dividends received from subsidiaries......... 62.9 143.9 107.7 Net cash provided by investing activities 79.4 51.8 90.2
Cash flows from financing activities: Proceeds from the issuance of debt........... - 40.0 - Principal payments on debt................... - (40.0) - Dividends paid............................... (56.6) (48.7) (41.9) Stock repurchases............................ (11.9) (1.0) (59.8) Proceeds from exercise of stock options and warrants 5.4 0.2 - Net cash (used for) financing activities(63.1) (49.5) (101.7)
Changes in cash and temporary cash investments.. (0.6) (0.4) (9.7) Cash and temporary cash investments at beginning of period.................................... 0.9 1.3 11.0 Cash and temporary cash investments at end of period................................... $ 0.3 $ 0.9 $ 1.3
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest (net of amount capitalized).. $ - $ - $ - Income taxes.......................... $ - $ - $ -
The Notes to Consolidated Financial Statements beginning on page are an integral part of this schedule.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ($ IN MILLIONS)
Year Ended December 31, 1997 Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Accrued redundancy reserve... $ 30.8 $ 1.1 $ 3.4 $ 28.5 Casualty and other reserves...... 45.0 7.7 13.2 39.5 Environmental.................... 17.2 2.4 9.7 9.9 Bad debt reserve................. 1.3 1.9 2.0 1.2 Taxes............................ 1.5 - - 1.5 Total.................. $ 95.8 $ 13.1 $ 28.3 $ 80.6
Year Ended December 31, 1996
Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Accrued redundancy reserve... $ 33.9 $ 2.1 $ 5.2 $ 30.8 Casualty and other reserves...... 55.7 8.9 19.6 45.0 Environmental.................... 12.9 1.9 (2.4) 17.2 Bad debt reserve................. 2.0 1.8 2.5 1.3 Taxes............................ 1.8 - 0.3 1.5 Total.................. $ 106.3 $ 14.7 $ 25.2 $ 95.8
Year Ended December 31, 1995
Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Accrued redundancy reserve... $ 38.2 $ 3.0 $ 7.3 $ 33.9 Casualty and other reserves...... 61.7 14.3 20.3 55.7 Environmental.................... 13.3 5.3 5.7 12.9 Bad debt reserve................. 2.1 1.9 2.0 2.0 Taxes............................ 1.8 - - 1.8 Total.................. $ 117.1 $ 24.5 $ 35.3 $ 106.3
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
2.1 Stock Purchase Agreement dated as of January 17, 1996 among Illinois Central Corporation, CCP Holdings, Inc., Donald R. Wood, Jr. and Lyle D. Reed, and the Ann L. and Walter A. Drexel Revocable Trust and Reed Charitable Remainder Unitrust and R. Kevin Trout, John A. Adair and Gregory L. Amys. (Incorporated by reference to Exhibit 2 to the current report on Form 8-K dated as of May 15, 1996 for the Illinois Central Corporation. (SEC File No. 1-10720))
2.2 Agreement and Plan of Merger dated as of February 10, 1998 among Canadian National Railway Company and Illinois Central Corporation, (Incorporated by reference to Exhibit 2.2 to the current report on Form 14D-9 dated as of February 13, 1998 and as amended February 23, 1998 and March 6, 1998 for the Illinois Central Corporation. (SEC File No. 5-41121))
3.1 Articles of Incorporation of Illinois Central Railroad Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Registration Statement of Illinois Central Railroad Company on Form S-1 dated as of September 26, 1989. (SEC File No. 33- 29269))
3.2 By-Laws of Illinois Central Railroad Company, as amended. (Incorporated by reference to Exhibit 3.2 to the Registration Statement of Illinois Central Railroad Company on Form S-1 dated as of September 26, 1989. (SEC File No. 33-29269))
3.3 Restated Articles of Incorporation of Illinois Central Corporation. (Incorporated by reference to Exhibit 3.1 to the Current Report of the Illinois Central Corporation on Form 8-K dated July 29, 1994. (SEC File No. 1-10720))
* Used herein to identify management contracts or compensation plans or arrangements as required by Item 14 of Form 10-K.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
3.4 By-Laws of Illinois Central Corporation, as amended. (Incorporated by reference to Exhibit 3.4 to the Registration Statement of Illinois Central Corporation and Illinois Central Railroad Company on Form S-1 dated as of August 21, 1990. (SEC File Nos. 33-36321 and 33-36321-01))
3.5 Certificate of Retirement of Illinois Central Corporation (Incorporated by reference to Exhibit 3.3 to the Registration Statement of Illinois Central Corporation and Illinois Central Railroad Company on Form S-1, as amended dated as of August 21, 1990. (SEC File No. 33-40696 and Post-Effective Amendments to Registration Statement Nos. 33-36321 and 33- 36321-01))
3.6 Certificate of Elimination of Illinois Central Corporation. (Incorporated by reference to Exhibit 3.2 to the Quarterly Report of the Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1991. (SEC File No. 1-10720))
3.7 By-Laws of Illinois Central Railroad Company, as amended. (Incorporated by reference to Exhibit 3 to the Quarterly Report of the Illinois Central Railroad Company on Form 10-Q for the three months ended June 30, 1997. (SEC File No. 1-7092))
4.2 Restated Articles of Incorporation of Illinois Central Corporation (included in Exhibit 3.3)
4.3 Form of Pledge Agreement dated as of September 22, 1989, and amended and restated as of July 23, 1991, among Illinois Central Corporation and the Banks named therein that are or may become parties to the Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 22, 1989, and amended and restated as of July 23, 1991, among the Illinois Central Railroad Company and the Banks named therein and the Senior Note Purchasers that are parties to the Note Purchase Agreement dated as of July 23, 1991. (Incorporated by reference to Exhibit 4.4 to the Quarterly Report of Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1991. (SEC File No. 1-10720))
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
4.4 Form of Note Purchase Agreement dated as of July 23, 1991, among Illinois Central Railroad Company, as issuer, and Illinois Central Corporation, as guarantor, for 10.02% Guaranteed Senior Secured Series A Notes due 1999 and for 10.4% Guaranteed Senior Secured Series B Notes due 2001 (including the Form of Series A Note and Series B Note included as Exhibits A-1 and A-2, respectively, therein). (Incorporated by reference to Exhibit 4.3 to the Quarterly Report of the Illinois Central Railroad Company on Form 10-Q for the three months ended September 30, 1991. (SEC File No. 1-7092))
4.5 Form of the Loan and Security Agreement dated as of December 6, 1991, between IC Leasing Corporation I and Hitachi Credit America Corp. (including the Form of the Initial Funding Credit Note, the Form of the Refurbishing Credit Note, the Form of Assignment of Lease and Agreement, the Form of the Pledge Agreement between IC Financial Services Corporation and Hitachi Credit America Corp. and the Form of the Guaranty Agreement between Illinois Central Corporation and Hitachi Credit America Corp. included as Exhibits D, E, F, G and H, respectively, therein). (Incorporated by reference to Exhibit 4.9 to the Annual Report on Form 10-K for the year ended December 31, 1991, for the Illinois Central Corporation filed March 12, 1992. (SEC File No. 1-10720))
4.6 Form of the Trust Agreement dated as of March 30, 1993, between IC Leasing Corporation II and Wilmington Trust Company. (Incorporated by reference to Exhibit 4.1 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720))
4.7 Form of the Security Agreement and Mortgage dated as of March 30, 1993, between IC Leasing Trust II and UNUM Life Insurance Company of America (Including the Form of the Promissory Note between IC Leasing Trust II and UNUM Life Insurance Company of America included as Exhibit A, therein). (Incorporated by reference to Exhibit 4.2 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720))
4.8 Assignment of Lease and Conveyance dated March 30, 1993, between IC Leasing Corporation II and IC Leasing Trust II. (Incorporated by reference to Exhibit 4.3 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720))
4.9 Assignment of Lease and Conveyance dated March 30, 1993, between IC Leasing Trust II and UNUM Life Insurance Company of America. (Incorporated by reference to Exhibit 4.4 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720))
4.10 Form of Commercial Paper Dealer Agreement between Illinois Central Railroad Company and Lehman Commercial Paper, Inc. dated as of November 19, 1993. (Incorporated by reference to Exhibit 4.10 to the Annual Report on Form 10-K for the year ended December 31, 1993 for Illinois Central Railroad Company filed March 16, 1994. (SEC File No. 1-7092))
4.11 Form of Issuing and Paying Agency Agreement of the Illinois Central Railroad Company related to the Commercial Paper Program between Illinois Central Railroad Company and Bank America National Trust Company dated as of November 19, 1993, (including Exhibit A the Form of Certificated Commercial Paper Note included therein). (Incorporated by reference to Exhibit 4.11 to the Annual Report on Form 10-K for the year ended December 31, 1993 for Illinois Central Railroad Company filed March 16, 1994. (SEC File No. 1-7092))
4.12 Form of Revolving Credit Agreement between Illinois Central Corporation and Bank of America National Trust and Saving Association Dated August 24, 1994. (Incorporated by reference to Exhibit 4.1 to the Quarterly Report of Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1994. (SEC File No. 1-10720))
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
4.13 Form of Revolving Credit and Term Loan Agreement between IC Leasing III and the First National Bank of Boston dated as of July 5, 1994. (Incorporated by reference to Exhibit 4.2 to the Quarterly Report of Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1994. (SEC File No. 1- 10720))
4.14 Toronto Dominion Credit Agreement (Incorporated by reference to Exhibit 4.1 to the Quarterly Report of the Illinois Central Railroad Company on Form 10-Q for the three months ended March 31, 1994. (SEC File No. 1-7092))
4.15 Form of Receivables Purchase Agreement dated as of March 29, 1994, between Illinois Central Railroad Company and Golden Gate Funding Corporation. (Incorporated by reference to Exhibit 4.2 to the Quarterly Report of the Illinois Central Railroad Company on Form 10-Q for the three months ended March 31, 1994. (SEC File No. 1-7092))
4.16 Form of Railcar Management Agreement between Interrail and IC Leasing Corporation III dated December 3, 1993. (Incorporated by reference to Exhibit 4.1 to the Current Report of the Illinois Central Corporation on Form 8-K dated July 29, 1994. (SEC File No. 1- 10720))
4.17 Form of Note Purchase Agreement dated as of May 1, 1993, between Illinois Central Railroad Company and The First National Bank of Boston (Incorporated by reference to Exhibit 4.1 to the Registration Statement of Illinois Central Railroad Company on Form S-3. (SEC File No. 33-61410))
4.18 Form of Second Amended and Restated Revolving Credit Agreement dated as of April 2, 1993, amended and restated as of October 27, 1993 and further amended and restated as of November 1, 1994, among Illinois Central Railroad Company and the Banks named therein (Incorporated by reference to Exhibit 4.14 to the Annual Report of Illinois Central Railroad Company on Form 10-K for the year ended December 31, 1994. (SEC File No. 1-7092))
4.19 Form of Lease Agreement dated as of July 1, 1994, between IC Leasing Corporation III and Illinois Central Railroad Company. (Incorporated by reference to Exhibit 4.10 to the Annual Report on Form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.20 Form of Lease Agreement dated as of July 1, 1994 between IC Leasing Corporation III and Waterloo Railway Company. (Incorporated by reference to Exhibit 4.11 to the Annual Report on Form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.21 Form of Options Agreement dated as of July 1, 1994, between IC Leasing Corporation III and Illinois Central Railroad Company. (Incorporated by reference to Exhibit 4.12 to the Annual Report on Form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.22 Form of Options Agreement dated as of July 1, 1994, between IC Leasing Corporation III and Illinois Central Railroad Company. (Incorporated by reference to Exhibit 4.13 to the Annual Report on form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.23 Third Amended and Restated Revolving Credit Agreement between Illinois Central Railroad Company and the banks named therein dated as of April 2, 1993, amended and restated as of October 27, 1993, further amended and restated as of November 1, 1994 and further amended and restated as of April 28, 1995. (Incorporated by reference to Exhibit 4.1 to the quarterly report of Illinois Central Railroad Company in Form 10-Q for the three months ended June 30, 1995. (SEC File No. 1-7092))
4.24 Form of Indenture dated as of April 1, 1995 between Illinois Central Railroad Company and The First National Bank of Boston. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 of Illinois Central Railroad Company dated April 12, 1995. (SEC File No. 33-58547))
4.25 Form of Fixed Rate Medium-Term Note dated as of May 1, 1995 between Illinois Central Railroad Company and Lehman Brothers Inc., Salomon Brothers, Inc and Smith Barney Inc. (Incorporated by reference to Exhibit 4.1 to the Current Report of Illinois Central Railroad Company of Form 8-K dated May 2, 1995. (SEC File No. 1-7092))
4.26 Form of Floating Rate Medium-Term Notes dated as of May 1, 1995 between Illinois Central Railroad Company and Lehman Brothers Inc, Salomon Brothers Inc and Smith Barney Inc. (Incorporated by reference to Exhibit 4.2 to the Current Report of Illinois Central Railroad Company on Form 8-K dated May 2, 1995. (SEC File No. 1-7092))
4.27 Amendment No. 1, dated as of April 29, 1996 to the Third Amended and Restated Revolving Credit Agreement, between Illinois Central Railroad Company and the First National Bank of Boston initially dated as of April 2, 1993, amended and restated November 1, 1994, and further amended and restated as of April 28, 1995. (Incorporated by reference to Exhibit 4 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, for the Illinois Central Railroad Company filed on August 13, 1996. (SEC File No. 1-7092))
4.28 Form of Revolving Credit Agreement between CCP Holdings, Inc., Chicago, Central & Pacific Railroad Company, Cedar River Railroad Company, Iron Horse Properties, Inc., Missouri River Bridge Company and the First National Bank of Boston and Bank of America Trust and Savings Association dated as of June 14, 1996. (Incorporated by reference to Exhibit 4 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 for the Illinois Central Corporation filed on November 8, 1996. (SEC File No. 1-10720))
4.29 Form of Indenture between the Illinois Central Railroad Company and The Chase Manhattan Bank, N.A., dated as of July 25, 1996. (Incorporated by reference to Exhibit 4.1 of Form S-3 dated as of May 15, 1996 for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.30 Form of Indenture between the Illinois Central Railroad Company and The Chase Manhattan Bank, N.A., dated as of May 1996. (Incorporated by reference to Exhibit 4.2 of Form S-3 dated as of May 15, 1996 for the Illinois Central Railroad Company. (SEC File No. 1-7092))
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
4.31 Form of Indenture between the Illinois Central Railroad Company and The Chase Manhattan Bank, N.A., dated as of July 25, 1996. (Incorporated by reference to Exhibit 4.1 of Form S-4 dated as of December 18, 1996 for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.32 Form of First Supplemental Indenture between the Illinois Central Railroad Company and The Chase Manhattan Bank, N.A. dated as of December 17, 1996. (Incorporated by reference to Exhibit 4.2 of Form S-4 dated as of December 18, 1996 for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.33 Form of Registration Rights Agreement among Illinois Central Railroad Company, Lehman Brothers Inc. And Merrill Lynch, Pierce, Fenner & Smith Incorporated dated as of December 10, 1996. (Incorporated by reference to Exhibit 4.3 of Form S-4 dated as of December 18, 1996 for the Illinois Central Railroad Company. (SEC File No. 1-7092))
4.34 Form of fixed and floating rate Medium-Term Notes Series B for the Illinois Central Railroad Company. (Incorporated by reference to Exhibit 4.3 to the current report on Form 8-K dated as of July 29, 1996 for the Illinois Central Railroad Company (SEC File No. 1-7092))
10.1* Form of supplemental retirement and savings plan. (Incorporated by reference to Exhibit 10C to the Registration Statement of Illinois Central Transportation Co. on Form 10 filed on October 7, 1988, as amended. (SEC File No. 1-10085))
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
10.2 Form of indemnification agreement dated as of January 29, 1991, between Illinois Central Corporation and certain officers and directors. (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 1990, for the Illinois Central Corporation filed on April 1, 1991. (SEC File No. 1-10720))
10.3* Form of IC 1990 Stock Purchase Plan. (Incorporated by reference to Exhibit 10.6 to the Registration Statement of Illinois Central Corporation on Form 10 filed on January 5, 1990, as amended. (SEC File No. 1-10720))
10.4* Form of IC Long-Term Incentive Option Plan. (Incorporated by reference to Exhibit 10.17 to the Registration Statement of Illinois Central Corporation and Illinois Central Railroad Company on Form S-1 dated as of September 26, 1989. (SEC File Nos. 33- 36321 and 33-36321-01))
10.5* Amendments No. 1 and No. 2 to the IC Long-Term Incentive Plan. (Incorporated by reference to the Proxy Statement of Illinois Central Corporation in connection with its 1992 Annual Meeting of Stockholders. (SEC File No. 1-10720))
10.6 Railroad Locomotive Lease Agreement between IC Leasing Corporation I and Illinois Central Railroad Company dated as of September 5, 1991. (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 1991 for the Illinois Central Railroad Company filed March 12, 1992. (SEC File No. 1-7092))
10.7 Railroad Locomotive Lease Agreement between IC Leasing Corporation II and Illinois Central Railroad Company dated as of January 14, 1993. (Incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 1992, for the Illinois Central Railroad Company filed March 5, 1993. (SEC File No. 1-7092))
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
10.8* Form of Consulting and Non-Competition Agreement between Illinois Central Corporation and Edward L. Moyers dated as of February 18, 1993. (Incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 1992, for the Illinois Central Corporation filed March 5, 1993. (SEC File No. 1-10720))
10.9* Form of the Note Agreement between the Illinois Central Corporation and Edward L. Moyers dated February 18, 1993. (Incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1992, for the Illinois Central Corporation filed March 5, 1993. (SEC File No. 1-10720))
10.10* Form of a Supplemental Retirement Benefit Agreement dated as of August 20, 1992 between Illinois Central Corporation and Edward L. Moyers. (Incorporated by reference to Exhibit 10.3 to the Quarterly Report of the Illinois Central Corporation on Form 10-Q for the three month ended September 30, 1992. (SEC File No. 1-10720))
10.11 The Asset Sale Agreement between Allied Railcar Company and IC Leasing Corporation III dated December 3, 1993, (Incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 1993 for the Illinois Central Corporation field March 16, 1994, including the Bill of Sale Agreement and Assumption of Liabilities included as Exhibits C and D, respectively, therein). (SEC File No. 1-10720))
10.12 The Purchase Agreement between IC Leasing Corporation III and The First National Bank of Maryland dated December 29, 1993. (Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the Illinois Central Corporation filed March 16, 1994. (SEC File No. 1-10720))
10.13* Form of the Illinois Central Railroad Company Executive Performance Compensation Program (Incorporated by reference to Exhibit 10.1 to the report on Form 8-K of the Illinois Central Railroad Company dated as of July 29, 1994. (SEC File No. 1- 7092))
10.14* Form of the Illinois Central Railroad Company Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.2 to the report on Form 8-K of the Illinois Central Railroad Company dated as of July 29, 1994. (SEC File No. 1-7092))
10.15* Form of the Illinois Central Railroad Company Executive Deferred Compensation Plan (Incorporated by reference to Exhibit 10.3 to the report on Form 8-K of the Illinois Central Railroad Company dated as of July 29, 1994. (SEC File No. 1-7092))
10.16* Form of Illinois Central Railroad Company Performance Compensation Program (Incorporated by reference to Exhibit 10.4 to the report on Form 8-K of the Illinois Central Railroad Company dated as of July 29, 1994. (SEC File No. 1-7092)
10.17* Illinois Central Corporation Management Employee Discounted Stock Purchase Plan. (Incorporated by reference to Exhibit 10.7 to the report of Form 10-K of Illinois Central Corporation for the year ended December 31, 1995. (SEC File No. 1-10720)
10.18 Form of Illinois Central Railroad Company Union Employees' Savings Plan. (Incorporated by reference to Registration Statement of Illinois Central Corporation on Form S-8 dated as of July 18, 1995. (SEC File No. 33-61095))
10.19 Form of Illinois Central Corporation Directors Incentive 2000 Option Plan (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, for the Illinois Central Corporation filed on May 10, 1996. (SEC File No. 1-10720))
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Sequential No. Descriptions Page No.
10.20* Form of Illinois Central Railroad Company Incentive 2000 Plan (Incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, for the Illinois Central Railroad Company filed on May 10, 1996. (SEC File No. 1-7092))
10.21 Form of Illinois Central Corporation Directors Deferred Compensation Plan, as amended and restated effective May 1, 1997. (Incorporated by reference to Exhibit 10 to the Quarterly Report of the Illinois Central Corporation on Form 10-Q for the three months ended June 30, 1997. (SEC File No. 1-10720))
10.22 Form of Illinois Central Corporation Directors Retirement Plan adopted effective as of January 1, 1994. (A)
11 Computation of Income Per Common Share (Included at E-13)
21 Subsidiaries of Registrant (Included at E-14)
23 Consent of Arthur Andersen LLP (A)
27 Financial Data Schedule (A)
99 Provisions of the Private Securities Litigation Reform Act of 1995
(A) Included herein but not reproduced.
Exhibit 11
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON SHARE ($ in millions, except share data)
Years Ended December 31, 1997 1996 1995 Income before extraordinary item $ 150.2 $ 136.6 $ 129.8
Extraordinary item, net - - (11.4)
Net income $ 150.2 $ 136.6 $ 118.4
Calculation of average number of shares outstanding (1): Basic: Weighted average number of common shares outstanding 61,408,637 61,417,769 62,608,274
Diluted: Weighted average number of common shares outstanding 61,408,637 61,417,769 62,608,274
Effect of shares issuable under stock options(2) 698,679 560,622 360,348 62,107,316 61,978,391 62,968,622
Income per common share: Basic: Before extraordinary item $ 2.45 $ 2.22 $ 2.07
Extraordinary item, net - - (0.18)
Net income $ 2.45 $ 2.22 $ 1.89
Diluted: Before extraordinary item $ 2.42 $ 2.20 $ 2.06
Extraordinary item, net - - (0.18)
Net income $ 2.42 $ 2.20 $ 1.88
(1) Shares restated to reflect the 3-for-2 stock split declared in January 1996 as if it took place at the earliest period shown. (2) The dilutive effect of outstanding stock options are calculated under the treasury stock method using the average price of Common Stock.
Exhibit 21
ILLINOIS CENTRAL CORPORATION Subsidiaries of the Registrant as of December 31, 1997
Name Place of Incorporation
Subsidiaries included in the financial statements, which are 100% owned:
Illinois Central Railroad Company Illinois IC Financial Services Corporation Delaware CCP Holdings, Inc. Delaware
Subsidiaries that are 100% owned by Illinois Central Railroad Company:
Kensington and Eastern Railroad Company Illinois Mississippi Valley Corporation Delaware Waterloo Railroad Company Delaware
Subsidiaries that are 100% owned by IC Financial Services Corporation:
IC Leasing Corporation I Nevada IC Leasing Corporation II Nevada IC Leasing Corporation III Nevada IC Terminal Holdings Company Delaware
Subsidiaries that are 100% owned by IC Terminal Holdings Company:
IC RailMarine Terminal Company Delaware IC Omnimodal Terminal Company of Delaware Delaware IC Omnimodal Terminal Company Louisiana NPC, Inc. Louisiana
Subsidiaries that are 100% owned by CCP Holdings, Inc.:
Chicago Central & Pacific Railroad Company Delaware Cedar River Railroad Company Iowa Iron Horse Properties, Inc. Delaware Missouri River Bridge Company Delaware