Capitalization of Burlington Northern, Inc. after merger. December 31, 1976-Continued

(1) BN short-term borrowings (historical) consisted of $16,388 of notes payable and $1,000 commercial paper. The average interest rates at December 31, 1976 were 4.76 percent and 4.75 percent for notes payable and commercial paper, respectively.

(2) Frisco's historical current portion of long-term debt and capitalized lease obligations have been adjusted to reflect the fair value of long-term debt maturities and capitalized lease obligations in arriving at the pro forma amount.

(3) Interest rates on BN obligations range from 2.625 percent to 8.60 percent and are due from 1978 to 2047. Interest rates on Frisco's obligations have been adjusted to reflect, on a pro forma basis, fair value at December 31, 1976, resulting in a pro forma reduction of $40,018,000 in principal amount; accordingly, such amounts included in the pro forma column have interest rates ranging from 8.25 percent to 13.16 percent and are due 1978 to 2006.

(4) BN's equipment and other obligations bear interest ranging from 3 7/8 percent to 9 3/4 percent and are due 1978 to 1993. Interest rates on SLSF's obligations have been adjusted to reflect, on a pro forma basis, fair value at December 31, 1976, resulting in a pro forma increase of $6,471,000; accordingly, such amounts included in the pro forma column have an interest rate of 8.25 percent and are due 1978 to 1992.

(5) BN's long-term capitalized lease obligations are due 1978 to 1991. Frisco's capitalized lease obligations (long-term portion of $12,287,000 at December 31, 1976) have been included in the pro forma column in order to reflect the adoption of FASB No. 13. Such lease obligations are due 1978 to 1993.

(6) BN's covertible debentures bear interest at 5 1/4 percent and are due 1992. The convertible debentures may be converted into common stock at $55 per share, subject to antidilution provisions, at any time on or before January 15, 1992. The debentures are redeemable at the option of BN at 103.7 percent of principal amount in 1977, at declining percentages through 1988.

Explanatory notes-Continued

and at par thereafter. Beginning in 1983 and continuing through 1991, BN is required to retire annually $5 million principal amount of debentures, subject to adjustment for debentures previously converted, acquired, or redeemed. In addition, during such period BN has the noncumulative option annually to provide cash for the retirement at 100 percent of the principal amount, of up to an additional $5 million of outstanding debentures. BN has reserved 1,181,818 shares of its authorized but unissued common stock for issuance upon conversion of the debentures.

(7) On May 12, 1977, BN stockholders approved an amendment to the restated certificate of incorporation creating a new class of redeemable preference shares consisting of 10,000 shares having a par value of $10,000 each. On the same date, the stockholders approved the 1977 stock option incentive plan, authorizing the granting of nonqualified options to purchase up to 600,000 shares of BN common stock officers and key salaried employees of BN and its subsidiaries. Pursuant to such authorization, the board of directors on May 12, 1977 granted options to 451 persons, covering 125,850 shares of common stock at a price of $48.50 per share.

(8) On July 7, 1977, BN issued 2 million shares of $2.85 convertible preferred stock at a price of $50 per share and accrued dividends for $96,932,000 net of issuance costs. The shares are convertible at any time into common stock of BN, unless previously redeemed, at a conversion rate of 0.8889 shares of common stock for each share of preferred stock subject to adjustments in certain events. BN may, at its option, redeem such preferred stock, in whole or in part, upon at least 30 days' notice at $52.85 per share prior to July 1, 1979, at decreasing prices thereafter prior to July 1, 1987, and thereafter at $50 per share.

(9) On May 11, 1976, Frisco stockholders approved an amendment to the articles of association creating a new class of redeemable preference shares consisting of 3,000 shares having a par value of $10,000 each.

(10) For pro forma purposes it is assumed that 1,305,693 shares of BN $2.125 no par value preferred stock, $25 redemption value, were issued December 31, 1976, at par at an exchange ratio of one-half share of preferred stock for each outstanding share of Frisco common stock. The pro forma share amount assumes no cash payments for fractional shares. Such payments are provided for in the merger agreement. The ultimate issuance of such stock is subject to approvals of the merger by BN and Frisco shareholders and the ICC. For *** the ICC, (In a letter to the Commission dated October 29, 1979, attorneys for the applicants stated that 1,347,785 shares of the new preferred stock would be issued or reserved for issuance).

(11) None of the Frisco $100 par value preferred stock ($1,500,000 shares authorized) has been issued.

(12) For pro forma purposes, it is assumed that an additional 2,480,817 shares of BN's common stock were issued December 31, 1976, at an exchange ratio of 0.95 BN share for each outstanding share of Frisco common stock. The pro forma share amount assumes no cash payments or fractional shares. Such payments are provided for in the merger agreement and are reflected in the adjustments and pro forma columns at a price of $41.25 per share, the closing market price of BN common stock on the date the respective boards of directors agreed in principle to the terms of the proposed merger. In addition, $2,036,000, which represents the assumed conversion of all outstanding Frisco stock options at the merger conversion rate less the grant price ($23.44) of such options, has been added to the common stock. For *** common stock, (In a letter to the Commission dated October 29, 1979, attorneys for the applicant stated that 2,560,791 shares of BN common stock are anticipated to be issued or reserved for issuance).

(13) The proposed transaction will be accounted for as a purchase and, accordingly, the Frisco common stock will be retired and Frisco capital surplus and retained earnings of prior to the date of merger are eliminated.

(14) Does not include: 1,181,818 shares of BN common stock initially reserved for issuance upon conversion of BN's 5 1/4 percent convertible debentures, due 1992; 580,545 shares of BN common stock reserved for issuance pursuant to the BN stock option incentive plan; 287,375 shares of BN common stock initially reserved for issuance upon conversion of the series A no par

Explanatory notes-Continued

value preferred stock; 1,777,800 shares of BN common stock initially reserved for issuance upon conversion of the BN $2.85 convertible preferred stock issued on July 7, 1977 (see (8) above); and 540 shares of BN common stock held in the treasury. Also not included are 79,974 shares of BN common stock and 42,092 shares of $2.125 no par value preferred stock which may be reserved for issuance at the exchange rate for the merger transaction, for Frisco common stock, pursuant to the Frisco stock option plan.

POSITIONS OF PARTIES

Supporting the merger application are the U.S. Department of Defense (DOD), Boise Cascade Corporation, Care-Nicky Corporation, International Mineral and Chemical Corporation, Proctor and Gamble Company, Farmlands Industries, Inc., American Cast Iron Pipe Company, Amax Coal Company, LambWeston, Weyerhaeuser Company, Shell Oil Company, Nabisco, Inc., and the Pacific Northwest Traffic League. The U.S. Department of Justice (DOJ) does not oppose the merger.

If the Commission imposes the stipulated conditions negotiated with applicants, the following carriers do not oppose the merger: the Atchison, Topeka and Santa Fe Railway Company (Santa Fe), Chicago and North Western Transportation Company (CNW), Illinois Terminal Railroad Company (ITC), the Family Lines, Southern Railway Company (Southern), Kansas City Southern Railway Company (KCS), Southern Pacific Transportation Company (SP), St. Louis Southwestern Railway Company (Cotton Belt), Union Pacific Railroad Company (UP), and Missouri-Pacific Railroad Company (Mopac). The stipulated conditions are set forth in appendix K. BN and Frisco support these conditions.

Six railroads are opposed to the merger. They are Chicago, Rock Island and Pacific Railroad Company, William M. Gibbons, trustee (Rock Island), Chicago, Milwaukee, St. Paul and Pacific Railroad Company, Richard B. Ogilvie, trustee (Milwaukee Road or MILW), Soo Line Railroad Company (Soo Line), Illinois Central Gulf Railroad Company (ICG), Missouri-Kansas-Texas Railroad Company (MKT or Katy), and Denver and Rio Grande Western Railroad Company (DRGW or Rio Grande). Additionally, the Railway Labor Executives' Association (RLEA); John W. McGinness, Illinois Legislative Director of the United Transportation Union (UTU-IL); Railway Employees' Department, AFL-CIO (RED); M. S. Stuckey, General Chairman of United Transportation Union on Illinois Central Gulf Railroad Company (UTU-ICG); M. M. Winter, General Chairman of United

Transportation Union on BN (UTU-BN); Iowa Department of Transportation, Transportation Regulation Board (IA-DOT); Illinois Department of Transportation (IL-DOT); Kansas City Board of Trade (KC Board); Montana Wheat Research and Marketing Committee (MT-Wheat); Wyo-Ben, Inc.; Riceland Foods; Superior Corp.; and John W. O'Neil oppose the merger.

No parties support Soo Lines' requests for trackage rights over BN between Superior, WI, and (a) McGregor, MN, (b) Schley, MN, and (c) Bald Eagle, MN. BN, Frisco, DOJ, and UTU-ICG oppose the request. BN and Frisco also oppose all other relief requested by Soo Line (set out in appendix K).

ICG's proposal for trackage rights over Frisco between Memphis, TN, and Jasper, AL, and terminal operations over Mopac in Memphis is opposed by BN, Frisco, DOJ, and UTU-ICG. BN and Frisco also oppose the other conditions sought by ICG.

The CNW proposal for trackage rights over BN between the Twin Cities and the Twin Ports over the White Bear Lake route is supported by BN and Frisco. However, DOJ opposes these trackage rights.

SP's proposed trackage rights in Portland, OR, are supported by BN, Frisco, and Crown Zellerbach. UP, DOJ, and UTU-ICG are opposed.

Milwaukee Road's proposed trackage rights to serve coalfields in eastern Montana are supported by the Wisconsin Power and Light Company (WI-P&L), Northern States Power Company, and the Western Energy Company, but opposed by BN, Frisco, DOJ, and UTU-ICG. BN and Frisco oppose other conditions sought by Milwaukee Road.

Rock Island's proposal for trackage rights over BN between Denver and Golden, CO, is supported by the Adolph Coors Company, the major shipper on the line. BN, Frisco, DOJ, and UTUICG oppose the trackage rights. Rock Island's use of the DRI&NW line is opposed by BN, Frisco, Termicold, Lamb-Weston, and Alcoa. Applicants oppose all other proposed protection for Rock Island.

The indemnity protection sought by MKT is supported by the Lower Colorado River Authority, La Barge, Inc., Breton Corporation, Clareden, Inc., the Denison Area Chamber of Commerce, and Gifford-Hill & Co., Inc. This condition is opposed by BN, Frisco, and DOJ.

DOJ also opposes the proposed indemnity conditions sought by Milwaukee Road and Rock Island.

The impact of the merger on each rail carrier participating in the proceeding and the relief requested are discussed separate below.

MILWAUKEE Road

Summary of Milwaukee Road's position

MILW contends that applicants have not shown the merger to be in the public interest. Many of its benefits could be accomplished without merger. Milwaukee asserts that 50 percent of all merger benefits attributed to the transaction would be derived from diverted traffic. MILW notes that applicants contend there is insufficient traffic to justify run-through operations short of merger; however, when diversions add to applicants' traffic base, such operations will commence.

MILW questions some of the anticipated benefits of the merger. It believes that applicants' "improved car supply" is an substantiated claim, particularly in view of the impossibility of estimating the effect of internal traffic reroutings. Applicants' proposed minor reductions in overhead staff conflict with the BN chairman's offer of continued employment to all Frisco senior management, thereby destroying a prime merger economy. MILW also contends that another claimed economy, joint purchasing, could be done now without merger, but BN policy stands against it. MILW contends that the supporting shippers agree that they could not count on applicants' innovative rate making policies, which could occur without merger.

MILW points to other shortcomings in applicants' case. MILW notes that applicants failed to calculate any benefit from increased productivity, one of the foremost problems of the railroad industry. MILW points out that terminal congestion directly affects railroad productivity and that applicants' proposal does nothing to relieve the general problem at their Kansas City interchange. MILW fears that, with the elimination of applicants' interchange at Kansas City, the situation may become worse. It believes that the same result may occur at St. Louis. MILW contends that problems may stem from the necessary conversion of applicants' incompatible information/computer systems. MILW stresses that the slightest miscalculation easily could cause the monumental foul-up experienced following the Penn Central merger.

MILW asserts that neither applicant needs the merger to saves its service as each is a large, strong, and prosperous railroad. MILW