CAPITALIZATION The capitalization of Pennco on a company only basis as of December 31, 1969, and as adjusted to reflect the issuance and sale of the Debentures, was as follows: (1) Includes $5.7 million of long-term debt due within one year. See Note 4 to Pennco Financial Statements for further information concerning long-term debt. See also "Business of Pennco-Norfolk and Western Railway Company" for information concerning N&W shares pledged as collateral and the possible necessity of prepaying or purchasing debt in order to free such shares to meet the exchange rights of other outstanding securities of Pennco and its affiliates. (2) See Schedule of Investments and Advances accompanying the Pennco Financial Statements for securities pledged as collateral under indentures of Pennco. (3) Bears interest at the prime rate in effect from time to time. (4) The 9% Sinking Fund Debentures Due 1994 are exchangeable from November 1, 1970 to April 15, 1979, inclusive, for N&W Common Stock at $81.97 per share and 610,002 shares of N&W Common Stock are at the date of this Circular held in escrow to provide for the exchange of such Debentures. The Cumulative Preferred Stock is exchangeable at any time for N&W Common Stock at $137 per share and 516,228 shares of N&W Common Stock are held in escrow to provide for the exchange of such Cumulative Preferred Stock. PENNSYLVANIA COMPANY (Company Only) STATEMENT OF EARNINGS The following statement of earnings of Pennsylvania Company (an indirect subsidiary of Penn Central Company), so far as it relates to the year ended December 31, 1969, has been examined by Peat, Marwick, Mitchell & Co., independent certified public accountants, whose report thereon appears elsewhere in this Circular. This statement should be read in conjunction with the balance sheet of Pennsylvania Company and the related notes included elsewhere in this Circular. With respect to the figures for the four years ended December 31, 1968, which are unaudited, management of the Company believes that all adjustments (none of which were other than normal recurring accruals) necessary to a fair presentation for such years have been included. The annual interest requirement on long-term debt outstanding on December 31, 1969 (excluding long-term debt due within one year) is $9.2 million. The initial annual interest on the Debentures offered hereby is $ On a pro forma basis for 1969, adjusting for the issuance of the Debentures (without including any income earned on securities to be purchased from the Railroad but including annual interest receivable on the $49 million note issued to Pennco by Railroad in December, 1969), interest and debt expense would have been earned 2.9 times. In addition, if 1969 income were adjusted for the $4.4 million reduction in dividend income resulting from the exchange of shares of Common Stock of Wabash Railroad Company ("Wabash") for shares of N&W Common Stock referred to below and to eliminate approximately $1.3 million of interest from an affiliate on advances which are no longer outstanding, the pro forma coverage would have been 2.6 times. The decrease in dividend income from 1965 through 1968 was due in part to a decline in the earnings of, and dividends paid by, Detroit, Toledo & Ironton Railroad Company (see "BusinessDetroit, Toledo & Ironton Railroad Company"), in part to the redemption by N&W in 1965 of 243,419 shares of its 4% Adjustment Preferred Stock and 71,100 shares of its 6% Cumulative Preferred Stock owned by Pennco and in part to sales by Pennco of shares of Common Stock of N&W and shares of 42% Preferred Stock of Wabash. See "Transactions with Affiliated Companies". In addition, dividend income has been and will continue to be adversely affected by exchange agreements between Pennco and N&W. Over the period October 1966 to June 1974, 800,000 shares of N&W Common Stock held by Pennco are to be exchanged in ten equal installments for $104 million principal amount of N&W 4%% Convertible Subordinated Debentures. A total of 400,000 of such shares was exchanged through December 31, 1969. The aggregate consideration of $104 million to be received by Pennco has been recorded as an investment and profit is being recognized as income ratably over the term of the agreement. Of the $52 million principal amount of such Debentures received to December 31, 1969, $41.6 million had been sold at prices ranging from 80% to 96.5% of principal amount. On March 31, 1970, 595,255 shares of Wabash Common Stock owned by Pennco were exchanged for 671,692 shares of N&W Common Stock. While this exchange produced a gain of $51 million in the reported consolidated results of Penn Central for the first quarter of 1970 ($46.9 million in Pennco's own statement), dividends received by Pennco on the Wabash Common Stock in 1969 amounted to $8.4 million compared to annual dividends of $4.0 million at the current dividend rate paid by N&W on the 671,692 shares of N&W Common Stock received. Including the $46.9 million gain from the exchange, Pennco reported net earnings of $57.7 million for the three months ended March 31, 1970 compared to $12.9 million for the three months ended March 31, 1969. Excluding such gain, net earnings for the three months ended March 31, 1970 would have been $10.8 million. PENNSYLVANIA COMPANY (Company Only) accountants) BUSINESS Pennco operates as an investment company. On December 31, 1969, the book value of total assets of the Company was $598.9 million, of which investments represented by stocks, bonds and other indebtedness amounted to $570.6 million (95.3% of total assets). Of this $570.6 million, stocks and bonds were $548.0 million (91.5% of total assets). For a schedule of securities owned by Pennco at December 31, 1969, see Schedule of Investments and Advances accompanying the Pennco Financial Statements. The following table lists the stocks and bonds owned by Pennco at May 8, 1970 (based on market quotations where available and otherwise as estimated by the Company) without giving any effect to the application of the proceeds from the sale of the Debentures other than inclusion of CBC, recently purchased at book net worth (see "Use of Proceeds"): Security Arvida Corporation Common Stock Market or (1) At bid prices for over-the-counter securities and closing sale prices for listed securities on May 8, 1970. There can, of course, be no assurance that these values could be realized upon a liquidation of such securities. (2) Pledged, in whole or in part, as collateral under the Company's indentures. At May 8, 1970, pledged securities had an aggregate market or estimated value of $179.6 million. The total principal amount of obligations secured by such pledged securities was $69.9 million. See Schedule of Investments and Advances accompanying the Pennco Financial Statements. (3) Included on a cost basis only. (4) Includes $2,550,000 of cost and $16.2 million of estimated value for warrants, which expire March 1, 1977, to purchase 2,102,110 shares of Common Stock at approximately $2.17 per share, (5) Pennco is subject to an order of the Interstate Commerce Commission that it and its affiliates dispose of all shares of N&W Common Stock owned by them by October 15, 1974, except that sufficient shares to meet the exchange rights of holders of Pennco's 9% Sinking Fund Debentures Due 1994 (610,000 shares) and of the holders of $3 Cumulative Preference Stock, Convertible Series A, of Penn Central (400,000 shares) need not be disposed of until October 15, 1979. At May 8, 1970, 516,172 shares of N&W Common Stock were held in escrow subject to the exchange rights of the holders of Pennco's 4%% Cumulative Preferred Stock and 610,002 shares of N&W Common Stock were held in escrow subject to the exchange rights of the holders of the Company's 9% Sinking Fund Debentures Due 1994. Under the terms of Penn Central's $3 Cumulative Preference Stock, Convertible Series A, Penn Central is to use its best efforts, subject to certain conditions, to deposit in escrow within five years 120,000 shares of N&W Common Stock. (6) Includes $49,000,000 principal amount of a 94% promissory note due 1994 of the Railroad having instalment payments comparable to the sinking fund payments applicable to Pennco's 9% Sinking Fund Debentures Due 1994. This note is junior to approximately $1.7 billion of secured debt of Railroad. Of the $767.6 million total market or estimated value of the stocks and bonds owned by Pennco at May 8, 1970, $100.8 million consisted of Railroad Investments. See "Description of Debentures-Certain Covenants". Arvida Corporation As of December 31, 1969, Pennco held 58% of the voting stock of Arvida. The corporation managing the properties of Arvida holds an option expiring July 25, 1970, to purchase from Pennco approximately 15% of the voting stock of Arvida at $7.80 per share. At May 8, 1970, the reported bid price of such stock in the over-the-counter market was $934 per share. Arvida owns land on both the east and west coasts of Florida totaling approximately 35,000 acres. Properties are located in the Miami, Fort Lauderdale, Boca Raton and Palm Beach areas on the east coast and the Sarasota area on the west coast. Arvida's business includes land development, construction and sale of condominium apartments, sales of land to developers and operation of the Boca Raton Hotel and Club. A summary statement of consolidated earnings for Arvida for the years 1965 through 1969 (not covered herein by report of independent certified public accountants) is as follows: Dividends have not been declared on the Arvida Common Stock. The decrease in real estate sales for the year ended December 31, 1969, is directly attributable to the delayed completion of two high-rise condominium apartment buildings and to a reduction in the volume of land holdings offered for sale by Arvida. Arvida has adopted a policy of retaining most of its land holdings for its own construction and development program, rather than selling them to others for development. For the three months ended March 31, 1970, Arvida reported revenues of $11.7 million and net income of $700,000, compared to revenues of $5.4 million and net income of $400,000 for the three months ended March 31, 1969. Buckeye Pipe Line Company Buckeye, 100%-owned by Pennco, operates a 7,000-mile system of crude oil pipelines in Indiana, New York, Pennsylvania, Michigan and Ohio and refined petroleum products pipelines in Florida, Illinois, Indiana, Michigan, New Jersey, New York, Ohio, Pennsylvania and Washington as a common carrier under the jurisdiction of the Interstate Commerce Commission ("ICC") and various state authorities. Based on the latest available transportation statistics for the United States, as published by the ICC, Buckeye's pipeline system was the 13th largest in total operating revenues and 8th largest in barrels of crude oil and refined products received into the system. During 1969 Buckeye transported an average of approximately 42 million gallons per day of crude oil and refined products. Under an indenture dated June 1, 1969, all of the Common Stock of Buckeye is pledged as security for the 84% Collateral Trust Bonds due 1989 of Pennco. A summary statement of consolidated earnings for Buckeye for the years 1965 through 1969 (not covered herein by report of independent certified public accountants) is as follows: NOTE: Buckeye has been included in the consolidated Federal income tax returns filed by the Railroad. No income taxes were paid for the periods covered, and no provision has been reflected above for Federal income taxes. 50-934 O 71 - 8 |