SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 1, 1997
NORFOLK SOUTHERN CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Virginia 1-8339 52-1188014
----------------------- ------------------- ------------------
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
Three Commercial Place
---------------------------------------
Norfolk, Virginia 23510-2191
(Address of principal executive offices)
(757) 629-2680
------------------------------
(Registrant's telephone number)
No Change
-----------------------------------------------------------
(Former name or former address, if changed since last report)
This Current Report on Form 8-K/A amends the Current Report on
Form 8-K of Norfolk Southern Corporation (the "Registrant") dated April
8, 1997 and filed on April 10, 1997.
Item 7(c). Exhibits.
23.1 Consent of Price Waterhouse LLP relating to
the financial statements of Conrail Inc.
99.3 The audited Consolidated Statements of
Income, Consolidated Statements of
Stockholders' Equity and Consolidated
Statements of Cash Flows of Conrail Inc. for
each of the years in the three-year period
ended December 31, 1996, and the Consoli-
dated Balance Sheets of Conrail Inc. at
December 31, 1996 and December 31, 1995.
99.4 Pro forma condensed consolidated financial statements of
the Registrant as of and for the year ended December 31,
1996, adjusted to reflect its acquisition of an interest
in Conrail Inc.
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 hereunto duly authorized.
Dated: May 1, 1997
NORFOLK SOUTHERN CORPORATION
(Registrant)
By: /s/ Dezora M. Martin
-------------------------
Dezora M. Martin
Corporate Secretary
EXHIBIT INDEX
Exhibit
Number Description
23.1 Consent of Price Waterhouse LLP relating to
the financial statements of Conrail Inc.
99.3 The audited Consolidated Statements of
Income, Consolidated Statements of
Stockholders' Equity and Consolidated
Statements of Cash Flows of Conrail Inc. for
each of the years in the three-year period
ended December 31, 1996, and the Consoli-
dated Balance Sheets of Conrail Inc. at
December 31, 1996 and December 31, 1995.
99.4 Pro forma condensed consolidated financial statements of
the Registrant as of and for the year ended December 31,
1996, adjusted to reflect its acquisition of an interest
in Conrail Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in the Current Report on Form 8-K/A of
Norfolk Southern Corporation dated May 1, 1997 of our report dated
January 21, 1997, except as to Note 2, which is as of March 7, 1997, on
the consolidated financial statements of Conrail Inc. for the year ended
December 31, 1996, appearing on page 6 of this Form 8-K/A.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, PA 19103
May 1, 1997
EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Conrail Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial
position of Conrail Inc. and subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 21, 1997,
except as to Note 2, which is as of March 7, 1997
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
---------------------------
($ In Millions Except Per Share Data) 1996 1995 1994
------ ------ ------
Revenues $3,714 $3,686 $3,733
------ ------ ------
Operating expenses
Way and structures 462 485 499
Equipment 803 766 815
Transportation 1,385 1,324 1,379
General and administrative 328 370 350
Voluntary separation programs (Note 3) 135
Asset disposition charge (Note 10) 285
Early retirement program (Note 11) 84
------ ------ ------
Total operating expenses 3,113 3,230 3,127
------ ------ ------
Income from operations 601 456 606
Interest expense (182) (194) (192)
Other income, net (Note 12) 112 130 118
------ ------ ------
Income before income taxes 531 392 532
Income taxes (Note 7) 189 128 208
------ ------ ------
Net income $ 342 $ 264 $ 324
====== ====== ======
Net income per common share (Note 1)
Primary $ 4.25 $ 3.19 $ 3.90
Fully diluted 3.89 2.94 3.56
Ratio of earnings to fixed charges
(Note 1) 3.19x 2.51x 3.19x
See accompanying notes.
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------
($ In Millions) 1996 1995
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 30 $ 73
Accounts receivable 630 614
Deferred tax assets (Note 7) 293 333
Material and supplies 139 158
Other current assets 25 28
------ ------
Total current assets 1,117 1,206
Property and equipment, net (Note 4) 6,590 6,408
Other assets 695 810
------ ------
Total assets $8,402 $8,424
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings 99 89
Current maturities of long-term debt (Note 6) 130 181
Accounts payable 135 113
Wages and employee benefits 143 183
Casualty reserves 141 110
Accrued and other current liabilities (Note 5) 444 494
------ ------
Total current liabilities 1,092 1,170
Long-term debt (Note 6) 1,876 1,911
Casualty reserves 190 217
Deferred income taxes (Note 7) 1,478 1,393
Special income tax obligation (Note 7) 346 440
Other liabilities 313 316
------ ------
Total liabilities 5,295 5,447
------ ------
Commitments and contingencies (Note 13)
Stockholders' equity (Notes 2 and 9)
Preferred stock (no par value; 15,000,000
shares authorized; no shares issued)
Series A ESOP convertible junior preferred
stock (no par value; 10,000,000
shares authorized; 7,303,920 and
9,770,993 shares issued and outstanding,
respectively) 211 282
Unearned ESOP compensation (222) (233)
Common stock ($1 par value; 250,000,000
shares authorized; 87,768,428 and
85,392,392 shares issued, respectively;
82,244,973 and 82,094,675 shares
outstanding, respectively) 88 85
Additional paid-in capital 2,404 2,187
Employee benefits trust, at market (3,394,988
and 4,706,665 shares, respectively) (384) (329)
Retained earnings 1,357 1,176
------ ------
3,454 3,168
Treasury stock, at cost (5,523,455 and
3,297,717 shares, respectively) (347) (191)
------ ------
Total stockholders' equity 3,107 2,977
------ ------
Total liabilities and stockholders' equity $8,402 $8,424
====== ======
See accompanying notes.
<TABLE>
<CAPTION>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Unearned Additional Employee
($ In Millions Except Preferred ESOP Com- Common Paid-in Benefits Retained Treasury
Per Share Data) Stock pensation Stock Capital Trust Earnings Stock
-------- --------- ------ ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 286 $ (253) $ 80 $ 1,819 $ 857 $ (5)
Amortization 10
Net income 324
Common dividends, $1.40
per share (111)
Preferred dividends,
$2.165 per share (21)
Common shares acquired (94)
Exercise of stock options 14
Other (3) 15 7
-------- --------- ------- ------- ------- -------- --------
Balance, December 31, 1994 283 (243) 80 1,848 1,056 (99)
Amortization 10
Net income 264
Common dividends, $1.60
per share (129)
Preferred dividends,
$2.165 per share (21)
Common shares acquired (92)
Exercise of stock options 6
Establishment of employee
benefits trust 5 245 (250)
Employee benefits trust
transactions, net 84 (79)
Other (1) 4 6
-------- --------- ------- ------- ------- -------- --------
Balance, December 31, 1995 282 (233) 85 2,187 (329) 1,176 (191)
Amortization 11
Net income 342
Common dividends, $1.80
per share (146)
Preferred dividends,
$2.165 per share (20)
Common shares acquired (156)
Exercise of stock options 29 53
Employee benefits trust
transactions, net 128 (116)
Effects of voluntary
separation programs (8) 8
Effects of CSX tender
offer (Note 2) (63) 3 60
Other 5
-------- --------- ------- ------- ------- ------- --------
Balance, December 31, 1996 $ 211 $ (222) $ 88 $ 2,404 $ (384) $ 1,357 $ (347)
======== ========= ======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
CONRAIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------
($ In Millions) 1996 1995 1994
------- ------- -------
Cash flows from operating activities
Net income $ 342 $ 264 $ 324
Adjustments to reconcile net income to
net cash provided by operating activities:
Voluntary separation programs 135
Asset disposition charge 285
Early retirement program 84
Depreciation and amortization 283 293 278
Deferred income taxes 183 108 150
Special income tax obligation (94) (73) (62)
Gains from sales of property (24) (27) (18)
Pension credit (46) (43) (46)
Changes in:
Accounts receivable (16) 32 (2)
Accounts and wages payable (18) 8 41
Settlement of tax audit (39)
Other (37) (74) (52)
------- ------- -------
Net cash provided by operating
activities 669 773 697
------- ------- -------
Cash flows from investing activities
Property and equipment acquisitions (387) (415) (490)
Proceeds from disposals of properties 34 38 32
Other (46) (59) (23)
------- ------- -------
Net cash used in investing activities (399) (436) (481)
------- ------- -------
Cash flows from financing activities
Repurchase of common stock (156) (92) (94)
Net proceeds from (repayments of)
short-term borrowings 10 (23) 33
Proceeds from long-term debt 26 85 114
Payment of long-term debt (184) (134) (158)
Loans from and redemptions of
insurance policies 95
Dividends on common stock (146) (129) (111)
Dividends on Series A preferred stock (25) (21) (16)
Proceeds from stock options and other 67 7 21
------- ------- -------
Net cash used in financing
activities (313) (307) (211)
------- ------- -------
Increase (decrease) in cash and cash
equivalents (43) 30 5
Cash and cash equivalents
Beginning of year 73 43 38
------- ------- -------
End of year $ 30 $ 73 $ 43
======= ======= =======
See accompanying notes.
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Industry
--------
Conrail Inc. ("Conrail") is a holding company of which the principal
subsidiary is Consolidated Rail Corporation ("CRC"), a freight
railroad which operates within the northeast and midwest United
States and the Province of Quebec.
Principles of Consolidation
---------------------------
The consolidated financial statements include Conrail and
majority-owned subsidiaries. Investments in 20% to 50% owned
companies are accounted for by the equity method.
Cash Equivalents
----------------
Cash equivalents consist of commercial paper, certificates of deposit
and other liquid securities purchased with a maturity of three months
or less, and are stated at cost which approximates market value.
Material and Supplies
---------------------
Material and supplies consist mainly of fuel oil and items for
maintenance of property and equipment, and are valued at the lower of
cost, principally weighted average, or market.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is provided
using the composite straight-line method. The cost (net of salvage)
of depreciable property retired or replaced in the ordinary course of
business is charged to accumulated depreciation and no gain or loss
is recognized.
Asset Impairment
----------------
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Expected future cash flows from the use
and disposition of long-lived assets are compared to the current
carrying amounts to determine the potential impairment loss.
Revenue Recognition
-------------------
Revenue is recognized proportionally as a shipment moves on the
Conrail system from origin to destination.
Earnings Per Share
------------------
Primary earnings per share are based on net income adjusted for the
effects of preferred dividends net of income tax benefits, divided by
the weighted average number of shares outstanding during the period,
including the dilutive effect of stock options. Fully diluted
earnings per share assume conversion of Series A ESOP Convertible
Junior Preferred Stock ("ESOP Stock") into Conrail common stock. Net
income amounts applicable to fully diluted earnings per share have
been adjusted by the increase, net of income tax benefits, in
ESOP-related expenses assuming conversion of all ESOP Stock to common
stock.
Shares in the Conrail Employee Benefits Trust are not considered
outstanding for computing earnings per share. The weighted average
number of shares of common stock outstanding during each of the most
recent three years are as follows:
1996 1995 1994
---------- ---------- ----------
Primary weighted
average shares 77,628,825 78,733,947 79,674,781
Fully diluted weighted
average shares 87,325,575 88,702,712 89,562,721
Ratio of Earnings to Fixed Charges
----------------------------------
Earnings used in computing the ratio of earnings to fixed charges
represent income before income taxes plus fixed charges, less equity
in undistributed earnings of 20% to 50% owned companies. Fixed
charges represent interest expense together with interest capitalized
and a portion of rent under long-term operating leases representative
of an interest factor.
New Accounting Standards
------------------------
During 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121) and SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), which are both
effective in 1996. The Company has decided to adopt only the
disclosure provisions of SFAS 123 in 1996 and continues to apply APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related interpretations in accounting for its stock-based
compensation plans. The Company adopted SFAS 121 in the first quarter
of 1996 and determined that it did not have a material effect on its
financial statements.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
2. Proposed Merger
---------------
On October 14, 1996, Conrail, CSX Corporation ("CSX") and a
subsidiary of CSX entered into an Agreement and Plan of Merger (as
amended, the "Merger Agreement"), pursuant to which Conrail was to be
merged with a subsidiary of CSX in a merger-of-equals transaction.
On October 24, 1996, Norfolk Southern Corporation ("Norfolk")
commenced an unsolicited tender offer for all outstanding Conrail
voting stock at $100 per share in cash. Norfolk has since increased
its offer to $115 per share in cash.
On November 20, 1996, CSX concluded its first tender offer and
purchased approximately 19.9% of Conrail's outstanding shares for
$110 per share.
On December 18, 1996, CSX and Conrail entered into a second amendment
to the Merger Agreement (the "Second Amendment") that would, among
other things, (i) increase the consideration payable pursuant to the
merger, (ii) accelerate the consummation of the merger to immediately
following the receipt of applicable shareholder approvals and prior
to the Surface Transportation Board ("STB") approval and (iii) extend
until December 31, 1998 an exclusivity period during which the
Conrail Board agreed not to withdraw or modify its recommendations of
the CSX transactions, approve or recommend any takeover proposal or
cause Conrail to enter into any agreement related to any takeover
proposal.
On January 13, 1997, Norfolk issued a press release announcing that
it would offer to purchase shares representing 9.9% of the
outstanding shares for $115 per share, in the event that Conrail
shareholders did not approve a proposal to opt out of a Pennsylvania
statute (the "Opt Out Proposal") at the meeting of shareholders to be
held on January 17, 1997 (the "Special Shareholders Meeting").
On January 17, 1997, Conrail shareholders voted at the Special
Shareholders Meeting against the Opt Out Proposal.
On February 4, 1997, the amended Norfolk tender offer expired, and
Norfolk subsequently purchased approximately 8.2 million shares
pursuant thereto.
On March 7, 1997, Conrail and CSX entered into a Third Amendment (the
"Third Amendment") to the Merger Agreement. Pursuant to the Third
Amendment, (i) the price per share has been increased from $110 to
$115, and the number of shares to be purchased in the tender offer
has been increased to all outstanding shares. The tender offer is
scheduled to close April 18, 1997 (subject to extension by CSX to
June 2, 1997 whether or not the conditions have been satisfied), (ii)
the consideration paid per share in the merger for all remaining
outstanding shares following consummation of the offer has been
increased to $115 in cash and (iii) the conditions to the offer
relating to certain provisions of Pennsylvania law becoming
inapplicable to Conrail and relating pending governmental actions or
proceedings have been deleted.
The Third Amendment also provides that CSX will have sole control
over the regulatory approval process and will be free to conduct by
itself discussions with other railroads, including Norfolk, relating
to competitive issues raised by the CSX transactions, and to enter
into any resulting agreement. It is anticipated that CSX and Norfolk
will negotiate an appropriate division of Conrail's assets; however,
neither the pending CSX tender offer nor the merger is conditioned on
CSX's reaching an agreement with Norfolk.
Pursuant to the Third Amendment, three members of Conrail's Board of
Directors approved by CSX shall be invited to join the CSX Board of
Directors and a transition team will be established, the leadership
of which will include senior executive officers of CSX and Conrail to
ensure the orderly operation of Conrail during the regulatory
approval process and an orderly transition thereafter.
Under the Third Amendment, Conrail and CSX agreed to reduce from
December 31, 1998 to December 31, 1997 the period of time during
which the Conrail Board is prohibited from (i) withdrawing or
modifying, or publicly proposing to withdraw or modify, its approval
or recommendation of the CSX transactions, in a manner adverse to
CSX, (ii) approving or recommending, or publicly proposing to approve
or recommend, any competing proposal or (iii) causing Conrail to
enter into any agreement related to any such competing proposal.
Under the Merger Agreement as amended, Conrail may terminate the
Merger Agreement in the event that after June 2, 1997, CSX fails to
consummate the tender offer for any reason other than the
non-occurrence of any condition to the tender offer. In the event
that CSX fails to consummate the tender offer under such
circumstances, Conrail will be entitled to exercise any additional
remedies it may have.
The full terms and conditions of the CSX and Norfolk offers and
Conrail's position with respect to the CSX and Norfolk offers are set
forth in documents filed by Conrail with the Securities and Exchange
Commission.
Pending approval by the Surface Transportation Board ("STB"), 100% of
Conrail's voting stock will be held by CSX in a voting trust. The
combination of the railroad operations of the two companies is
contingent upon the approval of the merger by the STB.
3. Voluntary Separation Programs
-----------------------------
During the second quarter of 1996, the Company recorded a charge of
$135 million (before tax benefits of $52 million) consisting of $102
million in termination benefits to be paid to non-union employees
participating in the voluntary retirement and separation programs
("voluntary separation programs") and losses of $33 million on
non-cancelable leases for office space no longer required as a result
of the reduction in the Company's workforce. Over 840 applications
were accepted from eligible employees under the voluntary separation
programs. Approximately $90 million of the termination benefits are
being paid from the Company's overfunded pension plan.
4. Property and Equipment
----------------------
December 31,
-----------------
1996 1995
------- -------
(In Millions)
Roadway $ 7,021 $ 6,828
Equipment 1,231 1,213
Less: Accumulated depreciation (1,654) (1,572)
Allowance for disposition (408) (439)
------- -------
6,190 6,030
------- -------
Capital leases (primarily equipment) 908 908
Accumulated amortization (508) (530)
------- -------
400 378
------- -------
$ 6,590 $ 6,408
======= =======
Conrail acquired equipment and incurred related long-term debt under
various capital leases of $82 million in 1996, $71 million in 1995
and $8 million in 1994. In 1995 (Note 10) and 1991, the Company
recorded allowances for disposition for the sale or abandonment of
certain under-utilized rail lines and other facilities.
5. Accrued and Other Current Liabilities
-------------------------------------
December 31,
--------------
1996 1995
---- ----
(In Millions)
Freight settlements due others $ 48 $ 54
Equipment rents (primarily car hire) 74 71
Unearned freight revenue 79 56
Property and corporate taxes 49 66
Other 194 247
---- ----
$444 $494
==== ====
6. Long-Term Debt
--------------
Long-term debt outstanding, including the weighted average interest
rates at December 31, 1996, is composed of the following:
December 31,
------------------
1996 1995
------ ------
(In Millions)
Capital leases $ 491 $ 489
Medium-term notes payable,
6.70%, due 1997 to 1999 109 208
Notes payable, 9.75%, due 2000 250 250
Debentures payable, 7.88%, due 2043 250 250
Debentures payable, 9.75%, due 2020 544 544
Equipment and other obligations, 6.55% 262 251
Commercial paper, 5.53% 100 100
------ ------
2,006 2,092
Less current portion (130) (181)
------ ------
$1,876 $1,911
====== ======
Using current market prices when available, or a valuation based on
the yield to maturity of comparable debt instruments having similar
characteristics, credit rating and maturity, the total fair value of
the Company's long-term debt, including the current portion, but
excluding capital leases, is $1,685 million and $1,870 million at
December 31, 1996 and 1995, respectively, compared with carrying
values of $1,515 million and $1,603 million at December 31, 1996 and
1995, respectively.
The Company's noncancelable long-term leases generally include
options to purchase at fair value and to extend the terms. Capital
leases have been discounted at rates ranging from 3.09% to 14.26% and
are collateralized by assets with a net book value of $400 million at
December 31, 1996.
Minimum commitments, exclusive of executory costs borne by the
Company, are:
Capital Operating
Leases Leases
------- ---------
(In Millions)
1997 $ 107 $115
1998 96 104
1999 86 87
2000 64 76
2001 57 68
2002 - 2017 273 523
----- ------
Total 683 $973
======
Less interest portion (192)
-----
Present value $ 491
=====
Operating lease rent expense was $127 million in 1996, $130 million
in 1995 and $118 million in 1994.
In June 1993, the Company and CRC filed a shelf registration
statement on Form S-3 to enable CRC to issue up to $500 million in
debt securities or the Company to issue up to $500 million in
convertible debt and equity securities. The remaining balance under
this shelf registration was $312 million at December 31, 1996.
In April 1996, CRC issued $50 million of Pass-Through Certificates at
a rate of 6.96% to finance equipment. Although the certificates are
not direct obligations of, or guaranteed by CRC, amounts payable
under related capital leases will be sufficient to pay principal and
interest on the certificates.
In July 1996, CRC issued $26 million of 1996 Equipment Trust
Certificates, Series A, with interest rates ranging from 6.0% to
7.48%, maturing annually from 1997 to 2011. The certificates were
used to finance approximately 85% of the purchase price of twenty
locomotives.
In June 1996, CRC borrowed $69 million against the cash surrender
value of the company-owned life insurance policies which it maintains
on certain of its non-union employees.
Equipment and other obligations mature in 1997 through 2043 and are
collateralized by assets with a net book value of $253 million at
December 31, 1996. Maturities of long-term debt other than capital
leases and commercial paper are $65 million in 1997, $46 million in
1998, $46 million in 1999, $266 million in 2000, $17 million in 2001
and $975 million in total from 2002 through 2043.
CRC had $199 million of commercial paper outstanding at December 31,
1996. Of the total amount outstanding, $100 million is classified as
long-term since it is expected to be refinanced through subsequent
issuances of commercial paper and is supported by the long-term
credit facility mentioned below.
CRC maintains a $500 million uncollateralized bank credit agreement
with a group of banks which is used for general corporate purposes
and to support CRC's commercial paper program. The agreement matures
in 2000 and requires interest to be paid on amounts borrowed at rates
based on various defined short-term rates and an annual maximum fee
of .125% of the facility amounts. The agreement contains, among other
conditions, restrictive covenants relating to a debt ratio and
consolidated tangible net worth. During 1996, CRC had no borrowings
under this agreement.
Interest payments were $170 million in 1996, $177 million in 1995 and
$174 million in 1994.
7. Income Taxes
------------
The provisions for income taxes are composed of the following:
1996 1995 1994
---- ---- -----
(In Millions)
Current
Federal $ 90 $ 78 $104
State 10 15 16
---- ---- ----
100 93 120
---- ---- ----
Deferred
Federal 151 110 125
State 32 (2) 25
---- ---- ----
183 108 150
---- ---- ----
Special income tax obligation
Federal (80) (61) (53)
State (14) (12) (9)
---- ---- ----
(94) (73) (62)
---- ---- ----
$189 $128 $208
==== ==== ====
In conjunction with the public sale in 1987 of the 85% of the
Company's common stock then owned by the U.S. Government, federal
legislation was enacted which resulted in a reduction of the tax
basis of certain of the Company's assets, particularly property and
equipment, thereby substantially decreasing tax depreciation
deductions and increasing future federal income tax payments. Also,
net operating loss and investment tax credit carryforwards were
canceled. As a result of the sale-related transactions, a special
income tax obligation was recorded in 1987 based on an estimated
effective federal and state income tax rate of 37.0%.
As a result of a decrease in a state income tax rate enacted during
1995, income tax expense for that year was reduced by $21 million
representing the effects of adjusting deferred income taxes and the
special income tax obligation for the rate decrease as required by
SFAS 109, "Accounting for Income Taxes".
In November 1996, the Company reached a settlement with the Internal
Revenue Service related to the audit of the Company's consolidated
federal income tax returns for the fiscal years 1990 through 1992.
The Company made a payment of $39 million pending resolution of the
final interest determination related to the settlement. Federal and
state income tax payments were $145 million in 1996 (excluding tax
settlement), $109 million in 1995 and $80 million in 1994.
Reconciliations of the U.S. statutory tax rates with the effective
tax rates are as follows:
1996 1995 1994
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.4 3.5 3.9
Effect of state tax decrease
on deferred taxes (5.3)
Other (2.8) (.5) .2
---- ---- ----
Effective tax rate 35.6% 32.7% 39.1%
==== ==== ====
Significant components of the Company's special income tax obligation
and deferred income tax liabilities and (assets) are as follows:
December 31,
-----------------
1996 1995
------ ------
(In Millions)
Current assets (primarily accounts
receivable) $ (9) $ (27)
Current liabilities (primarily accrued
liabilities and casualty reserves) (245) (265)
Tax benefits related to disposition of
subsidiary (30) (30)
Net operating loss carryforwards (9) (11)
------ ------
Current deferred tax asset, net $ (293) $ (333)
====== ======
Noncurrent liabilities:
Property and equipment 1,939 1,936
Other long-term assets (primarily prepaid
pension asset) 92 67
Miscellaneous 98 66
------ ------
2,129 2,069
------ ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (174) (144)
Tax benefit transfer receivable (36) (33)
Alternative minimum tax credits (38)
Miscellaneous (95) (21)
------ ------
(305) (236)
------ ------
Special income tax obligation and
deferred income tax liabilities, net $1,824 $1,833
====== ======
8. Employee Benefits
-----------------
Pension Plans
-------------
The Company and certain subsidiaries maintain defined benefit pension
plans which are noncontributory for all non-union employees and
generally contributory for participating union employees. Benefits
are based primarily on credited years of service and the level of
compensation near retirement. Funding is based on the minimum amount
required by the Employee Retirement Income Security Act of 1974.
Pension credits include the following components:
1996 1995 1994
----- ---- ----
(In Millions)
Service cost - benefits earned during the period $ 9 $ 8 $ 8
Interest cost on projected benefit obligation 51 51 48
Return on plan assets - actual (138) (254) (10)
- deferred 47 167 (77)
Net amortization and deferral (15) (15) (15)
----- ---- ----
$ (46) $(43) $(46)
===== ==== ====
The funded status of the pension plans and the amounts reflected in the
balance sheets are as follows:
1996 1995
------ -----
(In Millions)
Accumulated benefit obligation ($655 million
and $603 million vested, respectively) $ 661 $ 609
===== =====
Market value of plan assets 1,187 1,168
Projected benefit obligation (734) (726)
------ -----
Plan assets in excess of projected
benefit obligation 453 442
Unrecognized prior service cost 36 50
Unrecognized transition net asset (90) (120)
Unrecognized net gain (231) (157)
------ -----
Net prepaid pension cost $ 168 $ 215
====== =====
The assumed weighted average discount rates used in 1996 and 1995 are
7.5% and 7.0%, respectively, and the rate of increase in future
compensation levels used in determining the actuarial present value
of the projected benefit obligation as of December 31, 1996 and 1995
is 6.0%. The expected long-term rate of return on plan assets
(primarily equity securities) in 1996 and 1995 is 9.0%.
Savings Plans
-------------
The Company and certain subsidiaries provide 401(k) savings plans for
union and non-union employees. Under the Non-union ESOP, 100% of
employee contributions are matched in the form of ESOP Stock for the
first 6% of a participating employee's base pay. There is no Company
match provision under the union employee plan. Savings plan expense
was $4 million in 1996 and 1995, and $5 million in 1994.
In connection with the Non-union ESOP, the Company issued 9,979,562
of the authorized 10 million shares of its ESOP Stock to the
Non-union ESOP in exchange for a 20 year promissory note with
interest at 9.55% from the Non-union ESOP in the principal amount of
$288 million. In addition, unearned ESOP compensation of $288 million
was recognized as a charge to stockholders' equity coincident with
the Non-union ESOP's issuance of its $288 million promissory note to
the Company. The debt of the Non-union ESOP was recorded by the
Company and offset against the promissory note from the Non-union
ESOP. Unearned ESOP compensation is charged to expense as shares of
ESOP Stock are allocated to participants. Approximately 2.7 million
ESOP shares have been cumulatively allocated to participants through
December 31, 1996, and a portion of these shares have been tendered
to CSX (Note 2). An amount equivalent to the preferred dividends
declared on the ESOP Stock partially offsets compensation and
interest expense related to the Non-union ESOP.
In 1994, the ESOP's promissory note to the Company was refinanced. As
part of the refinancing, the interest rate was decreased to 8.0%,
from the original 9.55%, and accrued interest of $21 million was
capitalized as part of the principal balance of the promissory note.
The Company is obligated to make dividend payments at a rate of 7.51%
on the ESOP Stock and additional contributions in an aggregate amount
sufficient to enable the Non-union ESOP to make the required interest
and principal payments on its note to the Company.
Interest expense incurred by the Non-union ESOP on its debt to the
Company was $24 million in 1996 and 1995, and $30 million in 1994.
Compensation expense related to the Non-union ESOP was $11 million in
1996, and $10 million in 1995 and 1994. Preferred dividends of $20
million were declared in 1996, and $21 million in 1995 and 1994.
Preferred dividend payments of $25 million, $21 million and $16
million were made in 1996, 1995 and 1994, respectively. The Company
received debt service payments from the Non-union ESOP of $40 million
in 1996, $31 million in 1995 and $21 million in 1994.
Post-retirement Benefits Other Than Pensions
--------------------------------------------
The Company provides health and life insurance benefits to certain
retired non-union employees. Certain non-union employees are eligible
for retiree medical benefits, while substantially all non-union
employees are eligible for retiree life insurance benefits.
Generally, company-provided health care benefits terminate when
individuals reach age 65.
Retiree life insurance plan assets consist of a retiree life
insurance reserve held in the Company's group life insurance policy.
There are no plan assets for the retiree health benefits plan.
The following sets forth the plans' funded status reconciled with
amounts reported in the Company's balance sheets:
1996 1995
----------------- -----------------
Life Life
Medical Insurance Medical Insurance
Plan Plan Plan Plan
(In Millions)
Accumulated post-retirement benefit obligation:
Retirees $44 $20 $38 $19
Fully eligible active plan
participants 1 5 1
Other active plan participants 3 5
--- --- --- ---
Accumulated benefit obligation 45 23 43 25
Market value of plan assets (10) (7)
--- --- --- ---
Accumulated benefit obligation
in excess of plan assets 45 13 43 18
Unrecognized gains and (losses) (1) 2 1 (1)
Accrued benefit cost recognized
in the Consolidated Balance --- --- --- ---
Sheet $44 $15 $44 $17
=== === === ===
Net periodic post-retirement
benefit cost, primarily
interest cost $ 3 $ 1 $ 4 $ 1
=== === === ===
An 8 percent rate of increase in per capita costs of covered health
care benefits was assumed for 1997, gradually decreasing to 6 percent
by the year 2007. Increasing the assumed health care cost trend rates
by one percentage point in each year would increase the accumulated
post-retirement benefit obligation as of December 31, 1996 by $2
million and would have an immaterial effect on the net periodic
post-retirement benefit cost for 1996. Discount rates of 7.5% and
7.0% were used to determine the accumulated post-retirement benefit
obligations for both the medical and life insurance plans in 1996 and
1995, respectively.
The assumed rate of compensation increase was 6.0% in 1996 and 5.0%
in 1995.
Retiree medical benefits are funded by a combination of Company and
retiree contributions. Retiree life insurance benefits are provided
by insurance companies whose premiums are based on claims paid during
the year.
9. Capital Stock
-------------
Preferred Stock
---------------
The Company is authorized to issue 25 million shares of preferred
stock with no par value. The Board of Directors has the authority to
divide the preferred stock into series and to determine the rights
and preferences of each.
The Company cannot pay dividends on its common stock unless full
cumulative dividends have been paid on its ESOP Stock, and no
distributions can be made to the holders of common stock upon
liquidation or dissolution of the Company unless the holders of the
ESOP Stock have received a cash liquidation payment of $28.84375 per
share, plus unpaid dividends up to the date of such payment. The ESOP
Stock is convertible into an equivalent number of shares of common
stock based on their respective market values at the date of
conversion. The ESOP Stock is entitled to one vote per share, voting
together as a single class with common stock on all matters.
As a result of the CSX tender offer related to the proposed merger
(Note 2), 2.2 million shares of ESOP Stock have been converted to
common shares as a result of being removed from the Non-union ESOP
401(k) savings plan.
Employee Benefits Trust
-----------------------
In 1995, the Company issued approximately 4.7 million shares of its
common stock to the Conrail Employee Benefits Trust (the "Trust") in
exchange for a promissory note of $250 million at an interest rate of
6.9%. The Trust is being used to fund certain employee benefits and
other forms of compensation over its fifteen-year term. The amount
representing unearned employee benefits is recorded as a deduction
from stockholders' equity and is reduced as benefits and compensation
are paid through the release of shares from the Trust. The shares
owned by the Trust are valued at the closing market price as of the
end of each reporting period, with corresponding changes in the
balance of the Trust reflected in additional paid-in capital. The
Trust has sold shares of Conrail common stock in connection with the
CSX and Norfolk tender offers (Note 2) and has used the proceeds to
repurchase shares of Conrail common stock in the open market. Shares
held by the Trust are not considered outstanding for earnings per
share computations until released by the Trust, but do have voting
and dividend rights.
Common Stock Repurchase Program
-------------------------------
In April 1995, the Board of Directors approved a $250 million
multi-year stock repurchase program. During 1996, the Company
acquired 2,225,738 shares for approximately $156 million under this
program.
At December 31, 1996, approximately $93 million remained available
from this authorization; however, as a result of the proposed merger
with CSX Corporation (Note 2), the Company will not make any
additional stock repurchases under this program.
The activity and status of treasury stock follow:
1996 1995 1994
---------- --------- ---------
Shares, beginning of year 3,297,717 1,789,164 83,745
Acquired 2,225,738 1,508,553 1,705,419
---------- --------- ----------
Shares, end of year 5,523,455 3,297,717 1,789,164
========== ========= ==========
Stock Plans
-----------
The Company's stock-based compensation plans as of December 31, 1996
are described below. The Company applies APB 25 and related
interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option
plans. SFAS 123 was issued in 1995 and, if fully adopted, would
change the method of recognition of costs on plans similar to those
of the Company. Adoption of SFAS 123 is optional; however, the
required pro forma disclosures as if the Company had adopted the cost
recognition requirements under SFAS 123 in 1996 and 1995 are
presented below.
The Company's 1987 and 1991 Long-Term Incentive Plans authorize the
granting to officers and key employees of up to 4 million and 6.6
million shares of common stock, respectively, through stock options,
stock appreciation rights, phantom stock and awards of restricted or
performance shares. A stock option is exercisable for a specified
term commencing after grant at a price not less than the fair market
value of the stock on the date of grant. The vesting of awards made
pursuant to these plans is contingent upon one or more of the
following: continued employment, passage of time or financial and
other performance goals.
Effective November 1996, the Company's Board of Directors authorized
the automatic vesting of all unvested stock options outstanding in
connection with the Merger Agreement between CSX and the Company
(Note 2).
The activity and status of stock options under the incentive plans
follow:
Non-qualified Stock Options
-----------------------------------
Option Price Shares
Per Share Under Option
----------------- ------------
Balance, January 1, 1994 $14.000 - $60.500 1,966,321
Granted $52.188 - $66.938 23,988
Exercised $14.000 - $51.375 (507,450)
Canceled $42.625 - $60.500 (118,904)
------------
Balance, December 31, 1994 $14.000 - $66.938 1,363,955
Granted $50.688 - $68.563 516,757
Exercised $14.000 - $53.875 (200,940)
Canceled $42.625 - $53.875 (123,560)
------------
Balance, December 31, 1995 $14.000 - $68.563 1,556,212
Granted $68.563 - $96.063 551,038
Exercised $14.000 - $73.250 (1,268,085)
Canceled $42.625 - $70.031 (3,984)
------------
Balance, December 31, 1996 $14.000 - $96.063 835,181
============
Exercisable,
December 31, 1996 $14.000 - $74.188 831,481
============
Available for future grants
December 31, 1995 1,188,193
============
December 31, 1996 3,969,317
============
The weighted average exercise prices of options granted during 1996
and 1995 are $70.130 per share and $51.204 per share, respectively.
The weighted average exercise prices of options exercised during 1996
and 1995 are $48.32 per share and $31.16 per share, respectively. The
average remaining maximum terms of options is not considered
meaningful given the events that have occurred as a result of the
proposed merger with CSX (Note 2).
The fair value of each option granted during 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) dividend yield of 2.43%,
(2) expected volatility of 25.25%, (3) risk-free interest rate of
5.51%, and (4) expected life of 4 years. The weighted average fair
value of options granted during 1996 and 1995 is $16.00 per share and
$13.12 per share, respectively.
Had the compensation cost for the Company's 1996 and 1995 grants for
stock-based compensation plans been determined consistent with SFAS
123, the Company's net income, primary earnings per share and fully
diluted earnings per share for 1996 and 1995 would approximate the
pro forma amounts below ($ in millions except per share data):
1996 1995
----- -----
Net income as reported $ 342 $ 264
Net income pro forma 335 262
Primary earnings per share $4.25 $3.19
Primary earnings per share pro forma 4.16 3.16
Fully diluted earnings per share $3.89 $2.94
Fully diluted earnings per share pro forma 3.81 2.92
The Company has granted phantom shares and restricted stock under its
non-union employee bonus plans to eligible employees who elect to
defer all or a portion of their annual bonus in a given year. The
number of shares granted depends on the length of the deferral
period. Grants are made at the market price of the Company's common
stock at the date of grant. The Company has granted 148,749 shares
and 337,329 shares of phantom and restricted stock, respectively,
under its non-union employee bonus plans through December 31, 1996.
The Company has also granted 73,344 performance shares under its 1991
Long-Term Incentive Plan through December 31, 1996. Compensation
expense related to these plans was $2 million in 1996 and $3 million
in 1995. The weighted-average fair value for the phantom shares and
restricted stock granted during 1996 and 1995 was $68.02 per share
and $52.88 per share, respectively.
Stock Rights
------------
In 1989, the Company declared a dividend of one common share purchase
right (the "Right") on each outstanding share of common stock. The
Rights are not exercisable or transferable apart from the common
stock until the occurrence of certain events arising out of an actual
or potential acquisition of 10% or more of the Company's common
stock, and would at such time provide the holder with certain
additional entitlements. However, under the terms of the Merger
Agreement (Note 2) the CSX tender offer does not constitute an event
that would result in the Rights becoming exercisable. In 1995, a
dividend of one Right for each share of ESOP Stock was declared and
paid. The exercise price of the Rights is $205. The Rights may be
redeemed by the Company prior to becoming exercisable at one-half
cent ($.005) per Right and have no voting or dividend rights.
10. Asset Disposition Charge
------------------------
Included in 1995 operating expenses is an asset disposition charge of
$285 million, which reduced net income by $176 million. The asset
disposition charge resulted from a review of the Company's route
system and other operating assets to determine those that no longer
effectively and economically supported current and expected
operations. The Company identified and has committed to sell 1,800
miles of rail lines that are expected to provide proceeds
substantially less than net book value. In addition, other assets,
principally yards and side tracks, identified for disposition were
written down to estimated net realizable value (See Note 1 "Asset
Impairment").
11. 1994 Early Retirement Program
-----------------------------
During 1994, the Company recorded a charge of $84 million, which
reduced net income by $51 million, for a non-union employee voluntary
early retirement program and related costs. The majority of the cost
of the early retirement program is being paid from the Company's
overfunded pension plan.
12. Other Income, Net
-----------------
1996 1995 1994
---- ---- ----
(In Millions)
Interest income $ 29 $ 33 $ 34
Rental income 50 57 53
Property sales 23 27 18
Other, net 10 13 13
---- ---- ----
$112 $130 $118
==== ==== ====
13. Commitments and Contingencies
-----------------------------
Environmental
-------------
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. CRC is a party to
various proceedings brought by both regulatory agencies and private
parties under federal, state and local laws, including Superfund
laws, and has also received inquiries from governmental agencies with
respect to other potential environmental issues. At December 31,
1996, CRC has received, together with other companies, notices of its
involvement as a potentially responsible party or requests for
information under the Superfund laws with respect to cleanup and/or
removal costs due to its status as an alleged transporter, generator
or property owner at 135 locations. However, based on currently
available information, the Company believes CRC may have some
potential responsibility at only 61 of these sites. Due to the number
of parties involved at many of these sites, the wide range of costs
of possible remediation alternatives, the changing technology and the
length of time over which these matters develop, it is often not
possible to estimate CRC's liability for the costs associated with
the assessment and remediation of contaminated sites.
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting period if
CRC were held principally liable in certain of these actions, at
December 31, 1996, the Company had accrued $55 million, an amount it
believes is sufficient to cover the probable liability and
remediation costs that will be incurred at Superfund sites and other
sites based on known information and using various estimating
techniques. The Company believes the ultimate liability for these
matters will not materially affect its consolidated financial
condition.
The Company spent $11 million in 1996, $14 million in 1995 and $8
million in 1994 for environmental remediation and related costs and
anticipates spending an amount comparable to that spent in 1996
during 1997. In addition, the Company's capital expenditures for
environmental control and abatement projects were approximately $6
million in 1996 and 1995, and $5 million in 1994, and are anticipated
to be approximately $10 million in 1997.
The Environmental Quality Department is charged with promoting the
Company's compliance with laws and regulations affecting the
environment and instituting environmentally sound operating
practices. The department monitors the status of the sites where the
Company is alleged to have liability and continually reviews the
information available and assesses the adequacy of the recorded
liability.
Other
-----
The Company is involved in various legal actions, principally
relating to occupational health claims, personal injuries,
casualties, property damage and damage to lading. The Company has
recorded liabilities on its balance sheet for amounts sufficient to
cover the expected payments for such actions.
The Company may be contingently liable for approximately $63 million
at December 31, 1996 under indemnification provisions related to
sales of tax benefits.
CRC had an average of 20,761 employees in 1996, approximately 87% of
whom are represented by 14 different labor organizations and are
covered by 22 separate collective bargaining agreements. The Company
was engaged in collective bargaining at December 31, 1996 with labor
organizations representing approximately 22% of its labor force.
In 1994, Locomotive Management Services, a general partnership of
which CRC holds a fifty percent interest, issued $96 million of
Equipment Trust Certificates to fund the purchase price of 60 new
locomotives. While principal and interest payments on certificates
will be fully guaranteed by CRC, through a sharing agreement with its
partner, CRC's portion of the guarantee is reduced to approximately
$48 million, effective January 1, 1997, with the Company's purchase
of twenty of the locomotives.
CRC has received three adverse jury verdicts related to railroad
crossing accidents in Ohio that include significant punitive damage
awards that collectively approximate $30 million. CRC believes the
punitive damage awards in those cases are improper and that it has
meritorious defenses, which it plans to pursue on appeal. The Company
is not presently able to reasonably estimate the ultimate outcome of
these cases, and accordingly, no expense for such awards has been
recorded as of December 31, 1996.
As part of the Merger Agreement (Note 2), the Company may be a party
to certain stock purchase options or, under certain circumstances, be
required to pay substantial termination fees.
14. Condensed Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
------------- ------------- ------------- --------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
($ In Millions Except Per Share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $889 $889 $949 $923 $933 $923 $943 $951
Income (loss) from
operations 69 114 54 180 235 208 243 (46)
Net income (loss) 31 55 26 123 138 116 147 (30)
Net income (loss) per
common share:
Primary .36 .66 .30 1.52 1.74 1.44 1.86 (.43)
Fully diluted .35 .61 .29 1.37 1.58 1.31 1.70 (.43)
Ratio of earnings to
fixed charges 1.75x 2.39x 1.57x 3.42x 4.77x 4.02x 4.91x --
Dividends per
common share .425 .375 .425 .375 .475 .425 .475 .425
Market prices per
common share
(New York Stock Exchange)
High 77 1/4 57 5/8 73 1/4 56 1/4 74 5/8 70 1/4 100 7/8 74 3/8
Low 67 5/8 50 1/2 66 1/4 51 1/8 63 3/4 55 1/8 68 1/2 65 1/2
</TABLE>
During the second quarter of 1996, the Company recorded a one-time charge
of $135 million for the non-union employee voluntary early retirement and
separation programs and related costs, which reduced net income by $83
million (Note 3). Without this charge, net income would have been $109
million for the quarter ($1.37 and $1.25 per share, primary and fully
diluted, respectively).
As a result of a decrease in a state income tax rate enacted during the
second quarter of 1995, income tax expense was reduced by $21 million
representing the effects of adjusting deferred income taxes and the
special income tax obligation for the rate decrease as required under
SFAS 109 (Note 7). Without this one-time tax benefit, the Company's net
income for the quarter would have been $102 million ($1.25 and $1.14 per
share, primary and fully diluted, respectively). During the fourth
quarter of 1995, an asset disposition charge reduced income from
operations by $285 million and adversely affected the quarter's net
income by $176 million (Note 10). Without the asset disposition charge,
net income would have been $146 million ($1.82 and $1.65 per share,
primary and fully diluted, respectively) for the fourth quarter of 1995.
After the asset disposition charge, earnings were insufficient by $58
million to cover fixed charges for the quarter.
EXHIBIT 99.4
SELECTED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma financial statements included herein
present the Corporation's historical balance sheet and income statement
for 1996 adjusted to reflect its acquisition of an interest in Conrail
accounted for under the equity method. See Item 5 of the Corporation's
Current Report on Form 8-K dated April 8, 1997 and filed on April 10,
1997, which is amended hereby. Capitalized terms used herein but not
otherwise defined shall have the meanings assigned thereto in the
Form 8-K.
The equity method of accounting will be used during the period
the Conrail shares are held in a voting trust. The accounting treatment
for the Corporation's investment in Conrail after STB approval is
received will be determined based upon the extent of control that the
Corporation and CSX will individually have over specific Conrail assets
and is expected to be resolved after completion of the more-detailed
definitive documentation to be negotiated between the Corporation and CSX.
The unaudited pro forma financial statements do not reflect
synergies, and accordingly, do not account for any potential increases in
operating income, any estimated cost savings, any adjustments to conform
accounting practices or any one-time costs incurred by either the
Corporation or Conrail to achieve such improvements. The unaudited pro
forma financial statements are prepared for illustrative purposes only
and are not necessarily indicative of the financial position or results
of operations that might have occurred had the applicable transactions
actually taken place on the date indicated, or of future results of
operations or financial position of the stand-alone or combined entities.
Consummation of the Joint Offer by the Corporation and CSX is conditioned
upon, among other things, that prior to the expiration of the Joint
Offer, there shall have been validly tendered and not withdrawn such
number of shares which, together with the shares already beneficially
owned by the Corporation and CSX, constitutes at least a majority of
outstanding shares on a fully diluted basis. Consummation of the
transactions contemplated under the Agreement is conditioned upon, among
other things, approval of the STB.
The Acquisition is reflected in the pro forma balance sheet as if
it had occurred on December 31, 1996, and in the statement of income as if
it had occurred on January 1, 1996. The financial information for Conrail
is for 1996 and was excerpted from the consolidated financial statements of
Conrail included elsewhere herein. Conrail's 1996 results include a special
charge of $135 million (pre-tax) for voluntary separation programs.
The unaudited pro forma financial statements are based on the
historical consolidated financial statements of the Corporation and
Conrail and should be read in conjunction with such historical financial
statements and the notes thereto.
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated Balance Sheet of the Corporation
As of December 31, 1996
Unaudited
($ in millions)
Pro Forma
Pro Forma with Conrail
Historical Adjustments Investment
---------- ----------- -------------
ASSETS
<S> <C> <C> <C>
Current assets........................ $ 1,457 $ $ 1,457
Investments........................... 274 6,011 (1) 6,285
Property and equipment, net........... 9,529 9,529
Other assets.......................... 156 156
--------- ----------- ---------
Total assets....................... $ 11,416 $ 6,011 $ 17,427
========= ========== ===========
LIABILITIES AND EQUITY
Current liabilities................... $ 1,190 1,190
Long-term debt........................ 1,800 6,011 (2) 7,811
Other liabilities .................... 1,037 1,037
Deferred income taxes................. 2,412 2,412
--------- --------- ------------
Total liabilities.................. $ 6,439 $ 6,011 $ 12,450
Stockholders' equity
Common stock.......................... 132 132
Additional paid in capital............ 462 462
Retained earnings..................... 4,404 4,404
Treasury stock........................ (21) (21)
-------- -------------- -----------
Total stockholders' equity......... 4,977 4,977
-------- -------------- -----------
$ 11,416 $ 6,011 $ 17,427
======== ============== ===========
</TABLE>
See accompanying Notes to Pro Forma Financial Statements.
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated Statement of Income of the Corporation
Year ended December 31, 1996
Unaudited
($ in millions, except per share data)
Pro Forma
Pro Forma with Conrail
Historical Adjustments Investment(3)
---------- ----------- -------------
<S> <C> <C> <C>
Transportation operating revenues........... $ 5,031 $ $ 5,031
Transportation operating expenses........... 3,834 3,834
----- -----
Income from operations................... 1,197 1,197
Other income - net.......................... 116 122 (4) 238
Interest expense on debt.................... (116) (415)(2) (531)
------- ----- -----
Income before income taxes............... 1,197 (293)(x) 904
Provision for income taxes.................. 427 (154)(5) 273
------ ----- ------
Net income............................... $ 770 $ (139) $ 631
====== ======== ========
Earnings per share.......................... $6.09 $ 4.99
Average number of shares (in thou-
sands)...................................... 126,457 126,457
See accompanying Notes to Pro Forma Financial Statements.
</TABLE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(1) Pursuant to the Agreement, the Corporation will invest approximately
$5.9 billion (including $943 million already expended) to acquire
various Conrail routes and assets or rights thereto. The acquisition
is expected to be financed with a combination of notes and commercial
paper debt. The purchase price has been preliminarily calculated as
follows:
<TABLE>
<CAPTION>
(in millions,
except per
Preliminary Calculation of Purchase Price share data)
<S> <C>
Conrail shares outstanding December 31, 1996 89,549
Less: Shares acquired pursuant to CSX's first tender offer (17,775)
Shares acquired pursuant to the Corporation's first
tender offer (8,200)
--------
63,574
Joint tender offer price per share $ 115
--------
Cost of Shares to be acquired pursuant to the
Joint Offer 7,311
Plus: Cost of Shares acquired pursuant to CSX's first
tender offer 1,955
Cost of Shares acquired pursuant to the Corporation's
first tender offer 943
---------
10,209
The Corporation's allocation 58%
---------
5,921
Estimated transaction fees payable by the Corporation 90
---------
Purchase price payable by the Corporation
$ 6,011
</TABLE>
(2) Long-term debt has been increased by $6.0 billion to reflect the
financing of the acquisition and related transcation costs. The Pro
Forma Statement of Income reflects the estimated increase in interest
expense, at an estimated 6.9% on that debt. If interest rates vary
by one-eighth of one percent from that assumed, interest expense
would change by $8 million annually.
(3) As described in note 4 below, pro forma amounts reflected in the Pro
Forma Condensed Consolidated Statement of Income were calculated and
presented in accordance with the equity method of accounting.
Excluding the effects of Conrail's one-time after-tax charge of $83
million related to voluntary separation programs and after-tax
merger-related costs of $10 million, pro forma net income and pro
forma earnings per share for 1996 would have been $681 million and
$5.39, respectively.
(4) The equity method of accounting will be applied to the Corporation's
investment in Conrail during the pendency of the voting trust in
accordance with Accounting Principles Board Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock."
Accordingly, the Pro Forma Statement of Income includes 58% of
Conrail's 1996 historical net income, adjusted for amortization, net
of tax, of the difference between the Corporation's investment in
Conrail and Conrail's underlying equity in net assets. The
difference is primarily attributable to the estimated fair value of
property and equipment, net of the related deferred taxes and
includes approximately $200 million in goodwill. This adjustment is
based on preliminary estimates of fair values and is likely to
change as additional information in the form of appraisals,
actuarial reports and other valuations are made.
(5) The pro forma income statement includes the tax effect of the
additional interest expense (see Note 2 above) and the tax effect of
the equity income (see note 4 above).
