Filed Pursuant to Rule 424(b)(3)
Registration No. 333-114795
PROSPECTUS AND CONSENT SOLICITATION STATEMENT
[CSX TRANSPORTATION, INC. LOGO]
[CONSOLIDATED RAIL CORPORATION LOGO]
[NORFOLK SOUTHERN RAILWAY LOGO]
OFFER TO EXCHANGE AND SOLICITATION OF CONSENTS
CSX Transportation, Inc., or "CSXT," and Norfolk Southern Railway Company, or
"NSR," are offering to exchange any and all outstanding debentures of
Consolidated Rail Corporation, or "Conrail," listed in the table below under
"Conrail Debentures" for (1) a combination of new debt securities, or "New
Exchange Notes," consisting of "New CSXT Notes" and "New NSR Notes" and (2) a
"Cash Payment," all as set forth in the table below, to be paid to all holders
who validly tender their Conrail Debentures, subject to our acceptance.
Conrail is also seeking the consent of the holders of the Conrail Debentures to
a series of proposed amendments to the indenture that governs the terms of the
Conrail Debentures. The proposed amendments will eliminate substantially all of
the restrictive covenants contained in that indenture and will therefore permit
our consummation of the "Conrail Spin Off Transactions." By validly tendering
their Conrail Debentures, holders will be concurrently consenting to these
proposed amendments.
<Table>
<Caption>
AGGREGATE
PRINCIPAL
CONRAIL DEBENTURES AMOUNT
(ELIGIBLE FOR EXCHANGE) OUTSTANDING
- ----------------------------------------- ------------
9 3/4% Debentures
Due June 15, 2020 (CUSIP No. 209864AT4) $550,000,000
7 7/8% Debentures
Due May 15, 2043 (CUSIP No. 209864AU1) $250,000,000
<Caption>
CONSIDERATION PER PRINCIPAL AMOUNT
OF CONRAIL DEBENTURES VALIDLY TENDERED FOR EXCHANGE
------------------------------------------------------------------------------
AGGREGATE
CONRAIL DEBENTURES PRINCIPAL CASH
(ELIGIBLE FOR EXCHANGE) NEW EXCHANGE NOTES* AMOUNT PAYMENT+
- ----------------------- ----------------------------------------------------- ------------ --------
9 3/4% Debentures 42% of New CSXT 9 3/4% Notes Due June 15, 2020 $231,000,000
Due June 15, 2020 58% of New NSR 9 3/4% Notes Due June 15, 2020 $319,000,000 $7.00
7 7/8% Debentures 42% of New CSXT 7 7/8% Notes Due May 15, 2043 $105,000,000
Due May 15, 2043 58% of New NSR 7 7/8% Notes Due May 15, 2043 $145,000,000 $7.50
</Table>
- ---------------------
* Subject to the treatment of fractional interests to the extent applicable to
holders of Conrail Debentures who validly tender. The New CSXT Notes and the
New NSR Notes will initially be issued by NYC Newco, Inc., or "NYC Newco," and
PRR Newco, Inc., or "PRR Newco," respectively, and fully and unconditionally
guaranteed, respectively, by CSXT and NSR.
+ Per $1,000 of Conrail Debentures validly tendered. The New Exchange Notes and
Cash Payment will only be paid to holders who validly tender and do not
withdraw their Conrail Debentures on or prior to the expiration date and to
the extent such Conrail Debentures are accepted for exchange.
This exchange offer and consent solicitation is part of a series of related
transactions in connection with the ultimate non-taxable transfer by Conrail of
its ownership interests in two wholly owned subsidiaries, New York Central Lines
LLC, or "NYC," and Pennsylvania Lines LLC, or "PRR," to CSXT and to NSR,
respectively. We refer, collectively, to these transfers and the other related
transactions described herein as the "Conrail Spin Off Transactions."
Except for the interest payable by Conrail on the closing date and the resulting
adjustment in the amount of interest to be paid on the first interest payment
date, the interest rates, terms, payment dates and redemption provisions of the
New Exchange Notes will be identical to those provisions of Conrail Debentures
for which they are exchanged. The New Exchange Notes will have the same
aggregate principal amounts as the Conrail Debentures for which they are
exchanged. The New Exchange Notes will be issued under indentures containing
covenants and events of default substantially similar to those contained in the
existing indentures of CSX Corporation, or "CSX," and Norfolk Southern
Corporation, or "NSC," that govern their respective senior unsecured debt
securities.
THIS EXCHANGE OFFER AND CONSENT SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON AUGUST 23, 2004, UNLESS WE EXTEND IT. WE REFER TO THIS DATE AND
TIME IN THIS PROSPECTUS AND CONSENT SOLICITATION STATEMENT, IF AND AS IT IS
EXTENDED, AS THE "EXPIRATION DATE."
You may withdraw your tendered Conrail Debentures at any time on or prior to the
expiration date. This exchange offer and consent solicitation is described in
detail in this prospectus and consent solicitation statement and we urge you to
read it carefully, including the "Risk Factors" starting on page 23. Neither the
boards of directors of Conrail, CSXT or NSR nor any other person is making any
recommendation as to whether or not you should tender your Conrail Debentures in
this exchange offer and consent solicitation.
None of CSXT, NSR, Conrail or any other person will receive any proceeds from
the issuance of the New Exchange Notes in connection with this exchange offer
and consent solicitation.
CSXT and NSR do not intend to apply for listing or quotation of the New Exchange
Notes on any national securities exchange or market quotation system.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THIS EXCHANGE OFFER AND CONSENT SOLICITATION OR DETERMINED IF
THIS PROSPECTUS AND CONSENT SOLICITATION STATEMENT IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Dealer Manager for this exchange offer and consent solicitation is:
MORGAN STANLEY
This prospectus and consent solicitation statement is dated July 26, 2004
[CONRAIL FLOWCHART]
TABLE OF CONTENTS
<Table>
WHERE YOU CAN FIND MORE INFORMATION..... ii
IMPORTANT INFORMATION REGARDING THE CSXT
AND NSR APPENDICES.................... ii
QUESTIONS AND ANSWERS ABOUT THIS
EXCHANGE OFFER AND CONSENT
SOLICITATION.......................... 1
SUMMARY................................. 5
The Conrail Spin Off Transactions..... 5
This Exchange Offer and Consent
Solicitation....................... 5
The Companies......................... 10
Description of the New CSXT Notes..... 10
Description of the New NSR Notes...... 12
Surface Transportation Board
Approval........................... 14
Material United States Federal Income
Tax Consequences................... 14
The Dealer Manager.................... 14
The Information Agent................. 15
The Exchange Agent.................... 15
SELECTED HISTORICAL FINANCIAL DATA...... 16
UNAUDITED PRO FORMA FINANCIAL
INFORMATION........................... 18
RATIOS OF EARNINGS TO FIXED CHARGES..... 22
RISK FACTORS............................ 23
Risks Relating to This Exchange Offer
and Consent Solicitation........... 23
Risks Relating to Holders of Conrail
Debentures Who Do Not Validly
Tender in This Exchange Offer and
Consent Solicitation............... 26
Risks Relating to the Conrail Spin Off
Transactions....................... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CONRAIL................. 28
DESCRIPTION OF THIS EXCHANGE OFFER AND
CONSENT SOLICITATION.................. 35
Purpose of This Exchange Offer and
Consent Solicitation............... 35
Terms of This Exchange Offer and
Consent Solicitation............... 35
Expiration Date, Extensions,
Termination and Amendments......... 38
Important Reservation of Rights
Regarding This Exchange Offer and
Consent Solicitation............... 39
Terms of the New CSXT Notes and the
New NSR Notes...................... 39
Required Consent...................... 40
Conditions to This Exchange Offer and
Consent Solicitation............... 40
Fractional Notes...................... 42
No Proration.......................... 42
Proposed Amendments................... 42
Procedures for Tendering.............. 44
Book-Entry Transfer................... 47
Guaranteed Delivery Procedures........ 47
Acceptance of Conrail Debentures and
Delivery of New CSXT Notes, New NSR
Notes and Cash Payments............ 48
Withdrawal Rights..................... 49
The Dealer Manager.................... 50
Information Agent..................... 51
Exchange Agent........................ 51
Fees and Expenses..................... 52
Transfer Taxes........................ 52
Accounting Treatment.................. 52
Material United States Federal Income
Tax Consequences of This Exchange
Offer and Consent Solicitation..... 53
Use of Proceeds....................... 57
DESCRIPTION OF THE CONRAIL SPIN OFF
TRANSACTIONS.......................... 58
Background to the Conrail Spin Off
Transactions....................... 58
Regulatory Approvals.................. 59
Benefits of the Conrail Spin Off
Transactions....................... 61
Transaction Steps..................... 61
Timing of Closing..................... 62
The Distribution Agreement............ 62
The Transaction Agreement Amendment... 66
The Tax Allocation Agreement.......... 66
The Equipment Obligation Agreements... 67
Material United States Federal Income
Tax Consequences of the Conrail
Spin Off Transactions.............. 70
LEGAL MATTERS........................... 71
EXPERTS................................. 71
INFORMATION REGARDING FORWARD-LOOKING
STATEMENTS ........................... 71
</Table>
<Table>
ANNEX A: FORM OF CONRAIL
SUPPLEMENTAL INDENTURE ............... A-1
CSXT APPENDIX........................... CSXT-1
NSR APPENDIX............................ NSR-1
INDEX TO CONRAIL FINANCIAL
STATEMENTS............................ F-1
</Table>
i
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You should rely only on information contained in this prospectus and
consent solicitation statement, including with respect to the registration
statement filed by CSXT and NYC Newco, only the CSXT Appendix attached hereto,
and with respect to the registration statement filed by NSR and PRR Newco, only
the NSR Appendix attached hereto. No one is authorized to provide you with
information that is different from that contained in this prospectus and consent
solicitation statement and the CSXT and NSR Appendices attached hereto. We do
not intend for the contents of any websites referred to in this prospectus and
consent solicitation statement to be part of this prospectus and consent
solicitation statement.
CSXT and NSR are offering the New Exchange Notes only in jurisdictions
where offers and sales are permitted. In addition, Conrail is soliciting
consents from holders of Conrail Debentures only in jurisdictions where consent
solicitations are permitted. The information contained in this prospectus and
consent solicitation statement is accurate only as of its date regardless of the
time of delivery of this prospectus and consent solicitation statement or of any
sale of the New Exchange Notes.
WHERE YOU CAN FIND MORE INFORMATION
The Appendices to this prospectus and consent solicitation statement
incorporate important business and financial information about CSXT, NYC Newco,
NSR and PRR Newco, respectively, that is not contained in or delivered with this
prospectus and consent solicitation statement.
-- For information with respect to where you can find or obtain more
information about CSXT and NYC Newco, please refer to the CSXT
Appendix attached hereto.
-- For information with respect to where you can find or obtain more
information about NSR and PRR Newco, please refer to the NSR Appendix
attached hereto.
TO OBTAIN TIMELY DELIVERY OF ANY REQUEST FOR FILINGS OR OTHER DOCUMENTS,
THE REQUEST MUST BE MADE NOT LATER THAN FIVE BUSINESS DAYS PRIOR TO THE
EXPIRATION DATE.
This prospectus and consent solicitation statement is included in two
registration statements, each of which has been separately filed on Form S-4
with the Securities and Exchange Commission, or "SEC," under the Securities Act
of 1933, as amended, including the rules and regulations thereto, or the
"Securities Act," by (i) CSXT and NYC Newco and (ii) NSR and PRR Newco. As
permitted by the SEC, this prospectus and consent solicitation statement does
not contain all of the information included in the registration statements filed
with the SEC. You may refer to the registration statements for more information.
IMPORTANT INFORMATION REGARDING THE CSXT AND NSR APPENDICES
Information contained in this prospectus and consent solicitation statement
was prepared by CSXT, NSR, Conrail and their respective affiliates.
Information contained in the CSXT Appendix attached hereto was prepared
solely by CSXT and its affiliates. NSR did not participate in preparing the CSXT
Appendix attached hereto and did not make any due diligence inquiry or any other
independent investigation with respect to the information contained in the CSXT
Appendix attached hereto. Accordingly, NSR disclaims any responsibility for the
CSXT-specific information contained in the CSXT Appendix attached hereto or
elsewhere in this prospectus and consent solicitation statement.
Similarly, information contained in the NSR Appendix attached hereto was
prepared solely by NSR and its affiliates. CSXT did not participate in preparing
the NSR Appendix attached hereto and did not make any due diligence inquiry or
any other independent investigation with respect to the information contained in
the NSR Appendix attached hereto. Accordingly, CSXT disclaims any responsibility
for the NSR-specific information contained in the NSR Appendix attached hereto
or elsewhere in this prospectus and consent solicitation statement.
------------------------
ii
In this prospectus and consent solicitation statement, unless the context
requires otherwise: (1) "CSXT" refers to CSX Transportation, Inc.; (2) "NSR"
refers to Norfolk Southern Railway Company; (3) "Conrail" refers to Consolidated
Rail Corporation; (4) "we," "us," "our" or comparable terms refer collectively
to Conrail, CSXT and NSR; (5) "CSX" refers to CSX Corporation; (6) "NSC" refers
to Norfolk Southern Corporation; (7) "NYC" refers to New York Central Lines LLC;
(8) "PRR" refers to Pennsylvania Lines LLC; (9) "NYC Newco" refers to NYC Newco,
Inc.; (10) "PRR Newco" refers to PRR Newco, Inc.; and (11) "Distribution
Agreement" refers to that certain agreement which CRR, Conrail, CSX, CSXT, NSC,
NSR, CRR Holdings, NYC, PRR, NYC Newco, PRR Newco and certain other parties
thereto will enter into prior to, and in connection with, the Conrail Spin Off
Transactions.
------------------------
iii
QUESTIONS AND ANSWERS ABOUT THIS EXCHANGE OFFER
AND CONSENT SOLICITATION
The following questions and answers respond to some of the questions that
holders of the Conrail Debentures may have but will not contain all of the
information that is important to you. To better understand this exchange offer
and consent solicitation, you should read the summary following these questions
and answers, as well as the rest of this prospectus and consent solicitation
statement.
WHAT ARE THE CONRAIL SPIN OFF TRANSACTIONS?
We are seeking to merge NYC with CSXT and to merge PRR with NSR in order for
CSXT to acquire full legal ownership and control of the assets and properties of
NYC and for NSR to acquire full legal ownership and control of the assets and
properties of PRR. CSXT and NSR, respectively, already manage and operate the
assets of NYC and PRR through operating agreements approved by the United States
Surface Transportation Board, or the "STB."
The Conrail Spin Off Transactions will permit CSX and NSC to acquire
exclusive control, through CSXT and NSR, their respective wholly owned operating
railroad subsidiaries, of Conrail properties that they already own indirectly
(through their joint 42%/58% equity ownership of Conrail), and that they are
already authorized by the STB to operate and manage in a substantially
independent manner as part of their respective rail systems.
For purposes of this prospectus and consent solicitation statement, the
Conrail Spin Off Transactions are defined as the transactions contemplated by
the Distribution Agreement, in each case as amended, supplemented or otherwise
modified from time to time, including after the date of this prospectus and
consent solicitation statement.
IF I PARTICIPATE IN THIS EXCHANGE OFFER AND CONSENT SOLICITATION, WHAT WILL I
RECEIVE?
For each aggregate principal amount of Conrail Debentures validly tendered
by you, CSXT and NSR are offering to exchange such Conrail Debentures for
(1) 42% of such aggregate principal amount in New CSXT Notes that will initially
be obligations of NYC Newco, a wholly owned subsidiary of CSXT, and 58% of such
aggregate principal amount in New NSR Notes that will initially be obligations
of PRR Newco, a wholly owned subsidiary of NSR, subject in each case to the
treatment of fractional interests and (2) the relevant Cash Payment. The New
CSXT Notes will be fully and unconditionally guaranteed by CSXT and the New NSR
Notes will be fully and unconditionally guaranteed by NSR.
Holders of Conrail Debentures who validly tender in this exchange offer and
consent solicitation will also be concurrently consenting to the proposed
amendments, to be set forth in a supplemental indenture in the form attached
hereto as Annex A, or the "Conrail Supplemental Indenture," to that certain
indenture, or the "Conrail Indenture," dated as of May 1, 1990, between Conrail
and the related trustee.
Upon consummation of the Conrail Spin Off Transactions, the obligations of
NYC Newco and PRR Newco, respectively, with respect to the New CSXT Notes and
New NSR Notes, will be assumed by and become the primary obligations of CSXT and
NSR, respectively, through the respective mergers of NYC Newco with and into
CSXT and PRR Newco with and into NSR, and the CSXT and NSR guarantees will
automatically terminate.
None of CSXT, NSR or any other party will receive any cash proceeds from the
issuance or delivery of the New Exchange Notes in this exchange offer and
consent solicitation.
WHEN WILL I RECEIVE ACCRUED INTEREST ON MY CONRAIL DEBENTURES AND THE NEW
EXCHANGE NOTES?
If you validly tender your Conrail Debentures and we consummate this
exchange offer and consent solicitation, except as set forth in the following
paragraph, you will receive the same amount of interest payments on the same
interest payment dates that you would have received had you not participated in
this exchange offer and consent solicitation. You should refer to the specific
terms of the securities described in this prospectus and consent solicitation
statement to determine who will be eligible to receive accrued and unpaid
interest and when accrued and unpaid interest will be paid.
Interest on the New Exchange Notes will accrue from the date of original
issuance of these Notes, which will be on the date this exchange offer and
consent solicitation is consummated, or the "Closing Date." Interest accrued and
unpaid on any Conrail Debentures accepted in this exchange offer and consent
solicitation will be paid by Conrail on each scheduled interest payment date
that occurs prior to the Closing Date. Conrail will also pay all accrued and
unpaid interest on the Conrail Debentures from the interest payment date
immediately preceding the Closing Date through and including the calendar day
immediately prior to the Closing Date. Conrail will make this interest payment
on the Closing Date. In the event the Closing Date occurs on or before an
interest payment date for any series of Conrail Debentures but after the record
date for that interest payment date, holders of Conrail Debentures accepted in
this exchange offer and consent solicitation will be deemed to have waived their
right to receive from Conrail any other amount of interest that would otherwise
be payable after the Closing Date.
Conrail Debentures that are not tendered, or are tendered but not accepted,
in this exchange offer and consent solicitation will remain outstanding debt
obligations of Conrail. Holders of these unexchanged Conrail Debentures will be
entitled to receive the same amount of interest payments on the same interest
payment dates as currently scheduled for such Conrail Debentures.
WILL YOU ACCEPT ALL CONRAIL DEBENTURES TENDERED?
We will accept for exchange any Conrail Debentures that have been validly
tendered and not withdrawn on or prior to the expiration date provided that the
conditions to this exchange offer and consent solicitation have been satisfied.
WILL THERE BE PRORATION?
This exchange offer and consent solicitation is for all the Conrail
Debentures and is not subject to proration among holders of Conrail Debentures
who validly tender.
WHAT IS THE CONRAIL SUPPLEMENTAL INDENTURE?
As part of this exchange offer and consent solicitation, Conrail is
soliciting consents from the holders of Conrail Debentures to certain proposed
amendments to the Conrail Indenture. The merger covenant under the Conrail
Indenture does not permit the proposed transfer of Conrail's equity interests in
NYC and PRR to CSXT and NSR, respectively. A majority in aggregate principal
amount of Conrail Debentures, voting as a single class, must consent to the
elimination of this merger covenant and other restrictions in order to permit
the Conrail Spin Off Transactions.
The proposed amendments will also remove restrictions on Conrail's ability
to:
-- incur indebtedness at the LLC level;
-- terminate its corporate existence;
-- incur liens; and
-- waive compliance with the covenants set forth above.
The proposed amendments will also eliminate certain events of default and
will make certain definitional changes to the Conrail Indenture. For more
information about the proposed amendments, please read the section of this
prospectus and consent solicitation statement entitled "Proposed Amendments."
The amendments to the Conrail Indenture will be effective upon the execution
of the Conrail Supplemental Indenture by Conrail and the trustee under the
Conrail Indenture.
WILL I BE PAID FOR TENDERING MY CONRAIL DEBENTURES AND CONSENTING TO THE CONRAIL
SUPPLEMENTAL INDENTURE?
Yes. In exchange for your valid tender of Conrail Debentures and your
concurrent consent to the proposed amendments to the Conrail Indenture, you will
receive (1) New Exchange Notes and (2) a Cash Payment.
WHAT IS REQUIRED FOR THE CONRAIL SUPPLEMENTAL INDENTURE TO BE EFFECTIVE?
So long as all other conditions to this exchange offer and consent
solicitation have been satisfied or waived by us, the Conrail Supplemental
Indenture will be effective as to all of the Conrail Debentures if more than 50%
in aggregate principal amount of Conrail Debentures, voting as a single class,
have been validly tendered and not withdrawn on or prior to the expiration date,
and Conrail and the trustee under the Conrail Indenture execute the Conrail
Supplemental Indenture.
2
WILL I HAVE ANY DISSENTERS' RIGHTS IN CONNECTION WITH THE CONRAIL SUPPLEMENTAL
INDENTURE?
You will not be entitled to any dissenters' rights if we consummate the
Conrail Spin Off Transactions and the Conrail Supplemental Indenture becomes
effective.
DO I NEED TO SEPARATELY CONSENT TO THE CONRAIL SUPPLEMENTAL INDENTURE IN ORDER
TO BE ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER?
No. Validly completing the letter of consent/transmittal for this exchange
offer and consent solicitation, or following the procedures of the Automated
Tender Offer Program, or "ATOP," if your Conrail Debentures are held through The
Depository Trust Company, or "DTC," will constitute your consent to the Conrail
Supplemental Indenture to the extent we accept your Conrail Debentures for
exchange. If the requisite consents are received, the Conrail Supplemental
Indenture, upon its execution, will be binding on holders of any Conrail
Debentures that remain outstanding following the consummation of this exchange
offer and consent solicitation.
WHAT HAPPENS IF I DO NOT VALIDLY TENDER MY CONRAIL DEBENTURES IN THIS EXCHANGE
OFFER AND CONSENT SOLICITATION?
If you do not validly tender your Conrail Debentures, they will remain
obligations of Conrail. If this exchange offer and consent solicitation is
consummated, the Conrail Indenture will be amended by the proposed amendments
which will materially reduce the covenants and events of default to which
Conrail is subject under the Conrail Indenture. Therefore, consummation of this
exchange offer and consent solicitation and the adoption of the proposed
amendments may have adverse consequences for holders of Conrail Debentures who
elect not to participate in this exchange offer and consent solicitation.
If you do not tender your Conrail Debentures in this exchange offer and
consent solicitation, you will not be entitled to receive a combination of New
Exchange Notes, the full and unconditional guarantees related thereto and either
the 9 3/4% Cash Payment or the 7 7/8% Cash Payment (each as defined hereafter).
In addition, if you tender your Conrail Debentures and they are not accepted,
they will be returned to you.
ARE THERE ANY CONDITIONS THAT MUST BE SATISFIED IN ORDER TO CONSUMMATE THIS
EXCHANGE OFFER AND CONSENT SOLICITATION?
Yes. The consummation of this exchange offer and consent solicitation is
conditioned upon the satisfaction of certain conditions, including:
-- that holders of more than 50% of the aggregate principal amount of the
Conrail Debentures, voting as a single class, have consented to the
Conrail Supplemental Indenture by validly tendering and not
withdrawing their Conrail Debentures on or prior to the expiration
date;
-- that we have received required consents to the Conrail Spin Off
Transactions from holders of a majority of each series of Conrail's
equipment trust certificates and pass through trust certificates set
forth in the Distribution Agreement, as well as from the related
equity investors, lessors, owner trustees and owner participants, in
the consent solicitation that is occurring concurrently with this
exchange offer and consent solicitation; and
-- satisfaction or waiver of all conditions in the Distribution Agreement
and that the Distribution Agreement has not been terminated.
For a detailed description of these and other conditions, please see
"Description of This Exchange Offer and Consent Solicitation--Conditions to This
Exchange Offer and Consent Solicitation" starting on page 40.
We reserve the right, subject to applicable laws, to (a) waive any and all
conditions to this exchange offer and consent solicitation and (b) terminate or
extend this exchange offer and consent solicitation at any time and thereby
delay acceptance for exchange of all Conrail Debentures validly tendered on or
prior to the expiration date.
WHAT MAY HAPPEN IF WE DO NOT OBTAIN THE REQUIRED CONSENTS FROM HOLDERS OF THE
CONRAIL DEBENTURES?
If the parties are unable to resolve through negotiations any issues
pertaining to the required consents of holders of the Conrail Debentures, the
STB has the authority to make a determination that the treatment of the holders
of the Conrail Debentures under the terms of this exchange offer and consent
solicitation is fair, just and reasonable,
3
which we refer to as a "fairness determination." In the event that the STB makes
such a fairness determination, the STB could issue a ruling that allows Conrail,
CSX and Norfolk Southern to consummate the Conrail Spin Off Transactions and
this exchange offer and consent solicitation without the consent of the holders
of the Conrail Debentures and/or pursuant to such other terms and conditions as
the STB may prescribe. Following the filing with the STB of any request for a
fairness determination, we may, unless the STB determines otherwise, (a) wait
until the STB makes its fairness determination before consummating the Conrail
Spin Off Transactions, at which time Conrail, CSX and Norfolk Southern could
decide, based solely on their business judgment, not to proceed with the Conrail
Spin Off Transactions, or (b) consummate the Conrail Spin Off Transactions in
advance of the STB's fairness determination, which fairness determination would
be final and binding as to all parties, but subject to judicial review in the
United States Court of Appeals. Holders would be free to participate in any STB
fairness determination at their own cost and through their own counsel.
WHAT HAPPENS IF THE DISTRIBUTION AGREEMENT IS TERMINATED?
If the Distribution Agreement is terminated, the Conrail Debentures will not
be exchanged for the New Exchange Notes and the Cash Payments, and the Conrail
Debentures will remain the obligations of Conrail subject to their current
terms.
ARE THERE ANY RISKS THAT I SHOULD CONSIDER IN CONNECTION WITH THIS EXCHANGE
OFFER AND CONSENT SOLICITATION?
Yes. You should carefully consider the "RISK FACTORS" starting on page 23,
as well as the risks discussed in CSXT's and NSR's filings with the SEC that are
incorporated by reference into their respective Appendices to this prospectus
and consent solicitation statement.
WHEN DOES THIS EXCHANGE OFFER AND CONSENT SOLICITATION EXPIRE?
THIS EXCHANGE OFFER AND CONSENT SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON AUGUST 23, 2004, UNLESS WE EXTEND IT.
WE WILL ANNOUNCE ANY EXTENSIONS BY PRESS RELEASE OR OTHER PERMITTED MEANS NO
LATER THAN 9:00 A.M., NEW YORK CITY TIME, THE NEXT BUSINESS DAY FOLLOWING THE
EXPIRATION DATE OF THIS EXCHANGE OFFER AND CONSENT SOLICITATION.
HOW DO I TENDER OR WITHDRAW MY CONRAIL DEBENTURES IN THIS EXCHANGE OFFER AND
CONSENT SOLICITATION?
In order to tender Conrail Debentures in this exchange offer and consent
solicitation, you must validly submit your Conrail Debentures and a completed
letter of consent/transmittal and the other required agreements and documents,
or follow the ATOP procedures if your Conrail Debentures are held through DTC,
described in this prospectus and consent solicitation statement. Completing the
letter of consent/transmittal, or following the ATOP procedures if your Conrail
Debentures are held through DTC, will constitute your consent to the Conrail
Supplemental Indenture to the extent we accept your Conrail Debentures for
exchange, unless you subsequently withdraw your Conrail Debentures on or prior
to the expiration date. If you own Conrail Debentures held through a broker or
other third party, or in "street name," you will need to carefully follow the
instructions they provide to you about how to instruct them to tender the
Conrail Debentures on your behalf. If the requisite consents are received, the
Conrail Supplemental Indenture will be binding on all Conrail Debentures that
remain outstanding after the consummation of this exchange offer and consent
solicitation.
You may withdraw tendered Conrail Debentures at any time on or prior to the
expiration date. After the expiration date, you may not withdraw your Conrail
Debentures.
If you validly withdraw your tendered Conrail Debentures, you will revoke
your consent to the Conrail Supplemental Indenture.
Instructions on how to tender or withdraw Conrail Debentures in this
exchange offer and consent solicitation are set forth starting on page 44 of
this prospectus and consent solicitation statement and in the letter of
consent/transmittal.
HOW CAN I GET HELP IN TENDERING MY CONRAIL DEBENTURES, OR ADDITIONAL COPIES OF
THIS MATERIAL?
Please call the information agent for this exchange offer and consent
solicitation, Innisfree M&A Incorporated. Holders of Conrail Debentures may call
toll free at (877) 456-3507. (Banks and brokers may call collect at (212)
750-5833.)
4
SUMMARY
This summary highlights selected information from this prospectus and
consent solicitation statement and may not contain all of the information that
is important to you. To better understand this exchange offer and consent
solicitation, you should read this entire document carefully, as well as those
additional documents to which we refer you. See "Where You Can Find More
Information." In this prospectus and consent solicitation statement, references
to: "Conrail Debentures" mean both the Conrail 9 3/4% Debentures and the Conrail
7 7/8% Debentures; "New CSXT Notes" mean both the New CSXT 9 3/4% Notes and the
New CSXT 7 7/8% Notes; "New NSR Notes" mean both the New NSR 9 3/4% Notes and
the New NSR 7 7/8% Notes; and "New Exchange Notes" mean both the New CSXT Notes
and the New NSR Notes.
THE CONRAIL SPIN OFF TRANSACTIONS
Conrail, a Pennsylvania corporation, is an indirect subsidiary of CRR
Holdings LLC, or "CRR Holdings." CSX and NSC directly or indirectly hold 42% and
58%, respectively, of the economic interests of CRR Holdings. In 1999, CSX and
NSC reorganized Conrail to realize certain operational benefits of their
ownership of Conrail, which they acquired jointly in 1997. As part of this
reorganization, Conrail allocated certain assets to NYC and PRR, and in turn
Conrail made these assets available to CSXT and NSR, respectively, through
operating agreements. CSXT is a wholly owned subsidiary of CSX and NSR is a
wholly owned subsidiary of NSC. As a result of this reorganization, Conrail
conveyed or leased substantially all of its property, other than the Shared
Assets Areas (as defined hereafter), to NYC and PRR. We now propose to transfer
Conrail's entire ownership interest in NYC and PRR to CSXT and NSR,
respectively.
Conrail currently owns 100% of NYC and PRR. As part of the Conrail Spin Off
Transactions, Conrail will transfer its membership interest in NYC to NYC Newco,
a newly formed Virginia corporation and wholly owned subsidiary of CSXT, and
transfer its membership interest in PRR to PRR Newco, a newly formed Virginia
corporation and wholly owned subsidiary of NSR. After a series of consecutive
steps occurring on the Closing Date, NYC and PRR will be merged with and into
NYC Newco and PRR Newco, respectively. Immediately after such mergers, NYC Newco
will be merged with and into CSXT, and PRR Newco will be merged with and into
NSR. As a result of both of these mergers, the assets and properties of NYC and
PRR will be owned directly by CSXT and NSR, respectively. Although a regulatory
approval for the Conrail Spin Off Transactions has been obtained from the STB
and favorable rulings have been received from the Internal Revenue Service, or
"IRS," these transactions remain subject to a number of conditions, including
that these approvals remain in full force and effect.
See "Description of the Conrail Spin Off Transactions" for a description of
the principal agreements governing the Conrail Spin Off Transactions, the
conditions to consummation of the Conrail Spin Off Transactions and other
related information.
THIS EXCHANGE OFFER AND CONSENT SOLICITATION
We are offering to exchange Conrail Debentures for the same aggregate
principal amount of New Exchange Notes and the Cash Payments. Except for the
interest payable by Conrail on the Closing Date and the resulting adjustment in
the amount of interest to be paid on the first interest payment date, the New
Exchange Notes will have maturity dates, interest rates, and principal and
interest payment dates identical to those of the respective series of Conrail
Debentures for which they will be offered in exchange and together will
aggregate to the same principal amounts outstanding as the existing Conrail
Debentures for which they are exchanged. The New CSXT Notes and New NSR Notes
will initially be issued by NYC Newco and PRR Newco, respectively, and will be
fully and unconditionally guaranteed by CSXT and NSR, respectively. See
"Description of the New CSXT Notes" in the CSXT Appendix for a summary of the
terms of the New CSXT Notes and "Description of the New NSR Notes" in the NSR
Appendix for a summary of the terms of the New NSR Notes.
At substantially the same time as the consummation of this exchange offer
and consent solicitation, we expect to consummate the Conrail Spin Off
Transactions pursuant to which NYC and NYC Newco will ultimately merge with and
into CSXT and PRR and PRR Newco will ultimately merge with and into NSR.
5
Upon consummation of the Conrail Spin Off Transactions, the obligations of NYC
Newco and PRR Newco, respectively, with respect to the New CSXT Notes and the
New NSR Notes, will be assumed by and become the primary obligations of CSXT and
NSR, respectively, and the CSXT and NSR guarantees will automatically terminate.
Holders of Conrail Debentures must consent to the Conrail Supplemental
Indenture described below in order to validly tender their Conrail Debentures
and have them accepted for exchange. Conrail Debentures not validly tendered and
accepted for exchange will remain obligations of Conrail but will be bound by
the Conrail Supplemental Indenture if more than 50% in aggregate principal
amount of Conrail Debentures, voting as a single class, have been validly
tendered and accepted. THE TERMS OF YOUR CONRAIL DEBENTURES MAY BE AMENDED AS A
RESULT OF THIS EXCHANGE OFFER AND CONSENT SOLICITATION WHETHER OR NOT YOU
PARTICIPATE.
This exchange offer and consent solicitation is subject to a number of
conditions summarized below under "Conditions to This Exchange Offer and Consent
Solicitation" and described in detail under "Description of This Exchange Offer
and Consent Solicitation--Conditions to This Exchange Offer and Consent
Solicitation."
PAYMENT OF INTEREST ACCRUED ON THE CONRAIL DEBENTURES, THE NEW CSXT NOTES AND
THE NEW NSR NOTES
Except as set forth in the following paragraph, holders of outstanding
Conrail Debentures who participate in this exchange offer and consent
solicitation will receive the same amount of interest payments on the same
payment dates that they would have received had they not participated in this
exchange offer and consent solicitation. You should refer to the specific terms
of each series of the securities described in this prospectus and consent
solicitation statement to determine who will be eligible to receive accrued and
unpaid interest and when accrued and unpaid interest will be paid.
Interest on each of the New CSXT Notes and New NSR Notes will accrue from
the date of original issuance of that series of new notes, which will be the
Closing Date. Interest accrued and unpaid on any Conrail Debentures accepted in
this exchange offer and consent solicitation will be paid by Conrail on each
scheduled interest payment date that occurs prior to the Closing Date. Conrail
will also pay all accrued and unpaid interest on the Conrail Debentures from the
interest payment date immediately preceding the Closing Date through and
including the calendar day immediately prior to the Closing Date. Conrail will
make this interest payment on the Closing Date. In the event the Closing Date
occurs on or before an interest payment date for any series of Conrail
Debentures but after the record date for that interest payment date, holders of
Conrail Debentures accepted in this exchange offer and consent solicitation will
be deemed to have waived their right to receive from Conrail any other amount of
interest that would otherwise be payable after the Closing Date.
Conrail Debentures that are not tendered, or are tendered but not accepted,
in this exchange offer and consent solicitation will remain outstanding debt
obligations of Conrail. Holders of these unexchanged Conrail Debentures will be
entitled to receive the same amount of interest payments on the same interest
payment dates as currently scheduled for each respective series of Conrail
Debentures.
FRACTIONAL NOTES
The New CSXT Notes and the New NSR Notes will be issued only in
denominations of $1,000 and integral multiples of $1,000, although you may be
entitled to receive interests in such New Exchange Notes that are less than
$1,000 as a result of the 42%/58% ratio applied to your validly tendered Conrail
Debentures. We refer to such amounts as "fractional interests." Accordingly, if
you would otherwise be entitled to receive a fractional interest in a New CSXT
Note and a fractional interest in a New NSR Note, you will instead receive
either a $1,000 New CSXT Note or a $1,000 New NSR Note in lieu of fractional
interests in the New Exchange Notes. Whether you will receive a New CSXT Note or
a New NSR Note in lieu of fractional interests will be determined as follows:
-- if your fractional interest in a New CSXT Note is equal to or less
than $500 and your fractional interest in a New NSR Note is equal to
or greater than $500, you will receive a $1,000 New NSR Note in lieu
of any fractional interests; or
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-- if your fractional interest in a New NSR Note is less than $500 and
your fractional interest in a New CSXT Note is greater than $500, you
will receive a $1,000 New CSXT Note in lieu of any fractional
interests.
Under no circumstances will you receive a combination of New CSXT Notes and
New NSR Notes with a combined aggregate principal amount different from the
aggregate principal amount of Conrail Debentures that you validly tender in this
exchange offer and consent solicitation. Participants in DTC are responsible for
allocating the New CSXT Notes and the New NSR Notes, as well as fractional
interests related thereto, to beneficial owners and none of DTC, CSXT, NSR, the
exchange agent, the information agent or the dealer manager is responsible for
such allocations. In the event the treatment of fractional interests causes a
deviation in the allocation of New Exchange Notes from 42% to CSXT and 58% to
NSR, the parties intend to true up the deviation between themselves.
CONDITIONS TO THIS EXCHANGE OFFER AND CONSENT SOLICITATION
The consummation of this exchange offer and consent solicitation is
conditioned upon the satisfaction of certain conditions, including:
-- that holders of more than 50% of the aggregate principal amount of
the Conrail Debentures, voting as a single class, have consented to
the Conrail Supplemental Indenture by validly tendering and not
withdrawing their Conrail Debentures on or prior to the expiration
date;
-- that we have received required consents to the Conrail Spin Off
Transactions from holders of a majority of each series of Conrail's
equipment trust certificates and pass through trust certificates set
forth in the Distribution Agreement, as well as from each of the
related equity investors, lessors, owner trustees and owner
participants, in the solicitation that is occurring concurrently with
this exchange offer and consent solicitation; and
-- that all conditions in the Distribution Agreement have been satisfied
or waived and that the Distribution Agreement has not been
terminated.
For a detailed description of these and other conditions, see "Description
of This Exchange Offer and Consent Solicitation--Conditions to This Exchange
Offer and Consent Solicitation."
We reserve the right, subject to applicable laws, to (a) waive any and all
conditions to this exchange offer and consent solicitation and (b) terminate or
extend this exchange offer and consent solicitation at any time and thereby
delay acceptance for exchange of all Conrail Debentures validly tendered on or
prior to the expiration date.
NO PRORATION
This exchange offer and consent solicitation for Conrail Debentures is for
all such Conrail Debentures and is not subject to proration among holders of
Conrail Debentures who validly tender and do not withdraw their Conrail
Debentures on or prior to the expiration date.
PURPOSE OF THIS EXCHANGE OFFER AND CONSENT SOLICITATION AND DESCRIPTION OF THE
PROPOSED AMENDMENTS
We are making this exchange offer and consent solicitation in connection
with the proposed non-taxable transfer, through a series of consecutive and
related transactions, of Conrail's ownership interest in NYC and PRR to CSXT and
NSR, respectively. The Conrail Spin Off Transactions are described under
"Description of the Conrail Spin Off Transactions."
In connection with the exchange offer, Conrail is soliciting consents from
the holders of Conrail Debentures to certain proposed amendments to the Conrail
Indenture that, when effective, will, among other things, eliminate
substantially all the restrictive covenants contained in the Conrail Indenture.
One of the restrictive covenants that we intend to remove is the merger covenant
which would otherwise prohibit the transfer of Conrail's ownership interest in
NYC to CSXT and PRR to NSR, respectively. As a result, a majority in aggregate
principal amount of the Conrail Debentures, voting as a single class, must
consent to the proposed amendments, including the elimination of this merger
covenant, in order to permit the Conrail Spin Off Transactions.
7
The proposed amendments will also eliminate certain events of default and
will make certain other conforming and definitional changes to the Conrail
Indenture. You will not be entitled to any dissenters' rights if the Conrail
Supplemental Indenture becomes effective without your consent. For more
information about the proposed amendments, see "Description of This Exchange
Offer and Consent Solicitation--Proposed Amendments."
THE TEMPORARY GUARANTEES AND THE NEWCO MERGERS
As part of the Conrail Spin Off Transactions, the New CSXT Notes and the
New NSR Notes will be issued initially to Conrail by NYC Newco and PRR Newco,
along with substantially all of the stock of NYC Newco and PRR Newco,
respectively, in exchange for Conrail's membership interests in NYC and PRR.
This initial step and certain other consecutive steps must occur prior to the
merger of NYC Newco into CSXT and the merger of PRR Newco into NSR. CSXT and NSR
will fully and unconditionally guarantee the New CSXT Notes and the New NSR
Notes, respectively. The guarantees will rank equally with all other general
unsecured and unsubordinated obligations of CSXT and NSR. Upon consummation of
the Conrail Spin Off Transactions, which are expected to be consummated within a
single business day, the obligations of NYC Newco and PRR Newco, respectively,
with respect to the New CSXT Notes and the New NSR Notes will be assumed by and
will become the primary obligations of CSXT and NSR, respectively, through the
respective mergers of NYC Newco with and into CSXT and PRR Newco with and into
NSR. Upon consummation of these mergers, the CSXT and NSR guarantees will
automatically terminate.
For more information regarding the temporary guarantees, see "Description
of the New CSXT Notes--Guarantees" in the CSXT Appendix and "Description of the
New NSR Notes--Guarantees" in the NSR Appendix.
EXPIRATION, EXTENSION, TERMINATION OR AMENDMENT OF THIS EXCHANGE OFFER AND
CONSENT SOLICITATION
This exchange offer and consent solicitation will expire at 5:00 p.m., New
York City time, on August 23, 2004, unless we extend it or terminate it.
We will comply with applicable laws that require us to extend the period
during which the Conrail Debentures may be tendered or withdrawn as a result of
changes in the terms of, or information relating to, this exchange offer and
consent solicitation. We will announce any extensions or terminations by press
release or other permitted public announcement no later than 9:00 a.m., New York
City time, on the first business day following the previously scheduled
expiration date of this exchange offer and consent solicitation, unless
terminated earlier.
Without limiting the manner in which we may choose to make public
announcements of any extension, termination or amendment of this exchange offer
and consent solicitation, we shall have no obligation to publish, advertise or
otherwise communicate any public announcement, other than by making a timely
release to the Dow Jones News Service.
PROCEDURES FOR TENDERING OR WITHDRAWING CONRAIL DEBENTURES
If you wish to tender Conrail Debentures held in your name in this exchange
offer and consent solicitation and become eligible to receive the New Exchange
Notes and the 9 3/4% Cash Payment or the 7 7/8% Cash Payment, you must submit
your Conrail Debentures and a validly completed and duly executed letter of
consent/transmittal to the exchange agent, at the address set forth below under
"The Exchange Agent," on or prior to the expiration date.
If you hold the Conrail Debentures through DTC and wish to participate in
this exchange offer and consent solicitation, you must transfer your Conrail
Debentures in accordance with DTC's ATOP procedures. In lieu of delivering a
letter of consent/transmittal to the exchange agent, an electronic message, in
which a holder acknowledges and agrees to be bound by the terms of the letter of
consent/transmittal, must be transmitted by DTC on behalf of a holder of Conrail
Debentures and must be received by the exchange agent on or prior to the
expiration date. In all other cases, a letter of consent/transmittal must be
manually executed
8
and received by the exchange agent on or before the expiration date. By signing,
or agreeing to be bound by, the letter of consent/transmittal, you will be
consenting to the Conrail Supplemental Indenture.
All Conrail Debentures held by a single beneficial holder and not by a
nominee, trustee or other representative must be tendered on a single letter of
consent/transmittal.
You may withdraw tendered Conrail Debentures at any time on or prior to the
expiration date. After the expiration date, you may not withdraw your Conrail
Debentures. If you validly withdraw your tendered Conrail Debentures, you will
be deemed to have revoked your related consent to the Conrail Supplemental
Indenture.
If we decide for any reason not to accept any tendered Conrail Debentures,
those tendered Conrail Debentures will be returned without expense to the
tendering holders promptly following the expiration or termination of this
exchange offer and consent solicitation.
SEE PAGES 44 THROUGH 50 AND THE LETTER OF CONSENT/TRANSMITTAL FOR
PROCEDURES ON HOW TO TENDER OR WITHDRAW YOUR CONRAIL DEBENTURES.
SPECIAL PROCEDURES FOR BENEFICIAL OWNERS
If you are the beneficial owner of Conrail Debentures and your name does
not appear on a security position listing of DTC as the holder of such Conrail
Debentures, or if you are a beneficial owner of Conrail Debentures that are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee, and you wish to tender your Conrail Debentures in this exchange
offer and consent solicitation, you should promptly contact the person in whose
name your Conrail Debentures are registered and instruct such person to tender
on your behalf. If you wish to tender on your own behalf, you must, prior to
executing the letter of consent/transmittal and delivering your Conrail
Debentures, either make appropriate arrangements to register ownership of the
Conrail Debentures in your name or obtain a properly completed bond power from
the registered holder. Such a transfer of record ownership may take considerable
time.
GUARANTEED DELIVERY PROCEDURE
If you wish to tender your Conrail Debentures and your Conrail Debentures
are not immediately available or you cannot deliver your Conrail Debentures, the
letter of consent/transmittal or any other documents required by the letter of
consent/transmittal, or you cannot comply with the applicable procedures under
ATOP, on or prior to the expiration date, you must tender your Conrail
Debentures according to the guaranteed delivery procedures set forth in this
prospectus and consent solicitation statement under the "Description of This
Exchange Offer and Consent Solicitation--Guaranteed Delivery Procedures."
USE OF PROCEEDS
None of CSXT, NSR, Conrail or any other person will receive any cash
proceeds from the issuance of the New Exchange Notes in this exchange offer and
consent solicitation.
CERTAIN STRUCTURAL CONSIDERATIONS
Pursuant to the Transaction Agreement (as defined hereafter), CSX and NSC
committed to one another that they shall ensure that Conrail Inc., or "CRR,"
Conrail and their affiliates have sufficient cash to satisfy Conrail's retained
liabilities, including the Conrail Debentures, as they become due and any
operating and other expenses. Following receipt by CRR Holdings of written
notice from Conrail's board of directors (which is composed solely of
representatives of CSX and NSC) that Conrail requires additional cash to satisfy
its retained liabilities, CRR Holdings agreed to provide such cash to Conrail.
CSX and NSC intend that the economic burden of Conrail's retained liabilities
will continue to be borne without change, directly or indirectly, 42% by CSX and
58% by NSC.
For more information regarding the Transaction Agreement, see "Description
of the Conrail Spin Off Transactions--Background to the Conrail Spin Off
Transactions."
9
THE COMPANIES
CSXT AND NYC NEWCO
For a description of CSXT and NYC Newco, please refer to the CSXT Appendix
to this prospectus and consent solicitation statement.
NSR AND PRR NEWCO
For a description of NSR and PRR Newco, please refer to the NSR Appendix to
this prospectus and consent solicitation statement.
CONRAIL
Conrail, a principal freight railroad in the Northeastern United States, is
a wholly owned subsidiary of CRR. CSX and NSC, the major rail holding companies
in the Eastern United States, jointly control CRR through their ownership
interests in CRR Holdings, whose primary subsidiary is Green Acquisition Corp.,
or "Green Corp.," which owns CRR. CSX and NSC have equity interests in CRR
Holdings of 42% and 58%, respectively, and voting interests of 50% each. Under
operating and lease agreements, CSX and NSC operate a substantial portion of
Conrail's properties through their respective railroad subsidiaries, CSXT and
NSR. The major source of CRR's revenues is from CSXT and NSR, primarily in the
form of rental revenues and operating fees. Conrail is a wholly owned subsidiary
and as a consequence there is no market for its stock. Conrail's principal
executive offices are located at 2001 Market Street, 29th Floor, Philadelphia,
PA 19103, and its telephone number is (215) 209-5099.
DESCRIPTION OF THE NEW CSXT NOTES
The New CSXT Notes will be entitled to the benefits and will be subject to
the terms and conditions of the indenture, or the "New CSXT Indenture," to be
entered into among NYC Newco, as initial issuer, CSXT, as guarantor, and The
Bank of New York, as trustee. The New CSXT Notes will consist of the New 9 3/4%
CSXT Notes and the New 7 7/8% CSXT Notes and, except for the interest payable by
Conrail on the Closing Date and the resulting adjustment in the amount of
interest to be paid on the first interest payment date, will have maturity
dates, interest rates, and principal and interest payment dates identical to the
Conrail 9 3/4% Debentures and the Conrail 7 7/8% Debentures, respectively. The
New CSXT Notes will also be issued under an indenture containing covenants and
events of default substantially similar to those contained in the existing
indentures of CSX governing CSX's senior unsecured debt securities. The New CSXT
Notes will initially be issued by NYC Newco and will be fully and
unconditionally guaranteed by CSXT. In connection with the consummation of the
Conrail Spin Off Transactions, NYC Newco will be merged with and into CSXT, who
will thereby assume the obligations of NYC Newco with respect to the New CSXT
Notes and will become the primary obligor of the New CSXT Notes, and the
guarantee will thereafter automatically terminate. If the Distribution Agreement
is terminated, the Conrail Debentures will not be exchanged for the New Exchange
Notes and the Cash Payments, and the Conrail Debentures will remain the
obligations of Conrail, subject to their current terms.
BASIC TERMS OF THE NEW CSXT NOTES
The New CSXT Notes will consist of the New 9 3/4% CSXT Notes and the New
7 7/8% CSXT Notes.
The economic terms of the New 9 3/4% CSXT Notes will be substantially
identical to the terms of the current Conrail 9 3/4% Debentures. Specifically,
the New 9 3/4% CSXT Notes:
-- will have a maximum aggregate principal amount of $231 million, which
is equal to 42% of the aggregate principal amount of the Conrail
9 3/4% Debentures, subject to the treatment of fractional interests;
-- will mature on June 15, 2020;
-- will be dated as of the Closing Date; and
10
-- will accrue interest at 9 3/4% per year, payable in cash
semi-annually in arrears on each of June 15 and December 15 of each
year, beginning December 15, 2004.
The initial interest payment on December 15, 2004 will include interest
accrued from the date of original issuance of the New 9 3/4% CSXT Notes, which
will be the date this exchange offer and consent solicitation is consummated.
The economic terms of the New 7 7/8% CSXT Notes will be substantially
identical to the terms of the Conrail 7 7/8% Debentures. Specifically, the New
7 7/8% CSXT Notes:
-- will have a maximum aggregate principal amount of $105 million, which
is equal to 42% of the aggregate principal amount of the Conrail
7 7/8% Debentures, subject to the treatment of fractional interests;
-- will mature on May 15, 2043;
-- will be dated as of the Closing Date; and
-- will accrue interest at 7 7/8% per year, payable in cash
semi-annually in arrears on each of May 15 and November 15 of each
year, beginning November 15, 2004.
The initial interest payment on November 15, 2004 will include interest
accrued from the date of original issuance of the New 7 7/8% CSXT Notes, which
will be the date this exchange offer and consent solicitation is consummated.
RANKING
The New CSXT Notes will be senior unsecured obligations of NYC Newco and
CSXT and will rank equally with all existing and future senior unsecured
indebtedness of NYC Newco and CSXT, if any.
As of March 26, 2004, CSXT would have had approximately $1,409 million of
total indebtedness outstanding if holders of 100% of the Conrail Debentures had
validly tendered and not withdrawn their Conrail Debentures in connection with
this exchange offer and consent solicitation and the Conrail Spin Off
Transactions were consummated as of that date. Following the assumption by CSXT
of NYC Newco's obligations under the New CSXT Notes, the New CSXT Notes will be
subordinated to any secured indebtedness of CSXT, to the extent of the assets
securing that indebtedness, and structurally subordinated to all existing and
future obligations of subsidiaries of CSXT, including claims with respect to
trade payables. As of March 26, 2004, CSXT had approximately $815 million of
secured indebtedness and its subsidiaries had approximately $1 million of
unsecured indebtedness, each of which would rank senior to the New CSXT Notes.
Of the $815 million of secured indebtedness outstanding of CSXT, subsidiaries of
CSXT had approximately $30 million of secured indebtedness outstanding as of
March 26, 2004. In addition, as of March 26, 2004, CSXT had approximately $2,914
million of intercompany liabilities due to CSX and $294 million of intercompany
liabilities due to other affiliates of CSXT, each of which would rank equally
with or junior to the New CSXT Notes.
The New CSXT Notes rank senior to all subordinated indebtedness of NYC
Newco, and following the assumption of the obligations of NYC Newco with respect
thereto by CSXT, the New CSXT Notes will rank senior to all subordinated
indebtedness of CSXT then outstanding.
THE TEMPORARY GUARANTEE
The New CSXT Notes to be offered in the exchange offer by NYC Newco will be
fully and unconditionally guaranteed by CSXT, a wholly owned subsidiary of CSX.
The CSXT Guarantee will rank equally with all other existing and future senior
unsecured obligations of CSXT, if any. In connection with the consummation of
the Conrail Spin Off Transactions, NYC Newco will be merged with and into CSXT,
after which CSXT will become the primary obligor of the New CSXT Notes, and the
guarantee will automatically terminate. For more information regarding the CSXT
Guarantee, see "Description of the New CSXT Notes--Guarantees" in the CSXT
Appendix.
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MARKET FOR THE NEW CSXT NOTES; LISTING
CSXT does not intend to apply for listing or quotation of the New CSXT
Notes on any national securities exchange or market quotation system.
NO REDEMPTION
The New CSXT Notes will not be subject to redemption of any kind at any
time prior to maturity.
COVENANTS
The New CSXT Indenture under which the New CSXT Notes will be issued will
contain covenants that, among other things, limit the ability of NYC Newco, CSXT
and their subsidiaries to incur liens on the stock or indebtedness of The
Baltimore and Ohio Chicago Terminal Railroad Company, a wholly owned subsidiary
of CSXT, or "BOCT," and limit the ability of CSXT to enter into some types of
mergers and consolidations, in each case, other than in connection with the
Conrail Spin Off Transactions. These covenants are substantially similar to
those contained in the existing indentures of CSX governing CSX's unsecured debt
securities. See "Description of the New CSXT Notes--Certain Covenants" in the
CSXT Appendix. The New CSXT Notes will not contain financial covenants.
DESCRIPTION OF THE NEW NSR NOTES
The New NSR Notes will be entitled to the benefits and subject to the terms
and conditions of the base indenture and a first supplemental indenture, or
together the "New NSR Indenture," to be entered into among PRR Newco, as initial
issuer, NSR, as guarantor, and The Bank of New York, as trustee. The New NSR
Notes will consist of the New 9 3/4% NSR Notes and the New 7 7/8% NSR Notes and,
except for the interest payable by Conrail on the Closing Date and the resulting
adjustment in the amount of interest to be paid on the first interest payment
date, will have maturity dates, interest rates, and principal and interest
payment dates identical to the Conrail 9 3/4% Debentures and the Conrail 7 7/8%
Debentures, respectively. The New NSR Notes will be issued under a base
indenture and a first supplemental indenture containing covenants and events of
default substantially similar to those contained in the existing indentures of
NSC governing their senior unsecured debt securities. The New NSR Notes will
initially be issued by PRR Newco and will be fully and unconditionally
guaranteed by NSR. In connection with the consummation of the Conrail Spin Off
Transactions, PRR Newco will be merged with and into NSR, after which NSR will
become the primary obligor of the New NSR Notes, and the guarantee will
thereafter automatically terminate. If the Conrail Spin Off Transactions are not
consummated, the Conrail Debentures will remain the obligations of Conrail
subject to their current terms.
BASIC TERMS OF THE NEW NSR NOTES
The New NSR Notes will consist of the New 9 3/4% NSR Notes and the New
7 7/8% NSR Notes.
The economic terms of the New 9 3/4% NSR Notes will be substantially
identical to the terms of the current Conrail 9 3/4% Debentures. Specifically,
the New 9 3/4% NSR Notes:
-- will have a maximum aggregate principal amount of $319 million, which
is equal to 58% of the aggregate principal amount of the Conrail
9 3/4% Debentures, subject to the treatment of fractional interests;
-- will mature on June 15, 2020;
-- will be dated as of the Closing Date; and
-- will accrue interest at 9 3/4% per year, payable in cash
semi-annually in arrears on each of June 15 and December 15 of each
year, beginning December 15, 2004.
The initial interest payment on December 15, 2004 will include interest
accrued from the date of original issuance of the New 9 3/4% NSR Notes, which
will be the date this exchange offer and consent solicitation is consummated.
12
The economic terms of the New 7 7/8% NSR Notes will be substantially
identical to the terms of the Conrail 7 7/8% Debentures. Specifically, the New
7 7/8% NSR Notes:
-- will have a maximum aggregate principal amount of $145 million, which
is equal to 58% of the aggregate principal amount of the Conrail
7 7/8% Debentures, subject to the treatment of fractional interests;
-- will mature on May 15, 2043;
-- will be dated as of the Closing Date; and
-- will accrue interest at 7 7/8% per year, payable in cash
semi-annually in arrears on each of May 15 and November 15 of each
year, beginning November 15, 2004.
The initial interest payment on November 15, 2004 will include interest
accrued from the date of original issuance of the New 7 7/8% NSR Notes, which
will be the date this exchange offer and consent solicitation is consummated.
RANKING
The New NSR Notes will be senior unsecured obligations of PRR Newco and NSR
and will rank equally with all existing and future senior unsecured indebtedness
of PRR Newco and NSR, if any.
As of March 31, 2004, NSR would have had approximately $1,696 million of
total indebtedness outstanding if holders of 100% of the Conrail Debentures had
validly tendered and not withdrawn their Conrail Debentures in connection with
this exchange offer and consent solicitation and the Conrail Spin Off
Transactions were consummated as of that date. Following the assumption by NSR
of PRR Newco's obligations under the New NSR Notes, the New NSR Notes will be
subordinated to any secured indebtedness of NSR, to the extent of the assets
securing that indebtedness, and structurally subordinated to all existing and
future obligations of subsidiaries of NSR, including claims with respect to
trade payables. As of March 31, 2004, NSR had approximately $850 million of
secured indebtedness on a consolidated basis which would rank senior to the New
NSR Notes. As of March 31, 2004, subsidiaries of NSR had no outstanding
indebtedness. In addition, as of March 31, 2004, NSR had $765 million of
intercompany liabilities due to NSC which would rank equally with or junior to
the New NSR Notes.
The New NSR Notes will be senior in right of payment to all existing and
future subordinated indebtedness, including $8 million aggregate principal
amount of guarantees of NSR outstanding as of March 31, 2004.
THE TEMPORARY GUARANTEE
The New NSR Notes to be offered in the exchange offer by PRR Newco will be
fully and unconditionally guaranteed by NSR, a wholly owned subsidiary of NSC.
The NSR Guarantee will rank equally with all other existing and future senior
unsecured obligations of NSR, if any. In connection with the consummation of the
Conrail Spin Off Transactions, PRR Newco will be merged with and into NSR, after
which NSR will become the primary obligor of the New NSR Notes, and the
guarantee will automatically terminate. For more information regarding the NSR
Guarantee, see "Description of the New NSR Notes--Guarantees" in the NSR
Appendix.
MARKET FOR THE NEW NSR NOTES; LISTING
NSR does not intend to apply for listing or quotation of the New NSR Notes
on any national securities exchange or market quotation system.
NO REDEMPTION
The New NSR Notes will not be subject to redemption of any kind at any time
prior to maturity.
13
COVENANTS
The New NSR Indenture under which the New NSR Notes will be issued will
contain covenants that, among other things, limit the ability of PRR Newco, NSR
and their subsidiaries to incur liens on the stock or indebtedness of The
Alabama Great Southern Railroad Company, a wholly owned subsidiary of NSR, or
"AGS," or engage in certain transactions involving funded debt, and limit the
ability of PRR Newco and NSR to enter into some types of mergers and
consolidations in each case, other than in connection with the Conrail Spin Off
Transactions. These covenants are substantially similar to those contained in
the existing indentures of NSC governing NSC's unsecured debt securities. See
"Description of the New NSR Notes--Certain Covenants" in the NSR Appendix. The
New NSR Notes will not contain financial covenants.
SURFACE TRANSPORTATION BOARD APPROVAL
Railroad mergers and acquisitions are subject to the exclusive jurisdiction
of the STB, successor to the Interstate Commerce Commission. By written decision
on November 7, 2003, the STB, among other things, (1) approved the consolidation
of the business, assets and operations of NYC within CSXT and the consolidation
of the business, assets and operations of PRR within NSR, (2) specifically
authorized, subject to certain conditions, the Conrail Spin Off Transactions and
(3) rejected a condition requested by certain holders of Conrail Debentures that
would have conditioned the Conrail Spin Off Transactions on successful
negotiation of certain terms with these holders. Since the receipt of the
November 2003 STB decision, we have had preliminary discussions with members of
a committee which purports to represent certain holders of Conrail Debentures.
The STB also confirmed that it has the authority to make a determination
that the treatment of the holders of the Conrail Debentures under the terms of
this exchange offer and consent solicitation is fair, just and reasonable, which
we refer to as a "fairness determination." In the event that the STB makes such
a fairness determination, the STB could issue a ruling that allows Conrail, CSX
and Norfolk Southern to consummate the Conrail Spin Off Transactions and this
exchange offer and consent solicitation without the consent of the holders of
the Conrail Debentures and/or pursuant to such other terms and conditions as the
STB may prescribe. Following the filing with the STB of any request for a
fairness determination, we may, unless the STB determines otherwise, (a) wait
until the STB makes its fairness determination before consummating the Conrail
Spin Off Transactions, at which time Conrail, CSX and Norfolk Southern could
decide, based solely on their business judgment, not to consummate the Conrail
Spin Off Transactions, or (b) consummate the Conrail Spin Off Transactions in
advance of the STB's fairness determination, which fairness determination would
be final and binding as to all parties, but subject to judicial review in the
United States Court of Appeals. Holders would be free to participate in any STB
fairness determination at their own cost and through their own counsel.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The U.S. federal income tax consequences to a holder of Conrail Debentures
vary depending on whether or not the holder participates in this exchange offer
and consent solicitation. Depending on those facts, a holder of Conrail
Debentures may recognize gain or loss for U.S. federal income tax purposes in
connection with this exchange offer and consent solicitation and the
modification of certain terms of such notes upon consummation of the Conrail
Spin Off Transactions. See "Description of This Exchange Offer and Consent
Solicitation--Material United States Federal Income Tax Consequences of This
Exchange Offer and Consent Solicitation" starting on page 53 of this prospectus
and consent solicitation statement.
THE DEALER MANAGER
Morgan Stanley & Co. Incorporated will act as dealer manager for this
exchange offer and consent solicitation, and can be reached at the address and
telephone number set forth on the back cover of this prospectus and consent
solicitation statement.
14
THE INFORMATION AGENT
We have engaged Innisfree M&A Incorporated as the information agent for
this exchange offer and consent solicitation. Requests for additional copies of
this prospectus and consent solicitation statement or the letter of
consent/transmittal and for assistance in tendering your Conrail Debentures
should be directed to the information agent below.
Innisfree M&A Incorporated
501 Madison Avenue, 20th Floor
New York, New York 10022
Banks and Brokers Call Collect:
(212) 750-5833
All Others Call Toll Free:
(877) 456-3507
THE EXCHANGE AGENT
We have engaged The Bank of New York as the exchange agent for purposes of
processing tenders and withdrawals of your Conrail Debentures in this exchange
offer and consent solicitation. The address and telephone number of the exchange
agent are as follows:
The Bank of New York
Reorganization Unit
101 Barclay Street, 7E
New York, New York 10286
Attn: William Buckley/Carolle Montreuil
Facsimile Transmissions:
(212) 298-1915
To Confirm by Telephone:
(212) 815-5788/5920
15
SELECTED HISTORICAL FINANCIAL DATA
CSXT
For a description of the selected historical financial data of CSXT, please
refer to the CSXT Appendix attached hereto.
NSR
For a description of the selected historical financial data of NSR, please
refer to the NSR Appendix attached hereto.
CONRAIL
The following table sets forth selected historical financial data of
Conrail. The consolidated statements of operations data for the three months
ended March 31, 2004 and 2003 and the consolidated balance sheet data as of
March 31, 2004 have been derived from our unaudited consolidated financial
statements which are included in this prospectus and consent solicitation
statement. The consolidated statements of operations data for the years ended
December 31, 2003, 2002 and 2001, and the consolidated balance sheet data as of
December 31, 2003 and 2002, have been derived from Conrail's audited
consolidated financial statements, which are included in this prospectus and
consent solicitation statement. The consolidated balance sheet data as of March
31, 2003 has been derived from our unaudited consolidated financial statements
which are not included in this prospectus and consent solicitation statement.
The consolidated statements of operations data for the years ended December 31,
2000 and 1999, and the consolidated balance sheet data as of December 31, 2001,
2000 and 1999, are derived from Conrail's audited consolidated financial
statements not included or incorporated by reference in this prospectus and
consent solicitation statement. This data should be read in conjunction with the
unaudited pro forma financial information, related notes and other financial
information included in this prospectus and consent solicitation statement.
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------- -------------------------------------------
2004 2003 2003 2002 2001 2000 1999(A)
------ ------ ------ ------ ------ ------ -------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Railway Operating Revenues...... $ 230 $ 226 $ 918 $ 893 $ 903 $ 985 $2,168
Railway Operating Expenses...... 162 163 659 623 639 749 2,033
------ ------ ------ ------ ------ ------ ------
INCOME FROM RAILWAY
OPERATIONS............... 68 63 259 270 264 236 135
Interest Expense................ (24) (25) (99) (104) (109) (124) (151)
Other Income, Net............... 27 20 95 92 96 149 76
------ ------ ------ ------ ------ ------ ------
Income from Continuing
Operations before Income Taxes
and Accounting Change(s)...... 71 58 255 258 251 261 60
Provision for Income Taxes...... 26 22 93 71 81 94 19
------ ------ ------ ------ ------ ------ ------
Income from Continuing
Operations before Accounting
Change(s)..................... 45 36 162 187 170 167 41
Cumulative Effect of Change(s)
in Accounting
Principle(s)(b)............... (1) 40 40 -- -- -- --
------ ------ ------ ------ ------ ------ ------
NET INCOME...................... $ 44 $ 76 $ 202 $ 187 $ 170 $ 167 $ 41
====== ====== ====== ====== ====== ====== ======
</Table>
(footnotes on next page)
16
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------- -------------------------------------------
2004 2003 2003 2002 2001 2000 1999(a)
------ ------ ------ ------ ------ ------ -------
($ IN MILLIONS)
FINANCIAL POSITION (AS OF PERIOD
END)
Total Assets.................... $8,199 $8,121 $8,101 $8,040 $7,958 $7,939 $8,284
Total Long-Term Debt, including
Current Maturities............ 1,150 1,170 1,125 1,180 1,216 1,290 1,621
Stockholder's Equity............ 4,394 4,197 4,350 4,120 3,990 3,887 3,278
OTHER
Capital Expenditures............ $ 3 $ 7 $ 35 $ 23 $ 47 $ 220 $ 176
Employees--End of Period........ 1,306 1,397 1,346 1,415 1,544 1,750 2,315
</Table>
- ------------
(a) The operations of Conrail substantially changed beginning June 1, 1999, when
CSXT and NSR began operating a portion of Conrail's properties under
operating agreements. Effective on that date, Conrail's major source of
operating revenues became operating fees and lease rentals from CSXT and
NSR. The composition of Conrail's operating expenses was also impacted by
the change in operations. As a result, Conrail's 1999 results reflect both
freight railroad operations through May 31, 1999 and Conrail's newly
restructured operations thereafter.
(b) Net income in 2003 reflects a cumulative effect accounting change related to
the cost to remove railroad crossties that increased net income by $40
million.
17
UNAUDITED PRO FORMA FINANCIAL INFORMATION
CSXT
For information relating to the unaudited pro forma financial information
of CSXT, please refer to the CSXT Appendix attached hereto.
NSR
For information relating to the unaudited pro forma financial information
of NSR, please refer to the NSR Appendix attached hereto.
CONRAIL
The unaudited pro forma financial information set forth below gives effect
to the Conrail Spin Off Transactions and the assumptions described in the
accompanying notes. This unaudited pro forma consolidated financial information
is presented for informational purposes only. The pro forma information is not
necessarily indicative of what the financial position or results of operations
actually would have been had the Conrail Spin Off Transactions occurred on the
dates indicated. In addition, the unaudited pro forma consolidated financial
information does not purport to project the future financial position or
operating results of Conrail. The unaudited condensed pro forma consolidated
balance sheet has been prepared giving effect to the Conrail Spin Off
Transactions as if such transactions had occurred on March 31, 2004. The
unaudited pro forma consolidated statements of operations have been prepared as
if the Conrail Spin Off Transactions had occurred on January 1, 2003. The
unaudited pro forma financial information is based on historical financial
information.
CONRAIL UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
QUARTER ENDED MARCH 31, 2004 YEAR ENDED DECEMBER 31, 2003
----------------------------------------------- -----------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- -------------------- --------- ---------- -------------------- ---------
($ IN MILLIONS)
Operating Revenues............ $230 $(142)(a),(b) $88 $918 $(562)(a),(b) $356
Operating Expenses:
Compensation and Benefits... 45 -- 45 168 -- 168
Material, Services and
Rents..................... 28 -- 28 119 (1)(d) 118
Depreciation and
Amortization.............. 79 (73)(c) 6 329 (302)(c) 27
Fuel........................ 2 -- 2 7 (1)(d) 6
Casualties and Insurance.... 3 -- 3 17 -- 17
Other....................... 5 (1)(d) 4 19 (6)(d) 13
---- ----- --- ---- ----- ----
Total Operating
Expenses................ 162 (74) 88 659 (310) 349
---- ----- --- ---- ----- ----
Income from Operations.... 68 (68) -- 259 (252) 7
Interest Expense.............. (24) 18 (e) (6) (99) 73 (e) (26)
Other Income, Net............. 27 (5)(f),(g),(h) 22 95 (13)(f),(g),(h) 82
---- ----- --- ---- ----- ----
Income before Income Taxes
and Accounting
Change(s)............... 71 (55) 16 255 (192) 63
Provision for Income Taxes.... 26 (20)(i) 6 93 (70)(i) 23
---- ----- --- ---- ----- ----
Income before Accounting
Change(s)............... $ 45 $ (35) $10 $162 $(122) $ 40
==== ===== === ==== ===== ====
</Table>
(footnotes on next page)
18
The following adjustments record the various income and expense effects of the
Conrail Spin Off Transactions. All amounts recorded are based on historical
information.
(a) To record decreases of $152 million for the quarter ended March 31, 2004
and $602 million for the year ended December 31, 2003, related to the
cancellation of operating and lease agreements of NYC and PRR with CSXT and
NSR, respectively, as a result of the Conrail Spin Off Transactions.
(b) To record additional revenue of $10 million for the quarter ended March 31,
2004 and $40 million for the year ended December 31, 2003, related to
sublease transactions with CSXT and NSR.
(c) To record the decreases in depreciation expense related to the transfer of
net property and equipment of NYC and PRR to CSXT and NSR, respectively.
(d) To record the transfer of various expenses of NYC and PRR to CSXT and NSR,
respectively.
(e) To record the decreases in interest expense related to the cancellation of
Conrail Debentures, assuming all holders validly tender.
(f) To record the decrease in interest income of $5 million for the quarter
ended March 31, 2004 and $17 million for the year ended December 31, 2003,
related to the transfer of Notes Receivable of NYC and PRR to CSXT and NSR,
respectively.
(g) To record additional interest income of $6 million for the quarter ended
March 31, 2004 and $25 million for the year ended December 31, 2003,
related to sublease transactions with CSXT and NSR.
(h) To record the decrease of $6 million for the quarter ended March 31, 2004
and $21 million for the year ended December 31, 2003 related to the
transfer of other income, principally equity in earnings of affiliated
companies of NYC and PRR to CSXT and NSR, respectively.
(i) To record $20 million for the quarter ended March 31, 2004 and $70 million
for the year ended December 31, 2003 for the tax effects of the above
adjustments at Conrail's statutory tax rate of 39.2%.
Certain of the above adjustments would be different if less than all holders
of Conrail Debentures validly tender, and do not withdraw, their Conrail
Debentures in this exchange offer and consent solicitation. If 51% of holders
validly tender, and do not withdraw, their Conrail Debentures in this exchange
offer and consent solicitation, the amount for adjustment (e) would be reduced
to $9 million for the quarter ended March 31, 2004 and $37 million for the year
ended December 31, 2003, and the amount for adjustment (i) would be increased to
$23 million for the quarter ended March 31, 2004 and $83 million for the year
ended December 31, 2003.
If 75% of holders validly tender, and do not withdraw, their Conrail
Debentures in this exchange offer and consent solicitation, the amount for
adjustment (e) would be reduced to $14 million for the quarter ended March 31,
2004 and $55 million for the year ended December 31, 2003, and the amount for
adjustment (i) would be increased to $22 million for the quarter ended March 31,
2004 and $76 million for the year ended December 31, 2003.
19
CONRAIL UNAUDITED CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
AS OF MARCH 31, 2004
---------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- -------------------- ---------
($ IN MILLIONS)
ASSETS
Current Assets:
Cash and Cash Equivalents............................ $ 10 $ (1)(a) $ 9
Accounts Receivable, net............................. 33 (5)(a) 28
Due from NSR/CSXT.................................... 154 -- (b),(c) 154
Material and Supplies................................ 8 -- 8
Deferred Tax Assets.................................. 45 -- 45
Other Current Assets................................. 14 (9)(a) 5
------ ------- ------
Total Current Assets.............................. 264 (15) 249
Investments.......................................... 290 (290)(d) --
Property and Equipment, net.......................... 6,077 (5,522)(e) 555
Notes Receivable from NSC/CSX........................ 1,348 (1,348)(f) --
Other Assets......................................... 220 306 (g) 526
------ ------- ------
Total Assets...................................... $8,199 $(6,869) $1,330
====== ======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts Payable..................................... $ 70 $ (3)(h) $ 67
Current Maturities of Long-Term Debt................. 56 -- 56
Due to NSC/CSX....................................... 6 55 (i) 61
Wages and Employee Benefits.......................... 25 -- 25
Casualty Reserves.................................... 38 -- 38
Accrued and Other Current Liabilities................ 120 (11)(j) 109
------ ------- ------
Total Current Liabilities......................... 315 41 356
Long-Term Debt......................................... 1,094 (800)(k) 294
Casualty Reserves...................................... 121 -- 121
Deferred Income Taxes.................................. 1,820 (1,524)(l) 296
Other Liabilities...................................... 455 (19)(m) 436
------ ------- ------
Total Liabilities................................. 3,805 (2,302) 1,503
Stockholder's Equity................................... 4,394 (4,567)(n) (173)
------ ------- ------
Total Liabilities and Stockholder's Equity........ $8,199 $(6,869) $1,330
====== ======= ======
</Table>
The following adjustments reflect the transfer of ownership of NYC and PRR
assets and liabilities to CSXT and NSR, respectively, and other transactions, as
a result of the Conrail Spin Off Transactions. All amounts are based on
historical information.
(footnotes on next page)
20
(a) To record the transfer of cash and other current assets of NYC and PRR to
CSXT and NSR, respectively.
(b) To record current receivables, principally sublease receivables of $51
million, from CSXT and NSR.
(c) To record cancellation of operating and lease agreement receivables of $51
million of NYC and PRR with CSXT and NSR, respectively.
(d) To record the transfer of investments of NYC and PRR to CSXT and NSR,
respectively.
(e) To record the transfer of net property and equipment of NYC and PRR to CSXT
and NSR, respectively.
(f) To record the transfer of Notes Receivable of NYC and PRR to CSXT and NSR,
respectively.
(g) To record noncurrent receivables, principally sublease receivables from
CSXT and NSR.
(h) To record the transfer of miscellaneous payables of NYC and PRR to CSXT and
NSR, respectively.
(i) To recognize capital project advances from NYC and PRR to Conrail which
were formerly intercompany transactions with NYC and PRR.
(j) To record the transfer of accrued payables of NYC and PRR to CSXT and NSR,
respectively.
(k) To record the decrease in debt principal related to the cancellation of the
Conrail Debentures, assuming all holders validly tender.
(l) To record the transfer of deferred tax liabilities of NYC and PRR to CSXT
and NSR, respectively.
(m) To record the transfer of other liabilities of NYC and PRR to CSXT and NSR,
respectively.
(n) To recognize net impact resulting from the above transactions.
Certain of the above adjustments would be different if less than all holders
of Conrail Debentures validly tender, and do not withdraw, their Conrail
Debentures in this exchange offer and consent solicitation. If 51% of holders
validly tender, and do not withdraw, their Conrail Debentures in this exchange
offer and consent solicitation, the amount for adjustment (k) would be reduced
to $408 million and the amount for adjustment (n) would be increased to $4,959
million. If 75% of holders validly tender, and do not withdraw, their Conrail
Debentures in this exchange offer and consent solicitation, the amount for
adjustment (k) would be reduced to $600 million and the amount for adjustment
(n) would be increased to $4,767 million.
21
RATIOS OF EARNINGS TO FIXED CHARGES
CSXT
For information relating to the ratios of earnings to fixed charges of
CSXT, please refer to the CSXT Appendix attached hereto.
NSR
For information relating to the ratios of earnings to fixed charges of NSR,
please refer to the NSR Appendix attached hereto.
22
RISK FACTORS
An investment in the New Exchange Notes involves a number of risks. You
should consider the following information about these risks, as well as the
other information included in and incorporated by reference into this prospectus
and consent solicitation statement. In particular, you should consider the risks
discussed in CSX's, CSXT's, NSC's and NSR's filings with the SEC.
RISKS RELATING TO THIS EXCHANGE OFFER AND CONSENT SOLICITATION
CSXT AND NSR WILL CONTINUE TO HAVE A SUBSTANTIAL LEVEL OF INDEBTEDNESS AFTER
THE CONSUMMATION OF THE EXCHANGE OFFER AND CONSENT SOLICITATION AND MAY BE
UNABLE TO MEET THEIR RESPECTIVE OBLIGATIONS ON THE NEW CSXT NOTES AND THE NEW
NSR NOTES.
If this exchange offer and consent solicitation is consummated, each of
CSXT and NSR will continue to have significant liabilities and future cash
requirements.
As of March 26, 2004, CSXT had approximately $820 million aggregate
principal amount of total indebtedness outstanding. As of March 26, 2004, CSXT
would have had approximately $1,409 million of total indebtedness outstanding
(which includes secured indebtedness of $815 million as of March 26, 2004) if
holders of all Conrail Debentures had validly tendered and not withdrawn their
Conrail Debentures in this exchange offer and consent solicitation and the
Conrail Spin Off Transactions were consummated as of that date. In addition, as
of March 26, 2004, CSXT had approximately $2,914 million in intercompany
liabilities due to CSX and $294 million of intercompany liabilities due to other
affiliates of CSXT, each of which rank equally with or junior to the New CSXT
Notes.
As of March 31, 2004, NSR had approximately $885 million aggregate
principal amount of total debt outstanding. As of March 31, 2004, NSR would have
had approximately $1,696 million of total indebtedness outstanding (which
includes secured indebtedness of $850 million as of March 31, 2004) if holders
of all Conrail Debentures had validly tendered and not withdrawn their Conrail
Debentures in this exchange offer and consent solicitation and the Conrail Spin
Off Transactions were consummated as of that date. In addition, as of March 31,
2004, NSR had $765 million of intercompany liabilities due to NSC that rank
equally with or junior to the New NSR Notes.
The indenture for the New CSXT Notes does not prohibit or limit the
incurrence of additional indebtedness and other liabilities by CSXT, or any of
its subsidiaries, although the indenture does restrict the ability of CSXT and
its other subsidiaries to grant liens with respect to the stock or indebtedness
of BOCT. The indenture for the New NSR Notes does not prohibit or limit the
incurrence of additional indebtedness and other liabilities by NSR, or any of
its subsidiaries, although the NSR Indenture does contain covenants that
restrict the ability of NSR and its subsidiaries to grant liens with respect to
stock or indebtedness of AGS and limit the ability of PRR Newco, NSR and their
subsidiaries to engage in certain transactions involving funded debt. The
incurrence of additional indebtedness and other liabilities by CSXT or NSR or by
any of their subsidiaries could adversely affect each of CSXT's or NSR's ability
to pay their respective obligations on the New CSXT Notes or New NSR Notes. See
"Description of the New CSXT Notes" and "Description of the New NSR Notes" in
the Appendices attached hereto.
CSXT AND NSR AND THEIR SUBSIDIARIES WILL HAVE SIGNIFICANT DEBT AND DEBT-LIKE
OBLIGATIONS AND MAY NOT BE ABLE TO MAINTAIN INVESTMENT-GRADE CREDIT RATINGS.
After consummation of the Conrail Spin Off Transactions, CSXT and NSR and
their subsidiaries will have a significant amount of debt and debt-like
obligations, such as intercompany advances and operating leases. We expect that
the credit ratings of CSXT and NSR and their parent holding companies after
consummation of the Conrail Spin Off Transactions will be the same as their
existing credit ratings; however, we cannot predict how such credit ratings may
change over time. In addition, it is possible that CSXT, NSR or their parent
holding companies that issue debt may not continue to maintain an
investment-grade credit rating. Differences in credit ratings would affect the
interest rates charged on financings, as well as the amounts of indebtedness,
types of financing structures and debt markets that may be available to CSXT,
NSR
23
or their parent holding companies. A downgrade, suspension or withdrawal of the
rating assigned to CSXT or NSR by a rating agency could cause the liquidity or
market value of the applicable New Exchange Notes to decline significantly.
THE CREDIT RATINGS OF THE NEW CSXT NOTES AND THE NEW NSR NOTES ISSUED IN
EXCHANGE FOR THE CONRAIL DEBENTURES ARE BASED UPON THE CREDIT RATINGS OF CSXT
AND NSR, RESPECTIVELY, AND THEREFORE, AS A CONSEQUENCE OF BEING INDEPENDENT
FROM ONE ANOTHER, THEIR RATINGS MAY DIVERGE OVER TIME.
The Conrail Debentures are currently rated Baa2 by Moody's Investors
Service, or "Moody's," and BBB by Standard & Poor's. In general terms, these
current ratings are based, in part, on the obligations of CSXT and NSR to make
lease payments to NYC and PRR, respectively, and the separate obligations of CSX
and NSC, under certain circumstances, to provide sufficient cash to Conrail to
satisfy certain obligations up to their respective economic interest in Conrail.
Following the Conrail Spin Off Transactions, Conrail Debentures validly
tendered and accepted for exchange will no longer be Conrail obligations, but
will be exchanged for the New CSXT Notes and the New NSR Notes that are separate
obligations of CSXT and NSR, respectively. The credit ratings of the New CSXT
Notes and the New NSR Notes will be determined with regard to the credit rating
of other unsecured debt of CSXT and NSR, respectively. Therefore, the credit
ratings of the New CSXT Notes and the New NSR Notes may diverge in the future.
We currently expect that (i) the New CSXT Notes will be rated Baa2 by Moody's
and BBB by Standard & Poor's and (ii) the New NSR Notes will be rated Baa1 by
Moody's and BBB by Standard & Poor's. A rating reflects only the view of a
rating agency, and it is not a recommendation to buy, sell or hold securities.
Any rating can be revised upward or downward at any time by a rating agency if
such rating agency decides that circumstances warrant such a change.
On March 30, 2004, Standard & Poor's revised the outlook for CSX to
negative from stable after CSX's short-term corporate credit and commercial
paper ratings were lowered to A-3 from A-2. As a consequence, Conrail's outlook
was also revised from stable to negative since its outlook is based on its lower
rated owner, which presently is CSX. NSC's outlook continues to remain stable.
On July 6, 2004, Moody's also revised the outlook for CSX to negative from
stable. Moody's outlooks for Conrail and NSC were unchanged and continue to
remain stable.
THE NEW CSXT NOTES AND THE NEW NSR NOTES WILL BE UNSECURED AND THEREFORE
SUBORDINATED TO THE SECURED DEBT OF CSXT AND NSR, RESPECTIVELY, AND
STRUCTURALLY SUBORDINATED TO THE INDEBTEDNESS OF THE SUBSIDIARIES OF CSXT AND
NSR, RESPECTIVELY.
The New CSXT Notes and the New NSR Notes will be unsecured and, following
consummation of the Conrail Spin Off Transactions, will be subordinated to any
secured indebtedness of CSXT and NSR, respectively, and will be structurally
subordinated to other obligations, including trade payables, of any subsidiary
of CSXT or NSR, respectively. "Structurally subordinated" means that in the
event of bankruptcy, liquidation or reorganization of an obligor, the assets of
each subsidiary of that obligor will be available to pay obligations of the
obligor only after all of the indebtedness and other obligations of that
subsidiary have been paid in full.
As of March 26, 2004, CSXT had approximately $815 million of secured
indebtedness and its subsidiaries had approximately $1 million of unsecured
indebtedness, each of which would rank senior to the New CSXT Notes.
As of March 31, 2004, NSR had approximately $850 million of secured
indebtedness which would rank senior to the New NSR Notes. As of March 31, 2004,
subsidiaries of NSR had no outstanding indebtedness.
In the event that CSXT, NSR or any of their respective subsidiaries is
declared bankrupt, becomes insolvent or is liquidated or reorganized, any
secured debt will be entitled to be paid in full from the pledged assets before
any payment may be made with respect to the New CSXT Notes or the New NSR Notes,
as the case may be. Holders of the New CSXT Notes will participate ratably with
all other holders of CSXT's unsecured debt, and potentially with all of CSXT's
other general creditors, based on the respective amounts
24
owed to each holder or creditor, in CSXT's remaining assets. Holders of the New
NSR Notes will participate ratably with all other holders of NSR's unsecured
debt, and potentially with all of NSR's other general creditors, based on the
respective amounts owed to each holder or creditor, in NSR's remaining assets.
In any of the foregoing events, no assurance can be given that there will be
sufficient assets to pay amounts due on the New CSXT Notes or the New NSR Notes.
As a result, holders of the New CSXT Notes and the New NSR Notes are likely to
receive less, ratably, than holders of secured debt or holders of debt issued by
subsidiaries of CSXT and NSR, respectively, if they receive any payment in
respect of the New CSXT Notes and the New NSR Notes.
NO PUBLIC TRADING MARKET EXISTS FOR THE NEW CSXT NOTES OR THE NEW NSR NOTES.
No established public trading market exists for the New CSXT Notes or New
NSR Notes and there can be no assurance that a liquid trading market for these
notes will develop, that holders of these notes will be able to sell their
notes, that holders can determine now the price at which the holders of these
notes will be able to sell their notes or whether a public trading market, if it
develops, will continue. If a public trading market were to develop, the New
CSXT Notes or the New NSR Notes could trade at prices higher or lower than their
principal amount, depending on many factors, including prevailing interest
rates, the market for similar securities and CSXT's or NSR's respective
operating results.
YOU MAY BE SUBJECT TO U.S. FEDERAL INCOME TAXATION AS A RESULT OF TENDERING
YOUR CONRAIL DEBENTURES.
All or a portion of any gain you realize in exchanging your Conrail
Debentures for New Exchange Notes and in receiving the 9 3/4% Cash Payment
and/or 7 7/8% Cash Payment may be subject to U.S. federal income tax.
THE VALUE OF THE COMBINATION OF THE NEW CSXT NOTES AND THE NEW NSR NOTES AND
THE AMOUNT OF THE 9 3/4% CASH PAYMENT AND/OR THE 7 7/8% CASH PAYMENT HAS NOT
BEEN ESTABLISHED.
None of the boards of directors of CSXT, NSR or Conrail has made any
determination that the combination of the New CSXT Notes and the New NSR Notes
along with the amount of the 9 3/4% Cash Payment and/or the 7 7/8% Cash Payment
represents an appropriate valuation of the Conrail Debentures. If you tender
your Conrail Debentures, you may not receive more value than if you choose to
keep them.
THE NEW CSXT NOTES AND THE NEW NSR NOTES MAY NOT BE INCLUDED IN CERTAIN
PREVALENT BOND INDICES.
Each series of the New Exchange Notes will have a smaller aggregate
principal amount than the series of Conrail 9 3/4% Debentures and the series of
Conrail 7 7/8% Debentures that may be tendered in the exchange offer. Because of
these smaller aggregate principal amounts, the New CSXT Notes and the New NSR
Notes may not be eligible for inclusion on certain prevalent bond indices. The
exclusion of the New CSXT Notes and the New NSR Notes from these bond indices
could adversely affect the trading market for and market price of the New CSXT
Notes and the New NSR Notes. As a result, the New CSXT Notes and the New NSR
Notes may command a lower trading price than the parallel series of Conrail
Debentures with a larger outstanding aggregate principal amount.
THE PRO FORMA FINANCIAL DATA INCLUDED IN THE APPENDICES ATTACHED HERETO ARE
PRELIMINARY AND THE AMOUNTS ULTIMATELY REFLECTED IN OUR FINANCIAL STATEMENTS
COULD DIFFER MATERIALLY FROM THE AMOUNTS SHOWN IN SUCH PRO FORMA FINANCIAL
DATA.
The pro forma financial data included in the CSXT Appendix attached hereto
have been prepared assuming that the fair value of the ownership interests in
NYC being obtained by CSXT less the fair value of the New CSXT Notes being
offered in this exchange offer and consent solicitation equals the carrying
amount of the indirect ownership interest in PRR being foregone by CSXT.
The pro forma financial data included in the NSR Appendix attached hereto
have been prepared assuming that the fair value of the ownership interests in
PRR being obtained by NSR less the fair value of
25
the New NSR Notes being offered in this exchange offer and consent solicitation
equals the carrying amount of the indirect ownership interest in NYC being
foregone by NSR.
CSX and NSC are progressing toward ascertaining the fair value effects of
the Conrail Spin Off Transactions, which will be reflected in the accounting for
the Conrail Spin Off Transactions once consummated and that analysis has been
completed. Accordingly, the amounts ultimately reflected in CSXT's and NSR's
financial statements could differ materially from the amounts shown in the
unaudited pro forma financial data included in the Appendices attached hereto.
Based on the preliminary results of appraisals of the NYC and PRR assets, the
ultimate fair values of those assets recorded upon consummation of the Conrail
Spin Off Transactions will likely exceed the amounts shown in the unaudited pro
forma financial information.
RISKS RELATING TO HOLDERS OF CONRAIL DEBENTURES WHO DO NOT VALIDLY TENDER IN
THIS EXCHANGE OFFER AND CONSENT SOLICITATION
IF YOU DO NOT VALIDLY TENDER YOUR CONRAIL DEBENTURES AND THIS EXCHANGE OFFER
AND CONSENT SOLICITATION IS CONSUMMATED, THE TERMS OF YOUR CONRAIL DEBENTURES
WILL BE AMENDED AND YOU WILL RECEIVE NO COMPENSATION FOR THE CONRAIL
SUPPLEMENTAL INDENTURE OR ANY RESULTING RISKS.
The terms of your Conrail Debentures will be amended whether or not you
tender for exchange if the holders of more than 50% in aggregate principal
amount of Conrail Debentures outstanding, voting as a single class, consent to
the Conrail Supplemental Indenture. This means that, if you do not validly
tender your Conrail Debentures for exchange and this exchange offer and consent
solicitation is consummated, you will hold Conrail Debentures that will remain
obligations of Conrail, but Conrail will no longer include NYC and PRR and will
consist of a smaller pool of less diversified assets. This smaller pool of less
diversified assets will be limited to routes and assets in the Shared Assets
Areas located in and around Newark, New Jersey, Philadelphia, Pennsylvania and
Detroit, Michigan. These Shared Assets Areas currently are, and are intended to
remain, owned by Conrail but used and operated by NSR and CSXT and their
respective affiliates on a shared basis. Assuming the Conrail Spin Off
Transactions had occurred on March 31, 2004, Conrail would have had total assets
of $1,330 million at that date. Assuming the Conrail Spin Off Transactions had
occurred on January 1, 2003, Conrail would have had total revenues of $88
million and income before accounting change of $10 million for the three months
ended March 31, 2004. These reduced levels of total assets and revenues would be
applicable even if only 51% of the Conrail Debentures were validly tendered and
accepted in this exchange offer and consent solicitation; however, income before
accounting change would decrease to $4 million in such an event.
In addition, the terms of your Conrail Debentures will be amended in a
manner that will materially reduce the covenants and events of default to which
Conrail is subject under the Conrail Indenture. Accordingly, if the Conrail
Supplemental Indenture becomes operative, the Conrail Debentures will impose no
significant restrictions on Conrail's conduct of business and therefore will
afford less protection to holders of Conrail Debentures than the current Conrail
Indenture. As a result, consummation of this exchange offer and consent
solicitation and the adoption of the proposed amendments may have adverse
consequences for the holders of the Conrail Debentures who elect not to
participate in this exchange offer and consent solicitation.
You will not receive New Exchange Notes and Cash Payments or otherwise be
compensated for this change in the terms of your Conrail Debentures and any
risks that result if you do not validly tender your Conrail Debentures for
exchange and this exchange offer and consent solicitation is consummated. We do
not currently intend, nor are we required, to purchase any Conrail Debentures
not exchanged in this exchange offer and consent solicitation.
In addition, any Conrail Debentures not tendered in this exchange offer and
consent solicitation will remain outstanding debt obligations of Conrail.
Conrail will have approximately $392 million in aggregate principal amount of
unsecured debt outstanding if only 51% of the aggregate principal amount of the
Conrail Debentures are validly tendered and accepted in this exchange offer and
consent solicitation.
26
IF YOU DO NOT VALIDLY TENDER YOUR CONRAIL DEBENTURES AND THIS EXCHANGE OFFER
AND CONSENT SOLICITATION IS CONSUMMATED, THE CONRAIL DEBENTURES YOU RETAIN ARE
EXPECTED TO BECOME LESS LIQUID AS A RESULT OF THIS EXCHANGE OFFER AND CONSENT
SOLICITATION.
Because we anticipate that most holders of the Conrail Debentures will
elect to exchange Conrail Debentures for New Exchange Notes and Cash Payments,
we expect that the liquidity of the markets, if any, for the Conrail Debentures
remaining after the consummation of this exchange offer and consent solicitation
may be substantially reduced. Any Conrail Debentures tendered and exchanged in
this exchange offer and consent solicitation will reduce the aggregate principal
amount of the Conrail Debentures outstanding.
Therefore, if your Conrail Debentures are not validly tendered in this
exchange offer and consent solicitation, it may become more difficult for you to
sell or transfer your unexchanged Conrail Debentures. This reduction in
liquidity may in turn increase the volatility of the market price for the
Conrail Debentures. We cannot guarantee that the Conrail Debentures will
continue to be rated or maintain their existing debt ratings after the closing
of this exchange offer and consent solicitation. If the Conrail Debentures cease
to be rated or are rated lower than their current rating, their liquidity may be
further reduced.
RISKS RELATING TO THE CONRAIL SPIN OFF TRANSACTIONS
CSXT AND NSR WILL HAVE TO ABIDE BY RESTRICTIONS TO PRESERVE THE TAX TREATMENT
OF THE CONRAIL SPIN OFF TRANSACTIONS.
Conrail, CSXT and NSR obtained favorable rulings from the IRS to the effect
that the Conrail Spin Off Transactions will be tax-free to Conrail, CSXT, NYC
Newco, NSR and PRR Newco. Under the Tax Allocation Agreement described under
"Description of the Conrail Spin Off Transactions--The Tax Allocation
Agreement," to which Conrail, CSXT and NSR will be parties, if a party or any of
its subsidiaries breaches any representations in the Tax Allocation Agreement
relating to the ruling, or takes any action or fails to take any action that
causes its representations in the Tax Allocation Agreement relating to the
ruling to be untrue or engages in any action that causes the Conrail Spin Off
Transactions to be taxable, such party will be required to make an indemnity
payment for the resulting taxes. The amount of any such indemnity payment could
be material.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CONRAIL
OVERVIEW
The following analysis relates to the results of operations of Conrail and
its majority owned subsidiaries and should be read in conjunction with Conrail's
consolidated financial statements and notes thereto for the year ended December
31, 2003. Except for the historical information contained herein, the matters
discussed below are forward-looking statements that involve risks and
uncertainties that may cause actual results to differ materially from those
expressed in the statements.
GENERAL
DESCRIPTION OF BUSINESS
Conrail, a principal freight railroad in the Northeastern United States, is
a wholly owned subsidiary of CRR. CSX and NSC, the major rail holding companies
in the Eastern United States, jointly control CRR through their ownership
interests in CRR Holdings, whose primary subsidiary is Green Corp., which owns
CRR. CSX and NSC have equity interests in CRR Holdings of 42% and 58%,
respectively, and voting interests of 50% each. Under operating and lease
agreements, CSX and NSC operate a substantial portion of Conrail's properties
through their respective railroad subsidiaries, CSXT and NSR. The major source
of Conrail's revenues is from CSXT and NSR, primarily in the form of rental
revenues and operating fees.
RECENT DEVELOPMENTS
PROPOSED SPIN OFF OF CONRAIL'S SUBSIDIARIES
In June 2003, Conrail, together with CSX and NSC, filed a joint petition
with the STB to establish direct ownership and control by CSXT and NSR of
certain portions of the Conrail system already operated by them in a
substantially independent manner, under various agreements. These portions of
the Conrail system are currently owned by Conrail's primary subsidiaries, NYC
and PRR. The Conrail Spin Off Transactions involve the termination of the
existing operating agreements and the transfer of the direct equity ownership of
NYC and PRR to CSXT and NSR, respectively. The Conrail Spin Off Transactions do
not involve the Shared Assets Areas that will continue to be owned and operated
by Conrail. The consummation of the Conrail Spin Off Transactions is subject to
a number of conditions, including, among other things, that the STB
authorization, obtained by the parties in November 2003, remains in full force
and effect, that the IRS ruling received by the parties in November 2003,
favorably qualifying the Conrail Spin Off Transactions as non-taxable, remains
in full force and effect and that the parties obtain required consents from
Conrail's debt holders and other lessors and counterparties to certain of
Conrail's equipment leases and related financing arrangements. For a description
of these and other conditions, see "Description of the Conrail Spin Off
Transactions--The Distribution Agreement--Conditions to the Consummation of the
Conrail Spin Off Transactions."
As a part of the Conrail Spin Off Transactions, Conrail is undertaking a
restructuring of its existing unsecured and secured public indebtedness. New
guaranteed debt securities of two newly formed corporate subsidiaries of CSXT
and NSR would be offered in a 42%/58% ratio as well as substantially all of the
equity of such new subsidiaries in exchange for the equity of NYC and PRR. Upon
completion of the Conrail Spin Off Transactions, the new debt securities would
become direct unsecured obligations of CSXT and NSR, respectively. Conrail's
secured debt and lease obligations will remain obligations of Conrail and are
expected to be supported by new leases and subleases that, upon consummation of
the Conrail Spin Off Transactions, would be the direct lease and sublease
obligations of CSXT and NSR, respectively.
Conrail, NSC and CSX are working to complete all steps necessary to
consummate the Conrail Spin Off Transactions in 2004. CSX and NSC are
progressing toward ascertaining the fair value effects of the Conrail Spin Off
Transactions, which will be reflected in the accounting for the Conrail Spin Off
Transactions once consummated and that analysis has been completed. Upon
consummation of the Conrail Spin Off Transactions, Conrail's primary source of
revenue will be related to the operation of the Shared Assets Areas
28
instead of the operating and equipment rental activities of NYC and PRR.
Conrail's future operating expenses will reflect this change in operations.
Accordingly, Conrail's prospective operating results will be significantly
different from those currently reported.
RESULTS OF OPERATIONS
OVERVIEW
Three Months Ending March 31, 2004 Compared with Three Months Ending March 31,
2003
Conrail reported net income of $44 million for the first quarter of 2004
compared with $76 million net income in the first quarter 2003. The decrease
reflects the absence of a favorable net cumulative effect of a change in
accounting principle of $40 million included in net income for 2003.
OPERATING REVENUES
Operating revenues (primarily rental revenues and operating fees) for the
first quarter of 2004 were $230 million, an increase of $4 million, or 1.8%,
compared with the same 2003 period.
OPERATING EXPENSES
Operating expenses for the first quarter of 2004 were $162 million, a
decrease of $1 million, or 0.6%, compared with the same 2003 period.
Compensation and benefits increased $3 million, or 7.1%, primarily due to
increased pension expense.
Material, services and rents decreased $3 million, or 9.7%, due to reduced
legal fees and other purchased services.
Depreciation and amortization decreased $2 million, or 2.5%, as a result of
asset retirements.
Casualties and insurance increased $1 million, primarily due to the absence
in 2004 of a favorable insurance adjustment which benefited 2003.
OTHER INCOME, NET
Other Income, net, increased $7 million, or 35.0%, primarily due to
increased equity in earnings of affiliates and interest income.
Year Ending December 31, 2003 Compared with Year Ending December 31, 2002
2003 VS. 2002
Conrail reported net income of $202 million in 2003 that included a
cumulative effect of accounting change benefit of $40 million related to
Conrail's adoption of Financial Accounting Standard Board, or "FASB," Statement
143, "Accounting for Asset Retirement Obligations."
Operating revenues, primarily rental revenues and operating fees, increased
$25 million, or 2.8%, from $893 million in 2002 to $918 million in 2003. The
increase in 2003 is primarily attributable to higher operating fees.
29
Operating expenses increased $36 million, or 5.8%, from $623 million in
2002 to $659 million in 2003. The following table sets forth the operating
expenses for the two years shown:
<Table>
<Caption>
INCREASE
2003 2002 (DECREASE)
---- ---- ----------
($ IN MILLIONS)
Compensation and benefits................................... $168 $151 $17
Fuel........................................................ 7 6 1
Material, services and rents................................ 119 125 (6)
Depreciation and amortization............................... 329 322 7
Casualties and insurance.................................... 17 2 15
Other....................................................... 19 17 2
---- ---- ---
$659 $623 $36
==== ==== ===
</Table>
Compensation and benefits increased $17 million, or 11.3%, primarily due to
reduced pension credits due to the decline in value of the assets in Conrail's
pension plan. Material, services and rents decreased $6 million, or 4.8%, due to
cost containment initiatives. Depreciation and amortization increased $7
million, or 2.2%, as a result of a depreciation study, partially offset by asset
retirements. The large increase in casualties and insurance of $15 million
reflects the absence in 2003 of actuarially determined favorable casualty
expense adjustments that reduced casualty expense $16 million in 2002.
Other income, net, increased $3 million, or 3.3%, primarily due to
increased gains from property sales, partially offset by reduced interest
income.
Income tax expense in 2003 was $93 million, resulting in an effective tax
rate of 36.5%, compared with tax expense and an effective tax rate for 2002 of
$71 million and 27.5%, respectively. In 2002, the effective rate benefited from
a favorable tax settlement that decreased tax expense by $23 million.
2002 VS. 2001
Net income was $187 million in 2002, compared with net income of $170
million in 2001.
Operating revenues decreased $10 million, or 1.1%, from $903 million in
2001 to $893 million in 2002. The decrease in 2002 is attributable to lower
rental revenues due to equipment lease expirations and lower operating expense
reimbursements for the Shared Assets Areas operation.
Operating expenses decreased $16 million, or 2.5%, from $639 million in
2001 to $623 million in 2002. The following table sets forth the operating
expenses for the two years:
<Table>
<Caption>
INCREASE
2002 2001 (DECREASE)
---- ---- ----------
($ IN MILLIONS)
Compensation and benefits................................... $151 $158 $ (7)
Fuel........................................................ 6 7 (1)
Material, services and rents................................ 125 143 (18)
Depreciation and amortization............................... 322 325 (3)
Casualties and insurance.................................... 2 (13) 15
Other....................................................... 17 19 (2)
---- ---- ----
$623 $639 $(16)
==== ==== ====
</Table>
Compensation and benefits decreased $7 million, or 4.4%, primarily due to
reductions in employment levels. Material, services and rents decreased $18
million, or 12.6%, due to operating department efficiencies. Depreciation and
amortization decreased $3 million, or 0.9%, due to asset retirements. Casualties
and insurance increased $15 million, primarily due to a reduction in favorable
insurance settlements, from $14 million recognized in 2001 to $4 million
recognized in 2002.
30
Other income, net, decreased $4 million, or 4.2%, primarily due to a
reduction in equity in earnings of affiliates.
Income tax expense in 2002 was $71 million, resulting in an effective tax
rate of 27.5%, compared with tax expense and an effective tax rate for 2001 of
$81 million and 32.3%, respectively. In 2002, the effective rate benefited from
a favorable tax settlement that decreased tax expense by $23 million.
FINANCIAL CONDITION AND LIQUIDITY
Three Months Ending March 31, 2004 Compared with Three Months Ending March 31,
2003
OPERATING ACTIVITIES
Conrail's operating activities provided cash of $133 million in the first
quarter of 2004, compared with $150 million in the first quarter of 2003. The
decrease is principally attributable to timing differences related to working
capital.
Cash generated from operations is the principal source of liquidity and is
primarily used for debt repayments and capital expenditures.
INVESTING ACTIVITIES
Net cash used in investing activities was $122 million in the first quarter
of 2004 compared to $144 million in the first quarter of 2003 and primarily
relate to additional investments in interest-bearing notes receivable due from
NSC and CSX.
Capital expenditures were $3 million in the first quarter of 2004 compared
to $7 million for the same period in 2003.
FINANCING ACTIVITIES
Debt repayments totaled $10 million for both the first quarter of 2004 and
the first quarter of 2003.
WORKING CAPITAL
Conrail had working capital deficits of $51 million and $29 million at
March 31, 2004 and December 31, 2003, respectively. A working capital deficit is
not unusual for Conrail and does not indicate a lack of liquidity. Conrail
continues to maintain adequate current assets to satisfy current liabilities and
maturing obligations when they come due and has sufficient financial capacity to
manage its day-to-day cash requirements and any obligations arising from legal,
tax and other regulatory rulings.
Year Ending December 31, 2003 Compared with Year Ending December 31, 2002
OPERATING ACTIVITIES
Conrail's operating activities provided cash of $412 million in 2003,
compared with $423 million in 2002 and $502 million in 2001. The decrease in
cash provided by operations in 2003 reflects the IRS tax settlement refund
totaling $24 million received in 2002, partially offset by a reduction in cash
used for casualty claim payments. The decline in 2002 was primarily the result
of the absence of certain events that benefited 2001, most notably, $50 million
received for the granting of licensing and other rights to a third party
relating to signboard advertising on Conrail's property and $42 million received
from several insurance carriers pertaining to favorable settlements.
Cash generated from operations is the principal source of liquidity and is
primarily used for debt repayments and capital expenditures.
31
INVESTING ACTIVITIES
Net cash used in investing activities was $360 million in 2003, compared to
$375 million in 2002 and $457 million in 2001, and was primarily related to
interest-bearing notes receivable due from CSX and NSR.
Capital expenditures were $35 million, $23 million and $47 million in 2003,
2002 and 2001, respectively.
FINANCING ACTIVITIES
Debt repayments totaled $57 million, $59 million and $61 million in 2003,
2002 and 2001, respectively.
WORKING CAPITAL
Conrail had working capital deficits of $29 million and $35 million at
December 31, 2003 and December 31, 2002, respectively. A working capital deficit
is not unusual for Conrail and does not indicate a lack of liquidity. Conrail
continues to maintain adequate current assets to satisfy current liabilities and
maturing obligations when they come due and has sufficient financial capacity to
manage its day-to-day cash requirements and any obligations arising from legal,
tax and other regulatory rulings.
CONTRACTUAL OBLIGATIONS
The following table sets forth maturities of Conrail's contractual
obligations as of December 31, 2003:
<Table>
<Caption>
TYPE OF OBLIGATION 2004 2005 2006 2007 2008 THEREAFTER TOTAL
- ------------------ ---- ---- ---- ---- ---- ---------- ------
($ IN MILLIONS)
Long-term Debt and Capital Leases.... $ 58 $ 48 $40 $ 66 $31 $ 882 $1,125
Operating Leases..................... 58 58 56 55 51 271 549
---- ---- --- ---- --- ------ ------
Total Contractual Obligations........ $116 $106 $96 $121 $82 $1,153 $1,674
==== ==== === ==== === ====== ======
</Table>
OTHER
Conrail has a 50% non-controlling interest in Locomotive Management
Services, or "LMS," an unconsolidated partnership established in 1994, that will
be consolidated in the first quarter of 2004 pursuant to FASB Interpretation No.
46R, "Consolidation of Variable Interest Entities," or "FIN 46R." Conrail
currently guarantees $27 million of principal and interest payments relating to
equipment trust certificates held by LMS.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the 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. Management reviews its estimates,
including those related to the recoverability and useful lives of assets, as
well as liabilities for litigation, environmental remediation, casualty claims,
income taxes and pension and postretirement benefits. Changes in facts and
circumstances may result in revised estimates.
DEPRECIATION
Property and equipment are recorded at cost. Depreciation is provided using
the composite straight-line method over estimated service lives. Expenditures,
including those on leased assets that extend an asset's useful life or increase
its utility, are capitalized. Maintenance expense is recognized when repairs are
performed. 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. Conrail recorded depreciation and amortization
expense of $329 million, $322 million and $325 million for the years ended
32
December 31, 2003, 2002 and 2001, respectively. In 2003, the overall
depreciation rate averaged 3.4% for all roadway and equipment.
During 2003, Conrail completed a study to update the estimated useful lives
of its roadway and track property and the associated accumulated depreciation
reserves. This review did not have a material impact on Conrail's consolidated
financial statements.
CASUALTY CLAIMS
Conrail is involved in various legal actions, principally relating to
occupational health claims, personal injuries, casualties and property damage.
The casualty claims liability is determined using the aid of an independent
actuarial firm based upon claims filed and an estimate of claims incurred but
not yet reported. Conrail is generally self-insured for casualty claims. Claims
in excess of self-insurance levels are insured up to excess coverage limits.
While the ultimate amounts of claims incurred are dependent upon future
developments, in management's opinion, the recorded liability is adequate to
cover expected probable payments.
For the year ended December 31, 2003, the provision for casualty expense
totaled $17 million, or 2.6%, of consolidated operating expenses. As of December
31, 2003, Conrail had a total liability recorded for casualty claims of $164
million.
ENVIRONMENTAL
Conrail is subject to various federal, state and local laws and regulations
regarding environmental matters. Conrail is a party to various proceedings
brought by both regulatory agencies and private parties under federal, state and
local laws, including the Comprehensive Environmental Response, Compensation and
Liability Act, or "CERCLA," and has also received inquiries from governmental
agencies with respect to other potential environmental issues. As of December
31, 2003, Conrail had accrued $61 million, an amount it currently believes is
sufficient to cover the probable liability and remediation costs that will be
incurred at CERCLA sites and other sites based on known information and using
various estimating techniques. Conrail anticipates that much of this liability
will be paid out over five years, however, some costs will be paid out over a
longer period. Conrail believes the ultimate liability for these matters will
not materially affect its consolidated financial condition.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Conrail and its subsidiaries sponsor several qualified and nonqualified
pension plans and other postretirement employee benefits, or "OPEB," for its
employees. Accounting for pensions and OPEB expenses requires management to make
certain estimates and assumptions that include, among other things, expected
return on plan assets, discount rate, rate of salary increases and health care
cost trend rates. Conrail engages a third party actuarial firm to assist in
making these estimates.
Conrail recorded net pension income of $4 million in 2003, compared to
pension income of $17 million and $20 million recorded in 2002 and 2001,
respectively. The decrease in pension income for 2003 reflects the recent
decline in the investment markets. Conrail had a net pension benefit obligation
of $655 million and $646 million at December 31, 2003 and December 31, 2002,
respectively.
Conrail also recorded OPEB expenses of $2 million, $2 million and $1
million for the years ended December 31, 2003, 2002 and 2001, respectively. At
both December 31, 2003 and December 31, 2002, Conrail reported OPEB obligations
of $37 million.
INCOME TAXES
As required by FASB Statement No. 109, "Accounting for Income Taxes,"
Conrail's tax provision reflects income taxes both currently payable and
deferred.
33
Conrail is included in the consolidated federal income tax return of Green
Corp. The provision for current income taxes in the consolidated statements of
income reflects Conrail's portion of the consolidated tax portion of CRR. Tax
expense or tax benefit is recorded on a separate company basis.
Conrail's net deferred tax liability totaled $1,827 million and $1,814
million at December 31, 2003 and December 31, 2002, respectively. The liability
is primarily related to temporary differences associated with property and
equipment.
As of December 31, 2003 and December 31, 2002, Conrail has not recorded a
valuation allowance, as management believes that it is more likely than not that
the results of future operations will generate sufficient taxable income to
realize its deferred tax assets.
ACCOUNTING PRONOUNCEMENTS
Conrail adopted FASB Statement of Financial Accounting Standards, or
"SFAS," No. 143, "Accounting for Asset Retirement Obligations," effective
January 1, 2003. Pursuant to SFAS 143, companies are precluded from accruing
removal cost expenses that are not legal obligations. Previously, Conrail and
most other railroads had accrued removal costs as a component of depreciation
expense. In the first quarter of 2003, Conrail recorded income of $40 million
for the cumulative effect of this change on $65 million before taxes. Effective
with this pronouncement, removal costs are expensed as incurred. This change did
not have a material impact on Conrail's consolidated financial statements.
Also in 2003, the FASB issued FIN 46R, which requires consolidation by
Conrail of any variable interest entity owned by Conrail if a majority of such
entity's economic risks and/or rewards would belong to Conrail. The FASB delayed
the implementation of FIN 46R until 2004 for certain variable interest entities
that existed prior to February 1, 2003. Conrail has a 50% non-controlling
interest in LMS, an unconsolidated partnership established in 1994, that will be
consolidated pursuant to FIN 46R in the first quarter of 2004. The consolidation
will not have a material impact on Conrail's consolidated financial statements.
OTHER MATTERS
LABOR
Conrail had 1,346 employees at December 31, 2003, approximately 89% of whom
are represented by 11 different labor organizations and are covered by 16
separate collective bargaining agreements. These agreements remain in effect
until changed pursuant to the Railway Labor Act. Conrail was engaged in
collective bargaining at December 31, 2003, with labor organizations
representing approximately 6% of its labor force.
INFLATION
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of historical costs and disregards the impact of inflation on the costs of
replacing assets. The replacement cost of Conrail's property and equipment, as
well as the related depreciation expense, would be substantially greater than
historically reported amounts.
34
DESCRIPTION OF THIS EXCHANGE OFFER AND CONSENT SOLICITATION
PURPOSE OF THIS EXCHANGE OFFER AND CONSENT SOLICITATION
We are making this exchange offer and consent solicitation in connection
with the proposed non-taxable transfer, through a series of consecutive and
related transactions, of Conrail's ownership interest in NYC and PRR to CSXT and
NSR, respectively. The Conrail Spin Off Transactions are described in this
prospectus and consent solicitation statement under "Description of the Conrail
Spin Off Transactions."
In this exchange offer and consent solicitation, we are offering to
exchange the New CSXT Notes, the New NSR Notes and Cash Payments for any and all
Conrail Debentures that are validly tendered and not withdrawn on or prior to
the expiration date. Simultaneously, and in connection with the exchange offer,
Conrail is soliciting consents from the holders of the Conrail Debentures to the
proposed amendments to the Conrail Indenture. See "--Proposed Amendments."
The terms and conditions of this exchange offer and consent solicitation
are described in this prospectus and consent solicitation statement and in the
accompanying letter of consent/transmittal.
If you hold Conrail Debentures, you may participate in this exchange offer
and consent solicitation by following the procedures described in this
prospectus and consent solicitation statement. In order to validly tender your
Conrail Debentures and receive the New Exchange Notes and Cash Payments, you
will be required to give your consent to the proposed amendments to the Conrail
Indenture with respect to the Conrail Debentures you tendered by completing,
signing, mailing or otherwise delivering a letter of consent/transmittal
relating to the tender of your Conrail Debentures pursuant to the terms and
conditions set forth in this prospectus and consent solicitation statement. By
validly tendering your Conrail Debentures, you will also be consenting to the
proposed amendments to the Conrail Indenture. If you validly withdraw your
tender of Conrail Debentures, your consent to the amendments will also be
withdrawn. If the proposed Conrail Supplemental Indenture becomes effective,
each non-exchanging holder of Conrail Debentures will be bound by the proposed
amendments to the Conrail Indenture even though the holder did not consent. See
"--Proposed Amendments."
This exchange offer and consent solicitation is not being made to, nor will
we accept tenders for exchange or consents from, holders of Conrail Debentures
in any jurisdiction in which this exchange offer and consent solicitation or the
acceptance of it and consent to it would not be in compliance with the
securities or blue sky laws of such jurisdiction.
The board of directors of Conrail is not making any recommendation as to
whether or not you should tender your Conrail Debentures in this exchange offer
and consent solicitation because the board has not made any determination that
the combination of the New CSXT Notes and the New NSR Notes, along with the
9 3/4% Cash Payment and/or the 7 7/8% Cash Payment, represents an appropriate
valuation of the Conrail Debentures.
TERMS OF THIS EXCHANGE OFFER AND CONSENT SOLICITATION
This prospectus and consent solicitation statement and the accompanying
letter of consent/transmittal contain the terms and conditions of this exchange
offer and consent solicitation. Upon the terms and subject to the conditions
included in this prospectus and consent solicitation statement and in the
accompanying letter of consent/transmittal, which together comprise this
exchange offer and consent solicitation, Conrail will accept for exchange
Conrail Debentures that are validly tendered and not withdrawn on or prior to
the expiration date of this exchange offer and consent solicitation.
-- When you tender to us Conrail Debentures as provided below, Conrail's
acceptance of validly tendered Conrail Debentures will constitute a
binding agreement among you and Conrail upon the terms and subject to
the conditions in this prospectus and consent solicitation statement
and in the accompanying letter of consent/transmittal.
35
-- For each aggregate principal amount of Conrail 9 3/4% Debentures
accepted by Conrail in the exchange offer, you will receive in
return, if you validly tender your Conrail 9 3/4% Debentures on or
prior to the expiration date of the exchange offer, (1) 42% of such
aggregate principal amount in New CSXT 9 3/4% Notes and 58% of such
aggregate principal amount in New NSR 9 3/4% Notes, subject to the
treatment of fractional interests, plus (2) a cash payment of $7.00
per each $1,000 of Conrail 9 3/4% Debentures tendered, or the "9 3/4%
Cash Payment."
-- For each aggregate principal amount of Conrail 7 7/8% Debentures
accepted by Conrail in the exchange offer, you will receive in
return, if you validly tender your Conrail 7 7/8% Debentures on or
prior to the expiration date of the exchange offer, (1) 42% of such
aggregate principal amount in New CSXT 7 7/8% Notes and 58% of such
aggregate principal amount in New NSR 7 7/8% Notes, subject to the
treatment of fractional interests, plus (2) a cash payment of $7.50
per each $1,000 of Conrail 7 7/8% Debentures tendered, or the "7 7/8%
Cash Payment."
-- Except for the interest payable by Conrail on the Closing Date and
the resulting adjustment in the amount of interest to be paid on the
first interest payment date, the New Exchange Notes will have
maturity dates, interest rates, and principal and interest payment
dates identical to those of the related series of Conrail Debentures
and together will aggregate to the same principal amounts of the
Conrail Debentures accepted for exchange. The New Exchange Notes will
be issued under indentures containing covenants and events of default
substantially similar to those contained in the existing indentures
of CSX and NSC governing their senior unsecured debt securities.
Descriptions of the terms of the New CSXT Notes and the New NSR Notes
are included under "Description of the New CSXT Notes" and
"Description of the New NSR Notes" in the CSXT Appendix and the NSR
Appendix, respectively.
-- This exchange offer and consent solicitation for Conrail Debentures
is for all outstanding Conrail Debentures and is not subject to
proration.
-- The New Exchange Notes will be issued only in denominations of $1,000
and integral multiples of $1,000. Accordingly, if you would otherwise
be entitled to receive a fractional interest in a New CSXT Note and a
fractional interest in a New NSR Note, you will instead receive
either a $1,000 New CSXT Note or a $1,000 New NSR Note in lieu of
fractional interests in the New Exchange Notes. Whether you will
receive a New CSXT Note or a New NSR Note in lieu of fractional
interests will be determined as follows:
-- if your fractional interest in a New CSXT Note is equal to or less
than $500 and your fractional interest in a New NSR Note is equal to
or greater than $500, you will receive a $1,000 New NSR Note in lieu
of any fractional interests; or
-- if your fractional interest in a New NSR Note is less than $500 and
your fractional interest in a New CSXT Note is greater than $500,
you will receive a $1,000 New CSXT Note in lieu of any fractional
interests.
Under no circumstances will you receive a combination of the New CSXT Notes
and the New NSR Notes with a combined aggregate principal amount different from
the aggregate principal amount of Conrail Debentures that you validly tender in
this exchange offer and consent solicitation. Participants in DTC are
responsible for allocating the New CSXT Notes and the New NSR Notes, as well as
fractional interests related thereto, to beneficial owners and none of DTC,
CSXT, NSR, the exchange agent, the information agent or the dealer manager is
responsible for such allocations. In the event the treatment of fractional
interests causes a deviation in the allocation of New Exchange Notes from 42% to
CSXT and 58% to NSR, the parties intend to true up the deviation between
themselves.
-- Our obligation to accept Conrail Debentures for exchange in this
exchange offer and consent solicitation is also subject to the
conditions described in this prospectus and consent solicitation
statement under "--Conditions to This Exchange Offer and Consent
Solicitation."
-- We will keep the exchange offer open for not less than 20 business
days, or longer if required by applicable law, after the date that we
first mail notice of the exchange offer to the holders of Conrail
Debentures. We are sending this prospectus and consent solicitation
statement, together with the
36
letter of consent/transmittal, on or about the date of this
prospectus and consent solicitation statement.
-- Holders of Conrail Debentures do not have any appraisal or
dissenters' rights in connection with this exchange offer and consent
solicitation.
-- Except as set forth in the following two bullet points, holders of
outstanding Conrail Debentures who participate in this exchange offer
and consent solicitation will receive the same amount of interest
payments that they would have received had they not participated in
this exchange offer and consent solicitation and accepted the New
Exchange Notes.
-- Conrail will pay accrued but unpaid interest on the Conrail
Debentures exchanged in this exchange offer and consent solicitation
through the business day immediately prior to the Closing Date. In
general, this payment will be made to the holder who tendered the
Conrail Debentures. If, however, we accept for exchange any Conrail
Debentures on or before an interest payment date for that security
but after the record date for that interest payment date, Conrail
will pay the accrued but unpaid interest to the holder of those
Conrail Debentures as of that record date, if different from the
holder who tenders.
-- Interest will cease to accrue on the Conrail Debentures exchanged in
this exchange offer and consent solicitation from and after the
Closing Date. Conrail will make interest payments on the Conrail
Debentures on each scheduled interest payment date that occurs prior
to the Closing Date. Conrail will also pay all accrued and unpaid
interest on the Conrail Debentures from the interest payment date
immediately preceding the Closing Date through and including the
calendar day immediately prior to the Closing Date. Conrail will
make this interest payment on the Closing Date. In the event the
Closing Date occurs on or before an interest payment date for any
series of Conrail Debentures but after the record date for that
interest payment date, holders of Conrail Debentures accepted in the
exchange offer will be deemed to have waived their right to receive
from Conrail any other amount of interest that would otherwise be
payable pursuant to the Conrail Indenture after the Closing Date.
Interest on the New CSXT Notes and the New NSR Notes will accrue at
the applicable rate from and including their original issuance date,
which will be on the Closing Date.
-- Holders of Conrail Debentures that validly tender and do not withdraw
their Conrail Debentures will have consented to the Conrail
Supplemental Indenture, as described in this prospectus and consent
solicitation statement under "--Proposed Amendments," to the extent
their Conrail Debentures are actually exchanged. See "--Required
Consent." Furthermore, in order to give your consent to the Conrail
Supplemental Indenture, you must validly tender and not validly
withdraw your Conrail Debentures. If you validly withdraw the tender
of your Conrail Debentures, your consent to the Conrail Supplemental
Indenture will be deemed withdrawn.
-- If the proposed amendments to the Conrail Indenture become effective,
each non-exchanging holder of Conrail Debentures will be bound by the
proposed amendments to the Conrail Indenture even though the holder
did not consent. See "--Proposed Amendments." Holders of these
unexchanged Conrail Debentures will be entitled to receive the same
amount of interest payments on the same interest payment dates as
currently scheduled for the respective series of Conrail Debentures.
-- We will be deemed to have accepted for exchange validly tendered
Conrail Debentures when we have given written notice of the
acceptance to the exchange agent. The exchange agent will act as
agent for the tendering holders for the purposes of receiving the New
Exchange Notes and delivering the New Exchange Notes and the
applicable cash payment to such holders. We expressly reserve the
right to terminate or amend this exchange offer and consent
solicitation, and not to accept for exchange any Conrail Debentures
not previously accepted for exchange, upon the occurrence of any of
the conditions specified under "--Conditions to This Exchange Offer
and Consent Solicitation."
-- Holders of Conrail Debentures who tender their Conrail Debentures in
this exchange offer and consent solicitation will not be required to
pay brokerage commissions or fees or, subject to the
37
instructions in the letter of consent/transmittal, transfer taxes
with respect to the exchange of Conrail Debentures. We will pay all
charges, expenses and only applicable taxes described below, in
connection with this exchange offer and consent solicitation. You
should read the sections entitled "--Fees and Expenses" and
"--Transfer Taxes" for more details regarding transfer taxes, fees
and expenses incurred in this exchange offer and consent
solicitation.
-- We intend to conduct this exchange offer and consent solicitation in
accordance with the applicable requirements of the Securities Act,
the Securities Exchange Act of 1934, as amended, or the "Exchange
Act," and the applicable rules and regulations of the SEC.
EXPIRATION DATE, EXTENSIONS, TERMINATION AND AMENDMENTS
This exchange offer and consent solicitation will expire at 5:00 p.m., New
York City time, on August 23, 2004, unless we extend it or terminate it earlier.
References in this prospectus and consent solicitation statement to the
"expiration date" with respect to any series of Conrail Debentures mean 5:00
p.m., New York City time, on August 23, 2004 or, if extended by us, the latest
time and date to which this exchange offer and consent solicitation is extended
by us. In accordance with Rule 14e-1 under the Exchange Act, if we elect to
increase or decrease the percentage of the Conrail Debentures sought, the
consideration offered or the dealer manager's soliciting fees, this exchange
offer and consent solicitation will remain open for at least ten business days
from the date that notice of such change is first published or sent or given to
holders of the Conrail Debentures.
In order to extend the expiration date, we will:
-- notify the exchange agent of any extension by written communication;
and
-- issue a press release or other public announcement that will report
the approximate number of Conrail Debentures deposited, no later than
9:00 a.m., New York City time, on the first business day after the
previously scheduled expiration date of this exchange offer and
consent solicitation.
During any extensions, all Conrail Debentures previously tendered will
remain tendered, subject, however, to withdrawal rights as described under
"--Withdrawal Rights." Any Conrail Debentures not accepted for exchange for any
reason will be returned without expense to the tendering holder promptly after
the expiration or termination of this exchange offer and consent solicitation.
We expressly reserve the right, in our sole discretion:
-- to amend the terms of this exchange offer and consent solicitation in
any manner;
-- to waive, in whole or in part, any of the conditions to this exchange
offer and consent solicitation;
-- to extend the period of time during which this exchange offer and
consent solicitation is open and thereby delay acceptance of any of
the Conrail Debentures to which the extension applies, by giving
written notice of any extension to the exchange agent and notice of
such extension to the holders by press release or other public
announcement;
-- to extend or terminate this exchange offer and consent solicitation
and to refuse to accept Conrail Debentures not previously accepted if
any of the conditions set forth below under "--Conditions to This
Exchange Offer and Consent Solicitation" have not been satisfied or
waived by us, by giving written notice of such delay, extension or
termination to the exchange agent and written notice of such
extension or termination to holders by press release or other public
announcement; or
-- if, in the opinion of our counsel, the consummation of this exchange
offer and consent solicitation would violate any law or
interpretation of the Staff of the SEC, to terminate or amend this
exchange offer and consent solicitation by giving written notice to
the exchange agent.
We cannot assure you, in case any conditions to this exchange offer and
consent solicitation set forth under "--Conditions to This Exchange Offer and
Consent Solicitation" are not satisfied or waived by us, that we will exercise
our right to extend the expiration date for this exchange offer and consent
solicitation.
38
Any extension, termination or amendment will be followed as promptly as
practicable by press release or other public announcement. If we make a material
change in the terms of this exchange offer and consent solicitation or the
information concerning this exchange offer and consent solicitation or waive any
condition of this exchange offer and consent solicitation that results in a
material change to the circumstances of this exchange offer and consent
solicitation, we will circulate additional exchange offer and consent
solicitation materials if and to the extent required by applicable law. In those
circumstances, we will also extend this exchange offer and consent solicitation
if and to the extent required by applicable law in order to permit holders of
the Conrail Debentures subject to this exchange offer and consent solicitation
adequate time to consider the additional materials.
If we elect to provide one or more subsequent offering periods totaling
between three and 20 business days after the initial offering period has
expired, you will not be entitled to any withdrawal rights during the subsequent
offering period. For more information regarding a subsequent offering period,
see "--Withdrawal Rights."
IMPORTANT RESERVATION OF RIGHTS REGARDING THIS EXCHANGE OFFER AND CONSENT
SOLICITATION
You should note that:
-- All questions as to the validity, form, eligibility, time of receipt,
acceptance and any withdrawal of Conrail Debentures tendered for
exchange will be determined by us in our sole discretion, and such
determination shall be final and binding.
-- We reserve the absolute right to reject any and all tenders of any
particular Conrail Debentures not validly tendered or not to accept
any particular Conrail Debentures of which acceptance might, in our
sole judgment or the judgment of our counsels, be unlawful.
-- We also reserve the absolute right to waive any conditions of this
exchange offer and consent solicitation with respect to all holders
before the expiration date.
-- We further reserve the absolute right to jointly waive any defects or
irregularities in connection with the tender of any particular
Conrail Debentures either before or after the expiration date,
whether or not similar defects or irregularities are waived in
connection with other tendered Conrail Debentures. Unless we agree to
waive any defect or irregularity in connection with the tender of
Conrail Debentures for exchange, you must cure any defect or
irregularity within any reasonable period of time as we shall
determine.
-- Our interpretation of the terms and conditions of this exchange offer
and consent solicitation (including the instructions in the letter of
consent/transmittal) as to any particular Conrail Debentures either
before or after the expiration date shall be final and binding on all
other parties.
-- None of us, the exchange agent, or any other person shall be under
any duty to give notification of any defect or irregularity with
respect to any tender of Conrail Debentures for exchange, nor shall
any of them incur any liability for failure to give any notification.
-- Tenders of Conrail Debentures will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any
Conrail Debentures received by the exchange agent that are not
validly tendered and as to which the defects or irregularities have
not been cured or waived will be returned without cost by the
exchange agent to the tendering holder unless otherwise provided in
the letter of consent/transmittal, promptly following the expiration
date.
TERMS OF THE NEW CSXT NOTES AND THE NEW NSR NOTES
The New CSXT Notes and the New NSR Notes will be issued under and entitled
to the benefits of the New CSXT Indenture and New NSR Indenture. As a result,
each of the New CSXT Notes and the New NSR Notes will be treated as separate
debt obligations of each distinct obligor under their respective indentures.
39
Descriptions of the terms of the New CSXT Notes are included in this
prospectus and consent solicitation statement under "Description of the New CSXT
Notes" in the CSXT Appendix attached hereto. Descriptions of the terms of the
New NSR Notes are included in this prospectus and consent solicitation statement
under "Description of the New NSR Notes" in the NSR Appendix attached hereto. A
comparison of the terms of the New CSXT Notes to those of the Conrail Debentures
is included in this prospectus and consent solicitation statement under
"Comparison of the New CSXT Notes and the Conrail Debentures" in the CSXT
Appendix attached hereto. A comparison of the terms of the New NSR Notes to
those of the Conrail Debentures is included in this prospectus and consent
solicitation statement under "Comparison of the New NSR Notes and the Conrail
Debentures" in the NSR Appendix attached hereto.
REQUIRED CONSENT
If you tender your Conrail Debentures, you must also consent to the
proposed amendments to the Conrail Indenture to the extent your Conrail
Debentures are accepted for exchange. By submitting a letter of
consent/transmittal, you will have consented to the proposed amendments. See
"--Proposed Amendments."
CONDITIONS TO THIS EXCHANGE OFFER AND CONSENT SOLICITATION
No Conrail Debentures will be accepted for exchange unless holders of more
than 50% of the aggregate principal amount of the Conrail Debentures, voting as
a single class, have consented to the Conrail Supplemental Indenture and validly
tendered and not withdrawn their Conrail Debentures on or prior to the
expiration date.
The aggregate principal amount outstanding of each series of Conrail
Debentures as of the date of this prospectus and consent solicitation statement
are set forth below:
<Table>
9 3/4% Debentures Due June 15, 2020......................... $550,000,000
7 7/8% Debentures Due May 15, 2043.......................... 250,000,000
------------
TOTAL..................................................... $800,000,000
============
</Table>
Even if the above condition is met, notwithstanding any other term of this
exchange offer and consent solicitation or any extension of this exchange offer
and consent solicitation, we will not be required to accept for exchange any
Conrail Debentures and, prior to the expiration date, may terminate, amend, or
extend this exchange offer and consent solicitation if:
-- Conrail has not obtained the consent, by the lessors and
counterparties to Conrail's various private equipment leases and
private secured loans, to the Conrail Spin Off Transactions; or
-- Conrail does not obtain the consent by a majority of the holders of
each series of Conrail's equipment trust certificates and pass
through trust certificates, each voting as a separate class, as well
as the consent by the related equity investors, lessors, owner
trustees and owner participants, to the Conrail Spin Off
Transactions, as evidenced by the execution and delivery by such
holders of a letter of consent/transmittal pursuant to the consent
solicitation that is occurring concurrently with this exchange offer
and consent solicitation or by such other related party of another
agreement or document evidencing such consent; or
-- any action, proceeding or litigation seeking to enjoin, make illegal,
delay the consummation of or challenge in any respect this exchange
offer and consent solicitation or the Conrail Spin Off Transactions
or otherwise relating in any manner to this exchange offer and
consent solicitation or the Conrail Spin Off Transactions is pending,
instituted or threatened; or
-- any order, stay, judgment or decree is issued by any court,
government, governmental authority or other regulatory or
administrative authority and is in effect or any statute, rule,
regulation, governmental order or injunction shall have been
proposed, enacted, enforced or deemed applicable to this exchange
offer and consent solicitation, or the Conrail Spin Off Transactions,
any of which could restrain, prohibit or delay consummation of this
exchange offer and consent solicitation or the Conrail
40
Spin Off Transactions or impair the contemplated benefits of this
exchange offer and consent solicitation or the Conrail Spin Off
Transactions to CSXT, NSR or Conrail, as described under "Description
of the Conrail Spin Off Transactions--Benefits of the Conrail Spin
Off Transactions," including a change which occurs in the current
interpretations of the SEC that could materially impair our ability
to proceed with the exchange offer or consent solicitation; or
-- the trustee under the Conrail Indenture shall have objected in any
respect to, or taken any action that could adversely affect the
consummation of this exchange offer and consent solicitation or
Conrail's ability to cause the execution of the Conrail Supplemental
Indenture, or shall have taken any action that challenges the
validity or effectiveness of the procedures used by Conrail in
soliciting the consents (including the form thereof) or in the making
of this exchange offer and consent solicitation or the acceptance of
any of the Conrail Debentures or any of the consents; or
-- all conditions in the Distribution Agreement shall not have been
satisfied or waived. For a description of those conditions, see
"Description of the Conrail Spin Off Transactions--The Distribution
Agreement"; or
-- there has occurred:
-- any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange or in the
over-the-counter market in the United States;
-- the declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States;
-- the commencement of a war, armed hostilities or other international
or national calamity (or, with regard to any existing wars or
conflicts, any material escalation or expansion of such conflicts)
directly or indirectly involving the United States or any of its
territories;
-- any limitation (whether or not mandatory) by any governmental,
regulatory or administrative agency or authority on, or any event,
or any disruption or adverse change in the financial or capital
markets generally or the market for loan syndications in
particular, that could affect adversely the extension of credit by
banks or other lending institutions in the United States;
-- any event or events including, without limitation, general
political, market, economic or financial conditions in the United
States or abroad that have resulted or could result in an actual or
threatened material adverse change in the business, condition
(financial or other), income, operations, assets, liabilities,
properties, or prospects of NYC or PRR, CSXT and its subsidiaries,
taken as a whole, NSR and its subsidiaries, taken as a whole, or
that otherwise materially affects, or could impair in any way, the
contemplated future conduct of the business of any of the
foregoing, or that otherwise could materially affect the expected
benefits of this exchange offer and consent solicitation or the
Conrail Spin Off Transactions, as described under "Description of
the Conrail Spin Off Transactions--Benefits of the Conrail Spin Off
Transactions"; or
-- any termination of the Distribution Agreement. See "Description of
the Conrail Spin Off Transactions--The Distribution Agreement."
The conditions listed above are for our sole benefit and may be asserted by
any of us regardless of the circumstances giving rise to any of these
conditions. Prior to the expiration date, we may waive these conditions in whole
or in part at any time and from time to time. The conditions may only be waived
by us jointly. The failure by us at any time to exercise any of the above rights
will not be considered a waiver of that right, and these rights will be
considered to be ongoing rights which may be asserted, before the expiration
date, at any time and from time to time. Any determination by us concerning the
events described above will be final and binding upon all parties.
In addition, we will not consummate this exchange offer and consent
solicitation if at any time any stop order has been threatened or is in effect
with respect to either of the registration statements of which this
41
prospectus and consent solicitation statement constitutes a part or the
qualification of the New CSXT Indenture or the New NSR Indenture under the Trust
Indenture Act of 1939, or the "TIA."
FRACTIONAL NOTES
The New Exchange Notes will be issued only in denominations of $1,000 and
integral multiples of $1,000. Accordingly, if you would otherwise be entitled to
receive a fractional interest in a New CSXT Note and a fractional interest in a
New NSR Note, you will instead receive either a $1,000 New CSXT Note or a $1,000
New NSR Note in lieu of fractional interests in the New Exchange Notes. Whether
you will receive a $1,000 New CSXT Note or a $1,000 New NSR Note in lieu of
fractional interests will be determined as follows:
-- if your fractional interest in a New CSXT Note is equal to or less
than $500 and your fractional interest in a New NSR Note is equal to
or greater than $500, you will receive a $1,000 New NSR Note in lieu
of any fractional interests; or
-- if your fractional interest in a New NSR Note is less than $500 and
your fractional interest in a New CSXT Note is greater than $500, you
will receive a $1,000 New CSXT Note in lieu of any fractional
interests.
Under no circumstances will you receive a combination of New CSXT Notes and
New NSR Notes with a combined aggregate principal amount different from the
aggregate principal amount of Conrail Debentures that you validly tender in this
exchange offer and consent solicitation. Participants in DTC are responsible for
allocating the New CSXT Notes and the New NSR Notes, as well as fractional
interests related thereto, to beneficial owners and none of DTC, CSXT, NSR, the
exchange agent, the information agent or the dealer manager is responsible for
such allocations. In the event the treatment of fractional interests causes a
deviation in the allocation of New Exchange Notes from 42% to CSXT and 58% to
NSR, the parties intend to true up the deviation between themselves.
NO PRORATION
This exchange offer and consent solicitation for Conrail Debentures is for
all Conrail Debentures and is not subject to proration among holders of Conrail
Debentures who validly tender.
PROPOSED AMENDMENTS
This section sets forth a brief description of the Proposed Amendments to
the Conrail Indenture for which consents are being sought pursuant to this
exchange offer and consent solicitation. THE PROPOSED AMENDMENTS CONSTITUTE A
SINGLE PROPOSAL. IF YOU ELECT TO TENDER YOUR CONRAIL DEBENTURES, YOU MUST
CONSENT TO THE PROPOSED AMENDMENTS AS AN ENTIRETY AND MAY NOT CONSENT
SELECTIVELY TO SPECIFIC PROPOSED AMENDMENTS. IF YOU VALIDLY TENDER YOUR CONRAIL
DEBENTURES, YOU WILL HAVE CONSENTED TO THE PROPOSED AMENDMENTS.
The proposed amendments will not become effective unless and until we
accept for exchange all validly tendered Conrail Debentures pursuant to this
exchange offer and consent solicitation and such Conrail Debentures represent
more than 50% in aggregate principal amount of Conrail Debentures outstanding.
The Conrail Supplemental Indenture setting forth the proposed amendments will be
executed promptly following the expiration date, assuming that the requisite
consents have been received. Thereafter, the proposed amendments will be
effective and will be binding on all non-tendering holders of Conrail
Debentures. If this exchange offer and consent solicitation is withdrawn or is
otherwise not consummated, the Conrail Supplemental Indenture will become null
and void, the proposed amendments will not become effective and the Conrail
Indenture will remain in effect in its present form, subject to any
modifications, waivers or amendments in accordance with the provisions of the
Conrail Indenture, without giving effect to the proposed amendments.
The primary purpose of the Conrail Supplemental Indenture is to eliminate
substantially all of the restrictive covenants in the Conrail Indenture in order
to allow the Conrail Spin Off Transactions to go forward, other than the
covenants to pay interest on and principal of Conrail's Debentures when due and
covenants required by the TIA, and to eliminate certain related events of
default.
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The following summary of provisions of the Conrail Indenture after giving
effect to proposed amendments set forth below are qualified in their entirety by
reference to the full and complete terms contained in the Conrail Indenture,
dated May 1, 1990, between Conrail and J.P. Morgan Trust Company, National
Association, as successor to Bank One Trust Company, N.A., a national banking
corporation, which was successor in interest to The First National Bank of
Chicago, a national banking association, or "FNBC," and as amended by the
Conrail Supplemental Indenture, dated August 25, 1998, between Conrail and FNBC.
Holders may obtain copies of the Conrail Indenture and the Conrail Supplemental
Indenture without charge from the information agent.
The "proposed amendments" to the Conrail Indenture are as follows:
DELETION OF COVENANTS
The proposed amendments would, unless otherwise indicated, delete in their
entirety from the Conrail Indenture the provisions described and listed below by
their corresponding section number in the Conrail Indenture and any references
thereto.
SECTION 3.6 Corporate Existence. This provision currently requires
Conrail to keep in full force and effect its corporate existence and its rights
and franchises unless abandoning any right or franchise would not have a
material adverse effect on Conrail or its subsidiaries taken as a whole.
SECTION 3.7 Limitation on Liens. This provision currently restricts
Conrail's ability and its subsidiaries' ability to create or permit to exist
certain liens on their assets and properties and the debt or shares of stock of
certain of their subsidiaries.
SECTION 3.8 Waiver of Certain Covenants. This provision currently allows
holders of the Conrail Debentures to waive Conrail's compliance with Section 3.6
(Corporate Existence) and Section 3.7 (Limitation on Liens) of the Conrail
Indenture.
SECTION 3.10 Limitation upon LLC Indebtedness. This provision currently
restricts Conrail's ability to permit NYC or PRR or any successor of either to
incur, create or otherwise become liable for the payment of any indebtedness.
SECTION 5.1 Events of Default. Section 5.1 of the Conrail Indenture sets
forth events that would constitute a default by Conrail under the Conrail
Indenture.
Paragraph (c) describes events of default relating to Conrail's failure to
comply with its covenants or agreements under the Conrail Indenture; and
Paragraph (f) describes events of default relating to any other event of
default provided for in any supplemental indenture under which securities are
issued under the indenture.
SECTION 9.1 Issuer May Merge, Consolidate, etc., Only on Certain
Terms. This provision currently restricts Conrail's ability to merge,
consolidate or sell all or substantially all of its assets.
SECTION 9.2 Successor Corporation Substituted. This provision currently
provides that, following compliance with the terms of Section 9.1, the successor
corporation will succeed to the rights and powers of Conrail under the Conrail
Indenture, after which Conrail will be discharged from its obligations.
SECTION 9.3 Notes to be Secured in Certain Events. This provision
currently requires Conrail to secure the payment of any securities outstanding
under the Conrail Indenture prior to a merger or consolidation if a certain
amount of Conrail's assets or any shares of stock or debt of any of Conrail's
Subsidiaries will be subject to a lien following the merger or consolidation and
the securities outstanding under the Conrail Indenture will not be similarly
secured.
The Conrail Supplemental Indenture would also delete definitions from the
Conrail Indenture when references to these definitions are eliminated as a
result of the foregoing.
None of the maturity dates, payment provisions, interest rates, redemption
provisions or any other similar terms of the Conrail Indentures will be amended
as a result of the Conrail Supplemental Indenture.
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This description is also qualified in its entirety by reference to the full
provisions of the Conrail Indenture, which is filed as an exhibit to the
registration statements of which this prospectus and consent solicitation
statement is a part, and copies of which the information agent will provide to
you upon request. Holders of Conrail Debentures should carefully review the
Conrail Supplemental Indenture before consenting to the proposed amendments by
validly tendering and not withdrawing their Conrail Debentures in this exchange
offer and consent solicitation.
REQUISITE CONSENTS; OUTSTANDING CONRAIL DEBENTURES
In order for the Conrail Supplemental Indenture to be effective as to the
Conrail Debentures, holders of more than 50% in aggregate principal amount of
the Conrail Debentures, voting as a single class, must have validly tendered and
had their Conrail Debentures accepted in this exchange offer and consent
solicitation.
In contrast, in the consent solicitation that occurred in 1998, the
amendment to the Conrail Indenture required the consent of a majority in
aggregate principal amount of the holders of each of the 9 3/4% Conrail
Debentures and the 7 7/8% Conrail Debentures, each voting separately as a single
class.
As a consequence of the amendments approved in the 1998 consent
solicitation, all amendments or waivers subsequent to the 1998 amendments that
affect all series of securities outstanding under the Conrail Indenture (such as
those set forth in the Conrail Supplemental Indenture) may be made with the
consent of a majority in aggregate principal amount of all such series voting
together as a single class rather than on a series-by-series basis.
The principal amount outstanding of each series of Conrail Debentures as of
the date of this prospectus and consent solicitation statement is set forth
below:
<Table>
<Caption>
9 3/4% Debentures Due June 15, 2020......................... $550,000,000
7 7/8% Debentures Due May 15, 2043.......................... 250,000,000
------------
TOTAL..................................................... $800,000,000
============
</Table>
The failure of a holder of Conrail Debentures to have his Conrail
Debentures accepted in this exchange offer and consent solicitation, including
any failures resulting from failures by brokers to validly tender or to receive
instructions from their clients as to whether to tender Conrail Debentures in
this exchange offer and consent solicitation, will have the same effect as if
that holder had not granted a consent to the Conrail Supplemental Indenture.
To our knowledge, no director or executive officer of CSXT, NSR, Conrail or
any of their affiliates held any Conrail Debentures as of the close of business
on the date hereof.
PROCEDURES FOR TENDERING
WHAT TO SUBMIT AND HOW
We have forwarded to you, along with this prospectus and consent
solicitation statement, a letter of consent/transmittal relating to this
exchange offer and consent solicitation in order for you to receive the New
Exchange Notes and the respective Cash Payments. A holder need not submit a
letter of consent/transmittal if the holder tenders Conrail Debentures in
accordance with the ATOP procedures mandated by DTC. To tender Conrail
Debentures without submitting a letter of consent/transmittal, the electronic
instructions sent to DTC and transmitted to the exchange agent must contain your
acknowledgements of, receipt of, and your agreement to be bound by, and to make
all the representations contained in, the letter of consent/transmittal. In all
other cases, you must transmit a validly completed and duly executed letter of
consent/transmittal to The Bank of New York, at the address set forth below
under "--Exchange Agent," on or prior to the expiration date. Your valid tender
of Conrail Debentures through either method will constitute your consent to the
Conrail Supplemental Indenture.
Any beneficial holder whose Conrail Debentures are registered in the name
of its broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered
44
holder promptly and instruct such registered holder to tender on the beneficial
holder's behalf. In accordance with state securities laws, some beneficial
holders will be required to make representations and warranties about themselves
contained in the form of instructions to be sent to brokers, dealers, commercial
banks, trust companies and other nominees. If such beneficial holder wishes to
tender on its own behalf, such beneficial holder must, prior to completing and
executing the letter of consent/transmittal and delivering its Conrail
Debentures, either make appropriate arrangements to register ownership of the
Conrail Debentures in such holder's name or obtain a properly completed bond
power from the registered holder. The transfer of record ownership may take
considerable time and may not be capable of being completed prior to the
expiration date.
WE STRONGLY URGE EACH DTC PARTICIPANT WHO IS SUBMITTING TENDERS OF THE
CONRAIL DEBENTURES, ON BEHALF OF THEIR CLIENTS WHO ARE THE BENEFICIAL HOLDERS,
TO SUBMIT ONE TENDER FOR EACH BENEFICIAL HOLDER TO SIMPLIFY THE DISTRIBUTION OF
THE NEW CSXT NOTES AND NEW NSR NOTES. PLEASE NOTE THAT DISTRIBUTIONS OF THE NEW
CSXT NOTES AND NEW NSR NOTES WILL BE CALCULATED FOR EACH VOLUNTARY OFFERING
INSTRUCTION SUBMITTED.
In addition,
(1) certificates for the Conrail Debentures must be received by the
exchange agent along with the letter of consent/transmittal; or
(2) a timely confirmation of a book-entry transfer of the Conrail
Debentures, if such procedure is available, into the exchange agent's
account at DTC using the procedure for book-entry transfer described below,
must be received by the exchange agent on or prior to the expiration date;
or
(3) you must deliver a letter of consent/transmittal and, if
applicable, a notice of guaranteed delivery on or prior to the expiration
date. See "--Guaranteed Delivery Procedures."
All Conrail Debentures held by a single holder and not by a nominee,
trustee or other representative must all be tendered on a single letter of
consent/transmittal.
The tender by a holder that is not withdrawn on or prior to the expiration
date will constitute an agreement between the holder and us in accordance with
the terms and subject to the conditions set forth in this prospectus and consent
solicitation statement and in the letter of consent/transmittal, including, but
not limited to, the agreement by such holder to deliver good and marketable
title to the tendered Conrail Debentures free and clear of all liens, charges,
claims, encumbrances, interests and restrictions of any kind.
The method of delivery of Conrail Debentures, letters of
consent/transmittal and notices of guaranteed delivery is at your election and
risk. If delivery is by mail, we recommend that registered mail, properly
insured, with return receipt requested, be used. In all cases, sufficient time
should be allowed to assure timely delivery. No letters of consent/transmittal
or Conrail Debentures should be sent to CSXT, NSR, Conrail, NYC, PRR, the dealer
manager, the information agent or any other person other than the exchange
agent.
HOW TO SIGN YOUR LETTER OF CONSENT/TRANSMITTAL AND OTHER DOCUMENTS
Signatures on a letter of consent/transmittal or a notice of withdrawal, as
the case may be, must be guaranteed unless the Conrail Debentures being
surrendered for exchange are tendered:
-- by a registered holder of the Conrail Debentures who has not
completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the letter of consent/transmittal;
or
-- for the account of an eligible institution.
If signatures on a letter of consent/transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, the signatures must be
guaranteed by an "eligible guarantor institution" meeting the requirements of
the exchange agent, which requirements include membership or participation in
the Securities Transfer Agents Medallion Program, or "STAMP," or such other
"signature guarantee program" as may be determined by the exchange agent in
addition to, or in substitution for, STAMP, all in accordance with the Exchange
Act.
45
If the letter of consent/transmittal or any powers of attorney or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, the person should so indicate when signing and, unless
waived by us, proper evidence satisfactory to us of its authority to so act must
be submitted with the letter of consent/transmittal.
By signing the letter of consent/transmittal or tendering using ATOP
procedures established by DTC, each holder of Conrail Debentures will represent
to us that, among other things:
-- the holder has full power and authority to tender, assign, exchange
and transfer the Conrail Debentures tendered;
-- Conrail will acquire good title to the Conrail Debentures being
tendered, free and clear of all security interests, liens,
restrictions, charges, encumbrances, conditional sale agreements or
other obligations relating to their sale or transfer, and not subject
to any adverse claim when Conrail accepts the Conrail Debentures;
-- neither the holder nor any other person has an arrangement or
understanding with any person to participate in the distribution of
the New CSXT Notes, the New NSR Notes or the Cash Payments;
-- if the holder is a broker-dealer registered under the Exchange Act or
the holder is participating in this exchange offer and consent
solicitation for the purpose of distributing New CSXT Notes or New
NSR Notes, such broker-dealer must comply with the registration and
prospectus delivery requirements of the Securities Act in connection
with a secondary resale of New CSXT Notes or New NSR Notes, and such
broker-dealer may not rely on the position of the SEC's staff set
forth in their no-action letters;
-- any resales of New CSXT Notes or New NSR Notes obtained by the holder
in exchange for Conrail Debentures acquired by the holder directly
from Conrail should be covered by an effective registration statement
containing the selling security holder information required by Items
507 and 508, as applicable, of Regulation S-K of the SEC; and
-- neither the holder nor any such other person is our "affiliate"
within the meaning of Rule 405 under the Securities Act, or, if the
holder is our affiliate, it will comply with any applicable
registration and prospectus delivery requirements of the Securities
Act.
If you are a broker-dealer and you will receive New CSXT Notes or New NSR
Notes for your own account in exchange for Conrail Debentures that were acquired
as a result of market-making activities or other trading activities, you will be
required to acknowledge in the letter of consent/transmittal that you will
deliver a prospectus in connection with any resale of such New CSXT Notes or New
NSR Notes.
Participation in this exchange offer and consent solicitation is voluntary.
You are urged to consult your financial and tax advisors in making your decision
as to whether to participate in this exchange offer and consent solicitation.
CONSEQUENCES OF FAILURE TO VALIDLY TENDER CONRAIL DEBENTURES IN THIS EXCHANGE
OFFER AND CONSENT SOLICITATION
Delivery of the New Exchange Notes and the Cash Payments in exchange for
the Conrail Debentures under this exchange offer and consent solicitation will
be made only after timely receipt by the exchange agent of (1) such Conrail
Debentures, a validly completed and duly executed letter of consent/transmittal
and all other required documents, or (2) an agent's message, transmitted by DTC
and received by the exchange agent and forming a part of a book-entry
confirmation. Therefore, holders desiring to tender Conrail Debentures in
exchange for New CSXT Notes, New NSR Notes and Cash Payments should allow
sufficient time to ensure timely delivery. We are under no duty to give
notification of defects or irregularities of tenders of Conrail Debentures for
exchange.
To the extent that any Conrail Debentures remain outstanding following
consummation of the exchange offer, they will remain obligations of Conrail. If
we obtain the requisite consents and execute the Conrail
46
Supplemental Indenture, it will be binding on each holder of Conrail Debentures,
regardless of whether or not that holder consented by validly tendering such
holder's Conrail Debentures. You will not be entitled to any appraisal or
dissenters' rights if the Conrail Supplemental Indenture becomes effective
without your consent.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the Conrail Debentures at DTC for purposes of this exchange offer and consent
solicitation promptly after the date of this prospectus and consent solicitation
statement. Any financial institution that is a participant in DTC's systems or
any organization which is an indirect participant in DTC's systems, including
Euroclear and Clearstream, must make book-entry delivery of Conrail Debentures
by causing DTC to transfer Conrail Debentures into the exchange agent's account
in accordance with DTC's ATOP procedures for transfer. However, the Conrail
Debentures will be deemed tendered only after timely confirmation of book-entry
transfer of the Conrail Debentures into the exchange agent's account, and timely
receipt by the exchange agent of an agent's message, transmitted by DTC and
received by the exchange agent and forming a part of a book-entry confirmation.
The agent's message must state that DTC has received an express acknowledgment
from the participant tendering Conrail Debentures that are the subject of that
book-entry confirmation, that the participant has received and agrees to be
bound by the terms of the letter of consent/transmittal, and that we may enforce
the agreement against that participant.
If your Conrail Debentures are held through DTC, you must instruct the
participant(s) in DTC through whom you hold your Conrail Debentures of your
intention to tender your Conrail Debentures and instruct such participants to
deliver your Conrail Debentures utilizing DTC's ATOP procedures. Please note
that delivery of documents to DTC in accordance with its procedures does not
constitute delivery to the exchange agent, and we will not be able to accept
your tender of Conrail Debentures until a valid book-entry confirmation from
DTC, with respect to your Conrail Debentures, has been received by the exchange
agent.
Except as described under "Description of the New CSXT Notes--Certificated
Notes" and "Description of the New NSR Notes--Certificated Notes" in the CSXT
Appendix and NSR Appendix, respectively, we have arranged for the New Exchange
Notes to be issued in the form of global notes registered in the name of DTC or
its nominee and each holder's interest in these securities will be transferable
only in book-entry form through DTC.
GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of Conrail Debentures and you want to tender
your Conrail Debentures but your Conrail Debentures are not immediately
available, or time will not permit your Conrail Debentures to reach the exchange
agent on or prior to the expiration date, or the procedure for book-entry
transfer cannot be completed on or prior to the expiration date, a tender may be
effected if:
(1) the tender is made through an eligible institution;
(2) on or prior to the expiration date, the exchange agent receives,
by facsimile transmission, mail or hand delivery, from that eligible
institution a validly completed and duly executed letter of
consent/transmittal and notice of guaranteed delivery, in the form provided
by us, stating:
-- the name and address of the holder of Conrail Debentures;
-- the certificate number or numbers of the Conrail Debentures and
the principal amount of Conrail Debentures tendered; and
-- that the tender is being made by delivering the notice of
guaranteed delivery and guaranteeing that within three New York
Stock Exchange trading days after the date of execution of the
notice of guaranteed delivery, the certificates of all physically
tendered Conrail Debentures, in proper form for transfer, or a
book-entry confirmation, as the case may be, and any other
documents required by the letter of consent/transmittal, will be
deposited by that eligible institution with the exchange agent;
and
47
(3) the certificates for all physically tendered Conrail Debentures,
in proper form for transfer, or a book-entry confirmation, as the case may
be, and any other documents required by the letter of consent/transmittal,
are received by the exchange agent within three New York Stock Exchange
trading days after the date of execution of the notice of guaranteed
delivery.
Unless Conrail Debentures are tendered by the above-described method and
deposited with the exchange agent within the time period set forth above, we
may, at our option, reject the tender. The exchange agent will send you a notice
of guaranteed delivery upon your request if you want to tender your Conrail
Debentures according to the guaranteed delivery procedures described above.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAYABLE BY REASON OF ANY DELAY IN
MAKING PAYMENT TO ANY PERSON USING THE GUARANTEED DELIVERY PROCEDURES, AND THE
CASH PAYMENTS MADE IN CONNECTION WITH THE EXCHANGE OF CONRAIL'S DEBENTURES
PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES WILL BE THE SAME AS THAT FOR
CONRAIL DEBENTURES DELIVERED TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION
DATE.
ACCEPTANCE OF CONRAIL DEBENTURES AND DELIVERY OF NEW CSXT NOTES, NEW NSR NOTES
AND CASH PAYMENTS
Once all of the conditions to this exchange offer and consent solicitation
are satisfied or waived, (a) we will accept, promptly after the expiration date,
all Conrail Debentures validly tendered, (b) CSXT will cause the New CSXT Notes
to be issued to Conrail for the exchange of New CSXT Notes for Conrail
Debentures, (c) NSR will cause the New NSR Notes to be issued to Conrail for the
exchange of the New NSR Notes for Conrail Debentures, and (d) with respect to
all Conrail Debentures validly tendered and not withdrawn on or prior to the
expiration date, Conrail will cause to be paid to the holders of such Conrail
Debentures the 9 3/4% Cash Payment and/or the 7 7/8% Cash Payment, as the case
may be. See "--Conditions to This Exchange Offer and Consent Solicitation"
above.
Conrail will make the 9 3/4% Cash Payment and/or the 7 7/8% Cash Payment by
depositing the aggregate cash payments, to the extent payable, in immediately
available funds with the exchange agent, which will act as agent for the holders
who tender their Conrail Debentures on or prior to the expiration date for the
purpose of, among other things, receiving the New Exchange Notes and Cash
Payments from Conrail and transmitting such New Exchange Notes and Cash Payments
to those holders. For purposes of this exchange offer and consent solicitation,
the giving of written notice of our acceptance to the exchange agent will be
considered our acceptance of this exchange offer and consent solicitation.
In all cases, the New Exchange Notes and Cash Payments will be delivered in
exchange for Conrail Debentures that are accepted for exchange only after timely
receipt by the exchange agent of:
-- a timely book-entry confirmation with respect to the Conrail
Debentures which must contain your acknowledgements of, receipt of,
and your agreement to be bound by, and to make all the
representations contained in, the letter of consent/transmittal; or
-- certificates for the Conrail Debentures and a validly completed and
duly executed letter of consent/transmittal as well as any other
documents required by the letter of consent/transmittal and the
instructions to the letter of consent/transmittal.
The exchange agent will make the exchange and cash payment on, or promptly
after, the date it receives notice of acceptance from CSXT and NSR, and as a
result of this exchange the holders in whose names the New Exchange Notes and
Cash Payments will be deliverable upon exchange will be deemed to be the holders
of record of the New Exchange Notes. Holders tendering pursuant to the
procedures for guaranteed delivery discussed under "--Guaranteed Delivery
Procedures" whose certificates for Conrail Debentures or book-entry confirmation
with respect to Conrail Debentures are actually received by the exchange agent
after expiration of this exchange offer and consent solicitation, may receive
the New Exchange Notes and the Cash Payments later than other holders. All
tendering holders, by execution of the letter of consent/transmittal, or by
following the ATOP procedures for Conrail Debentures held by DTC, waive any
right to receive notice of acceptance of the Conrail Debentures for exchange.
48
The reasons we may not accept tendered Conrail Debentures are:
-- the Conrail Debentures were not validly tendered pursuant to the
procedures for tendering; see "--Procedures for Tendering";
-- we determine that one or more of the conditions to this exchange
offer and consent solicitation has not been satisfied; see
"--Conditions to This Exchange Offer and Consent Solicitation";
-- a holder has validly withdrawn a tender of Conrail Debentures as
described under "--Withdrawal Rights"; or
-- we have terminated or extended this exchange offer and consent
solicitation. See "--Terms of This Exchange Offer and Consent
Solicitation" and "--Procedures for Tendering."
If we do not accept any tendered Conrail Debentures for any reason included
in the terms and conditions of this exchange offer and consent solicitation or
if you submit certificates representing Conrail Debentures in a greater
principal amount than you wish to exchange, we will promptly return any
unaccepted or non-exchanged Conrail Debentures without expense to the tendering
holder or, in the case of Conrail Debentures tendered by book-entry transfer
into the exchange agent's account at DTC using the book-entry transfer
procedures described above, non-exchanged Conrail Debentures will be credited to
an account maintained with DTC promptly after the expiration or termination of
this exchange offer and consent solicitation.
Conrail Debentures that are not tendered for exchange or are tendered but
not accepted in connection with this exchange offer and consent solicitation
will not be retired or cancelled and will remain outstanding and remain subject
to the Conrail Indenture, as modified by the Conrail Supplemental Indenture in
the event this exchange offer and consent solicitation is consummated.
WITHDRAWAL RIGHTS
Subject to applicable law, you may withdraw tenders of Conrail Debentures
and thereby revoke your related consents at any time on or prior to the
expiration date, but not after. A valid withdrawal of tendered Conrail
Debentures made on or prior to the expiration date is an automatic revocation of
your related consent.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses listed below under
"--Exchange Agent" on or prior to the expiration date or any extension of the
withdrawal period as described above. Any notice of withdrawal must specify:
-- the name of the person having tendered the Conrail Debentures to be
withdrawn;
-- the Conrail Debentures to be withdrawn;
-- the principal amount of the Conrail Debentures to be withdrawn
(including the principal amount of such Conrail Debentures and the
CUSIP numbers, if held by DTC);
-- if certificates for Conrail Debentures have been delivered to the
exchange agent, the name in which the Conrail Debentures are
registered, if different from that of the withdrawing holder;
-- if certificates for Conrail Debentures have been delivered or
otherwise identified to the exchange agent, in which case, prior to
the release of those certificates, you must also submit the serial
numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an eligible
institution unless you are an eligible institution; and
-- if Conrail Debentures have been tendered using the procedure for
book-entry transfer described above, in which case, any notice of
withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawn Conrail Debentures and otherwise
comply with the procedures of that facility.
If a revocation is signed by a trustee, partner, executor, administrator,
guardian, attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, that person must so indicate when signing
and must submit with the revocation appropriate evidence of authority to execute
the revocation.
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Please note that all questions as to the validity, form, eligibility and
time of receipt of notices of withdrawal will be determined by us, and our
determination shall be final and binding on all parties. Any Conrail Debentures
so withdrawn will be considered not to have been validly tendered for exchange
for purposes of this exchange offer and consent solicitation and you will not be
eligible to receive the New Exchange Notes or the Cash Payments. In addition,
the holders of any Conrail Debentures so withdrawn will be considered not to
have consented to the Conrail Supplemental Indenture described under "--Proposed
Amendments." You may not revoke your consent without withdrawing your tender of
the Conrail Debentures relating to such consent.
If you have validly withdrawn Conrail Debentures and wish to re-tender
them, you may do so by following one of the procedures described under
"--Procedures for Tendering" above at any time on or prior to the expiration
date.
SUBSEQUENT OFFERING PERIOD
We may elect, in our sole discretion, to provide a subsequent offering
period of not less than three business days nor more than 20 business days. A
subsequent offering period is not an extension of the initial (or extended)
offering period. A subsequent offering period would be an additional period of
time, following the expiration of the initial (or extended) offering period, in
which holders of Conrail Debentures may tender their Conrail Debentures not
tendered during the initial (or extended) offering period. You will not have the
right to withdraw any Conrail Debentures that you tender during a subsequent
offering period and you will not have the right to withdraw any Conrail
Debentures tendered prior to the expiration of the initial (or extended)
offering period during a subsequent offering period.
If we elect to have a subsequent offering period, we will issue a press
release or other public announcement. In addition, if we elect to have a
subsequent offering period, we intend to comply with the provisions of Rule
14d-11 under the Exchange Act.
THE DEALER MANAGER
Conrail, CSX and NSC have engaged Morgan Stanley & Co. Incorporated to act
as sole dealer manager and sole solicitation agent in connection with this
exchange offer and consent solicitation and to provide financial advisory
services to Conrail, CSX and NSC in connection with this exchange offer and
consent solicitation.
The principal solicitation in connection with this exchange offer and
consent solicitation is being made by mail. However, additional solicitation may
be made by telephone, facsimile, electronic media or in person by the dealer
manager and its officers, regular employees and affiliates. In addition,
additional solicitation may be made by telephone, facsimile, electronic media or
in person by our officers, regular employees and affiliates. We will not pay any
additional compensation to any of our officers and employees who engage in
soliciting tenders or consents. In any jurisdiction in which the securities laws
or blue sky laws require solicitations to be made by a licensed broker or
dealer, any solicitations in connection with this exchange offer and consent
solicitation will be deemed to be made on behalf of us and the other registrants
by the dealer manager or its affiliates that are licensed under the laws of the
applicable jurisdictions.
The dealer manager has provided, and we expect will provide, investment
banking and financial advisory services to CSX, CSXT, NSC, NSR and Conrail, as
the case may be, for which it received, and we expect will receive, customary
fees. In particular, Conrail, CSX and NSC have engaged Morgan Stanley & Co.
Incorporated to act as sole solicitation agent in connection with the
solicitation of consents from holders of Conrail's equipment trust and pass
through trust certificates. Conrail is seeking, among other things, the consent
of these secured debt holders to effectuate the Conrail Spin Off Transactions.
CSXT, NSR and Conrail will enter into a dealer manager agreement with the
dealer manager. In that agreement, Conrail, CSX and NSC will agree to pay the
dealer manager customary fees for its services, including reasonable
out-of-pocket expenses and fees and expenses of legal counsel. Conrail, CSX and
NSC
50
have also agreed to indemnify the dealer manager against specified liabilities,
including specified liabilities under the federal securities laws.
At any given time, the dealer manager may trade the Conrail Debentures and,
upon their issuance, the New Exchange Notes, for its own account or for the
accounts of its customers, and, accordingly, may hold a long or a short position
in these securities or such other securities.
The dealer manager does not assume any responsibility for the accuracy or
completeness of the information concerning this exchange offer and consent
solicitation, the Conrail Spin Off Transactions, CSX, CSXT, NSC, NSR or Conrail
contained in this prospectus and consent solicitation statement or any documents
incorporated herein by reference or for any failure by us to disclose events
that may have occurred and may affect the significance or accuracy of such
information.
Questions regarding the terms of this exchange offer and consent
solicitation should be directed to the dealer manager at the address and
telephone numbers set forth on the back cover of this prospectus and consent
solicitation statement.
INFORMATION AGENT
We have engaged Innisfree M&A Incorporated as the information agent for the
exchange offer. Questions and requests for assistance, requests for additional
copies of this prospectus and consent solicitation statement or of the letter of
consent/transmittal and requests for notices of guaranteed delivery should be
directed to the information agent. The information agent may be contacted as
follows:
Innisfree M&A Incorporated
501 Madison Avenue, 20th Floor
New York, New York 10022
Banks and Brokers Call Collect:
(212) 750-5833
All Others Call Toll Free:
(877) 456-3507
EXCHANGE AGENT
We have engaged The Bank of New York as the exchange agent for this
exchange offer and consent solicitation. All executed letters of
consent/transmittal should be directed to the exchange agent at the address set
forth below:
Deliver to:
The Bank of New York
Reorganization Unit
101 Barclay Street, 7E
New York, New York 10286
Attn: William Buckley/Carolle Montreuil
Facsimile Transmissions:
(212) 298-1915
To Confirm by Telephone:
(212) 815-5788/5920
Delivery to an address other than as listed above or transmission of
instructions via facsimile other than as listed above does not constitute a
valid delivery.
You and your broker, dealer, commercial bank, trust company or other
nominee should send letters of consent/transmittal and all correspondence in
connection with this exchange offer and consent solicitation to the exchange
agent at the address and telephone number listed above.
51
FEES AND EXPENSES
The information agent and exchange agent will receive reasonable and
customary compensation for their services, and will be reimbursed by Conrail for
various reasonable out-of-pocket expenses.
The dealer manager, information agent and exchange agent will be
indemnified against various liabilities in connection with this exchange offer
and consent solicitation, including liabilities under the federal securities
laws.
No fees or commissions (other than fees to the dealer manager, information
agent and exchange agent) will be payable by us to brokers, dealers or other
persons for soliciting tenders of Conrail Debentures pursuant to this exchange
offer and consent solicitation. We, however, upon request, will reimburse
brokers, dealers and commercial banks for customary mailing and handling
expenses incurred by them in forwarding this prospectus and consent solicitation
statement and related materials to the beneficial owners of Conrail Debentures
held by them as a nominee or in a fiduciary capacity. Other than the dealer
manager, no broker, dealer, commercial bank or trust company has been authorized
to act as our agent for purposes of this exchange offer and consent
solicitation.
TRANSFER TAXES
Conrail will pay all transfer taxes, if any, applicable to the exchange of
Conrail Debentures under this exchange offer and consent solicitation. If,
however, certificates representing New CSXT Notes or New NSR Notes or Conrail
Debentures for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be registered or issued in the name of, any person other
than the registered holder of the Conrail Debentures tendered, or if tendered
Conrail Debentures are registered in the name of any person other than the
person signing the letter of consent/transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Conrail Debentures pursuant to
this exchange offer and consent solicitation, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other person)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the letter of
consent/transmittal, the amount of such transfer taxes will be billed directly
to such tendering holder.
We are not aware of any state or local jurisdiction where the consummation
of this exchange offer and consent solicitation is prohibited by administrative
or judicial action pursuant to a state or local statute. If we become aware of
any state or local jurisdiction where the consummation of this exchange offer
and consent solicitation is so prohibited, we will make a good faith effort to
comply with any such statute. If, after that effort, we cannot comply with that
statute, this exchange offer and consent solicitation will not be consummated
(nor will consents or letters of consent/transmittal be accepted from or on
behalf of the holders of Conrail's Debentures) in that state or local
jurisdiction.
ACCOUNTING TREATMENT
CSX and NSC through their indirect ownership of Conrail each have ownership
interests in both NYC and PRR. Presently, their indirect ownership interests in
these entities mirror their ownership interest in Conrail (42% for CSX and 58%
for NSC). As a result of the Conrail Spin Off Transactions, CSX (and ultimately
CSXT) will obtain direct ownership of all of NYC and NSC (and ultimately NSR)
will obtain direct ownership of all of PRR. Thus, CSX will in effect receive
NSC's 58% indirect ownership interest in NYC and NSC will in effect receive
CSX's 42% indirect ownership interest in PRR. Accordingly, after the Conrail
Spin Off Transactions, CSX will no longer have an indirect ownership interest in
PRR and NSC will no longer have an indirect ownership interest in NYC. The
receipt of the interests not already indirectly owned by CSX and NSC will be
accounted for at fair value using the principles of purchase accounting. The
receipt of the interests already indirectly owned by CSX and NSC will be
accounted for using CSX's and NSC's bases in amounts already included within
their respective investments in Conrail. The pro forma financial information
included in the Appendices attached hereto has been prepared assuming that the
fair value of the direct ownership interests being obtained equals the carrying
amount of the indirect ownership interests being foregone. CSX and NSC are
progressing toward ascertaining the fair value effects of the Conrail Spin Off
52
Transactions, which will be reflected in the accounting for the Conrail Spin Off
Transactions once consummated and that analysis has been completed. Accordingly,
the amounts ultimately reflected in CSXT's and NSR's financial statements could
differ materially from the amounts shown in the unaudited pro forma financial
information included in the Appendices attached hereto. Based on the preliminary
results of appraisals of the NYC and PRR assets, the ultimate fair values
recorded upon consummation of the Conrail Spin Off Transactions will likely
exceed the amounts shown in the unaudited pro forma financial information. CSXT
and NSR will recognize capital contributions from CSX and NSC, respectively, and
accordingly will not recognize any gain or loss related to the Conrail Spin Off
Transactions, notwithstanding any gain or loss that may be recognized by CSX and
NSC.
Conrail will recognize a gain or loss on any difference between the fair
value and carrying value of NYC and PRR, including the effect of the
extinguishment of the Conrail Debentures upon consummation of this exchange
offer and consent solicitation, and then concurrently will record the
distribution of NYC and PRR to its parent, CRR, as a dividend.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THIS EXCHANGE OFFER
AND CONSENT SOLICITATION
The following is a summary of the material United States federal income tax
consequences (i) to holders of Conrail Debentures who exchange their Conrail
Debentures for New Exchange Notes and the receipt by such holders of the Cash
Payment paid in the exchange and (ii) to holders who do not participate in the
exchange. Except where otherwise noted, this summary is based on the Internal
Revenue Code of 1986, as amended, or the "Code," administrative pronouncements,
judicial decisions and existing and proposed U.S. Treasury Regulations, all as
in effect on the date of this prospectus and consent solicitation statement and
all of which are subject to change, possibly with retroactive effect. This
summary assumes that the Conrail Debentures and the New Exchange Notes are held
as capital assets (as defined in the Code) and does not address the tax
consequences that may be relevant to a holder subject to special U.S. tax rules,
including, but not limited to, non-U.S. holders, certain expatriates, dealers in
securities or foreign currency, banks, trusts, insurance companies, tax-exempt
organizations and persons that hold the New Exchange Notes as part of a
straddle, hedge against currency risk or constructive sale or conversion
transaction. Moreover, this discussion does not address any aspect of state,
local or foreign tax considerations and does not address U.S. federal income tax
consequences that may be relevant to a particular holder in light of his or her
personal circumstances.
As used herein, a "holder" means a beneficial owner of a Conrail Debenture,
New CSXT Note or New NSR Note that is, for U.S. federal income tax purposes:
-- an individual who is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident of
the United States or meets the "substantial presence" test under
Section 7701 of the Code;
-- a corporation (or any other entity taxable as a corporation for U.S.
federal income tax purposes) created or organized under the laws of
the United States or of any political subdivision thereof;
-- an estate the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
-- a trust if (x) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial
decisions of the trust, or (y) the trust has a valid election in
effect under the applicable U.S. Treasury Regulations to be treated
as a United States person.
THE FOLLOWING SUMMARY IS NOT TAX ADVICE. ACCORDINGLY, HOLDERS ARE URGED TO
CONSULT WITH THEIR TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES TO THEM OF THIS
EXCHANGE OFFER AND CONSENT SOLICITATION AND THE PAYMENT OF CASH, INCLUDING THE
APPLICABILITY OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
53
THE EXCHANGE OF CONRAIL DEBENTURES FOR NEW CSXT NOTES AND NEW NSR NOTES
We have received a ruling from the IRS concerning certain aspects of the
exchange of Conrail Debentures for New CSXT Notes, New NSR Notes and Cash
Payments. Consistent with the ruling, the following discussion (except as
otherwise specifically noted) assumes that the Conrail Debentures, the New CSXT
Notes and the New NSR Notes are "securities" for U.S. federal income tax
purposes under the relevant provisions of the Code. Based on the foregoing, and
subject to the discussion below under "-- Cash Payment Received in Connection
with the Exchange by Holders of Conrail Debentures," the material U.S. federal
income tax consequences of the exchange should be as follows:
-- holders of Conrail Debentures who exchange Conrail Debentures for New
Exchange Notes and Cash Payments should recognize any gain (but not
loss) realized on each Conrail Debenture in an amount equal to the
lesser of:
-- the amount of the Cash Payment received; or
-- the amount equal to the excess, if any, of (a) the sum of (i) the
Cash Payment received and (ii) the aggregate issue price
(described hereafter) of the New CSXT Note and the New NSR Note
received in the exchange over (b) the holder's adjusted tax basis
in the Conrail Debenture exchanged therefor.
The issue price of the New CSXT Note and the New NSR Note depends on
whether a substantial amount of such New Exchange Notes is considered to be
"traded on an established market" within the meaning of the applicable U.S.
Treasury Regulations. If, as Conrail expects, a substantial amount of the New
CSXT Notes and the New NSR Notes is considered to be traded on an established
market, the issue price of such Notes will be their trading price on the issue
date. If it is not the case that a substantial amount of the New CSXT Notes and
the New NSR Notes is considered to be traded on an established market, but a
substantial amount of the Conrail Debentures is considered to be so traded, the
fair market value of the Conrail Debenture on the date of the exchange will be
allocated between the New CSXT Note and the New NSR Note based on such New
Exchange Notes' relative fair market values, and the issue price of the New CSXT
Note and the New NSR Note will equal the portion of the Conrail Debenture fair
market value allocated to such New Exchange Notes. If the New CSXT Notes, the
New NSR Notes and the Conrail Debentures are considered not to be traded on an
established market, the issue price of the New CSXT Notes and New NSR Notes will
be equal to their stated principal amounts. HOLDERS OF NEW CSXT NOTES AND NEW
NSR NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE DETERMINATION OF
THE ISSUE PRICE OF SUCH NEW EXCHANGE NOTES.
Except as discussed below, gain recognized by an exchanging holder will be
treated as capital gain and will be long-term capital gain if, at the time of
the exchange, the Conrail Debenture has been held for more than one year. Gain
recognized by an exchanging holder will be treated as ordinary income to the
extent of any market discount on the Conrail Debenture exchanged therefor that
has accrued during the period that the exchanging holder held the Conrail
Debenture and that has not previously been included in income by the holder. A
Conrail Debenture generally will be considered to have been acquired with market
discount if the adjusted issue price of the Conrail Debenture at the time of
acquisition exceeded the initial tax basis of the Conrail Debenture in the hands
of the holder by more than a specified de minimis amount. Market discount
accrues on a ratable basis, unless the holder elects to accrue the market
discount using a constant-yield method.
The gain calculation must be made separately for each Conrail Debenture
exchanged, and a loss realized on one Conrail Debenture will not be recognized
and therefore may not be used to offset a gain recognized on another Conrail
Debenture.
-- the holding period of the New CSXT Note and the New NSR Note will
include the holding period of the Conrail Debenture exchanged for the
New CSXT Note and the New NSR Note;
-- the aggregate adjusted tax basis of the New CSXT Note and the New NSR
Note received will be equal to the tax basis in the Conrail Debenture
exchanged (a) reduced by the amount of the Cash
54
Payment received that is attributable to such Conrail Debenture and
(b) increased by the amount of gain, if any, recognized by such
holder on the exchange with respect to such Conrail Debenture and
such basis will be allocated between the New CSXT Note and the New
NSR Note based on their relative fair market values; and
-- any accrued market discount on the Conrail Debenture not previously
treated as ordinary income will carry over to and be allocated
between the New CSXT Note and the New NSR Note.
CASH PAYMENT RECEIVED IN CONNECTION WITH THE EXCHANGE BY HOLDERS OF CONRAIL
DEBENTURES
We intend to treat the Conrail Debentures, the New CSXT Notes and the New
NSR Notes as securities for federal income tax purposes and, consistent with a
ruling we have received from the IRS, we intend to treat the Cash Payment to
holders as additional consideration received by holders as part of the exchange.
In the event that the Cash Payment is not treated as additional consideration
received by holders as part of the exchange, such payments will likely be
treated as a separate payment in the nature of a fee paid for holders' consent,
and holders would likely recognize ordinary income in the amount of the cash
received as opposed to capital gain as described above.
NONPARTICIPATION IN THE EXCHANGE
Some holders of Conrail Debentures may not participate in the exchange.
Whether such holders are treated as constructively exchanging their "old"
Conrail Debentures for "new" Conrail Debentures for U.S. federal income tax
purposes as a result of the adoption of the Conrail Supplemental Indenture
depends on whether the adoption of the Conrail Supplemental Indenture
constitutes a "significant modification" of the existing Conrail Debentures
(within the meaning of the applicable U.S. Treasury Regulations). The adoption
of the Conrail Supplemental Indenture should not constitute a significant
modification of the terms of the Conrail Debentures. Accordingly, holders of
Conrail Debentures who do not participate in this exchange offer and consent
solicitation should not be deemed to have exchanged their Conrail Debentures and
otherwise should not recognize income, gain or loss solely as a result of the
adoption of the Conrail Supplemental Indenture. Similarly, there should be no
U.S. federal income tax consequences of this exchange offer and consent
solicitation to a participating holder with respect to any portion of the
holder's Conrail Debentures that are not tendered or are withdrawn on or prior
to the expiration of this exchange offer and consent solicitation.
CONSEQUENCES OF HOLDING NEW EXCHANGE NOTES
The following is a summary of the principal U.S. federal income tax
consequences resulting from the ownership and disposition of the New CSXT Notes
and the New NSR Notes:
Payments of Interest and Original Issue Discount. Interest paid on a New
CSXT Note and a New NSR Note will be taxable to a holder as ordinary interest
income at the time it accrues or is received in accordance with the holder's
method of accounting for U.S. federal income tax purposes. In the event that the
"stated redemption price at maturity" of the New CSXT Note or the New NSR Note
exceeds its "issue price" (as described above), provided such excess is greater
than a specified de minimis amount, each New CSXT Note or New NSR Note will be
considered to have been issued with original issue discount, or "OID." Each
holder of a New Exchange Note issued with OID will be required to include in
income each year, without regard to whether any cash payments of interest are
made with respect to such New Exchange Note and without regard to the holder's
method of accounting for U.S. federal income tax purposes, a portion of the OID
on the New CSXT Notes or the New NSR Notes or both, as the case may be, so as to
provide a constant yield to maturity, subject to reductions in respect of
acquisition premium (as defined hereafter). The amount required to be so
included will be treated as ordinary income. In compliance with U.S. Treasury
Regulations, if the New Exchange Notes are issued with OID, the issuers will
provide certain information to the IRS and holders that is relevant to
determining the amount of OID in each accrual period. The New Exchange Notes are
not expected to be issued with OID.
55
Acquisition Premium and Amortizable Bond Premium. If a holder's adjusted
tax basis in a New CSXT Note or a New NSR Note immediately after the exchange of
a Conrail Debenture for such New Exchange Note (i) is less than or equal to the
sum of all amounts payable on the New CSXT Note or the New NSR Note (other than
payments of qualified stated interest), but (ii) exceeds the adjusted issue
price of such New Exchange Note, such excess will be considered "acquisition
premium." In such case, a holder may reduce its OID inclusions with respect to
the New CSXT Note or the New NSR Note by an amount equal to the amount of OID
such holder would otherwise include in its gross income multiplied by a
fraction, the numerator of which is the amount of acquisition premium and the
denominator of which is the excess of the sum of all amounts (other than
qualified stated interest) payable on the New CSXT Note or the New NSR Note
after the date of the exchange over the adjusted issue price of the New CSXT
Note or the New NSR Note. Alternatively, a holder may elect to amortize
acquisition premium on a constant-yield basis.
If a holder's adjusted tax basis in a New CSXT Note or a New NSR Note
immediately after the exchange exceeds the amount that is payable at maturity,
the holder will be considered to have amortizable bond premium equal to such
excess and will not be required to accrue any OID into income. In addition, the
holder may elect to amortize this premium using a constant yield method, over
the remaining term of the New Exchange Note. A holder who elects to amortize
bond premium may offset each interest payment on such New Exchange Note by the
portion of the bond premium allocable to such payment and must reduce its tax
basis in the New Exchange Note by the amount of the premium amortized in any
year.
Market Discount. Accrued market discount on a Conrail Debenture not
previously treated as ordinary income by a holder will carry over to and be
allocated between the New CSXT Note and the New NSR Note. A holder will be
required to treat any principal payment on, or any gain on the sale, exchange,
retirement or other disposition of, a New CSXT Note or a New NSR Note as
ordinary income to the extent of the market discount on the New Exchange Note at
the time of the payment or disposition unless the market discount has been
previously included in income by the holder pursuant to an election by the
holder to include the market discount in income as it accrues, or pursuant to a
constant yield election by the holder.
Sale, Exchange, Redemption or Other Taxable Disposition of the New CSXT
Notes and the New NSR Notes. Upon the sale, exchange, redemption or other
taxable disposition of a New CSXT Note or a New NSR Note, a holder will
recognize gain or loss, if any, for U.S. federal income tax purposes equal to
the difference between (i) the amount realized upon the sale, exchange,
redemption or other taxable disposition (except to the extent such amount is
attributable to accrued but unpaid interest that has not previously been
included in income and that is taxable as ordinary interest income upon the
sale, exchange, redemption or other taxable disposition) and (ii) such holder's
adjusted tax basis in such New CSXT Note or New NSR Note.
Except as provided below, any gain or loss recognized on the sale, exchange
or redemption of a New CSXT Note or a New NSR Note will generally be capital
gain or loss and will be long-term capital gain or loss if at the time of sale,
exchange or redemption the holder's holding period of the New CSXT Note or the
New NSR Note for U.S. federal income tax purposes is more than one year. A
holder who has market discount with respect to a New CSXT Note or a New NSR Note
will generally be required to treat gain realized on the sale, exchange,
redemption or other disposition of the New CSXT Notes or the New NSR Notes
(including certain dispositions that are non-recognition transactions under the
Code) as ordinary income to the extent of the market discount accrued to the
date of the disposition, less any accrued market discount previously reported as
ordinary income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting requirements will generally apply to certain payments
made and any OID with respect to the New CSXT Notes and the New NSR Notes. To
prevent backup withholding at the then applicable rate with respect to such
payments and with respect to the exchange, U.S. federal income tax law requires
that each exchanging holder must provide the exchange agent with such holder's
correct taxpayer identification number that, in the case of an individual, is
his or her social security number, and certain other information, or otherwise
establish a basis for exemption from backup withholding. Exempt holders
56
(including, among others, all corporations, and certain foreign individuals) are
not subject to these backup withholding and information reporting requirements.
Backup withholding tax is not an additional U.S. federal income tax.
Rather, the U.S. federal income tax liability of persons subject to backup
withholding tax will be offset by the amount of tax withheld. If backup
withholding tax results in an overpayment of U.S. federal income tax, a refund
or credit may be obtained from the IRS, provided the required information is
timely furnished to the IRS.
THE FOREGOING DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX CONSIDERATIONS OR ANY OTHER
CONSIDERATIONS RELATING TO THIS EXCHANGE OFFER AND CONSENT SOLICITATION. THUS,
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THIS EXCHANGE OFFER AND CONSENT SOLICITATION TO THEM, INCLUDING
TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
USE OF PROCEEDS
None of CSXT, NSR, Conrail or any other party will receive any cash
proceeds from the delivery or issuance of the New CSXT Notes, the New NSR Notes
or the Cash Payments in this exchange offer and consent solicitation.
57
DESCRIPTION OF THE CONRAIL SPIN OFF TRANSACTIONS
We are proposing, through a series of consecutive and concurrent
transactions, to merge NYC with CSXT and to merge PRR with NSR in order to
further effectuate the joint acquisition of Conrail accomplished by CSX and NSR
during the second quarter of 1997. The Conrail Spin Off Transactions are not
expected to affect our rail operations, service or competition generally, and
are not expected to have any adverse impact on shippers, other rail carriers or
our employees. We do not believe that any of our employees will be dismissed or
displaced as a result of the Conrail Spin Off Transactions, or that any changes
are required to be made to existing labor agreements or to the compensation,
benefits or working conditions of our employees. The employees now working on
the railroad assets owned by NYC and PRR are expected to continue to work for
the same employers, and the labor agreements that now apply to these employees,
and that are expected to continue to apply, are the CSXT and NSR labor
agreements.
The Conrail Spin Off Transactions have been structured to permit CSX and
NSC to acquire full ownership and exclusive control of Conrail properties that
they already own indirectly, through their joint ownership of Conrail, and that
they are already authorized by the STB to operate and manage separately and
independently as part of their respective rail systems. In practical effect, we
are seeking to extend and make more effective the already existing division of
Conrail's assets between NYC for use and operation by CSXT and PRR for use and
operation by NSR that has been previously approved by the STB. The result of
such permanent division will allow CSXT and NSR to become the direct owners of
NYC and PRR, thereby allowing CSX and NSC to enjoy the full management control
and independence over the assets of NYC and PRR, respectively, without any
control or responsibility with respect to those assets by one another.
The Conrail Spin Off Transactions have been structured to preserve the
existing rail operating structure in the Conrail Shared Assets Areas separately
designated as North Jersey, South Jersey/Philadelphia and Detroit, and is
intended to preserve the balanced competitive rail service in the eastern United
States that resulted from the creation of the Shared Assets Areas and otherwise
from the original joint acquisition of Conrail. The present situation, however,
in which CSX and NSC pay operating fees on the former Conrail properties they
each operate to an entity partially owned by the other, will be eliminated, and
with this elimination, numerous other entangling arrangements will be removed,
thereby enhancing the ability of CSX and NSC to manage their respective rail
properties independently and minimizing the potential conflicts associated with
their indirect joint ownership of Conrail.
BACKGROUND TO THE CONRAIL SPIN OFF TRANSACTIONS
CSX and NSC originally acquired all the outstanding shares of CRR, a
Pennsylvania corporation of which Conrail is the principal subsidiary, not
already owned by them for $115 per share in cash through CRR Holdings, an entity
jointly owned by CSX and NSC. The total cost of acquiring the outstanding shares
of CRR was approximately $9.8 billion, of which CSX paid 42%, or approximately
$4.1 billion, and NSC paid 58%, or approximately $5.7 billion. To reflect this
apportionment of CRR's acquisition cost, CSX and NSC each held, and continue to
hold 42% and 58%, respectively, of the economic interests in CRR Holdings, with
CRR Holdings' voting interests apportioned 50% to CSX and 50% to NSC. CSX and
NSC recognized that upon consummation of the joint acquisition of CRR's stock, a
workable arrangement was needed whereby their respective railroad systems would
benefit from and bear the costs of Conrail's routes, businesses and assets under
a structure acceptable to the STB and Conrail's various other constituencies.
With these goals in mind, on June 10, 1997, CSX, CSXT, NSC, NSR, CRR, Conrail,
and CRR Holdings, entered into the Transaction Agreement, by which CSX and NSC
provided for the joint governance and operation of CRR and its affiliates,
including Conrail.
Pursuant to the Transaction Agreement, and by a process of mutual
designation, CSX and NSC divided Conrail's railroad operating properties and
related assets, generally, into three groups: (1) the "NYC Allocated Assets,"
consisting of properties reserved for exclusive operation by CSXT (consisting
principally of former New York Central rail lines, including lines running from
New York/New Jersey through Albany and Buffalo to St. Louis, and from Albany to
Boston, and certain owned and unencumbered rolling stock of Conrail); (2) the
"PRR Allocated Assets," consisting of properties reserved for exclusive
operation by NSR
58
(consisting principally of former Pennsylvania Railroad lines, including lines
running from New York/New Jersey and Philadelphia through Pittsburgh and
Cleveland to Chicago, and certain owned and unencumbered rolling stock of
Conrail); and (3) the "Retained Assets," consisting primarily of the Shared
Assets Areas, operated by Conrail for the benefit of both CSXT and NSR,
providing rail service in North Jersey, South Jersey/Philadelphia and Detroit.
To effectuate this allocation of assets, Conrail formed two separate,
wholly owned Delaware limited liability companies, NYC and PRR (collectively,
the "LLCs"). Conrail transferred to NYC ownership of the NYC Allocated Assets
and transferred to PRR ownership of the PRR Allocated Assets. NYC entered into
an allocated assets operating agreement with CSXT, granting CSXT the exclusive
right to operate and use the NYC Allocated Assets, and PRR entered into a
similar agreement with NSR, granting NSR the exclusive right to operate and use
the PRR Allocated Assets. The Retained Assets continued to be directly operated
by Conrail for the benefit of both CSX and NSC. With respect to liabilities, NYC
was allocated liabilities arising on or after June 1, 1999 that related
predominantly to the NYC Allocated Assets and PRR was allocated liabilities
arising on or after June 1, 1999 that related predominantly to the PRR Allocated
Assets. Conrail remained responsible for all retained liabilities that did not
relate predominantly to the NYC Allocated Assets or PRR Allocated Assets; and
Conrail continued to be responsible for certain liabilities that arose prior to
June 1, 1999. Conrail has generally satisfied such retained liabilities,
including its debt obligations, out of payments received, either directly or
through NYC and PRR, from CSXT and NSR in connection with the Allocated Assets
and the Shared Assets Areas. Following receipt by CRR Holdings of written notice
from Conrail's board of directors (that is composed solely of representatives of
CSX and NSC) that Conrail requires additional cash to satisfy its retained
liabilities that include, but are not limited to, the Conrail Debentures, CRR
Holdings will, pursuant to agreement, provide such cash to Conrail. In addition,
pursuant to the Transaction Agreement, CSX and NSC committed to one another that
they shall ensure that CRR, Conrail and their affiliates have sufficient cash to
satisfy the retained liabilities as they become due and any operating and other
expenses. CSX and NSC intend that the economic burden of Conrail's retained
liabilities will continue to be borne without change, directly or indirectly,
42% by CSX and 58% by NSC.
Under the terms of the Transaction Agreement and the LLC operating
agreements of NYC and PRR, CSX has the right to manage NYC and to designate its
officers and directors, and NSC has the right to manage PRR and to designate its
officers and directors. Certain major decisions of NYC and PRR, however, were
reserved to Conrail, which can act in that respect only with the indirect
approval of both CSX and NSC pursuant to their respective 50% voting interests
in Conrail's ultimate parent, CRR Holdings.
The current terms of the NYC and PRR allocated assets operating agreements
have fixed terms of 25 years (with options for two subsequent renewal periods),
and require return of the subject rail assets by CSXT to NYC and by NSR to PRR
upon termination or expiration of the agreements. The agreements also provide
that an operating fee (analogous to rent) is to be paid by each operating
railroad (CSXT and NSR) to its respective counterparty (NYC and PRR) quarterly.
Every six years after June 1, 1999, the date upon which the asset allocations
and operating agreements set forth in the Transaction Agreement became
effective, the respective operating fees are to be revalued and reset to then
current "fair market rental value," defined as the rent that would be negotiated
at arm's-length between parties under no compulsion to lease.
As a result of the original transactions consummated pursuant to the
Transaction Agreement, ownership of the NYC Allocated Assets and PRR Allocated
Assets remained within the corporate structure of Conrail, while their operation
and general day-to-day management was conducted, as of June 1, 1999, separately
by CSXT and NSR.
REGULATORY APPROVALS
SURFACE TRANSPORTATION BOARD
Railroad mergers and acquisitions are subject to the exclusive jurisdiction
of the STB, successor to the Interstate Commerce Commission.
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On July 23, 1998, the STB issued a written order, effective August 22,
1998, authorizing the acquisition of control of CRR by CSX and NSC and
specifically authorizing the actions contemplated by the Transaction Agreement.
In its 1998 order, the STB found that CSXT and NSR "shall have the right to
use, operate, perform, and enjoy" the assets of Conrail "notwithstanding any
provision in any law, agreement, order, document or otherwise purporting to
limit or prohibit Conrail's assignment of its right to use, operate, perform and
enjoy such assets to another person or persons, or purporting to affect those
rights in the case of a change in control." However, because CSX and NSC did not
seek the STB's approval during the original Conrail acquisition for the proposed
transfer of direct ownership and exclusive control of NYC to CSX and of PRR to
NSC, it was also necessary for us to petition the STB for such authorization,
which the STB granted on November 7, 2003 on the basis of the June 4, 2003
petition described below.
On June 4, 2003, in connection with the Conrail Spin Off Transactions,
Conrail, CSX and NSC filed a Petition for Supplemental Order seeking the STB's
authorization of the consolidation of NYC within CSXT, the consolidation of PRR
within NSR and specific authorization of the Conrail Spin Off Transactions,
subject to a condition requiring Conrail, CSX and NSC either: (i) to resolve
through negotiations any issues pertaining to the required consents of holders
of the Conrail Debentures; or (ii) to propose further proceedings to determine
whether the treatment of holders of the Conrail Debentures under the terms of
the Conrail Spin Off Transactions is fair, just, and reasonable. With the
Petition for Supplemental Order, Conrail, CSX and NSC provided the STB with
letters from the credit rating agencies, Moody's and Standard & Poor's, in which
the rating agencies determined, subject to certain assumptions and
qualifications, that as of the consummation of this exchange offer and consent
solicitation: (y) the ratings assigned to the debt securities to be issued in
this exchange offer and consent solicitation will be at least equal to the
ratings assigned to Conrail's unsecured debentures; and (z) the ratings of
Conrail's secured debt obligations will not be reduced as a consequence of the
Conrail Spin Off Transactions. On November 7, 2003, the STB issued a
supplemental order, effective that date, specifically authorizing the Conrail
Spin Off Transactions. Rejecting a condition requested by certain Conrail
bondholders that would have made authorization of the Conrail Spin Off
Transactions subject to completion of the consent solicitation process on terms
agreed to by the parties, the STB confirmed that it has the authority to make a
determination that the treatment of the holders of the Conrail Debentures under
the terms of this exchange offer and consent solicitation is fair, just and
reasonable (hereafter referred to as a "fairness determination"). The STB
therefore imposed the condition proposed by Conrail, CSX and NSC as set forth
above on its grant of the authorization for Conrail, CSX and NSC to carry out
the Conrail Spin Off Transactions. Since the receipt of the November 2003 STB
supplemental order, we have had preliminary discussions with members of a
committee which purports to represent certain holders of Conrail Debentures.
In the event that the STB is asked to make a fairness determination,
interested parties would be free to appear before the STB and, through their own
counsel and at their own expense, offer evidence and legal arguments to support
their position with respect to the fairness issue. In that event, the STB would
determine what is fair, just and reasonable to the holders of Conrail's debt
obligations, which could include, among other possibilities, the implementation
of the Proposed Amendments or other conditions on such terms as the STB may
prescribe, which could be effectuated as a matter of law without the requirement
of the consent of the holders of the Conrail Debentures. Unless the STB
determines otherwise, Conrail, CSX and NSC may elect, following the filing of a
request for a fairness determination, to consummate the Conrail Spin Off
Transactions; provided that following such consummation, the terms of the
Conrail Spin Off Transactions would be subject to the STB's subsequent fairness
determination, including without limitation such terms as the STB may prescribe
with respect to Conrail's debt obligations, which would be binding as to all
parties. However, because the STB's authorization for the Conrail Spin Off
Transactions is permissive and not mandatory with respect to the carriers,
Conrail, CSX and NSC may instead defer consummation of the Conrail Spin Off
Transactions until the STB's fairness determination has been issued, at which
time Conrail, CSX and NSC could decide, based exclusively on their business
judgment, not to consummate the Conrail Spin Off Transactions. Final STB
decisions, including any fairness determinations, are subject to judicial review
in the United States Court of Appeals.
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INTERNAL REVENUE SERVICE
In November 2003, we received a private letter ruling from the IRS
confirming that no gain (except to the extent of cash received) or loss will be
recognized by Conrail, its shareholders or certain of its securityholders with
respect to the Conrail Spin Off Transactions. Although the rulings contained in
the private letter ruling relating to the Conrail Spin Off Transactions are
generally binding on the IRS, the continuing validity of such rulings is subject
to factual representations and assumptions. We are not aware of any facts or
circumstances that would adversely impact the continuing validity of such
rulings.
BENEFITS OF THE CONRAIL SPIN OFF TRANSACTIONS
The proposed transfer of NYC to CSXT and PRR to NSR would simplify the
existing management structure of Conrail assets. Under the current corporate
structure, CSXT and NSR directly operate and manage on a day-to-day basis the
Conrail assets allocated to them pursuant to operating agreements, but their
ownership of these properties is joint and indirect, through their joint
ownership of Conrail. After the consummation of the Conrail Spin Off
Transactions, the Conrail assets allocated to and currently operated by CSXT
will be brought under CSX's direct ownership and control, and the Conrail assets
allocated to and currently operated by NSR will be brought under NSC's direct
ownership and control. As a result, both CSX and NSC will benefit from:
-- increased independence over the management of the assets of NYC and
PRR;
-- improved transparency of the financial reporting of CSX and NSC by
consolidation of the financial results of NYC and PRR into those of
CSX and NSC, respectively, thereby enhancing access to the capital
markets;
-- elimination of the dependence of CSXT on NSR's consent and NSR on
CSXT's consent for many decisions relating to CSXT's and NSR's
respective management of the underlying assets of NYC and PRR;
-- improved incentives for new business innovations, long-term capital
improvements and strategic dispositions and acquisitions of NYC and
PRR properties and assets; and
-- reductions in potential conflicts associated with the indirect joint
ownership of NYC's and PRR's assets, which arise because CSX and NSC,
though joint owners of NYC and PRR, do not share a joint economic
agenda regarding NYC and PRR due to their status as competitors.
TRANSACTION STEPS
The Conrail Spin Off Transactions will occur in several immediately
consecutive steps, each on the Closing Date, as follows:
(1) Conrail will transfer (a) its membership interest in NYC to NYC
Newco in exchange for (i) NYC Newco's issuance to Conrail of common stock
sufficient to provide Conrail 99.9% of the then-outstanding common stock of
NYC Newco and (ii) New CSXT Notes, and (b) its membership interest in PRR
to PRR Newco in exchange for (i) PRR Newco's issuance to Conrail of common
stock sufficient to provide Conrail 99.9% of the then-outstanding common
stock of PRR Newco and (ii) New NSR Notes, these transactions to be
collectively referred to as the "Contributions." As a result of the
Contributions, Conrail will own 99.9% of the common stock of, and therefore
will control, NYC Newco (which will wholly own and control NYC), and
Conrail will own 99.9% of the common stock of, and therefore will control,
PRR Newco (which will wholly own and control PRR).
(2) The stock of NYC Newco will then be transferred successively from
Conrail to CRR, from CRR to Green Corp. and from Green Corp. to CRR
Holdings. (These transactions comprise the "Spin Offs.") CRR Holdings will
then transfer the NYC Newco stock to CSX Rail Holding Corporation, or "CSX
Rail," and CSX Northeast Holding Corporation, or "CSX Northeast," both of
which are wholly owned subsidiaries of CSX. CSX Rail and CSX Northeast will
transfer the NYC Newco stock to CSX, which will then transfer it to CSXT.
Similarly, the stock of PRR Newco will be transferred successively
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from Conrail to CRR to Green Corp. to CRR Holdings and then, successively,
to NSC and NSR. As a result of these transfers, CSXT will wholly own and
control NYC Newco (which will wholly own and control NYC) and NSR will
wholly own and control PRR Newco (which will wholly own and control PRR).
(3) NYC will then be merged with and into NYC Newco, with NYC Newco as
the surviving company, and PRR will then be merged with and into PRR Newco,
with PRR Newco as the surviving company.
(4) As a final step, NYC Newco will be merged with and into CSXT, with
CSXT as the surviving company, and PRR Newco will be merged with and into
NSR, with NSR as the surviving company, thereby consummating the
consolidation of NYC's business, assets and operations within CSXT and of
PRR's business, assets and operations within NSR.
TIMING OF CLOSING
The Closing Date for the Conrail Spin Off Transactions will occur as soon
as practicable after the expiration date and satisfaction or waiver of all
conditions to the Conrail Spin Off Transactions as set forth in the Distribution
Agreement. The Conrail Spin Off Transactions will become effective upon
consummation of the various interrelated transaction steps.
THE DISTRIBUTION AGREEMENT
The following summary of the Distribution Agreement is qualified in its
entirety by reference to the complete text of the Distribution Agreement which
is an exhibit to the registration statement of which this prospectus and consent
solicitation statement is a part. Capitalized terms used in this subsection
without definition shall have the meaning ascribed to them in the Distribution
Agreement.
THE DISTRIBUTION
In connection with the Conrail Spin Off Transactions, CRR, Conrail, CSX,
CSXT, NSC, NSR, CRR Holdings, NYC Newco, PRR Newco and certain other parties
thereto will have entered into a distribution agreement, or the "Distribution
Agreement." The Distribution Agreement may be amended by the parties without the
consent of the holders of the Conrail Debentures.
After a series of consecutive steps, occurring on the Closing Date, as set
forth above, NYC and PRR will be transferred to CSXT and NSR, respectively.
TIMING OF THE CONRAIL SPIN OFF TRANSACTIONS
The consummations of all the consecutive transactions to the Conrail Spin
Off Transactions, including the consummation of this exchange offer and consent
solicitation, are scheduled to occur on the Closing Date. See "--Timing of
Closing."
CONDITIONS TO THE CONSUMMATION OF THE CONRAIL SPIN OFF TRANSACTIONS
The conditions that must be met, or waived, to consummate the Conrail Spin
Off Transactions include, among other things, that
(a) no preliminary or permanent injunction or other order or decree
issued by a court of competent jurisdiction or any other legal restraint or
prohibition that prevents the consummation of the Conrail Spin Off
Transactions shall be in effect and no statute, rule or regulation shall
have been enacted by any governmental entity prohibiting the consummation
of the transactions to occur on the Closing Date;
(b) since the date of execution of the Distribution Agreement, there
shall not have been any condition, circumstance, event or occurrence
occurring or existing that, individually or in the aggregate, has resulted
or could result in a change in the percentage allocation to NYC of 42% and
to PRR of 58%, respectively, of the fair values of NYC and PRR taken
together;
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(c) Conrail shall have obtained the consent of holders of a majority
in principal amount of each series of equipment trust certificates and pass
through trust certificates set forth in the Distribution Agreement on the
terms set forth in the solicitation thereof, collectively referred to as
the "Secured Debt Consent Solicitation," and the consent of the lessor and
other counterparties to Conrail's equipment leases identified in the
Distribution Agreement on terms no less favorable than those currently
applicable to such equipment leases, or shall have received a decision of
the STB, on terms no less favorable than those set forth in the Secured
Debt Consent Solicitation or those currently applicable to such equipment
leases, respectively, establishing that such consents are not necessary to
effectuate the Conrail Spin Off Transactions;
(d) CSXT, NYC Newco, NSR, PRR Newco and Conrail shall have obtained
the consent of the holders of more than 50% of the aggregate principal
amount of Conrail Debentures, voting as a single class, to the adoption of
the Conrail Supplemental Indenture on the terms set forth in this
prospectus and consent solicitation statement, or shall have received a
decision of the STB, on terms no less favorable than those set forth in
this prospectus and consent solicitation statement, establishing that such
consents are not necessary to effectuate the Conrail Spin Off Transactions;
(e) the parties shall have entered into the instruments of transfer
and distribution and the other agreements contemplated herein;
(f) since the date of the filing made to the IRS, there shall not have
been any condition, circumstance, event or occurrence occurring or existing
that, individually or in the aggregate, has resulted or could reasonably be
expected to result in a material adverse effect on any of the parties to
the Distribution Agreement, involving or relating to the transactions set
forth in the Transaction Agreement;
(g) each of the parties to the Distribution Agreement shall have
delivered an officer's certificate to the other parties thereto to the
effect that (1) the representations and warranties of such party contained
in the Distribution Agreement are true and correct in all material respects
on and as of the Closing Date as if made on and as of the date of the
Distribution Agreement and on and as of the Closing Date, (2) the
conditions set forth in subparts (e) and (f) above are satisfied with
respect to such party and (3) such party has satisfied in all material
respects all covenants to be performed by such party under the Distribution
Agreement at or prior to the Closing Date;
(h) the approvals obtained from the STB and the favorable rulings
received from the IRS relating to the Conrail Spin Off Transactions shall
remain in full force and effect and there shall not have occurred any
change in, or interpretation of, any law, IRS policy, IRS procedure, or
facts that formed the basis of such rulings that affects adversely or could
affect adversely any significant aspect of the rulings or the ability of
NSC or CSX to rely on such rulings; and
(i) the conditions to this exchange offer and consent solicitation set
forth under "Description of This Exchange Offer and Consent
Solicitation--Conditions to This Exchange Offer and Consent Solicitation"
have been satisfied or jointly waived by Conrail, CSX and NSC.
The conditions listed above (other than the conditions described in (i))
may be asserted by either CSX or NSC regardless of the circumstances giving rise
to any of these conditions and such conditions may only be waived by CSX and NSC
acting jointly.
INDEMNIFICATION
Conrail, CSX and NSC have each agreed in the Distribution Agreement to
indemnify each other and their respective affiliates and subsidiaries against
certain liabilities in connection with the Conrail Spin Off Transactions,
including liabilities under the Securities Act, and to contribute to payments
that any indemnified party may be required to make in respect thereof.
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Indemnification by CSX/CSXT. CSX and CSXT will jointly and severally
indemnify CRR Holdings, NSC and their respective affiliates and subsidiaries and
any director, officer, employee or agent of any of them from any and all
liabilities relating to, arising out of or resulting from any of the following:
-- the untruth or inaccuracy of any representation or warranty of CSX,
CSXT or any of their respective affiliates or subsidiaries contained
in or made pursuant to the Distribution Agreement or any related
agreements;
-- the breach or non-performance of any agreement of CSX, CSXT or any of
their respective affiliates or subsidiaries contained in or made
pursuant to the Distribution Agreement or any related agreements;
-- the NYC Allocated Liabilities (as defined in the Distribution
Agreement); and
-- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into the registration
statement filed by CSXT and NYC Newco (of which this prospectus and
consent solicitation statement forms a part) or any amendment
thereof, the Secured Debt Consent Solicitation or in connection with
this exchange offer and consent solicitation (in each case as amended
or supplemented), or caused by any omission or alleged omission to
state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that CSX and CSXT shall not
be liable in respect of the foregoing indemnity to the extent that
any indemnifiable losses are caused by any untrue statement or
omission or alleged untrue statement or omission made in any such
document in reliance upon and in conformity with information
furnished in writing on behalf of CRR Holdings or any of its
subsidiaries or NSC or any of its affiliates (other than CRR Holdings
and its subsidiaries) or subsidiaries expressly for use therein.
Indemnification by NSC and NSR. NSC and NSR will jointly and severally
indemnify CRR Holdings, CSX and their respective affiliates and subsidiaries and
any director, officer, employee or agent of any of them from any and all
liabilities relating to, arising out of or resulting from any of the following:
-- the untruth or inaccuracy of any representation or warranty of NSC,
NSR or any of their respective affiliates or subsidiaries contained
in or made pursuant to the Distribution Agreement or any related
agreements;
-- the breach or non-performance of any agreement of NSC, NSR or any of
their respective affiliates or subsidiaries contained in or made
pursuant to the Distribution Agreement or any of the Related
Agreements;
-- the PRR Allocated Liabilities (as defined in the Distribution
Agreement); and
-- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into the registration
statement filed by NSR and PRR Newco (of which this prospectus and
consent solicitation statement forms a part) or any amendment
thereof, the Secured Debt Consent Solicitation or in connection with
this exchange offer and consent solicitation (in each case as amended
or supplemented), or caused by any omission or alleged omission to
state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that NSC and NSR shall not
be liable in respect of the foregoing indemnity to the extent that
any indemnifiable losses are caused by any untrue statement or
omission or alleged untrue statement or omission made in any such
document in reliance upon and in conformity with information
furnished in writing on behalf of CRR Holdings or any of its
subsidiaries or CSX or any of its affiliates (other than CRR Holdings
and its subsidiaries) or subsidiaries expressly for use therein.
Indemnification by CRR Holdings, Green Corp., CRR and Conrail. CRR
Holdings, Green Corp., CRR and Conrail will jointly and severally indemnify CSX
and NSC and any of their respective affiliates and subsidiaries (other than CRR
Holdings, Green Corp., CRR and Conrail) and any director, officer, employee
64
or agent of any of them from any and all liabilities relating to, arising out of
or resulting from any of the following:
-- the untruth or inaccuracy of any representation or warranty of CRR
Holdings, Green Corp., CRR, Conrail or any of their respective
affiliates or subsidiaries contained in or made pursuant to the
Distribution Agreement or any of the agreements related thereto;
-- the breach or non-performance of any agreement of CRR Holdings, Green
Corp., CRR, Conrail or any of their respective affiliates or
subsidiaries contained in or made pursuant to the Distribution
Agreement or any of the agreements related thereto; and
-- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into the registration
statements (of which this prospectus and consent solicitation
statement forms a part) or any amendment thereof, the Secured Debt
Consent Solicitation or in connection with this exchange offer and
consent solicitation (in each case as amended or supplemented), or
caused by any omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
provided, however, that CRR Holdings, Green Corp., CRR and Conrail
and any of their respective subsidiaries shall not be liable in
respect of the foregoing indemnity to the extent that any
indemnifiable losses are caused by any untrue statement or omission
or alleged untrue statement or omission made in any such document in
reliance upon and in conformity with information furnished in writing
on behalf of CSX or NSC or any of their affiliates (other than CRR
Holdings and its subsidiaries) and subsidiaries expressly for use
therein.
TERMINATION RIGHTS
The Distribution Agreement may be terminated, upon written notice by the
terminating party, at any time on or prior to the expiration date:
-- by Conrail, CSX or NSC at any time after September 30, 2004 if the
consummation of the Conrail Spin Off Transactions shall not have
occurred by such date;
-- by any of the parties thereto if another party shall have breached or
failed to perform in any material respect any of its respective
representations, warranties, covenants or other agreements contained
in the Distribution Agreement, which breach or failure to perform (1)
would give rise to the failure of a closing condition and (2) cannot
be or has not been cured within 30 days after such defaulting party
has received written notice from the other parties;
-- by any of the parties if any "Governmental Entity" (as defined in the
Distribution Agreement) shall have issued an order, decree or ruling
or taken any other action (which order, decree, ruling or other
action the parties hereto shall use their reasonable efforts to
lift), which permanently restrains, enjoins or otherwise prohibits
the transactions contemplated by the Distribution Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable; or
-- prior to the expiration date of this exchange offer and consent
solicitation, by any of the parties upon any condition for such
party's benefit becoming incapable of satisfaction on or before that
expiration date.
AMENDMENTS AND WAIVERS
Any provision of the Distribution Agreement may be amended or waived prior
to the consummation of the Conrail Spin Off Transactions if, but only if, such
amendment or waiver is in writing and is signed, in the case of an amendment, by
each party to the Distribution Agreement or, in the case of a waiver, by the
party to the Distribution Agreement against whom the waiver is to be effective.
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COVENANTS
The parties to the Distribution Agreement have agreed to use their
reasonable best efforts to take all actions necessary or advisable to consummate
the Conrail Spin Off Transactions including cooperating in good faith.
THE TRANSACTION AGREEMENT AMENDMENT
In connection with the Conrail Spin Off Transactions, CRR, Conrail, CSX,
CSXT, NSC, NSR, CRR Holdings and certain other parties thereto will enter into
an amendment to the Transaction Agreement, or the "Transaction Agreement
Amendment." The Transaction Agreement may be amended by the parties without the
consent of the holders of the Conrail Debentures.
The following is a summary of, and is qualified in its entirety by
reference to, the full text of the Transaction Agreement Amendment, including
attachments and exhibits, which is an exhibit to the registration statements of
which this prospectus and consent solicitation statement is a part.
The Transaction Agreement Amendment clarifies certain of the parties'
understandings and agreements with respect to the impact of the Conrail Spin Off
Transactions on the "Retained Assets" that consist primarily of the Shared
Assets Areas, operated by Conrail for the benefit of both CSXT and NSR,
providing rail service in North Jersey, South Jersey/Philadelphia and Detroit.
In general, the Transaction Agreement Amendment provides:
-- that notwithstanding the Transaction Agreement Amendment or any
action taken in connection with the Conrail Spin Off Transactions or
the Transaction Agreement, no changes, modifications or amendments to
the North Jersey, South Jersey/Philadelphia or Detroit Shared Assets
Area Operating Agreements by and among Conrail, NYC, CSXT, PRR or
NSR, or to those Shared Assets Areas are being made by the
Transaction Agreement Amendment or the Conrail Spin Off Transactions,
and none will be implied;
-- that except as specifically set forth in the Transaction Agreement
Amendment, all other terms and provisions of the Transaction
Agreement and certain related ancillary agreements will continue in
full force and effect and unchanged and are confirmed in all
respects;
-- that in order to consummate the transactions contemplated in the
Distribution Agreement, the parties will cooperate to modify the
Transaction Agreement and the related schedules and the other
agreements contemplated thereby so as to permit the transfer of
properties and other actions contemplated by the Distribution
Agreement in order to reflect changes to rentals and funds flows
resulting from the restructuring of debt obligations in accordance
with the terms and subject to the conditions of the Distribution
Agreement, all in accordance with the economic allocation of the
parties' interests in the Transaction Agreement;
-- for the amendment or termination of certain agreements that are
ancillary to the Transaction Agreement;
-- for the reallocation of certain operating fees, interest rentals and
base rent; and
-- for agreements among CSX, CSXT, NSC and NSR relating to certain lines
of railroad within the State of New Jersey or New York or the area
within 25 miles of the City of Philadelphia, Pennsylvania.
THE TAX ALLOCATION AGREEMENT
As contemplated by the Distribution Agreement, Green Corp., CRR, CSX, NSC,
Conrail, NYC and PRR will enter into a tax sharing agreement, or the "Tax
Allocation Agreement," at the Closing Date. The Tax Allocation Agreement governs
the respective rights, responsibilities, and obligations of NYC and its
subsidiaries, or collectively, the "NYC Group," PRR and its subsidiaries, or
collectively, the "PRR Group,"
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Green Corp., CSX and NSC after the Conrail Spin Off Transactions with respect to
tax liabilities, refunds, tax proceedings and other tax matters regarding income
taxes, other taxes and related returns.
In general, under the Tax Allocation Agreement, the NYC Group and the PRR
Group will each prepare pro forma consolidated federal income tax returns for
each tax period ending after the date of the Transaction Agreement and beginning
on or before the Closing Date of the Conrail Spin Off Transactions during which
either Group or any of its members was included in the Green Corp. consolidated
group, or collectively, the "Green Group," for federal income tax purposes. Each
applicable Group and Green Corp. will then make payments between each other so
that, generally, with respect to any such tax period, the amount of taxes in
excess of an amount determined pursuant to a formula will be paid by either
applicable group and will be determined as if each applicable group filed its
own respective consolidated, combined or unitary tax returns and as if NYC and
PRR were the common parent filing such returns. The NYC Group and PRR Group are
each generally responsible for any taxes in excess of an amount determined
pursuant to a formula with respect to any tax returns that include only its
respective group or members.
In the case of a refund with respect to U.S. federal income tax paid to the
Green Group with respect to certain tax periods in which either applicable group
or any of its respective members were members of the Green Group, Green Corp.
shall pay to each applicable group its allocable share, if any, of the refund
that it receives. In the case of an increase in U.S. federal income tax paid by
the Green Group with respect to certain tax periods in which either applicable
group or any of its respective members were members of the Green Group, each
applicable group shall pay to Green Corp. its allocable share, if any, of the
tax increase.
The Tax Allocation Agreement also provides restrictions on CSX and NSC and
any of their respective subsidiaries (including restrictions on share issuance,
business combinations, and sales of assets and similar transactions) that are
designed to preserve the tax-free nature of the Conrail Spin Off Transactions.
CSX or NSC may also request that Green Corp. seek an additional ruling from the
IRS that certain actions the requesting party wishes to take will not result in
any aspect of the Conrail Spin Off Transactions becoming taxable.
The Tax Allocation Agreement contains provisions regarding tax audits and
other proceedings, each such tax audit or proceeding, a "Tax Contest." Green
Corp. has the right under the agreement, with certain exceptions, to represent
the interests of the Green Group in any Tax Contest relating to a tax period
beginning on or before the Conrail Spin Off Transactions. Regarding Tax Contests
related to tax periods beginning after Conrail Spin Off Transactions, Green
Corp. has the right to represent the interests of the Green Group and its
members (other than the NYC Group, PRR Group or any of their respective members)
and the NYC Group and PRR Group have the right to represent the interests of
their respective members with respect to such Tax Contests.
All applicable parties under the Tax Allocation Agreement agree to
cooperate, and take all actions reasonably requested by any other member of
another Group in connection with the preparation and filing of tax returns and
in any Tax Contest.
The Tax Allocation Agreement also assigns responsibilities for
administrative matters related to taxes (i.e., retention of records).
THE EQUIPMENT OBLIGATION AGREEMENTS
Concurrently with this exchange offer and consent solicitation, Conrail is
also soliciting consents to certain proposed amendments pursuant to which
certain outstanding equipment trust certificates and pass through certificates
of Conrail were issued. Conrail is seeking, among other things, the consent of
the holders of these certificates, as well as the consent of the related equity
investors, lessors, owner trustees and owner participants, to these proposed
amendments which, if adopted, will permit the consummation of the Conrail Spin
Off Transactions. In addition, Conrail is separately seeking consent to the
Conrail Spin Off Transactions from the various lessors and counter parties to
Conrail's various private equipment leases and private secured loans.
67
Pursuant to a separate consent solicitation statement, Conrail intends to
offer holders of pass through trust certificates and equipment trust
certificates a consent fee according to the following table:
<Table>
<Caption>
AGGREGATE CONSENT FEE
PRINCIPAL AMOUNT PER $1,000
OUTSTANDING AS OF PRINCIPAL AMOUNT
CUSIP NO. JULY 22, 2004 TITLE OF SERIES OUTSTANDING
- --------- ----------------- --------------------------------------------- ----------------
209864AP2 $ 3,654,000 9.80% 1988 ETC, Series A due October 15, 2004 $5.50
209864AR8 $ 3,056,403 9.82% 1990 ETC, Series A due, April 1, 2005 $5.00
209864AV9 $35,814,739 8.65% 1991 ETC, Series A due October 1, 2008 $5.50
209864BH9 $10,796,715 7.07% 1992 ETC, Series A due April 1, 2005 $5.50
209864BJ5 $ 2,380,480 7.22% 1992 ETC, Series A due April 1, 2007 $6.00
209864BK2 $ 9,429,120 7.28% 1992 ETC, Series A due April 1, 2008 $6.00
209864BL0 $ 9,772,136 7.35% 1992 ETC, Series A due April 1, 2009 $6.00
209864BM8 $ 2,523,918 7.42% 1992 ETC, Series A due April 1, 2010 $6.50
209864BN6 $34,247,375 5.98% 1993 ETC, Series A due July 1, 2013 $5.50
209866AA0 $ 8,376,700 8.59% PTC, Series 1991-1 due May 29, 2005 $5.00
6.86% PTC, Series 1993-A2 due December 31,
209937AB7 $42,395,442 2007 $6.00
20986TAA0 $22,404,712 8.45% PTC, Series 1994-A due July 2, 2014 $6.00
20986NAA3 $64,180,217 6.76% PTC, Series 1995-A due May 25, 2015 $6.00
20986NAB1 $24,426,948 6.96% PTC, Series 1996-A due March 25, 2010 $5.50
</Table>
This prospectus and consent solicitation statement does not constitute an
offer for or a solicitation of consents with respect to holders of Conrail's
pass through trust certificates and equipment trust certificates. The
solicitation of these consents will be made only by means of that certain
consent solicitation statement distributed to the holders of Conrail's equipment
trust certificates and pass through trust certificates by Conrail. Conrail
expects to solicit the consent of these holders on or after the date of
effectiveness of the registration statements to which this prospectus and
consent solicitation statement forms a part.
The consent of the holders of Conrail Debentures is not required for the
proposed amendments. In addition to these proposed amendments, CSXT, NSR and
Conrail will enter into various other commercial agreements in connection with
the Conrail Spin Off Transactions. A brief summary of these agreements follows:
The pass through trust agreements, equipment trust agreements, trust
indentures and related lease agreements, security agreements, participation
agreements and other agreements, or collectively, the "Existing Agreements," for
equipment trust certificates, pass through certificates and other equipment
obligations that are part of the Secured Debt Consent Solicitation or,
collectively, the "Certificates," will remain in effect (subject to certain
amendments), and the equipment covered thereby will be subleased, directly or
indirectly, to CSXT and NSR, in the approximate 42%/58% proportion by which the
equipment was originally allocated to each of them, in one of two structures
designed to support the obligations of Conrail for the benefit of the holders of
Certificates. We refer to all of the transactions described in this paragraph,
collectively, as the "Secured Debt Restructuring."
In the case of all of Conrail's equipment obligations that support
Certificates (which include obligations to the related lessors, owner trustees
and owner participants), except the 1991 and 1993 issues of pass through trust
certificates, Conrail will lease or sublease approximately 42% of the covered
equipment to NYC Newco and the remainder to PRR Newco, in leases or subleases
reflecting the pro rata portion of the payment and other terms of the Existing
Agreements constituting the senior equipment obligations. Upon consummation of
the Conrail Spin Off Transactions and as a result of the mergers of NYC Newco
into CSXT and PRR Newco into NSR, the NYC Newco sublease obligations will be
assumed by CSXT and the PRR Newco sublease obligations will be assumed by NSR.
Conrail will then assign its rights to receive rents under each such lease or
sublease to the applicable lessor under each Existing Agreement, as security for
the due and punctual payments of Conrail's obligations under such Existing
Agreement. Each lessor will further assign such rights
68
to the applicable pass through trustee, equipment trust trustee or indenture
trustee for the holders of the Certificates issued in connection with such
Existing Agreement. This leasing and subleasing structure also applies to each
of the private equipment leases and private secured loans for which Conrail is
soliciting consents, other than consents to be sought from lessors and lenders
in certain private Japanese leveraged lease transactions entered into by Conrail
in 1990.
In the case of the equipment obligations supporting the pass through trust
certificates issued in 1991 and 1993, in which certain modifications require the
consents of the related equity investors, lessors, owner trustees and owner
participants, as well as the 1990 Japanese leveraged lease transactions and the
Philadelphia Plan equipment trust certificates issued in 1993 and 1994,
respectively, Conrail will also sublease the covered equipment to NYC Newco and
PRR Newco in the manner described in the immediately preceding paragraph.
However, NYC Newco and PRR Newco have created bankruptcy-remote Delaware trusts
and will assign all of their rights under the Conrail subleases to these trusts,
which trusts would assume the respective obligations of NYC Newco and PRR Newco
under these subleases. The bankruptcy-remote Delaware trusts will then sublease
the equipment to CSXT and NSR, as the case may be, and assign payments under
these subleases to Conrail.
Conrail will assign its rights to receive rents under each such lease or
sublease to the applicable lessor under each Existing Agreement, as security for
the due and punctual payments of Conrail's obligations under such Existing
Agreement. Each lessor will further assign such rights to the applicable pass
through trustee, equipment trust trustee or indenture trustee for the holders of
Certificates issued in connection with such Existing Agreement. After NYC Newco
and PRR Newco are distributed to CSXT and NSR, respectively, but before being
merged into CSXT and NSR, NYC Newco and PRR Newco each will transfer, if
applicable, the beneficial interest in its bankruptcy-remote Delaware trusts to
a newly formed, bankruptcy-remote limited liability company, wholly owned by NYC
Newco and PRR Newco, respectively. The newly-formed limited liability companies
will be preserved as separate subsidiaries of CSXT and NSR.
In the case of both subleasing structures used in the Secured Debt
Restructuring, the scheduled rent obligations of CSXT and NSR under the
subleases related to an Existing Agreement, as assigned to the senior lessors
and reassigned to the various trustees for the benefit of the holders of
Certificates, will be at least equal to Conrail's obligations under that
Existing Agreement when due, for the full term of the Existing Agreement. The
expiration dates of the various subleases of equipment subject to leases in
Existing Agreements will not extend beyond the term applicable thereto set forth
in the Existing Agreement, except in certain cases of Conrail's Existing
Agreements that are secured debt transactions. In each such case, CSXT and NSR
will be obligated to prepay the rents for such extended term so that CSXT's and
NSR's payments under their subleases will be sufficient to permit Conrail to
discharge its obligations under the applicable Existing Agreement.
CSXT and NSR, as sublessees, are subject to the risk that the other party
may default on its subleases of Conrail's equipment subject to the same Existing
Agreement, which would subject all of the equipment covered by the Existing
Agreement to foreclosure by the relevant group of Holders. For example, if NSR
is in default under a particular financing, Holders relating to such financing
would have the right to foreclose on CSXT's as well as NSR's equipment to
satisfy the outstanding debt. Conversely, if CSXT is in default under a
particular financing, Holders relating to such financing would have the right to
foreclose on NSR's as well as CSXT's equipment to satisfy the outstanding debt.
Therefore, in conjunction with the sublease obligations, Conrail, CSXT and NSR
will enter into a cross-assignment of subleasehold interests agreement, or the
"Cross Assignment Agreement," whereby CSXT will be permitted to cure defaults by
NSR and NSR will be permitted to cure defaults by CSXT under the respective
sublease with Conrail for a limited period of time and, should the defaulting
party not reimburse the curing party for the costs and expenses incurred to
effect any such cure, assume the rights and obligations of the defaulting
party's subleasehold agreement with Conrail. In the event that CSXT assumes the
sublease obligation of NSR and takes delivery of the equipment subject to such
sublease obligation pursuant to the Cross Assignment Agreement, NSR will be
relieved of any further liability covered in the subleases assumed by CSXT.
Conversely, in the event that NSR assumes the sublease obligation of CSXT and
takes delivery of the equipment subject to such sublease obligation pursuant to
the Cross Assignment Agreement, CSXT will be relieved of any further liability
covered in the subleases
69
assumed by NSR. Under either of these circumstances, CSXT and NSR would no
longer be supporting Conrail's lease obligations in the initial ratio, but in a
ratio adjusted for the amount of obligations covered in the assumed subleases.
In addition, default under a sublease would not, ipso facto, result in a default
under the relevant Existing Agreement, and Conrail remains obligated to service
the Existing Agreement and may do so to prevent default by it. Accordingly, the
rights of the applicable curing party under the Cross Assignment Agreement will
be subject to and subordinate to the rights of the parties to the related
Existing Agreement, and in the case of default by Conrail, such parties could
exercise remedies against the equipment and the curing party, as sublessee.
In all of Conrail's equipment financings securing the Certificates, holders
of Conrail's secured debt instruments are entitled to the benefit of section
1168 of the Bankruptcy Code (11 U.S.C. sec. 1168), or "section 1168," which
provides certain protection to creditors of railroad companies under equipment
leasing and financing arrangements in the event of a bankruptcy of a railroad.
In order to preserve the existing protection that holders of each series of
Conrail's Certificates enjoy under section 1168, the agreements pursuant to
which equipment subject to the Existing Agreements is subleased will provide,
among other things, that: (1) any such sublease, and the rights and interests of
the sublessee in the leased or subleased equipment, will be junior and
subordinate in all respects to the applicable Existing Agreement and the rights
and interests of the holders of Certificates issued in connection therewith; (2)
the sublessee, upon default by Conrail under an Existing Agreement, will
surrender possession of the related equipment in accordance with the terms of
the applicable Existing Agreement; and (3) each sublessee in possession will be
a railroad against which section 1168 protection would be available.
Subject to limited exceptions, the sublease agreements (by incorporating
the terms, conditions and provisions of the Existing Agreements) will prohibit
CSXT and NSR, or any bankruptcy-remote Delaware trust formed by NYC Newco or PRR
Newco, from creating, incurring, assuming or suffering to exist any claim, lien,
pledge, mortgage, charge, security interest or other encumbrance on the leased
equipment. None of CSXT and NSR, or any bankruptcy-remote Delaware trust formed
by NYC Newco or PRR Newco, will be permitted, pursuant to the terms of the
relevant Existing Agreement, to sublease the leased equipment, except to each
other, and except to other railroad companies and users for brief terms in the
ordinary course of business, without the prior written consent of Conrail and,
in some instances, the applicable lessor.
All of the subleases to be entered into or assumed by CSXT and NSR will
provide generally that CSXT and NSR, as the case may be, may not consolidate
with or merge into any other corporation or convey, lease or transfer its
properties and assets substantially as an entirety to any person unless, among
other things, the corporation formed by such consolidation or into which CSXT or
NSR, as the case may be, is merged or the person that acquires by conveyance,
lease or transfer the properties and assets of CSXT and NSR substantially as an
entirety assumes the obligations of CSXT or NSR, as the case may be, under its
subleases with Conrail or the bankruptcy-remote Delaware trusts.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE CONRAIL SPIN OFF
TRANSACTIONS
We have received a private letter ruling from the IRS confirming that no
gain (except to the extent of cash received) or loss will be recognized by
Conrail, its shareholders or its security holders with respect to the Conrail
Spin Off Transactions. Although the rulings contained in the private letter
ruling relating to the Conrail Spin Off Transactions are generally binding on
the IRS, the continuing validity of such rulings are subject to factual
representations and assumptions. We are not aware of any facts or circumstances
that would adversely impact the continuing validity of such rulings.
70
LEGAL MATTERS
For legal matters pertaining to CSXT and NYC Newco, please refer to the
CSXT Appendix attached hereto. For legal matters pertaining to NSR and PRR
Newco, please refer to the NSR Appendix attached hereto. Certain legal matters
will be passed upon for the dealer manager by Shearman & Sterling LLP.
EXPERTS
CSXT
Please refer to the CSXT Appendix attached hereto for information relating
to certain experts retained by CSXT.
NSR
Please refer to the NSR Appendix attached hereto for information relating
to certain experts retained by NSR.
CONRAIL
The consolidated financial statements of Conrail as of December 31, 2003
and 2002 and for each of the three years in the period ended December 31, 2003
included in this prospectus and consent solicitation statement have been audited
by Ernst & Young LLP and KPMG LLP, independent registered public accounting
firms, as set forth in their report, which is also included in this prospectus
and consent solicitation statement in reliance upon such report given on the
authority of said firms as experts in accounting and auditing. The audit report
covering the December 31, 2003 consolidated financial statements refers to the
adoption of FASB Statement No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and consent solicitation statement contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, or the "PSLRA." The safe harbor protections of
the PSLRA do not apply to the forward-looking statements made in connection with
this exchange offer and consent solicitation. These statements may be made
directly in this prospectus and consent solicitation statement referring to
CSXT, NSR and Conrail, and they may also be made a part of this prospectus and
consent solicitation statement by reference to other documents filed with the
SEC, which is known as "incorporation by reference." These statements may
include statements regarding the period leading up to and following consummation
of the Conrail Spin Off Transactions.
Words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and words and terms of similar substance used in connection
with any discussion of future operating or financial performance, or the Conrail
Spin Off Transactions, identify forward-looking statements. All forward-looking
statements are management's present estimates of future events and are subject
to a number of factors and uncertainties, including without limitation the risks
associated with the lack of complete data and the potential inaccuracy of data
relied upon in making such forward-looking statements, that could cause actual
results to differ materially from those described in the forward-looking
statements. In addition, the risks related to the businesses of CSXT, NSR and
Conrail and the factors relating to the Conrail Spin Off Transaction discussed
under "RISK FACTORS," among others, could cause actual results to differ
materially from those described in the forward-looking statements. Holders of
Conrail Debentures are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this prospectus
and consent solicitation statement or as of the date of any document
incorporated by reference in this prospectus and consent solicitation statement,
as applicable. None of CSXT, NSR and Conrail is under any obligation, and each
expressly disclaims any obligation, to update or alter any forward-looking
statements, whether as a result of new information, future events or otherwise.
71
For additional information about factors that could cause actual results to
differ materially from those described in the forward-looking statements, please
see the CSXT Appendix attached hereto and the NSR Appendix attached hereto for
more information regarding the annual reports on Form 10-K and the quarterly
reports on Form 10-Q that CSXT and NSR have filed with the SEC.
All subsequent forward-looking statements attributable to CSXT, NSR and
Conrail or any person acting on their behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section
of this prospectus and consent solicitation statement.
72
ANNEX A
[FORM OF CONRAIL SUPPLEMENTAL INDENTURE]
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of
, 2004 between CONSOLIDATED RAIL CORPORATION, a Pennsylvania
corporation (the "Issuer"), having its principal executive office at 2001 Market
Street, Philadelphia, PA 19101, and J.P. MORGAN TRUST COMPANY, National
Association, as successor to Bank One Trust Company, N.A., a national banking
corporation, which was the successor in interest to The First National Bank of
Chicago, a national banking association, as trustee (the "Trustee"), having its
principal corporate trust office in the City of New York.
RECITALS OF THE COMPANY
WHEREAS, the Issuer and the Trustee have entered into an Indenture, dated
as of May 1, 1990, as amended and supplemented by indentures supplemental
thereto and that certain Supplemental Indenture, dated August 25, 1998 (such
Indenture, as so supplemented and amended, hereinafter referred to as the
"Indenture"), providing for the issuance from time to time of unsecured
debentures, notes or other evidences of indebtedness of the Issuer (the
"Securities"), to be issued in one or more series as provided for in the
Indenture;
WHEREAS, $250,000,000 in aggregate principal amount of 7 7/8% Debentures
due May 15, 2043 and $550,000,000 in aggregate principal amount of 9 3/4%
Debentures due June 15, 2020 have each been issued as a series of Securities
pursuant to the Indenture and are Outstanding (collectively, the "Securities
Outstanding");
WHEREAS, pursuant to Section 8.2 of the Indenture, the Issuer has requested
the Trustee to enter into this Supplemental Indenture; and
WHEREAS, the Holders of not less than a majority of the aggregate principal
amount of the Securities Outstanding voting as a single class have consented to
the execution and delivery of this Supplemental Indenture by the Trustee.
NOW, THEREFORE, for consideration, the adequacy and sufficiency of which
are hereby acknowledged by the parties hereto, each party agrees, for the
benefit of the other parties and for the equal and proportionate benefit of all
Holders of the Securities, as follows:
ARTICLE 1
AMENDMENTS
SECTION 1.1. Article One of the Indenture is hereby amended by deleting
the following definitions from Section 1.1:
"Debt," "Excluded Conveyance," "Indebtedness" and "LLC."
SECTION 1.2. Article Three of the Indenture is hereby amended by deleting
Section 3.6, Section 3.7, Section 3.8 and Section 3.10 in their entirety and
replacing each with the following, respectively:
"Section 3.6 [Intentionally Omitted]."
"Section 3.7 [Intentionally Omitted]."
"Section 3.8 [Intentionally Omitted]."
"Section 3.10 [Intentionally Omitted]."
A-1
SECTION 1.3. Article Five of the Indenture is hereby amended by deleting
Section 5.1 thereof in its entirety and replacing it with the following:
"Section 5.1 Event of Default Defined; Acceleration of Maturity;
Waiver of Default. "Event of Default," with respect to Securities of any
series wherever used herein, means each one of the following events which
shall have occurred and be continuing (whatever the reason for such Event
of Default):
(a) default in the payment of any installment of interest upon any
of the Securities of such series, as and when the same shall become due
and payable, and continuance of such default for a period of 30 days; or
(b) default in the payment of all or any part of the principal on
any of the Securities of such series, as and when the same shall become
due and payable, either at maturity, upon any redemption, by declaration
or otherwise; or
(c) a court having jurisdiction in the premises shall enter a
decree or order for relief in respect of the Issuer in an involuntary
case under any applicable bankruptcy, insolvency or other similar law
now or hereafter in effect, or appointing a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or similar official) of the
Issuer or for any substantial part of its property or ordering the
winding up or liquidation of its affairs, and such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days; or
(d) the Issuer shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or
taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Issuer or for any
substantial part of its property, or make any general assignment for the
benefit of creditors.
If an Event of Default described in clause (a) or (b) occurs and is
continuing, then, and in each and every such case, except for any series of
Securities the principal of which shall have already become due and
payable, either the Trustee or the Holders of not less than 25% in
aggregate principal amount of the Securities of each such affected series
then Outstanding hereunder (voting as a single class) by notice in writing
to the Issuer (and to the Trustee if given by Securityholders), may declare
the entire principal (or, if the Securities of any such affected series are
Original Issue Discount Securities, such portion of the principal amount as
may be specified in the terms of such series) of all Securities of all such
affected series, and the interest accrued thereon, if any, to be due and
payable immediately, and upon any such declaration, the same shall become
immediately due and payable. If an Event of Default described in clause (c)
or (d) occurs and is continuing, then and in each and every such case,
unless the principal of all the Securities shall have already become due
and payable, either the Trustee or the Holders of not less than 25% in
aggregate principal amount of all the Securities then Outstanding hereunder
(treated as one class), by notice in writing to the Issuer (and to the
Trustee if given by Securityholders), may declare the entire principal (or,
if any Securities are Original Issue Discount Securities, such portion of
the principal as may be specified in the terms thereof) of all the
Securities then Outstanding, and interest accrued thereon, if any, to be
due and payable immediately, and upon any such declaration the same shall
become immediately due and payable.
The foregoing provisions, however, are subject to the condition that
if, at any time after the principal (or, if the Securities are Original
Issue Discount Securities, such portion of the principal as may be
specified in the terms thereof) of the Securities of any series (or of all
the Securities, as the case may be) shall have been so declared due and
payable, and before any judgment or decree for the payment of the moneys
due shall have been obtained or entered as hereinafter provided, the Issuer
shall pay or shall deposit with the Trustee a sum sufficient to pay all
matured installments of interest upon all the Securities of such series (or
of all the Securities, as the case may be) and the principal of any and all
Securities of each such series (or of all the Securities, as the case may
be) which shall have become due otherwise than by acceleration (with
interest upon such principal and, to the extent that payment of such
interest is enforceable under applicable law, on overdue installments of
interest, at the same rate as the rate of
A-2
interest or Yield to Maturity (in the case of Original Issue Discount
Securities) specified in the Securities of each such series (or at the
respective rates of interest or Yields to Maturity of all the Securities,
as the case may be) to the date of such payment or deposit) and such amount
as shall be sufficient to cover reasonable compensation to the Trustee and
each predecessor Trustee, its agents, attorneys and counsel, and all other
expenses and liabilities incurred, and all advances made, by the Trustee
and each predecessor Trustee except as a result of negligence or bad faith,
and if any and all Events of Default under the Indenture, other than the
non-payment of the principal of Securities which shall have become due by
acceleration, shall have been cured, waived or otherwise remedied as
provided herein--then and in every such case the Holders of a majority in
aggregate principal amount of all Securities of each such series, or of all
the Securities, in each case voting as a single class, then Outstanding, by
written notice to the Issuer and to the Trustee, may waive all defaults
with respect to each such series (or with respect to all the Securities, as
the case may be) and rescind and annul such declaration and its
consequences, but no waiver or rescission and annulment shall extend to or
shall affect any subsequent default or shall impair any right consequent
thereon.
For all purposes under this Indenture, if a portion of the principal
of any Original Issue Discount Securities shall have been accelerated and
declared due and payable pursuant to the provisions hereof, then, from and
after such declaration, unless such declaration has been rescinded and
annulled, the principal amount of such Original Issue Discount Securities
shall be deemed, for all purposes hereunder, to be such portion of the
principal thereof as shall be due and payable as a result of such
acceleration, and payment of such portion of the principal thereof as shall
be due and payable as a result of such acceleration, together with
interest, if any, thereon and all other amounts owing thereunder, shall
constitute payment in full of such Original Issue Discount Securities."
SECTION 1.4. Article Nine of the Indenture is hereby amended by deleting
such article in its entirety and replacing it with the following:
"ARTICLE NINE
[Intentionally Omitted]."
ARTICLE 2
MISCELLANEOUS
SECTION 2.1. This Supplemental Indenture is executed and shall be
construed as an indenture supplemental to the Indenture with respect to the
Securities and, as provided in the Indenture, this Supplemental Indenture forms
a part thereof with respect to the Securities. Except as herein modified, the
Indenture is in all respects ratified and confirmed with respect to the
Securities and all the terms, provisions and conditions thereof shall be and
remain in full force and effect with respect to the Securities and every Holder
of Securities shall be bound hereby. Except as expressly otherwise defined, the
use of the terms and expressions herein is in accordance with the definitions,
uses and constructions contained in the Indenture.
SECTION 2.2. If any provision of this Supplemental Indenture limits,
qualifies or conflicts with any other provision hereof or of the Indenture that
is required to be included in the Indenture by any of the provisions of the TIA,
such required provision shall control.
SECTION 2.3. Unless otherwise indicated, capitalized terms used herein
without definition shall have the meanings specified therefor in Section 1.1 of
the Indenture as amended hereby.
SECTION 2.4. If any provision of this Supplemental Indenture shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 2.5. This Supplemental Indenture shall be construed in accordance
with and governed by the laws of the State of New York.
A-3
SECTION 2.6. This Supplemental Indenture may be executed in any number of
counterparts, each of which shall be an original but such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be executed as of the day and year first above written.
CONSOLIDATED RAIL CORPORATION
By:
------------------------------------
Name:
Title:
J.P. MORGAN TRUST COMPANY, N.A.
as Trustee
By:
------------------------------------
Name:
Title:
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NSR APPENDIX
TABLE OF CONTENTS
<Table>
Forward-Looking Statements.................................. NSR-1
NSR and PRR Newco Information............................... NSR-1
Norfolk Southern Railway Company............................ NSR-1
PRR Newco, Inc. ............................................ NSR-4
Selected Historical Financial Data.......................... NSR-5
Unaudited Pro Forma Financial Information................... NSR-7
Capitalization.............................................. NSR-11
Ratio of Earnings to Fixed Charges.......................... NSR-12
Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... NSR-13
Directors and Executive Officers............................ NSR-13
Board of Directors and Committees........................... NSR-13
Compensation of Directors................................... NSR-14
NSC Compensation Committees Interlocks and Insider
Participation............................................. NSR-14
Material Contacts with Conrail.............................. NSR-14
Certain Relationships and Related Transactions.............. NSR-15
Executive Compensation...................................... NSR-15
Security Ownership of Management............................ NSR-21
NSC Joint Committee Report Concerning the 2003 Compensation
of Certain Executive Officers............................. NSR-23
Performance Graph........................................... NSR-27
Description of the New NSR Notes............................ NSR-28
Basic Terms of the New NSR Notes.......................... NSR-28
Guarantees................................................ NSR-29
Ranking................................................... NSR-29
Further Issues............................................ NSR-30
Certain Covenants......................................... NSR-30
Limitations on Liens on Stock or Indebtedness of Principal
Subsidiaries........................................... NSR-30
Limitatations on Funded Debt.............................. NSR-31
Consolidation, Merger, Conveyance, Lease or Transfer...... NSR-34
No Redemption or Sinking Fund............................. NSR-34
No Conversion or Exchange................................. NSR-34
No Repayment at Option of the Holders..................... NSR-35
Events of Default......................................... NSR-35
Satisfaction and Discharge of Indenture................... NSR-36
Modification and Waiver................................... NSR-36
Concerning the Trustee.................................... NSR-37
Book-Entry Procedures..................................... NSR-37
The Depositary............................................ NSR-38
Certificated Notes........................................ NSR-39
Governing Law............................................. NSR-39
Notices................................................... NSR-40
Same-Day Settlement and Payment........................... NSR-40
Comparison of the New NSR Notes and the Conrail
Debentures................................................ NSR-41
Comparison of Basic Terms................................. NSR-41
</Table>
NSR-i
<Table>
No Redemption or Sinking Fund............................. NSR-42
No Conversion or Exchange................................. NSR-42
No Repayment at Option of the Holders..................... NSR-42
Covenants................................................. NSR-42
Limitation upon Liens and Limitation on Funded Debt....... NSR-42
Limitation upon LLC Indebtedness.......................... NSR-43
Consolidation, Merger, Conveyance, Lease or Transfer...... NSR-44
Conrail Supplemental Indenture; Elimination of Restrictive
Covenants.............................................. NSR-44
Satisfaction and Discharge of Indenture................... NSR-44
Modification and Waiver................................... NSR-46
Events of Default......................................... NSR-47
Control by Holders of Securities.......................... NSR-49
Compliance Statements..................................... NSR-49
Expenses.................................................. NSR-49
Defaulted Interest........................................ NSR-50
Legal Matters............................................... NSR-51
Experts..................................................... NSR-51
Where You Can Find More Information......................... NSR-51
</Table>
NSR-ii
NSR APPENDIX
FORWARD-LOOKING STATEMENTS
The prospectus and consent solicitation statement, of which this Appendix
forms a part (including the documents incorporated by reference herein) contains
forward-looking statements that may be identified by the use of words like
"believe," "expect," "anticipate" and "project." Forward-looking statements
reflect good-faith evaluations of information currently available by the
management of NSR and PRR Newco. However, such statements are dependent on and,
therefore, can be influenced by, a number of external variables over which the
management of NSR and PRR Newco have little or no control, including: domestic
and international economic conditions; the business environment in industries
that produce and consume rail freight; competition and consolidation within the
transportation industry; fluctuation in prices of key materials, in particular
diesel fuel; labor difficulties, including strikes and work stoppages;
legislative and regulatory developments; changes in securities and capital
markets; and natural events such as severe weather, floods and earthquakes.
Forward-looking statements are not, and should not be relied upon as, a guaranty
of future performance or results. Nor will they necessarily prove to be accurate
indications of the times at or by which any such performance or results will be
achieved. As a result, actual outcomes and results may differ materially from
those expressed in forward-looking statements. Neither NSR nor PRR Newco
undertake any obligation to update or revise forward-looking statements.
NSR AND PRR NEWCO INFORMATION
You should read the information regarding NSR and PRR Newco contained in
the prospectus and consent solicitation statement, of which this Appendix forms
a part, together with the rest of the prospectus and consent solicitation
statement, including the financial information and reports included herein and
therein and incorporated by reference, as well as the registration statement on
Form S-4 filed by NSR and PRR Newco of which this Appendix forms a part, and the
exhibits thereto before making an investment decision.
NORFOLK SOUTHERN RAILWAY COMPANY
Norfolk Southern Railway Company
Three Commercial Place
Norfolk, Virginia 23510-2191
(757) 629-2680
NSR, together with its consolidated subsidiaries, is primarily engaged in
the transportation of freight by rail. All of the common stock of NSR is owned
directly by NSC. NSC common stock is publicly held and listed on the New York
Stock Exchange.
Since June 1, 1999, NSR and CSXT have each operated separate portions of
Conrail's rail routes and assets. Substantially all such assets are currently
owned by two wholly owned subsidiaries of Conrail. One of those subsidiaries,
PRR, is operated and managed by NSR pursuant to an operating agreement between
PRR and NSR and the other subsidiary, NYC, is operated and managed by CSXT
pursuant to an operating agreement between NYC and CSXT. Certain rail assets
(Shared Assets Areas) still are owned by CRC, which operates them for joint and
exclusive use by NSR and CSXT. Consummation of the Conrail Spin Off Transactions
would replace the operating agreements described above and allow NSR and CSXT to
directly own and operate their respective assets of PRR and NYC. The Conrail
Spin Off Transactions would not involve the Shared Assets Areas, and are not
expected to have any effect on the competitive rail service provided in the
Shared Assets Areas. Conrail would continue to own, manage and operate the
Shared Assets Areas as previously approved by the STB.
Operation of the PRR routes and assets increased the size of the system
over which NSR provides service by nearly 50% and afforded access to the New
York metropolitan area, to much of the Northeast and to most of the major East
Coast ports north of Norfolk, Virginia. Also, leasing arrangements with PRR
augmented
NSR-1
NSR's locomotive, freight car and intermodal fleet. As of December 31, 2003, NSR
operated approximately 21,500 miles of road in the states of Alabama, Delaware,
Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland,
Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio,
Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, the District
of Columbia and in the Province of Ontario, Canada.
In addition to the lines currently leased from Conrail, NSR has major
leased lines between Cincinnati, Ohio and Chattanooga, Tennessee, and operates
over trackage owned by North Carolina Railway Company, or NCRR. The
Cincinnati-Chattanooga lease, covering about 335 miles of road, expires in 2026,
and is subject to an option to extend the lease for an additional 25 years, at
terms to be agreed upon. The trackage rights over NCRR cover approximately 315
miles of road under an agreement through 2014 with the right to renew for two
additional 15-year periods.
NSR's lines carry raw materials, intermediate products and finished goods
primarily in the Southeast, East and Midwest, and via interchange with other
rail carriers, to and from the rest of the United States and parts of Canada.
These lines also transport overseas freight through several Atlantic and Gulf
Coast ports. Atlantic ports served by NSR include: Norfolk, Virginia; Morehead
City, North Carolina; Charleston, South Carolina; Savannah and Brunswick,
Georgia; Jacksonville, Florida; Baltimore, Maryland; Philadelphia,
Pennsylvania/Camden, New Jersey; Wilmington, Delaware; and the Ports of New
York/New Jersey. Gulf Coast ports served include Mobile, Alabama, and New
Orleans, Louisiana.
NSR's lines reach most of the larger industrial and trading centers of the
Southeast, Northeast, Mid-Atlantic region and Midwest. Chicago, Norfolk,
Detroit, Atlanta, Metropolitan New York City, Jacksonville, Kansas City
(Missouri), Baltimore, Buffalo, Charleston, Cleveland, Columbus, Philadelphia,
Pittsburgh, Toledo, Greensboro, Charlotte and Savannah are among the leading
centers originating and terminating freight traffic on the system. In addition,
haulage arrangements with connecting carriers allow NSR to provide single-line
service to and from additional markets, including haulage provided by Florida
East Coast Railway Company to serve southern and eastern Florida, including the
port cities of Miami, West Palm Beach and Fort Lauderdale; and haulage provided
by The Kansas City Southern Railway Company to provide transcontinental
intermodal service via a connection with the Burlington Northern and Santa Fe
Railway Company. Service is provided to New England, including the Port of
Boston, via haulage, trackage rights and interline arrangements with Canadian
Pacific Railway Company and Guilford Transportation Industries. The NSR system's
lines also reach many individual industries, electric generating facilities,
mines (in western Virginia, eastern Kentucky, southern and northern West
Virginia and western Pennsylvania), distribution centers, transload facilities
and other businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include those from
the New York City area to Chicago (via Allentown and Pittsburgh); Chicago to
Jacksonville (via Cincinnati, Chattanooga and Atlanta); Appalachian coal fields
of Virginia, West Virginia and Kentucky, to Norfolk, Virginia and Sandusky,
Ohio; Cleveland to Kansas City; and Knoxville to Chattanooga. Chicago, Memphis,
Sidney/Salem, New Orleans, Kansas City, Buffalo, St. Louis and Meridian are
major gateways for interterritorial system traffic.
RAILWAY OPERATING REVENUES
NSR's total railway operating revenues were $6.3 billion in 2003.
Coal Traffic. Coal, coke and iron ore, most of which is bituminous coal,
is NSR's largest commodity group as measured by revenues. NSR handled a total of
172 million tons in 2003, most of which originated on NSR's lines in West
Virginia, Virginia, Pennsylvania and Kentucky. Revenues from coal, coke and iron
ore accounted for about 24% of NSR's total railway operating revenues in 2003.
General Merchandise Traffic. General merchandise traffic is composed of
five major commodity groupings: automotive; chemicals; metals and construction;
agriculture, consumer products and government; and paper, clay and forest
products. The automotive group includes finished vehicles for BMW,
DaimlerChrysler, Ford Motor Company, General Motors, Honda, Isuzu, Jaguar, Land
Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota
and Volkswagen, and auto parts for Ford Motor Company, General Motors,
Mercedes-Benz and Toyota. The chemicals group includes sulfur and related
NSR-2
chemicals, petroleum products, chlorine and bleaching compounds, plastics,
rubber, industrial chemicals, chemical wastes and municipal wastes. The metals
and construction group includes steel, aluminum products, machinery, scrap
metals, cement, aggregates, bricks and minerals. The agriculture, consumer
products and government group includes soybeans, wheat, corn, fertilizer, animal
and poultry feed, food oils, flour, beverages, canned goods, sweeteners,
consumer products, ethanol and items for the military. The paper, clay and
forest products group includes lumber and wood products, pulpboard and paper
products, woodfibers, woodpulp, scrap paper and clay. General merchandise
carloads handled in 2003 were 2.78 million, compared with 2.76 million handled
in 2002, an increase of 1%.
In 2003, 134 million tons of general merchandise freight, or approximately
66% of total general merchandise tonnage handled by NSR, originated online. The
balance of general merchandise traffic was received from connecting carriers at
interterritorial gateways. The principal interchange points for NSR-received
traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City,
Detroit, Hagerstown, St. Louis/East St. Louis and Louisville.
Intermodal Traffic. The intermodal market consists of shipments moving in
trailers, domestic and international containers, and Roadrailer(R) equipment.
These shipments are handled on behalf of intermodal marketing companies,
international steamship lines, truckers and other shippers. Intermodal units
handled in 2003 were 2.47 million, compared with 2.35 million handled in 2002,
an increase of 5%.
Freight Rates. In 2003, NSR continued its reliance on private contracts
and exempt price quotes as the predominant pricing mechanism. Thus, a major
portion of NSR's freight business is not currently economically regulated by the
government. In general, market forces have been substituted for government
regulation and now are the primary determinant of rail service prices. However,
in 2003 there were significant coal movements moving under common carrier
(tariff) rates that had previously moved under rates contained in transportation
contracts. Beginning January 1, 2002, coal moving to Duke Energy's (Duke)
Belew's Creek, Allen, Buck and Dan River generating stations moved under common
carrier rates and beginning April 1, 2002, coal moving to Carolina Power and
Light's (CP&L) Hyco and Mayo plants moved under common carrier rates. In 2002,
Duke and CP&L filed rate reasonableness complaints at the STB alleging that
NSR's tariff rates for the transportation of coal were unreasonable. In the Duke
proceeding the STB initially found NSR's rates to be reasonable in November
2003, but subsequently issued technical corrections in February 2004 finding
that in certain years some portion of the rates were unreasonable.
In the CP&L proceeding, the STB found NSR's rates to be unreasonable in
December 2003, but upheld a significant portion of NSR's tariff increase. Both
of the STB's rate decisions remain subject to petitions for rehearing and
appeals. Future developments in the two cases could have a significant impact on
results of operations in a particular quarter.
In 2003, NSR was found by the STB not to be "revenue adequate" based on
results for the year 2002. A railroad is "revenue adequate" under the applicable
law when its return on net investment exceeds the rail industry's composite cost
of capital. This determination is made pursuant to statutory requirement and
does not adversely impact NSR's liquidity or capital resources.
Passenger Operations. Regularly scheduled passenger trains are operated by
Amtrak on NSR's lines between Alexandria and New Orleans, and between Greensboro
and Selma, North Carolina. Commuter trains are operated on the NSR line between
Manassas and Alexandria in accordance with contracts with two transportation
commissions of the Commonwealth of Virginia. NSR also leases the Chicago to
Manhattan, Illinois line to the Commuter Rail Division of the Regional
Transportation Authority of Northeast Illinois. Since June 1, 1999, NSR has
operated former Conrail lines on which Amtrak conducts regularly scheduled
passenger operations between Chicago, Illinois, and Detroit, Michigan, and
between Chicago and Harrisburg, Pennsylvania.
Also since June 1, 1999, through its operation of PRR's routes, NSR has
been providing freight service over former Conrail lines with significant
ongoing Amtrak and commuter passenger operations, and is conducting freight
operations over some trackage owned by Amtrak or by New Jersey Transit, the
Southeastern Pennsylvania Transportation Authority, Metro-North Commuter
Railroad Company and
NSR-3
Maryland DOT. Finally, passenger operations are conducted either by Amtrak or by
the commuter agencies over trackage owned by PRR, or by Conrail in the Shared
Assets Areas.
PRR NEWCO, INC.
PRR Newco, Inc.
Three Commercial Place
Norfolk, Virginia 23510-2191
(757) 629-2680
PRR Newco, Inc., or PRR Newco, is a newly formed corporation organized
under the laws of the Commonwealth of Virginia that, to date, has not conducted
any independent operations or activities, has no meaningful financial
information and shares the same officers and directors as NSR. In connection
with the Conrail Spin Off Transactions, PRR Newco will be the initial primary
obligor under the New NSR Indenture and will immediately thereafter be merged
into NSR, with NSR as the surviving corporation.
NSR-4
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of NSR.
The consolidated statements of operations data for the three months ended
March 31, 2004 and 2003 and the consolidated balance sheet data as of March 31,
2004 have been derived from our consolidated financial statements, that are
included in NSR's Quarterly Report on Form 10-Q for the three months ended March
31, 2004 which is incorporated by reference in the prospectus and consent
solicitation statement, of which this Appendix forms a part. The consolidated
statements of operations data for the years ended December 31, 2003, 2002 and
2001, and the consolidated balance sheet data as of December 31, 2003 and 2002,
have been derived from our audited consolidated financial statements, which are
incorporated by reference in the prospectus and consent solicitation statement,
of which this Appendix forms a part, and which have been audited by KPMG LLP,
independent registered public accounting firm. The consolidated statements of
operations data for the years ended December 31, 2000 and 1999, and the
consolidated balance sheet data as of December 31, 2001, 2000 and 1999, are
derived from our audited consolidated financial statements not included or
incorporated by reference in the prospectus and consent solicitation statement.
The consolidated balance sheet data as of March 31, 2003 is derived from our
consolidated financial statements not included or incorporated by reference in
the prospectus and consent solicitation statement, of which this Appendix forms
a part. This data should be read in conjunction with the unaudited pro forma
financial information, related notes, and other financial information
incorporated by reference in the prospectus and consent solicitation statement,
of which this Appendix forms a part.
<Table>
<Caption>
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -----------------------------------------------
2004 2003 2003(a) 2002 2001 2000(b) 1999(c)
------- ------- ------- ------- ------- ------- -------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Railway operating revenues...... $ 1,645 $ 1,519 $ 6,290 $ 6,095 $ 6,009 $ 6,012 $ 5,161
Railway operating expenses...... 1,343 1,330 5,434 5,124 5,178 5,521 4,658
------- ------- ------- ------- ------- ------- -------
Income from railway
operations.................... 302 189 856 971 831 491 503
Other income (expense)--net..... (65) (51) (220) (221) (243) (169) 42
Interest expense on debt........ (5) (7) (24) (30) (37) (37) (39)
------- ------- ------- ------- ------- ------- -------
Income before income taxes and
accounting changes............ 232 131 612 720 551 285 506
Provision for income taxes...... 89 51 229 278 202 99 174
------- ------- ------- ------- ------- ------- -------
Income before accounting
changes....................... 143 80 383 442 349 186 332
Cumulative effect of changes in
accounting principles, net of
taxes(d)...................... -- 104 104 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net Income................. $ 143 $ 184 $ 487 $ 442 $ 349 $ 186 $ 332
======= ======= ======= ======= ======= ======= =======
FINANCIAL POSITION (AS OF PERIOD
END)
Total Assets.................... $13,504 $13,083 $13,612 $12,853 $12,541 $12,017 $12,632
Total long-term debt including
current maturities(e)......... $ 885 $ 981 $ 915 $ 857 $ 868 $ 771 $ 866
Stockholders' equity............ $ 4,381 $ 4,976 $ 4,544 $ 4,813 $ 4,821 $ 5,106 $ 5,385
OTHER
Capital expenditures............ $ 171 $ 104 $ 705 $ 667 $ 725 $ 628 $ 915
Average number of
employees(f).................. 27,770 28,260 28,363 28,587 30,510 33,344 30,897
</Table>
NSR-5
- ------------
(a) 2003 operating expenses include a $107 million charge for a voluntary
separation program that reduced net income by $66 million.
(b) 2000 operating expenses include $165 million in work-force reduction costs
for early retirement and separations programs, which reduced net income by
$101 million.
(c) On June 1, 1999, NSR began operating a substantial portion of Conrail's
properties. As a result, both its railroad miles and the number of its
employees increased by approximately 50% on that date.
(d) Net income in 2003 reflects two accounting changes, the cumulative effect of
which increased net income by $104 million: a change in the accounting for
the cost to remove railroad crossties, which increased net income by
$100 million, and a change in accounting related to a special-purpose entity
that leases certain locomotives to NSR, which increased net income by
$4 million. This entity's assets and liabilities, principally the
locomotives and debt related to their purchase, are now reflected in the NSR
Consolidated Balance Sheet.
(e) Excludes notes payable to a subsidiary of PRR of $785 million as of
March 31, 2004, $594 million as of March 31, 2003, $716 million in 2003,
$513 million in 2002, $301 million in 2001, $51 million in 2000 and
$123 million in 1999.
(f) Includes NSC employees who provide management services to NSR.
NSR-6
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information set forth below gives effect
to the Conrail Spin Off Transactions and the assumptions described in the
accompanying notes. This unaudited pro forma financial information is not
necessarily indicative of the results of future operations and should be read in
conjunction with the discussion under the heading "Management's Narrative
Analysis of the Results of Operations" in NSR's Annual Report on Form 10-K for
the year ended December 31, 2003, and in NSR's Quarterly Report on Form 10-Q for
the three months ended March 31, 2004 which are incorporated by reference into
the prospectus and consent solicitation statement, of which this Appendix forms
a part, and the "Capitalization" and the selected financial data and related
notes included elsewhere in this Appendix.
The unaudited pro forma consolidated balance sheet presented below adjusts
the historical consolidated balance sheet of NSR, giving effect to the merger of
PRR with and into NSR as contemplated by the Conrail Spin Off Transactions as if
such merger had occurred on March 31, 2004. The unaudited pro forma consolidated
income statements presented below adjust the historical consolidated income
statement of NSR as if the merger of PRR with and into NSR as contemplated by
the Conrail Spin Off Transactions had occurred on January 1, 2003. NSR has
adjusted the historical consolidated financial information to give effect to pro
forma events that are (1) directly attributable to the merger, (2) factually
supportable, and (3) with respect to the income statement, expected to have a
continuing impact on the combined results. You should read this information in
conjunction with the:
-- Accompanying notes to the Unaudited Pro Forma Financial Information;
and
-- Separate historical consolidated financial statements of NSR as of
and for the three months ended March 31, 2004 and for the year ended
December 31, 2003 incorporated by reference into the prospectus and
consent solicitation statement, of which this Appendix forms a part.
See "Where You Can Find More Information."
The unaudited pro forma financial information is presented for
informational purposes only. The unaudited pro forma financial information is
not necessarily indicative of what the financial position or results of
operations actually would have been had the merger of PRR with and into NSR as
contemplated by the Conrail Spin Off Transactions been completed at the dates
indicated. In addition, the unaudited pro forma financial information does not
purport to project the future financial position or operating results of the
combined company.
The following unaudited pro forma financial information has been prepared
assuming that the fair value of the direct ownership interest in PRR being
obtained by NSC (and ultimately NSR) equals the carrying amount of the indirect
ownership interests in NYC being forgone by NSC as a result of the Conrail Spin
Off Transactions. NSC and CSX are progressing toward ascertaining the fair value
effects of the Conrail Spin Off Transactions, which will be reflected in the
accounting for the Conrail Spin Off Transactions once consummated and that
analysis has been completed. Accordingly, the amounts ultimately reflected in
NSR's financial statements could differ materially from the amounts shown in the
following unaudited pro forma information. Based on the preliminary results of
an appraisal of the PRR assets, the ultimate fair value recorded upon
consummation of the Conrail Spin Off Transactions will likely exceed the amounts
shown in the following unaudited pro forma financial information.
We have excluded pro forma per share information from the tables below
because all of the outstanding shares of NSR are held by NSC and therefore, such
per share information would not be meaningful.
NSR-7
NSR UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
AS OF MARCH 31, 2004
-----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
($ IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 82 $ -- $ 82
Accounts receivable--net................................ 121 -- 121
Materials and supplies.................................. 96 -- 96
Deferred income taxes................................... 182 -- 182
Other current assets.................................... 151 22(a) 173
------- ------ -------
Total current assets................................. 632 22 654
Investments............................................... 769 234(b) 1,003
Properties less accumulated depreciation.................. 11,397 7,879(c) 19,276
Other assets.............................................. 706 -- 706
------- ------ -------
Total assets......................................... $13,504 $8,135 $21,639
======= ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 827 $ -- $ 827
Income and other taxes.................................. 212 9(d) 221
Due to NSC--net......................................... 765 -- 765
Due to Conrail.......................................... 89 (29)(e) 60
Other current liabilities............................... 119 -- 119
Current maturities of long-term debt.................... 102 32(f) 134
------- ------ -------
Total current liabilities............................ 2,114 12 2,126
Long-term debt............................................ 783 779(f),(g) 1,562
Other liabilities......................................... 1,035 45(h) 1,080
Due to Conrail............................................ 785 (785)(e) --
Deferred income taxes..................................... 4,406 2,674(i) 7,080
------- ------ -------
Total liabilities.................................... 9,123 2,725 11,848
Stockholders' equity:
Common stock............................................ 167 -- 167
Additional paid-in capital.............................. 721 5,410(j) 6,131
Accumulated other comprehensive income.................. 308 -- 308
Retained income......................................... 3,185 -- 3,185
------- ------ -------
Total stockholders' equity........................... 4,381 5,410 9,791
------- ------ -------
Total liabilities and stockholders' equity........... $13,504 $8,135 $21,639
======= ====== =======
</Table>
- ------------
The following adjustments record various assets and liabilities of PRR that
will be received by NSR as a result of the Conrail Spin Off Transactions and the
effects of the exchange offer and consent solicitation. The amounts related to
the assets and liabilities of PRR are estimated based on the current carrying
amounts of NSC's investment in Conrail. The amounts recorded upon consummation
of the Conrail Spin Off Transactions will reflect the fair value of the assets
and liabilities received, and as a result, could differ from these estimates.
(a) To record the other current assets of PRR received by NSR, which are
primarily a receivable from CRC for advances made by PRR.
(b) To record investments of PRR received by NSR, principally a partial
ownership interest in an equipment leasing company.
(c) To record the properties of PRR received by NSR. This amount is estimated
based on NSC's basis of its investment in Conrail, but will ultimately be
recorded based on: (1) NSC's basis for the 58% indirect interest currently
held by NSC and (2) the fair value for
NSR-8
the 42% interest being received through the Conrail Spin Off Transactions.
Accordingly, the amount recorded upon consummation of the Conrail Spin Off
Transactions could be different. Based on the preliminary results of an
appraisal of the PRR assets, the ultimate fair value recorded upon consummation
of the Conrail Spin Off Transactions will likely exceed this amount.
(d) To record miscellaneous tax liabilities, primarily franchise taxes, assumed
by NSR.
(e) To record the extinguishment of amounts due from NSR to PRR as a result of
the Conrail Spin Off Transactions.
(f) To record $32 million of current maturities and $160 million of long-term
debt for liabilities incurred through the Conrail Spin Off Transactions
related to the restructuring of Conrail's secured debt.
(g) To record the issuance of the New NSR Notes in exchange for existing Conrail
Debentures as contemplated by the Conrail Spin Off Transactions assuming all
holders of Conrail Debentures validly tender, and do not withdraw, their
Conrail Debentures. The amount of this adjustment, $619 million, reflects
the estimated fair value of the $464 million aggregate principal amount of
the New NSR Notes.
(h) To record other liabilities of PRR, principally environmental remediation
liabilities, assumed by NSR.
(i) To record the estimated deferred tax effects of the Conrail Spin Off
Transactions and the deferred taxes assumed by NSR as a result of the
Conrail Spin Off Transactions.
(j) To record the net impact of the Conrail Spin Off Transactions as a capital
contribution from NSC.
Certain of the above adjustments would be different if less than all holders
of Conrail Debentures validly tender, and do not withdraw, their Conrail
Debentures. If 51% of holders validly tender, and do not withdraw, their Conrail
Debentures, the amount for adjustment (g) would be reduced to $316 million, the
amount for adjustment (i) would be increased to $2,704 million, and the amount
for adjustment (j) would be increased to $5,683 million. If 75% of holders
validly tender, and do not withdraw, their Conrail Debentures, the amount for
adjustment (g) would be reduced to $464 million, the amount for adjustment
(i) would be increased to $2,689 million, and the amount for adjustment
(j) would be increased to $5,550 million.
NSR-9
NSR UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2004 YEAR ENDED DECEMBER 31, 2003
------------------------------------ ------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
($ IN MILLIONS) ($ IN MILLIONS)
Railway operating revenues... $1,645 $ -- $1,645 $6,290 $ -- $6,290
Railway operating expenses:
Compensation and
benefits................ 420 -- 420 1,636 -- 1,636
Materials, services and
rents................... 454 4(a) 458 1,970 13(a) 1,983
Conrail rents and
services................ 116 (88)(b) 28 477 (348)(b) 129
Depreciation............... 126 61(c) 187 498 245(c) 743
Diesel fuel................ 107 -- 107 380 -- 380
Casualties and other
claims.................. 40 -- 40 183 -- 183
Other...................... 80 -- 80 290 -- 290
------ ---- ------ ------ ----- ------
Total railway operating
expenses.............. 1,343 (23) 1,320 5,434 (90) 5,344
------ ---- ------ ------ ----- ------
Income from railway
operations............ 302 23 325 856 90 946
Other income
(expenses)--net............ (65) -- (65) (220) -- (220)
Interest expense on debt..... (5) (8)(d) (13) (24) (38)(d) (62)
------ ---- ------ ------ ----- ------
Income before income taxes
and accounting changes..... 232 15 247 612 52 664
Provision for income taxes... 89 5(e) 94 229 17(e) 246
------ ---- ------ ------ ----- ------
Income before accounting
changes............... $ 143 $ 10 $ 153 $ 383 $ 35 $ 418
====== ==== ====== ====== ===== ======
</Table>
- ------------
The following adjustments record the various income and expense effects of the
Conrail Spin Off Transactions. These amounts are estimated based on the current
carrying amounts of NSC's investment in Conrail except for the interest expense
on debt which is at estimated fair value. The amounts recorded upon consummation
of the Conrail Spin Off Transactions will reflect the fair value of the assets
and liabilities received, and as a result, could differ from these estimates.
(a) To record expenses for various operating leases entered into as a result of
the Conrail Spin Off Transactions, and to record the equity earnings from a
partial ownership interest in an equipment leasing company received by NSR
as a result of the Conrail Spin Off Transactions.
(b) To eliminate expenses related to the operating and lease agreements between
NSR and PRR which will be extinguished as a result of the Conrail Spin Off
Transactions.
(c) To record additional depreciation expense related to the PRR assets received
by NSR as a result of the Conrail Spin Off Transactions. This amount is
estimated based on the current carrying amount and related depreciation of
NSC's investment in Conrail. The actual amount will reflect the fair value
of the related assets upon consummation of the Conrail Spin Off
Transactions. Based on the preliminary results of an appraisal of the PRR
assets, the ultimate amount for depreciation upon consummation of the
Conrail Spin Off Transactions will likely exceed this amount.
(d) To record additional interest expense related to liabilities assumed by NSR
and the debt exchange contemplated by the Conrail Spin Off Transactions,
assuming all holders of Conrail Debentures validly tender, and do not
withdraw, their Conrail Debentures. This amount is based on the estimated
fair value of these liabilities and debt. The actual amount will reflect the
fair value of these liabilities and debt upon consummation of the Conrail
Spin Off Transactions.
(e) To record the tax effects of the above adjustments at NSR's statutory rate
of 39.3% (including 20% of the equity earnings included in adjustment (a)
above).
Certain of the above adjustments would be different if less than all holders of
Conrail Debentures validly tender, and do not withdraw, their Conrail Debentures
in this exchange offer and consent solicitation. If 51% of holders validly
tender, and do not withdraw, their Conrail Debentures in this exchange offer and
consent solicitation, the amount for adjustment (d) would be reduced to
$4 million for the three months ended March 31, 2004, and to $21 million for the
year ended December 31, 2003, and the amount for adjustment (e) would be
increased to $7 million for the three months ended March 31, 2004, and to
$24 million for the year ended December 31, 2003. If 75% of holders validly
tender, and do not withdraw, their Conrail Debentures in this exchange offer and
consent solicitation, the amount for adjustment (d) would be reduced to
$6 million for the three months ended March 31, 2004, and to $29 million for the
year ended December 31, 2003, and the amount for adjustment (e) would be
increased to $6 million for the three months ended March 31, 2004, and to
$20 million for the year ended December 31, 2003.
NSR-10
CAPITALIZATION
The following table sets forth NSR's debt and total capitalization as of
March 31, 2004, and as adjusted to give effect to the Conrail Spin Off
Transactions; including but not limited to the exchange offer and consent
solicitation assuming holders of all Conrail Debentures validly tender, and do
not withdraw, their Conrail Debentures. You should read this and the historical
consolidated financial statements and accompanying notes that are included in
NSR's 2003 Annual Report on Form 10-K for the year ended December 31, 2003, and
in NSR's Quarterly Report on Form 10-Q for the three months ended March 31,
2004, which are incorporated by reference into the prospectus and consent
solicitation statement, of which this Appendix forms a part.
<Table>
<Caption>
AS OF MARCH 31, 2004
---------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ---------------- ---------
($ IN MILLIONS)
LIABILITIES
Due to NSC--net........................................... $ 765 $ -- $ 765
Due to Conrail............................................ 89 (29)(a) 60
Current maturities of long-term debt...................... 102 32(b) 134
Long-term debt............................................ 783 779(b),(c) 1,562
Due to Conrail (long-term)................................ 785 (785)(a) --
------ ------ -------
Total debt (including current portion of long-term
debt and related party balances)................... 2,524 (3) 2,521
STOCKHOLDERS' EQUITY
Common stock............................................ 167 167
Additional paid-in capital.............................. 721 5,410(d) 6,131
Accumulated other comprehensive income.................. 308 -- 308
Retained income......................................... 3,185 -- 3,185
------ ------ -------
Total stockholders' equity........................... 4,381 5,410 9,791
------ ------ -------
Total Capitalization (including current portion of
long-term debt and related party balances)......... $6,905 $5,407 $12,312
====== ====== =======
</Table>
- ------------
The following adjustments record various assets and liabilities of PRR that will
be received by NSR as a result of the Conrail Spin Off Transactions and the
effects of the exchange offer and consent solicitation. The amounts related to
the assets and liabilities of PRR are estimated based on the current carrying
amounts of NSC's investment in Conrail. The amounts recorded upon consummation
of the Conrail Spin Off Transactions will reflect the fair value of the assets
and liabilities received, and as a result, could differ from these estimates.
(a) To record the extinguishment of amounts due from NSR to PRR as a result of
the Conrail Spin Off Transactions.
(b) To record $32 million of current maturities and $160 million of long-term
debt for liabilities incurred through the Conrail Spin Off Transactions
related to the restructuring of Conrail's secured debt.
(c) To record the issuance of the New NSR Notes in exchange for existing Conrail
Debentures as contemplated by the Conrail Spin Off Transactions assuming all
holders of Conrail Debentures validly tender, and do not withdraw, their
Conrail Debentures. The amount of this adjustment, $619 million, reflects
the estimated fair value of the $464 million aggregate principal amount of
the New NSR Notes.
(d) To record the net impact of the Conrail Spin Off Transactions as a capital
contribution from NSC.
Certain of the above adjustments would be different if less than all holders
of Conrail Debentures validly tender, and do not withdraw, their Conrail
Debentures in this exchange offer and consent solicitation. If 51% of holders
validly tender, and do not withdraw, their Conrail Debentures in this exchange
offer and consent solicitation, the amount for adjustment (c) would be reduced
to $316 million and the amount for adjustment (d) would be increased to $5,683
million. If 75% of holders validly tender, and do not withdraw, their Conrail
Debentures in this exchange offer and consent solicitation, the amount for
adjustment (c) would be reduced to $464 million and the amount for adjustment
(d) would be increased to $5,550 million.
NSR-11
RATIO OF EARNINGS TO FIXED CHARGES
For purposes of computing each ratio of earnings to fixed charges,
"earnings" represents income before income taxes, plus interest expenses
(including a portion of rental expenses representing an interest factor) and
subsidiaries' preferred dividend requirements, less the equity in undistributed
earnings of 20%-49% owned companies, net of dividends. "Fixed charges"
represents interest expenses (including a portion of rental expense representing
an interest factor) plus capitalized interest and preferred dividend
requirements on a pretax basis.
The following table sets forth the ratio of earnings to fixed charges for
NSR for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
------------------ --------------------------------
MARCH 31, 2004 2003 2002 2001 2000 1999
------------------ ---- ---- ---- ---- ----
Ratio of earnings to fixed
charges........................... 9.77x 7.37x 6.46x 5.88x 2.36x 4.31x
</Table>
NSR-12
MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
Since June 1, 1982, NSC has owned all the common stock of NSR. The common
stock is not publicly traded.
PREFERRED STOCK INFORMATION
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors of NSR with any series having such voting
and other powers, designations, dividends and other preferences as deemed
appropriate at the time of issuance.
In 2003, NSC redeemed all publicly held shares of NSR's $2.60 Cumulative
Preferred Stock, Series A, for a redemption price of $50 per share plus accrued
and unpaid dividends, for an aggregate redemption price of $50.2066 per share.
DIRECTORS AND EXECUTIVE OFFICERS
The following persons served as directors and officers of NSR and as
officers of NSC.
DAVID R. GOODE, 63, Norfolk, Va.; he has served as Chairman, President and
Chief Executive Officer of Norfolk Southern Corporation and President and Chief
Executive Officer of Norfolk Southern Railway Company since September 1, 1992.
He is a director of Norfolk Southern Corporation and several Norfolk Southern
Corporation and Norfolk Southern Railway Company subsidiaries. He is also a
director of Caterpillar, Inc., Delta Air Lines, Inc., Georgia-Pacific
Corporation and Texas Instruments Incorporated. Mr. Goode has been a director
since 1992 and his term expires in 2004.
L. I. PRILLAMAN, 60, Norfolk, Va.; he has served as Vice Chairman and Chief
Marketing Officer of Norfolk Southern Corporation since August 1, 1998, and Vice
President of Norfolk Southern Railway Company since May 30, 2000, having served
prior thereto as Executive Vice President-Marketing of Norfolk Southern
Corporation and Vice President and Chief Marketing Officer of Norfolk Southern
Railway Company. He is a director of several Norfolk Southern Corporation and
Norfolk Southern Railway Company subsidiaries. Mr. Prillaman has been a director
since 1996 and his term expires in 2006.
STEPHEN C. TOBIAS, 59, Norfolk, Va.; he has served as Vice Chairman and
Chief Operating Officer of Norfolk Southern Corporation since August 1, 1998,
and Vice President of Norfolk Southern Railway Company since May 30, 2000,
having served prior thereto as Executive Vice President-Operations of Norfolk
Southern Corporation and Vice President and Chief Operating Officer of Norfolk
Southern Railway Company. He is a director of several Norfolk Southern
Corporation and Norfolk Southern Railway Company subsidiaries. He is also a
director of Plum Creek Timber Company. Mr. Tobias has been a director since 1994
and his term expires in 2004.
HENRY C. WOLF, 61, Norfolk, Va.; he has served as Vice Chairman and Chief
Financial Officer of Norfolk Southern Corporation since August 1, 1998, and Vice
President of Norfolk Southern Railway Company since May 30, 2000, having served
prior thereto as Executive Vice President-Finance of Norfolk Southern
Corporation and Vice President and Chief Financial Officer of Norfolk Southern
Railway Company. He is a director of several Norfolk Southern Corporation and
Norfolk Southern Railway Company subsidiaries. Mr. Wolf has been a director
since 1994 and his term expires in 2005.
BOARD OF DIRECTORS AND COMMITTEES
On December 31, 2003, the Board of Directors of NSR consisted of four
members. The Board is divided into three classes; the members of each class are
elected for a term of three years, and each class contains as nearly as possible
one third of the total number of directors. The Board of Directors has no audit,
nominating
NSR-13
or compensation committees. In 2003, the Board of Directors acted by unanimous
written consent on twenty separate occasions.
The Executive Committee took no action in 2003; its members were David R.
Goode, Chair, and Henry C. Wolf. This Committee is empowered to exercise, to the
extent permitted by Virginia law, all the authority of the Board of Directors
when the Board is not in session. All actions taken by the Committee are to be
reported to the Board at its meeting next succeeding such action and are subject
to revision or alteration by the Board.
COMPENSATION OF DIRECTORS
NSR is a wholly-owned subsidiary of NSC. In 2003, each of the NSR directors
was also an officer of both NSR and NSC. The NSR directors were not paid a
retainer, meeting fees or other compensation for their service as directors.
Instead, their compensation was based solely on their position as NSC officers
and was determined in accordance with the NSC Joint Committee Report Concerning
the 2003 Compensation of Certain Executive Officers which is included in this
Appendix beginning on page NSR-24.
NSC COMPENSATION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION
In 2003, the NSR directors were not paid any retainer, meeting fees or
other compensation for their service as directors. Additionally, the NSR
officers were not paid any compensation for their service as NSR officers.
Instead, the compensation paid to the NSR directors and officers was based
solely on their respective positions as NSC officers in accordance with the
compensation policies of NSC as determined by the NSC Compensation and
Nominating Committee.
The members of the NSC Compensation and Nominating Committee during 2003
were Gene R. Carter, who served as chairman, Landon Hilliard, Jane Margaret
O'Brien and Harold W. Pote. The members of the NSC Performance-Based
Compensation Committee during 2003 were Mr. Carter, who served as chairman,
Ms. O'Brien and Mr. Pote. Other than Mr. Hilliard's relationship with Brown
Brothers Harriman & Co., which is described below, there were no reportable
business relationships between NSC and such individuals.
MATERIAL CONTACTS WITH CONRAIL
NSR operates as a part of its rail system the routes and assets of PRR
pursuant to operating and lease agreements. The June 1999 Operating Agreement
between NSR and PRR governs substantially all track assets operated by NSR and
has an initial 25-year term, renewable at the option of NSR for two five-year
terms. Payments under the Operating Agreement are subject to adjustment every
six years to reflect changes in values. NSR also has leased or subleased
equipment for varying terms from PRR. Costs necessary to operate and maintain
the PRR assets, including leasehold improvements are borne by NSR. CSXT operates
the routes and assets of another CRC subsidiary, NYC under comparable terms.
Upon consummation of the Conrail Spin Off Transactions, these agreements will be
extinguished and NSR will have direct ownership of the PRR routes and assets and
CSXT will have direct ownership of the NYC routes and assets.
NSR and CSXT also have entered into agreements with Conrail governing other
properties that continue to be owned operated by Conrail (the Shared Assets
Areas). NSR and CSXT pay Conrail a fee for joint and exclusive access to the
Shared Assets Areas. In addition, NSR and CSXT pay, based on usage, the costs
incurred by Conrail to operate the Shared Assets Areas. The Conrail Spin Off
Transactions will not affect these agreements.
Operating lease expense related to PRR and Shared Assets Areas agreements,
which is included in the line item "Conrail Rents and Services" on NSR's income
statement, amounted to $478 million in 2003, $468 million in 2002 and
$467 million in 2001.
NSR's balance sheet includes two "Due to Conrail" line items. The current
liability is composed of amounts related to expenses included in "Conrail Rents
and Services," as discussed above. The noncurrent
NSR-14
liability represents borrowings from a PRR subsidiary of amounts previously paid
to PRR under the operating and lease agreements discussed above. The interest
rate for these loans is variable and was 1.7% at December 31, 2003. Upon
consummation of the Conrail Spin Off Transactions, these loans and a portion of
the current liability "Due to Conrail" will be extinguished.
NSR also provides certain general and administrative support functions to
Conrail, the fees for which are billed in accordance with several
service-provider arrangements and totaled $7 million in each of 2003 and 2002.
The Conrail Spin Off Transactions will not affect amounts billed to Conrail
under such agreements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NSC maintains various banking relationships with Brown Brothers Harriman &
Co. ("Brown Brothers"), in which Mr. Hilliard is a partner, on bases that are
consistent with normal financial and banking practices. All transactions are
entered into in the ordinary course of business on substantially the same terms
as those prevailing at the time for comparable transactions with other banks.
Brown Brothers was paid fees for managing a portion of the assets of NSC's
pension fund and fees for brokerage and custodial services rendered to the
Norfolk Southern Foundation in 2003. The total fees paid by NSC to
Brown Brothers in 2003 were less than 1% of the gross revenues of Brown Brothers
for fiscal year 2003.
EXECUTIVE COMPENSATION
NSR is a wholly-owned subsidiary of NSC. In 2003, each of the NSR officers
was also an officer of NSC and was not paid any compensation for their service
as an NSR officer. Instead, their compensation was based solely on their
position as NSC officers and was determined in accordance with the NSC Joint
Committee Report Concerning the 2003 Compensation of Certain Executive Officers
which is included in this Appendix beginning on page NSR-24. Accordingly, we
have included information regarding executive compensation paid by NSC to NSC's
Chief Executive Officer and its other four most highly compensated executive
officers. Four of these executive officers, including NSC's Chief Executive
Officer, comprise the only executive officers of NSR.
NSR-15
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the cash compensation paid, as well as
certain other compensation accrued or paid, to the Chief Executive Officer and
to each of the other four most highly compensated executive officers of NSC in
2003 (together, the "Named Executive Officers"), for service in all capacities
to NSC and its subsidiaries, including NSR, by the Named Executive Officers in
the fiscal years ending December 31, 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ------------------------------------
AWARDS PAYOUTS
RESTRICTED ---------- ----------
OTHER ANNUAL STOCK SECURITIES LTIP ALL OTHER
NAME AND PRINCIPAL SALARY(1) BONUS(1) COMPENSATION(2) AWARDS(3) UNDERLYING PAYOUTS(5) COMPENSATION(6)
POSITION YEAR ($) ($) ($) ($) OPTIONS(4) ($) ($)
- ------------------ ---- --------- --------- --------------- ---------- ---------- ---------- ---------------
David R. Goode......... 2003 1,000,000 1,672,000 493,484(7) 3,142,400 310,000 1,458,605 159,528
Chairman, President
and 2002 970,833 883,944 932,322(7) 0 650,000 1,069,170 47,030
Chief Executive
Officer 2001 950,000 959,025 526,034(7) 0 525,000 426,410 49,545
L. I. Prillaman........ 2003 525,000 548,625 75,366 982,000 80,000 364,651 48,882
Vice Chairman and 2002 481,250 292,119 287,313 0 200,000 267,293 28,027
Chief Marketing
Officer 2001 406,250 273,406 66,163 0 150,000 106,603 17,413
Stephen C. Tobias...... 2003 575,000 600,875 191,804 982,000 80,000 364,651 65,031
Vice Chairman and 2002 545,833 331,321 376,761 0 200,000 267,293 32,135
Chief Operating
Officer 2001 510,417 343,510 150,400 0 150,000 106,603 28,049
Henry C. Wolf.......... 2003 575,000 600,875 228,895 982,000 80,000 364,651 84,680
Vice Chairman and 2002 545,833 331,321 407,412 0 200,000 267,293 35,631
Chief Financial
Officer 2001 510,417 343,510 156,140 0 150,000 106,603 30,785
James A. Hixon......... 2003 310,000 259,160 22,023 392,800 40,000 182,326 19,892
Senior Vice
President-- 2002 292,500 150,930 154,205 0 100,000 133,646 16,205
Legal and Government 2001 270,000 154,454 33,768 0 60,000 35,534 12,307
Affairs
</Table>
- ------------
(1) Includes portion of any salary or bonus award elected to be received on a
deferred basis.
(2) Includes amounts reimbursed for the payment of taxes on personal benefits.
Also includes the amount by which the interest accrued on salary and bonuses
deferred under the NSC Officers' Deferred Compensation Plan exceeds 120% of
the applicable Federal long-term rate provided under Section 1274(d) of the
Code; for 2003, these amounts were: for Mr. Goode, $182,916; Mr. Prillaman,
$28,535; Mr. Tobias, $130,079; Mr. Wolf, $147,923; and Mr. Hixon, $4,146.
Includes tax absorption payments in 2001 for gains realized upon exercise of
certain stock options and tax absorption payments in 2003 for payments made
on behalf of the listed individuals for executive life insurance policies.
Includes awards paid in 2002 under the NSC Stock Unit Plan.
(3) Includes the value of Restricted Shares awarded pursuant to the Long-Term
Incentive Plan based on the closing price of Common Stock on the date of
grant, February 3, 2003. During the three-year restriction period, the
holder of Restricted Shares receives any dividends paid on Common Stock.
Also includes the value of Restricted Stock Units awarded pursuant to the
Restricted Stock Unit Plan based on the closing price of Common Stock on the
date of grant, February 3, 2003. During the three-year restriction period,
the holder of a Restricted Stock Unit will receive a cash payment equivalent
to any dividend paid on Common Stock. As of December 31, 2003, the aggregate
value of all Restricted Shares held was: for Mr. Goode, $2,270,400; Mr.
Prillaman, $709,500; Mr. Tobias, $709,500; Mr. Wolf, $709,500; and Mr.
Hixon, $283,800. As of December 31, 2003, the aggregate value of all
Restricted Stock Units held was: for Mr. Goode, $1,513,600; Mr. Prillaman,
$473,000; Mr. Tobias, $473,000; Mr. Wolf, $473,000; and Mr. Hixon, $189,200.
(4) Options were granted without tandem Stock Appreciation Rights.
(5) Represents the value of the "earn out" pursuant to the performance share
feature of the NSC Long-Term Incentive Plan for periods ended December 31,
2003, 2002 and 2001 (for 2003, performance shares were earned for
achievements in the three-year period 2001-2003; for 2002, for achievements
in the three-year period 2000-2002; and for 2001, for achievements in the
three-year period 1999-2001).
(6) Includes for 2003 (i) contributions of $6,000 to NSC's 401(k) plan on behalf
of each of the Named Executive Officers and (ii) total premiums paid on
behalf of each of the Named Executive Officers on individually-owned
executive life insurance policies (converted from former "split dollar" life
insurance policies): for Mr. Goode, $153,528; Mr. Prillaman, $42,882; Mr.
Tobias, $59,031; Mr. Wolf, $78,680; and Mr. Hixon, $13,892.
(7) Includes personal use, as directed by resolution of the Board of Directors,
of NSC's aircraft valued at $108,532 for 2003; $143,456 for 2002; and
$164,683 for 2001--calculated on the basis of the aggregate incremental cost
of such use to NSC.
NSR-16
LONG-TERM INCENTIVE PLAN
The NSC Long-Term Incentive Plan, as last approved by stockholders in 2001,
provides for the award of Incentive Stock Options, Non-qualified Stock Options,
Stock Appreciation Rights, Restricted Shares and Performance Share Units to
officers and other key employees of NSC and certain of its subsidiaries
(including NSR). The Performance-Based Compensation Committee of the NSC Board
of Directors ("Committee") administers the Plan and has the sole discretion,
subject to certain limitations, to interpret the Plan; to select Plan
participants; to determine the type, size, terms and conditions of awards under
the Plan; to authorize the grant of such awards; and to adopt, amend and rescind
rules relating to the Plan. Except for capital adjustments, such as stock
splits, the option price may not be decreased after the option is granted, nor
may any outstanding option be modified or replaced through cancellation if the
effect would be to reduce the price of the option, unless such repricing,
modification or replacement is approved by NSC's stockholders.
STOCK OPTIONS
The following table sets forth certain information concerning the grant in
2003 of stock options under the Long-Term Incentive Plan to each Named Executive
Officer:
OPTION/SAR* GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
GRANT DATE
INDIVIDUAL GRANTS VALUE
- ----------------------------------------------------------------------------- ----------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OR GRANT DATE
GRANTED(1) EMPLOYEES IN BASE PRICE(2) EXPIRATION PRESENT VALUE(3)
NAME (#) FISCAL YEAR ($ PER SHARE) DATE ($)
- ---- ---------- ------------ ------------- ---------- ----------------
D. R. Goode.......... 310,000 5.44% 19.625 2/02/2013 2,740,400
L. I. Prillaman...... 80,000 1.40% 19.625 2/02/2013 707,200
S.C. Tobias.......... 80,000 1.40% 19.625 2/02/2013 707,200
H.C. Wolf............ 80,000 1.40% 19.625 2/02/2013 707,200
J.A. Hixon........... 40,000 0.70% 19.625 2/02/2013 353,600
</Table>
* No SARs were granted in 2003.
- ------------
(1) These options (of which the first 5,095 granted to each Named Executive
Officer are Incentive Stock Options and the remainder are Non-qualified
Stock Options) were granted as of February 3, 2003, and are exercisable one
year after the date of grant. Dividend equivalents are paid in cash on these
options for five years in an amount equal to, and commensurate with,
dividends paid on NSC Common Stock.
(2) The exercise price (Fair Market Value on the date of grant) may be paid in
cash or in shares of NSC Common Stock (previously owned by the optionee for
at least one year next preceding the date of exercise) valued at Fair Market
Value on the date of exercise.
(3) In accordance with regulations of the SEC, the present value of the option
grant on the date of grant was determined using the Black-Scholes
statistical model. The actual amount, if any, a Named Executive Officer may
realize upon exercise depends on the stock price on the exercise date;
consequently, there is no assurance the amount realized by a Named Executive
Officer will be at or near the monetary value determined by using this
statistical model.
NSR-17
The Black-Scholes model used the following measures and assumptions to
calculate the present value of an option grant on the date of grant:
(a) a stock volatility factor of 0.3975: volatility was determined by
an independent compensation consultant using monthly data averaged over the
36-month period February 1, 2000 through January 31, 2003;
(b) a dividend yield of 1.79%: yield was determined using monthly data
averaged over the 36-month period February 1, 2000 through January 31,
2003;
(c) a risk-free rate of return of 4.43% equal to the 10-year Treasury
strip rate on January 31, 2003; and
(d) that the option will be exercised during its ten-year term.
The foregoing produces a Black-Scholes factor of 0.4502 and a resulting
present value of $8.84 for each share of NSC Common Stock subject to the 2003
option grant; the factor and resulting present value have not been adjusted to
reflect (i) that options cannot be exercised during the first year of their
10-year term and (ii) the payment of dividend equivalents on unexercised
options.
The following table sets forth certain information concerning the exercise
of options by each Named Executive Officer during 2003 and the number of
unexercised options held by each as of December 31, 2003:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED OPTIONS/SARS AT FY-END AT FY-END(1)
ON VALUE (#) ($)
EXERCISE REALIZED ---------------------------- ------------------------------
NAME (#) ($) EXERCISABLE* UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
- ---- -------- -------- ------------ ------------- -------------- -------------
D. R. Goode.......... 0 0 2,825,000 310,000 9,094,193 1,264,800
L. I. Prillaman...... 0 0 752,000 80,000 2,535,701 326,400
S.C. Tobias.......... 0 0 774,500 80,000 2,600,314 326,400
H.C. Wolf............ 0 0 797,000 80,000 2,600,314 326,400
J.A. Hixon........... 0 0 335,000 40,000 1,064,426 163,200
</Table>
* Reports, for each Named Executive Officer, the total number of unexercised
options that have passed the first anniversary of their grant date.
- ------------
(1) Equal to the mean of the high and low trading prices on the New York Stock
Exchange-Composite Transactions of the NSC Common Stock on December 31, 2003
($23.705), less the exercise prices of in-the-money options, multiplied by
the number of such options.
(2) Because the market price of the NSC Common Stock on December 31, 2003,
($23.705) was below the exercise price of options granted in 1994 and 1996
through 1999, they are "out-of-the-money" and have no reportable value. The
numbers shown are for the options granted in 1995, 2000, 2001 and 2002,
which are in-the-money.
NSR-18
PERFORMANCE SHARE UNITS ("PSUS")
The following table sets forth certain information concerning the grant in
2003 of PSUs under the NSC Long-Term Incentive Plan to each Named Executive
Officer. These PSU grants entitle a recipient to "earn out" or receive
performance compensation at the end of a three-year performance cycle
(2003-2005) based on the NSC performance during that three-year period. Under
the 2003 award, corporate performance will be measured using three predetermined
and equally weighted standards; that is, each of the following performance areas
will serve as the basis for "earning out" up to one third of the total number of
PSUs granted: (1) three-year average return on average capital invested
("ROACI"), (2) three-year average NSC operating ratio and (3) three-year total
return to NSC stockholders. A more detailed discussion of these performance
criteria can be found in the NSC Joint Committee Report Concerning the 2003
Compensation of Certain Executive Officers under the caption, "Long-Term
Incentive Compensation," beginning on page NSR-25.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
(PERFORMANCE SHARE UNITS)
<Table>
<Caption>
ESTIMATED FUTURE
PAYOUTS UNDER
NUMBER OF NON-STOCK
SHARES, UNITS PRICE-BASED PLANS
OR OTHER PERFORMANCE OR OTHER -------------------
RIGHTS(1) PERIOD UNTIL THRESHOLD TARGET(2) MAXIMUM
NAME (#) MATURATION OR PAYOUT (#) (#) (#)
- ---- -------------- -------------------- --------- --------- -------
D. R. Goode.......... 160,000 01/01/03-12/31/05 0 72,640 160,000
L. I. Prillaman...... 50,000 01/01/03-12/31/05 0 22,700 50,000
S. C. Tobias......... 50,000 01/01/03-12/31/05 0 22,700 50,000
H. C. Wolf........... 50,000 01/01/03-12/31/05 0 22,700 50,000
J. A. Hixon.......... 20,000 01/01/03-12/31/05 0 9,080 20,000
</Table>
- ------------
(1) "Earn outs" may be satisfied in cash or in shares of NSC's Common Stock (or
in some combination of the two).
(2) The Long-Term Incentive Plan does not provide a performance target for an
"earn out" under this feature of the Plan; consequently, this column
represents 45.4% of the maximum potential "earn out," which, in accordance
with applicable rules of the SEC, is the percentage actually "earned out"
under the Plan at the end of the performance cycle which ended on December
31, 2002
RESTRICTED SHARES
The Summary Compensation Table includes the value of Restricted Shares
granted in February 2003 pursuant to the Long-Term Incentive Plan. Under the
terms of the grant, the shares are subject to a three-year restriction period,
during which the executive has voting power but not investment power over the
shares. During the restriction period, the holder of the Restricted Shares
receives dividends as paid on all shares of Common Stock.
NSR-19
PENSION PLANS
The following table sets forth the estimated annual retirement benefits
payable on a qualified joint-and-survivor-annuity basis in specified
remuneration and years of creditable service classifications under NSC's
qualified defined benefit pension plans, as well as nonqualified supplemental
pension plans that provide benefits otherwise denied participants because of
certain Internal Revenue Code limitations on qualified plan benefits. It is
assumed, for purposes of the table, that an individual retired in 2003 at age 65
(normal retirement age) with the maximum allowable Railroad Retirement Act
annuity. The benefits shown are in addition to amounts payable under the
Railroad Retirement Act.
PENSION PLAN TABLE
ESTIMATED ANNUAL RETIREMENT BENEFITS
FOR YEARS OF SERVICE INDICATED
<Table>
<Caption>
YEARS OF CREDITABLE SERVICE
-------------------------------------------------------------------
REMUNERATION 15 20 25 30 35 40
- ------------ -------- -------- -------- -------- ---------- ----------
$ 300,000.................. $ 51,209 $ 71,071 $ 91,037 $111,250 $ 131,647 $ 154,147
400,000................. 73,709 101,071 128,537 156,250 184,147 214,147
500,000................. 96,209 131,071 166,037 201,250 236,647 274,147
600,000................. 118,709 161,071 203,537 246,250 289,147 334,147
700,000................. 141,209 191,071 241,037 291,250 341,647 394,147
800,000................. 163,709 221,071 278,537 336,250 394,147 454,147
900,000................. 186,209 251,071 316,037 381,250 446,647 514,147
1,000,000................. 208,709 281,071 353,537 426,250 499,147 574,147
1,100,000................. 231,209 311,071 391,037 471,250 551,647 634,147
1,200,000................. 253,709 341,071 428,537 516,250 604,147 694,147
1,300,000................. 276,209 371,071 466,037 561,250 656,647 754,147
1,400,000................. 298,709 401,071 503,537 606,250 709,147 814,147
1,500,000................. 321,209 431,071 541,037 651,250 761,647 874,147
1,600,000................. 343,709 461,071 578,537 696,250 814,147 934,147
1,700,000................. 366,209 491,071 616,037 741,250 866,647 994,147
1,800,000................. 388,709 521,071 653,537 786,250 919,147 1,054,147
1,900,000................. 411,209 551,071 691,037 831,250 971,647 1,114,147
2,000,000................. 433,709 581,071 728,537 876,250 1,024,147 1,174,147
2,100,000................. 456,209 611,071 766,037 921,250 1,076,647 1,234,147
2,200,000................. 478,709 641,071 803,537 966,250 1,129,147 1,294,147
2,300,000................. 501,209 671,071 841,037 1,011,250 1,181,647 1,354,147
</Table>
Under the pension plans, covered compensation includes salary and bonus;
each officer can expect to receive an annual retirement benefit equal to average
annual compensation for the five most highly compensated years out of the last
ten years of creditable service multiplied by the number that is equal to 1.5%
times total years of creditable service, but not in excess of 60% of such
average compensation, less an offset for the annual Railroad Retirement Act
annuity.
The Board of Directors approved on September 25, 2001, NSC's entering into
agreements with each of Messrs. Prillaman, Tobias and Wolf, providing enhanced
pension benefits in exchange for each individual's continued employment with NSC
for an additional two years. These agreements were filed as an exhibit to NSC's
Report on Form 10-Q for the period ended September 30, 2001. Because Messrs.
Prillaman, Tobias and Wolf remained employed with NSC through September 30,
2003, each has received an additional three years of creditable service and his
benefit is based on average annual compensation for the three most highly
compensated years, instead of the five most highly compensated years, out of the
last ten years of creditable service.
NSR-20
The respective five-year average compensation and approximate years of
creditable service, as of January 1, 2004, for Mr. Goode and Mr. Hixon were: Mr.
Goode, $1,912,041 and 38 years; Mr. Hixon, $421,663 and 19 years. The respective
three-year average compensation and approximate years of creditable service
(including the additional three years of service pursuant to the enhanced
pension benefit agreements), as of January 1, 2004, for the other Named
Executive Officers were: Mr. Prillaman, $719,899 and 37 years; Mr. Tobias,
$880,410 and 37 years; Mr. Wolf, $880,410 and 34 years.
SECURITY OWNERSHIP OF MANAGEMENT
Rail Investment Company, a wholly-owned subsidiary of NSR, held 90,342
shares, or 100%, of NSR's outstanding Preferred Stock on January 31, 2004 and
NSC held 16,668,997 shares, or 100%, of NSR's outstanding Common Stock on
January 31, 2004.
The following table sets forth as of February 2, 2004, the beneficial
ownership of Norfolk Southern Corporation Common Stock for:
-- each director (including the Chief Executive Officer);
-- each of the other four most highly compensated officers, based on the
sum of salary and incentive pay for 2003, (three of whom are also
directors), from the group of officers designated by the Board of
Directors as executive officers for purposes of Section 16 of the
Securities Exchange Act of 1934 ("Executive Officers"); and
-- all directors and Executive Officers of the Company as a group.
Unless otherwise indicated by footnote to the data in the table, all such
shares are held with sole voting and investment powers, and no director or
Executive Officer beneficially owns any equity securities of NSC or its
subsidiaries other than NSC Common Stock. No one director or Executive Officer
owns as much as 1% of the total outstanding shares of NSC Common Stock. All of
NSR's directors and Executive Officers as a group own 2.1% of the total
outstanding shares of NSC Common Stock. No director or Executive Officer owns
any shares of NSR's Preferred Stock.
<Table>
<Caption>
SHARES OF
NSC COMMON STOCK
BENEFICIALLY OWNED AS OF
NAME FEBRUARY 2, 2004
- ---- ------------------------
David R. Goode.............................................. 3,635,035(1)
L. I. Prillaman............................................. 1,024,748(2)
Stephen C. Tobias........................................... 1,032,068(3)
Henry C. Wolf............................................... 1,005,587(4)
James A. Hixon.............................................. 423,499(5)
12 Directors and Executive Officers as a group
(including the persons named above)....................... 9,049,009(6)
</Table>
- ------------
(1) Includes 12,766 shares credited to Mr. Goode's account in NSC's Thrift and
Investment Plan; 77,429 performance shares and option exercise gain shares
held by NSC under share retention agreements pursuant to NSC's Long-Term
Incentive Plan over which Mr. Goode possesses voting power but has no
investment power until the shares are distributed; 3,015,000 shares subject
to stock options granted pursuant to NSC's Long-Term Incentive Plan with
respect to which Mr. Goode has the right to acquire beneficial ownership
within 60 days; 192,000 restricted shares awarded to Mr. Goode pursuant to
NSC's Long-Term Incentive Plan over which Mr. Goode possesses voting power
but has no investment power until the restriction period lapses; and 942
shares over which Mr. Goode shares voting power and investment power.
(2) Includes 26,172 shares credited to Mr. Prillaman's account in NSC's Thrift
and Investment Plan; 31,124 performance shares and option exercise gain
shares held by NSC under share retention agreements pursuant to NSC's
Long-Term Incentive Plan over which Mr. Prillaman possesses voting power but
has no investment power until the shares are distributed; 817,000 shares
subject to stock options granted pursuant to NSC's Long-Term Incentive Plan
with respect to which Mr. Prillaman has the right to acquire beneficial
(footnotes on next page)
NSR-21
ownership within 60 days; and 60,000 restricted shares awarded to Mr.
Prillaman pursuant to NSC's Long-Term Incentive Plan over which Mr.
Prillaman possesses voting power but has no investment power until the
restriction period lapses.
(3) Includes 16,571 shares credited to Mr. Tobias' account in NSC's Thrift and
Investment Plan; 30,271 performance shares and option exercise gain shares
held by NSC under share retention agreements pursuant to NSC's Long-Term
Incentive Plan over which Mr. Tobias possesses voting power but has no
investment power until the shares are distributed; 839,500 shares subject to
stock options granted pursuant to NSC's Long-Term Incentive Plan with
respect to which Mr. Tobias has the right to acquire beneficial ownership
within 60 days; 60,000 restricted shares awarded to Mr. Tobias pursuant to
NSC's Long-Term Incentive Plan over which Mr. Tobias possesses voting power
but has no investment power until the restriction period lapses; and 10,326
shares over which Mr. Tobias shares voting and investment power.
(4) Includes 12,505 shares credited to Mr. Wolf's account in NSC's Thrift and
Investment Plan; 21,812 performance shares and option exercise gain shares
held by NSC under share retention agreements pursuant to NSC's Long-Term
Incentive Plan over which Mr. Wolf possesses voting power but has no
investment power until the shares are distributed; 839,500 shares subject to
stock options granted pursuant to NSC's Long-Term Incentive Plan with
respect to which Mr. Wolf has the right to acquire beneficial ownership
within 60 days; and 60,000 restricted shares awarded to Mr. Wolf pursuant to
NSC's Long-Term Incentive Plan over which Mr. Wolf possesses voting power
but has no investment power until the restriction period lapses.
(5) Includes 6,354 shares credited to Mr. Hixon's account in NSC's Thrift and
Investment Plan; 9,668 performance shares and option exercise gain shares
held by NSC under share retention agreements pursuant to NSC's Long-Term
Incentive Plan over which Mr. Hixon possesses voting power but has no
investment power until the shares are distributed; 360,000 shares subject to
stock options granted pursuant to NSC's Long-Term Incentive Plan with
respect to which Mr. Hixon has the right to acquire beneficial ownership
within 60 days; and 21,000 restricted shares awarded to Mr. Hixon pursuant
to NSC's Long-Term Incentive Plan over which Mr. Hixon possesses voting
power but has no investment power until the restriction period lapses.
(6) Includes 110,366 shares credited to Executive Officers' individual accounts
under NSC's Thrift and Investment Plan. Also includes: 206,738 performance
shares and option exercise gain shares held by NSC for such officers under
share retention agreements pursuant to NSC's Long-Term Incentive Plan over
which the officer possesses voting power but has no investment power until
the shares are distributed; 7,530,546 shares subject to stock options
granted to Executive Officers pursuant to NSC's Long-Term Incentive Plan
with respect to which the optionee has the right to acquire beneficial
ownership within 60 days; 512,100 restricted shares awarded to Executive
Officers pursuant to NSC's Long-Term Incentive Plan over which they possess
voting power but no investment power until the restriction period lapses;
and 11,418 shares over which Executive Officers share voting and investment
power. Also includes 1,006 shares in which Executive Officers disclaim
beneficial ownership.
NSR-22
NSC JOINT COMMITTEE REPORT CONCERNING
THE 2003 COMPENSATION OF CERTAIN EXECUTIVE OFFICERS
This Report describes NSC's Executive Officer compensation philosophy, the
components of its compensation program and the manner in which 2003 compensation
determinations were made for NSC's Chairman, President and Chief Executive
Officer, David R. Goode, and for the four other officers (collectively,
including Mr. Goode, referred to in this report as the "Named Executive
Officers") whose 2003 compensation is reported in the Summary Compensation Table
beginning on page NSR-17 of this Appendix.
The Board's Compensation and Nominating Committee ("C&N Committee") and its
Performance-Based Compensation Committee ("PBC Committee") were composed
entirely of directors who were not also officers of NSC and met, respectively,
six times and three times during 2003. Among other things, the C&N Committee was
responsible in 2003 for recommending to the Board the salaries of Executive
Officers and administering NSC's annual cash incentive plans (the Executive
Management Incentive Plan and the Management Incentive Plan). The PBC Committee
was responsible for administering the Long-Term Incentive Plan, as amended and
last approved by stockholders at their May 2001 Annual Meeting, which authorizes
awards of stock options and performance share units and certain other
equity-based incentive awards, and the Restricted Stock Unit Plan. Effective
January 27, 2004, the Board reconstituted the Compensation and Nominating
Committee as the Compensation Committee.
BASE SALARY: While the Board believes that a substantial portion of each
Executive Officer's total compensation should be "performance-based," both it
and the C&N Committee seek to assure that the base salaries of the Executive
Officers are competitive with those earned by individuals in comparable
positions.
Specifically, the C&N Committee compared Mr. Goode's base salary with
salaries paid to chief executive officers of other holding companies of Class I
railroads (the same companies comprising the S&P Railroad Index included in the
Performance Graph) and of other U.S. corporations of comparable size. The base
salaries of the other Named Executive Officers--as well as all other Executive
Officers of NSC--were evaluated, principally by Mr. Goode, relative to survey
data of base salaries for comparable positions at a large number of U.S.
corporations of comparable size, including but not limited to those included in
the S&P 500 Index and S&P 500 Railroad Index; both of these indices are included
in the Performance Graph. These data were compiled by NSC's Human Resources
Department and by an outside compensation consultant. The Committee's general
intention is to set the base salaries of the Executive Officers around the 50th
percentile of their peers in the respective groups with which they are compared.
Mr. Goode discussed with the Committee the specific contributions and
performance of each of the Executive Officers, including each of the other Named
Executive Officers. Based on such evaluations, comparative salary data and each
such Executive Officer's performance in light of the length of service in his
current position, Mr. Goode made base salary recommendations which were
submitted for Committee and Board approval.
Mr. Goode made no recommendation concerning, nor does he play any role in
determining, his base salary (or other compensation), which was set by the
independent members of the Board at a session without Mr. Goode present. The
independent members of the Board determined Mr. Goode's salary based on their
assessment of NSC's performance, including its total operating revenues and net
income, and market considerations, and did not base its determination on the
application of any specific formula. As noted, the C&N Committee customarily
seeks to set the NSC Chairman, President and CEO's base salary between the 25th
and 50th percentile of the base salaries paid to CEOs of other U.S. corporations
of comparable size and competitively (within the mid-range of compensation
practice) with those of the chairmen of the other holding companies of Class I
railroads. Mr. Goode's base salary in 2003 remained between the 25th and the
50th percentile.
For 2003, Mr. Goode did not receive a salary increase. This decision was
made considering his salary increase in August 2002, which maintained his base
salary within the targeted range, and his annual and long-
NSR-23
term incentive compensation. The base salaries of each of the other Named
Executive Officers remained unchanged in 2003.
ANNUAL INCENTIVE COMPENSATION: NSC provides annual incentive compensation
through the Executive Management Incentive Plan (EMIP) which is designed and
administered to ensure that a significant portion of each Executive Officer's
total annual cash compensation is based on NSC's annual financial performance.
Awards to Executive Officers including Named Executive Officers, and to
participants in NSC's Management Incentive Plan (MIP) are paid, if at all, based
on NSC's performance relative to two pre-determined criteria: operating ratio
for the year and pre-tax net income; the performance standards relative to these
two criteria are established by the C&N Committee not later than the end of the
first month of each incentive year.
It is the C&N Committee's philosophy that, to the extent NSC achieves EMIP
goals, the total of each Executive Officer's base salary and EMIP award should
become increasingly competitive with the total annual cash compensation paid by
comparable organizations. In years in which those goals are not realized, the
Executive Officers will receive less or no incentive pay.
Specifically, incentive pay opportunities for Mr. Goode were determined by
the C&N Committee by comparing Mr. Goode's total annual cash compensation with
that paid to the chief executive officers of all other holding companies of
Class I railroads (the same companies comprising the S&P Railroad Index included
in the Stock Performance Graph) and of other U.S. corporations of comparable
size. Incentive pay opportunities for the other Executive Officers are
determined annually by the C&N Committee based on its review of the annual cash
compensation of comparable positions at companies of comparable size, including
but not limited to those identified in the Stock Performance Graph.
Using those criteria, in November of 2002 the C&N Committee set Mr. Goode's
target 2003 incentive opportunity at 200% of his 2003 base salary, Mr.
Prillaman's, Mr. Tobias' and Mr. Wolf's at 125% of their 2003 base salary and
Mr. Hixon's at 100% of his 2003 base salary. Actual payments, if any, are based
on the extent to which established performance standards are achieved.
For 2003, Mr. Goode and all other Executive Officers earned EMIP awards and
each of the other officers and key employees earned EMIP or MIP awards, as
applicable, equal in the case of each such individual to 83.6% of that
individual's target incentive opportunity.
As a result, total 2003 cash compensation--2003 base salary and 2003 EMIP
awards paid in 2004--earned by Mr. Goode was positioned at approximately the
80th percentile.
LONG-TERM INCENTIVE COMPENSATION: The Board and the PBC Committee believe
that a substantial component of each Executive Officer's total direct
compensation should be based on and reflect NSC's efficient use of assets, its
profitability and the total returns (stock price appreciation and dividends) to
its stockholders. This objective is supported through the making of annual
grants of stock options, performance share units, and restricted shares under
the Long-Term Incentive Plan (LTIP) and restricted stock units under the
Restricted Stock Unit Plan (RSUP) to each of NSC's Executive Officers, including
each of the Named Executive Officers.
These LTIP and RSUP arrangements are intended to ensure that the
longer-term financial interests of the Executive Officers are directly aligned
with those of NSC's stockholders. Specifically, LTIP is intended to provide
Executive Officers with the opportunity to acquire a meaningful beneficial stock
ownership in NSC and RSUP is intended to reflect the total returns to
stockholders without providing actual stock ownership. The Board adopted RSUP in
January 2003 to provide for the grant of restricted stock units whose value is
measured by the fair market value of NSC's common stock and which are payable in
cash upon satisfaction of applicable restrictions.
In determining LTIP and RSUP awards, the size of prior grants was analyzed
within a framework of current total direct compensation predicated on a review
of both the long-term awards and the total compensation (base salary, short- and
long-term awards) of comparable positions in U.S. companies of comparable size.
The mix of long-term awards varies from year to year to reflect the relative
expected value of each type of award and certain other considerations. For 2003,
the PBC Committee changed the mix of such
NSR-24
awards to include restricted shares and restricted stock units, along with
options and performance share units, while striving to maintain a total value
for such awards comparable to the long-term awards granted in 2002. The number
of stock options, performance share units, restricted shares and restricted
stock units granted in 2003 was determined so as to place the total compensation
of Mr. Goode and the Executive Officers, when corporate performance warranted,
around the 75th percentile of total direct compensation for their respective
peer groups.
At its January 2003 meeting, the PBC Committee granted stock options under
LTIP to each of the Executive Officers, including each of the Named Executive
Officers, and to other officers and key employees at an exercise price equal to
the fair market value of the shares on the date of grant. These options are
exercisable during a ten-year period following the date of grant, after a
one-year vesting period has elapsed.
For all stock options granted in 2003 to the Executive Officers, for the
first five (5) years following the date stock options are granted, NSC pays in
cash to each Executive Officer dividend equivalents on unexercised options equal
to the dividend paid on NSC's Common Stock.
At the same January 2003 meeting, the PBC Committee granted performance
share units under LTIP which provide the Executive Officers, including each of
the Named Executive Officers and other recipients, the opportunity to earn
awards (that will be paid either in cash or in shares of NSC's Common Stock, or
in some combination thereof) during the first quarter of 2006. The number of
performance share units actually payable to recipients is based on criteria
specified in LTIP, last approved by stockholders at their May 2001 Annual
Meeting--specifically, NSC's three-year (i.e., 2003-2005) average Return on
Average Capital Invested, three-year average Operating Ratio and three-year
Total Stockholder Return, evaluated relative to performance measures established
by the PBC Committee and set out in the schedules below. One-third of the
performance share units granted in 2003 are available to be earned based on each
of the three performance criteria.
NSR-25
<Table>
<Caption>
2003-2005 CYCLE 2003-2005 CYCLE
TOTAL STOCKHOLDER RETURN RETURN ON AVERAGE CAPITAL
("TSR") VS. S&P 500 INVESTED ("ROACI")
- ---------------------------------------------------- -------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
PERFORMANCE PERFORMANCE
THREE-YEAR AVERAGE TSR SHARE UNITS THREE-YEAR AVERAGE SHARE UNITS
VS. S&P 500 EARNED OUT ROACI EARNED OUT
- -------------------------------- ------------- ----------------------------- -------------
90th percentile and above....... 100% 17 and above %............... 100%
80th............................ 90% 16%.......................... 90%
70th............................ 85% 15%.......................... 80%
60th............................ 80% 14%.......................... 70%
50th............................ 75% 13%.......................... 60%
40th............................ 50% 12%.......................... 50%
30th............................ 30% 11%.......................... 40%
25th and below.................. 0% 10%.......................... 30%
9%........................... 20%
8%........................... 10%
Below 8%..................... 0%
</Table>
<Table>
<Caption>
2003-2005 CYCLE
OPERATING RATIO ("OpR")
- ---------------------------------------
PERCENTAGE OF
PERFORMANCE
THREE-YEAR SHARE UNITS
NSC AVERAGE OPR EARNED OUT
- ------------------- -------------
75% or below..... 100%
80%.............. 75%
85%.............. 50%
90%.............. 25%
Above 90%........ 0%
</Table>
Also at the January 2003 meeting, the PBC Committee granted restricted
shares under LTIP to the Executive Officers, including each of the Named
Executive Officers, and other recipients as designated by the Committee. The
restricted shares are subject to a three-year restriction period, during which
the holder has voting power but not investment power over the shares and
receives dividends on the shares as declared on NSC's Common Stock.
At the January 2003 meeting, the PBC Committee granted restricted stock
units under RSUP to Mr. Goode and each of the other Executive Officers. The
restricted stock unit awards were subject to a three-year restriction period,
during which NSC pays in cash to each Executive Officer dividend equivalents on
the restricted stock units equal to the dividend paid on NSC's Common Stock.
For 2003, Mr. Goode was granted options (including 5,095 incentive stock
options that may receive capital gains treatment) on 310,000 shares of common
stock, 96,000 restricted shares, 64,000 restricted stock units and the
opportunity to earn up to 160,000 performance shares; the other four Named
Executive Officers as a group were awarded options (including in the case of
each such officer, 5,095 incentive stock options that may receive capital gains
treatment) on a total of 280,000 shares of common stock, 102,000 restricted
shares, 68,000 restricted stock units and the opportunity to earn up to 170,000
performance shares.
In summary, the C&N Committee and the PBC Committee believe that the
compensation program for Executive Officers, including the Named Executive
Officers, is designed to offer opportunities competitive with those of similar
positions at comparable American corporations. More importantly, these
Committees believe each Executive Officer's compensation has been appropriately
structured and administered so that a
NSR-26
substantial component of total compensation is dependent upon, and directly
related to, NSC's efficient use of assets, its profitability and the total
returns to its stockholders.
Section 162(m) of the Internal Revenue Code limits to $1 million the
corporate federal income tax deduction for certain "non-performance based"
compensation paid in a year to any of NSC's Executive Officers. Each Committee
has carefully considered NSC's executive compensation program in light of the
applicable tax rules. Accordingly, NSC amended the Long-Term Incentive Plan in
1995 with stockholder approval to permit the grant of stock options that meet
the requirements of Section 162(m), and stockholders last approved the Plan in
2001. However, each Committee believes that tax-deductibility is but one factor
to be considered in fashioning an appropriate compensation package for
executives. As a result, each Committee reserves and will exercise its
discretion in this area so as to serve the best interests of NSC and its
stockholders.
<Table>
NSC Compensation and NSC Performance-Based
Nominating Committee Compensation Committee
Gene R. Carter, Chair Gene R. Carter, Chair
Landon Hilliard, Member Burton M. Joyce, Member*
Burton M. Joyce, Member* Jane Margaret O'Brien, Member
Jane Margaret O'Brien, Member Harold W. Pote, Member
Harold W. Pote, Member
</Table>
- ------------
* Mr. Joyce became a member of each committee effective January 26, 2004.
PERFORMANCE GRAPH
The performance graph comparing the yearly percentage change in the
cumulative total stockholder return on NSR's common stock with the cumulative
total return of the S&P Composite 500 Stock Index and a published industry index
has been omitted because NSR's common stock is owned entirely by NSC and is not
publicly traded.
NSR-27
DESCRIPTION OF THE NEW NSR NOTES
The following is a summary of the terms of the New NSR Notes. For a
description of the New CSXT Notes, see "Description of the New CSXT Notes" in
the CSXT Appendix attached hereto. The New NSR Notes will be issued under the
New NSR Indenture to be entered into among PRR Newco, as initial issuer, NSR, as
guarantor, and The Bank of New York, as trustee. The terms of the New NSR Notes
include those terms stated in the New NSR Indenture and those terms made part of
the New NSR Indenture by reference to the TIA. The New NSR Notes issued by PRR
Newco will be fully and unconditionally guaranteed by NSR. In connection with
the consummation of the Conrail Spin Off Transactions, PRR Newco will be merged
with and into NSR, who will thereby assume the obligations of PRR Newco with
respect to the New NSR Notes and will become the primary obligor of the New NSR
Notes, and the guarantee will thereafter automatically terminate. As hereafter
used, the term "NSR Obligor" means PRR Newco, until such time as PRR Newco is
merged with and into NSR, and thereafter shall mean NSR or any successor of NSR
permitted pursuant to the terms of the New NSR Notes and the New NSR Indenture.
This section of this NSR Appendix is only a summary of the material
provisions of the New NSR Indenture. This section does not purport to be
complete and does not restate the New NSR Indenture in its entirety. Copies of
each of the base indenture and the first supplemental indenture, which together
constitute the New NSR Indenture, have been filed with the SEC as exhibits to
the NSR registration statement of which this NSR Appendix is a part. We urge you
to read the New NSR Indenture because the New NSR Indenture and not this
description defines your rights as holders of the New NSR Notes. You may obtain
copies of the New NSR Indenture from NSR. See "Where You Can Find More
Information."
BASIC TERMS OF THE NEW NSR NOTES
THE NEW NSR 9 3/4% NOTES
The economic terms of the New NSR 9 3/4% Notes are substantially identical
to the economic terms of the current Conrail 9 3/4% Debentures. Therefore,
holders of outstanding Conrail Debentures who participate in this exchange offer
and consent solicitation, to the extent they receive New NSR 9 3/4% Notes in
exchange for their current Conrail 9 3/4% Debentures, will receive the same
amount in the aggregate of interest payments that they would have received had
they not participated in this exchange offer and consent solicitation with
respect to the New NSR Notes. Specifically, the New NSR 9 3/4% Notes:
-- will have a maximum aggregate principal amount of $319 million,
subject to the treatment of fractional interests (58% of the $550
million aggregate principal amount of the Conrail 9 3/4% Debentures);
-- will mature on June 15, 2020;
-- will be dated as of the Closing Date;
-- will accrue interest at 9 3/4% per year, payable semi-annually in
arrears on each of June 15 and December 15 of each year, beginning
December 15, 2004. Except as set forth below, the NSR Obligor will
make interest payments to the holders of record on the immediately
preceding June 1 and December 1, respectively. The initial interest
payment on December 15, 2004 will include interest accrued from the
Closing Date; and
-- will be senior unsecured obligations of the NSR Obligor.
THE NEW NSR 7 7/8% NOTES:
The economic terms of the New NSR 7 7/8% Notes are substantially identical
to the economic terms of the Conrail 7 7/8% Debentures. Therefore, holders of
outstanding Conrail Debentures who participate in this exchange offer and
consent solicitation, to the extent they receive New NSR 7 7/8% Notes in
exchange for their current Conrail 9 3/4% Debentures, will receive the same
amount in the aggregate of interest payments that they
NSR-28
would have received had they not participated in this exchange offer and consent
solicitation with respect to the New NSR Notes. Specifically, the New NSR 7 7/8%
Notes:
-- will have a maximum aggregate principal amount of $145 million,
subject to the treatment of fractional interests (58% of the $250
million aggregate principal amount of the Conrail 7 7/8% Debentures);
-- will mature on May 15, 2043;
-- will be dated as of the Closing Date;
-- will accrue interest at 7 7/8% per year, payable semi-annually in
arrears on each of May 15 and November 15 of each year, beginning
November 15, 2004. Except as set forth below, the NSR Obligor will
make interest payments to the holders of record on the immediately
preceding May 1 and November 1, respectively. The initial interest
payment on November 15, 2004 will include interest accrued from the
Closing Date; and
-- will be senior unsecured obligations of the NSR Obligor.
The NSR Obligor will pay interest on the New NSR Notes semi-annually in
arrears on the interest payment dates. Interest on the New NSR Notes will be
computed on the basis of a 360-day year of twelve 30-day months. If any interest
payment date or a maturity date falls on a day that is not a business day, the
required payment shall be made on the next business day as if it were made the
date such payment was due, and no interest shall accrue on the amount so payable
for the period from and after such interest payment date or such maturity date,
as the case may be, to such business day. The principal of and interest on the
New NSR Notes will be payable at the office or agency of the trustee, acting as
paying agent, maintained for those purposes. However, at the NSR Obligor's
option, it may pay interest by check mailed to the address of the registered
holders as such address appears in the security register maintained by the
trustee, who will initially act as the paying agent and registrar for the New
NSR Notes, or by transfer to an account maintained by the payee with a bank
located in the United States.
The New NSR Notes will initially be issued in global form. See "Description
of This Exchange Offer and Consent Solicitation--Book-Entry Transfer." The NSR
Obligor will not charge a service fee for any registration of transfer or
exchange of New NSR Notes, but payment of a sum sufficient to cover any transfer
tax or other similar governmental charge and any other expenses (including fees
and expenses of the trustee) that may be payable in connection therewith may be
required.
For more information on payment and transfer procedures for the New NSR
Notes, see "--Book-Entry Procedures" and "--Same-Day Settlement and Payment."
GUARANTEES
The obligations of PRR Newco under the New NSR Notes will be fully and
unconditionally guaranteed on a senior, unsecured basis by NSR. Immediately
following the consummation of this exchange offer and consent solicitation and
in connection with the consummation of the Conrail Spin Off Transactions, PRR
Newco will be merged with and into NSR and the obligations of PRR Newco with
respect to the New NSR Notes will be assumed by, and become the primary
obligations of, NSR, and the guarantee will thereafter automatically terminate.
RANKING
The indebtedness evidenced by the New NSR Notes ranks equally with all
existing and future senior unsecured indebtedness, if any, of PRR Newco, and,
while in effect, the NSR guarantee ranks equally with all then existing and
future senior unsecured indebtedness, if any, of NSR. In addition, following the
assumption by NSR of the New NSR Notes, the New NSR Notes will rank equally with
all then existing and future senior unsecured indebtedness, if any, of NSR.
NSR-29
As of March 31, 2004, NSR would have had approximately $1,696 million of
total indebtedness outstanding if holders of 100% of the Conrail Debentures had
validly tendered and not withdrawn their Conrail Debentures in connection with
this exchange offer and consent solicitation and the Conrail Spin Off
Transactions were consummated as of that date. Following the assumption by NSR
of PRR Newco's obligations under the New NSR Notes, the New NSR Notes will be
subordinated to any secured indebtedness of NSR, to the extent of the assets
securing that indebtedness, and structurally subordinated to all existing and
future obligations of subsidiaries of NSR, including claims with respect to
trade payables. As of March 31, 2004, NSR had approximately $850 million of
secured indebtedness on a consolidated basis which would rank senior to the New
NSR Notes. As of March 31, 2004, subsidiaries of NSR had no outstanding
indebtedness. In addition, as of March 31, 2004 NSR had $765 million of
intercompany liabilities due to NSC which would rank equally with or be junior
to the New NSR Notes.
The New NSR Notes rank senior to all subordinated indebtedness of PRR
Newco, and following the assumption of the obligations of PRR Newco with respect
thereto by NSR, the New NSR Notes will rank senior to all subordinated
indebtedness of NSR then outstanding, including $8 million aggregate principal
amount of guarantees of NSR outstanding as of March 31, 2004. If the NSR Obligor
defaults in connection with any series of the New NSR Notes, the holders of such
series are entitled to be paid in full before any of the NSR Obligor's
subordinated debt.
FURTHER ISSUES
The NSR Obligor may, without the consent of the holders of the New NSR
Notes, create and issue additional notes having the same ranking and the same
interest rate, maturity and other terms as the New NSR Notes. Any such
additional notes would be consolidated with and form a single series with the
New NSR Notes under the New NSR Indenture.
CERTAIN COVENANTS
PRR Newco and NSR have agreed to some restrictions on their activities for
the benefit of holders of debt securities issued under the New NSR Indenture,
including among other things, the covenants set forth below. The restrictive
covenants summarized below will apply, unless the covenants are waived or
amended, so long as any of the New NSR Notes are outstanding. Certain
capitalized terms used in describing the covenants will be defined within the
section describing the applicable covenant.
LIMITATIONS ON LIENS ON STOCK OR INDEBTEDNESS OF PRINCIPAL SUBSIDIARIES
For so long as any debt securities issued under the New NSR Indenture,
including the New NSR Notes, are outstanding, other than in connection with the
Conrail Spin Off Transactions (that, for purposes of this subsection, has the
meaning ascribed to such term in the NSR Indenture), neither PRR Newco nor NSR
may, nor will either of them permit any Subsidiary to, create, assume, incur or
suffer to exist any mortgage, pledge, lien, encumbrance, charge or security
interest of any kind (other than a Purchase Money Lien), upon any stock or
indebtedness, whether owned on the effective date of the New NSR Indenture or
thereafter acquired, of any Principal Subsidiary, to secure any Obligation
(other than the debt securities issued under the New NSR Indenture, including
the New NSR Notes) of PRR Newco or NSR, any of their respective Subsidiaries or
any other person, without making effective provision for all of the outstanding
debt securities issued under the New NSR Indenture, including the New NSR Notes,
to be directly secured equally and ratably with the Obligation so secured. This
restriction does not apply to any mortgage, pledge, lien, encumbrance, charge or
security interest on any stock or indebtedness of a corporation existing at the
time such corporation becomes a Subsidiary. This provision does not restrict any
other property of PRR Newco, NSR or their respective Subsidiaries. This
provision does not restrict the sale by PRR Newco, NSR or their respective
Subsidiaries of any stock or indebtedness of any Subsidiary.
NSR-30
The following definitions apply only to the foregoing limitations on liens
on stock or indebtedness of Principal Subsidiaries:
"Obligation" means any indebtedness for money borrowed or indebtedness
evidenced by a bond, note, debenture or other evidence of indebtedness.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Principal Subsidiary" means AGS.
"Purchase Money Lien" means any mortgage, pledge, lien, encumbrance, charge
or security interest of any kind upon any indebtedness of any Principal
Subsidiary acquired after the date any debt securities under the New NSR
Indenture are first issued if such Purchase Money Lien is for the purpose of
financing, and does not exceed, the cost to the NSR Obligor or any Subsidiary of
acquiring the indebtedness of such Principal Subsidiary and such financing is
effected concurrently with, or within 180 days after, the date of such
acquisition.
"Subsidiary" means a Person a majority of the outstanding voting stock of
which is owned, directly or indirectly, by the NSR Obligor or by one or more
other Subsidiaries, or by the NSR Obligor and one or more other Subsidiaries,
but does not include CRR Holdings or its Subsidiaries. For the purposes of this
definition, "voting stock" means stock that ordinarily has voting power for the
election of directors, whether at all times or only so long as no senior class
of stock has such voting power by reason of any contingency.
LIMITATIONS ON FUNDED DEBT
For so long as any debt securities issued under the New NSR Indenture,
including the New NSR Notes, are outstanding, other than in connection with the
Conrail Spin Off Transactions (that, for purposes of this subsection, has the
meaning ascribed to such term in the NSR, Indenture), neither PRR Newco nor NSR
may, nor will either of them permit any Restricted Subsidiary to, incur, issue,
guarantee or create any Funded Debt (as defined hereafter) unless, after giving
effect thereto, the sum of the aggregate amount of all outstanding Funded Debt
of the NSR Obligor and the Restricted Subsidiaries would not exceed an amount
equal to 15% of Consolidated Net Tangible Assets (as defined hereafter).
The limitation on Funded Debt will not apply to, and there will be excluded
from Funded Debt in any computation under such restriction, Funded Debt secured
by:
(1) Liens (as defined hereafter) on real or physical property of any
corporation existing at the time such corporation becomes a Subsidiary;
(2) Liens on real or physical property existing at the time of
acquisition thereof incurred within 180 days of the time of acquisition
thereof (including, without limitation, acquisition through merger or
consolidation) by PRR Newco, NSR or any Restricted Subsidiary;
(3) Liens on real or physical property thereafter acquired (or
constructed) by PRR Newco, NSR or any Restricted Subsidiary and created
prior to, at the time of, or within 270 days after such acquisition
(including, without limitation, acquisition through merger or
consolidation) (or the completion of such construction or commencement of
commercial operation of such property, whichever is later) to secure or
provide for the payment of all or any part of the purchase price (or the
construction price) thereof;
(4) Liens in favor of PRR Newco, NSR or any Restricted Subsidiary;
(5) Liens in favor of the United States of America, any State thereof
or the District of Columbia, or any agency, department or other
instrumentality thereof, to secure partial, progress, advance or other
payments pursuant to any contract or provisions of any statute;
NSR-31
(6) Liens incurred or assumed in connection with the issuance of
revenue bonds the interest on which is exempt from Federal Income taxation
pursuant to Section 103(b) of the Internal Revenue Code of 1954, as
amended;
(7) Liens securing the performance of any contract or undertaking not
directly or indirectly in connection with the borrowing of money, the
obtaining of advances or credit or the securing of Funded Debt if made and
continuing in the ordinary course of business;
(8) Liens incurred (no matter when created) in connection with PRR
Newco's, NSR's or a Restricted Subsidiary's engaging in leveraged or
single-investor lease transactions; provided, however, that the instrument
creating or evidencing any borrowings secured by such Lien will provide
that such borrowings are payable solely out of the income and proceeds of
the property subject to such Lien and are not a general obligation of PRR
Newco, NSR or such Restricted Subsidiary as the case may be;
(9) Liens under workers' compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with
bids, tenders, contracts or deposits to secure public or statutory
obligations of PRR Newco, NSR or any Restricted Subsidiary, or deposits of
cash or obligations of the United States of America to secure surety,
repletion and appeal bonds to which PRR Newco, NSR or any Restricted
Subsidiary is a party or in lieu of such bonds, or pledges or deposits for
similar purposes in the ordinary course of business, or Liens imposed by
law, such as laborers' or other employees', carriers', warehousemen's,
mechanics', materialmen's and vendors' Liens and Liens arising out of
judgments or awards against PRR Newco, NSR or any Restricted Subsidiary
with respect to which PRR Newco, NSR or such Restricted Subsidiary at the
time shall be prosecuting an appeal or proceedings for review and with
respect to which it shall have secured a stay of execution pending such
appeal or proceedings for review, or Liens for taxes not yet subject to
penalties for nonpayment or the amount or validity of which is being in
good faith contested by appropriate proceedings by PRR Newco, NSR or any
Restricted Subsidiary, as the case may be, or minor survey exceptions,
minor encumbrances, easement or reservations of, or rights of others for,
rights of way, sewers, electric lines, telegraph and telephone lines and
other similar purposes, or zoning or other restrictions or Liens as the use
of real properties, which Liens, exceptions, encumbrances easements,
reservations, rights and restrictions do not, in the opinion of the NSR
Obligor, in the aggregate materially detract from the value of said
properties or materially impair their use in the operation of the business
of the NSR Obligor and its Restricted Subsidiaries;
(10) Liens incurred to finance construction, alteration or repair of
any real or physical property and improvements thereto prior to or within
270 days after completion of such construction, alteration or repair;
(11) Liens incurred (no matter when created) in connection with a
Securitization Transaction (as defined hereafter);
(12) Liens on property (or any Receivable arising in connection with
the lease thereof) acquired by the NSR Obligor or a Restricted Subsidiary
through repossession, foreclosure or like proceeding and existing at the
time of the repossession, foreclosure, or like proceeding;
(13) Liens on deposits of the NSR Obligor or a Restricted Subsidiary
with banks (in the aggregate, not exceeding $50 million), in accordance
with customary banking practice, in connection with the provision by the
NSR Obligor or a Restricted Subsidiary of financial accommodations to any
Person in the ordinary course of business; or
(14) any extension, renewal, refunding or replacement of the
foregoing.
The following definitions apply only to the foregoing limitations on Funded
Debt:
"Capital Lease Obligation" means any obligation arising out of any lease of
property which is required to be classified and accounted for by the lessee as a
capitalized lease on a balance sheet of such lessee under generally accepted
accounting principles.
NSR-32
"Consolidated Net Tangible Assets" means, at any date, the total assets
appearing on the most recent consolidated balance sheet of the NSR Obligor and
its Restricted Subsidiaries as at the end of the fiscal quarter of the NSR
Obligor ending not more than 135 days prior to such date, prepared in accordance
with generally accepted accounting principles, less (i) all current liabilities
(due within one year) as shown on such balance sheet, (ii) applicable reserves,
(iii) investments in and advances to Securitization Subsidiaries and
Subsidiaries of Securitization Subsidiaries that are consolidated on the
consolidated balance sheet of the NSR Obligor and its Subsidiaries, and (iv)
Intangible Assets (as defined hereafter) and liabilities relating thereto.
"Funded Debt" means (i) any indebtedness of the NSR Obligor or a Restricted
Subsidiary maturing more than twelve months after the time of computation
thereof, (ii) guarantees by the NSR Obligor or a Restricted Subsidiary of Funded
Debt or of dividends of others (except guarantees in connection with the sale or
discount of accounts receivable, trade acceptances and other paper arising in
the ordinary course of business), (iii) all preferred stock of the NSR Obligor
or such Restricted Subsidiaries, and (iv) all Capital Lease Obligations of the
NSR Obligor or a Restricted Subsidiary.
"Indebtedness" means, at any date, without duplication, (i) all obligations
for borrowed money of the NSR Obligor or a Restricted Subsidiary or any other
indebtedness of a Restricted Subsidiary, evidenced by bonds, debentures, notes
or other similar instruments, and (ii) Funded Debt, except such obligations and
other indebtedness of the NSR Obligor or a Restricted Subsidiary and Funded
Debt, if any, incurred as part of a Securitization Transaction.
"Intangible Assets" means at any date, the value (net of any applicable
reserves) as shown on or reflected in the most recent consolidated balance sheet
of the NSR Obligor and the Restricted Subsidiaries as at the end of the fiscal
quarter of the NSR Obligor ending not more than 135 days prior to such date,
prepared in accordance with generally accepted accounting principles, of: (i)
all trade names, trademarks, licenses, patents, copyrights, service marks,
goodwill and other like intangibles; (ii) organizational and development costs;
(iii) deferred charges (other than prepaid items, such as insurance, taxes,
interest, commissions, rents, deferred interest waiver, compensation and similar
items and tangible assets being amortized); and (iv) unamortized debt discount
and expense, less unamortized premium.
"Liens" means such pledges, mortgages, security interests and other liens,
including purchase money liens, on property of the NSR Obligor or any Restricted
Subsidiary that secure Funded Debt.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Receivables" mean any right of payment from or on behalf of any obligor,
whether constituting an account, chattel paper, instrument, general intangible
or otherwise, arising, either directly or indirectly, from the financing by the
NSR Obligor or any Subsidiary of property or services, monies due thereunder,
security interests in the property and services financed thereby and any and all
other related rights.
"Restricted Subsidiary" means each Subsidiary of the NSR Obligor other than
Securitization Subsidiaries and Subsidiaries of Securitization Subsidiaries.
"Securitization Subsidiary" means a Subsidiary of the NSR Obligor (i) that
is formed for the purpose of effecting one or more Securitization Transactions
and engaging in other activities reasonably related thereto and (ii) as to which
no portion of the Indebtedness or any other obligations of which (a) is
guaranteed by any Restricted Subsidiary, or (b) subjects any property or assets
of any Restricted Subsidiary, directly or indirectly, contingently or otherwise,
to any lien, other than pursuant to representations, warranties and covenants
(including those related to servicing) entered into in the ordinary course of
business in connection with a Securitization Transaction and intercompany notes
and other forms of capital or credit support relating to the transfer or sale of
Receivables or asset-backed securities to such Securitization Subsidiary and
customarily necessary or desirable in connection with such transactions.
"Securitization Transaction" means any transaction or series of
transactions that have been or may be entered into by the NSR Obligor or any of
its Subsidiaries in connection with or reasonably related to a
NSR-33
transaction or series of transactions in which the NSR Obligor or any of its
Subsidiaries may sell, convey or otherwise transfer to (i) a Securitization
Subsidiary or (ii) any other Person, or may grant a security interest in, any
Receivables or asset-backed securities or interest therein (whether such
Receivables or securities are then existing or arising in the future) of the NSR
Obligor or any of its Subsidiaries, and any assets related thereto, including,
without limitation, all security interests in the property or services financed
thereby, the proceeds of such Receivables or asset-backed securities and any
other assets that are sold in respect of which security interests are granted in
connection with securitization transactions involving such assets.
"Subsidiary" means a Person a majority of the outstanding voting stock of
which is owned, directly or indirectly, by the NSR Obligor or by one or more
other Subsidiaries, or by the NSR Obligor and one or more other Subsidiaries,
but does not include CRR Holdings or its Subsidiaries. For the purposes of this
definition, "voting stock" means stock that ordinarily has voting power for the
election of directors, whether at all times or only so long as no senior class
of stock has such voting power by reason of any contingency.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
Other than in connection with the Conrail Spin Off Transactions (that, for
purposes of this subsection, has the meaning ascribed to such term in the NSR
Indenture), the New NSR Indenture will restrict the ability of the NSR Obligor,
and so long as the guarantee is in effect, the ability of the guarantor, to
consolidate with or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person unless:
(1) in the case of a merger or consolidation, or a conveyance,
transfer or lease of substantially all of its assets, the Person formed by
the consolidation or into which the NSR Obligor or the guarantor, as the
case may be, is merged or the Person acquiring the property and assets
substantially as an entirety, as the case may be, shall be an entity
organized and existing under the laws of the United States of America, any
state thereof or the District of Columbia and shall assume substantially
all of the obligations of the NSR Obligor or the guarantor, as the case may
be, under the New NSR Indenture;
(2) immediately after giving effect to any transaction described in
clause (1) of this sentence, no Event of Default, and no event that, after
notice or lapse of time or both, would become an Event of Default, shall
have happened and be continuing; and
(3) the NSR Obligor or the guarantor, as the case may be, shall
deliver an officer's certificate and an opinion of counsel stating that the
merger, consolidation, conveyance, transfer or lease comply with the New
NSR Indenture.
Upon any express assumption of the obligations of the NSR Obligor or the
guarantor, as the case may be, as described above, the NSR Obligor or the
guarantor, as the case may be, shall be released and discharged from all
obligations and covenants under the New NSR Indenture and all New NSR Notes. The
merger of PRR Newco with and into NSR, and the assumption by NSR of the
obligations of PRR Newco under the New NSR Indenture are expressly contemplated
by the New NSR Indenture.
For purposes of the covenant restricting consolidation, merger, conveyance,
lease or transfer, "Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
NO REDEMPTION OR SINKING FUND
There will be no redemption prior to maturity or any sinking fund.
NO CONVERSION OR EXCHANGE
The New NSR Notes will not be convertible into or exchangeable for any
other debt or equity securities of the NSR Obligor.
NSR-34
NO REPAYMENT AT OPTION OF THE HOLDERS
The New NSR Notes will not be repayable at the option of the holders of the
New NSR Notes before their stated maturity.
EVENTS OF DEFAULT
The New NSR Indenture defines an "Event of Default" as any of the following
events with respect to debt securities of any series, including the New NSR
Notes:
(a) failure to pay principal of or any premium on any debt security
of that series when due;
(b) failure to pay any interest on any debt security of that series
when due, continued for 30 days;
(c) failure to perform, or breach of, any other covenant of the NSR
Obligor in the New NSR Indenture (other than a covenant included in the New
NSR Indenture solely for the benefit of a series of debt securities other
than that series), continued for 90 days after written notice as provided
in the New NSR Indenture;
(d) acceleration of debt securities or any other indebtedness for
borrowed money, in an aggregate principal amount exceeding $45 million of
the NSR Obligor or any Significant Subsidiary (within the meaning of the
federal securities laws) under the terms of the instrument or instruments
under which the indebtedness is issued or secured, if the acceleration is
not annulled, or the indebtedness is not discharged, or a sum of money
sufficient to discharge in full the indebtedness is not deposited in trust,
within ten days after written notice as provided in the New NSR Indenture;
(e) certain events of bankruptcy, insolvency or reorganization of the
NSR Obligor;
(f) subject to the termination of the guarantee, failure of the
guarantee to be in full force and effect, or any action taken by the
guarantor to discontinue or to assert the invalidity or unenforceability of
the guarantee, or the failure of the guarantor to comply with any of the
terms or provisions of the guarantee, or the denial by the guarantor that
it has any further liability under the guarantee or the guarantor giving
notice to such effect; or
(g) any other Event of Default provided with respect to debt
securities of that series.
If an Event of Default with respect to any outstanding series of debt
securities, including either series of the New NSR Notes, occurs and is
continuing, either the trustee or the holders of at least 25% in aggregate
principal amount of the outstanding debt securities of that series may declare,
by notice as provided in the New NSR Indenture, the principal amount of all the
outstanding debt securities of that series to be due and payable immediately,
and upon any such declaration such principal amount will become immediately due
and payable. At any time after a declaration of acceleration with respect to
debt securities of any series, including the New NSR Notes, has been made, but
before a judgment or decree for payment of money has been obtained by the
trustee, the holders of a majority in aggregate principal amount of those debt
securities may rescind and annul such acceleration if all payments due (other
than as a result of acceleration) have been made and all Events of Default have
been cured or waived.
The New NSR Indenture provides that the trustee will not be under any
obligation to exercise any of its rights or powers under the New NSR Indenture
at the request or direction of any of the debt security holders, unless such
holders shall have offered to the trustee reasonable security or indemnity
satisfactory to the trustee. Subject to providing for indemnification of the
trustee and compliance with all laws and the terms of the New NSR Indenture or
the debt securities of such series, the holders of a majority in principal
amount of the outstanding debt securities of any series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or exercising any trust or power conferred on the
trustee, in each case, with respect to such series of debt securities, including
as to the New NSR Notes; provided that the trustee may take any other action it
deems proper that is not inconsistent with such direction and provided that such
direction shall not subject the trustee to any personal liability.
NSR-35
The New NSR Indenture requires the NSR Obligor to furnish to the trustee
annually a statement as to the performance by the NSR Obligor of its obligations
under the New NSR Indenture and as to any default in such performance.
SATISFACTION AND DISCHARGE OF INDENTURE
The New NSR Indenture provides generally that the NSR Obligor may terminate
its obligations under the New NSR Indenture with respect to debt securities of
any series (subject to the survival of certain provisions of the New NSR
Indenture as described below) if all the debt securities of such series
previously authenticated and delivered (other than lost, destroyed or stolen
debt securities of such series that have been replaced or paid) and debt
securities for whose payment money has been deposited in trust, or segregated
and held in trust by the NSR Obligor, and thereafter repaid to the NSR Obligor,
or discharged from such trust as provided in the New NSR Indenture, have been
delivered to the trustee for cancellation and the NSR Obligor has paid all sums
payable by it thereunder, or if the NSR Obligor irrevocably deposits with the
trustee (i) sufficient funds to pay the principal, premium, if any, and interest
to stated maturity on the debt securities of such series and/or (ii) such amount
of direct obligations of, or obligations the principal of and interest on which
are fully guaranteed by, the government that issued the currency in which the
debt securities are denominated, and that are not subject to prepayment,
redemption or call, as will, through the payment of principal and interest
thereon in accordance with their terms, be sufficient to pay when due, the
principal of, premium, if any, and interest to stated maturity on, the debt
securities of such series. As a condition to discharge, the NSR Obligor must
deliver to the trustee (A) an opinion of counsel to the effect that the holders
of the debt securities will not recognize gain or loss for federal income tax
purposes solely as a result of such discharge and will be subject to federal
income tax in the same amounts and at the same times as would have been the case
if such discharge had not occurred and (B) an officer's certificate and an
opinion of counsel, each stating that all conditions precedent to discharge with
respect to the debt securities have been complied with. In the event of any such
discharge, holders of debt securities, including the New NSR Notes, must look to
the deposited money for payment.
The New NSR Indenture provides for the survival of certain obligations with
respect to debt securities of any discharged series, including, (i) the NSR
Obligor's obligations to compensate and indemnify the trustee, (ii) the
obligations of the trustee to any authenticating agent and (iii) if money, U.S.
Government Obligations and/or Foreign Government Securities (as defined
hereafter) shall have been deposited with the trustee in connection with such
discharge, the obligations of the trustee under the New NSR Indenture to (1) pay
in accordance with the terms of such New NSR Notes and the New NSR Indenture the
amounts held for payment in trust and (2) subject to the satisfaction of certain
conditions, repay to the NSR Obligor any excess money remaining unclaimed for
two years after having become due and payable held by the trustee (or in certain
instances, any paying agent or the Company, in trust).
MODIFICATION AND WAIVER
The NSR Obligor and the trustee, without the consent of any holders of debt
securities issued under the NSR Indenture including the New NSR Notes, may enter
into one or more indentures supplemental to the New NSR Indenture for any of the
following purposes: (i) to evidence the succession of another corporation to the
NSR Obligor and the assumption by any such successor corporation of the
covenants of the NSR Obligor under the New NSR Notes and the New NSR Indenture;
(ii) to add to the covenants of the NSR Obligor for the benefit of the holders
of all or any series of debt securities issued under the New NSR Indenture or to
surrender any right or power conferred upon the NSR Obligor in the New NSR
Indenture; (iii) to add any additional Events of Default; (iv) to add to or to
change any provisions of the New NSR Indenture to the extent necessary to permit
or facilitate the issuance of debt securities in bearer form, registrable or not
registrable as to principal, and with or without interest coupons; (v) to change
or eliminate any of the provisions of the New NSR Indenture, provided that any
such change or elimination will become effective only when there is no series of
debt securities issued under the New NSR Indenture outstanding that would be
entitled to the benefit of such provision; (vi) to secure any series of debt
securities issued under the New NSR Indenture; (vii) to evidence and provide for
the acceptance of appointment under the New NSR
NSR-36
Indenture of a successor trustee with respect to any series of securities issued
under the New NSR Indenture and, if applicable, to add to or change any of the
provisions of the New NSR Indenture as necessary to provide for or facilitate
the administration of the trusts by more than one trustee; (viii) to cure any
ambiguity, to correct or supplement any provision of the New NSR Indenture that
may be inconsistent with any other provision therein, or to make any other
provisions that do not adversely affect the interests of the holders of any
series of debt securities issued under the New NSR Indenture in any material
respect; or (ix) to establish the form and terms of the debt securities of any
series as permitted under the New NSR Indenture, or to authorize the issuance of
additional debt securities of a series previously authorized or to add to the
conditions, limitations or restrictions on the authorized amount, terms or
purposes of issue, authentication or delivery of the debt securities of any
series, as set forth in the New NSR Indenture, or other conditions, limitations
or restrictions thereafter to be observed.
The NSR Obligor and the trustee, with the consent of the holders of a
majority in aggregate principal amount of the outstanding debt securities issued
under the New NSR Indenture, may enter into one or more indentures supplemental
to the New NSR Indenture for any purpose, subject to some exceptions. No such
supplemental indenture may be entered into without the consent of the holder of
each outstanding debt security affected thereby if the supplemental indenture
would, among other things: (i) change the stated maturity date of the principal
of, or any installment of principal of or interest, if any, on any debt
security, including the New NSR Notes; (ii) reduce the principal amount of, or
premium or interest, if any, on any debt security, including the New NSR Notes;
(iii) change the place or currency of payment of principal of, or premium or
interest, if any, on any debt security, including the New NSR Notes; (iv) impair
the right to institute suit for the enforcement of any payment on or with
respect to any debt security, including the New NSR Notes; or (v) reduce the
percentage in principal amount of outstanding debt securities of any series, if
consent of the holders of such series is required for a supplemental indenture,
or for waiver of compliance with certain provisions of the New NSR Indenture or
for waiver of certain defaults and their consequences.
The holders of a majority in aggregate principal amount of outstanding debt
securities of each series may, on behalf of all holders of debt securities of
that series: (i) waive, insofar as that series is concerned, compliance by the
NSR Obligor with certain restrictive provisions of the New NSR Indenture; and
(ii) waive any past default under the New NSR Indenture with respect to debt
securities of that series except (A) a default in the payment of principal of,
or of premium or interest, if any, on any debt security of such series,
including the New NSR Notes or (B) in respect of a covenant or provision of the
New NSR Indenture that cannot be modified or amended without the consent of the
holder of each outstanding debt security of such series affected.
CONCERNING THE TRUSTEE
The TIA contains limitations on the rights of a trustee, should it become a
creditor of the NSR Obligor, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of those claims, as
security or otherwise. The trustee is, however, permitted to engage in other
transactions with PRR Newco, NSR and/or their respective subsidiaries or
affiliates from time to time, provided that if the trustee acquires any
conflicting interest it must eliminate the conflict upon the occurrence of an
Event of Default under the New NSR Indenture, or else resign.
Each of PRR Newco and NSR and certain of their respective subsidiaries or
affiliates may from time to time maintain lines of credit, and have other
customary banking and commercial relationships, with The Bank of New York and
its affiliates. For example, The Bank of New York serves as exchange agent for
certain NSC equity securities and serves as the trustee for certain NSC debt
securities.
BOOK-ENTRY PROCEDURES
The NSR Obligor will initially issue the New NSR Notes in the form of one
or more global notes, or the "NSR Global Notes," in definitive, fully registered
form without interest coupons. Each beneficial interest in a NSR Global Note is
referred to herein as a "NSR Book-Entry Note." Each NSR Global Note representing
NSR-37
NSR Book-Entry Notes will be deposited with the trustee, as custodian for, and
registered in the name of, a nominee of DTC, as depositary, located in the
Borough of Manhattan, The City of New York.
The NSR Global Notes representing NSR Book-Entry Notes may not be
transferred except as a whole by a nominee of the depositary to the depositary
or to another nominee of the depositary, or by the depositary or the nominee to
a successor of the depositary or a nominee of the successor.
THE DEPOSITARY
The following operations and procedures are solely within the control of
the depositary and are subject to change by the depositary from time to time.
None of the trustee, the NSR Obligor, NSR, as guarantor, or any of their
respective agents take any responsibility for these operations or procedures,
and investors are urged to contact the depositary or the persons who have
accounts with the depositary (referred to herein as "Participants") directly to
discuss these matters.
The depositary has advised the NSR Obligor as follows: the depositary is a
limited purpose trust company organized under the laws of the State of New York,
a "banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The depositary was created to
hold securities of its Participants and to facilitate the clearance and
settlement of securities transactions among its Participants in such securities
through electronic book-entry changes in accounts of its Participants and
certain other organizations, thereby eliminating the need for physical movement
of securities certificates. The depositary's Participants include securities
brokers and dealers, banks, trust companies, clearing corporations, and certain
other organizations, some of which (and/or their representatives) own interests
in the depositary. Indirect access to the depositary's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies
(collectively referred to herein as, the "Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly.
The NSR Obligor has been advised by the depositary that upon the issuance
of NSR Global Notes representing NSR Book-Entry Notes, and the deposit of those
NSR Global Notes with the depositary, the depositary will immediately credit, on
its book-entry registration and transfer system, the respective principal
amounts of the NSR Book-Entry Notes represented by those NSR Global Notes to the
accounts of Participants. Ownership of beneficial interests in NSR Book-Entry
Notes will be limited to Participants or Indirect Participants. Ownership of
beneficial interests in NSR Book-Entry Notes will be shown on, and the transfer
of that ownership will be effected only through, records maintained by the
depositary or its nominee (with respect to interests of Participants) and the
records of Participants (with respect to Indirect Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Those
laws may impair the ability to transfer or pledge NSR Book-Entry Notes.
So long as the depositary, or its nominee, is the registered owner or
holder of a NSR Global Note, the depositary or the nominee, as the case may be,
will be considered the sole legal owner or holder of the New NSR Notes
represented by that NSR Global Note for all purposes under the New NSR Indenture
and the New NSR Notes. Except as set forth below under "--Certificated Notes,"
owners of NSR Book-Entry Notes will not be entitled to receive physical delivery
of Notes in definitive form and will not be considered the holders of those
notes for any purpose under the New NSR Indenture, and no NSR Global Note
representing NSR Book-Entry Notes will be exchangeable, except for another NSR
Global Note of like denomination and tenor to be registered in the name of the
depositary or its nominee. Accordingly, each person owning a NSR Book-Entry Note
must rely on the procedures of the depositary and, if that person is not a
Participant, on the procedures of the Participant through which that person owns
its interest, to exercise any rights of a holder under that NSR Global Note or
the New NSR Indenture. The New NSR Indenture provides that the depositary, as a
holder, may appoint agents and otherwise authorize Participants to give or take
any request, demand, authorization, direction, notice, consent, waiver or other
action that a holder is entitled to give or take
NSR-38
under the New NSR Indenture. The NSR Obligor understands that under existing
industry practices, if the NSR Obligor requests any action of holders or an
owner of a NSR Book-Entry Note desires to give or take any action a holder is
entitled to give or take under the New NSR Indenture, the depositary would
authorize the Participants owning the relevant NSR Book-Entry Notes to give or
take that action, and those Participants would authorize beneficial owners
owning through those Participants to give or take that action or would otherwise
act upon the instructions of beneficial owners owning through them.
The NSR Obligor expects that the depositary or its nominee, upon receipt of
any payment of principal of or interest in respect of a NSR Global Note, will
immediately credit, on its book-entry registration and transfer system, accounts
of Participants with payments in amounts proportionate to their respective
beneficial interests in the principal amount of the applicable NSR Global Note
as shown on the records of the depositary or its nominee. The NSR Obligor also
expects that payments by Participants or Indirect Participants or account
holders, as applicable, to owners of beneficial interests in NSR Book-Entry
Notes held through those Participants or Indirect Participants or account
holders will be governed by standing instructions and customary practices, as is
now the case with securities held for the accounts of customers registered in
"street name," and will be the responsibility of such Participants or Indirect
Participants or account holders, as applicable. None of the NSR Obligor, NSR, as
guarantor, the trustee or any agent of the NSR Obligor, NSR, as guarantor, or
the trustee will have any responsibility or liability for any aspect of the
depositary's records or any Participant's records relating to or payments made
on account of NSR Book-Entry Notes or for maintaining, supervising or reviewing
any of the depositary's records or any Participant's records relating to NSR
Book-Entry Notes, or for any other aspect of the relationship between the
depositary and its Participants or Indirect Participants, or the relationship
between such Participants or Indirect Participants and the owners of beneficial
interests in the NSR Global Notes owning through such Participants or Indirect
Participants.
CERTIFICATED NOTES
Subject to certain conditions, the NSR Global Notes representing NSR
Book-Entry Notes are exchangeable for certificated notes in definitive
registered form, of like tenor and of an equal aggregate principal amount, only
if:
(1) the depositary notifies the NSR Obligor that it is unwilling,
unable or ineligible to continue as depositary for the NSR Global Note and
a successor depositary is not appointed by the NSR Obligor within 90 days;
(2) the NSR Obligor in its sole discretion determines that the NSR
Book-Entry Notes will be exchangeable for certificated notes in definitive
registered form; or
(3) an event of default entitling the holders of the applicable New
NSR Notes to accelerate the maturity thereof has occurred and is
continuing.
Any NSR Global Note representing NSR Book-Entry Notes that is exchangeable
pursuant to the preceding sentence will be exchangeable in whole for
certificated notes in definitive registered form, of like tenor and of an equal
aggregate principal amount, in denominations of U.S. $1,000 and integral
multiples of U.S. $1,000. Upon the exchange of a NSR Global Note for
certificated notes, the NSR Global Note will be canceled by the trustee and the
certificated notes will be registered in the names and in the authorized
denominations as the depositary, pursuant to instructions from its Participants,
any Indirect Participants or otherwise, instruct the trustee. The trustee will
deliver those certificated notes to the persons in whose names those notes are
registered and will recognize those persons as the holders of those notes.
GOVERNING LAW
The New NSR Indenture (including the guarantee) and the New NSR Notes
issued under the New NSR Indenture will be governed by, and construed in
accordance with, the internal laws of the State of New York.
NSR-39
NOTICES
The New NSR Indenture provides that, in all cases where the New NSR
Indenture provides for notice to holders of debt securities of any event,
notices to holders of registered securities will be given by mail to each such
holder affected by the event, at the holder's address as it appears in the
security register.
SAME-DAY SETTLEMENT AND PAYMENT
The New NSR Indenture requires payments of principal of and interest on NSR
Book-Entry Notes will be made to the depositary or its nominee, as the case may
be, as the registered owner of the NSR Global Notes. Those payments to the
depositary or its nominee, as the case may be, will be made in immediately
available funds at the offices of The Bank of New York, as paying agent, in the
Borough of Manhattan, The City of New York. In addition, transfers between
Participants in the depositary will be effected in the ordinary way in
accordance with the depositary's rules and will be settled in same-day funds.
Payments (including principal and interest) and transfers with respect to
the New NSR Notes in certificated form may be executed at the office or agency
maintained for such purpose within the City and State of New York (initially the
office of the paying agent maintained for such purpose) or, with respect to
payment of interest, at the NSR Obligor's option, by check mailed to the holders
thereof at the respective addresses set forth in the register of holders of the
applicable New NSR Notes, provided that all payments (including principal and
interest) on New NSR Notes in certificated form, for which the holders thereof
have given wire transfer instructions, will be required to be made by wire
transfer of immediately available funds to the accounts specified by the holders
thereof. No service charge will be made for any registration of transfer or
exchange, but payment of a sum sufficient to cover any tax or other governmental
charge and any other expenses (including fees and expenses of the trustee) that
may be payable in connection therewith (other than in certain circumstances) may
be required.
Secondary trading in long-term notes and notes of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the NSR
Global Notes are expected to trade in depositary's same-day funds settlement
system until maturity, and secondary market trading activity in the NSR Global
Notes will therefore be required by the depositary to settle in immediately
available funds. Secondary trading in certificated New NSR Notes will also be
required to be settled in immediately available funds. No assurance can be given
as to the effect, if any, of settlement in immediately available funds on
trading activity in the New NSR Notes.
NSR-40
COMPARISON OF THE NEW NSR NOTES
AND THE CONRAIL DEBENTURES
The following comparison of the New NSR Notes and the Conrail Debentures
summarizes the material differences between the New NSR Notes and the Conrail
Debentures. See "Description of the New NSR Notes" for a more complete
discussion of the material terms of the New NSR Indenture and the New NSR Notes.
Because this is a summary, it may not contain all the information that is
important to you. You should therefore read the New NSR Indenture, that has been
filed as an exhibit to the registration statement of which this NSR Appendix is
a part, in its entirety. The Conrail Debentures compared below reflect the
Conrail Debentures as they exist today without taking into account any changes
discussed and described in the prospectus and consent solicitation statement
under "Description of This Exchange Offer and Consent Solicitation--Proposed
Amendments."
COMPARISON OF BASIC TERMS
CHANGES IN OBLIGORS
The Conrail Debentures are and will continue to be the obligation of
Conrail and, upon consummation of the Conrail Spin Off Transactions, will be
governed by the Conrail Indenture as amended by the Conrail Supplemental
Indenture. See "Description of This Exchange Offer and Consent Solicitation--
Proposed Amendments" in the prospectus and consent solicitation statement of
which this NSR Appendix forms a part. The New NSR Notes will initially be the
primary obligation of PRR Newco and will be fully and unconditionally guaranteed
by NSR. In connection with the consummation of the Conrail Spin Off
Transactions, PRR Newco will be merged with and into NSR, who will thereby
assume the obligations of PRR Newco with respect to the New NSR Notes will be
assumed in their entirety by NSR and the guarantee will thereafter automatically
terminate.
NO CHANGES TO INTEREST RATE, MATURITY DATE, INTEREST PAYMENT DATES OR
REGULAR RECORD DATES
The economic terms of each series of the New NSR Notes are substantially
identical to the current economic terms of the parallel series of Conrail
Debentures, other than as to the aggregate principal amount, since each series
of New NSR Notes will only represent approximately 58% of each parallel series
of Conrail Debentures. Except as set forth in the next paragraph, none of the
maturity dates, interest payment dates, regular record dates, interest rates or
any other similar terms of the New NSR Notes will be different from the
respective terms of the Conrail Debentures for which they will be exchanged.
Therefore, holders of outstanding Conrail Debentures who participate in this
exchange offer and consent solicitation, to the extent they receive New NSR
Notes in exchange for their current Conrail Debentures, will receive the same
amount in the aggregate of interest payments that they would have received had
they not participated in this exchange offer and consent solicitation with
respect to the New NSR Notes. For a detailed description of the economic terms
of the New NSR Notes, see "Description of the New NSR Notes--Basic Terms of the
New NSR Notes."
Interest on the New NSR Notes will accrue from the Closing Date. Interest
accrued and unpaid on any Conrail Debentures accepted in this exchange offer and
consent solicitation will be paid by Conrail on each scheduled interest payment
date that occurs prior to the Closing Date. Conrail will also pay all accrued
and unpaid interest on the Conrail Debentures from the interest payment date
immediately preceding the Closing Date through and including the date
immediately prior to the Closing Date. Conrail will make this interest payment
on the Closing Date. In the event the Closing Date occurs on or before an
interest payment date for any series of Conrail Debentures but after the record
date for that interest payment date, holders of Conrail Debentures accepted in
this exchange offer and consent solicitation will be deemed to have waived their
right to receive from Conrail any other amount of interest that would otherwise
be payable after the Closing Date.
Conrail Debentures that are not tendered or are tendered but not accepted
in this exchange offer and consent solicitation will remain outstanding debt
obligations of Conrail. Holders of these unexchanged Conrail Debentures will be
entitled to receive the same amount of interest payments on the same interest
payment dates as currently scheduled for such Conrail Debentures.
NSR-41
NO REDEMPTION OR SINKING FUND
Neither the New NSR Notes nor the Conrail Debentures are subject to
redemption prior to maturity or to any sinking fund.
NO CONVERSION OR EXCHANGE
Neither the New NSR Notes nor the Conrail Debentures are convertible into
or exchangeable for the common stock, preferred stock, depositary shares or
other debt securities of their respective primary obligors.
NO REPAYMENT AT OPTION OF THE HOLDERS
Neither the New NSR Notes nor the Conrail Debentures are repayable at the
option of the holders of such notes before their stated maturity.
COVENANTS
For a description of some of the restrictive covenants contained in the New
NSR Indenture, see "Description of the New NSR Notes--Certain Covenants."
LIMITATION UPON LIENS AND LIMITATION ON FUNDED DEBT
The Conrail Indenture provides that (i) Conrail will not itself, and will
not permit any Subsidiary to, create, incur, issue or assume any notes, bonds,
debentures or other evidences of indebtedness for money borrowed (such notes,
bonds, debentures or other similar evidences of indebtedness for money borrowed
referred to herein as "Debt") secured by any pledge of, or mortgage, lien,
encumbrance and security interest (such pledges, mortgages, liens, encumbrances
and security interests referred to herein as "Liens") on any Principal Property
owned by Conrail or any Subsidiary (as defined herein) and (ii) Conrail will not
itself, and will not permit any Subsidiary to, create, incur, issue or assume
any Debt secured by any Lien on any shares of stock or Debt of any Subsidiary,
without, in any event described in the foregoing clause (i) or (ii), equally and
ratably securing the Conrail Debentures, unless after giving effect thereto the
aggregate principal amount of such secured Debt then outstanding would not
exceed an amount equal to 20% of Consolidated Net Tangible Assets (as defined
herein). This restriction does not apply to, and there will be excluded in
computing secured Debt for purposes of this restriction, Debt secured by certain
permitted Liens, including:
-- Liens existing on May 1, 1990;
-- Liens existing on any property or assets of, or shares of stock or
Debt of, any corporation at the time it becomes a Subsidiary, or
arising thereafter (1) otherwise than in connection with the
borrowing of money arranged thereafter and (2) pursuant to
contractual commitments entered into prior to, and not in
contemplation of, such corporation becoming a Subsidiary;
-- Liens on property or assets (including shares of stock or Debt of a
Subsidiary existing at the time of acquisition thereof) and certain
purchase money or similar liens incurred at the time of acquisition
or within twelve months thereafter;
-- Liens securing Debt owing by a Subsidiary to Conrail or to another
Subsidiary;
-- Liens in connection with government contracts, including the
assignment of moneys due or to become due thereon;
-- materialmen's, carriers', mechanics', workmen's, repairmen's or other
like liens arising in the ordinary course of business that are not
overdue or that are being contested in good faith in appropriate
proceedings;
-- certain deposits or pledges as security for performance of certain
contracts or undertakings not directly or indirectly in connection
with the securing of Debt;
-- certain Liens in connection with legal proceedings; and
-- extensions, substitutions, replacements or renewals of the foregoing.
NSR-42
The "Limitation upon Liens" covenant in the Conrail Indenture described
above differs from the covenants in the New NSR Indenture that are described in
this prospectus and consent solicitation statement under "Description of the New
NSR Notes--Certain Covenants," "--Limitations on Liens on Stock or Indebtedness
of Principal Subsidiaries" and "--Limitations on Funded Debt." The "Limitations
on Liens" covenant in the New NSR Indenture restricts the creation of any liens
on the stock or indebtedness of any Principal Subsidiary without effectively
providing for the equal and ratable (or if applicable, prior) treatment of the
New NSR Notes with the new obligation, except for specified categories of liens;
whereas the equivalent provision of the Conrail Indenture restricts the creation
of any liens on the shares of stock or debt of all Conrail Subsidiaries without
effectively providing for the equal and ratable (or if applicable, prior)
treatment of the Conrail Debentures. In addition, the "Limitations on Liens"
provision of the New NSR Indenture does not restrict any other property of the
NSR Obligor or its respective Subsidiaries, while the Conrail Indenture
restricts the creation of any liens on certain Principal Property of Conrail and
its Subsidiaries. Moreover, the restriction on the creation of liens in the
Conrail Indenture and the requirement to provide for equal and ratable (or if
applicable, prior) treatment does not apply unless the aggregate principal
amount of the new debt obligations incurred and secured exceeds an amount equal
to 20% of Consolidated Net Tangible Assets. By contrast, the New NSR Indenture
contains a restriction limiting the ability of the NSR Obligor or any Restricted
Subsidiary of the NSR Obligor to incur, issue, guarantee or create any Funded
Debt unless, after giving effect thereto, the sum of the aggregate amount of all
outstanding Funded Debt of the NSR Obligor and its Restricted Subsidiaries would
not exceed an amount equal to 15% of Consolidated Net Tangible Assets. See
"Description of the New NSR Notes--Limitation on Liens on Stock or Indebtedness
of Principal Subsidiaries" and "--Limitations on Funded Debt."
The following definitions apply only to the foregoing description of the
limitation upon liens contained in the Conrail Indenture:
"Consolidated Net Tangible Assets" means the total amount of assets (less
applicable reserves and other properly deductible items) after deducting
therefrom (i) all current liabilities (excluding any thereof which are by their
terms extendible or renewable at the option of the obligor thereon to a time
more than twelve months after the time as of which the amount thereof is being
computed), (ii) all good will, trade names, trademarks, patents, unamortized
debt discount and expense and other like intangibles and (iii) appropriate
adjustments on account of minority interests of other persons holding stock in
Conrail's Subsidiaries, all as set forth on the most recent balance sheet of
Conrail and its consolidated Subsidiaries and computed in accordance with
generally accepted accounting principles.
"Principal Property" means any line or segment of track, together with
signaling or communication systems appurtenant thereto, owned by Conrail or any
Subsidiary over which at least ten million gross tons of revenue freight moved
in the calendar year next preceding the date on which the relevant determination
is made; all locomotives and freight cars then owned by Conrail or any
Subsidiary and all freight yards and repair facilities then owned by Conrail or
any Subsidiary.
"Subsidiary" means any corporation of which, at the time of determination,
Conrail, directly and/or indirectly through one or more Subsidiaries, owns more
than 50% of the shares of voting stock.
Each of the New NSR Indenture and the Conrail Indenture explicitly permit
the waiver of the "Limitation upon Liens" covenant, in similar circumstances.
The primary difference between the two is that the waiver provision under the
New NSR Indenture requires the waiver by the holders of at least a majority in
aggregate principal amount of the debt securities on a series-by-series basis,
whereas the Conrail Indenture requires the waiver by the holders of at least a
majority in aggregate principal amount of all Conrail Debentures. The NSR
Indenture also explicitly permits the waiver of the Funded Debt covenant.
LIMITATION UPON LLC INDEBTEDNESS
The Conrail Indenture contains a provision prohibiting Conrail from
permitting either NYC or PRR, or any successor of either of them from incurring,
creating, issuing, assuming, guaranteeing or otherwise becoming liable for or
with respect to, or becoming responsible for, the payment of, contingently or
otherwise, any Indebtedness. In connection with the Conrail Spin Off
Transactions, NYC and PRR will be merged with
NSR-43
and into NYC Newco and PRR Newco, respectively, and NYC Newco and PRR Newco will
be merged with and into CSXT and NSR, respectively.
Because Conrail would no longer own or control NYC and PRR upon
consummation of the Conrail Spin Off Transactions, the prohibition on NYC and
PRR indebtedness contained in the Conrail Indenture would cease to be in effect
at the time of such consummation. Although the New NSR Indenture does not
contain a "Limitation upon LLC Indebtedness" covenant, the Limitations on Funded
Debt covenant of the New NSR Indenture does limit the ability of NSR and its
Restricted Subsidiaries to incur certain types of indebtedness. For a detailed
description of the restrictions imposed by the Limitations on Funded Debt
covenant see "Description of the New NSR Notes--Limitations on Funded Debt."
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
Under the Conrail Indenture, upon any consolidation of Conrail with, or
merger of Conrail into, any other corporation, or upon any conveyance, lease or
transfer of Conrail's property as an entirety or substantially as an entirety to
any other corporation, if any Principal Property of Conrail or of any
Subsidiary, or any shares of stock or Debt of any Subsidiary would thereupon
become subject to any Lien, then unless such Lien could be created without
triggering the requirements described in "Limitation upon Liens" above to
equally and ratably secure the Conrail Debentures, Conrail, prior to the
consolidation, merger, conveyance, lease or transfer, must secure the
outstanding Conrail Debentures equally and ratably with the Debt secured by such
Lien, or must cause the Conrail Debentures to be so secured. The New NSR
Indenture does not contain such a provision, or any provision similar to the
provision described in this paragraph.
In addition, the Conrail Indenture provides that the restrictions relating
to consolidation, merger, conveyance, lease or transfer do not apply to mergers
or consolidations in which Conrail is the surviving corporation or is the
transferee or lessee and do not apply to any conveyance, lease, transfer, or
sublease described or contemplated in the Transaction Agreement. By contrast,
the provision in the New NSR Indenture relating to consolidation, merger,
conveyance, lease or transfer applies whether the NSR Obligor or, so long as the
guarantee is in effect, the guarantor, is or is not the surviving corporation or
the transferor or lessor. The provision in the New NSR Indenture relating to
consolidation, merger, conveyance or transfer is otherwise substantially
identical to the applicable provision in the Conrail Indenture. For a detailed
description of the relevant provision in the New NSR Indenture, see "Description
of the New NSR Notes--Certain Covenants," "--Consolidation, Merger, Conveyance,
Lease or Transfer."
CONRAIL SUPPLEMENTAL INDENTURE; ELIMINATION OF RESTRICTIVE COVENANTS
It is important to note that a condition of acceptance of the exchange of
Conrail Debentures tendered in the exchange offer and consent solicitation is
the grant by the exchanging holder of Conrail Debentures of a consent that
allows the Conrail Spin Off Transactions to go forward and that eliminates
substantially all of the restrictive covenants contained in the Conrail
Indenture. The termination of these covenants will be effectuated, prior to the
closing of the Conrail Spin Off Transactions, by Conrail entering into a
supplemental indenture with respect to the Conrail Indenture that will bind the
holders of Conrail Debentures who do not exchange their Conrail Debentures for
New Exchange Notes and the Cash Payments. The Conrail Supplemental Indenture
would eliminate substantially all of the protective covenants and other
provisions set forth in the original Conrail Indenture. Holders of Conrail
Debentures who do not participate in this exchange offer and consent
solicitation will continue to hold Conrail Debentures without the benefit of
such covenants and other provisions currently contained in the Conrail
Indenture. For more information on the proposed changes see "Description of This
Exchange Offer and Consent Solicitation--Proposed Amendments" in the prospectus
and consent solicitation statement of which this NSR Appendix forms a part.
SATISFACTION AND DISCHARGE OF INDENTURE
Under the Conrail Indenture, Conrail may discharge certain obligations to
holders of any series of Conrail Debentures that have not already been delivered
to the trustee for cancellation and that have either become due and payable or
are by their terms due and payable within one year and where the exact amount
(including
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the currency of payment) of principal and interest due is determinable at the
time of making the deposit described in (i), (i) by irrevocably depositing with
the trustee cash or, in the case of any series of Conrail Debentures payable
only in United States dollars, direct obligations of the United States backed by
its full faith and credit, or a combination thereof, as trust funds in an amount
certified by a nationally recognized firm of independent public accountants to
be sufficient to pay when due the principal of and interest on such debt
securities and (ii) by delivering to the trustee an officer's certificate and an
opinion of counsel acknowledging that all conditions precedent to the discharge
have been complied with.
The New NSR Indenture provides a similar mechanism for discharge of the
obligations of the New NSR Obligor with respect to outstanding debt securities,
on a series-by-series basis, but does not require (1) the debt securities with
respect to which the obligations under the New NSR Indenture are to be
discharged to be due and payable, or by their terms, to become due and payable
within one year; or (2) that the exact amount (including the currency of
payment) of principal and interest due be determinable at the time of making the
deposit described in (i) above. In addition, the New NSR Indenture (1) allows
the NSR Obligor, in connection with the deposit described in (i) above and in
the case of debt securities denominated in a currency other than United States
dollars, to deposit money in such other currency or Foreign Government
Securities (as defined hereafter) and (2) requires the NSR Obligor, in
connection with the discharge of debt securities, on a series-by-series basis,
to deliver to the trustee an opinion of counsel to the effect that the holders
of the debt securities of such series will not recognize gain or loss for
federal income tax purposes solely as a result of such discharge and will be
subject to federal income tax in the same amounts and at the same times as would
have been the case if such discharge had not occurred.
With respect to all Conrail Debentures of the discharged series, the
obligations of Conrail and/or the trustee to, among other things: (i) register
the transfer or exchange of debt securities of such series, (ii) subject to the
satisfaction of certain conditions, substitute for mutilated, defaced,
destroyed, lost or stolen debt securities, (iii) pay in accordance with the
terms of such series of Conrail Debentures the moneys held for payment in trust,
and (iv) the obligations of Conrail to maintain an office or agency, shall
survive such discharge. In addition, the Conrail Indenture provides that the
rights, obligations, duties and immunities of the trustee under the Conrail
Indenture, and the rights of the holders of debt securities of such series as
beneficiaries with respect to the property deposited with the trustee payable to
all or any of them, shall survive. By contrast, the New NSR Indenture provides
that with respect to all New NSR Notes of the discharged series, only (i) the
NSR Obligor's obligations to compensate and indemnify the trustee, (ii) the
obligations of the trustee to any authenticating agent and (iii) if money, U.S.
Government Obligations and/or Foreign Government Securities (as defined
hereafter) shall have been deposited with the trustee in connection with such
discharge, the obligations of the trustee under the New NSR Indenture to among
other things: (1) pay in accordance with the terms of such New NSR Notes and the
New NSR Indenture the amounts held for payment in trust and (2) subject to the
satisfaction of certain conditions, repay to the NSR Obligor any excess money
remaining unclaimed for two years after having become due and payable held by
the trustee (or in certain instances, any paying agent or the NSR Obligor, in
trust) under the New NSR Indenture, shall survive the discharge.
For purposes of the foregoing description of the provisions of the New NSR
Indenture relating to satisfaction and discharge, the term "Foreign Government
Securities" means, with respect to debt securities of any series that are
denominated in a currency other than United States dollars, debt securities that
are (i) direct obligations of the government that issued such currency for the
payment of which obligations its full faith and credit is pledged; or (ii)
obligations of a person controlled or supervised by and acting as an agency or
instrumentality of such government (the timely payment of which is
unconditionally guaranteed as a full faith and credit obligation of such
government) which, in either case under clauses (i) or (ii), are not callable or
redeemable at the option of the issuer thereof.
Separate and apart from the provisions relating to the discharge of
obligations described above and in "Description of the New NSR Notes--
Satisfaction and Discharge of Indenture," the New NSR Indenture does not provide
specifically for the defeasance of any specific obligations or covenant
defeasance with respect to any outstanding series of debt securities issued
under the New NSR Indenture. The Conrail Indenture, by contrast, specifically
provides for (1) the defeasance of any and all of Conrail's obligations to
holders of any
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one or more series of debt securities issued under the Conrail Indenture at any
time, and (2) the covenant defeasance with respect to any outstanding series of
debt securities issued under the Conrail Indenture from certain obligations
imposed by the Conrail Indenture.
MODIFICATION AND WAIVER
Each of the Conrail Indenture and the New NSR Indenture permit Conrail, in
the case of the Conrail Indenture, and the NSR Obligor, in the case of the New
NSR Indenture, and the applicable trustees thereunder to enter into indentures
supplemental to the Conrail Indenture and the New NSR Indenture, as the case may
be, without the consent of the holders of any securities at the time outstanding
under the applicable indenture to achieve one or more purposes specified in the
indentures. In addition to the kinds of amendments, modifications or waivers
that may be made under the Conrail Indenture without the consent of any holder,
the New NSR Indenture further provides that the NSR Obligor and the trustee may
amend or supplement the New NSR Indenture or the New NSR Notes without notice to
or the consent of any holder, among other things: (i) to add to or to change any
provisions of the New NSR Indenture to the extent necessary to permit or
facilitate the issuance of debt securities in bearer form, registrable or not
registrable as to principal, and with or without interest coupons; and (ii) to
change or eliminate any of the provisions of the New NSR Indenture, provided
that any such change or elimination will become effective only when there is no
debt security outstanding that would be entitled to the benefit of such
provision. With the exception of the additional rights provided by the New NSR
Indenture detailed above, or the difference detailed in the next succeeding
paragraph, the ability of the NSR Obligor and the trustee to enter into one or
more indentures supplemental to the New NSR Indenture without the consent of the
holders of the debt securities issued under the New NSR Indenture is
substantially similar to the ability of Conrail and the trustee to enter into
one or more indentures supplemental to the Conrail Indenture without the consent
of the holders of Conrail Debentures. For a detailed description of the rights
of the NSR Obligor and the trustee to enter into one or more indentures
supplemental to the New NSR Indenture, see "Description of the New NSR Notes--
Modification and Waiver."
In addition, whereas the Conrail Indenture permits Conrail and the trustee
to amend or supplement the Conrail Indenture or the Conrail Debentures without
notice to or the consent of any holder to cure any ambiguity, defect, or
inconsistency in the Conrail Indenture provided that such amendments or
supplements shall not adversely affect the interests of the holders, the New NSR
Indenture permits these amendments or supplements provided that the amendment or
supplement shall not adversely affect the interests of the holders in any
material respect.
Each of the New NSR Indenture and the Conrail Indenture permit the obligors
and the trustees thereunder to enter into supplemental indentures with the
consent of certain holders of debt securities. These provisions differ, however,
in that the New NSR Indenture permits the NSR Obligor and the trustee to enter
into one or more supplemental indentures with the consent of the holders of a
majority in aggregate principal amount of the outstanding debt securities of
each series issued under the New NSR Indenture affected by such supplemental
indenture (subject to certain exceptions), whereas, the Conrail Indenture
requires Conrail and the trustee to obtain the consent of a majority in
aggregate principal amount of the outstanding debt securities of all series
affected by any supplemental indenture, voting as a single class, to enter into
one or more supplemental indentures. In addition to the exceptions provided in
the Conrail Indenture with respect to supplemental indentures that may be
entered into with the consent of certain holders, the New NSR Indenture provides
that the NSR Obligor and the trustee may not enter into supplemental indentures
without the consent of the holder of each outstanding security affected thereby
if such supplemental indenture would (i) reduce the percentage in principal
amount of outstanding debt securities of any series, the consent of whose
holders is required for any waiver (of compliance with certain provisions of the
New NSR Indenture or certain defaults under the New NSR Indenture and their
consequences) provided for in the New NSR Indenture; or (ii) modify any of the
provisions of the New NSR Indenture relating to entering into supplemental
indentures with the consent of the holders, or the sections dealing with waiver
of past default or waiver of certain covenants, except to increase any stated
percentage or to provide that certain other provisions of the New NSR Indenture
cannot be modified or waived without the consent of the holder of each
NSR-46
outstanding security affected thereby. With the exception of the differences
described above, the ability of the New NSR Obligor and the trustee to enter
into indentures supplemental to the New NSR Indenture with the consent of
certain holders of the debt securities issued thereunder is substantially
similar to the ability of Conrail and the trustee to enter into indentures
supplemental to the Conrail Indenture with the consent of certain holders of the
debt securities issued thereunder. For a detailed description of the rights of
the NSR Obligor and the trustee to enter into one or more indentures
supplemental to the New NSR Indenture, see "Description of the New NSR
Notes--Modification and Waiver."
EVENTS OF DEFAULT
The New NSR Indenture defines an "Event of Default" with respect to debt
securities of any series as any of the following events: (a) failure to pay
interest when due and payable, continued for 30 days; (b) failure to pay
principal of, or any premium on, the New NSR Notes at maturity (whether at
stated maturity or by declaration of acceleration, call for redemption, request
for repayment or otherwise); (c) failure to pay any sinking fund installment
when due; (d) failure to perform any other covenant of PRR Newco or NSR, as the
case may be, in the New NSR Indenture, continued for 90 days after written
notice as provided in the New NSR Indenture; (e) acceleration of debt securities
or any other indebtedness for borrowed money, in an aggregate principal amount
exceeding $45 million, of the NSR Obligor or any Significant Subsidiary (within
the meaning of the federal securities laws) under the terms of the instrument or
instruments under which the indebtedness is issued or secured, if the
acceleration is not annulled, or the indebtedness is not discharged, or a sum of
money sufficient to discharge in full the indebtedness is not deposited in
trust, within ten days after written notice as provided in the New NSR
Indenture; (f) events relating to bankruptcy, insolvency or reorganization; and
(g) subject to the termination of the guarantee as described in the New NSR
Indenture, failure of the guarantee to be (or a claim by the Guarantor that the
guarantee is not) in full force and effect.
The events constituting an Event of Default are substantially similar under
the Conrail Indenture as the events described above as constituting an Event of
Default under the New NSR Indenture. There are, however, some differences, that
should be noted. With respect to the Conrail Indenture, it does not provide for
an Event of Default upon a cross-default or acceleration of any other
indebtedness of Conrail as is provided in the New NSR Indenture. In addition,
each of the Conrail Indenture and the New NSR Indenture provides for an Event of
Default upon the failure of Conrail or the NSR Obligor, as the case may be, to
observe or perform any covenants or agreements contained in their respective
indentures continued for a period of 90 days after receipt of written notice (in
each case, the "Notice of Default"). However, the Conrail Indenture provides
that the Notice of Default may be delivered either by the trustee to Conrail, or
by the holders of at least 25% in aggregate principal amount of all Conrail
Debentures affected thereby, voting as a single class, to Conrail and the
trustee. By contrast, the New NSR Indenture provides that the Notice of Default
may be delivered either by the trustee to the NSR Obligor, or by the holders of
only 10% in aggregate principal amount of the outstanding debt securities of the
applicable series of New NSR Notes to the NSR Obligor and the trustee. In
addition, the Events of Default relating to bankruptcy, insolvency or
reorganization, while largely similar, are generally more stringent in the case
of the New NSR Indenture, affording increased protection to debt security
holders, than the equivalent provisions of the Conrail Indenture.
Under the Conrail Indenture, an Event of Default relating to bankruptcy,
insolvency or reorganization would occur if:
(a) a court having jurisdiction enters a decree or order for:
-- relief in respect of Conrail in an involuntary case under any
applicable bankruptcy, insolvency, or other similar law now or
hereafter in effect;
-- appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator, or similar official of Conrail for all or for any
substantial part of Conrail's property; or
-- the winding-up or liquidation of Conrail's affairs;
NSR-47
and, in each case, such decree or order shall remain unstayed and in effect
for a period of 60 consecutive days; or
(b) Conrail:
-- commences a voluntary case under any applicable bankruptcy,
insolvency, or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case
under any such law;
-- consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator, or similar
official of Conrail or for any substantial part of its property; or
-- effects any general assignment for the benefit of creditors.
The New NSR Indenture's provisions relating to bankruptcy related Events of
Defaults are substantially similar to the provisions in the Conrail Indenture
described above. However, the New NSR Indenture includes as an Event of Default,
in addition to the events listed in clause (a) above, the entry by a court
having jurisdiction in the premises of a decree or order adjudging the NSR
Obligor a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the NSR Obligor under any applicable federal or state law. Further, the New
NSR Indenture includes as an Event of Default, in addition to the events listed
in clause (b) above:
-- the consent by the NSR Obligor to the commencement of any bankruptcy
or insolvency case or proceeding against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under
any applicable federal or state law;
-- the admission by the NSR Obligor in writing of its inability to pay
its debts generally as they become due; and
-- the taking of any corporate action by the NSR Obligor in furtherance
of any of the foregoing.
With respect to the Conrail Indenture, if an Event of Default relating to
bankruptcy, insolvency or reorganization, or relating to a failure to perform or
breach of covenants (other than with respect to payments to be made on any debt
securities) or other events of default by Conrail specifically provided for in a
supplemental indenture for such series, that affects all of the series of
Conrail Debentures occurs and is continuing, either the trustee or the holders
of at least 25% in aggregate principal amount of all outstanding Conrail
Debentures, voting as a single class, may declare, by notice as provided in the
Conrail Indenture, the entire principal amount of all Conrail Debentures and
interest accrued thereon, if any, to be due and payable immediately. The Conrail
Indenture also provides that, if any other Event of Default occurs and is
continuing, either the trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Conrail Debentures of each particular series
affected by such Event of Default, voting as a single class, may declare, by
notice as provided in the Conrail Indenture, the principal amount of all Conrail
Debentures of the affected series and interest accrued thereon, if any, to be
due and payable immediately. By contrast, the New NSR Indenture does not
distinguish between the type of Events of Default in determining the requisite
number of holders necessary to accelerate, but specifies in all instances that
holders of at least 25% in principal amount of the outstanding securities of an
affected series, voting as a single class, may declare the principal of such
series to be due and payable immediately.
A similar difference exists with respect to the ability of the holders of
debt securities to rescind and annul a declaration of acceleration. Under the
Conrail Indenture, if at any time after a declaration of acceleration with
respect to any series of the Conrail Debentures has been made, but before a
judgment or decree for payment of money has been obtained by the trustee,
Conrail shall pay or deposit with the trustee a sum sufficient to pay all
matured installments of interest upon all the debt securities of the applicable
series and the principal which has become due and payable (other than due to the
acceleration), an amount to cover interest on overdue principal, and, if allowed
by law, overdue interest, and an amount sufficient to cover reasonable
administrative expenses of the trustee, its agents, attorneys and counsel
related to the Event of Default, and if any and all Events of Default other than
the non-payment of the principal of securities which have become due by
acceleration, have been cured, waived or otherwise remedied as provided under
the Conrail Indenture,
NSR-48
then the holders of a majority in aggregate principal amount of the outstanding
debt securities of each affected series, or of all series of debt securities of
the Conrail Debentures in certain instances similar to those described in the
immediately preceding paragraph, in each case, voting as a single class, by
written notice may waive all defaults with respect to each such affected series
(or with respect to all series of debt securities) and rescind and annul such
acceleration and its consequences, but no such rescission or annulment shall
extend to or affect any subsequent default or shall impair any right with
respect to such subsequent default. By contrast, the New NSR Indenture provides
that holders of at least a majority in principal amount of the outstanding debt
securities of an affected series (without regard to voting of any other series
of debt securities in all cases) may by written notice waive all defaults with
respect only to such affected series of debt securities and rescind and annul
such acceleration and its consequences, but no such rescission or annulment
shall extend to or affect any subsequent default or shall impair any right with
respect to such subsequent default.
CONTROL BY HOLDERS OF SECURITIES
Each of the New NSR Indenture and the Conrail Indenture contain
substantially similar provisions entitling the trustee to be indemnified by the
holders of the applicable debt securities before proceeding to exercise any
right or power under the applicable indenture at the request of such holders.
The provisions differ in that, subject to this indemnification protection of the
trustee, the Conrail Indenture provides that the holders of a majority in
aggregate principal amount of the outstanding Conrail Debentures of each series
affected, with all such series voting as a single class, have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or of exercising any trust or power conferred on the
trustee, with respect to the debt securities of such series by the Conrail
Indenture. The New NSR Indenture, by contrast, provides that, subject to the
indemnification protection described in the first sentence of this paragraph and
compliance with all laws and the terms of the New NSR Indenture or the debt
securities of the applicable series, the holders of a majority in principal
amount of the outstanding debt securities of each series affected (voting on a
series-by-series basis) have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee, with respect to the debt securities
of such series by the New NSR Indenture provided that such direction shall not
subject the trustee to any personal liability.
COMPLIANCE STATEMENTS
Both the New NSR Indenture and the Conrail Indenture require that the NSR
Obligor or Conrail, as the case may be, deliver to the relevant trustee, a
statement of compliance. The two indentures differ, however, in the level of
specificity required. The New NSR Indenture requires NSR to furnish to the
trustee by May 1 of each year an officer's certificate stating as to each signer
that to the best of such officer's knowledge, (A) the NSR Obligor has fulfilled
all its obligations under the New NSR Indenture throughout the year, or, if
there has been a default in the fulfillment of any obligation, specifying each
such default known to such officer and the nature and status thereof, and (B) no
event has occurred and is continuing that is, or after notice or lapse of time
or both would become, an Event of Default, or, if such an event has occurred and
is continuing, specifying each such event known to such officer and the nature
and status thereof. By contrast, the statement of compliance required by the
Conrail Indenture, while similar in substance, simply requires Conrail to
deliver to the trustee within 120 days after the end of each fiscal year an
officer's certificate stating (i) that in the course of the performance by a
signatory of his or her duties as an officer of Conrail such an officer would
normally have knowledge of any default by Conrail under the Conrail Indenture,
(ii) whether or not they have knowledge of any such default and (iii) if so,
specifying each such default.
EXPENSES
Each of the Conrail Indenture and the New NSR Indenture provide that
although no service charge shall be made for registration of transfer or
exchange of the Conrail Debentures or the New NSR Notes, as the case may be,
Conrail and the New NSR Obligor, as the case may be, can require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any exchange or registration. The New NSR Indenture limits
the ability of the NSR Obligor to impose such expenses in
NSR-49
connection with exchanges related to: (i) the authentication and delivery of
temporary securities; (ii) debt securities of any series authenticated and
delivered after the execution of any supplemental indenture; or (iii) debt
securities authenticated and delivered in connection with a partial redemption.
The Conrail Indenture does not contain such limitations in respect of expenses
related to any exchange of debt securities.
DEFAULTED INTEREST
Under each of the Conrail Indenture and the New NSR Indenture the person in
whose name any registered security of any series at the close of business on the
record date is generally entitled to payment of such interest, notwithstanding
any transfer or exchange following the record date. This, however, is not the
case if there is a default in the payment of such interest. In such case, the
Conrail Indenture provides that the defaulted interest will be paid to the
persons in whose names debt securities for such series are registered at the
close of business on a special record date (that shall not be less than five
business days before the date of payment of such defaulted interest) established
by notice given to the holders of the debt securities not less than 15 days
prior to the special record date. The New NSR Indenture also provides that the
defaulted interest will be paid to the persons in whose names debt securities
for such series are registered at the close of business on a special record date
(that shall not be more than 15 days and not less than ten days prior to the
date of the proposed payment and not less than ten days after receipt by the
trustee of the notice of proposed payment from the NSR Obligor) established by
notice given to the holders of the debt securities not less than ten days prior
to such special record date. The New NSR Indenture also specifically provides
that the trustee should have received a deposit of the defaulted interest or
obtained satisfactory assurance of such deposit before it is required to fix a
special record date. The NSR Obligor may also make payment of any defaulted
interest in any other lawful manner.
NSR-50
LEGAL MATTERS
James A. Squires, Esq., Vice President-Law of NSC, having acted as counsel
to NSR and PRR Newco in connection with the Conrail Spin Off Transactions, will
pass upon the validity of the New NSR Notes to be issued in connection with the
Conrail Spin Off Transactions. As of April 19, 2004, Mr. Squires owned directly
or indirectly 8,100 shares of common stock of NSC and options to purchase 80,500
additional shares of common stock of NSC (including 13,000 option shares which
will not vest until January 30, 2005). Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York will pass upon customary legal matters in connection with the
Conrail Spin Off Transactions. Customary legal matters will be passed upon for
the dealer manager by Shearman & Sterling LLP, New York, New York.
EXPERTS
The consolidated financial statements of NSR as of December 31, 2003 and
2002, and for each of the years in the three-year period ended December 31, 2003
and the related financial statement schedule have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent registered public accounting firm, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing. The audit report covering the December 31, 2003 consolidated financial
statements refers to the adoption of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations," and FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," effective January 1, 2003.
With respect to the unaudited consolidated interim financial information
for the periods ended March 31, 2004 and 2003, incorporated by reference herein,
the independent registered public accounting firm has reported that they applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report included in NSR's quarterly
report on Form 10-Q for the quarter ended March 31, 2004, and incorporated by
reference herein, states that they did not audit and they do not express an
opinion on that consolidated interim financial information. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review of procedures applied. The accountants
are not subject to the liability provisions of Section 11 of the Securities Act
of 1933 for their report on the unaudited consolidated interim financial
information because that report is not a "report" or a "part" of the
registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act of 1933.
WHERE YOU CAN FIND MORE INFORMATION
NSR files annual, quarterly and special reports, prospectuses and other
information with the SEC. NSR makes available free of charge through the website
www.nscorp.com, its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or
furnished to the SEC. In addition, you may read and copy any reports, statements
or other information NSR files at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. The SEC filings of NSR are
also available to the public from commercial document retrieval services and at
the website maintained by the SEC at www.sec.gov.
The SEC allows NSR to "incorporate by reference" information into the
prospectus and consent solicitation statement, of which this Appendix forms a
part, which means that we can disclose important information to you by referring
you to another document we have filed separately with the SEC. The information
incorporated by reference is deemed to be part of the prospectus and consent
solicitation statement, except for any information superseded by information
contained directly in the prospectus and consent solicitation statement, of
which this Appendix forms a part.
NSR-51
The documents filed by NSR with the Commission listed below are
incorporated in the prospectus by reference and constitute an important part of
the prospectus:
-- Annual Report on Form 10-K for the year ended December 31, 2003,
filed on February 13, 2004; and
-- Quarterly Report on Form 10-Q for the three months ended March 31,
2004, filed on April 28, 2004;
-- All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 2003.
We also incorporate by reference into the prospectus and consent
solicitation statement additional documents that may be filed by NSR with the
SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act from the
date of the prospectus and consent solicitation statement before the termination
of this offering. These include periodic reports, such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
prospectuses. Any statements contained in a previously filed document
incorporated by reference into the prospectus and consent solicitation statement
is deemed to be modified or superseded for purposes of the prospectus and
consent solicitation statement to the extent that a statement contained in the
prospectus and consent solicitation statement, or in a subsequently filed
document also incorporated by reference herein, modifies or supersedes that
statement.
You may obtain copies of any documents incorporated by reference in the
prospectus and consent solicitation statement through us, the SEC or the SEC's
website as described above. Documents incorporated by reference are available
from us without charge, excluding exhibits thereto unless we have specifically
incorporated by reference such exhibits in the prospectus and consent
solicitation statement. Any person to whom the prospectus and consent
solicitation statement is delivered may obtain documents incorporated by
reference in, but not delivered with, the prospectus and consent solicitation
statement by requesting them from the information agent in writing or by
telephone at the address set forth on the back cover of the prospectus and
consent solicitation statement. ANY REQUEST SHOULD BE MADE NOT LATER THAN FIVE
BUSINESS DAYS PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER AND CONSENT
SOLICITATION, AS EXTENDED.
The prospectus and consent solicitation statement, of which this NSR
Appendix forms a part, is part of a registration statement on Form S-4 filed by
us under the Securities Act with the SEC with respect to the exchange offer and
consent solicitation. The prospectus and consent solicitation statement does not
contain all of the information included in the registration statement and the
exhibits thereto. You will find additional information about the New NSR Notes
and the companies involved in the exchange offer and consent solicitation in the
registration statement and the exhibits thereto. You should be aware that
statements contained in the prospectus and consent solicitation statement
concerning the provisions of any documents filed as an exhibit to the
registration statement or otherwise filed with the SEC are not necessarily
complete, and in each instance reference is made to the copy of such document so
filed. Each such statement is qualified in its entirety by such reference.
Certain items are omitted in accordance with the rules and regulations of the
SEC.
NSR-52
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
UNAUDITED FINANCIAL STATEMENTS
Consolidated Statements of Income for the Three Months Ended
March 31, 2004 and 2003................................... F-2
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003......................................... F-3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003............................. F-4
Notes to Consolidated Financial Statements.................. F-5
AUDITED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firms.... F-8
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001.......................... F-9
Consolidated Balance Sheets for the Years Ended December 31,
2003 and 2002............................................. F-10
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001.............. F-11
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.......................... F-12
Notes to Consolidated Financial Statements.................. F-13
</Table>
F-1
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
---------------
2004 2003
----- -----
(UNAUDITED)
($ IN MILLIONS)
OPERATING REVENUES
NSC/CSX (Note 2)............................................ $207 $205
Third parties............................................... 23 21
---- ----
Total operating revenues............................... 230 226
OPERATING EXPENSES
Compensation and benefits................................. 45 42
Fuel...................................................... 2 2
Material, services and rents.............................. 28 31
Depreciation and amortization............................. 79 81
Casualties and insurance.................................. 3 2
Other..................................................... 5 5
---- ----
Total operating expenses............................... 162 163
---- ----
Income from operations...................................... 68 63
Interest expense............................................ (24) (25)
Other income, net........................................... 27 20
---- ----
Income from continuing operations before income taxes and
accounting changes........................................ 71 58
Provision for income taxes.................................. 26 22
---- ----
Income from continuing operations before accounting
changes................................................... 45 36
Cumulative effect of changes in accounting principles, net
of taxes (Note 4)......................................... (1) 40
---- ----
NET INCOME.................................................. $ 44 $ 76
==== ====
</Table>
See accompanying notes to the consolidated financial statements.
F-2
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
(UNAUDITED)
($ IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 10 $ 9
Accounts receivable, net.................................. 33 34
Due from NSR/CSXT......................................... 154 136
Deferred tax assets....................................... 45 45
Material and supplies..................................... 8 8
Other current assets...................................... 14 16
------ ------
Total current assets................................... 264 248
PROPERTY AND EQUIPMENT, NET................................. 6,077 6,119
NOTES RECEIVABLE FROM NSC/CSX............................... 1,348 1,231
OTHER ASSETS................................................ 510 503
------ ------
Total assets........................................... $8,199 $8,101
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... 70 37
Current maturities of long-term debt...................... 56 58
Due to NSC/CSX............................................ 6 5
Wages and employee benefits............................... 25 31
Casualty reserves......................................... 38 39
Accrued and other current liabilities..................... 120 107
------ ------
Total current liabilities.............................. 315 277
LONG-TERM DEBT.............................................. 1,094 1,067
CASUALTY RESERVES........................................... 121 125
DEFERRED INCOME TAXES....................................... 1,820 1,827
OTHER LIABILITIES........................................... 455 455
------ ------
Total liabilities...................................... 3,805 3,751
------ ------
STOCKHOLDER'S EQUITY
Common stock ($1 par value; 100 shares authorized, issued
and outstanding)....................................... -- --
Additional paid-in capital................................ 2,268 2,268
Retained earnings......................................... 2,230 2,186
Accumulated other comprehensive loss...................... (104) (104)
------ ------
Total stockholder's equity............................. 4,394 4,350
------ ------
Total liabilities and stockholder's equity............. $8,199 $8,101
====== ======
</Table>
See accompanying notes to the consolidated financial statements.
F-3
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
----- -----
($ IN MILLIONS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 44 $ 76
Adjustments to reconcile net income to net cash provided
by operating activities:
Net cumulative effect of changes in accounting
principles............................................. 1 (40)
Depreciation and amortization............................. 79 81
Deferred income taxes..................................... (10) (6)
Equity in earnings of affiliates.......................... (7) (3)
Gains from sales of property.............................. (1) --
Pension expense (credit).................................. 3 (1)
Changes in:
Accounts receivable.................................... 1 (1)
Accounts and wages payable............................. 27 32
Due from NSR/CSXT...................................... (18) 18
Due to NSC/CSX......................................... 1 (2)
Other..................................................... 13 (4)
----- -----
Net cash provided by operating activities.............. 133 150
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions....................... (3) (7)
Notes receivable from NSC/CSX............................. (117) (139)
Proceeds from disposal of property and equipment.......... 2 2
Other..................................................... (4) --
----- -----
Net cash used in investing activities.................. (122) (144)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt................................. (10) (10)
----- -----
Net cash used in financing activities.................. (10) (10)
----- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1 (4)
CASH AND CASH EQUIVALENTS
At beginning of year...................................... 9 14
----- -----
At end of period.......................................... $ 10 $ 10
===== =====
</Table>
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements contained herein present the
consolidated financial position of Consolidated Rail Corporation ("Conrail" or
the "Company") as of March 31, 2004 and December 31, 2003, and the consolidated
results of operations and cash flows for the three-month periods ended March 31,
2004 and 2003. In the opinion of management, these financial statements include
all adjustments, consisting of normal recurring adjustments necessary to present
fairly the results for the interim periods included.
2. DESCRIPTION OF BUSINESS
Conrail, a principal freight railroad in the Northeastern United States, is
a wholly-owned subsidiary of Conrail Inc. CSX Corporation ("CSX") and Norfolk
Southern Corporation ("NSC"), the major rail holding companies in the Eastern
United States, jointly control Conrail Inc. through their ownership interests in
CRR Holdings LLC ("CRR"), whose primary subsidiary is Green Acquisition
Corporation, which owns Conrail Inc. CSX and NSC have equity interests in CRR of
42% and 58%, respectively, and voting interests of 50% each. Under operating and
lease agreements, CSX and NSC operate a substantial portion of Conrail's
properties through their respective railroad subsidiaries, CSX Transportation,
Inc ("CSXT") and Norfolk Southern Railway Company ("NSR").
The major source of Conrail's revenues is from CSXT and NSR, primarily in
the form of rental revenues and operating fees.
3. RECENT DEVELOPMENTS
PROPOSED SPIN OFF OF CONRAIL'S SUBSIDIARIES
In June 2003, Conrail, together with CSX and NSC, filed a joint petition
with the Surface Transportation Board ("STB") to establish direct ownership and
control by CSXT and NSR of certain portions of the Conrail system already
operated by them in a substantially independent manner, under various
agreements. These portions of the Conrail system are currently owned by
Conrail's primary subsidiaries, New York Central Lines LLC ("NYC") and
Pennsylvania Lines LLC ("PRR"). The proposed transactions involve the
termination of the existing operating agreements and the transfer of the direct
equity ownership of NYC and PRR to CSXT and NSR, respectively. The proposed
transactions do not involve the Company's other properties ("Shared Assets
Areas") that will continue to be owned and operated by Conrail. The consummation
of the proposed transactions is subject to a number of conditions, including,
among other things, that the STB authorization, obtained by the parties in
November 2003, remains in full force and effect, that the Internal Revenue
Service ruling received by the parties in November 2003, favorably qualifying
the proposed transactions as non-taxable, remains in full force and effect and
that the parties obtain required consents from Conrail's debt holders and other
lessors and counterparties to certain of Conrail's equipment leases and related
financing arrangements.
As a part of the proposed transactions, Conrail is undertaking a
restructuring of its existing unsecured and secured public indebtedness. New
guaranteed debt securities of two newly formed corporate subsidiaries of CSXT
and NSR would be offered in an approximately 42%/58% ratio as well as
substantially all of the equity of such new subsidiaries in exchange for the
equity of NYC and PRR. Upon completion of the proposed transactions, the new
debt securities would become direct unsecured obligations of CSXT and NSR,
respectively. Conrail's secured debt and lease obligations will remain
obligations of Conrail and are expected to be supported by new leases and
subleases that, upon consummation of the proposed transactions, would be the
direct lease and sublease obligations of CSXT and NSR, respectively.
F-5
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Conrail, NSC and CSX are working to complete all steps necessary to
consummate the proposed transactions in 2004. CSX and NSC are progressing toward
ascertaining the fair value effects of the proposed transactions, which will be
reflected in the accounting for the proposed transactions once consummated and
that analysis has been completed. Upon consummation of the proposed
transactions, Conrail's primary source of revenue will be related to the
operation of the Shared Assets Areas instead of the operating and equipment
rental activities of NYC and PRR. Conrail's future operating expenses will also
reflect this change in operations. Accordingly, Conrail's prospective operating
results will be significantly different from those currently reported.
4. NEW ACCOUNTING PRONOUNCEMENTS
In 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46R, "Consolidation of Variable Interest Entities"("FIN 46R")
which requires that a variable interest entity be consolidated by the company
that is subject to a majority of the economic risks and/or rewards of that
entity. As of March 31, 2004, pursuant to FIN 46R, Conrail consolidated a
locomotive leasing entity, Locomotive Management Services ("LMS") and recorded a
$1 million net adjustment for the cumulative effect of this accounting change.
LMS had total assets, primarily depreciable equipment, of $37 million as of
March 31, 2004. Total liabilities as of March 31, 2004, totaled $40 million,
including $4 million and $30 million of current and long-term debt,
respectively. The consolidation of LMS will not have an impact on net income in
future periods as Conrail previously accounted for its investment in LMS under
the equity method of accounting.
The Company adopted FASB Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations", effective
January 1, 2003. Pursuant to SFAS 143, companies are precluded from accruing
removal cost expenses that are not legal obligations. Previously, the Company
and most other railroads had accrued removal costs as a component of
depreciation expense. In the first quarter of 2003, the Company recorded income
of $40 million for the cumulative effect of this change ($65 million before
taxes). Effective with this pronouncement, removal costs are expensed as
incurred. This change did not have a material impact on the Company's
consolidated financial statements.
5. PENSION AND POSTRETIREMENT BENEFITS
The Company and its subsidiaries sponsor several qualified and nonqualified
pension plans and other postretirement benefit plans for its employees.
Components of the net periodic cost (benefit) for the three months ended March
31 were as follows (in millions):
<Table>
<Caption>
PENSION
BENEFITS
-----------
2004 2003
---- ----
Service cost................................................ $ -- $ --
Interest cost............................................... 10 11
Expected return on assets................................... (11) (13)
Amortization of unrecognized net actuarial (gain) loss...... 4 1
---- ----
Net cost (benefit).......................................... $ 3 $ (1)
==== ====
</Table>
The net periodic cost for other postretirement benefits was less than $1
million for the three-month period ending March 31, 2004 and 2003, respectively.
F-6
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONTRIBUTIONS FOR PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Conrail previously disclosed in its consolidated financial statements for
the year ended December 31, 2003, that it expected to contribute $2 million to
the pension plans and $3 million to the other postretirement benefit plans in
2004. For the three months ended March 31, 2004, contributions of less than $1
million have been made for each of the plans. Conrail presently anticipates
contributing in 2004 a total of $2 million and $3 million for its pension and
other postretirement benefits plans, respectively.
MEDICARE CHANGES
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Act) was signed into law in December 2003. The Act introduces a
prescription drug benefit under Medicare Part D as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. Because significant
uncertainties exist regarding the measurement and disclosure requirements of the
Act, the FASB has issued staff position No. FAS 106-1, which allows a plan
sponsor to recognize or defer accounting for the effects of the Act in their
2003 financial statements. The Company has elected the deferral option and is
currently evaluating how the Act may impact its postretirement benefit
obligations. Specific authoritative guidance on the accounting for the Act's
subsidy is pending, and that guidance, when issued, could require the Company to
change previously reported information.
6. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. The Company 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. The Company 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 37 locations. Conrail regularly participates in monitoring the status of the
known sites and assessing the adequacy of the liability estimates.
At both March 31, 2004 and December 31, 2003, the Company had accrued $61
million for estimated environmental exposures. The Company anticipates that much
of this liability will be paid out over five years; however, some costs will be
paid out over a longer period. The Company believes the ultimate liability for
these matters will not materially affect its consolidated financial condition.
CASUALTY
The casualty claim liability is determined using the aid of an independent
actuarial firm based upon claims filed and an estimate of claims incurred but
not yet reported. The Company is generally self-insured for casualty claims.
Claims in excess of self-insurance levels are insured up to excess coverage
limits. While the ultimate amounts of claims incurred are dependent upon future
developments, in management's opinion, the recorded liability is adequate to
cover expected probable payments.
OTHER
The Company is involved in other various legal actions and claims arising
from the ordinary course of railroad operations. The Company believes it has
recorded liabilities sufficient to cover the future payments for such claims.
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
THE STOCKHOLDERS AND BOARD OF DIRECTORS
CONSOLIDATED RAIL CORPORATION:
We have audited the accompanying consolidated balance sheets of
Consolidated Rail Corporation and subsidiaries (a wholly-owned subsidiary of
Conrail Inc.) as of December 31, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Consolidated
Rail Corporation and subsidiaries (a wholly-owned subsidiary of Conrail Inc.) as
of December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2003, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2003 the Company adopted Financial Accounting Standards Board
Statement No. 143, "Accounting for Asset Retirement Obligations."
<Table>
/s/ KPMG LLP /s/ ERNST & YOUNG LLP
KPMG LLP Ernst & Young LLP
Norfolk, Virginia Jacksonville, Florida
</Table>
January 27, 2004
F-8
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
---------------------
2003 2002 2001
----- ----- -----
($ in millions)
REVENUES -- NSC/CSX (NOTE 2)................................ $ 836 $ 813 $ 823
REVENUES -- THIRD PARTIES................................... 82 80 80
----- ----- -----
Total operating revenues............................... 918 893 903
----- ----- -----
OPERATING EXPENSES (NOTE 3)
Compensation and benefits................................. 168 151 158
Fuel...................................................... 7 6 7
Material, services and rents.............................. 119 125 143
Depreciation and amortization............................. 329 322 325
Casualties and insurance.................................. 17 2 (13)
Other..................................................... 19 17 19
----- ----- -----
Total operating expenses............................... 659 623 639
----- ----- -----
Income from operations...................................... 259 270 264
Interest expense............................................ (99) (104) (109)
Other income, net (Note 10)................................. 95 92 96
----- ----- -----
Income from continuing operations before income taxes and
accounting change......................................... 255 258 251
Provision for income taxes (Note 7)......................... 93 71 81
----- ----- -----
Income from continuing operations before accounting
change.................................................... 162 187 170
Cumulative effect of change in accounting principle, net of
taxes (Note 1)............................................ 40 -- --
----- ----- -----
NET INCOME.................................................. $ 202 $ 187 $ 170
===== ===== =====
</Table>
See accompanying notes to the consolidated financial statements.
F-9
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------
2003 2002
------ ------
($ in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 9 $ 14
Accounts receivable, net.................................. 34 35
Due from NSR/CSXT (Note 2)................................ 136 158
Material and supplies..................................... 8 8
Deferred tax assets (Note 7).............................. 45 65
Other current assets...................................... 16 11
------ ------
Total current assets................................... 248 291
PROPERTY AND EQUIPMENT, NET (NOTE 4)........................ 6,119 6,382
NOTES RECEIVABLE FROM NSC/CSX (NOTE 2)...................... 1,231 892
OTHER ASSETS................................................ 503 475
------ ------
Total assets........................................... $8,101 $8,040
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... 37 33
Current maturities of long-term debt (Note 6)............. 58 57
Due to NSC/CSX (Note 2)................................... 5 9
Wages and employee benefits............................... 31 31
Casualty reserves......................................... 39 69
Accrued and other current liabilities (Note 5)............ 107 127
------ ------
Total current liabilities.............................. 277 326
LONG-TERM DEBT (NOTE 6)..................................... 1,067 1,123
Casualty reserves........................................... 125 119
DEFERRED INCOME TAXES (NOTE 7).............................. 1,827 1,814
OTHER LIABILITIES........................................... 455 538
------ ------
Total liabilities...................................... 3,751 3,920
------ ------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY (NOTES 2 AND 9)
Common stock ($1 par value; 100 shares authorized, issued
and outstanding)....................................... -- --
Additional paid-in capital................................ 2,268 2,265
Retained earnings......................................... 2,186 1,984
Accumulated other comprehensive loss........................ (104) (129)
------ ------
Total stockholders' equity............................. 4,350 4,120
------ ------
Total liabilities and stockholders' equity............. $8,101 $8,040
====== ======
</Table>
See accompanying notes to the consolidated financial statements.
F-10
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
CAPITAL EARNINGS LOSS TOTAL
---------- -------- ------------- ------
($ in millions)
BALANCE, JANUARY 1, 2001......................... $2,260 $1,627 $ -- $3,887
Comprehensive income -- 2001
Net Income..................................... -- 170 -- 170
Minimum pension liability, net of
$45 million income taxes (Note 8)........... -- -- (70) (70)
------
Total comprehensive income..................... 100
------
Capital contributions from Conrail (Note 2).... 3 -- -- 3
------ ------ ----- ------
BALANCE, DECEMBER 31, 2001....................... 2,263 1,797 (70) 3,990
Comprehensive income -- 2002
Net Income..................................... -- 187 -- 187
Minimum pension liability, net of
$39 million income taxes (Note 8)........... -- -- (59) (59)
------
Total comprehensive income..................... 128
------
Capital contributions from Conrail (Note 2).... 2 -- -- 2
------ ------ ----- ------
BALANCE, DECEMBER 31, 2002....................... 2,265 1,984 (129) 4,120
Comprehensive income -- 2003
Net Income..................................... -- 202 -- 202
Minimum pension liability, net of
$16 million income taxes (Note 8)........... -- -- 25 25
------
Total comprehensive income..................... 227
------
Capital contributions from Conrail
(Note 2).................................... 3 -- -- 3
------ ------ ----- ------
BALANCE, DECEMBER 31, 2003....................... $2,268 $2,186 ($104) $4,350
====== ====== ===== ======
</Table>
See accompanying notes to the consolidated financial statements.
F-11
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
---------------------
2003 2002 2001
----- ----- -----
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 202 $ 187 $ 170
Adjustments to reconcile net income to net cash provided
by operating activities:
Net cumulative effect of change in accounting
principle............................................. (40) -- --
Depreciation and amortization.......................... 329 322 325
Deferred income taxes.................................. (12) (18) (18)
Equity in earnings of affiliates....................... (19) (19) (24)
Gains from sales of property........................... (7) (3) (2)
Pension credit......................................... (4) (17) (19)
Changes in:
Accounts receivable.................................. 1 (3) 1
Accounts and wages payable........................... 4 (14) (32)
Due from NSR/CSXT.................................... 22 14 60
Due to NSC/CSX....................................... (4) (3) (19)
Other.................................................. (60) (23) 60
----- ----- -----
Net cash provided by operating activities............ 412 423 502
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions....................... (35) (23) (47)
Notes receivable from NSC/CSX............................. (339) (377) (424)
Proceeds from disposal of property and equipment.......... 12 14 14
Other..................................................... 2 11 --
----- ----- -----
Net cash used in investing activities................ (360) (375) (457)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt................................. (57) (59) (61)
----- ----- -----
Net cash used in financing activities................ (57) (59) (61)
----- ----- -----
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (5) (11) (16)
CASH AND CASH EQUIVALENTS
At beginning of year...................................... 14 25 41
----- ----- -----
At end of year............................................ $ 9 $ 14 $ 25
===== ===== =====
</Table>
See accompanying notes to the consolidated financial statements.
F-12
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Consolidated Rail Corporation ("CRC" or the "Company"), the major freight
railroad in the Northeast, is a wholly owned subsidiary of Conrail
Inc.("Conrail"). Norfolk Southern Corporation ("NSC") and CSX Corporation
("CSX"), the major railroads in the Southeast, jointly control Conrail through
their ownership interests in CRR Holdings LLC ("CRR"), whose primary subsidiary
is Green Acquisition Corporation ("Green Acquisition"), which owns Conrail. NSC
and CSX have equity interests in CRR of 58% and 42%, respectively, and voting
interests of 50% each. Under operating and lease agreements, NSC and CSX operate
a substantial portion of the Conrail properties through their railroad
subsidiaries, Norfolk Southern Railway Company ("NSR") and CSX Transportation,
Inc. ("CSXT")(Note 2).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and
majority-owned subsidiaries. Investments in 20% to 50% owned companies are
accounted for by the equity method. All significant intercompany accounts and
transactions have been eliminated.
CASH EQUIVALENTS
Cash equivalents consist of highly 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 of maintenance material valued at the lower
of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the composite straight-line method over estimated service lives. Expenditures,
including those on leased assets that extend an asset's useful life or increase
its utility, are capitalized. Maintenance expense is recognized when repairs are
performed. 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. In 2003, the overall depreciation rate averaged 3.4%
for all roadway and equipment.
During 2003, the Company completed a study to update the estimated useful
lives of its roadway and track property and the associated accumulated
depreciation reserves. This review did not have a material impact on the
Company's consolidated financial statements.
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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations", effective January 1, 2003. Pursuant to SFAS 143,
companies are precluded from accruing removal cost expenses that are not legal
F-13
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
obligations. Previously, the Company and most other railroads had accrued
removal costs as a component of depreciation expense. In the first quarter of
2003, the Company recorded income of $40 million for the cumulative effect of
this change ($65 million before taxes). Effective with this pronouncement,
removal costs are expensed as incurred. This change did not have a material
impact on the Company's consolidated financial statements.
Also in 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) which requires that a variable interest
entity be consolidated by the company that is subject to a majority of the
economic risks and/or rewards of that entity. The FASB delayed until 2004, the
implementation of FIN 46 for certain variable entities that existed prior to
February 1, 2003. The Company has a fifty percent non-controlling interest in
Locomotive Management Services (LMS), an unconsolidated partnership established
in 1994, which will likely be consolidated pursuant to FIN 46. LMS, a locomotive
leasing venture, had assets totaling $37 million as of December 31, 2003,
consisting primarily of depreciable equipment property. Total liabilities as of
December 31, 2003 totaled $40 million, including $30 million in long-term debt
installments maturing in 2012. If consolidation is required, the impact on the
consolidated financial statements will be immaterial (Note 11).
REVENUE RECOGNITION
CRC's major sources of revenues are from NSC and CSX, primarily in the form
of rental revenues and operating fees, which are recognized when earned (Note
2). The Company also has third party revenues, which are recognized when earned,
related to the operations of Indiana Harbor Belt Railroad Company, a 51% owned
terminal railroad subsidiary.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the 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. Management reviews its estimates,
including those related to the recoverability and useful lives of assets as well
as liabilities for litigation, environmental remediation, casualty claims,
income taxes and pension and postretirement benefits. Changes in facts and
circumstances may result in revised estimates.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements and notes thereto
have been reclassified to conform to the 2003 presentation.
2. RELATED PARTIES TRANSACTIONS
BACKGROUND
On May 23, 1997, NSC and CSX completed their joint acquisition of Conrail
stock. On June 17, 1997, NSC and CSX executed an agreement that generally
outlines the methods of governing and operating Conrail and its subsidiaries
("Transaction Agreement"). On July 23, 1998, the Surface Transportation Board
("STB") issued a written opinion that permitted NSC and CSX to exercise
operating control of Conrail beginning August 22, 1998. On June 1, 1999, NSC and
CSX began to operate over certain CRC lines.
F-14
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPERATIONS BY NSR AND CSXT
The majority of CRC's routes and assets are segregated into separate
subsidiaries of CRC, Pennsylvania Lines LLC ("PRR") and New York Central Lines
LLC ("NYC"). PRR and NYC have separate but identical operating and lease
agreements with NSR and CSXT, respectively, (the "Operating Agreements") which
govern substantially all nonequipment assets to be used by NSR and CSXT and have
initial 25-year terms, renewable at the options of NSR and CSXT for two 5-year
terms. Payments made under the Operating Agreements are based on appraised
values that are subject to adjustment every six years. NSR and CSXT have also
leased or subleased certain equipment assets at rentals based on appraised
values for varying term lengths from PRR and NYC, respectively, as well as from
CRC.
NSC and CSX also have agreements with the Company governing other
properties that continue to be owned and operated by Conrail ("the Shared Assets
Areas"). NSR and CSXT pay CRC a fee for joint and exclusive access to the Shared
Assets Areas. In addition, NSR and CSXT pay, based on usage, the costs incurred
by CRC to operate the Shared Assets Areas plus a profit factor.
Payments made by NSR to CRC under the Shared Assets agreements were $135
million and $115 million during 2003 and 2002, respectively, of which $31
million and $23 million, were minimum rents. Payments made by CSXT to CRC under
the Shared Assets agreements were $124 million and $92 million during 2003 and
2002, respectively, of which $24 million and $17 million, were minimum rents.
Payments from NSR under the Operating Agreements to PRR amounted to $348
million and $339 million during 2003 and 2002, respectively. Payments from CSXT
under the Operating Agreements to NYC amounted to $253 million and $248 million
during 2003 and 2002, respectively. In addition, costs necessary to operate and
maintain the related assets under these agreements, including leasehold
improvements, are borne by NSR and CSXT.
Future minimum lease payments to be received from NSR/CSXT are as follows:
<Table>
<Caption>
NSR NSR CSXT CSXT
TO PRR TO CRC TO NYC TO CRC TOTAL
------ ------ ------ ------ -------
($ in millions)
2004............................ $ 342 $ 32 $ 237 $ 23 $ 634
2005............................ 321 33 223 24 601
2006............................ 307 34 212 24 577
2007............................ 295 34 205 24 558
2008............................ 290 34 200 24 548
2009 and Beyond................. 4,128 551 2,740 378 7,797
------ ---- ------ ---- -------
TOTAL......................... $5,683 $718 $3,817 $497 $10,715
------ ---- ------ ---- -------
</Table>
RELATED PARTY BALANCES AND TRANSACTIONS
"Due from NSR/CSXT" at December 31, 2003 and 2002, is primarily comprised
of amounts due for the above-described operating and rental activities.
PRR and NYC have interest-bearing notes receivable due from NSC and CSX. As
of December 31, 2003, the notes receivable due from NSC and CSX included in
noncurrent assets were $716 million and $515 million, respectively. At December
31, 2002, the notes receivable balances from NSC and CSX included in noncurrent
assets were $513 million and $379 million, respectively. The interest rates on
the notes receivable from NSC and CSX are variable and were both 1.66% at
December 31, 2003. Interest income related to the PRR and NYC notes receivable
was $16 million in 2003, $18 million in 2002 and $13 million in 2001.
F-15
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Due to NSC/CSX" includes amounts payable for property and equipment
rentals, as well as amounts related to service provider agreements with both NSC
and CSX to provide certain general and administrative support to CRC.
A summary of the "Due to NSC and CSX" activity for the services described
above follows:
<Table>
<Caption>
PAYMENTS TO PAYMENTS TO
NSC CSX
----------- -------------
2003 2002 2003 2002
---- ---- ----- -----
($ in millions)
Service Provider Agreements.............................. $ 7 $ 5 $ 3 $ --
Material purchases....................................... 18 20 -- --
Rental of locomotives, equipment and facilities.......... 5 5 4 4
Capital Project activities............................... 6 5 -- --
--- --- ----- -----
TOTAL PAYMENTS......................................... $36 $35 $ 7 $ 4
--- --- ----- -----
</Table>
<Table>
<Caption>
2003 2002 2003 2002
---- ---- ---- ----
Due to "NSC and CSX" at December 31...................... $ 3 $ 7 $ 2 $ 2
</Table>
From time to time, NSC and CSX, as the indirect owners of CRC, may need to
provide some of the Company's cash requirements through capital contributions,
loans or advances. Through December 31, 2003 there have been no transactions
under these arrangements.
The Company also engages in various transactions with Conrail. The Company
received capital contributions from Conrail of $3 million in 2003, $2 million in
2002 and $3 million in 2001. There are no intercompany receivables or payables
with Conrail at December 31, 2003 or December 31, 2002.
PROPOSED SPIN-OFF OF PRR AND NYC
In June 2003, Conrail together with NSC and CSX, filed a joint petition
with the STB to establish direct ownership and control by NSR and CSXT of PRR
and NYC, respectively. The proposed transaction would replace the existing
operating agreements and allow NSR and CSXT to operate PRR and NYC,
respectively, via direct ownership. The proposed transaction does not involve
the Shared Assets Areas. The proposed transaction is subject to a number of
conditions, including STB approval, an Internal Revenue Service (IRS) ruling
qualifying it as a nontaxable distribution and obtaining consents from the
Company's debt holders. (In 2003, the IRS issued a ruling that the
reorganization would qualify as a tax-free distribution. Also in 2003, the STB
granted its authorization to carry out the proposed transaction, subject to
certain conditions.)
As a part of the proposed transaction, CRC would undertake a restructuring
of its existing unsecured and secured public indebtedness. Currently the Company
has two series of unsecured public debentures with an outstanding principal
amount of $800 million at December 31, 2003 and 13 series of secured debt with
an outstanding principal amount of approximately $321 million at December 31,
2003. It is currently contemplated that guaranteed debt securities of two newly
formed corporate subsidiaries of NSR and CSXT would be offered in a 58%/42%
ratio in exchange for the Company's unsecured debentures. Upon completion of the
proposed transaction, the new debt securities would become direct unsecured
obligations of NSR and CSXT, respectively.
CRC's secured debt and lease obligations will remain obligations of the
Company and are expected to be supported by new leases and subleases which, upon
completion of the proposed transaction, would be the direct lease and sublease
obligations of NSR or CSXT.
F-16
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Conrail, NS and CSX are working to complete all steps necessary to
consummate the spin-off in 2004. A valuation of NYC and PRR will be performed
prior to effecting the spin-off transaction. The results of the valuation could
impact the carrying value of the assets of NYC and PRR. Upon consummation of the
proposed transaction, the Company's primary source of revenue will be related to
the operation of the Shared Assets Areas instead of the operating and equipment
rental activities of PRR and NYC. The Company's future operating expenses will
also reflect this change in operations. Accordingly, the Company's prospective
operating results will be significantly different than those currently reported.
3. TRANSITION, ACQUISITION-RELATED AND OTHER ITEMS
During the first quarter of 2002 and the fourth quarter of 2001, the
Company received cash proceeds totaling $4 million and $42 million respectively,
from several London-based insurance carriers as settlement for current and
future exposures related to personal injury, occupational, environmental and
other claims. The Company recognized pretax gains of $4 million and $14 million,
respectively, which is included in the "Casualties and insurance" line item of
the income statement for 2002 and 2001.
During 2002, accrued termination payments totaling $1 million were made to
6 non-union employees whose non-executive positions were eliminated as a result
of the joint acquisition of Conrail. During 2001 accrued termination payments of
$15 million were made. Most of these termination payments have been made in the
form of supplemental retirement benefits from the Company's pension plan. As of
December 31, 2003, the remaining amount of this liability is less than $1
million.
During the second quarter of 2001, the Company received a $50 million cash
payment for transferring to a third party certain of its rights to license,
manage and market signboard advertising on the Company's property for 25 years.
The payment is being recognized into other income on a straight-line basis over
the 25 year contract period.
The Company has a long-term liability in connection with employment "change
in control" agreements with certain current and former executives, which became
operative as a result of the joint acquisition of Conrail. Payments were $4
million in 2003, $1 million in 2002 and $9 million in 2001 and were made
primarily from the Company's pension plan. The remaining amount, approximately
$24 million at December 31, 2003, will be paid out at the discretion of the
participants in the program.
4. PROPERTY AND EQUIPMENT
<Table>
<Caption>
DECEMBER 31,
-----------------
2003 2002
------- -------
(in millions)
Roadway..................................................... $ 7,400 $ 7,476
Equipment................................................... 1,544 1,511
Less: Accumulated depreciation............................ (3,029) (2,828)
------- -------
5,915 6,159
------- -------
Capital leases (primarily equipment)........................ 416 496
Accumulated amortization.................................... (212) (273)
------- -------
204 223
------- -------
$ 6,119 $ 6,382
======= =======
</Table>
Substantially all assets are leased to NSR or CSXT (Note 2).
F-17
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED AND OTHER CURRENT LIABILITIES
<Table>
<Caption>
DECEMBER 31,
--------------
2003 2002
----- -----
(in millions)
Operating leases............................................ $ 47 $ 47
Income and other taxes...................................... 34 44
Other....................................................... 26 36
---- ----
$107 $127
==== ====
</Table>
6. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Long-term debt outstanding, including the weighted average interest rates
at December 31, 2003, is composed of the following:
<Table>
<Caption>
DECEMBER 31,
---------------
2003 2002
------ ------
(in millions)
Capital leases.............................................. $ 157 $ 192
Debentures payable, 7.88%, due 2043......................... 250 250
Debentures payable, 9.75%, due 2020......................... 550 550
Equipment and other obligations, 6.97%...................... 168 188
------ ------
1,125 1,180
Less current portion........................................ (58) (57)
------ ------
$1,067 $1,123
====== ======
</Table>
Interest payments were $100 million in 2003, $105 million in 2002 and $113
million in 2001.
Equipment and other obligations mature in 2004 through 2043 and are
collateralized by assets with a net book value of $208 million at December 31,
2003. Maturities of long-term debt other than capital leases are $21 million in
2004, $20 million in 2005, $21 million in 2006, $43 million in 2007, $18 million
in 2008 and $845 million in total from 2009 through 2043.
LEASES
The Company's noncancelable long-term leases generally include options to
purchase at fair value and to extend the terms. Certain lease obligations are
payable in Japanese yen, which require the maintenance of yen-denominated
deposits sufficient to satisfy the yen-denominated obligation. These deposits
are included in the "Other assets" line item of the balance sheet and totaled
$43 million and $45 million at December 31, 2003 and December 31, 2002,
respectively. 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 $204 million at
December 31, 2003.
F-18
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Minimum commitments, exclusive of executory costs borne by the Company,
are:
<Table>
<Caption>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(in millions)
2004........................................................ $ 54 $ 58
2005........................................................ 38 58
2006........................................................ 25 56
2007........................................................ 27 55
2008........................................................ 15 51
2009 - 2025................................................. 39 271
---- ----
Total....................................................... 198 $549
====
Less interest portion....................................... (41)
----
Present value............................................... $157
====
</Table>
Operating lease rent expense was $60 million in 2003, $62 million in 2002
and $70 million in 2001.
7. INCOME TAXES
The provisions for income taxes are composed of the following:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
(in millions)
Current
Federal................................................... $ 94 $ 81 $ 75
State..................................................... 11 8 24
---- ---- ----
105 89 99
---- ---- ----
Deferred
Federal................................................... (21) (29) (22)
State..................................................... 9 11 4
---- ---- ----
(12) (18) (18)
---- ---- ----
$ 93 $ 71 $ 81
==== ==== ====
</Table>
Reconciliation of the U.S. statutory tax rates with the effective tax rates
is as follows:
<Table>
<Caption>
2003 2002 2001
---- ---- ----
Statutory tax rate.......................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................. 4.2 4.2 4.2
Settlement of IRS audit..................................... -- (8.8) --
Settlement of state tax issues.............................. -- -- (3.7)
Other....................................................... (2.7) (2.9) (3.2)
---- ---- ----
Effective tax rate.......................................... 36.5% 27.5% 32.3%
==== ==== ====
</Table>
CRC is included in the consolidated federal income tax return of Green
Acquisition. The provision for current income taxes in the Consolidated
Statements of Income reflects CRC's portion of Conrail Inc.'s consolidated tax
provision. Tax expense or tax benefit is recorded on a separate company basis.
F-19
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has reached final settlements with the Internal Revenue Service
("IRS") related to all of the audits of the Company's consolidated federal
income tax returns through the fiscal year May 23, 1997. As a result of the
settlement Conrail received tax refunds of $24 million and reduced tax expense
by $23 million during 2002. The Company's consolidated income tax returns for
the short tax year period May 24, 1997-December 31, 1997 and calender year
periods 1998 through 2001 are currently being examined by the IRS. Federal and
state income tax payments were $129 million in 2003, $113 million in 2002 and
$86 million in 2001.
Significant components of the Company's deferred income tax assets
(liabilities) are as follows:
<Table>
<Caption>
DECEMBER 31,
-----------------
2003 2002
------- -------
(in millions)
Current assets.............................................. $ 1 $ 5
Current liabilities......................................... 44 60
------- -------
CURRENT DEFERRED TAX ASSET, NET............................. $ 45 $ 65
======= =======
Noncurrent liabilities:
Property and equipment.................................... (1,970) (2,000)
Other..................................................... (108) (104)
------- -------
(2,078) (2,104)
------- -------
Noncurrent assets:
Nondeductible reserves and other liabilities.............. 251 290
------- -------
DEFERRED INCOME TAX LIABILITIES, NET........................ $(1,827) $(1,814)
======= =======
</Table>
The Company has not recorded a valuation allowance, as management believes
that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax assets.
8. PENSION AND POSTRETIREMENT BENEFITS
The Company and its subsidiaries sponsor several qualified and nonqualified
pension plans and other postretirement benefit plans for its employees.
PENSION PLAN ASSET MANAGEMENT
Six investment firms manage the Company's defined benefit pension plan's
assets under investment guidelines approved by a pension fund investment
committee. Investments are allocated among domestic fixed income investments,
and domestic and international equity investments. Limitations restrict
investment concentration and use of certain derivative instruments. Fixed income
investments must have an average rating of 'AA' or better. Equity investments
must be in liquid securities listed on national exchanges. However no direct
investment is permitted in the securities of either NSC or CSX. Equity
investment managers have specific equity strategies and their returns are
expected to exceed selected market indices by prescribed margins.
The target asset allocation range is for equity allocations to be between
44% and 56% of the fund's assets with approximately 10% of the assets allocated
to international equity investments. The asset allocation on December 31, 2003,
was 45% in fixed income investments and 55% in equity investments including 13%
in
F-20
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
international equities. This compared to 54% fixed income and 46% equity
including 9% international equity as of December 31, 2002.
The plan's assumed future returns are based principally on the asset
allocation and the historic returns for the plan's asset classes determined from
both the actual plan returns and, over longer time periods, the market returns
for those asset classes.
MEDICARE CHANGES
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Act) was signed into law in December 2003. The Act introduces a
prescription drug benefit under Medicare Part D as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. Because significant
uncertainties exist regarding the measurement and disclosure requirements of the
Act, the FASB has issued staff position No. FAS 106-1, which allows a plan
sponsor to recognize or defer accounting for the effects of the Act in their
2003 financial statements. The Company has elected the deferral option and is
currently evaluating how the Act may impact its postretirement benefit
obligations. Specific authoritative guidance on the accounting for the Act's
subsidy is pending, and that guidance, when issued, could require the Company to
change previously reported information.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended
December 31, 2003, and a statement of the funded status as of December 31 of
both years:
<Table>
<Caption>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- --------------
2003 2002 2003 2002
----- ------ ---- ----
(in millions)
CHANGE IN BENEFIT OBLIGATION
Net benefit obligation at beginning of year.... $646 $ 662 $ 37 $ 36
Service cost................................... 1 1 -- --
Interest cost.................................. 41 44 2 3
Plan participants' contributions............... -- -- 4 6
Actuarial losses............................... 32 5 4 2
Benefits paid.................................. (65) (66) (10) (10)
---- ----- ---- ----
Net benefit obligation at end of year.......... $655 $ 646 $ 37 $ 37
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year......................................... $522 $ 613 $ 7 $ 8
Actual return on plan assets................... 117 (28) -- 1
Employer contributions......................... 2 3 5 2
Plan participants' contributions............... -- -- 4 6
Benefits paid.................................. (65) (66) (10) (10)
---- ----- ---- ----
Fair value of plan assets at end of year....... $576 $ 522 $ 6 $ 7
Funded status at end of year................... $(79) $(124) $(31) $(30)
Unrecognized prior service cost................ 7 8 (1) (1)
Unrecognized actuarial (gains) losses.......... 168 206 (5) (9)
---- ----- ---- ----
Net amount recognized at year end.............. $ 96 $ 90 $(37) $(40)
==== ===== ==== ====
</Table>
F-21
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following amounts have been recognized in the balance sheets as of
December 31:
<Table>
<Caption>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------- ---------------
2003 2002 2003 2002
----- ----- ----- -----
(in millions)
Prepaid pension cost................................. $ 131 $ 126 -- --
Accrued benefit cost................................. (214) (257) $(37) $(40)
Intangible asset..................................... 7 8 -- --
Accumulated other comprehensive loss................. 172 213 -- --
----- ----- ---- ----
$ 96 $ 90 $(37) $(40)
===== ===== ==== ====
</Table>
All of the Company's plans for postretirement benefits other than pensions
have no plan assets except for the retiree life insurance plan, which has $6
million and $7 million of assets in 2003 and 2002, respectively. The aggregate
benefit obligation for the postretirement plans other than pensions was $37
million at, both December 31, 2003 and 2002, respectively.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $648 million, $641 million and $566 million,
respectively, as of December 31, 2003 and $639 million, $635 million and $514
million, respectively as of December 31, 2002. As required by Statement of
Financial Accounting Standard No. 87 "Employers' Accounting for Pensions", the
Company has recorded a minimum liability of $179 million and $220 million at
December 31, 2003 and December 31, 2002, respectively. The minimum liability was
partially offset by an intangible asset to the extent of previously unrecognized
prior service costs of $7 million at both December 31, 2003 and December 31,
2002. The remaining amounts, $104 million as of December 31, 2003 and $129
million as of December 31, 2002, are recorded as a component of stockholders'
equity, net of related tax benefits as "Accumulated Other Comprehensive Loss."
The assumptions used in the measurement of the Company's benefit obligation
are as follows:
<Table>
<Caption>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------ --------------
2003 2002 2003 2002
---- ---- ----- -----
FUNDED STATUS:
Discount rate......................................... 6.25% 6.75% 6.25% 6.75%
Rate of compensation increase......................... 5.00% 5.00% 5.00% 5.00%
PENSION COST:
Discount rate......................................... 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets........................ 9.00% 9.00% 8.00% 8.00%
Rate of compensation increase......................... 5.00% 5.00% 5.00% 5.00%
</Table>
A 10% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2003, gradually decreasing to 5% by the year 2006.
Assumed health care cost trend rates affect amounts reported for the health
care plans. The effect of a one percentage point increase and (decrease) in the
assumed health care cost trend rate on the accumulated postretirement benefit
obligation is $1 million and $(1) million, respectively.
F-22
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the Company's net periodic benefit cost (income) for the
plans are as follows:
<Table>
<Caption>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------ --------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ----- -----
(in millions)
Service cost............................... $ 1 $ 1 $ 2 $-- $ -- $ --
Interest cost.............................. 41 44 45 2 3 3
Expected return on assets.................. (52) (62) (66) -- (1) (1)
Amortization of:
Transition asset......................... -- -- (1) -- -- --
Prior service cost....................... 1 1 1 -- -- --
Actuarial (gain) loss.................... 5 (1) (1) -- -- (1)
---- ---- ---- --- ----- -----
$ (4) $(17) $(20) $ 2 $ 2 $ 1
==== ==== ==== === ===== =====
</Table>
CONTRIBUTIONS FOR PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company expects to contribute approximately $2 million to the pension
plans and $3 million to the other postretirement benefit plans in 2004.
SAVINGS PLANS
The Company and certain subsidiaries provide 401(k) savings plans for union
and non-union employees. For the non-union savings plan, the Company matches a
portion of employee contributions, subject to the applicable limitations.
Savings plan expense related to the non-union savings plan was $1 million in
each of the years 2003, 2002 and 2001. There is no Company match provision under
the union employee plan except for certain unions, which negotiated a Company
match as part of their contract provisions.
INCENTIVE COMPENSATION PLANS
The Company has an incentive compensation plan for all non-union employees
in which employees receive targeted cash awards upon attainment of certain
performance criteria established by the Company's Board of Directors.
Compensation expense under this plan was $3 million in 2003 and 2002 and $2
million in 2001.
The Company also has a long-term incentive plan under which phantom stock
options are granted to officers and other key non-union employees. The option
price for the phantom shares is equal to the blended fair market value of NSC
and CSX common stock at the date of grant. Options will vest one year after
grant date and the option term may not exceed ten years. Upon exercise, eligible
participants will receive cash payments equal to the appreciation on the
composite NSC and CSX common stock fair values. Compensation expense for this
plan was $2 million in 2003, less than $1 million in 2002 and $2 million in
2001.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has 100 shares of common stock outstanding, all held by
Conrail.
F-23
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNDISTRIBUTED EARNINGS OF EQUITY INVESTEES
"Retained earnings" includes undistributed earnings of equity investees of
$218 million, $199 million and $180 million at December 31, 2003, 2002 and 2001,
respectively.
10. OTHER INCOME, NET
<Table>
<Caption>
2003 2002 2001
---- ---- ----
(in millions)
Interest income............................................. $19 $21 $16
Rental income............................................... 46 45 47
Property sales.............................................. 7 3 2
Equity in earnings of affiliates............................ 19 19 24
Other, net.................................................. 4 4 7
--- --- ---
$95 $92 $96
=== === ===
</Table>
11. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. The Company 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, 2003, the Company 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 37 locations. 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 the Company'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, 2003, the
Company had accrued $61 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 anticipates that much of this liability will be paid out
over five years; however some costs will be paid out over a longer period. The
Company believes the ultimate liability for these matters will not materially
affect its consolidated financial condition.
The Company spent $5 million in 2003, $6 million in 2002 and $10 million in
2001 for environmental remediation and related costs. In addition, the Company's
capital expenditures for environmental control and abatement projects were less
than $1 million in each of the years 2001 thru 2003.
CASUALTY
The Company is involved in various legal actions, principally relating to
occupational health claims, personal injuries, casualties and property damage.
The casualty claim liability is determined using the aid of an independent
actuarial firm based upon claims filed and an estimate of claims incurred but
not yet reported. The Company is generally self-insured for casualty claims.
Claims in excess of self-insurance levels are insured up to excess coverage
limits. While the ultimate amounts of claims incurred are dependent upon
F-24
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
future developments, in management's opinion, the recorded liability is adequate
to cover expected probable payments.
Expense recognized for casualty claims is included in the "Casualties and
insurance" line item of the income statement. For 2003, the expense recognized
was consistent with actuarial estimates. During both 2002 and 2001, the Company,
based on favorable claims development, recognized actuarial determined gains of
$16 million and $12 million respectively.
LABOR
The Company had 1,346 employees at December 31, 2003; approximately 89% of
whom are represented by 11 different labor organizations and are covered by 16
separate collective bargaining agreements. These agreements remain in effect
until changed pursuant to the Railway Labor Act. The Company was engaged in
collective bargaining at December 31, 2003 with labor organizations representing
approximately 6% of its labor force.
GUARANTEES
The Company currently guarantees the principal and interest payments in the
amount of $27 million on Equipment Trust Certificates for LMS. In addition, the
Company is also contingently liable as guarantor with respect to $3 million of
indebtedness for an affiliate company, Triple Crown Services. No liability has
been recorded related to these guarantees.
Also the Company is contingently liable under indemnification provisions
related to the sale of tax benefits. This liability is recorded in the "Other
liability" line item of the balance sheet and totaled $13 million at both
December 31, 2003 and December 31, 2002.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Accounts receivable,"
"Notes receivable from NSC/ CSX" and "Accounts payable" approximate the carrying
values of these financial instruments at December 31, 2003 and 2002.
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 $1,260
million and $1,254 million at December 31, 2003 and 2002, respectively, compared
with carrying values of $968 million and $988 million at December 31, 2003 and
2002.
F-25
EXCHANGE AGENT
THE BANK OF NEW YORK
<Table>
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT COURIER:
The Bank of New York The Bank of New York
Reorganization Unit Reorganization Unit
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attention: William Buckley/Carolle Montreuil New York, New York 10286
Attention: William Buckley/Carolle Montreuil
BY FACSIMILE: CONFIRM BY TELEPHONE:
(212) 298-1915 (212) 815-5788/5920
</Table>
Questions and requests for assistance or for additional copies of this
prospectus and consent solicitation statement and the letter of
consent/transmittal may be directed to the information agent at the telephone
number and address listed below. You may also contact your broker, dealer,
commercial bank, trust company or other nominee for assistance concerning this
exchange offer and consent solicitation.
INFORMATION AGENT
THE INFORMATION AGENT FOR THIS EXCHANGE OFFER AND CONSENT SOLICITATION IS:
INNISFREE M&A INCORPORATED
501 Madison Avenue, 20th Floor
New York, New York 10022
Banks and Brokers Call Collect:
(212) 750-5833
All Others Call Toll Free:
(877) 456-3507
DEALER MANAGER
THE DEALER MANAGER FOR THIS EXCHANGE OFFER AND CONSENT SOLICITATION IS AS
FOLLOWS:
MORGAN STANLEY
1585 Broadway
New York, New York 10036
Attn: Liability Management Group
Telephone: (800) 624-1808 (Toll Free)
Collect: (212) 761-1864
Contact: Patrick Sieb
July 26, 2004