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, as previously amended by the Corporation's Current
Report on Form 8-K/A dated and filed May 1, 1997. Capitalized terms
used herein but not otherwise defined shall have the meanings assigned
thereto in the Form 8-K.
The Corporation intends to use the equity method of
accounting for its interest in Conrail following consummation of the
Joint Offer and during the period Conrail shares are held in a voting
trust--a period that will extend at least until the effective date of
the STB's decision approving the transactions contemplated by the
Agreement (if such approval is obtained). The Corporation and CSX
have requested a 255-day review period. However, other interested
parties have requested either a 365-day review period or the maximum
period permitted under the statute--16 months. The Corporation and
CSX intend to file a joint application with the STB in June;
therefore, even under the accelerated schedule requested by the
Corporation and CSX, an STB decision is not likely prior to March 1,
1998, and could be delayed until as late as October 1998 if the
maximum statutory period is used.
The Corporation and CSX will have, respectively, a 58
percent and a 42 percent economic interest in--and each will exercise
a 50 percent voting interest in--the entity formed to acquire Conrail
shares. Under the Agreement subject to STB approval, the Corporation
will operate routes and assets (or rights therein or thereto) that
generated approximately 58 percent of Conrail's 1995 revenues,
pursuant to leasing, operating, partnership or other arrangements to
be negotiated and implemented between the Corporation and CSX. Each
of the Corporation and CSX will have the right to appoint 50 percent
of that entity's directors and will be entitled to appoint full-time
Co-Chief Executive Officers.
The equity method will be used for the investment in Conrail
until the transaction has been approved by the STB and the voting
trust is dissolved. The method of accounting for the investment in
Conrail subsequent to the voting trust being dissolved will depend on
the ownership arrangement that is ultimately negotiated between the
Corporation and CSX, and approved by the STB, and the determination of
whether and how controlling financial interests will be established
for selected assets, liabilities and operations of Conrail.
Additionally, the terms of leases, operating, partnership and other
arrangements, yet to be negotiated, will impact the accounting. It is
also expected that some of the assets and operations of Conrail will
remain subject to joint control by the Corporation and CSX and thus
will continue to be accounted for using the equity method of
accounting post STB approval.
The Joint Offer for Conrail shares expires on May 23, 1997,
unless extended, and the tendered shares will be paid for soon
thereafter. As required by Accounting Principles Board Opinion No.
18, "The Equity Method of Accounting for Investments in Common Stock"
(APB 18), the excess of the Corporation's purchase price over the
underlying net assets acquired will be amortized over appropriate
periods based on a preliminary analysis of the underlying net assets
of Conrail. To the extent specific assets and liabilities are
allocated to Conrail entities over which the Corporation 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 of such by the STB.
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 transaction 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 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 $135
million (pre-tax) for voluntary separation programs.
The unaudited pro forma financial statements are based on the
historical consolidated financial statements of the Corporation and
Conrail and should be read in conjunction with such historical
financial statements and the notes thereto.
Pro Forma Consolidated Balance Sheet of the Corporation
As of December 31, 1996
Unaudited
($ in millions)
Pro Forma
Pro Forma with Conrail
Historical Adjustments Investment
Assets
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
========= ============= =========
See accompanying Notes to Pro Forma Financial Statements.
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)
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
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Earnings per share . . . . . $6.09 $ 4.99
Average number of shares (in
thousands) . . . . . . . . . 126,457 126,457
See accompanying Notes to Pro Forma Financial Statements.
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:
(in millions,
except per
Preliminary Calculation of Purchase Price share data)
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
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(2) Long-term debt has been increased by $6.0 billion to reflect the
financing of the acquisition and related transaction costs. The Pro
Forma Statement of Income reflects the estimated increase in
interest expense, at an estimated 6.9% which represents the
Corporation's best estimate of the weighted average rates on
commercial paper and term notes to be incurred in connection with
the transaction. 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 58% 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 APB 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 $200 million in goodwill.
This adjustment is based on preliminary estimates of fair values and
is likely to change as additional information in the form of
appraisals, actuarial reports and other valuations are made.
Preliminary Allocation of Purchase Price ($ in millions)
Net assets of Conrail Inc. at December 31, 1996 $3,107
The Corporation's economic interest x 58%
------
$1,802
Fair value adjustments, principally
property and equipment 6,482
Transaction fees 90
Deferred Taxes on fair value adjustments
and transaction fees at 39% (2,563)
Goodwill 200
-----
Purchase Price payable by the Corporation $6,011
======
This allocation is based on preliminary estimates of fair values and
it is likely to change after the agreements are finalized and
regulatory approvals are obtained. An appraisal of the assets is
underway and is expected to be completed by the end of June 1997. To
the extent that specific assets and liabilities are allocated to
Conrail entities over which the Corporation will have a controlling
financial interest, the allocation will be redesignated to follow
the method in which the investment is accounted for subsequent to
the approval by the STB. The Corporation intends to amortize any
goodwill resulting from the purchase over a period of 40 years, the
maximum allowable period under generally accepted ac counting
principles, which is less than the expected life of the business
acquired. The effect of changes to the final purchase price
allocation are not expected to be material to the results of
operations. Whether the excess of the purchase price over the book
value of Conrail's net assets is assigned to physical assets or
goodwill is not expected to have a significant effect on net income,
since railroad assets are typically long-lived and the goodwill is
expected to be amortized over a period of 40 years.
Detail of Pro Forma Adjustment #4 ($ in millions)
Conrail Inc. 1996 net income $ 342
The Corporation's economic interest x 58%
------
$ 198
Estimated additional depreciation (115)
Estimated amortization of goodwill (40-year life) (5)
Estimated amortization of debt organization costs (2)
Tax benefit on the additional depreciation and
amortization at 39% 46
-----
Other income - net pro forma adjustment $ 122
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(5) The pro forma income statement includes the tax effect of the addi-
tional interest expense (see Note 2 above) and an additional tax
effect related to equity income.
Tax benefit from additional interest
expense at 39% $( 162)
Additional tax effect on equity income 8
------
Provision for income taxes pro forma adjustment $ (154)
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(6) Summarized Consolidated Conrail Financial Information Because of
the numerous agreements that must be negotiated and completed, it is
not possible to present some or most of the Corporation's investment
in Conrail based on separate assets, liabilities and operations.
However, the Corporation will have a 58% interest in the entity
formed to acquire Conrail shares. It is expected that in some form,
yet to be determined, the Corporation will have primary operating
interest in the routes and facilities as described more fully in
Section 3 of Exhibit 99.2. The following historical Conrail
financial information, as of and for the year ended December 31,
1996, is presented to facilitate the estimation of the Corporation's
ultimate economic interest in Conrail:
CONRAIL INC.
Summarized Consolidated Statement of Income
($ in millions)
(Year Ended December 31, 1996)
Revenues $3,714
Operating expenses 3,113*
------
Income from operations 601
Interest expense (182)
Other income - net 112
------
Income before income taxes 531
Income taxes 189
------
Net income $ 342
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* Operating expenses include a $135 million charge for voluntary
separation programs.
CONRAIL INC.
Summarized Consolidated Balance Sheet
($ in millions)
(As of December 31, 1996)
ASSETS:
Current assets $1,117
Property and equipment 6,590
Other assets 695
------
Total assets $8,402
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $1,092
Long-term debt 1,876
Other long-term liabilities 2,327
------
Total liabilities 5,295
Stockholders' equity 3,107
------
Total liabilities and stockholders'
equity $8,402
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