Exhibit 99.5
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On May 23, 1997, the Joint Tender Offer for the Conrail shares expired. As
a result of the contribution by the Company and NSC of Conrail shares owned by
them before the Joint Tender Offer as well as the contribution of funds to
complete the Joint Tender Offer and the merger, they have, respectively, a 42
percent and a 58 percent economic interest in a jointly owned acquisition entity
(the "Acquisition Entity") which now owns the Conrail shares held in a voting
trust pending Surface Transportation Board ("STB") approval. The Company and NSC
also each may exercise a 50 percent voting interest in the Acquisition Entity
and each has the right to appoint 50 percent of that entity's directors and a
full-time Co-Chief Executive Officer. Under the CSX/NSC Agreement, subject to
STB approval, the Company will operate routes and assets (or rights thereto)
that generated approximately 42 percent of Conrail's 1995 revenues.
The exercise of control over Conrail by the Company and NSC remains subject
to a number of conditions and approvals, including approval by the STB, which
has the authority to modify contract terms and impose additional conditions,
including with respect to divestitures, grants of trackage rights and other
terms of continuing operations. The Company and NSC intend to file a joint
application with the STB in June 1997 for control and division of Conrail and
for such other matters as may be required to be approved by the STB. The joint
STB application will address traffic flows, operations and related matters; will
outline the capital investments each company plans to make in new connections
and facilities and to increase capacity on critical routes; and will detail
operating savings and other public benefits resulting from the transaction. The
application also will contain certain historical and pro forma financial
information required by the STB. The STB has issued a scheduling order that
provides for issuance of a final STB decision no later than 350 days after the
Company and NSC file their joint application. No assurance can be given with
respect to the receipt of STB approval or the modifications or conditions that
may be imposed in connection therewith.
The Unaudited Pro Forma Financial Statements included herein present a
Condensed Consolidated Statement of Financial Position for the Company as of
March 28, 1997, and Condensed Consolidated Statements of Earnings for the fiscal
quarter ended March 28, 1997, and the fiscal year ended December 27, 1996. The
pro forma financial statements reflect (i) the completion by the Company and NSC
of their Joint Tender Offer for the Conrail Shares and the merger at $115 per
share through the Acquisition Entity; and (ii) the related borrowings by the
Company.
These events are reflected in the Pro Forma Condensed Consolidated
Statement of Financial Position as if they had occurred on March 28, 1997, and
in the Pro Forma Condensed Consolidated Statements of Earnings as if they had
occurred at the beginning of the period presented. The financial information for
Conrail was based upon its historical financial statements for the quarter ended
March 31, 1997, and for the year ended December 31, 1996, as reported in its
Form 10-Q and Form 10-K, respectively. Conrail's 1996 results included a special
charge of $135 million (pre-tax) for voluntary separation programs.
The Company is using the equity method of accounting for its interest in
Conrail following consummation of the Joint Tender Offer and continuing through
the date Conrail shares are held in the voting trust - a period that will extend
at least until the effective date of the STB's decision approving the
transactions contemplated by the CSX/NSC Agreement (if such approval is
obtained). In accordance with Accounting Principles Board ("APB") Opinion No.
18, "The Equity Method of Accounting for Investments in Common Stock," the
excess of the Company's purchase price over the underlying net assets acquired
("Excess") is being amortized. Based on a preliminary analysis of the fair value
of the underlying net assets of Conrail, the Company believes a significant
portion of the Excess will be allocated to long-lived assets other than
goodwill. Further information as to the values of assets and liabilities, as
well as specific allocations to the Company or NSC, may affect these preliminary
estimates.
The method of accounting for the investment in Conrail subsequent to
dissolution of the voting trust will depend on the final terms of the ownership
arrangement between the Company and NSC approved by the STB. Additionally, the
ultimate terms of leases, operating partnerships and other arrangements will
affect the accounting. It is also expected that some of the assets and
operations of Conrail will remain subject to joint control by the Company and
NSC and, thus, will continue to be accounted for using the equity method of
accounting even after STB approval.
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
capital expenditures to be realized or made by either the Company 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 standalone or combined
entities.
The unaudited pro forma financial statements are based on the historical
consolidated financial statements of the Company and Conrail and should be read
in conjunction with such historical financial statements and the notes thereto.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As of March 28, 1997
Unaudited
(Dollars in Millions)
Pro Forma
CSX with
CSX Pro Forma Conrail
Historical Adjustments Investment
Assets
Current assets $ 1,941 $ 1,941
Properties - net 11,924 11,924
Investment in Conrail 1,955 $ 2,251(1) 4,206
Other long-term assets 1,068 50(1) 1,118
-------- -------- --------
Total assets $ 16,888 $ 2,301 $ 19,189
======== ======== ========
Liabilities
Current liabilities $ 2,571 $ 101(1) $ 2,672
Long-term debt 4,243 2,200(1) 6,443
Deferred income taxes 2,743 2,743
Other long-term liabilities 2,204 2,204
-------- -------- --------
Total liabilities 11,761 2,301 14,062
-------- -------- --------
Shareholders' Equity
Common stock 218 218
Other capital 1,470 1,470
Retained earnings 3,546 3,546
Minimum pension liability (107) (107)
-------- -------- --------
Total shareholders' equity 5,127 -- 5,127
-------- -------- --------
Total liabilities and shareholders'
equity $ 16,888 $ 2,301 $ 19,189
======== ======== ========
See accompanying Notes to Unaudited Pro Forma Financial Statements.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Fiscal Quarter Ended March 28, 1997
Unaudited
(Dollars in Millions, Except Per Share Data)
Pro Forma CSX
CSX Pro Forma with Conrail
Historical Adjustments Investment (5)
---------- ----------- --------------
Operating revenue $2,567 $ 2,567
Operating expense 2,243 2,243
------ --------
Operating income 324 324
Other income (expense) (7) $ 1 (3) (6)
Interest expense 84 46 (2) 130
------ ------ --------
Earnings before income taxes 233 (45) 188
Income tax expense 82 (16)(4) 66
------ ------ --------
Net earnings $ 151 $ (29) $ 122
====== ====== ========
Earnings per share $ 0.70 $(0.14) $ 0.56
Average common shares outstanding
(thousands) 217,227 217,227
See accompanying Notes to Unaudited Pro Forma Financial Statements.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Fiscal Year Ended December 27, 1996
Unaudited
(Dollars in Millions, Except Per Share Data)
Pro Forma CSX
CSX Pro Forma with Conrail
Historical Adjustments Investment (5)
---------- ----------- --------------
Operating revenue $ 10,536 $ 10,536
Operating expense 9,014 9,014
--------- ---------
Operating income 1,522 1,522
Other income 43 $ 70 (3) 113
Interest expense 249 285 (2) 534
--------- --------- ---------
Earnings before income taxes 1,316 (215) 1,101
Income tax expense 461 (96)(4) 365
--------- --------- ---------
Net earnings $ 855 $ (119) $ 736
========= ========= =========
Earnings per share $ 4.00 $ (0.55) $ 3.45
Average common shares outstanding
(thousands) 213,633 213,633
See accompanying Notes to Unaudited Pro Forma Financial Statements.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (Dollars in
Millions, Except Per Share Data)
Note 1. Preliminary Calculation of Purchase Price
Pursuant to the CSX/NSC Agreement, CSX has invested approximately $4.156
billion (including the $1.955 billion expended in November 1996, and excluding
transaction costs) to acquire, through its ownership interest in Conrail,
various Conrail routes and assets or rights thereto. The acquisition was
financed with a combination of debentures and commercial paper. The purchase
price has been preliminarily calculated as follows:
Estimated Conrail shares outstanding at May 23, 1997 (000's) 86,475
Less: Shares acquired pursuant to CSX's first tender offer (a) (17,775)
Shares acquired pursuant to NSC's first tender offer (8,200)
--------
Shares acquired pursuant to Joint Tender Offer and merger 60,500
Joint Tender Offer and merger price per share $ 115
--------
Cost of shares acquired pursuant to Joint Tender Offer and merger $ 6,958
Plus: Cost of shares acquired pursuant to CSX's first tender offer (a) 1,955
Cost of shares acquired pursuant to NSC's first tender offer 943
Unexercised Conrail stock options 39
--------
Joint purchase price 9,895
CSX's allocation 42%
--------
Joint purchase price payable by CSX 4,156
Estimated transaction fees payable by CSX 50
--
Purchase price payable by CSX, including transaction fees 4,206
Less: Cost of shares held at March 28, 1997 (1,955)
--------
Pro forma adjustment to Conrail investment 2,251
Pro forma adjustment for debt issuance costs 50
--------
Pro forma adjustment to debt 2,301
Less: Current portion of commercial paper (101)
--------
Pro forma adjustment to long-term debt $ 2,200
========
(a) Exclusive of 85,000 shares previously sold by CSX at an average price of
$98.983 per share.
Note 2. Debt
Long-term debt has been increased by $2.2 billion and short-term debt has
been increased by $0.1 billion to reflect the net additional borrowing
subsequent to March 28, 1997 to finance the Company's purchase price (including
transaction fees and debt issuance costs) in excess of the $1.955 billion
previously paid. This net additional borrowing is inclusive of the proceeds of
$2.5 billion of debentures, reduced by net repayments of commercial paper
previously outstanding. As a consequence of the Company's first tender offer and
its share of the subsequent Joint Tender Offer and merger, short-term and
long-term debt of $4.256 billion is outstanding, as follows:
Weighted-Average
Principal Interest Rate for
Amount Pro Forma Adjustment
------ --------------------
Debentures $2,500 7.55% (fixed)
Commercial paper 1,756 5.70% (variable)
Total debt incurred by CSX $4,256 6.79%
Pro forma interest expense has been increased as a result of the additional debt
incurred, as noted below. Debt placement fees, debt discount and related costs
are being amortized on the interest method and, together with annual commitment
fees, approximate $7 million in the first year after consummation of the Joint
Tender Offer. Inclusive of these costs, the effective interest rate is
approximately 6.95%. If interest rates assumed were to change by one-eighth of
one percent, the pro forma interest expense on variable rate debt associated
with the transaction would vary by $2 million annually.
Fiscal Quarter Ended Fiscal Year Ended
Mar. 28, 1997 Dec. 27, 1996
------------- -------------
Effective interest on $4.256
billion of debt $74 $296
Less: interest already recognized
in historical financial statements* (28) (11)
--- ---
Pro forma adjustment $46 $285
=== ====
*Resulting from long-term debt incurred to finance the first tender offer.
Note 3. Other Income
The equity method of accounting will be applied to the Company's investment
in Conrail throughout the period the investment is held in the voting trust. In
accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," other income includes 42% of Conrail's historical
net income, adjusted for amortization, net of tax, of the difference between the
Company's investment in Conrail and 42% of 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 $757 million in goodwill. This allocation is based on preliminary
estimates of fair values of all Conrail assets and liabilities and is likely to
change after the Definitive Documentation is finalized and regulatory approvals
are obtained. To the extent that specific assets and liabilities are allocated
to Conrail entities over which the Company will have a controlling financial
interest, the allocation will be redesignated to follow the method in which the
investment is accounted for subsequent to the approval by the STB. The
preliminary estimates are also likely to change as additional information
concerning fair values and remaining useful lives becomes available. An
appraisal of the assets is currently underway. The Company intends to amortize
any goodwill resulting from the purchase over a period of 40 years. Adjustments
to property and equipment are depreciated over their estimated remaining useful
lives, which range from 2 to 102 years.
Preliminary Allocation of Purchase Price
----------------------------------------
Net assets of Conrail at March 31, 1997 $3,152
CSX's economic interest x 42%
-----
CSX share of Conrail net assets 1,324
Estimated fair value adjustments, principally
property and equipment 3,480
Deferred taxes on estimated fair value adjustments
and transaction fees (1,305)
Estimated goodwill 757
------
Purchase price payable by CSX (including
transaction costs) $4,256
======
Detail of Pro Forma Adjustment
------------------------------
Fiscal Quarter Fiscal Year
Ended Ended
Mar. 28, 1997 Dec. 27, 1996
------------- -------------
Conrail net income $ 61 $ 342
CSX's economic interest x42% x 42%
---- -----
Equity earnings from investment in Conrail 26 144
Depreciation (19) (77)
Amortization of goodwill (40-year life) (5) (19)
Tax benefit on depreciation 7 30
---- -----
Net impact on other income 9 78
Less: dividend amounts previously recognized
(cost method) (8) (8)
---- -----
Pro Forma adjustment to Other Income (Expense) $ 1 $ 70
==== =====
Note 4. Income Tax Expense
Income tax expense includes the tax benefit on the additional interest
expense (see Note 2) as well as the tax effect on equity income:
Fiscal Quarter Fiscal Year
Ended Ended
Mar. 28, 1997 Dec. 27, 1996
------------- -------------
Tax benefit on acquisition debt interest expense $ (26) $(104)
Tax expense on dividends received 1 5
----- -----
Net tax benefit (25) (99)
Less tax benefit previously recognized (9) (3)
----- -----
Pro forma adjustment to income tax expense $ (16) $ (96)
===== =====
Note 5. Unusual Events
As described in Note 3, pro forma amounts reflected in the Pro Forma
Condensed Consolidated Statements of Earnings were calculated and presented in
accordance with the equity method of accounting. If the effects of 42% of
Conrail's after-tax merger-related costs of $14 million had been excluded for
the fiscal quarter ended March 28, 1997, pro forma net earnings and pro forma
earnings per share would have been $128 million and 59 cents, respectively. If
the effects of 42% 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 had been excluded for the fiscal year ended December 27, 1996, pro forma
net earnings and pro forma earnings per share would have been $775 million and
$3.63, respectively.
Note 6. Summarized Consolidated Conrail Financial Data
Because of the numerous agreements that must be negotiated and completed,
and because STB approval must be obtained, it is not possible to present some or
most of the Company's investment in Conrail based on separate assets,
liabilities and operations. However, the Company has a 42% economic interest in
the entity formed to acquire Conrail Shares. It is expected that in some form,
yet to be finally determined, the Company will have a primary operating interest
in certain routes and facilities of Conrail. The following historical Conrail
financial data, as of and for the quarter ended March 31, 1997 and the year
ended December 31, 1996, respectively, is presented to facilitate an
understanding of the Company's ultimate economic interest in Conrail:
Conrail Inc.
Summarized Consolidated Statement of Income
(Dollars in millions)
Quarter Ended Year Ended
March 31, 1997 December 31, 1996
-------------- -----------------
Revenues $ 906 $ 3,714
Operating expenses 790 3,113*
----- -------
Income from operations 116 601
Interest expense (45) (182)
Other income - net 27 112
----- -------
Income before income taxes 98 531
Income taxes 37 189
----- -------
Net income $ 61 $ 342
===== =======
*Operating expenses include a $135 million charge for voluntary separation
programs, $83 million after tax.
Conrail Inc.
Summarized Consolidated Balance Sheet
(Dollars in millions)
As of As of
Mar. 31, 1997 Dec. 31, 1996
------------- -------------
Assets
Current assets $1,162 $1,117
Property and equipment 6,599 6,590
Other assets 709 695
------ ------
Total assets $8,470 $8,402
====== ======
Liabilities and Stockholders' Equity
Current liabilities $1,078 $1,092
Long-term debt 1,889 1,876
Other long-term liabilities 2,351 2,327
------ ------
Total liabilities 5,318 5,295
Stockholders' equity 3,152 3,107
------ ------
Total liabilities and stockholders'
equity $8,470 $8,402
====== ======