Item 1. Business
Background
Illinois Central Corporation (the "Company") was incorporated under the laws of Delaware on January 27, 1989. The Company, through its wholly-owned subsidiary, Illinois Central Railroad Company (the "Railroad"), traces its origin to 1851, when the Railroad was incorporated as the nation's first land grant railroad. Today, the Railroad operates 2,700 miles of main line track between Chicago and the Gulf of Mexico, primarily carrying chemicals, coal and paper north, with coal, grain and milled grain products moving south along its lines. The Railroad has been significantly downsized and restructured from its peak of nearly 10,000 miles of track operated in 13 states, rebuilding its main line and converting to a single-track main line with a centralized traffic control system and divesting major east-west segments. In addition to the Railroad, the Company's other direct subsidiary conducts railroad related financing operations.
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.
General - 1992 Four-Year Plan
In late 1992, the Company announced a four-year plan designed to increase its revenues and lower its operating ratio and interest costs. With 1992 as its base, the plan focuses on taking advantage of the Company's leading operating ratio (operating expenses divided by operating revenues) among Class I railroads. The components of the plan are:
- increase annual revenues by $100 million by the end of 1996 - reduce the operating ratio by one percentage point per year for a total of four (4) points below the 1992 base of 70.7% - reduce annual interest expense by $10 million
To accomplish this plan management identified three sources of planned revenue growth -- economic expansion, new and expanded plants on line and market share growth. Economic expansion is the combination of industrial production improvement and freight rate increases. Market share growth is volume gained from competition, (i.e., other railroads, trucklines and barges) facilitated by being a low cost producer. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the significant progress in achieving these goals through 1994.
Having completed two years of the four-year plan, management is developing a new five-year plan which uses 1994 as a base. The new plan covers the period 1995 through 1999 and features $200 million in revenue growth, a significantly lower operating ratio, and a stockholder-driven long-term equity enhancement program.
Commodities and Customers
The Railroad's customers are engaged in a wide variety of businesses and ship a number of different products that can be classified into commodity groups: chemicals, coal, grain, paper, grain mill and food products and other commodities. In 1994, two customers accounted for approximately 7% and 6%, respectively, of revenues (no other customer exceeded 5%) and the ten largest customers accounted for approximately 37% of revenues.
In 1994, approximately 74% of the Railroad's freight traffic originated on its own lines, of which approximately 28% was forwarded to other carriers. Approximately 17% of the Railroad's freight traffic was received from other carriers for final delivery by the Railroad, and the balance of approximately 9% represented bridge or through traffic.
In order to address more effectively the diversity of the Company's customer base and attain the four-year growth plan, the Railroad's marketing department was re-organized in 1993 along major commodity groups. The Railroad now focuses on these units - chemicals and bulk, grain and grain mill, forest products, coal and coke and metals, and intermodal. The formation of separate units enables a fully integrated sales and marketing effort. Specialization allows employees to anticipate and respond to customer needs more quickly, to attract customers who previously used trucks or barges for their service needs, and to establish business relationships with new shippers. These new units work with current and prospective customers to develop customized shipping solutions. Management believes that this commitment to improved customer service has enhanced relations with shippers. Further refinements to the new marketing organization in 1994 included the hiring of a new Vice President-Marketing and Sales with 33 years experience in the transportation industry and a new Assistant Vice President for the Chemicals unit.
The formation of the Intermodal Business Unit underscores the Company's commitment to intermodal through long-term relationships with major participants in this strategic market. In each of the three years ended December 1994, the Railroad entered into joint operating agreements with trucklines and other railroads. By forming a separate business unit and entering into these agreements, the Railroad has fully integrated its intermodal hub operation with sales and marketing for enhanced control of this highly specialized and competitive service. Management anticipates that the result will be better service to customers and seamless transportation of goods for shippers and their customers.
To effectively compete in the intermodal market the Railroad has acquired 900 trailers over the last two years, constructed its newest, state-of-the-art terminal, just south of Chicago at the intersections of major expressways and completed a major expansion at the Memphis facility.
To address the needs of the bulk chemical and intermodal markets a bulk transfer facility (a storage track, easily accessible by truck, where carloads of plastic pellets and other dry products can be stored in bulk and transferred to truck for delivery) was opened in the Company's Chicago intermodal facility in 1994. The 11 acre bulk facility, which can be expanded if volume warrants, provides track capacity for 52 railcars and is designed to serve customers in a five-state region. This transfer facility concept may be expanded to other sites.
The respective percentage contributions by principal commodity group to the Railroad's freight revenues and revenue ton miles during the past five years are set forth below:
Contributions to Total Freight Revenues by Commodity Group Commodity Group
1994 1993 1992 1991 1990 Chemicals 24.8% 25.0% 24.3% 24.5% 25.3% Coal 15.2 12.8 15.3 15.0 15.3 Grain . . . . . . 10.2 14.0 12.2 11.7 10.7 Paper . . . . . . 12.2 12.4 12.1 11.2 10.7 Grain mill & food products 8.5 9.8 8.8 8.7 9.5 Intermodal 6.6 5.4 5.4 5.2 5.0 All other 22.5 20.6 21.9 23.7 23.5 Total . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Contribution to Revenue Ton Miles by Commodity Group(1)
Commodity Group 1994 1993 1992 1991 Chemicals 15.8% 15.9% 15.1% 16.0% Coal 24.0 15.1 18.2 17.0 Grain 20.0 27.9 27.3 27.7 Paper 9.8 9.6 9.0 8.4 Grain mill & food products 9.3 9.9 9.0 8.3 Intermodal 5.5 3.7 3.1 2.9 All other 15.6 17.9 18.3 19.7 Total 100.0% 100.0% 100.0% 100.0%
(1) A new car tracking system was installed in late 1990. As a result pre-1991 ton mile data is not comparable, and therefore is not presented.
The principal elements of these commodity groupings are as follows:
Chemicals A wide variety of chemicals and related products such as chlorine, caustic soda, potash, soda ash, vinyl chloride monomer, carbon dioxide, synthetic resins, alcohols, glycols, styrene monomer, plastics, sulfuric acid, muriatic acid, anhydrous ammonia, phosphates, mixed fertilizer compounds and carbon blacks.
Coal Bituminous and metallurgical coal.
Grain Corn, wheat, soybeans, sorghum, barley and oats.
Paper Pulpboard, fiberboard, woodpulp, printing paper, newsprint and scrap or waste paper. Grain Mill & Food Products Products obtained by processing grain and other farm products such as feed, soybean meal, corn syrup, flour and middlings, animal packinghouse by-products (tallow), canned food, corn oil, soybean oil, vegetable oils, malt liquors, sugar and molasses.
Intermodal A wide variety of products shipped either in containers or trailers on specially designed cars.
Other Pulpwood and chips, lumber and other wood products; sand, gravel and stone, coke and petroleum products, metallic ores and other bulk commodities; primary and scrap metals, machinery and metal products, appliances, automobiles and parts, transportation equipment and farm machinery; glass and clay products, ordnance and explosives, rubber and plastic products, and general commodities.
Operating Statistics
Set forth below is certain information relating to the Railroad's freight traffic during the past five years:
1994 1993 1992 1991 1990 Carloads (in thousands) 915 848 852 866 853 Freight train miles(in thousands)(2) 7,179 5,659 5,149 5,445 5,496 Revenue ton miles of freight traffic (in millions) (1)(3) 21,160 20,334 18,734 19,357 NM Revenue tons per carload 76.3 79.1 76.6 79.0 77.7 Average length of haul (in miles) 286 293 284 286 270 Gross freight revenue per ton mile (1)(4) $.027 $.027 $.029 $.028 NM Net freight ton miles per average route mile (in millions) (1) 7.9 7.5 6.8 7.0 NM Gallons per ton mile(5) .00248 .00251 .00269 .00276 .00292 Active locomotives 328 322 331 361 375 Track resurfacing (miles) 1,397 1,293 1,465 940 618 Percent resurfaced 33.0% 29.8% 32.0% 19.6% 12.7% Ties laid in replacement (including switch ties) 346,994 323,764 296,536 255,283 240,968 Slow order miles 275.79 152.32 135.42 194.62 149.74
1 A new car tracking system was installed in 1990. As a result pre-1991 ton mile data is not comparable, and therefore is not meaningful (NM). 2 Freight train miles equals the total number of miles traveled by the Railroad's trains in the movement of freight. 3 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. 4 Revenue per ton mile equals net 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 tables summarize operating expense-to-revenue ratios of the Company for each of the past five years, excluding the effect of the $8.9 million pretax special charge in 1992. The first table analyzes the various components of operating expenses based on the line items appearing on the income statements, whereas the second table is based on Interstate Commerce Commission ("ICC") functional groupings.
Ratio 1994 1993 1992 1991 1990
Operating(1) 66.3% 68.2% 70.7% 73.5% 75.4% Labor and fringe benefits 33.1 33.7 35.0 35.8 37.3 Leases and car hire 8.2 11.9 12.9 14.0 14.8 Diesel fuel 5.3 5.4 5.5 6.0 5.9 Materials and supplies 6.5 6.5 6.0 5.7 4.8 Depreciation and amortization 4.6 4.2 4.0 3.8 4.0 Other 8.6 6.5 7.3 8.2 8.6
1994 1993 1992 1991 1990 Operating(1) 66.3% 68.2% 70.7% 73.5% 75.4% Transportation (2) 28.9 29.6 31.6 34.8 35.3 Maintenance of way(3) 7.7 7.2 7.0 6.4 7.1 Maintenance of equipment(4) 19.2 20.7 22.5 23.9 23.7
1 Operating ratio means the ratio of operating expenses before special charge over operating revenues. 2 Transportation ratio means the ratio of transportation expenses (such as expenses of operating, servicing, inspecting, weighing, assembling and switching trains) over operating revenues. 3 Maintenance of way ratio means the ratio of maintenance of way expenses (such as the expense of repairing, maintaining, leasing, depreciating and retiring right-of-way and trackage structures, buildings and facilities) over operating revenues. 4 Maintenance of equipment ratio means the ratio of maintenance of equipment expenses (such as the expense of repairing, maintaining, leasing, depreciating and retiring transportation and other operating equipment) over operating revenues.
Employees; Labor Relations
Railroad industry personnel 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 because of the increasing proportion of retired employees receiving benefits relative to the shrinking number of working employees.
Labor relations in the railroad industry are subject to extensive governmental regulation under the Railway Labor Act. Railroad industry personnel are also 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.
The Railroad is a party to several national collective bargaining agreements which, until 1994, establish the wages and benefits of its union workers -- 90% of all Railroad employees are represented by a union. These agreements became subject to renegotiation beginning November 1, 1994, when bargaining notices were filed; however, cost of living allowance provisions and other terms in each agreement continue until new agreements are reached. Despite being part of the national bargaining group, the Railroad has expressed a desire to negotiate separate distinct agreements with each of its unions on a local basis. To date, discussions with all eleven union organizations have been initiated. Three unions, representing 29% of the Railroad's represented workforce have ratified agreements which cover wages and work rule issues through 1999. During the term of the agreements wages will rise approximately 3%-4% per year on average. In reaching these agreements approximately $.8 million was paid in signing bonuses. It is too early to determine if separate agreements will be reached with the other crafts. The following table shows the average annual employment levels of the Railroad:
1994 1993 1992 1991 1990 Total employees 3,250 3,306 3,421 3,611 3,688
A significant portion of the decline from the 1992 level is the result of a separate agreement between the Railroad and the United Transportation Union, reached in November 1991. This agreement permits the Railroad to reduce the size of all crews on all trains operated. In accordance with this agreement, 158 crew members were severed at a cost of $9.6 million to date. The current crew size of approximately 2.74 is not expected to change dramatically.
Management believes that over the next several years attrition and retirements would be the primary source of future declines in employment levels. Increases in employment levels, particularly in train operations, are possible in response to growth of business in accordance with the four year plan.
Regulatory Matters; Freight Rates; Environmental Considerations
The Railroad is subject to significant governmental regulation by the ICC and other federal, state and local regulatory authorities with respect to rates, service, safety and operations.
The jurisdiction of the ICC encompasses, among other things, rates charged for certain transportation services, issuance of securities, 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. Current congressional proposals to eliminate the ICC are still unclear as to what regulatory scheme might remain and thus the potential impact of the proposals on the Company are unknown.
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.
The amount of Southern Illinois coal transported by the Railroad is expected to decline somewhat as the Clean Air Act is fully implemented. Much of the coal from mines in that area currently served by the Railroad will not meet the environmental standards of the Clean Air Act without blending with compliance coal or installation of air scrubbers at point of use. On the other hand, the Railroad expects to participate in additional movements of Western coal and Southern Illinois coal which does comply. Overall, management believes that implementation of the Clean Air Act is unlikely to have a material adverse effect on the results of the Company.
The Company is and will continue to be 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. Inherent in the operations and real estate activities of the Railroad and other railroads is the risk of environmental liabilities. See Item 2.
Item 2. Properties
Physical Plant and Equipment
System. As of December 31, 1994, the Railroad's total system consisted of approximately 4,600 miles of track comprised of 2,700 miles of main line, 200 miles of secondary main line and 1,700 miles of passing, yard and switching track. The Railroad owns all of the track except for 190 miles operated by agreements over track owned by other railroads.
Track Structures. During the five years ended December 31, 1994, the Railroad has spent $348.7 million on track structure to maintain its rail lines, as follows ($ in millions):
CAPITAL EXPENDITURES MAINTENANCE TOTAL 1994 $ 63.2 $ 29.1 $ 92.3 1993 50.3 25.1 75.4 1992 46.4 23.0 69.4 1991 36.3 20.7 57.0 1990 34.6 20.0 54.6
Total $230.8 $117.9 $348.7
These expenditures concentrated primarily on track roadway and bridge rehabilitation in 1994, 1993 and 1992. Approximately, 1,400 miles, 1,300 miles and 1,400 miles of road were resurfaced in 1994, 1993 and 1992, respectively. During 1994 and 1993, approximately $11.4 million was spent to complete the conversion of 198 miles of track, known as the Yazoo District, to a single track with centralized traffic control ("CTC"). Over the last three years, a total of $11.4 million was spent to construct new or expanded intermodal facilities in Chicago and Memphis. Expenditures in 1991 and 1990 benefited from the use of reclaimed rail, cross ties, ballast and other track materials from the second main line when the Railroad's double-track mainline was converted to a single-track mainline with CTC. Future capital expenditures for track structures are expected to average $52 million to $60 million annually.
Fleet. The Railroad's fleet has undergone significant rationalization and upgrading from its peak in 1985 of 862 locomotives and 28,616 freight cars. Over the last two years older, less efficient locomotives were replaced with newer larger horsepower and more efficient equipment. In 1993, the Company implemented a lease conversion program to increase ownership of locomotives and freight cars to become less dependent on the leasing market as a source of equipment. The program resulted in 118 locomotives and 4,228 freight cars either being acquired outright or leased under more favorable lease terms by the Company. As a result of the new lease terms, $24.7 million of capital leases were recorded in 1994. Most of these leases contain fixed price options whereby the equipment can be acquired at or below fair market value.
Since 1992, the Railroad acquired 4 SD-40-2 locomotives and also upgraded its highway trailer fleet with 900 newly built trailers. Of this amount, 800 replaced 880 older leased trailers and 100 were for expanded volume. The locomotives are leased to the Railroad for seven and one-half years. Approximately 1,800 of the cars acquired are leased to the Railroad as well. The remaining cars are leased to other non-affiliated railroads. When those leases expire, the Railroad has first right of refusal to lease the equipment. As these cars are leased to the Railroad other leased equipment will be returned to the independent, third-party lessors or short-term car hire agreements will be terminated.
In 1995, the Company will replace 31 older smaller locomotives with 20 new SD-70's with an option to acquire an additional 20 SD-70's in 1996.
The Railroad has 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 the Railroad anticipates it will need the equipment for its expansion.
The following is the overall fleet at December 31:
TOTAL UNITS: 1994 1993 1992 1991 1990 Locomotives(1) 417 468 449 470 471 Freight cars 16,498 16,634 15,877 16,381 16,526 Work equipment 625 745 902 881 934 Highway trailers (2) 898 898 203 124 67
1 Approximately 89 locomotives need repair before they can be returned to service. This equipment is repaired if needed on an ongoing basis or sold. The Railroad sold 48, 23 and 66 surplus locomotives in 1994, 1993 and 1992, respectively. The active fleet is 328 as of December 31, 1994. 2 Excludes trailers being accumulated for return to lessors.
The components of the fleet by subsidiary and in total for 1994 and in total for 1993 are shown below:
Leasing Railroad Subsid- Long- iaries Owned Term 1994 1993 Description: Total (2) Lease(3) Total Total Total Locomotives: Multi-purpose 60 224 41 265 325 368 Switching - 50 42 92 92 100 Total 60 274 83 357 417 468
Freight Cars: Box (general service) 1,130 235 97 332 1,462 1,221 Box (special purpose) 386 2,560 155 2,715 3,101 3,510 Gondola - 935 427 1,362 1,362 1,094 Hopper (open top) 320 2,096 2,301 4,397 4,717 4,955 Hopper (covered) - 2,792 940 3,732 3,732 3,777 Flat - 251 529 780 780 851 Other - 1,191 153 1,344 1,344 1,226 Total 1,836 10,060 4,602 14,662 16,498 16,634
Work Equipment 617 8 625 625 745 Highway trailers(4) - 898 898 898 898
1 In addition, approximately 1,744 freight cars were being used by the Railroad under short-term car hire agreements. 2 Includes 65 locomotives and 1,762 freight cars under capital leases. 3 Excludes equipment listed under Leasing Subsidiaries. 4 Excludes trailers being accumulated for return to lessor.
Environmental Conditions
The Railroad faces potential environmental cleanup costs associated with approximately 20 contaminated sites and various fueling facilities for which a total of $13 million has been reserved as of December 31, 1994. The most significant of those sites are described below.
Mobile, Alabama
The Railroad 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. The Railroad has been participating in joint cleanup efforts with the current owner and the Railroad's lessee. See Item 3.
Item 3. Legal Proceedings
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 the Railroad, which owned the land until 1976, Alabama Wood Treading Corporation, Inc., and Reilly Industries, Inc. ("RII"), which leased the land from the Railroad and conducted creosote operations on the site. In December 1976, the Railroad 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 the Railroad 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. The Railroad has contributed $2.3 million. Further clean-up activities are anticipated.
Under the agreement, if any party disagrees with the amount determined by the joint technical committee to be expended or otherwise disagrees with any aspect of the clean-up, such party may decline further participation and recommence legal proceedings. However, amounts already contributed by any party will be credited against that party's eventual liability and may not be recovered from any other party.
In the Matter of Illinois Central Railroad Company, et al., Tennessee Division of Superfund No. 94-0187
The Tennessee Department of Environmental and Conservation has issued a Remedial Order requiring cleanup by the Railroad and the current owners of a site in Jackson, Tennessee. The Railroad operated a rail yard and locomotive repair facility at the site. Trichloroethylene ("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. The Railroad has commenced a remedial investigation and feasibility study of the site, and expects to cooperate with the agency and other Potentially Responsible Parties to conduct any necessary clean-up activities.
People of the State of Illinois v. Illinois Central Railroad No. 95 CH842 (Circuit Court of Cook County, Illinois)
On February 2, 1995, the State of Illinois filed a Complaint for Injunction and Civil Penalties against the Railroad relating to a release of diesel fuel from an underground pipeline at the Railroad's Markham Yard facility in East Hazel Crest, Illinois. The Complaint alleges that the Railroad violated State water pollution statutes by allowing diesel fuel to enter waters of the State and seeks an order compelling the Railroad to take necessary corrective actions at the site and to pay a civil penalty.
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.
Item 4A. Executive Officers of the Registrant
The executive officers of the Company are identified in the table below. Each executive officer of the Company currently holds an identical position with the Railroad. Executive officers of the Company and the Railroad serve at the pleasure of the respective Boards of Directors.
Name Age Position(s)
Gilbert H. Lamphere 42 Chairman of the Board of Directors E. Hunter Harrison 50 President and Chief Executive Officer, John D. McPherson 48 Senior Vice President - Operations Gerald F. Mohan 54 Senior Vice President - Marketing James M. Harrell 42 Vice President - Human Resources David C. Kelly 50 Vice President - Maintenance Ronald A. Lane 44 Vice President and General Counsel and Secretary Dale W. Phillips 40 Vice President and Chief Financial Officer Donald H. Skelton 51 Vice President - Marketing and Sales John V. Mulvaney 44 Controller
Biographical Information
The following sets forth the periods during which the executive officers of the Company and the Railroad have served as such and a brief account of the business experience of such persons during the past five years.
Mr. Lamphere has been a director of the Corporation and the Railroad 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 The Noel Group, Inc. from 1991 until 1994 and was the Chairman and Chief Executive Officer of The Prospect Group, Inc. until 1994, for which he had served in various capacities since becoming a director in 1983. Mr. Lamphere also is a director of and Chairman of both Recognition International Inc. and Belding Heminway, Inc. He also serves as a director of Fremont and Prospect.
Mr. Harrison was appointed President, Chief Executive Officer and a Director of the Company and the Railroad in February 1993. He joined the Company and the Railroad as Vice President and Chief Transportation Officer in 1989. In November 1991 he was appointed Senior Vice President - Transportation and was named Senior Vice President - Operations in July 1992.
Mr. McPherson joined the Company and the Railroad in July 1993. He was named Senior Vice President - Operations in 1994. He also serves as a Director of the Railroad. Prior to joining the Company and the Railroad, 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. Mohan was appointed Senior Vice President - Marketing of the Railroad in 1986. In April 1993 he was elected a Director of the Railroad. He was appointed to his present position with the Company in December 1989.
Mr. Harrell joined the Company and the Railroad 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 and the Railroad as Vice President and Chief Engineer in 1989. In January 1994, he was appointed Vice President - Maintenance.
Mr. Lane joined the Company and the Railroad as Vice President and General Counsel and Secretary in 1990. In April 1993 he was elected a Director of the Railroad. He was previously employed by The Atchison, Topeka and Santa Fe Railway Company and Santa Fe Pacific Corporation serving as Assistant Vice President - Personnel and Labor Relations, 1987 to 1990.
Mr. Phillips was appointed to his present position in the Company and the Railroad in April 1990. He joined the Railroad in 1988 serving as Controller from April 1989 to April 1990. In April 1993 he was elected a Director of the Railroad. Mr. Phillips also serves as a director of Rail Association Insurance, Ltd.
Mr. Skelton joined the Company and the Railroad 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. Mulvaney joined the Company and the Railroad as Controller in June 1990. He was previously employed by Navistar International Transportation Corp., serving as Director of Accounting, 1987 to 1990.
No family relationship exists among the officers of the Company or the Railroad.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder 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.
Stock Price Dividends High Low Per Share First Quarter $27.250 $23.625 $ .15 Second Quarter 30.125 25.375 .15 Third Quarter 32.750 26.625 .17 Fourth Quarter 36.000 29.250 .17
First Quarter $38.625 $32.375 $ .21 Second Quarter 37.875 30.500 .21 Third Quarter 31.750 29.250 .21 Fourth Quarter 31.500 28.625 .21
First Quarter (through March 2) $34.875 $30.750 $ .25
As of March 2, 1995, there were approximately 15,000 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 March 2, 1995 was $33.875 per share.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated financial data of the Company for the five years ended December 31, 1994, all derived from the consolidated financial statements of the Company which were audited by Arthur Andersen LLP. Arthur Andersen LLP has included an explanatory paragraph in its report on the consolidated financial statements and schedules for the three years ended December 31, 1994, to describe the Company's change in its methods of accounting for income taxes and for postretirement health care and postemployment benefits in 1992 and 1993, respectively. This summary should be read in conjunction with the consolidated financial statements included elsewhere in this Report and the schedules and notes thereto.
SELECTED CONSOLIDATED FINANCIAL INFORMATION ($ in millions, except share data) Years Ended December 31, 1994 1993 1992 1991 1990 Income Statement Data: Revenues $593.9 $564.7 $547.4 $549.7 $544.2 Operating expenses before special charge 393.6 385.2 387.0 404.1 410.4 Special charge - - 8.9 - - Operating income 200.3 179.5 151.5 145.6 133.8 Other income, net 1.0 1.7 2.0 5.7 6.2 Interest expense, net (28.4) (33.1) (43.6) (55.1) (71.4) Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles 172.9 148.1 109.9 96.2 68.6 Provision for income taxes 59.0 56.4 37.4 30.8 22.4 Income before extraordinary item and cumulative effect of changes in accounting priciples 113.9 91.7 72.5 65.4 46.2 Extraordinary item, net - (23.4) - - - Cumulative effect of changes in accounting principles - (0.1) 23.4 - - Net income 113.9 68.2 95.9 65.4 46.2 Preferred stock dividends requirements - - - - 5.1 Income applicable to common stock $113.9 $68.2 $95.9 $65.4 $41.1 Income per share(1): Before extraordinary item and accounting changes $2.67 $2.14 $1.70 $1.64 $1.31 Extraordinary item - (0.55) - - - Accounting changes - - 0.55 - - Net income per share $2.67 $1.59 $2.25 $1.64 $1.31 Weighted average number of common shares outstanding (in thousands)(1) 42,726 42,680 42,600 39,830 31,460 Cash dividends declared per common share $0.88 $0.70 $0.50 - - Operating ratio (2) 66.3% 68.2% 70.7% 73.5% 75.4%
Years Ended December 31, 1994 1993 1992 1991 1990 Balance Sheet Data: Total assets $1,308.7 $1,258.7 $1,206.1 $1,183.5 $1,152.0 Long-term debt 328.6 360.3 367.3 413.5 486.1 Stockholders' equity 454.1 377.4 338.8 260.3 128.4 Working capital (deficit) (65.4) (32.4) (2.9) (3.4) (44.9)
1. Amounts for the years 1991 and 1990 have been restated to give effect to a 3-for 2 stock split effective in February 1992. 2. Operating ratio is the ratio of operating expenses before special charge to operating revenue.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Four-Year Growth Plan
With two years of the 1992 four-year growth plan completed, the Company has achieved two key goals and is on track in the third. Announced in the fall of 1992 the plan was to reduce interest expense by $10 million annually and lower the already lowest operating ratio in the industry to 66.7%, while raising total revenue $100 million. As of December 31, 1994, the Company's interest expense had declined from $44 million to $28 million well ahead of the planned $10 million reduction. The operating ratio for 1994 was 66.3%, approximately one-half percentage point lower than the four year goal. During the last two years revenues rose 3.1% and 5.2%, respectively, and at $594 million are 8.5% higher than 1992. This revenue growth was accomplished despite the impact of two major unplanned events in 1993. In May 1993, the United Mine Workers struck against several companies affecting six mines served by the Railroad. As a result, approximately 35,000 carloads of coal were lost. The strike was settled in December 1993, and full production resumed in January 1994. Partially offsetting the lost coal loads was a gain of approximately 15,000 carloads of grain and grain mill products. This traffic was diverted to the Railroad as a result of the flooding of the upper Mississippi River in July and August 1993. Additionally, over 500 trains from several other Class I railroads were detoured over the Railroad's system. The result was a significant temporary increase in traffic density over the Company's routes.
Contributing to 1994's gain in revenue was a resurgence in chemical traffic and sharp growth in intermodal. Intermodal traffic increased 53% benefiting from strength across the board plus two partnerships with other carriers, one of which was in effect for only the last half of 1994.
The tender offer for and retirement of $145 million 14-1/8% debentures of the Railroad, in the second quarter of 1993, was the most significant contributor in the achievement of the interest expense goal of the growth plan.
Having completed two years of the four-year plan, management is developing a new five-year plan which uses 1994 as a base. The new plan covers the period 1995 through 1999 and features $200 million in revenue growth, a significantly lower operating ratio, and a stockholder-driven long-term equity enhancement program.
Results of Operations
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.
1994 Compared to 1993
Revenues for 1994 increased from the prior year by $29.2 million or 5.2% to $593.9 million. The increase was a result of a 7.9% increase in carloadings partially offset by a 3.7% decrease in the average freight revenue per carload. In 1994, the Company experienced increased carloadings in intermodal (53.0%), coal (22.6%), chemicals (3.6%) and paper (2.2%) partially offset by decreased loadings in grain (12.5%) and grain mill products (10.3%). The increase in intermodal carloadings highlighted the Company's emphasis and commitment in this area. For the year, carloadings increased over 67,000 to approximately 915,000 carloads.
Operating expenses for 1994 increased $8.4 million or 2.2%. Labor and fuel expenses increased reflecting the increased loadings experienced in 1994 over 1993. Depreciation expense was higher in 1994 because of the Company's shift to ownership of equipment from leasing. Other expenses, which include property and franchise taxes, casualty and environmental accruals, joint facilities, net and equipment related expenses, increased $14.0 million. Partially offsetting the increased expenses was a $18.4 million decrease in lease and car hire expense which resulted from the Company's shift from leasing to owning, more effective turnaround of cars and lower export grain.
Operating income increased $20.8 million or 11.6% to $200.3 million for the reasons described above.
Net interest expense for 1994 decreased 14.2% ($4.7 million) to $28.4 million compared to $33.1 million in 1993. The sales of accounts receivable under a revolving agreement allowed the Company to utilize existing assets to obtain funds rather than issuing additional debt. The expense associated with this transaction is accounted for as Other Income, Net, not Interest Expense and when coupled with paydowns of other existing debt produced the decrease in interest expense.
Net income was further affected by two unusual transactions. The first was the terminated merger discussions with the Kansas City Southern Railroad Company which resulted in a $2.7 million pretax charge ($1.7 million after tax), and the second was a $5.0 million after tax gain on the favorable resolution of prior period tax issues.
1993 Compared to 1992
Revenues for 1993 increased from the prior year by $17.3 million or 3.1% to $564.7 million. The increase was a result of a 2.9% increase in average gross freight revenue per carload, resulting from an improved commodity mix and modest rate increases. The 1993 revenue increase was attributable in part to the gain in carloads when the upper Mississippi River flooding affected barge traffic and also disrupted rail operations of other carriers who diverted traffic to the Company's system. Additionally, chemical loads were up 6% and paper was up 3%. Intermodal was up 5%, reflecting the Company's commitment to increase this aspect of operation, as evidenced by the new Chicago- area intermodal facility and expansions in Memphis. These gains were offset by lost carloads of coal resulting from the United Mine Workers strike of certain coal producers. For the year, carloadings declined .5% (or 4,400 carloads) to 847,900 carloads.
Operating expenses for 1993 decreased $1.8 million, or .5% as compared to 1992, excluding the special charge recorded in 1992. Labor expense decreased $1.1 million as a result of on-going cost control programs, including the reduction in train crews, and an overall improvement in efficiency. This decrease was accomplished despite the additional expense incurred because of the flood-related detours of other railroads' trains over the Railroad's track and a 3% wage increase which was effective July 1, 1993 for union employees. Fuel expense reflects the increased traffic in 1993 and 1992 coupled with a total of $1.5 million for increased fuel taxes resulting from the Omnibus Budget Reconciliation Act of 1993 and for the costs associated with fuel hedges. The more fuel efficient locomotives acquired over the last two years partially offset the rise in fuel costs. Materials and supplies increased $3.6 million primarily as a result of track material purchases. The surplus from the single track project was substantially depleted necessitating purchase of new materials.
Operating income for 1993 increased 18.5% ($28.0 million) to $179.5 million compared to $151.5 million for 1992, as a result of increased revenues cited above and decreased expenses (including the 1992 special charge). Excluding the special charge, the increase in operating income was 11.9% ($19.1 million).
Net interest expense decreased by 24.1% to $33.1 million compared to $43.6 million in 1992. The issuance of new notes at 6.75% to replace the 14-1/8% Senior Subordinated Debentures (the "Debentures") and lower interest rates on floating debt account for the reduced interest expense in 1993. The Debentures were retired via a tender offer which resulted in an extraordinary loss of $23.4 million, net of $12.6 million in tax benefits. The extraordinary loss covers the costs associated with the tender (i.e., premium on repurchase, the write-off of unamortized financing fees and debt discount and the costs associated with calling the untendered Debentures).
In August 1993, the Omnibus Budget Reconciliation Act of 1993 became law and increased the maximum corporate federal income tax rate from 34% to 35%, retroactive to January 1, 1993.
Liquidity and Capital Resources
Operating Data:
1994 1993 1992 Cash flows provided by (used for): Operating activities $205.3 $124.3 $124.4 Investing activities (80.4) (89.0) (46.6) Financing activities (111.4) (59.2) (75.9) Net change in cash and temporary cash investments $ 13.5 $(23.9) $ 1.9
Cash from operating activities in 1994 and 1993 was primarily net income before depreciation, deferred taxes, extraordinary item and the cumulative effect of changes in accounting principles, and 1994 was also affected by the sales of accounts receivable. A significant source of cash in 1993 and 1992 ($6.3 million and $26.4 million, respectively) was the realization of settlement proceeds with numerous insurance carriers in connection with asbestos and hearing loss casualty claims. Most of the settlements were for prior claims but some cover future claims related to prior periods. As part of the settlements, the Railroad agreed to release the carriers from liability for future hearing loss claims. Only $.5 million was received in 1994.
During 1994, additions to property of $90.1 million included approximately $44.7 million spent on track and bridge rehabilitation, approximately $13.8 million on communications and signal work (including the conversion to CTC on the Yazoo district), approximately $28.3 million on equipment purchases and betterments and approximately $3.0 million on expansion and rehabilitation of intermodal facilities, primarily Memphis. During 1993, additions to property of $90.7 million included approximately $36.6 million for track and bridge rehabilitation and approximately $31.4 million for the purchase of 21 locomotives and 1,522 freight cars. In 1994 and 1993 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. During 1992, additions to property of $50.8 million included approximately $46.4 million for track and bridge rehabilitation including approximately $5 million for the construction of a new intermodal facility in the Chicago area. Proceeds from the sales of excess materials generated by the single- track project ($4.1 million in 1992) partially offset the cost of property additions. Property retirements and removals unrelated to the single-track project generated proceeds of $8.2 million, $5.3 million and $3.5 million in 1994, 1993 and 1992, respectively.
The Railroad anticipates that base capital expenditures for 1995 will be approximately $65 million and will concentrate on track maintenance and renewal of track structures such as bridges. In February 1995, the Railroad placed a $25.8 million order for 20 new SD70 locomotives to be delivered in the fourth quarter of 1995, to upgrade the locomotive fleet. If additional opportunities such as lease conversions or market-driven expansions occur in 1995, the total capital spending could be approximately $100 million to $110 million. These expenditures are expected to be met from current operations or other available sources.
Since 1990, management has concentrated on reducing leverage, expanding funding sources, lowering funding costs and upgrading the debt ratings issued by the rating services. During 1994, several events continued this process. The Railroad's commercial paper program was expanded. A total of $100 million can be issued and outstanding under the program which is supported by a $150 million Revolver with the Railroad's bank lending group (see below). Standard & Poor's Corporation ("S&P"), Moody's Investor Services ("Moody's") and Fitch Investors Service ("Fitch") have rated the commercial paper A2, P3 and, respectively. At December 31, 1994, $15.0 million was outstanding. For the year the rates ranged from 3.365% to 6.25%. The Railroad views this program as a significant long-term funding source and intends to issue replacement notes as each existing issue matures. Therefore, commercial paper borrowings are classified as long-term.
In the first quarter of 1994, the Railroad entered into a receivables purchase agreement to sell undivided percentage interests in certain of its accounts receivable, with recourse, to a financial institution. The agreement, which expires March 1997, allows for sales of accounts receivable up to a maximum of $50 million at any one time. The Railroad services the accounts receivable sold under the agreement. At December 31, 1994, $50 million in accounts receivable had been sold pursuant to the agreement. The Railroad retains the same exposure to credit loss as existed prior to the sale. Costs related to the agreement vary in correlation with changes in prevailing interest rates. These costs, which are included in Other Income, Net, were $2.2 million for the year ended December 31, 1994.
In November 1994, the Railroad concluded negotiations with its bank lending group whereby the Railroad's $100 million Revolver was amended and restated to a $150 million Revolver expiring in 1999. Fees and interest rates are predicated on the Railroad's long-term credit ratings. Currently, the annual fee is 25 basis points and borrowings under this agreement are at LIBOR plus 50 basis points. This amended facility replaced the $100 million revolver due in 1996 and a $50 million 364-day facility due in October 1994. The new Revolver will be used primarily for backup for the Railroad'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 the Railroad under the facility. No amounts have been drawn under the Revolver. At December 31, 1994, the $150 million was limited to $132.6 million because $15.0 million in commercial paper was outstanding and $2.4 million in letters of credit had been issued. Since April 1993, when a tender offer for the Railroad's $145 million 14-1/8% Senior Subordinated Debentures ("Debentures") was completed, the agreements with the bank groups and the $160 million senior secured notes ("Senior Notes") issued in 1991 have been unsecured. The Senior Notes are callable with a make-whole provision in April 1995. No decision has been made to prepay these notes.
In 1994, in order to facilitate the stock repurchase program, the Company entered into a $50 million 364-day floating-rate revolving loan agreement which charges a 20 basis point annual fee, interest between LIBOR plus 62.5 basis points to LIBOR plus 100 basis points, expires in August 1995 and was not drawn upon during 1994. The Company's financing/leasing subsidiaries have approximately $31.0 million in long-term borrowing agreements which were used to acquire a total of 61 locomotives during 1993 and 1991 and 1,522 freight cars in 1993.
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.
Various borrowings of the Company's subsidiaries are governed by agreements which contain financial and operating covenants. All entities were in compliance with these covenant requirements at December 31, 1994, and management does not anticipate any difficulty in maintaining such compliance.
In 1993, a $23.4 million extraordinary loss, net of $12.6 million in tax benefits, was incurred in connection with the Railroad's tender offer for the Debentures and the costs associated with calling the $10.3 million untendered portion.
In connection with the tender offer for the Debentures, the Railroad issued $100 million of 6.75% non-callable, 10-year notes due 2003 (the "Notes") and irrevocably placed funds with a trustee to cover principal, a 6% premium and interest through the first call date of October 1, 1994, for the untendered Debentures. At December 31, 1994, the Railroad's public debt was rated Baa3 by Moody's and BBB by S&P. On March 2, 1995, Moody's raised their rating to Baa2 and raised the commercial paper program to P2.
The Railroad has entered into various hedge agreements designed to mitigate significant changes in fuel prices. As a result, approximately 92% of the Railroad's short-term diesel fuel requirements through March 1995 and 46% through June 1995 are protected against significant price changes. See Note 7 of the Notes to Consolidated Financial Statements.
The Company declared its twelfth consecutive quarterly cash dividend which was paid on January 6, 1995. The Board intends to continue a policy of quarterly dividends with a target of 33% of expected earnings, subject to existing conditions. Future dividends may be dependent on the Railroad's ability to pay cash dividends to the Company. Certain covenants of the Railroad's debt agreements restrict the level of dividends it may pay to the Company. At December 31, 1994, approximately $44.9 million of Railroad equity was free of such restrictions.
The Company has paid approximately $6 million, $8 million and $10 million in 1994, 1993, and 1992, respectively, for severance, lump sum signing awards and other costs associated with the various agreements signed in 1994, 1992 and 1991. The Company anticipates that an additional $7 million will be required in 1995 related to all such agreements. These requirements are expected to be met from current operating activities or other available sources. As the Company continues to negotiate with its operating unions on a local level, agreements may be reached that require significant lump sum payments. It is too early to determine if separate agreements will be reached but management believes available funding sources will be sufficient to meet any required payments.
Stock Repurchase Program
In 1994, the Board of Directors adopted an ongoing plan to target approximately 75% to 150% of projected free cash flow after capital expenditures and dividends, subject to maintaining a target debt-to- capital ratio of not more than 45%, for the repurchase of Common Stock. The Board will review annually the appropriate levels of repurchases for the following year. For 1995, the Board authorized the purchase of $60 million of Common Stock. Such purchases under the program are to be funded by a special $60 million dividend from the Railroad which was declared in 1994 and will be paid as requested by the Company. At December 31, 1994, the Company had spent $.2 million to acquire 8,000 shares of Common Stock under the plan. Further purchases are dependent on market conditions, the economy, cash needs and alternative investment opportunities.
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 has been notified that it is a potentially responsible party at sites ranging from those with hundreds of potentially responsible parties to sites at which the Company is primarily responsible. 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 20 contaminated sites and various fueling facilities at which it is probably liable for some portion of the clean-up. The Company paid approximately $3.0 million in 1994 toward the investigation and remediation of those sites, and anticipates similar expenditures annually in the future. During 1994, the Company spent an additional $.6 million remediating environmental spills resulting from derailments and other operating activities. Furthermore, recent amendments to the Clean Air Act require the Environmental Protection Agency to promulgate regulations restricting the level of pollutants in locomotive emissions which could impose significant retrofitting requirements, operational inefficiencies or capital expenditures in the future.
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, 1994, the Company estimated the probable range of its estimated liability to be $13 million to $48 million, and in accordance with the provisions of SFAS No. 5 had a reserve of $13 million for environmental contingencies. This amount is not reduced for potential insurance recoveries or third- party contribution where the Company is primarily liable.
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 the Railroad 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 to have a material adverse effect on the Company`s financial position, results of operations, cash flow or liquidity.
Recent Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"). SFAS No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. This statement applies to financial statements for fiscal years beginning after December 31, 1994, with earlier adoption encouraged. The Company is currently evaluating the impact, if any, this statement will have on its reported results when it is adopted in the first quarter of 1995.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on page 31 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
Item 11.
Item 11. Executive Compensation
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by these items is incorporated by reference to the sections of the Company's definitive proxy statement for its 1995 Annual Meeting of Stockholders (which is expected to be filed with the Securities and Exchange Commission on or before March 16, 1995) entitled Nominees for Election as Class I Directors who would hold office until 1998, Class II Directors continuing in office until 1996, Class III Directors continuing in office until 1997, Committees of the Board of Directors, Compensation of Executive Officers and Directors, Ownership of Common Stock and Certain Transactions-Certain Transactions and General-Compliance with the Securities Exchange Act. However, the Compensation Committee Report and the Performance Graph are specifically not incorporated by reference.
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 31 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:
During the fourth quarter of 1994 the Registrant filed with the Securities and Exchange Commission the following reports on Form 8-K on the dates indicated to report the events described:
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/ DALE W. PHILLIPS Dale W. Phillips Vice President and Chief Financial Officer Date: March 8, 1995
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.
/s/ GILBERT H. LAMPHERE Chairman of the March 8, 1995 Gilbert H. Lamphere Board and Director
/s/ E. HUNTER HARRISON President and Chief March 8, 1995 E. Hunter Harrison Executive Officer (principal executive officer), Director
/s/ DALE W. PHILLIPS Vice President March 8, 1995 Dale W. Phillips and Chief Financial Officer (principal financial officer)
/s/ JOHN V. MULVANEY Controller March 8, 1995 John V. Mulvaney (principal accounting officer)
Director Thomas A. Barron
/s/ GEORGE D. GOULD Director March 8, 1995 George D. Gould
/s/ WILLIAM B. JOHNSON Director March 8, 1995 William B. Johnson
/s/ ALEXANDER P. LYNCH Director March 8, 1995 Alexander P. Lynch
/s/ SAMUEL F. PRYOR, IV Director March 8, 1995 Samuel F. Pryor, IV
/s/ F. JAY TAYLOR Director March 8, 1995 F. Jay Taylor
/s/ JOHN V. TUNNEY Director March 8, 1995 John V. Tunney
/s/ ALAN H. WASHKOWITZ Director March 8, 1995 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, 1994
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Cash Flows for the three years ended December 31, 1994
Consolidated Statements of Stockholders' Equity and Retained Income for the three years ended December 31, 1994
Notes to Consolidated Financial Statements for the three years ended December 31, 1994
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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 11 and 12 to the consolidated financial statements, effective January 1, 1992, and January 1, 1993, the Company changed its methods of accounting for income taxes and for postretirement health care and postemployment benefits, respectively.
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 17, 1995
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income ($ in millions, except share data)
Years Ended December 31, 1994 1993 1992 Revenues $593.9 $564.7 $547.4 Operating expenses: Labor and fringe benefits 196.2 190.2 191.3 Leases and car hire 48.8 67.2 70.4 Diesel fuel 31.5 30.4 30.0 Materials and supplies 38.6 36.7 33.1 Depreciation & amortization 27.4 23.6 22.1 Other 51.1 37.1 40.1 Special charge - - 8.9 Operating expenses 393.6 385.2 395.9
Operating income 200.3 179.5 151.5
Other income, net 1.0 1.7 2.0 Interest expense, net (28.4) (33.1) (43.6) Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles 172.9 148.1 109.9 Provision for income taxes 59.0 56.4 37.4 Income before extraordinary item and cumulative effect of changes in accounting principles 113.9 91.7 72.5 Extraordinary item, net - (23.4) - Cumulative effect of changes in accounting principles - (.1) 23.4
Net income $113.9 $68.2 $95.9
Income per share: Before extraordinary item and cumulative effect of changes in accounting principles $2.67 $2.14 $1.70 Extraordinary item, net - (.55) - Cumulative effect of changes in accounting principles - - .55 Net income per share $2.67 $1.59 $2.25
Weighted average number of shares of common stock and common stock equivalents outstanding 42,725,739 42,679,683 42,600,107 The following notes are an integral part of the consolidated financial statements.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets ($ in millions)
ASSETS December 31, 1994 1993 Current assets: Cash and temporary cash investments $24.2 $10.7 Receivables, net of allowance for doubtful accounts of $2.1 in 1994 and $3.1 in 1993 33.9 80.3 Materials and supplies, at average cost 15.7 20.1 Assets held for disposition 9.1 9.1 Deferred income taxes - current 21.8 22.8 Other current assets 3.3 3.6 Total current assets 108.0 146.6
Investments 13.5 15.7
Properties: Transportation: Road and structures, including land 994.9 947.9 Equipment 165.6 118.1 Other, principally land 40.8 40.4 Total properties 1,201.3 1,106.4 Accumulated depreciation (30.0) (20.9) Net properties 1,171.3 1,085.5
Other assets 15.9 10.9 Total assets $1,308.7 $1,258.7
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $11.1 $24.3 Accounts payable 54.5 54.4 Dividends payable 10.7 9.0 Income taxes payable 0.9 1.5 Casualty and freight claims 24.9 24.7 Employee compensation and vacations 16.5 15.8 Taxes other than income taxes 16.2 14.0 Accrued redundancy reserves 6.8 6.8 Other accrued expenses 31.8 28.5 Total current liabilities 173.4 179.0
Long-term debt 328.6 360.3 Deferred income taxes 218.2 202.3 Other liabilities and reserves 134.4 139.7
Contingencies and commitments (Note 15) Stockholders' equity: Common stock, par value $.001, authorized 100,000,000 shares, 42,853,564 shares issued and 42,609,591 shares outstanding - - Additional paid-in capital 165.1 164.2 Retained income 293.0 216.5 Treasury stock (243,973 shares) (4.0) (3.3) Total stockholders' equity 454.1 377.4 Total liabilities and stockholders' equity $1,308.7 $1,258.7 The following notes are an integral part of the consolidated financial statements.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in millions)
Years Ended December 31, 1994 1993 1992 Cash flows from operating activities : Net income $113.9 $68.2 $95.9 Reconciliation of net income to net cash provided by (used for) operating activities: Extraordinary item, net - 23.4 - Cumulative effect of changes in accounting principles - 0.1 (23.4) Depreciation and amortization 27.4 23.7 22.1 Deferred income taxes 17.4 31.9 21.4 Special charge - - 8.9 Equity in undistributed earnings of affiliates, net of dividends received (0.4) (0.3) 0.2 Net gains on sales of real estate (2.0) (0.8) (0.4) Cash changes in working capital 54.3 (0.8) (15.8) Changes in other assets (4.4) (1.4) 2.8 Changes in other liabilities and reserves (0.9) (19.7) 12.7 Net cash provided by operating activities 205.3 124.3 124.4
Cash flows from investing activities: Additions to properties (90.1) (90.7) (50.8) Proceeds from sales of real estate 3.8 1.5 1.3 Proceeds from single track sales - - 4.1 Proceeds from equipment sales 4.4 3.8 2.2 Proceeds from sales of investments 2.7 (0.4) 1.8 Other (1.2) (3.2) (5.2) Net cash (used for) investing activities (80.4) (89.0) (46.6)
Cash flows from financing activities: Proceeds from issuance of debt 134.7 330.8 .9 Principal payments on debt (184.6) (401.1) (61.7) Net proceeds (payments) - Commercial Paper (23.1) 38.1 - Dividends paid (35.7) (27.1) (14.8) Proceeds from exercise of stock options and warrants - .5 .2 Purchase of subsidiary's common stock (2.7) (.4) (.5) Net cash (used for) financing activities (111.4) (59.2) (75.9) Changes in cash and temporary cash investments 13.5 (23.9) 1.9 Cash and temporary cash investments at beginning of year 10.7 34.6 32.7 Cash and temporary cash investments at end of year $24.2 $10.7 $34.6 Supplemental disclosure of cash flow information : Cash paid during the year for: Interest (net of amount capitalized) $30.2 $39.3 $45.3 Income taxes $42.7 $10.9 $15.9 The following notes are an integral part of the consolidated financial statements.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Retained Income
Shares Equity ($ in millions) Total (000's) Additional Stock- Common Common Paid-In Retained Treasury holders' Stock Stock Capital Income Stock Equity
Balance December 31, 1991 28,205 $ - $157.1 $103.2 $ - $260.3 Issuance of Common Stock: Stock split 3-for-2 14,102 - - - Exercise stock options 17 - .2 .2 Restricted stock awards 350 - 3.6 3.6 Dividends (21.2) (21.2) Net income 95.9 95.9 Balance December 31, 1992 42,674 - 160.9 177.9 - 338.8 Issuance of Common Stock: Exercise stock options 50 - .5 .5 Restricted stock awards 25 - 2.8 2.8 Stock repurchased / forfeited (134) (3.3) (3.3) Dividends (29.6) (29.6) Net income 68.2 68.2 Balance December 31, 1993 42,615 - 164.2 216.5 (3.3) 377.4 Issuance of Common Stock: Exercise stock options 1 - - - Restricted stock awards 15 - .9 .9 Stock repurchased / forfeited (21) (.7) (.7) Dividends (37.4) (37.4) Net income 113.9 113.9 Balance December 31, 1994 42,610 $ - $165.1 $293.0 $(4.0) $454.1 The following notes are an integral part of the consolidated financial statements.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statement
1. The Company
Illinois Central Corporation, a holding company, (hereinafter, the "Company") was incorporated under the laws of Delaware. The Company was formed originally for the purpose of acquiring, through a wholly-owned subsidiary, the outstanding common stock of Illinois Central Transportation Company ("ICTC"). Following a tender offer and several mergers, the Illinois Central Railroad Company ("Railroad") is the surviving corporation and the successor to ICTC and now a wholly-owned subsidiary of the Company.
2. 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.
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. At the Railroad, depreciation for track structure, other road property, and equipment is calculated using the composite method. In the case of routine retirements, removal cost less salvage recovery is charged to accumulated depreciation. Expenditures for maintenance and repairs are charged to operating expense.
The Interstate Commerce Commission ("ICC") approves the depreciation rates used by the Railroad. The approximate ranges of annual depreciation rates for major property classifications are as follows:
Road properties . . . . . 1% - 8% Transportation equipment. 1% - 7%
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
Effective January 1, 1992, the Company adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred income taxes are accounted for on the asset and liability method by applying enacted statutory tax rates to differences ("temporary differences") between the financial statement carrying amounts and the tax bases of assets and liabilities. The resulting deferred tax assets and liabilities represent taxes to be collected or paid in the future when the related assets and liabilities are recovered and settled, respectively. See Note 12 for discussion of the 1992 impact of adopting SFAS No. 109.
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 based on the weighted average number of shares of common stock and common stock equivalents outstanding for the period. Dilution, which could result if all outstanding common stock equivalents were exercised, is not significant.
Futures, Options, Caps, Floors and Forward Contracts
In March 1990, the FASB issued Statement of Financial Accounting Standards No. 105 "Disclosure of Information about Financial Instruments with Off Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk" ("SFAS 105"). Disclosures required by SFAS 105 are found in various notes where the financial instruments or related risks are discussed. See specifically Notes 7, 8, 9, 10 and 15.
Derivatives
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. Specifically, the Company has entered into various diesel fuel commodity collar and swap agreements with the objective of mitigating significant changes 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 and swap agreements are accrued as increases or decreases to Diesel Fuel Expense. See Note 7.
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. Estimated amounts expected to be settled within one year are classified as current liabilities in the accompanying Consolidated Balance Sheets.
Employee Benefit Plans
All employees of the Railroad are covered under the Railroad Retirement Act. In addition, management employees of the Railroad are covered under a defined contribution plan. Contribution costs of the plan are funded currently.
Mr. E. L. Moyers, the Company's former Chairman, President and Chief Executive Officer ("Mr. Moyers") is covered by a supplemental plan which is discussed in Note 11.
Effective January 1, 1993, the Company adopted both the Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106") and the Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112"). See Note 11 for discussion of the impact of SFAS No. 106 and SFAS No. 112.
Reclassifications
Certain items relating to prior years have been reclassified to conform to the presentation in the current year.
3. Stock Repurchase Program
In 1994, the Board of Directors adopted an ongoing plan to target approximately 75% to 150% of projected free cash flow after capital expenditures and dividends, subject to maintaining a target debt-to- capital ratio of not more than 45%, for the repurchase of Common Stock. The Board will review annually the appropriate levels of repurchases for the following year. For 1995, the Board authorized the purchase of $60 million of Common Stock. Such purchases under the program are to be funded by a special $60 million dividend from the Railroad which was declared in 1994 and will be paid as requested by the Company. At December 31, 1994, the Company had spent $.2 million to acquire 8,000 shares of Common Stock under the plan. Further purchases are dependent on market conditions, the economy, cash needs and alternative investment opportunities.
4. Extraordinary Item and Refinancing
The 1993 extraordinary loss resulted from the retirement of the Railroad's 14-1/8% Senior Subordinated Debentures (the "Debentures") and refinancing the Permanent Facility. The loss was $23.4 million, net of tax benefits of $12.6 million. The loss resulted from the premium paid, the write-off of unamortized financing fees and debt discount and costs associated with the calling of the $10.3 million of Debentures not tendered. The net proceeds of the 6.75% Notes (see Note 9), borrowings under the $180 million Revolving Credit Facility and other available cash were used to fund the retirement of the Debentures.
5. Other Income, Net
Other Income, Net consisted of the following ($ in millions):
Years Ended December 31,
1994 1993 1992
Rental income, net $ 3.3 $ 3.9 $ 3.8 Net gains on real estate sales 2.0 .8 .4 Net gain (loss) on disposal of rolling stock .2 (2.3) - Equity in undistributed earnings of affiliates .7 .5 .3 Receivable sales (see Note 10) (2.2) - - Terminated merger discussions with Kansas City Southern (2.7) - - Other, net (.3) (1.2) (2.5) Other Income, Net $ 1.0 $ 1.7 $ 2.0
6. 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, 1994 1993 1992
Receivables, net $46.3 $ (3.9) $ 4.7 Materials and supplies 4.4 (1.4) (3.2) Other current assets .6 (1.5) .3 Accounts payable 2.8 1.1 (5.7) Income taxes payable (1.3) 13.6 .5 Accrued redundancy reserves - (2.6) (11.0) Other current liabilities 1.5 (6.1) (1.4) $54.3 $ (.8) $ (15.8)
Included in changes in Other Liabilities and Reserves is approximately $6.3 million and $23.4 million for the years ended December 31, 1993 and 1992, respectively, reflecting the settlement of casualty claims with numerous insurance carriers.
The Railroad entered into capital leases of $24.7 million covering 65 locomotives and 1,623 freight cars in 1994 and 200 freight cars in 1993 in the amount of $4.4 million. See Note 8 for a recap of the present value of the minimum lease payments.
7. Materials and Supplies
Materials and Supplies, valued using the average cost method, consist of track material, switches, cars and locomotive parts and fuel.
As of December 31, 1994, the Company was a party to four diesel fuel collar agreements under which the Company receives or makes monthly payments based on the monthly average near-by contract price for Heating Oil #2 traded on the New York Mercantile Exchange (the "Contract Price"), which was $.486 per gallon for December 1994. Under the agreements, the Company receives or makes monthly payments on notional amounts based on the excess of the Contract Price over $.60 per gallon or when the Contract Price is below an amount averaging approximately $.51, respectively. As of December 31, 1994, the agreements covered notional quantities amounting to 4,000,000 gallons through March 1995 and 2,000,000 gallons for the period April 1995 through June 1995, or approximately 92% and 46%, respectively, of the Company's monthly diesel fuel requirements.
8. Leases
As of December 31, 1994, the Company leased 6,364 of its cars and 148 of its locomotives. These leases generally have original terms of 15 years and expire between 1995 and 2003. Under the terms of the majority of its leases, 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 and computer equipment, vehicles and office facilities.
Net obligations under capital leases at December 31, 1994 and 1993, included in the Consolidated Balance Sheets are $27.9 million and $5.4 million, respectively.
At December 31, 1994, minimum rental payments under capital and operating leases that have initial or remaining noncancellable terms in excess of one year were as follows ($ in millions):
Capital Operating Leases Leases 1995 $11.2 $24.1 1996 13.9 20.9 1997 2.0 11.3 1998 1.5 6.7 1999 1.5 6.2 Thereafter 2.6 17.8 Total minimum lease payments $32.7 $87.0 Less: Imputed interest 4.8 Present value of minimum payments $27.9
Total rent expense applicable to noncancellable operating leases amounted to $38.1 million in 1994, $44.9 million in 1993 and $46.2 million for 1992. Most of the leases provide that the Company pay taxes, maintenance, insurance and certain other operating expenses.
9. Long-Term Debt and Interest Expense
Long-Term Debt at December 31, consisted of the following ($ in millions):
1994 1993 Equipment obligations, due annually to 2000, 6.11% to 9.254% $ 31.0 $ 13.0 Debentures and other debt, due 1995 to 2056, 4.5% to 10.9% 10.5 10.8 Commercial Paper, at average interest rate 4.72% in 1994 and 3.57% in 1993 15.0 38.1 Bank Line, at average interest rate of 4.02% in 1994 and 3.49% in 1993 - 40.0 Notes, due 2003, 6.75% 100.0 100.0 Senior Notes, due 1998 to 2001, 10.02% and 10.4% 159.8 159.8 Capitalized leases (Note 8) 18.5 4.9 Unamortized (discount) (6.2) (6.3) Total Long-Term Debt $328.6 $360.3
At December 31, 1994, the aggregate annual maturities and sinking fund requirements for debt payments for 1995 through 2000 and thereafter are $11.1 million, $31.5 million, $7.4 million, $62.0 million, $65.6 million, $30.2 million and $131.9 million, respectively. The weighted- average interest rate for 1994 and 1993 on total debt excluding the effect of discounts, premiums and related amortization was 8.6% and 9.1%, respectively.
In November 1993, the Railroad initiated a public commercial paper program. The commercial paper is rated A2 by S&P, P3 by Moody's and by Fitch and is supported by a new $150 million Revolver with the Railroad's bank lending group due 1999. The Railroad pays an annual fee of 25 basis points on the Revolver and LIBOR plus 50 basis points for any borrowings. The Revolver replaced both a $50 million Bank Line which expired in October 1994 and the former $100 million revolver with the banks due 1996. The Railroad views commercial paper as a significant long- term funding source and intends to issue replacement notes as maturities occur. Therefore, the $15.0 million outstanding at December 31, 1994 has been classified as long-term.
The Revolver will be used primarily as backup for the commercial paper 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 the Railroad under the facility. No amounts have been drawn under the Revolver. The $150 million was limited to $132.6 million because $15.0 million in commercial paper was outstanding and $2.4 million in letters of credit had been issued.
The $100 million 6.75% Notes ("Notes") (issued at a slight discount 1.071%) pay interest semiannually in May and November and are covered by an Indenture. Of the $160 million Senior Notes ("Senior Notes"), $109.8 million bears interest at a rate of 10.02% and $50 million at 10.4%. Principal payments of $55 million, $54.8 million, $25 million and $25 million are due in 1998, 1999, 2000 and 2001, respectively. The Senior Notes are governed by a Note Purchase Agreement and are subject to prepayment beginning in April 1995.
In 1994, in order to facilitate the stock repurchase program the Company entered into a $50 million 364-day floating-rate revolving loan agreement which charges a 20 basis point annual fee, interest between LIBOR plus 62.5 basis points to LIBOR plus 100 basis points, expires in August 1995 and was not drawn upon during 1994. The Company's financing/leasing subsidiaries have approximately $13.0 million in long- term borrowing agreements which were used to acquire a total of 61 locomotives during 1993 and 1991. Such borrowings are secured by equipment which is leased to the Railroad and mature in 1999 and 2000. Another subsidiary used a short-term bridge financing of $21.7 million to acquire 1,522 box cars in December 1993. In July 1994, the subsidiary refinanced this debt with a seven year floating rate revolving facility and term loan.
Various borrowings of the Company's subsidiaries are governed by agreements which contain certain affirmative and negative covenants customary for facilities of this nature including restrictions on additional indebtedness, investments, guarantees, liens, distributions, sales and leasebacks, and sales of assets and capital stock. Some also require the Railroad to satisfy certain financial tests, including a leverage ratio, an earnings before interest and taxes to interest charges ratio, debt service coverage, and minimum consolidated tangible net worth requirements.
Interest Expense, Net consisted of the following ($ in millions):
Years Ended December 31, 1994 1993 1992 Interest expense $31.2 $35.2 $46.2 Less: Interest capitalized 1.4 .8 .6 Interest income 1.4 1.3 2.0 Interest Expense, Net $28.4 $33.1 $43.6
10. Sales of Accounts Receivable
In 1994, the Railroad entered into a revolving agreement to sell undivided percentage interests in certain of its accounts receivable, with recourse, to a financial institution. The agreement, which expires March 1997, allows for sales of accounts receivable up to a maximum of $50 million at any one time. The Railroad services the accounts receivable sold under the agreement. At December 31, 1994, $50 million in accounts receivable had been sold pursuant to the agreement. The Railroad retains the same exposure to credit loss as existed prior to the sale. Costs related to the agreement vary in correlation with changes in prevailing interest rates. These costs, which are included in Other Income, Net, were $2.2 million for 1994.
11. Employee Benefit Plans
Retirement Plans. All employees of the Railroad are covered under the Railroad Retirement Act. In addition, management employees of the Railroad are covered under a defined contribution plan. Contributions under the plan vest immediately. Expenses relating to the defined contribution plan were $.5 million, $.4 million and $.4 million for the years ended December 31, 1994, 1993 and 1992, respectively.
Mr. Moyers is covered by a non-qualified, unfunded supplemental retirement benefit agreement which provides for a defined benefit payable annually, commencing upon death, permanent disability or retirement (with benefits arising from retirement commencing upon his attaining age 65 and compliance with certain non-competition agreements), in the amount of $250,000 per year for a maximum of 15 years. In accordance with the term of the agreement, no payments will be made while Mr. Moyers is employed by another Class I railroad. The present value of this agreement was included in the 1992 special charge. See Note 17.
Postretirement Plans. In addition to the Company's defined contribution plan for management employees, the Company 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 inflation rate exceeds 9.5%, and contains other cost sharing features such as deductibles and co- payments. The Company'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 the Company funds these benefits as claims are paid.
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.
SFAS No. 106 and SFAS No.112. As described in Note 2 effective January 1, 1993 the Company adopted SFAS No. 106 and SFAS No. 112. With respect to SFAS No. 106, the Company elected to immediately recognize the transition asset associated with adoption which resulted because the Company had previously recorded an amount under purchase accounting to reflect the estimated liability for such benefits as of the acquisition date of ICTC. SFAS No. 106 requires that future costs associated with providing postretirement benefits be recognized as expense over the employees' requisite service period.
As a result of adopting these two standards, the Company recorded a decrease to net income of $84,000 (net of taxes of $46,000) as a cumulative effect of changes in accounting principles ($ in millions):
Postretirement Benefits (SFAS No. 106): APBO at January 1, 1993: Medical $36.5 Life 2.3 Total APB 38.8 Liability previously recorded (40.3) Transition Asset 1.5 Postemployment Benefits Obligation at January 1, 1993 (SFAS 112) (1.6) Pre-tax Cumulative Effect of Changes in Accounting Principles (.1) Related tax benefit - Cumulative Effect of Changes in Accounting Principles $ (.1) Per Share Impact $ -
In accordance with each standard, years prior to 1993 have not been restated. The adoption of these two standards had no significant effect on income before cumulative effect of changes in accounting principles as compared to the Company's prior pay-as-you-go method of accounting for such benefits.
The accumulated postretirement benefit obligations ("APBO") of the postretirement plans were as follows ($ in millions):
December 31, 1994 1993 Medical Life Total Total Accumulated postretirement benefit obligation: Retirees $15.7 $ 2.0 $17.7 $28.8 Fully eligible active plan participants .6 - .6 .7 Other active plan participants 3.3 - 3.3 4.7 Total APBO $19.6 $ 2.0 21.6 34.2 Unrecognized net gain 18.9 5.0 Accrued liability for post- retirement benefits $40.5 $39.2
The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 7.25% at December 31, 1993. As a result of the rise in general interest rates in 1994 on high quality investment vehicles, the Company increased the weighted-average discount rate to 8.5% as of December 31, 1994. The change in rates resulted in approximately $2.2 million actuarial gain. The actuarial gain along with actual experience gains, primarily fewer claims and lower medical rate inflation, resulted in a total $18.9 million unrecognized net gain as of December 31, 1994. In accordance with SFAS No. 106, the excess gain is subject to $1.3 million annual amortization based on an amortization period of approximately 13 years.
The components of the net periodic postretirement benefits cost were as follows ($ in millions):
Years Ending December 31, 1994 1993 Service costs $ .2 $ .1 Interest costs 2.4 3.0 Net amortization of excess gain (.1) - Net periodic postretirement benefit costs $ 2.5 $ 3.1
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 13.0% for 1995 and is assumed to decrease gradually to 6.25% by 2001 and remain at that level thereafter. The health care cost trend rate assumption normally has a significant effect on the amounts reported; however, as discussed, the plan limits annual inflation for the Company's portion of such costs to 9.5% each year. 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, 1994, or the aggregate of the service and interest cost components of net periodic postretirement benefit expense in future years.
12. Provision for Income Taxes
Effective January 1, 1992, the Company adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). As a result, the Company recorded a $23.4 million ($.55 per share) reduction in its accrued net deferred income tax liability as of January 1, 1992. The gain recorded upon adoption could not be recognized previously in accordance with SFAS No. 96 which the Company had adopted in 1988. The Company elected to report this change as the cumulative effect of a change of accounting principle.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 became law and increased the maximum corporate federal income tax rate from 34% to 35% retroactive to January 1, 1993. This change required the Company to record additional deferred income tax expense of approximately $3.1 million in 1993 to reflect the new tax rate's impact on net deferred income tax liability as of January 1, 1993. In 1994, a $5.0 million tax benefit was recorded to reflect the favorable resolution of prior-period tax issues associated with the former parent of ICTC.
The Provision for Income Taxes for continuing operations consisted of the following ($ in millions):
Years Ended December 31, 1994 1993 1992 Current income tax: Federal $37.5 $23.6 $14.4 State 4.1 .9 1.6 Deferred income taxes 17.4 31.9 21.4 Provision for Income Taxes $59.0 $56.4 $37.4
The effective income tax rates for the years ended December 31, 1994, 1993 and 1992, were 34%, 38% and 34%, respectively. See Note 4 for the tax benefits associated with the 1993 extraordinary loss.
The items which gave rise to differences between the income taxes provided for continuing operations in the Consolidated Statements of Income and the income taxes computed at the statutory rate are summarized below ($ in millions):
Years Ended December 31, 1994 1993 1992 Expected tax expense computed at statutory rate $60.5 35% $51.8 35% $37.4 34% Dividends received exclusion (.9) - (.1) - (.1) - Impact of OBRA 1993 rate change - - 3.1 2 - - State income taxes, net of Federal tax effect 3.6 2 .6 - 1.0 1 Favorable resolution of prior period tax issues (5.0)(3) - - - - Other items, net .8 - 1.0 1 (.9) (1) Provision for Income Taxes $59.0 34% $56.4 38% $37.4 34%
Temporary differences between book and tax income arise because the tax effects of transactions are recorded in the year in which they enter into the determination of taxable income. As a result, the book provisions for taxes differ from the actual taxes reported on the income tax returns. The net results of such differences are included in Deferred Income Taxes in the Consolidated Balance Sheets.
At December 31, 1994, the Company, for tax or financial statement reporting purposes, had no Federal net operating loss carryovers.
Deferred Income Taxes consisted of the following ($ in millions):
December 31, 1994 1993 Deferred tax assets $ 71.6 $ 82.2 Less: Valuation allowance (1.8) (2.2) Deferred tax assets, net of valuation allowance 69.8 80.0 Deferred tax liabilities (266.2) (259.5) Deferred Income Taxes $(196.4) $(179.5)
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 ($56.5 million) and safe harbor leases ($11.3 million). Major types of deferred tax liabilities are: accelerated depreciation ($222.0 million), land basis differences ($10.1 million) and debt marked to market ($2.0 million).
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 prior net operating losses or credit carryovers from prior years.
13. Common Stock and Dividends
The Company is authorized to issue 100,000,000 shares of Common Stock, par value $.001. At December 31, 1994, there were 42,609,591 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, 1994 and 1993.
On February 4, 1992, the Board of Directors authorized a three-for- two stock split on Common Stock. The split was in the form of a stock dividend and was paid on February 28, 1992. Fractional shares were settled for cash. A total of 14,132,058 shares were issued from authorized but unissued shares. In 1992, the Board of Directors initiated a policy of quarterly dividends on the Common Stock of the Company. Future dividends may be dependent on the ability of the Railroad to pay dividends to the Company. Certain covenants of the Railroad's debt restrict the level of dividends it may pay to the Company. In December 1994, the Railroad declared a special $60 million dividend payable in connection with the stock repurchase program. At December 31, 1994, an additional $44.9 million was free of covenant restrictions (see Note 3).
The Company awarded 15,000 shares, 25,000 shares and 150,000 shares of restricted stock to eligible employees of the Railroad in 1994, 1993 and 1992, respectively. No cash payments are required by the individuals. Shares awarded under the plans may not be sold, transferred, or used as collateral by the holders until the shares awarded 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 the Railroad is terminated. A total of 100 shares and 13,500 shares were forfeited in 1994 and 1993, respectively. If the employee becomes disabled, or dies, or a change in control occurs during the vesting period, the restrictions lapse at that time. 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 $.9 million, $.8 million and $.5 million in 1994, 1993 and 1992, respectively.
In 1992, the Company awarded 200,000 shares to Mr. Moyers as well. Of this amount, 133,000 were vested upon his retirement in 1993. The remaining 67,000 were forfeited in 1993 when Mr. Moyers was employed by another Class I railroad. See Note 17.
14. Compensation and Stock Options
Stock Purchase Plan. Under the Company's 1990 Stock Purchase Plan (the "Stock Plan"), 736,380 shares (post split) of Common Stock were made available from shares held by Prospect for sale to key employees and officers of the Company as determined by the Company's Board of Directors. Shares so awarded were sold at a price of $.10 per share (post split)(which was Prospect's approximate original per share cost for such stock as adjusted for the 3 for 2 stock split in February 1992). Shares awarded pursuant to the Stock Purchase Plan were restricted when issued. At December 31, 1994, all shares awarded have vested. The unawarded shares (63,270) and those repurchased in 1991 are now included in Treasury Stock.
Long-Term Incentive Plan. Under the Company's 1990 Long-Term Incentive Plan (the "Long-Term Incentive Plan") shares of Common Stock are available 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 and to certain other individuals who possess the potential to contribute to the future success of the Company. At the 1993 Annual Meeting, the stockholders authorized an additional one million shares to be available for issuance under the Long-Term Incentive Plan. 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 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. The Compensation Committee awarded stock options to employees under the Long-Term Incentive Plan for the first time in 1993. Awards, all at fair market value, 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 1,500 shares of Common Stock. Until the 1994 Annual Meeting of Stockholders, Outside Directors were granted an option to purchase 15,000 shares of Common Stock upon initial appointment or election. In addition, Outside Directors as of November 1990 were granted options to purchase an additional 10,000 shares, which grants were approved at the 1991 Annual Meeting of Stockholders. 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.
The following table summarizes the shares available for award under the Incentive Plan for the year ended December 31, 1994:
Shares available for award at beginning of year 1,427,500 Options exercised (1,500) Restricted stock (15,000) (16,500) Subtotal 1,411,000
Shares of restricted stock forfeited 100 Change in options outstanding during year (27,000)
Shares available for award at end of year 1,384,100
The following table summarizes changes in shares under option for the year ended December 31, 1994:
Option Outside Price Range Directors Employees Total Per Share
Outstanding options - - beginning of year 162,000 520,000 682,000 $ 8.000 to $31.250
Options - Granted 28,500 - 28,500 $34.250 to $37.750 - Exercised (1,500) - (1,500) $12.750 - Terminated - - -
Change during the year 27,000 - 27,000
Outstanding options end of year 189,000 520,000 709,000 $8.000 to $37.750
The last date exercisable for options granted to Outside Directors is April 21, 2004, and November 23, 2003 for those granted to employees.
In 1994, Outside Directors exercised 1,500 options at $12.75 per share when the market price was $37.25 per share.
See Notes 13 and 17 for a discussion of the restricted stock issued under the Long-Term Incentive Plan.
15. Contingencies, Commitments and Concentration of Risks
The Company has unconditionally guaranteed its finance subsidiary's $12.8 million obligations via a pledge of the stock of the finance subsidiary.
The Company is self-insured for the first $5 million of each loss. The Company carries $295 million of liability insurance per occurrence, subject to an annual cap of $395 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.
As of December 31, 1994, the Company had $2.4 million of letters of credit outstanding as collateral primarily for surety bonds executed on behalf of the Company. Such letters of credit expire in 1995 and are automatically renewable for one year. The letters of credit reduced the maximum amount that could be borrowed under the Revolver (see Note 9).
The Company has guaranteed repayment of certain indebtedness of a jointly owned company aggregating $7.8 million. The Company's primary share is $1.0 million; the remainder is a primary obligation of other unrelated owner companies.
The Company has agreed to acquire 20 new SD-70 locomotives for a total cost of $25.8 million with delivery expected in October 1995.
There are various regulatory proceedings, claims and litigation pending against the Company. While the ultimate amount of liability that may result cannot be determined, in the opinion of the Company's management, based on present information, adequate provisions for liabilities have been recorded. See "Management's Discussion and Analysis - Liquidity and Capital Resources - Environmental Liabilities" for a discussion of environmental matters.
16. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and temporary cash investments. The carrying amount approximates fair value because of the short maturity of those instruments.
Certain Investments in Debt and Equity Securities. Effective January 1, 1994, the Company adopted the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investment in Debt and Equity Securities"("SFAS No. 115"). SFAS No. 115 expands the use of fair value accounting for certain investments in debt and equity securities but retains the use of the amortized cost method for investments in debt securities that the reporting enterprise has the positive intent and ability to hold to maturity. All of the investments are temporary and held for less than 90 days. They are included in the Consolidated Balance Sheet as part of Cash and Temporary Cash Investments. For the periods presented below, all investments were in U.S. Corporate demand notes. It is the intent of the Company to hold all debt securities to maturity, therefore, the following is provided in accordance with SFAS No. 115 ($ in millions):
12-31-94 1-1-94 Aggregate fair value $19.4 $5.6 Gross unrealized holding gains - - Gross unrealized holding losses - - Amortized cost 19.4 5.6
Investments. The Company has investments of $8.8 million in 1994 and $10.3 million in 1993 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 ($4.7 million in 1994 and $5.4 million in 1993) are accounted for by the equity method.
Long-term debt. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Derivatives. The fair value of diesel fuel collar and swap agreements is the estimated amount that the Company would receive or pay to terminate the agreements as of year end, taking into account the current credit worthiness of the agreement counterparties.
The estimated fair values of the Company's financial instruments at December 31, are as follows ($ in millions):
1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value Cash and temporary cash investments $24.2 $24.8 $ 10.7 $ 10.7 Investments 8.8 8.8 10.3 10.3 Accounts payable (derivatives) (.1) (.4) (.5) (4.6) Debt (339.7)(341.2) (384.6) (406.0)
17. Special Charge
In 1992, the Company recorded a pretax special charge of $8.9 million as part of operating expense. The special charge reduced Net Income by $5.9 million or $.13 per share.
The special charge consisted of $7 million for various costs associated with the retirement of Mr. Moyers and the related organizational changes. The costs associated with Mr. Moyers' retirement include the present value of his pension, accelerated vesting of a portion of his restricted stock award and certain costs of a non-competition agreement. The remaining $1.9 million was for the disposition costs of railcars and a building and its adjacent land.
18. Selected Quarterly Financial Data - (Unaudited) ($ in millions, except share data):
First Second Third Fourth 1994 Quarter Quarter Quarter Quarter(a) Revenues $147.5 $145.2 $146.7 $154.5 Operating income 50.6 45.2 45.9 58.6 Net income 27.7 24.8 25.9 35.5
Net income per share $ .65 $ .58 $ .61 $ .83
Revenues $142.7 $132.1 $147.4 $142.5 Operating income 46.4 38.3 46.4 48.4 Income before extraordinary item and cumulative effect of changes in accounting principles 24.0 19.9 21.5 26.3 Net income (loss) 23.9 (3.5) 21.5 26.3
Income per share: Before extraordinary item and cumulative effect $ .56 $ .47 $ .50 $ .61 Extraordinary item - (.55) - - Cumulative effect - - - - Net income (loss) per share $ .56 $ (.08) $ .50 $ .61
Revenues $138.7 $129.9 $131.4 $147.4 Operating income 42.6 36.7 36.5 35.7 Income before cumulative effect of change in accounting principle 21.1 16.9 17.6 16.9 Net income 44.5 16.9 17.6 16.9
Income per share: Before cumulative effect $.50 $.40 $ .41 $ .39 Cumulative effect .55 - - - Net income per share $ 1.05 $ .40 $ .41 $ .39
(a) Includes the special charge recorded in the fourth quarter of 1992, see Note 17.
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, 1994:
I-Condensed financial information.. .F-27 II-Valuation and qualifying accounts .F-30
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, 1994 1993 1992 Operating expenses $0.3 $0.2 $0.3 Operating (loss) (0.3) (0.2) (0.3) Other income (expense), net (3.7) (1.3) (1.6) Interest income (expense), net (0.1) - 0.4 (Loss) before taxes and earnings of subsidiaries (4.1) (1.5) (1.5) Earnings of subsidiaries 116.5 69.1 97.0 (Benefit) for income taxes (1.5) (0.6) (0.4) Net income $113.9 $68.2 $95.9 Income per share $2.67 $1.59 $2.25 Weighted average number of shares outstanding (thousands) 42,725.7 42,679.7 42,600.1
The Notes to Consolidated Financial Statements beginning on page are an integral part of this schedule.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Balance Sheets ($ in millions)
December 31, 1994 1993 ASSETS Current assets: Cash and temporary cash investments $11.0 $1.3 Receivables 60.6 16.0 Other current assets 0.1 0.1 Total current assets 71.7 17.4
Investments in subsidiaries 404.6 375.1
Other assets 0.4 0.5 Total assets $476.7 $393.0
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $8.9 $6.3 Dividends payable 10.6 8.9 Income taxes payable 0.4 (1.9) Total current liabilities 19.9 13.3
Deferred income taxes 1.1 0.7
Other liabilities and reserves 1.6 1.6
Contingencies and commitments
Stockholders' equity: Common stock, par value $.001 authorized 100,000,000 shares: 42,853,564 shares issued and 42,609,591 shares outstanding - - Additional paid-in capital 165.1 164.2 Retained income 293.0 216.5 Treasury stock (243,973 shares) (4.0) (3.3) Total stockholders' equity 454.1 377.4
Total liabilities and stockholders' equity $476.7 $393.0
The Notes to Consolidated Financial Statements beginning on page are an integral part of this schedule.
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Statements of Cash Flows ($ in millions)
Years Ended December 31, 1994 1993 1992 Cash flows from operating activities: Net income $113.9 $68.2 $95.9 Reconciliation of net income to net cash provided by (used for) operating activities: Deferred income taxes 0.4 0.3 0.3 Earnings of subsidiaries (116.5) (69.1) (97.0) Cash changes in working capital: Receivables 0.4 0.1 (0.4) Other current assets - (0.1) - Accounts payable 2.6 2.2 1.4 Income taxes payable 2.3 (0.7) (1.0) Taxes other than income taxes - (0.1) 0.1 Changes in other assets 0.1 (0.5) 0.1 Changes in other liabilities and reserves - 1.1 - Net cash provided by (used for) operating activities 3.2 1.4 (0.6)
Cash flows from investing activities: Capital contribution to subsidiaries (0.3) (9.9) - Dividends received from subsidiaries 42.5 27.4 6.4 Net cash provided by investing activities 42.2 17.5 6.4
Cash flows from financing activities: Dividends paid (35.7) (27.1) (14.8) Proceeds from exercise of stock options and warrants - 0.5 0.2 Net cash (used for) financing activities (35.7) (26.6) (14.6)
Changes in cash and temporary cash investments 9.7 (7.7) (8.8) Cash and temporary cash investments at beginning of period 1.3 9.0 17.8 Cash and temporary cash investments at end of period $11.0 $1.3 $9.0
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, 1994
Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Redundancy and guarantee reserves $43.6 $1.8 $7.2 $38.2 Casualty and other reserves 62.3 16.9 17.5 61.7 Environmental 11.9 4.4 3.0 13.3 Bad debt reserve 3.1 1.9 2.9 2.1 Taxes 2.2 - 0.4 1.8 Total $123.1 $25.0 $31.0 $117.1
Year Ended December 31, 1993
Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Redundancy and guarantee reserves $51.6 $1.8 $9.8 $43.6 Casualty and other reserves 67.4 18.8 23.9 62.3 Environmental 9.9 2.9 0.9 11.9 Bad debt reserve 2.6 2.0 1.5 3.1 Taxes 3.3 - 1.1 2.2 Total $134.8 $25.5 $37.2 $123.1
Year Ended December 31, 1992
Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Redundancy and guarantee reserves $61.3 $2.1 $11.8 $51.6 Casualty and other reserves 60.4 21.3 14.3 67.4 Environmental 10.1 2.3 2.5 9.9 Bad debt reserve 5.1 1.9 4.4 2.6 Taxes - 3.7 0.4 3.3 Total $136.9 $31.3 $33.4 $134.8
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Sequential No. Description Page No. 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. (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. (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))
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. (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. (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))
* Used herein to identify management contracts or compensation plans or arrangements as required by Item 14 of Form 10-K.
4.1 Form of 14-1/8% Senior Subordinated Debenture Indenture dated as of September 15, 1989 (the "Senior Subordinated Debenture Indenture") between Illinois Central Railroad Company and United States Trust Company of New York, Trustee (including the form of 14-1/8% Senior Subordinated Debenture included as Exhibit A therein). (Incorporated by reference to Exhibit 4.1 to the Registration Statement of Illinois Central Railroad Company on Form S-1, as amended. (SEC File No. 33-29269))
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))
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 4.10 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 4.11 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 4.12 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 4.13 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))
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 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 refernce 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 Option 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 Option 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))
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))
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. (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))
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 of the Illinois Central Railroad Company on Form 8-K 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 of the Illinois Central Railroad Company on Form 8-K 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 of the Illinois Central Railroad Company on Form 8-K 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 of the Illinois Central Railroad Company on Form 8-K dated as of July 29,1994. (SEC File No. 1-7092))
10.17* Illinois Central Corporation Management Employee Discounted Stock Purchase Plan. (A)
11 Computation of Income Per CommonShare (Included at E-9)
21 Subsidiaries of Registrant (Included at E-10)
23 Consent of Arthur Andersen LLP (A)
27 Financial Data Schedule (A)
(A) Included herein but not reproduced.