Filed Pursuant to Rule 424(b)(3)
Registration No. 333-114795
[CSX TRANSPORTATION, INC. LOGO]
[CONSOLIDATED RAIL CORPORATION LOGO]
[NORFOLK SOUTHERN RAILWAY LOGO]
First Supplement To
The Offer To Exchange And Solicitation Of Consents
Originally Dated July 26, 2004
CONSOLIDATED RAIL CORPORATION (CONRAIL), CSX TRANSPORTATION, INC. (CSXT) AND
NORFOLK SOUTHERN RAILWAY COMPANY (NSR) HAVE INCREASED THE CASH CONSIDERATION AND
AMENDED CERTAIN TERMS OF THEIR OFFER TO EXCHANGE AND SOLICITATION OF CONSENTS
FOR CONRAIL'S 9 3/4% DEBENTURES DUE JUNE 15, 2020 AND CONRAIL'S 7 7/8%
DEBENTURES DUE MAY 15, 2043
---------------------------
THIS EXCHANGE OFFER AND CONSENT SOLICITATION (AS AMENDED BY THIS SUPPLEMENT, THE
"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 THE PROSPECTUS AND CONSENT SOLICITATION STATEMENT AND THIS SUPPLEMENT,
IF AND AS IT IS EXTENDED, AS THE "EXPIRATION DATE."
---------------------------
This first supplement to the offer to exchange and solicitation of consents (the
"Supplement") supplements our Prospectus and Consent Solicitation Statement
dated July 26, 2004 (collectively with the Supplement, the "Prospectus and
Consent Solicitation Statement"). Unless otherwise defined herein, capitalized
terms used herein have the same meanings as in the Prospectus and Consent
Solicitation Statement. Except as set forth herein, the terms and conditions of
this exchange offer and consent solicitation remain as set forth in the
Prospectus and Consent Solicitation Statement.
Conrail, CSXT and NSR have increased the Cash Payments in this exchange offer
and consent solicitation as to each series of Conrail Debentures to be as
follows:
<Table>
<Caption>
CONRAIL DEBENTURES CASH PAYMENT+
(ELIGIBLE FOR EXCHANGE) -------------
-----------------------
9 3/4% Debentures Due June 15, 2020......................... $15.00
7 7/8% Debentures Due May 15, 2043.......................... $22.25
</Table>
+ Per $1,000 of Conrail Debentures validly tendered. The 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.
In addition, CSXT and NSR have agreed to add additional covenants to the
proposed New CSXT Indenture and the proposed New NSR Indenture, respectively;
and as a result such indentures are amended as described herein. For a
discussion of the changes to the New CSXT Indenture, please refer to the CSXT
Appendix Supplement attached hereto. For a discussion of the changes to the New
NSR Indenture, please refer to the NSR Appendix Supplement attached hereto.
The procedures for tendering or withdrawing Conrail Debentures have not been
changed. The revised letter of consent/transmittal, which is being delivered
herewith, reflects the increased Cash Payment. Holders may validly tender their
notes using either the original or revised letter of consent/transmittal. All
holders who validly tender their notes in accordance with the terms of this
exchange offer and consent solicitation and are eligible to receive a Cash
Payment will receive the increased Cash Payment, including those who have
tendered on or prior to the date hereof using the original letter of
consent/transmittal.
We had discussions with an ad hoc committee that has advised us that it
represents holders of approximately $477 million in aggregate principal amount
of Conrail Debentures. Based on the commitment by Conrail, CSXT and NSR to
increase the Cash Payment and amend the other terms of this exchange offer and
consent solicitation as noted above, the members of this committee have
committed to tender their Conrail Debentures into this exchange offer and
consent solicitation. If the members of the committee validly tender and do not
withdraw their Conrail Debentures on or prior to the Expiration Date, the
condition to this exchange offer and consent solicitation requiring the consent
of holders of more than 50% of the aggregate principal amount of the Conrail
Debentures would be satisfied.
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 SUPPLEMENT 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 first supplement is dated August 9, 2004
TABLE OF CONTENTS
<Table>
WHERE YOU CAN FIND MORE INFORMATION..... i
IMPORTANT INFORMATION REGARDING THE CSXT
AND NSR APPENDICES.................... ii
SUMMARY................................. 1
SELECTED HISTORICAL FINANCIAL DATA OF
CONRAIL............................... 2
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF CONRAIL................ 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CONRAIL................. 7
</Table>
<Table>
CSXT APPENDIX SUPPLEMENT ......... CSXT-1
NSR APPENDIX SUPPLEMENT........... NSR-1
INDEX TO CONRAIL FINANCIAL
STATEMENTS...................... F-1
</Table>
------------------------
You should rely only on information contained in the Prospectus and Consent
Solicitation Statement, as supplemented hereby, including with respect to the
registration statement filed by CSXT and NYC Newco, only the CSXT Appendix
attached thereto, as supplemented hereby, and with respect to the registration
statement filed by NSR and PRR Newco, only the NSR Appendix attached thereto, as
supplemented hereby. No one is authorized to provide you with information that
is different from that contained in the Prospectus and Consent Solicitation
Statement, as supplemented hereby, and the CSXT and NSR Appendices attached
thereto, as supplemented hereby. We do not intend for the contents of any
websites referred to in the Prospectus and Consent Solicitation Statement or
this supplement to be part of the Prospectus and Consent Solicitation Statement,
as supplemented hereby.
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 the Prospectus and
Consent Solicitation Statement, as supplemented hereby, is accurate only as of
the date of this supplement regardless of the time of delivery of the Prospectus
and Consent Solicitation Statement, this supplement or of any sale of the New
Exchange Notes.
WHERE YOU CAN FIND MORE INFORMATION
The Appendices to the original Prospectus and Consent Solicitation
Statement dated July 26, 2004, incorporate important business and financial
information about CSXT, NYC Newco, NSR and PRR Newco, respectively, that is not
contained in or delivered with the original Prospectus and Consent Solicitation
Statement dated July 26, 2004, as supplemented hereby.
-- 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 to the original Prospectus and Consent Solicitation
Statement dated July 26, 2004.
-- 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 to the original Prospectus and Consent Solicitation
Statement dated July 26, 2004.
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.
The Prospectus and Consent Solicitation Statement, as supplemented hereby,
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, the Prospectus and Consent Solicitation
Statement, as supplemented hereby, does not contain all of the information
included in the registration statements filed with the SEC. You may refer to the
registration statements including any post-effective amendments relating to this
Supplement for more information.
i
IMPORTANT INFORMATION REGARDING THE CSXT AND NSR APPENDICES
Information contained in the Prospectus and Consent Solicitation Statement,
as supplemented hereby, was prepared by CSXT, NSR, Conrail and their respective
affiliates.
Information contained in the CSXT Appendix, as supplemented hereby,
attached to the Prospectus and Consent Solicitation Statement, as supplemented
hereby, was prepared solely by CSXT and its affiliates. NSR did not participate
in preparing the CSXT Appendix attached thereto, and supplemented hereby, and
did not make any due diligence inquiry or any other independent investigation
with respect to the information contained in the CSXT Appendix attached thereto,
and supplemented hereby. Accordingly, NSR disclaims any responsibility for the
CSXT-specific information contained in the CSXT Appendix attached thereto, and
supplemented hereby, or elsewhere in the Prospectus and Consent Solicitation
Statement, as supplemented hereby.
Similarly, information contained in the NSR Appendix attached to the
Prospectus and Consent Solicitation Statement, as supplemented hereby, was
prepared solely by NSR and its affiliates. CSXT did not participate in preparing
the NSR Appendix attached thereto, and supplemented hereby, and did not make any
due diligence inquiry or any other independent investigation with respect to the
information contained in the NSR Appendix attached thereto, and supplemented
hereby. Accordingly, CSXT disclaims any responsibility for the NSR-specific
information contained in the NSR Appendix attached thereto, and supplemented
hereby, or elsewhere in the Prospectus and Consent Solicitation Statement, as
supplemented hereby.
------------------------
ii
SUMMARY
The following discussion supplements the "Summary" section of the
Prospectus and Consent Solicitation Statement on pages 11 and 13 thereto.
RANKING OF THE INDEBTEDNESS OF CSX TRANSPORTATION, INC.
AND NORFOLK SOUTHERN RAILWAY COMPANY
CSX TRANSPORTATION, INC. 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 June 25, 2004, CSXT would have had approximately $1,348 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
the 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 June 25, 2004, CSXT had approximately $761 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 $761 million of secured indebtedness outstanding of CSXT, subsidiaries of
CSXT had approximately $30 million of secured indebtedness outstanding as of
June 25, 2004. In addition, as of June 25, 2004, CSXT had approximately $2,662
million of intercompany liabilities due to CSX and $528 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.
NORFOLK SOUTHERN RAILWAY COMPANY 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 June 30, 2004, NSR would have had approximately $1,654 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 June 30, 2004, NSR had approximately $818 million of
secured indebtedness on a consolidated basis which would rank senior to the New
NSR Notes. As of June 30, 2004, subsidiaries of NSR had no outstanding
indebtedness. In addition, as of June 30, 2004, NSR had $863 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 $8 million aggregate principal
amount of guarantees of NSR outstanding as of June 30, 2004.
1
SELECTED HISTORICAL FINANCIAL DATA OF CONRAIL
The following table sets forth selected historical financial data of
Conrail. The consolidated statements of operations data for the six months ended
June 30, 2004 and 2003 and the consolidated balance sheet data as of June 30,
2004 have been derived from Conrail unaudited consolidated financial statements
which are not included in the Prospectus and Consent Solicitation Statement, as
supplemented hereby. The consolidated statements of operations data for the
years ended December 31, 2003, 2002 and 2001, and the consolidated balance sheet
data as of December 31, 2003 and 2002, have been derived from Conrail's audited
consolidated financial statements which are included in the Prospectus and
Consent Solicitation Statement, as supplemented hereby. The consolidated balance
sheet data as of June 30, 2003 has been derived from our unaudited consolidated
financial statements which are not included in the Prospectus and Consent
Solicitation Statement, as supplemented hereby. The consolidated statements of
operations data for the years ended December 31, 2000 and 1999, and the
consolidated balance sheet data as of December 31, 2001, 2000 and 1999, are
derived from Conrail's audited consolidated financial statements not included or
incorporated by reference in the Prospectus and Consent Solicitation Statement,
as supplemented hereby. This data should be read in conjunction with the
unaudited pro forma financial information, related notes and other financial
information included in the Prospectus and Consent Solicitation Statement, as
supplemented hereby.
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------- -------------------------------------------
2004 2003 2003 2002 2001 2000 1999(A)
------ ------ ------ ------ ------ ------ -------
($ IN MILLIONS)
RESULTS OF OPERATIONS
Railway operating revenues....... $ 466 $ 457 $ 918 $ 893 $ 903 $ 985 $2,168
Railway operating expenses....... 323 328 659 623 639 749 2,033
------ ------ ------ ------ ------ ------ ------
Income from railway operations... 143 129 259 270 264 236 135
Interest expense................. (49) (50) (99) (104) (109) (124) (151)
Other income, net................ 54 41 95 92 96 149 76
------ ------ ------ ------ ------ ------ ------
Income from continuing operations
before income taxes and
accounting change(s)........... 148 120 255 258 251 261 60
Provision for income taxes....... 54 44 93 71 81 94 19
------ ------ ------ ------ ------ ------ ------
Income from continuing operations
before accounting change(s).... 94 76 162 187 170 167 41
Cumulative effect of change(s) in
accounting principle(s)(b)..... (1) 40 40 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net income.................. $ 93 $ 116 $ 202 $ 187 $ 170 $ 167 $ 41
====== ====== ====== ====== ====== ====== ======
FINANCIAL POSITION (AS OF PERIOD
END)
Total assets..................... $8,154 $8,075 $8,101 $8,040 $7,958 $7,939 $8,284
Total long-term debt, including
current maturities............. 1,139 1,158 1,125 1,180 1,216 1,290 1,621
Stockholder's equity............. 4,444 4,237 4,350 4,120 3,990 3,887 3,278
OTHER
Capital expenditures............. $ 9 $ 16 $ 35 $ 23 $ 47 $ 220 $ 176
Employees--end of period......... 1,296 1,375 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 2004 reflects a cumulative effect accounting change related to
the consolidation of a locomotive leasing company that decreased net income
by $1 million. Net income in 2003 reflects a cumulative effect accounting
change related to the cost to remove railroad crossties that increased net
income by $40 million.
2
UNAUDITED PRO FORMA FINANCIAL INFORMATION OF CONRAIL
The unaudited pro forma financial information set forth below gives effect
to the Conrail Spin Off Transactions and the assumptions described in the
accompanying notes. This unaudited pro forma consolidated financial information
is presented for informational purposes only. The pro forma information is not
necessarily indicative of what the financial position or results of operations
actually would have been had the Conrail Spin Off Transactions occurred on the
dates indicated. In addition, the unaudited pro forma consolidated financial
information does not purport to project the future financial position or
operating results of Conrail. The unaudited condensed pro forma consolidated
balance sheet has been prepared giving effect to the Conrail Spin Off
Transactions as if such transactions had occurred on June 30, 2004. The
unaudited pro forma consolidated statements of operations have been prepared as
if the Conrail Spin Off Transactions had occurred on January 1, 2003. The
unaudited pro forma financial information is based on historical financial
information.
CONRAIL UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2004 YEAR ENDED DECEMBER 31, 2003
------------------------------------- -------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
($ IN MILLIONS)
Operating revenues............ $466 $(286)(a),(b) $180 $918 $(562)(a),(b) $356
Operating expenses:
Compensation and benefits... 91 -- 91 168 -- 168
Material, services and
rents..................... 57 -- 57 119 (1)(d) 118
Depreciation and
amortization.............. 158 (146)(c) 12 329 (302)(c) 27
Fuel........................ 4 (1)(d) 3 7 (1)(d) 6
Casualties and insurance.... 7 (2)(d) 5 17 -- 17
Other....................... 6 -- 6 19 (6)(d) 13
---- ----- ---- ---- ----- ----
Total operating
expenses................ 323 (149) 174 659 (310) 349
---- ----- ---- ---- ----- ----
Income from operations.... 143 (137) 6 259 (252) 7
Interest expense.............. (49) 37(e) (12) (99) 73(e) (26)
Other income, net............. 54 (16)(f),(g),(h) 38 95 (13)(f),(g),(h) 82
---- ----- ---- ---- ----- ----
Income before income taxes
and accounting
change(s)............... 148 (116) 32 255 (192) 63
Provision for income taxes.... 54 (42)(i) 12 93 (70)(i) 23
---- ----- ---- ---- ----- ----
Income before accounting
change(s)............... $ 94 $ (74) $ 20 $162 $(122) $ 40
==== ===== ==== ==== ===== ====
</Table>
- ------------
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 $306 million for the six months ended June 30, 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 $20 million for the six months ended June
30, 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 $11 million for the six months
ended June 30, 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 $10 million for the six months ended
June 30, 2004 and $25 million for the year ended December 31, 2003, related
to sublease transactions with CSXT and NSR.
3
(h) To record the decrease of $15 million for the six months ended June 30, 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 $42 million for the six months ended June 30, 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 $19
million for the six months ended June 30, 2004 and $37 million for the year
ended December 31, 2003, and the amount for adjustment (i) would be increased to
$49 million for the six months ended June 30, 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 $28 million for the six months ended June 30, 2004 and $55
million for the year ended December 31, 2003, and the amount for adjustment (i)
would be increased to $46 million for the six months ended June 30, 2004 and $76
million for the year ended December 31, 2003.
4
CONRAIL UNAUDITED CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
AS OF JUNE 30, 2004
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
($ IN MILLIONS)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 25 $ (4)(a) $ 21
Accounts receivable, net........................... 29 2(a) 31
Due from NSR/CSXT.................................. 143 2(b),(c) 145
Material and Supplies.............................. 10 -- 10
Deferred tax assets................................ 45 -- 45
Other current assets............................... 18 (9)(a) 9
------ ------- ------
Total current assets............................ 270 (9) 261
Investments.......................................... 296 (296)(d) --
Property and Equipment, net.......................... 6,001 (5,447)(e) 554
Notes Receivable from NSC/CSX........................ 1,374 (1,374)(f) --
Other Assets......................................... 213 289(g) 502
------ ------- ------
Total Assets.................................... $8,154 $(6,837) $1,317
====== ======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................... $ 28 $ (3)(h) $ 25
Current maturities of long-term debt............... 61 -- 61
Due to NSC/CSX..................................... 5 55(i) 60
Wages and employee benefits........................ 26 -- 26
Casualty reserves.................................. 39 -- 39
Accrued and other current liabilities.............. 91 (11)(j) 80
------ ------- ------
Total Current Liabilities....................... 250 41 291
Long-term debt....................................... 1,078 (800)(k) 278
Casualty reserves.................................... 112 -- 112
Deferred income taxes................................ 1,811 (1,507)(l) 304
Other liabilities.................................... 459 (19)(m) 440
------ ------- ------
Total liabilities............................... 3,710 (2,285) 1,425
------ ------- ------
Stockholder's equity................................. 4,444 (4,552)(n) (108)
------ ------- ------
Total liabilities and stockholder's equity...... $8,154 $(6,837) $1,317
====== ======= ======
</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.
(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 $56
million, from CSXT and NSR.
(c)To record cancellation of operating and lease agreement receivables of $54
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.
5
(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 $4,944 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 $4,752 million.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CONRAIL
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.
RESULTS OF OPERATIONS
OVERVIEW
Three and Six Months Ending June 30, 2004 Compared with Three and Six
Months Ending June 30, 2003
Conrail reported net income of $49 million for the second quarter of 2004,
an increase of $10 million, or 25.6%, compared with the second quarter of 2003.
The increase is principally due to higher income from operations.
For the six months ended June 30, 2004, Conrail reported net income of $93
million compared with $116 million for the same 2003 period. The decrease
reflects the absence of a favorable net cumulative effect accounting change
adjustment of $40 million included in net income for 2003 partially offset by
increases in operating income and other income, net.
OPERATING REVENUES
Operating revenues (primarily rental revenues and operating fees) for the
second quarter of 2004 were $236 million, an increase of $5 million, or 2.2%,
compared with same 2003 period.
For the six months ended June 30, 2004, operating revenues were $466
million, an increase of $9 million, or 2.0%, versus the same 2003 period.
OPERATING EXPENSES
Operating expenses for the second quarter of 2004 were $162 million, a
decrease of $3 million or 1.8%, compared with the prior year, as discussed
below.
For the six months ended June 30, 2004, operating expenses were $323
million, a decrease of $5 million, or 1.5%, versus the same 2003 period.
Compensation and benefits increased $3 million, or 7.0%, for the second
quarter of 2004 and $6 million, or 7.1%, for the six months ended June 30, 2004,
compared with the same 2003 periods. Both variances are principally attributable
to increased pension expense.
Material, services and rents decreased $2 million, or 6.5%, in the second
quarter of 2004 and $5 million , or 8.1%, for the six months ended June 30,
2004, compared with the same 2003 periods. The decreases are primarily due to
reduced legal fees and other purchased services.
Depreciation and amortization decreased $6 million, or 7.1%, in the second
quarter of 2004 and $8 million or 4.8%, for the first six months, compared with
the same 2003 periods. The decreases primarily reflect asset retirements.
Casualties and insurance increased $5 million in the second quarter of 2004
and $6 million for the six months ended June 30, 2004, compared with the same
2003 periods. The increases are attributable to an adjustment in environmental
reserves and less favorable occupational claim experience.
Other operating expenses decreased $3 million in the second quarter of 2004
and $4 million for the six months ended June 30, 2004, compared with the same
2003 periods. The decrease is principally related to a favorable property tax
adjustment recognized in the second quarter of 2004.
7
OTHER INCOME, NET
Other Income, net, increased $7 million, or 33.3%, in the second quarter of
2004 and $13 million, or 31.7%, for the six months ended June 30, 2004, compared
with the same 2003 periods. The increases are primarily due to increased equity
in earnings of affiliates and interest income.
FINANCIAL CONDITION AND LIQUIDITY
Six Months Ending June 30, 2004 Compared with Six Months Ending June 30,
2003
OPERATING ACTIVITIES
Conrail's operating activities provided cash of $184 million for the six
months ended June 30, 2004, compared with $197 million for the same 2003 period.
The small decrease is principally attributable to changes in 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 $150 million for the six months
ended June 30, 2004, compared to $179 million for the same 2003 period. The
principal activity is investment in interest bearing notes receivable due from
NSC and CSX.
Capital expenditures were $9 million for the six months ended June 30,
2004, compared to $16 million for the same 2003 period.
FINANCING ACTIVITIES
Debt payments totaled $18 million for the six months ended June 30, 2004,
compared to $21 million for the same 2003 period.
WORKING CAPITAL
Conrail had working capital of $20 million at June 30, 2004 compared to a
working capital deficit of $29 million at December 31, 2003. 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.
8
NSR APPENDIX SUPPLEMENT
TABLE OF CONTENTS
<Table>
Unaudited Pro Forma Financial Information................... NSR-1
Capitalization.............................................. NSR-5
Ratio of Earnings to Fixed Charges.......................... NSR-6
Computation of Ratio of Earnings to Fixed Charges........... NSR-6
Description of the New NSR Notes............................ NSR-7
Reports by Company........................................ NSR-7
</Table>
NSR-i
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 six months ended June 30, 2004 which are incorporated by reference into the
Prospectus and Consent Solicitation Statement as supplemented hereby, and the
"Capitalization" and the selected financial data and related notes included in
the Prospectus and Consent Solicitation Statement as supplemented hereby.
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 June 30, 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 six months ended June 30, 2004 and for the year ended
December 31, 2003 incorporated by reference into the prospectus and
consent solicitation statement.
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-1
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
AS OF JUNE 30, 2004
---------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
($ IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 159 $ 3(a) $ 162
Accounts receivable -- net............................. 131 -- 131
Materials and supplies................................. 99 -- 99
Deferred income taxes.................................. 175 -- 175
Other current assets................................... 149 24(b) 173
------- ------ -------
Total current assets................................ 713 27 740
Investments.............................................. 879 237(c) 1,116
Properties less accumulated depreciation................. 11,489 7,822(d) 19,311
Other assets............................................. 711 -- 711
------- ------ -------
Total assets........................................ $13,792 $8,086 $21,878
======= ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 862 $ -- $ 862
Income and other taxes................................. 182 11(e) 193
Due to NSC--net........................................ 863 -- 863
Due to Conrail......................................... 80 (31)(f) 49
Other current liabilities.............................. 124 -- 124
Current maturities of long-term debt................... 102 35(g) 137
------- ------ -------
Total current liabilities........................... 2,213 15 2,228
Long-term debt........................................... 750 767 (g),(h 1,517
Other liabilities........................................ 1,037 46(i) 1,083
Due to Conrail........................................... 797 (797)(f) --
Deferred income taxes.................................... 4,516 2,660(j) 7,176
------- ------ -------
Total liabilities................................... 9,313 2,691 12,004
Stockholders' equity:
Common stock........................................... 167 -- 167
Additional paid-in capital............................. 721 5,395(k) 6,116
Accumulated other comprehensive income................. 385 -- 385
Retained income........................................ 3,206 -- 3,206
------- ------ -------
Total stockholders' equity.......................... 4,479 5,395 9,874
------- ------ -------
Total liabilities and stockholders' equity.......... $13,792 $8,086 $21,878
======= ====== =======
</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.
NSR-2
(a) To record the cash and cash equivalents of PRR received by NSR.
(b) To record the other current assets of PRR received by NSR, which are
primarily a receivable from CRC for advances made by PRR.
(c) To record investments of PRR received by NSR, principally a partial
ownership interest in an equipment leasing company.
(d) 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 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.
(e) To record miscellaneous tax liabilities, primarily franchise taxes, assumed
by NSR.
(f) To record the extinguishment of amounts due from NSR to PRR as a result of
the Conrail Spin Off Transactions.
(g) To record $35 million of current maturities and $151 million of long-term
debt for liabilities incurred through the Conrail Spin Off Transactions
related to the restructuring of Conrail's secured debt.
(h) 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, $616 million, reflects
the estimated fair value of the $464 million aggregate principal amount of
the New NSR Notes.
(i) To record other liabilities of PRR, principally environmental remediation
liabilities, assumed by NSR.
(j) 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.
(k) 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 (h) would be reduced to $314 million, the
amount for adjustment (j) would be increased to $2,690 million, and the amount
for adjustment (k) would be increased to $5,667 million. If 75% of holders
validly tender, and do not withdraw, their Conrail Debentures, the amount for
adjustment (h) would be reduced to $462 million, the amount for adjustment (j)
would be increased to $2,675 million, and the amount for adjustment (k) would be
increased to $5,534 million.
NSR-3
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2004 YEAR ENDED DECEMBER 31, 2003
------------------------------------ --------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ------ ----------- ---------
($ IN MILLIONS) ($ IN MILLIONS)
Railway operating revenues..... $3,405 $ -- $3,405 $6,290 $ -- $6,290
Railway operating expenses:
Compensation and benefits.... 840 -- 840 1,636 -- 1,636
Materials, services and
rents...................... 944 6(a) 950 1,970 13(a) 1,983
Conrail rents and services... 236 (177)(b) 59 477 (348)(b) 129
Depreciation................. 253 119(c) 372 498 245(c) 743
Diesel fuel.................. 213 -- 213 380 -- 380
Casualties and other
claims..................... 78 -- 78 183 -- 183
Other........................ 163 -- 163 290 -- 290
------ ----- ------ ------ ----- ------
Total railway operating
expenses................ 2,727 (52) 2,675 5,434 (90) 5,344
------ ----- ------ ------ ----- ------
Income from railway
operations.............. 678 52 730 856 90 946
Other income (expenses)--net... (159) -- (159) (220) -- (220)
Interest expense on debt....... (14) (17)(d) (31) (24) (38)(d) (62)
------ ----- ------ ------ ----- ------
Income before income taxes and
accounting changes........... 505 35 540 612 52 664
Provision for income taxes..... 182 11(e) 193 229 17(e) 246
------ ----- ------ ------ ----- ------
Income before accounting
changes................. $ 323 $ 24 $ 347 $ 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 $9
million for the six months ended June 30, 2004, and to $21 million for the year
ended December 31, 2003, and the amount for adjustment (e) would be increased to
$15 million for the six months ended June 30, 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 $13 million for
the six months ended June 30, 2004, and to $29 million for the year ended
December 31, 2003, and the amount for adjustment (e) would be increased to $13
million for the six months ended June 30, 2004, and to $20 million for the year
ended December 31, 2003.
NSR-4
CAPITALIZATION
The following table sets forth NSR's debt and total capitalization as of
June 30, 2004, and as adjusted to give effect to the Conrail Spin Off
Transactions; including but not limited to the exchange offer and consent
solicitation assuming holders of all Conrail Debentures validly tender, and do
not withdraw, their Conrail Debentures. You should read this and the historical
consolidated financial statements and accompanying notes that are included in
NSR's 2003 Annual Report on Form 10-K for the year ended December 31, 2003, and
in NSR's Quarterly Report on Form 10-Q for the six months ended June 30, 2004,
which are incorporated by reference into the Prospectus and Consent Solicitation
Statement as supplemented hereby.
<Table>
<Caption>
AS OF JUNE 30, 2004
----------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
($ IN MILLIONS)
LIABILITIES
Due to NSC--net........................................... $ 863 $ -- $ 863
Due to Conrail............................................ 80 (31)(a) 49
Current maturities of long-term debt...................... 102 35(b) 137
Long-term debt............................................ 750 767(b),(c) 1,517
Due to Conrail (long-term)................................ 797 (797)(a) --
------ ------ -------
Total debt (including current portion of long-term
debt and related party balances)................... 2,592 (26) 2,566
STOCKHOLDERS' EQUITY
Common stock............................................ 167 -- 167
Additional paid-in capital.............................. 721 5,395(d) 6,116
Accumulated other comprehensive income.................. 385 -- 385
Retained income......................................... 3,206 -- 3,206
------ ------ -------
Total stockholders' equity........................... 4,479 5,395 9,874
------ ------ -------
Total Capitalization (including current portion of
long-term debt and related party balances)......... $7,071 $5,369 $12,440
====== ====== =======
</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 $35 million of current maturities and $151 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, $616 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 $314 million and the amount for adjustment (d) would be increased to $5,667
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 $462 million and the amount for adjustment
(d) would be increased to $5,534 million.
NSR-5
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>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -------------------------------------
JUNE 30, 2004 2003 2002 2001 2000 1999
---------------- ----- ----- ----- ----- -----
Ratio of earnings to fixed charges........... 10.98x 7.37x 6.46x 5.88x 2.36x 4.31x
</Table>
NSR AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------------------
JUNE 30, 2004 2003 2002 2001 2000 1999
---------------- ------ ------ ------ ------ ------
EARNINGS
Income from continuing operations before
income taxes as reported.............. $ 505 $ 612 $ 720 $ 551 $ 285 $ 506
Add:
Total interest expenses (as detailed
below)............................. 45 82 114 87 185 130
Amortization of capitalized
interest........................... 3 5 6 5 5 4
Income (loss) of partially owned
entities (1)....................... (4) (6) (9) (10) 12 --
Subsidiaries' preferred dividend
requirements....................... -- -- 2 2 2 2
Income before income taxes, as
adjusted.............................. $ 549 $ 693 $ 833 $ 635 $ 489 $ 642
FIXED CHARGES
Interest expense on debt................ $ 14 $ 24 $ 30 $ 37 $ 37 $ 39
Other interest expense.................. 11 19 44 10 109 57
Calculated interest portion of rent
expense............................... 20 39 40 40 39 34
Total interest expenses................. 45 82 114 87 185 130
Capitalized interest.................... 5 12 11 17 18 15
Subsidiaries' preferred dividend
requirement on a pretax basis......... -- -- 4 4 4 4
Total fixed charges..................... $ 50 $ 94 $ 129 $ 108 $ 207 $ 149
RATIO OF EARNINGS TO FIXED CHARGES...... 10.98x 7.37x 6.46x 5.88x 2.36x 4.31x
</Table>
- ---------------
(1) Includes: (a) the distributed income of 20%-49% owned entities, net of
equity recorded in undistributed income and the minority income of
consolidated entities which have fixed charges.
The computations do not include $0.3 million of interest expense related to
$7.8 million of debt guaranteed for a less than 50% owned entity.
NSR-6
DESCRIPTION OF THE NEW NSR NOTES
The following discussion supplements the summary of the terms of the New
NSR Notes contained in the NSR Appendix which formed a part of the Prospectus
and Consent Solicitation Statement.
REPORTS BY COMPANY
The New NSR Indenture provides that NSR shall:
(1) file with the trustee, within 15 days after NSR is required to file the
same with the SEC, copies of the annual reports and of the information,
documents and other reports (or copies of such portions of any of the
foregoing as the SEC may from time to time by rules and regulations
prescribe) which NSR may be required to file with the SEC pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or,
if NSR is not required to file information, documents or reports
pursuant to either of said Sections, then it shall file with the
trustee audited annual and unaudited quarterly financial statements as
would have been required to be included in an annual report on Form
10-K or a quarterly report on Form 10-Q as applicable;
(2) file with the trustee and the SEC, in accordance with rules and
regulations prescribed from time to time by the SEC, such additional
information, documents and reports with respect to compliance by NSR
with the conditions and covenants of the New NSR Indenture as may be
required from time to time by such rules and regulations; and
(3) transmit to all holders of New NSR Notes within 30 days after the
filing thereof with the trustee, in the manner and to the extent
provided in Section 313(c) of the Trust Indenture Act, such summaries
of any information, documents and reports required to be filed by NSR
pursuant to paragraphs (1) and (2) of this section of the New NSR
Indenture as may be required by rules and regulations prescribed from
time to time by the SEC.
Delivery of such documents, reports and information pursuant to this
section of the New NSR Indenture is for information purposes only and the
trustee's receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including NSR's compliance with any of its covenants thereunder (as to
which the trustee is entitled to rely exclusively on an officers' certificate).
NSR shall reasonably promptly notify the trustee when any New NSR Notes
become listed on any national securities exchange and of any delisting
therefrom.
NSR-7
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 and
Six Months Ended June 30, 2004 and 2003................... F-2
Consolidated Balance Sheets as of June 30, 2004 and December
31, 2003.................................................. F-3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003.............................. F-4
Notes to Consolidated Financial Statements.................. F-5
</Table>
F-1
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
($ IN MILLIONS)
Operating Revenues NSC/CSX (Note 2)........................ $211 $211 $418 $416
Third parties.............................................. 25 20 48 41
---- ---- ---- ----
Total operating revenues................................. 236 231 466 457
OPERATING EXPENSES
Compensation and benefits................................ 46 43 91 85
Fuel..................................................... 2 2 4 4
Material, services and rents............................. 29 31 57 62
Depreciation and amortization............................ 79 85 158 166
Casualties and insurance................................. 4 (1) 7 1
Other.................................................... 2 5 6 10
---- ---- ---- ----
Total operating expenses................................. 162 165 323 328
---- ---- ---- ----
Income from operations..................................... 74 66 143 129
Interest expense........................................... (25) (25) (49) (50)
Other income, net.......................................... 28 21 54 41
---- ---- ---- ----
Income from continuing operations before income taxes and
accounting changes....................................... 77 62 148 120
Provision for income taxes................................. 28 23 54 44
---- ---- ---- ----
Income from continuing operations before accounting
changes.................................................. 49 39 94 76
Cumulative effect of changes in accounting principles, net
of taxes (Note 4)........................................ -- -- (1) 40
---- ---- ---- ----
NET INCOME................................................. $ 49 $ 39 $ 93 $116
==== ==== ==== ====
</Table>
See accompanying notes to the consolidated financial statements.
F-2
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
($ IN MILLIONS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 25 $ 9
Accounts receivable, net.................................. 29 34
Due from NSR/CSXT......................................... 143 136
Deferred tax assets....................................... 45 45
Material and supplies..................................... 10 8
Other current assets...................................... 18 16
------ ------
Total current assets................................... 270 248
Property and equipment, net................................. 6,001 6,119
Notes receivable from NSC/CSX............................... 1,374 1,231
Other Assets................................................ 509 503
------ ------
Total assets........................................... $8,154 $8,101
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... 28 37
Current maturities of long-term debt...................... 61 58
Due to NSC/CSX............................................ 5 5
Wages and employee benefits............................... 26 31
Casualty reserves......................................... 39 39
Accrued and other current liabilities..................... 91 107
------ ------
Total current liabilities.............................. 250 277
Long-term debt.............................................. 1,078 1,067
Casualty reserves........................................... 112 125
Deferred income taxes....................................... 1,811 1,827
Other liabilities........................................... 459 455
------ ------
Total liabilities...................................... 3,710 3,751
------ ------
Stockholder's equity
Common stock ($1 par value; 100 shares authorized, issued
and outstanding)....................................... -- --
Additional paid-in capital................................ 2,269 2,268
Retained earnings......................................... 2,279 2,186
Accumulated other comprehensive loss...................... (104) (104)
------ ------
Total stockholder's equity............................. 4,444 4,350
------ ------
Total liabilities and stockholder's equity............. $8,154 $8,101
====== ======
</Table>
See accompanying notes to the consolidated financial statements.
F-3
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30,
----------------
2004 2003
------ ------
($ IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 93 $ 116
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............................... 158 166
Deferred income taxes....................................... (19) (14)
Equity in earnings of affiliates............................ (14) (9)
Gains from sales of property................................ (2) (1)
Pension expense (credit).................................... 5 (2)
Changes in:
Accounts receivable....................................... 5 2
Accounts and wages payable................................ (14) 3
Accrued and other current liabilities..................... (16) (23)
Due from NSR/CSXT......................................... (7) 19
Due to NSC/CSX............................................ -- (3)
Other....................................................... (6) (17)
----- -----
Net cash provided by operating activities.............. 184 197
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions....................... (9) (16)
Notes receivable from NSC/CSX............................. (143) (168)
Proceeds from disposal of property and equipment.......... 6 3
Other..................................................... (4) 2
----- -----
Net cash used in investing activities.................. (150) (179)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt.............................. (18) (21)
----- -----
Net cash used in financing activities.................. (18) (21)
----- -----
Net Increase (Decrease) in Cash and Cash Equivalents........ 16 (3)
Cash and Cash Equivalents
At beginning of period.................................... 9 14
----- -----
At end of period.......................................... $ 25 $ 11
===== =====
</Table>
See accompanying notes to the 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 June 30, 2004 and December 31, 2003, the consolidated
results of operations for the three and six-month periods ended June 30, 2004
and 2003 and the consolidated cash flows for the six-month periods ending June
30, 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 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 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
(UNAUDITED)
Effective July 26, 2004, Conrail, CSXT and NSR announced the commencement
of the exchange offer for Conrail's unsecured debt. In connection with this
exchange offer, Conrail also is soliciting consents from the holders of the
unsecured debt to permit the proposed restructuring. In addition, on July 26,
2004, Conrail began soliciting consents from holders of certain secured debt and
lease obligations to, among other things, permit the proposed restructuring.
Both the exchange offer and unsecured and secured debt consent solicitations
will expire on August 23, 2004, unless extended.
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 March 2004, Conrail adopted Financial Accounting Standards Board
("FASB") 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. Pursuant to FIN 46R, in the first quarter of
2004, 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 $40 million as of June 30, 2004. Total liabilities as of June 30,
2004, totaled $42 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 also 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.
F-6
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30
were as follows (in millions):
<Table>
<Caption>
PENSION
BENEFITS
-----------
2004 2003
---- ----
Service cost................................................ $ 1 $ 1
Interest cost............................................... 19 20
Expected return on assets................................... (23) (26)
Amortization of unrecognized net actuarial (gain) loss...... 8 3
---- ----
Net cost (benefit).......................................... $ 5 $ (2)
==== ====
</Table>
The net periodic cost for other postretirement benefits was $1 million for
the six-month period ending June 30, 2004 and 2003, respectively.
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 six months ended June 30, 2004, contributions of $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.
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 29 locations. Conrail regularly participates in monitoring the status of the
known sites and assessing the adequacy of the liability estimates.
F-7
CONSOLIDATED RAIL CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CONRAIL INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At June 30, 2004 and December 31, 2003, the Company had accrued $62 million
and $61 million, respectively, 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-8
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 supplement and the revised 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
August 9, 2004