-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N/1Dmcmnq6mWasr+hOaPOHXaDM1+M8o/KZ9ue2MWjlz64IThGHaGBVnyvnmruKCO z8wNd8FbmRWFAMy64cNXWQ== 0000702165-97-000006.txt : 19970327 0000702165-97-000006.hdr.sgml : 19970327 ACCESSION NUMBER: 0000702165-97-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORFOLK SOUTHERN CORP CENTRAL INDEX KEY: 0000702165 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 521188014 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08339 FILM NUMBER: 97564133 BUSINESS ADDRESS: STREET 1: THREE COMMERCIAL PL CITY: NORFOLK STATE: VA ZIP: 23510-2191 BUSINESS PHONE: 8046292680 10-K405 1 NORFOLK SOUTHERN CORPORATION 10-K405 FYE 12/31/96 PAGE 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 --------------------------- FORM 10-K405 (X)ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996. OR ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission file number 1-8339 NORFOLK SOUTHERN CORPORATION ----------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 52-1188014 ------------------------------------------------ ------------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) Three Commercial Place, Norfolk, Virginia 23510-2191 ------------------------------------------------ ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (757) 629-2680 ------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each Class on which registered ------------------- --------------------- Norfolk Southern Corporation Common Stock (Par Value $1.00) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K405 or any amendment to this Form 10-K405. (X) The aggregate market value of the voting stock held by nonaffiliates as of February 28, 1997: $11,407,533,062 The number of shares outstanding of each of the registrant's classes of common stock, as of February 28, 1997: 125,185,548 (excluding 7,252,634 shares held by registrant's consolidated subsidiaries) PAGE 2 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive proxy statement (to be dated April 1, 1997) to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year are incorporated by reference in Part III. PAGE 3 TABLE OF CONTENTS ----------------- Item Page ---- ---- Part I 1. Business 4 2. Properties 4 3. Legal Proceedings 21 4. Submission of Matters to a Vote of Security Holders 24 Executive Officers of the Registrant 25 Part II 5. Market for Registrant's Common Stock and Related Stockholder Matters 29 6. Selected Financial Data 30 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 37 8. Financial Statements and Supplementary Data 54 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 80 Part III 10. Directors and Executive Officers of the Registrant 80 11. Executive Compensation 80 12. Security Ownership of Certain Beneficial Owners and Management 80 13. Certain Relationships and Related Transactions 80 Part IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 81 Index to Consolidated Financial Statement Schedule 81 Power of Attorney 86 Signatures 86 Exhibit Index 90 PAGE 4 PART I Item 1. Business. - ------ -------- and Item 2. Properties. - ------ ---------- GENERAL - Norfolk Southern Corporation (Norfolk Southern) was incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia. On June l, 1982, Norfolk Southern acquired control of two major operating railroads, Norfolk and Western Railway Company (NW) and Southern Railway Company (Southern) in accordance with an Agreement of Merger and Reorganization dated as of July 31, 1980, and with the approval of the transaction by the Interstate Commerce Commission (ICC) (now the Surface Transportation Board {STB}). Effective December 31, 1990, Norfolk Southern transferred all the common stock of NW to Southern, and Southern's name was changed to Norfolk Southern Railway Company (Norfolk Southern Railway). As of December 31, 1996, all the common stock of NW (100 percent voting control) was owned by Norfolk Southern Railway, and all the common stock of Norfolk Southern Railway and 16.1 percent of its voting preferred stock (resulting in 94.8 percent voting control) was owned directly by Norfolk Southern. On June 21, 1985, Norfolk Southern acquired control of North American Van Lines, Inc. and its subsidiaries (NAVL), a diversified motor carrier. In accordance with an Acquisition Agreement dated May 2, 1984, and with the approval of the transaction by the ICC, Norfolk Southern acquired all the issued and outstanding common stock of NAVL. During 1993, NAVL underwent a restructuring (see discussion on page 7) designed to enhance its opportunities to return to profitability. Unless indicated otherwise, Norfolk Southern and its subsidiaries are referred to collectively as NS. PROPOSED ACQUISITION OF CONRAIL INC. - On October 24, 1996, in response to the October 15, 1996, announcement that Conrail Inc. (Conrail) had entered into a merger agreement with CSX Corporation, NS commenced an all-cash tender offer for all the Common Stock and Series A ESOP Convertible Junior Preferred Stock of Conrail (collectively, Shares), including in each case the associated Common Stock Purchase Rights. See Note 15 to the Consolidated Financial Statements on page 76 for additional details. On February 11, 1997, NS acquired 8.2 million Shares of Conrail stock (approximately 9.9 percent of the then outstanding Conrail Common Stock), representing the approximate maximum number NS could buy without triggering Conrail's anti-takeover defenses, at a cost of $115 per Share, or $943 million in the aggregate. The purchase was financed through issuance of commercial paper backed by a portion of the revolving debt capacity under the credit facility obtained in connection with the proposed acquisition of Conrail. PAGE 5 These Shares have been placed in a voting trust and under certain circumstances might have to be sold at a loss. On February 12, 1997, NS commenced a second tender offer for the remaining Shares and has notified Conrail of its intention to conduct a proxy contest in connection with Conrail's 1997 Annual Meeting of shareholders, currently scheduled for December 19, 1997, seeking, among other things, to remove certain of the current members of the Conrail Board and to elect a new slate of nominees designated by NS. Pursuant to an amendment to the merger agreement between CSX and Conrail announced on March 7, 1997, CSX has offered to purchase all Shares for $115 per Share in cash and CSX is permitted to enter into negotiations with other parties, including NS, concerning the acquisition of the securities or assets, or concessions relating to the assets or operations, of Conrail. NS and CSX are negotiating a comprehensive resolution of the issues confronting the eastern railroads based on the proposal submitted by NS to both CSX and Conrail on February 24, 1997. Such a resolution could involve a joint acquisition of Shares by NS and CSX. However, unless and until such negotiations are successfully concluded, NS intends to continue in effect its tender offer for all Shares not owned by NS. For additional information concerning NS' pending tender offer for Shares not owned by NS, reference is made to NS' Tender Offer Statement on Schedule 14D-1, together with the exhibits thereto, initially filed with the Securities and Exchange Commission on February 12, 1997, as amended. RAILROAD OPERATIONS - As of December 31, 1996, NS' railroads operated approximately 14,300 miles of road in the states of Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia, and the Province of Ontario, Canada. Of this total, 12,094 miles are owned with the balance operated under lease or trackage rights; most of this total are main line track. In addition, its railroads operate 10,800 miles of passing, industrial, yard and side tracks. NS' railroads have major leased lines between Cincinnati, Ohio, and Chattanooga, Tennessee, and in the State of North Carolina. The Cincinnati-Chattanooga lease, covering about 335 miles, 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 North Carolina leases, covering approximately 330 miles, expired by their terms at the end of 1994. Although a lease extension agreement was approved by the boards of both Norfolk Southern and the North Carolina Railroad Company (NCRR) and by the stockholders of NCRR, the U.S. District Court in Raleigh ruled that there was no quorum at the stockholders' meeting and enjoined the parties from performing under the extension agreement. NCRR has suits pending against Norfolk PAGE 6 Southern and various subsidiaries in federal court in Raleigh to enforce rights under the expired leases and at the STB to seek the establishment of terms and conditions of NS' railroads' continued use, including interim and long-term compensation. Also, certain NCRR stockholders earlier had filed four separate, and still pending, derivative actions challenging the adequacy of the rental terms in the extension agreement. NS' railroads presently are operating over the leased lines under the requirements of federal law, and will continue to do so until the matter has been resolved through agreement or a decision by the STB establishing reasonable conditions or permitting discontinuance of such operations. Whatever the ultimate resolution of the litigation, it is not expected to have a material effect on NS' consolidated financial statements. NS' lines carry raw materials, intermediate products and finished goods primarily in the Southeast and Midwest and 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 NS include: Norfolk, Virginia; Morehead City, North Carolina; Charleston, South Carolina; Savannah and Brunswick, Georgia; and Jacksonville, Florida. Gulf Coast ports served include: Mobile, Alabama, and New Orleans, Louisiana. The lines of NS' railroads reach most of the larger industrial and trading centers of the Southeast and Midwest, with the exception of those in central and southern Florida. Atlanta, Birmingham, New Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago, Detroit, Cincinnati, Buffalo, Norfolk, Charleston, Savannah and Jacksonville are among the leading centers originating and terminating freight traffic on the system. In addition, a haulage arrangement with the Florida East Coast Railway allows NS' railroads to provide single-line service to and from south Florida, including the port cities of Miami, West Palm Beach and Fort Lauderdale. The system's lines also reach many individual industries, mines (in western Virginia, eastern Kentucky and southern West Virginia) and businesses located in smaller communities in its service area. The traffic corridors carrying the heaviest volumes of freight include those from the Appalachian coal fields of Virginia, West Virginia and Kentucky to Norfolk and Sandusky, Ohio; Buffalo to Chicago and Kansas City; Chicago to Jacksonville (via Cincinnati, Chattanooga and Atlanta); and Washington, D.C./Hagerstown, Maryland, to New Orleans (via Atlanta and Birmingham). Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City, Memphis, New Orleans and St. Louis are major gateways for interterritorial system traffic. NS' railroads and other railroads have entered into service interruption agreements, effective December 30, 1994, providing indemnities to parties affected by a strike over specified industry issues. If NS were so affected, it could receive daily indemnities from non-affected parties; if parties other than NS were affected, NS could be required to pay indemnities to those parties. If NS were required to pay the maximum amount of indemnities required of it under these agreements--an event considered unlikely at this time--such liability should not exceed approximately $85 million. PAGE 7 MOTOR CARRIER OPERATIONS - DOMESTIC OPERATIONS - NAVL's principal transportation activity is the domestic, irregular route common and contract carriage of used household goods and special commodities between points in the United States. NAVL also operates as an intrastate carrier of property in 29 states. Prior to its restructuring in 1993, NAVL's domestic motor carrier business was organized into three primary divisions: Relocation Services (RS) specializing in residential relocation of used household goods; High Value Products (HVP) specializing in office and industrial relocations and transporting exhibits; and Commercial Transport (CT) specializing in the transportation of truckload shipments of general commodities. In 1993, NAVL underwent a restructuring involving termination of the CT Division and sale of the operations of Tran-Star, Inc. (Tran-Star), NAVL's refrigerated trucking subsidiary. In 1993, NAVL discontinued CT's operations, transferred some parts of CT's business to other divisions and began selling CT's assets that were not needed in NAVL's other operations. The sale of Tran-Star's operations was completed on December 31, 1993. During 1996, the RS and HVP divisions conducted operations through a network of over 400 agents at approximately 680 locations in the United States. Agents are local moving and storage companies that provide NAVL with such services as solicitation, packing and warehousing in connection with the movement of household goods and specialized products. NAVL's future domestic operations are expected to be conducted principally through the RS and HVP divisions. Customized Logistics Services (CLS) was established in 1993 as an operating unit of the HVP Division. CLS' business is to focus NAVL's resources to respond to a variety of customer needs for integrated logistics services. The services include emergency parts order fulfillment, time-definite transportation and in-transit merge programs (delivering an entire order, merged from multiple manufacturing points, to a customer at one time). FOREIGN OPERATIONS - NAVL's foreign operations are conducted through the RS and HVP Divisions and through foreign subsidiaries, including North American Van Lines Canada, Ltd. The Canadian subsidiary provides motor carrier service for the transportation of used household goods and specialized commodities between most points in Canada through a network of approximately 150 agent locations. During 1996, certain administrative functions related to the Canadian operations were transferred to NAVL's Fort Wayne, Indiana, headquarters. NAVL's international operations consist primarily of forwarding used household goods to and from the United States and between foreign countries through a network of approximately 360 foreign agents and representatives. NAVL's international operations are structurally aligned with the services provided by its domestic operating divisions. All international household goods operations and related subsidiaries in Alaska and Canada are assigned to the RS Division. The remaining international operations, which include subsidiaries in the United States, Germany and the United Kingdom, are involved in the transportation of selected general and specialized commodities and are assigned to the HVP Division. PAGE 8 TRIPLE CROWN OPERATIONS - Until April 1993, Norfolk Southern's intermodal subsidiary, Triple Crown Services, Inc. (TCS), offered intermodal service using RoadRailer (Registered Trademark) (RT) equipment and domestic containers. RoadRailer(RT) units are enclosed vans which can be pulled over highways in tractor- trailer configuration and over the rails by locomotives. On April 1, 1993, the business, name and operations of TCS were transferred to Triple Crown Services Company (TCSC), a partnership in which subsidiaries of Norfolk Southern and Conrail are equal partners. RoadRailer(RT) equipment owned or leased by TCS (which was renamed TCS Leasing, Inc.) is operated by TCSC. Because NS indirectly owns only 50 percent of TCSC, the revenues of TCSC are not consolidated with the results of NS. TCSC offers door-to-door intermodal service using RoadRailer(RT) equipment and domestic containers in the corridors previously served by TCS, as well as service to the New York and New Jersey markets via Conrail. Major traffic corridors include those between New York and Chicago, Chicago and Atlanta, and Atlanta and New York. TRANSPORTATION OPERATING REVENUES - NS' total transportation operating revenues were $4.8 billion in 1996. Revenue, shipments and revenue yield by principal transportation operating revenue sources for the past five years are set forth in the following table:
Year Ended December 31, Principal Sources of ------------------------------------------------ Transportation Operating Revenues 1996 1995 1994 1993 1992 - -------------------- ---- ---- ---- ---- ---- (Revenues in millions, shipments in thousands, revenue yield in dollars per shipments) COAL Revenues $ 1,304.7 $1,267.8 $1,290.2 $1,239.2 $1,324.1 % of total revenues 27.4% 27.2% 28.1% 27.8% 28.7% Shipments 1,309.6 1,266.8 1,274.2 1,208.7 1,291.9 % of total shipments 26.5% 26.2% 27.2% 26.4% 28.2% Revenue Yield $ 996 $ 1,001 $ 1,013 $ 1,025 $ 1,025 CHEMICALS Revenues $ 555.9 $ 536.5 $ 534.7 $ 499.0 $ 498.9 % of total revenues 11.7% 11.5% 11.7% 11.2% 10.8% Shipments 378.6 368.3 370.7 341.6 327.4 % of total shipments 7.7% 7.6% 7.9% 7.5% 7.1% Revenue Yield $ 1,468 $ 1,457 $ 1,442 $ 1,461 $ 1,524 PAPER/FOREST Revenues $ 513.0 $ 537.3 $ 521.8 $ 522.2 $ 517.2 % of total revenues 10.8% 11.5% 11.4% 11.7% 11.2 Shipments 438.2 459.1 464.2 466.3 465.4 % of total shipments 8.9% 9.5% 9.9% 10.2% 10.1% Revenue Yield $ 1,171 $ 1,170 $ 1,124 $ 1,120 $ 1,111 AUTOMOTIVE Revenues $ 488.7 $ 449.1 $ 429.0 $ 425.8 $ 391.6 % of total revenues 10.2% 9.6% 9.4% 9.5% 8.5% Shipments 354.3 328.4 317.2 317.8 287.7 % of total shipments 7.2% 6.8% 6.8% 6.9% 6.3% Revenue Yield $ 1,379 $ 1,368 $ 1,352 $ 1,340 $ 1,361
PAGE 9
Year Ended December 31, Principal Sources of ------------------------------------------------ Transportation Operating Revenues 1996 1995 1994 1993 1992 - -------------------- ---- ---- ---- ---- ---- (Revenues in millions, shipments in thousands, revenue yield in dollars per shipments) AGRICULTURE Revenues $ 393.3 $ 393.7 $ 379.5 $ 357.0 $ 344.4 % of total revenues 8.2% 8.4% 8.3% 8.0% 7.5% Shipments 376.3 391.1 382.5 359.1 352.4 % of total shipments 7.6% 8.1% 8.2% 7.9% 7.7% Revenue Yield $ 1,045 $ 1,007 $ 992 $ 994 $ 977 METALS/CONSTRUCTION Revenues $ 358.0 $ 353.1 $ 334.2 $ 310.9 $ 289.4 % of total revenues 7.5% 7.6% 7.3% 7.0% 6.3% Shipments 364.9 372.3 371.3 339.6 312.8 % of total shipments 7.4% 7.7% 7.9% 7.4% 6.8% Revenue Yield $ 981 $ 948 $ 900 $ 915 $ 925 INTERMODAL (Trailers, Containers and RoadRailers) Revenues $ 487.4 $ 474.3 $ 428.7 $ 373.6 $ 343.5 % of total revenues 10.2% 10.2% 9.3% 8.4% 7.5% Shipments 1,331.0 1,262.6 1,127.3 994.7 916.2 % of total shipments 27.0% 26.2% 24.0% 21.7% 20.0% Revenue Yield $ 366 $ 376 $ 380 $ 376 $ 375 OTHER INTERMODAL RELATED* Revenues $ -- $ -- $ -- $ 18.2 $ 67.9 % of total revenues -- -- -- 0.4% 1.5% --------- -------- -------- -------- -------- Total Railway Operating Revenues $4,101.0 $4,011.8 $3,918.1 $3,745.9 $3,777.0 Total Railway Shipments 4,552.9 4,448.6 4,307.4 4,027.8 3,953.8 MOTOR CARRIER** Revenues $ 669.0 $ 656.2 $ 663.2 $ 714.2 $ 829.6 % of total revenues 14.0% 14.0% 14.5% 16.0% 18.0% Shipments (domestic) 383.1 381.1 379.3 550.2 631.0 % of total shipments 7.7% 7.9% 8.1% 12.0% 13.8% Revenue Yield $ 1,746 $ 1,722 $ 1,748 $ 1,298 $ 1,315 --------- -------- -------- -------- -------- Total Transportation Operating Revenues $ 4,770.0 $4,668.0 $4,581.3 $4,460.1 $4,606.6 Total Shipments 4,936.0 4,829.7 4,686.7 4,578.0 4,584.8 Note: Revenues previously reported as "other railway revenues" (principally switching and demurrage) have been allocated to revenues reported for each commodity group. Shipments include general merchandise and coal rail carloads, intermodal rail and RoadRailer(RT) units, and domestic motor carrier shipments. * See discussion on page 8 regarding TCSC revenues. ** See discussion on page 7 regarding motor carrier restructuring.
PAGE 10 COAL TRAFFIC - Coal, coke and iron ore--most of which is bituminous coal--is NS' railroads' principal commodity group. They originated 116.8 million tons of coal, coke and iron ore in 1996 and handled a total of 130.2 million tons. Originated tonnage increased 2 percent from 114.2 million tons in 1995, and total tons handled increased 4 percent from 125.1 million tons in 1995. Revenues from coal, coke and iron ore account for about 27 percent of NS' total transportation operating revenues. The following table shows total coal, coke and iron ore tonnage originated on line, received from connections and handled for the past five years:
Tons of Coal, Coke and Iron Ore (Millions) --------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Originated 116.8 114.2 114.8 111.9 117.9 Received 13.4 10.9 11.1 6.1 6.5 ----- ----- ----- ----- ----- Handled 130.2 125.1 125.9 118.0 124.4
Of the 116.8 million tons of coal, coke and iron ore originated on NS' railroads' lines in 1996, the approximate breakdown by origin state was as follows:
Origin State Millions of Tons ------------ ---------------- West Virginia 40.7 Virginia 35.4 Kentucky 26.8 Alabama 5.4 Illinois 5.1 Tennessee 1.8 Indiana 0.9 Ohio 0.5 New York 0.2 ----- Total 116.8 =====
Of this originated coal, coke and iron ore, approximately 26.9 million tons moved for export, principally through NS' pier facilities at Norfolk (Lamberts Point), Virginia; 19.7 million tons moved to domestic and Canadian steel industries; 62.3 million tons of steam coal moved to electric utilities; and 7.9 million tons moved to other industrial and miscellaneous users. NS' railroads moved 8.7 million tons of originated coal, coke and iron ore to various docks on the Ohio River, and 3.6 million tons to various Lake Erie ports. Other than coal for export, virtually all coal handled by NS' railroads was terminated in states situated east of the Mississippi River. PAGE 11 Total coal handled through all system ports in 1996 was 41.7 million tons. Of this total, 71 percent moved through the pier facilities at Lamberts Point. In 1996, total tonnage handled at Lamberts Point, including coastwise traffic, was 29.5 million tons, a 2 percent increase from the 28.9 million tons handled in 1995. The quantities of NS export coal handled through Lamberts Point for the past five years were as follows:
Export Coal through Lamberts Point (Millions of tons) -------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Originated 26.3 25.4 23.9 24.6 30.8 Handled 26.4 25.5 24.1 24.9 31.2
See the discussion of coal traffic, by type of coal, in Part II, Item 7, "Management's Discussion and Analysis," on page 37. MERCHANDISE RAIL TRAFFIC - The merchandise traffic group consists of Intermodal and five major commodity groupings: Paper/Forest; Chemicals; Automotive; Agriculture; and Metals/Construction. Total merchandise revenues in 1996 were $2.8 billion, a 2 percent increase over 1995. Merchandise carloads handled in 1996 were 3.24 million, compared with 3.18 million handled in 1995, an increase of 2 percent. Intermodal results, for 1993 and later, reflect the effect of the formation, in April 1993, of TCSC, a partnership between NS and Conrail subsidiaries (see also page 7). This partnership provides RoadRailer(RT) service previously offered by a wholly owned subsidiary of NS. Because NS owns only 50 percent of TCSC, its revenues are not consolidated. NS' intermodal revenues include only revenues for rail service NS provides the partnership. In 1996, 106.2 million tons of merchandise freight, or approximately 68 percent of total merchandise tonnage handled by NS, originated on line. The balance of merchandise traffic was received from connecting carriers (mostly railroads, with some truck, water and highway as well), usually at interterritorial gateways. The principal interchange points for NS-received traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St. Louis and Louisville. Revenues in four of the six market groups comprising merchandise traffic improved in 1996 over 1995. The biggest gains were in Automotive, up $39.6 million; Chemicals, up $19.4 million; and Intermodal, up $13.1 million. See the discussion of merchandise rail traffic by commodity group in Part II, Item 7, "Management's Discussion and Analysis," on page 37. PAGE 12 MOTOR CARRIER TRAFFIC - Motor carrier revenues increased 2 percent to $669.0 million in 1996, primarily due to gains in the HVP Division. In 1995, motor carrier revenues were $656.2 million, down 1 percent from 1994, as gains in the HVP Division were offset by reductions in RS. DOMESTIC OPERATIONS are conducted through NAVL's RS and HVP divisions. In 1996, total domestic shipments for these divisions were 383,137, up 0.5 percent from 1995. RS - Domestic shipments of used household goods transported by the RS Division fall into three market categories. Approximately 52 percent of the domestic shipment volume comes from the sale of moving services to individual consumers. Another 38 percent comes from corporations and other businesses that pay for the relocation of their employees. The remaining 10 percent is derived from military, government and other sources. Total domestic RS Division shipments in 1996 represented 27 percent of the NAVL domestic motor carrier shipments transported by the two primary divisions. Total domestic revenues from this division were down 2 percent, compared with 1995, and represented 40 percent of total revenues from operations. HVP - The HVP Division specializes in providing transportation services in less-than-truckload (LTL) and truckload (TL) quantities of sensitive products. These products are divided into the following categories: office furniture and equipment, exhibits and displays, electronic equipment, industrial machinery, commercial relocation, LTL furniture and selected general commodities. Total HVP Division shipments transported in 1996, including TL and LTL, represented 73 percent of the NAVL domestic motor carrier shipments transported by the two primary divisions. Revenues from this division were up 5 percent from 1995 levels and represented 47 percent of total revenues from operations. FOREIGN OPERATIONS include NAVL's Canadian subsidiary, North American Van Lines Canada, Ltd., as well as operating subsidiaries in England and Germany. Foreign operations involving the transportation of used household goods and selected general and specialized commodities generated revenues of $86.0 million in 1996, up 5 percent from 1995. Revenues from foreign operations represented 13 percent of NAVL's total revenues. PAGE 13 RAIL OPERATING STATISTICS - The following table sets forth certain statistics relating to NS' railroads' operations for the past five years:
Year Ended December 31, ------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Revenue ton miles (billions) 129.8 126.6 122.3 111.6 107.6 Freight train miles traveled (millions) 49.4 48.5 46.0 43.3 41.1 Revenue per ton mile $0.0316 $0.0317 $0.0320 $0.0336 $0.0351 Revenue tons per train 2,625 2,611 2,655 2,577 2,618 Revenue ton miles per man-hour worked 2,764 2,679 2,579 2,304 2,184 Percentage ratio of railway operating expenses to railway operating revenues 71.6 73.5 73.4 75.6 75.5
FREIGHT RATES - In 1996, NS' railroads continued their reliance on private contracts and exempt price quotes as their predominant pricing mechanisms. Thus, a major portion of NS' railroads' freight business is not 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. In 1996, NS' railroads were found by the STB to be "revenue adequate" based on results for the year 1995. A railroad is "revenue adequate" under the applicable law when its return on net investment exceeds the rail industry's composite cost of capital. The revenue adequacy measure is one of several factors considered by the STB when it is called upon to rule on the reasonableness of regulated rates. Pricing and service flexibility afforded by the Motor Carrier Act of 1980 and the Household Goods Transportation Act of 1980 has resulted in NAVL's increased emphasis on innovative pricing action in order to remain competitive. Since 1980, NAVL has increasingly operated as a contract carrier. As of December 31, 1996, domestic contract carriage agreements accounted for the following percentage of shipments: RS Division, 31 percent and HVP Division, 69 percent. PAGE 14 PASSENGER OPERATIONS - Regularly scheduled passenger operations on NS' railroads' lines consist of Amtrak trains operating between Alexandria and New Orleans, and between Charlotte and Selma, North Carolina. Former Amtrak operations between East St. Louis and Centralia, Illinois, were discontinued by Amtrak on November 3, 1993. Commuter trains continued operations on the NS line between Manassas and Alexandria under contract with two transportation commissions of the Commonwealth of Virginia, providing for rental and for reimbursement of related expenses incurred by NS. During 1993, a lease of the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois replaced an agreement under which NS had provided commuter rail service for the Authority. NONCARRIER OPERATIONS - Norfolk Southern's noncarrier subsidiaries engage principally in the acquisition and subsequent leasing of coal, oil, gas and timberlands, the development of commercial real estate and the leasing or sale of rail property and equipment. In 1996, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment set forth in Statement of Financial Accounting Standards No. 14. PAGE 15 RAILWAY PROPERTY: EQUIPMENT - As of December 31, 1996, NS owned or leased the following units of equipment:
Number of Units -------------------------------- Capacity Owned* Leased Total of Equipment --------- -------- -------- ------------ Type of Equipment - ----------------- Locomotives: (Horsepower) Multiple purpose 1,974 0 1,974 6,149,850 Switching 119 0 119 174,450 Auxiliary units 65 0 65 0 --------- ------- -------- ----------- Total locomotives 2,158 0 2,158 6,324,300 ========= ======= ======== =========== Freight Cars: (Tons) Hopper 24,933 41 24,974 2,643,019 Box 19,976 428 20,404 1,584,306 Covered Hopper 12,489 2,272 14,761 1,549,737 Gondola 24,170 105 24,275 2,584,134 Flat 4,078 819 4,897 352,762 Caboose 231 0 231 0 Other 1,741 4 1,745 119,598 --------- ------- -------- ----------- Total freight cars 87,618 3,669 91,287 8,833,556 ========= ======= ======== =========== Other: Work equipment 6,959 5 6,964 Vehicles 3,698 0 3,698 Highway trailers and containers 2,348 3,181 5,529 RoadRailers(RT) 923 0 923 Miscellaneous 1,518 1,199 2,717 --------- ------- -------- Total other 15,446 4,385 19,831 ========= ======= ======== * Includes railroad equipment leased to outside parties and railroad equipment operated by NS' railroads that is subject to equipment trusts and capitalized leases.
PAGE 16 The following table indicates the number and year of purchase for locomotives and freight cars owned at December 31, 1996:
Year Built --------------------------------------------------------- 1986- 1980- 1979 & 1996 1995 1994 1993 1992 1991 1985 Before Total ---- ---- ---- ---- ---- ---- ---- ------ ----- Locomotives: Number of units 120 125 25 31 55 452 426 924 2,158 Percent of fleet 5.6 5.8 1.2 1.4 2.6 21.0 19.7 42.7 100.0 Freight cars: Number of units 871 932 778 930 607 5,520 10,210 67,770 87,618 Percent of fleet 1.0 1.1 0.9 1.1 0.7 6.3 11.7 77.2 100.0
The average age of the freight car fleet at December 31, 1996, was 22.3 years. During 1996, 7,485 freight cars were retired. As of December 31, 1996, the average age of the locomotive fleet was 15.4 years. During 1996, 105 locomotives, the average age of which was 24.4 years, were retired. Since 1988, more than 23,000 coal cars have been rebodied. As a result, the remaining serviceability of the freight car fleet is greater than may be inferred from the high percentage of freight cars built in earlier years. Ongoing freight car and locomotive maintenance programs are intended to ensure the highest standards of safety, reliability, customer satisfaction and equipment marketability. In past years, the bad order ratio reflected the storage of certain types of cars which were not in high demand. The ratio has declined more recently as a result of a disposition program for underutilized, unserviceable and over-age revenue cars. In this connection, an orderly disposition of 17,000 freight cars, begun in October 1994, was substantially complete at the end of 1996.
Annual Average Bad Order Ratio -------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Freight Cars (excluding cabooses): NS Rail 4.8% 5.8% 6.7% 7.3% 7.6% All Class I railroads 5.0* 6.0* 7.3 7.1 7.5 Locomotives: NS Rail 4.5 4.7 4.7 4.3 4.4 * In 1996 and 1995, the industry bad order ratio was as of June 1. Prior years' industry ratios were based on a monthly average.
PAGE 17 TRACKAGE - All NS trackage is standard gauge, and the rail in approximately 95 percent of the main line trackage (including first, second, third and branch main tracks, all excluding trackage rights) ranges from 100 to 140 pounds per yard. Of the 22,369 miles of track maintained as of December 31, 1996, 15,877 were laid with welded rail. The density of traffic on running tracks (main line trackage plus passing tracks) during 1996 was as follows:
Gross tons of freight carried per track mile Track miles Percent (Millions) of running tracks* of total ---------------- ----------------- -------- 0-4 4,837 30 5-19 4,682 29 20 and over 6,529 41 ------ --- 16,048 100 * Excludes trackage rights.
The following table summarizes certain information about NS' track roadway additions and replacements during the past five years:
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Track miles of rail installed 401 403 480 574 660 Miles of track surfaced 4,686 4,668 4,760 5,048 5,690 New crossties installed (millions) 1.9 2.0 1.7 1.6 1.9
MICROWAVE SYSTEM - The NS microwave system, consisting of 6,960 radio path miles, 398 active stations and 5 passive repeater stations, provides communications between most operating locations. The microwave system is used principally for voice communications, VHF radio control circuits, data and facsimile transmissions, traffic control operations, AEI data transmissions and relay of intelligence from defective equipment detectors. TRAFFIC CONTROL - Of a total of 12,762 road miles operated by NS, excluding trackage rights over foreign lines, 5,400 road miles are governed by centralized traffic control systems (of which 230 miles are controlled by data radio from 14 microwave site locations) and 2,600 road miles are equipped for automatic block system operation. COMPUTERS - Data processing facilities connect the yards, terminals, transportation offices, rolling stock repair points, sales offices and other key system locations to the central computer complex in Atlanta, Ga. Operating and traffic data are compiled and stored to provide customers with information on their shipments throughout the system. Data processing facilities are capable of providing current information on the location of every train and each car on line, as well as related waybill and other train and car movement data. PAGE 18 Additionally, these facilities afford substantial capacity for, and are utilized to assist management in the performance of, a wide variety of functions and services, including payroll, car and revenue accounting, billing, material management activities and controls, and special studies. OTHER - The railroads have extensive facilities for support of operations, including freight depots, car construction shops, maintenance shops, office buildings, and signals and communications facilities. MOTOR CARRIER PROPERTY: REAL ESTATE - NAVL owns and leases real estate in support of its operations. Principal real estate holdings include NAVL's headquarters complex and warehouse and vehicle maintenance facilities in Fort Wayne, Indiana, vehicle maintenance facilities in Fontana, California, and terminal facilities in Grand Rapids, Michigan, and Great Falls, Montana. NAVL also leases facilities throughout the United States for sales offices, maintenance facilities and for warehouse, terminal and distribution center operations. EQUIPMENT - NAVL relies extensively on independent contractors (owner-operators) who supply the power equipment (tractors) used to pull NAVL trailers. Agents also provide a substantial portion of NAVL's equipment needs, particularly for the transportation of household goods, by furnishing tractors and trailers on either a permanent or an intermittent lease basis. As of December 31, 1996, agents and owner-operators together supplied 3,438 tractors, representing 97 percent of the U.S. power equipment operated in NAVL service. Also as of December 31, 1996, NAVL owned 2,976 trailer units, representing 52 percent of the U.S. trailer fleet in NAVL service. The remaining 48 percent was provided mainly by agents and owner-operators. Agents and owner-operators also provided 1,058 straight trucks, or 97 percent, of such units in NAVL service. NAVL has an extensive program for the repair and maintenance of its trailer equipment. In 1996, approximately 12,920 work orders were completed at NAVL's facility in Fort Wayne. As of December 31, 1996, the average age of trailer equipment in the NAVL fleet was 8.4 years. COMPUTERS - NAVL relies extensively on data processing facilities for shipment planning and dispatch functions as well as shipment tracing. Data processing capabilities are also utilized in revenue processing functions, driver and agent account settlement activity, and internal accounting and record keeping service. ENCUMBRANCES - Certain railroad equipment is subject to the prior lien of equipment financing obligations amounting to approximately $593.4 million as of December 31, 1996, and $545.4 million at December 31, 1995. In addition, a portion of NS' properties is subject to liens securing, as of December 31, 1996, and 1995, approximately $50.9 million and $77.2 million of mortgage debt, respectively. PAGE 19 Many of the tractors utilized in NAVL service are purchased by NAVL from manufacturers and resold to agents and owner-operators under a NAVL-sponsored financing program. At December 31, 1996, NAVL had $13.9 million in such tractor contracts receivable. This program allows NAVL to generate the funds necessary to purchase the tractors and to resell them under favorable financing terms. The equipment is sold under conditional sales contracts with the agents and owner- operators. CAPITAL EXPENDITURES - Capital expenditures for road, equipment and other property for the past five years were as follows:
Capital Expenditures -------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (In millions of dollars) Transportation property Road $437.8 $385.7 $384.6 $417.9 $426.5 Equipment 332.1 344.3 245.9 240.5 281.3 Other property 26.1 33.4 82.4 10.8 8.3 ------ ------ ------ ------ ------ Total $796.0 $763.4 $712.9 $669.2 $716.1 ====== ====== ====== ====== ======
Capital spending and maintenance programs are and have been designed to assure the ability to provide safe, efficient and reliable transportation services. For 1997, NS is planning $792 million of capital spending, of which $781 million will be for railway projects and $11 million for motor carrier property. Looking further ahead, total rail and motor carrier spending is expected to be similar to 1995 and 1996 levels. A substantial portion of future capital spending is expected to be funded through internally generated cash, although debt financing will continue as the primary funding source for equipment acquisitions. Acquisition of all or part of Conrail (see page 4) could cause the reallocation of already-planned capital spending and/or additional capital spending. ENVIRONMENTAL MATTERS - Compliance with federal, state and local laws and regulations relating to the protection of the environment is a principal NS goal. To date, such compliance has not affected materially NS' capital additions, earnings, liquidity or competitive position. See the discussion of "Environmental Matters" in Part II, Item 7, "Management's Discussion and Analysis" on page 37, and in Note 15 to the Consolidated Financial Statements on page 76. EMPLOYEES - NS employed an average of 25,830 employees in 1996, compared with an average of 26,944 in 1995. The approximate average cost per employee during 1996 was $45,173 in wages and $17,772 in employee benefits. Approximately 74 percent of these employees are represented by various labor organizations. PAGE 20 As of the end of 1996, NS had negotiated labor agreements with all of its unions, except the American Train Dispatchers, which represents about 200 employees. The accords with the 12 other union organizations, which include compensation settlements in line with other major industries, will not be due for change until after January 1, 2000. GOVERNMENT REGULATION - In addition to environmental, safety, securities and other regulations generally applicable to all businesses, NS' railroads are subject to regulation by the STB, which succeeded the ICC on January 1, 1996. The STB has jurisdiction over some rates, routes, conditions of service, and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by rail common carriers. The Department of Transportation regulates certain track and mechanical equipment standards. The relaxation of economic regulation of railroads, begun over a decade ago by the ICC under the Staggers Rail Act of 1980, is expected to continue under the STB. Thus it appears that additional rail business will be exempted from regulation in the future. Significant exemptions are TOFC/COFC (i.e., "piggyback") business, rail boxcar traffic, lumber, manufactured steel, automobiles and certain bulk commodities such as sand, gravel, pulpwood and wood chips for paper manufacturing. Transportation contracts on regulated shipments, which no longer require regulatory approval, effectively remove those shipments from regulation as well. Over 80 percent of NS' freight revenues come from either exempt traffic or traffic moving under transportation contracts. For motor carrier operations conducted by NAVL, the Department of Transportation and the STB are the principal regulatory entities. The STB exercises jurisdiction over the relationship between carriers and owner-operators, and carrier practices and common carrier rates relating to the transportation of household goods. The primary focus of the Department of Transportation is on driver qualification and safety standards, including maximum trailer length and width. COMPETITION - There is continuing strong competition among rail, water and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company. Inventory carrying costs, service reliability, ease of handling and the desire to avoid loss and damage during transit are increasingly important considerations, especially for higher valued finished goods, machinery and consumer products. Even for raw materials, semi-finished goods and work-in-process, users are increasingly sensitive to transport arrangements which minimize problems at successive production stages. PAGE 21 NS' primary rail competitor is the CSX system; both operate throughout much of the same territory. Other railroads also operate in parts of the territory. NS also competes with motor carriers, water carriers and with shippers who have the additional option of handling their own goods in private carriage. Consummation of the proposed merger agreement between Conrail and CSX (see page 4) could result in a serious imbalance in rail competition in the East--an outcome NS is resisting vigorously on a number of fronts and that the negotiations with CSX could prevent. Certain cooperative strategies between railroads (such as the TCSC partnership involving NS and Conrail, see page 7) and between railroads and motor carriers enable carriers to compete more effectively in specific markets. NAVL continues to face strong competition due to deregulation and overcapacity in the industry that will keep profits at a modest level. While service remains a key issue, many shippers now place greater emphasis on price. For the RS Division, contract carriage and volume discount programs dominate the corporate relocation segment, and guaranteed price options are common to the individual consumer segment. Contract carriage agreements are also utilized extensively by the HVP Division to meet the service and price requirements of its customers. Item 3. Legal Proceedings. - ------ ----------------- Conrail. On October 15, 1996, Conrail Inc. ("Conrail") and CSX Corporation ("CSX") announced an agreement to merge, in connection with which CSX announced its intention to commence a multi-tier tender offer for shares of Conrail stock in return for cash and shares of CSX stock. On October 23, 1996, NS announced it would make a competing, all-cash tender offer for all shares of Conrail stock; on the same date, NS, Atlantic Acquisition Corporation (a wholly owned Pennsylvania subsidiary of NS) and a Conrail stockholder who is an NS employee (such parties together, the "Plaintiffs") filed a complaint against Conrail and its directors and against CSX (such parties together, the "Defendants") in the United States District Court for the Eastern District of Pennsylvania. Plaintiffs sought, among other things, certain declaratory and injunctive relief and alleged various breaches of fiduciary duty and violations of certain federal securities laws. The District Court set a November 12 hearing date-- two days prior to the date then set for a Special Meeting at which Conrail stockholders were to be asked to approve an amendment to the Articles of Incorporation that ultimately would be necessary to permit CSX to acquire sufficient shares of Conrail stock virtually to assure approval of that merger. PAGE 22 On October 30, 1996, Plaintiffs amended the complaint. In addition to the allegations cited in the original complaint, the amended complaint alleged, among other things, that provisions in the merger agreement between Conrail and CSX, which prohibit the Conrail Board from redeeming the rights issuable under a Conrail- adopted rights plan (Conrail's "Poison Pill") and from amending or otherwise taking further action with respect to the Conrail rights plan, are ultra vires under Pennsylvania law and constitute a breach of the Conrail directors' fiduciary duties of loyalty and care; that the tender offer materials distributed by Conrail and CSX misrepresented key terms of the Conrail rights plan necessary to an understanding of the effects of that plan; that the provisions of the merger agreement between Conrail and CSX which prohibit the Conrail directors from withdrawing their recommendation that Conrail stockholders accept and approve the proposed CSX transaction and from terminating the merger agreement between Conrail and CSX for a period of 180 days from the date of execution of that agreement are ultra vires under Pennsylvania law and constitute a breach of the Conrail directors' fiduciary duties of loyalty and care; and that CSX has knowingly participated in the illegal conduct of Conrail and its directors. In the amended complaint, Plaintiffs sought certain declaratory and injunctive relief in addition to that sought pursuant to the original complaint. On November 1, Plaintiffs requested that the District Court temporarily enjoin the Defendants from taking, or in certain instances to require them to take, certain actions, including taking the steps necessary to prevent a "Distribution Date" from occurring under the Conrail rights plan. At the hearing on November 4 to hear arguments concerning Plaintiffs' motion, Conrail advised that its directors earlier that day had adopted a resolution deferring the "Distribution Date" under that plan. As a result of Conrail's announcement that its Special Meeting had been rescheduled from November 14, the District Court moved its hearing from November 12 to November 18. At that hearing, Plaintiffs also sought to enjoin, among other things, CSX from acquiring shares pursuant to the CSX offer. On November 19, 1996, the District Court denied Plaintiffs' motion for preliminary injunctive relief. On December 5, 1996, Defendants filed an answer and counterclaim alleging, among other things, tortious interference with contractual relationships and requesting, among other things, damages. NS believes that the counterclaim is without merit and on December 20, 1996, filed a Motion to Dismiss the counterclaim for failure to state a claim pursuant to Rule 12(b) of the Federal Rules of Civil Procedure. PAGE 23 On December 17, 1996, the District Court held a hearing to consider Plaintiffs' Motion for a Preliminary Injunction as to Plaintiffs' claims (i) that Defendants' stated intention not to convene the special meeting of the Company's stockholders scheduled for December 23, 1996, constituted a breach of fiduciary duty; and (ii) that Defendants' stated intention successively to postpone the vote of Company stockholders scheduled for December 23, 1996, until such stockholders submit to Defendants' will constituted fraudulent and fundamentally unfair conduct. At the conclusion of the hearing, the District Court issued an order enjoining Defendants from failing to convene, and/or from postponing, and/or from adjourning the Pennsylvania Special Meeting scheduled for Monday, December 23, 1996, by reason of the Company, or its nominees' not having received sufficient proxies to assure approval of the proposal set forth in the Company's "Notice of Special Meeting of Shareholders" and in the Company's proxy materials to "opt-out" of Subchapter E. On January 2, 1997, Plaintiffs filed a Motion for Preliminary Injunction and a Motion for Partial Summary Judgment in the District Court. In their Motion for Partial Summary Judgment, Plaintiffs requested an order stating that consummation of the CSX First Offer caused a "Control Transaction" with respect to the Company to occur under the Pennsylvania Control Transaction Law and created joint and several liability among the members of the Control Transaction Group to pay at least $110 cash per Share to each demanding Company stockholder. In their Motion for Preliminary Injunction, Plaintiffs requested that the District Court enjoin Defendants, and all persons acting in concert with them, from seeking to enforce or requiring compliance with, the No Negotiation Provision, as extended, and to enjoin Defendants from convening the Pennsylvania Special Meeting until ten business days after Company stockholders receive notice of the District Court's ruling on Plaintiffs' Motions for Preliminary Injunction and Partial Summary Judgment. On January 8, 1997, Plaintiffs filed a Supplemental Motion for Preliminary Injunction requesting that Defendants be enjoined from convening the Pennsylvania Special Meeting until ten business days after Company stockholders received notice of the District Court's final judgment on the Pennsylvania Control Transaction Law issue. Such motions were denied on January 9, 1997. On January 28, 1997, the Third Circuit issued an order consolidating the pending appeals and setting a briefing schedule and an oral argument for February 25, 1997; the decision of the District Court was affirmed on March 7. PAGE 24 Pursuant to an amendment to the merger agreement between CSX and Conrail announced on March 7, 1997, CSX has offered to purchase all shares of Conrail for $115 per Share in cash and CSX is permitted to enter into negotiations with other parties, including NS, concerning the acquisition of the securities or assets, or concessions relating to the assets or operations, of Conrail. NS and CSX are negotiating a comprehensive resolution of the issues confronting the eastern railroads based on the proposal submitted by NS to both CSX and Conrail on February 24, 1997. Such a resolution could involve a joint acquisition of shares of Conrail by NS and CSX. However, unless and until such negotiations are successfully concluded, NS intends to continue in effect its tender offer for all shares of Conrail not owned by NS. The effect of these negotiations on the described legal proceedings cannot be predicted with certainty. This matter has been reported previously by NS in Part II, Item 1, of its Form 10-Q Report for the quarter ending September 30, 1996. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of 1996. PAGE 25 Executive Officers of the Registrant. - ------------------------------------- Norfolk Southern's officers are elected annually by the Board of Directors at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected. There are no family relationships among the officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, as of March 1, 1997, relating to these officers: Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ David R. Goode, 56, Present position since September Chairman, President and 1992; prior thereto was Chief Executive Officer President. James C. Bishop, Jr., 60, Present position since March 1, Executive Vice President-Law 1996; prior thereto was Vice President-Law. R. Alan Brogan, 56, Executive Present position since December Vice President-Transportation 1992; prior thereto was Logistics (and President-North Vice President-Quality American Van Lines, Inc.) Management. L. I. Prillaman, 53, Executive Present position since October Vice President-Marketing 1995. Served as Vice President- Properties from December 1992 to October 1995, and prior thereto was Vice President and Controller. Stephen C. Tobias, 52, Present position since July 1994. Executive Vice President- Served as Senior Vice President- Operations Operations from October 1993 to July 1994, Vice President- Strategic Planning from December 1992 to October 1993, and prior thereto was Vice President- Transportation. Henry C. Wolf, 54, Executive Present position since June 1993; Vice President-Finance prior thereto was Vice President- Taxation. William B. Bales, 62, Senior Present position since October Vice President-International 1995. Served as Vice President- Coal Marketing from August 1993 to October 1995, and prior thereto was Vice President-Coal and Ore Traffic. PAGE 26 Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ Paul N. Austin, 53, Vice Present position since June 1994. President-Personnel Served as Assistant Vice President-Personnel from February 1993 to June 1994, and prior thereto was Director Compensation. John F. Corcoran, 56, Vice Present position since March 1992. President-Public Affairs David A. Cox, 60, Vice Present position since December President-Properties 1995; prior thereto was Assistant Vice President- Industrial Development. Thomas L. Finkbiner, 44, Present position since August 1993. Vice President-Intermodal Served as Senior Assistant Vice President-International and Intermodal from April to August 1993, and prior thereto was Assistant Vice President- International and Intermodal. Robert C. Fort, 52, Vice Present position since December President-Public Relations 1996; prior thereto was Assistant Vice President-Public Relations. John W. Fox, Jr., 49, Vice Present position since October President-Coal Marketing 1995. Served as Assistant Vice President-Coal Marketing from August 1993 to October 1995, and prior thereto was General Manager Eastern Region. Thomas J. Golian, 63, Present position since October Vice President 1995. Served as Executive Assistant to the Chairman, President and CEO from April 1993 to October 1995, and prior thereto was Special Assistant to the President. James L. Granum, 60, Vice Present position since March 1992. President-Public Affairs James A. Hixon, 43, Vice Present position since June 1993; President-Taxation prior thereto was Assistant Vice President-Tax Counsel. PAGE 27 Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ Jon L. Manetta, 58, Vice Present position since December President-Transportation & 1995. Served as Vice President- Mechanical Transportation from June 1994 to December 1995, Assistant Vice President-Transportation from October 1993 to June 1994, Assistant Vice President- Strategic Planning from January to October 1993, and prior thereto was Director Joint Facilities and Budget. Harold C. Mauney, Jr., 58, Present position since December Vice President-Operations 1996; prior thereto was Vice Planning and Budget President-Quality Management. Donald W. Mayberry, 53, Vice Present position since December President-Research and Tests 1995; prior thereto was Vice President-Mechanical. James W. McClellan, 57, Vice Present position since October President-Strategic Planning 1993; prior thereto was Assistant Vice President- Corporate Planning. Kathryn B. McQuade, 40, Present position since December Vice President-Internal Audit 1992; prior thereto was Director- Income Tax Administration. Charles W. Moorman, 45, Vice Present position since October President-Information 1993. Served as Vice President- Technology Employee Relations from December 1992 to October 1993, and prior thereto was Vice President- Personnel and Labor Relations. Phillip R. Ogden, 56, Vice Present position since December President-Engineering 1992; prior thereto was Assistant Vice President- Maintenance. John P. Rathbone, 45, Vice Present position since December President and Controller 1992; prior thereto was Assistant Vice President- Internal Audit. William J. Romig, 52, Vice Present position since April 1992; President and Treasurer prior thereto was Assistant Vice President-Finance. PAGE 28 Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ Donald W. Seale, 44, Vice Present position since August 1993. President-Merchandise Served as Assistant Vice Marketing President-Sales and Service from May 1992 to August 1993, and prior thereto was Director- Metals, Waste and Construction. Robert S. Spenski, 62, Vice Present position since June 1994; President-Labor Relations prior thereto was Senior Assistant Vice President-Labor Relations. Rashe W. Stephens, Jr., 55, Present position since December Vice President-Quality 1996. Served as Assistant Vice Management President-Public Affairs from February 1993 to December 1996, and prior thereto was Director, EEO and Manpower Planning. William C. Wooldridge, 53, Present position since March 1996; Vice President-Law prior thereto was General Counsel-Corporate. Dezora M. Martin, 49, Present position since April 1995. Corporate Secretary Served as Assistant Corporate Secretary-NS from October 1993 to April 1995, and prior thereto was Assistant Corporate Secretary-Planning. PAGE 29 PART II Item 5. Market for Registrant's Common Stock and Related - ------- ------------------------------------------------ Stockholder Matters. ------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES STOCK PRICE AND DIVIDEND INFORMATION (Unaudited) The common stock of Norfolk Southern Corporation, owned by 50,748 stockholders of record as of December 31, 1996, is traded on the New York Stock Exchange with the symbol NSC. The following table shows the high and low sales prices and dividends per share, by quarter, for 1996 and 1995.
Quarter -------------------------------------- 1996 1st 2nd 3rd 4th ---- --- --- --- --- Market price High $ 88 $ 89-7/8 $ 91-3/4 $ 96-5/8 Low 76-3/8 80 78-3/8 84-5/8 Dividends per share $ 0.56 $ 0.56 $ 0.56 $ 0.56 1995 1st 2nd 3rd 4th ---- --- --- --- --- Market price High $ 68-1/8 $ 68-1/2 $ 77-3/8 $ 81-5/8 Low 60-1/2 62-3/4 67-1/8 72-1/4 Dividends per share $ 0.52 $ 0.52 $ 0.52 $ 0.52
PAGE 30 Item 6. Selected Financial Data. - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1993 - 1996 Page One
1996 1995 1994 1993 --------- --------- --------- --------- ($ in millions, except per share amounts) RESULTS OF OPERATIONS: Transportation operating revenues: Railway operating revenues $ 4,101.0 $ 4,011.8 $ 3,918.1 $ 3,745.9 Motor carrier operating revenues 669.0 656.2 663.2 714.2 --------- --------- --------- --------- Total transportation operating revenues 4,770.0 4,668.0 4,581.3 4,460.1 Transportation operating expenses: Railway operating expenses 2,936.1 2,950.0 2,874.8 2,830.6 Motor carrier operating expenses 636.9 631.7 641.1 769.1 Special charge -- -- -- -- --------- --------- --------- --------- Total transportation operating expenses 3,573.0 3,581.7 3,515.9 3,599.7 Income from operations 1,197.0 1,086.3 1,065.4 860.4 Other income - net 115.6 141.8 85.2 136.8 Interest expense on debt 115.7 113.4 101.6 98.6 --------- --------- --------- --------- Income before income taxes 1,196.9 1,114.7 1,049.0 898.6 Provision for income taxes 426.5 402.0 381.2 349.9 --------- --------- --------- --------- Income before accounting changes 770.4 712.7 667.8 548.7 Cumulative effect of accounting changes -- -- -- 223.3 --------- --------- --------- --------- Net income $ 770.4 $ 712.7 $ 667.8 $ 772.0 ========= ========= ========= =========
PAGE 31 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1993 - 1996 Page Two
1996 1995 1994 1993 --------- --------- --------- --------- ($ in millions, except per share amounts) PER SHARE DATA: Earnings $ 6.09 $ 5.44 $ 4.90 $ 5.54 Dividends $ 2.24 $ 2.08 $ 1.92 $ 1.86 Stockholders' equity at year end $ 39.79 $ 37.42 $ 35.19 $ 33.36 FINANCIAL POSITION: Total assets $11,416.4 $10,904.8 $10,587.8 $10,519.8 Total long-term debt, including current maturities $ 1,856.3 $ 1,639.0 $ 1,619.8 $ 1,595.2 Stockholders' equity $ 4,977.6 $ 4,829.0 $ 4,684.8 $ 4,620.7 OTHER: Capital expenditures $ 796.0 $ 763.4 $ 712.9 $ 669.2 Average number of shares outstanding (thousands) 126,457 130,996 136,301 139,414 Number of stockholders at year end 50,748 53,401 52,442 51,884 Average number of employees: Rail 23,361 24,488 24,710 25,531 Nonrail 2,469 2,456 2,458 3,773 --------- --------- --------- --------- Total 25,830 26,944 27,168 29,304 ========= ========= ========= ========= 1993 results include a $54 million increase in the provision for income taxes reflecting a 1% increase in the federal income tax rate, which reduced net income by $54 million, or $0.39 per share. 1993 motor carrier expenses include a $50 million restructuring charge for the disposition of two NAVL businesses. The cumulative effect of accounting changes increased 1993 earnings by $223 million, or $1.60 per share. The change in accounting for income taxes increased net income by $467 million, with a corresponding reduction in deferred taxes. The changes in accounting for postretirement and postemployment benefits decreased net income by $244 million.
PAGE 32 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1989 - 1992 Page One
1992 1991 1990 1989 --------- --------- --------- --------- ($ in millions, except per share amounts) RESULTS OF OPERATIONS: Transportation operating revenues: Railway operating revenues $ 3,777.0 $ 3,654.0 $ 3,786.0 $ 3,694.1 Motor carrier operating revenues 829.6 797.3 831.0 841.9 --------- --------- --------- --------- Total transportation operating revenues 4,606.6 4,451.3 4,617.0 4,536.0 Transportation operating expenses: Railway operating expenses 2,850.8 2,862.2 2,969.4 2,864.4 Motor carrier operating expenses 869.3 797.1 839.5 846.4 Special charge -- 680.0 -- -- --------- --------- --------- --------- Total transportation operating expenses 3,720.1 4,339.3 3,808.9 3,710.8 Income from operations 886.5 112.0 808.1 825.2 Other income - net 97.8 131.3 145.3 158.2 Interest expense on debt 109.0 99.7 78.0 50.7 --------- --------- --------- --------- Income before income taxes 875.3 143.6 875.4 932.0 Provision for income taxes 317.6 113.9 319.3 326.5 --------- --------- --------- --------- Income before accounting changes 557.7 29.7 556.1 606.2 Cumulative effect of accounting changes -- -- -- -- --------- --------- --------- --------- Net income $ 557.7 $ 29.7 $ 556.1 $ 606.2 ========= ========= ========= =========
PAGE 33 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1989 - 1992 Page Two
1992 1991 1990 1989 --------- --------- --------- --------- ($ in millions, except per share amounts) PER SHARE DATA: Earnings $ 3.94 $ 0.20 $ 3.43 $ 3.48 Dividends $ 1.80 $ 1.60 $ 1.52 $ 1.38 Stockholders' equity at year end $ 30.16 $ 28.64 $ 31.57 $ 30.44 FINANCIAL POSITION: Total assets $10,400.5 $10,148.1 $10,523.0 $10,244.3 Total long-term debt, including current maturities $ 1,648.9 $ 1,389.2 $ 1,125.2 $ 841.1 Stockholders' equity $ 4,232.6 $ 4,093.4 $ 4,911.9 $ 5,168.6 OTHER: Capital expenditures $ 716.1 $ 713.4 $ 696.9 $ 651.7 Average number of shares outstanding (thousands) 141,459 147,759 162,095 174,370 Number of stockholders at year end 51,200 53,725 56,187 61,630 Average number of employees: Rail 25,650 27,366 28,697 29,667 Nonrail 4,485 4,586 4,584 4,645 --------- --------- --------- --------- Total 30,135 31,952 33,281 34,312 ========= ========= ========= ========= 1991 transportation operating expenses include a $680 million special charge, primarily comprised of costs for labor force reductions and the write-down of the goodwill portion of NS' investment in NAVL. This charge reduced net income by $498 million, or $3.37 per share.
PAGE 34 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1986 - 1988 Page One
1988 1987 1986 --------- --------- --------- ($ in millions, except per share amounts) RESULTS OF OPERATIONS: Transportation operating revenues: Railway operating revenues $ 3,616.6 $ 3,335.6 $ 3,327.8 Motor carrier operating revenues 845.0 777.2 748.6 --------- --------- --------- Total transportation operating revenues 4,461.6 4,112.8 4,076.4 Transportation operating expenses: Railway operating expenses 2,679.7 2,652.8 2,665.9 Motor carrier operating expenses 836.6 734.5 708.5 Special charge -- 620.4 -- --------- --------- --------- Total transportation operating expenses 3,516.3 4,007.7 3,374.4 Income from operations 945.3 105.1 702.0 Other income - net 108.4 232.9 215.8 Interest expense on debt 53.1 58.5 61.8 --------- --------- --------- Income before income taxes 1,000.6 279.5 856.0 Provision for income taxes 365.5 107.1 337.3 --------- --------- --------- Income before accounting changes 635.1 172.4 518.7 Cumulative effect of accounting changes -- -- -- --------- --------- --------- Net income $ 635.1 $ 172.4 $ 518.7 ========= ========= =========
PAGE 35 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1986 - 1988 Page Two
1988 1987 1986 --------- --------- --------- ($ in millions, except per share amounts) PER SHARE DATA: Earnings $ 3.51 $ 0.91 $ 2.74 Dividends $ 1.26 $ 1.20 $1.13-1/3 Stockholders' equity at year end $ 28.74 $ 26.48 $ 26.78 FINANCIAL POSITION: Total assets $10,059.1 $ 9,831.6 $ 9,752.4 Total long-term debt, including current maturities $ 780.9 $ 795.0 $ 891.3 Stockholders' equity $ 5,152.6 $ 4,979.4 $ 5,070.8 OTHER: Capital expenditures $ 528.8 $ 562.9 $ 698.4 Average number of shares outstanding (thousands) 181,038 189,464 189,217 Number of stockholders at year end 64,974 68,121 65,832 Average number of employees: Rail 30,330 32,563 34,857 Nonrail 4,209 3,539 3,440 --------- --------- --------- Total 34,539 36,102 38,297 ========= ========= ========= 1987 transportation operating expenses include a $620 million special charge, principally related to railroad restructuring costs. This charge reduced net income by $352 million, or $1.86 per share.
PAGE 36 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Table of Graphs Included with the Eleven-Year Financial Review The following financial information appears as three (3) separate graphs with the Eleven-Year Financial Review in the 1996 Norfolk Southern Corporation Annual Report to Stockholders.
1996 1995 1994 1993 1992 1991 -------- -------- -------- ------ ------ ------ INCOME FROM RAILWAY OPERATIONS (Railway operating revenues less railway operating expenses) ($ millions) $1,164.9 $1,095.4* $1,043.3 $915.3 $926.2 $791.8*** RETURN ON EQUITY (Net income divided by average stockholders' equity) 15.7% 15.4%* 14.4% 13.7%** 13.4% 11.1%*** DIVIDENDS PER SHARE (dollars) $2.24 $2.08 $1.92 $1.86 $1.80 $1.60 * Excludes $33.6 million ($20.4 million after-tax) charge for early retirement program. ** Excludes the cumulative effects of required accounting changes and the prior years' effect of the federal income tax increase. *** Excludes special charge.
PAGE 37 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. ----------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis (which--with the exception of "Proposed Acquisition of Conrail"--is identical to what is contained in the Corporation's 1996 Annual Report to Stockholders) should be read in conjunction with the Consolidated Financial Statements and Notes beginning on page 56 and the Eleven-Year Financial Review beginning on page 30. SUMMARIZED RESULTS OF OPERATIONS 1996 Compared with 1995 - ----------------------- Net income in 1996 was a record $770.4 million, an increase of 8%. However, results in 1995 were affected by a $33.6 million early retirement charge, which reduced net income by $20.4 million. Absent the effects of that charge, 1996 net income was up 5%. The improvement was due to increased operating income, reflecting higher railway operating revenues, up 2%, and generally flat railway operating expenses, up less than 1% (excluding the early retirement charge), which more than compensated for decreased nonoperating income. Included in 1995 nonoperating income was a $30.5 million gain from the partial redemption of a real estate partnership interest. Interest expense on debt was up 2%, a result of interest expense on $200 million of new debt issued in September 1996 (see Note 6 on page 65). Record earnings per share of $6.09 for 1996 were up 12% (9%, excluding the effects of the early retirement charge). The greater improvement in earnings per share compared with net income was the result of the stock purchase program, which was suspended on October 23, 1996 (see Note 13 on page 75). 1995 Compared with 1994 - ----------------------- Net income in 1995 was $712.7 million, up 7%. Excluding the 1995 early retirement charge, net income rose 10%. Increases in both operating income and nonoperating income were principally responsible for the improvement. The increase in nonoperating income primarily resulted from the $30.5 million partnership gain and a $24.3 million increase in gains from sale of properties and investments (see Note 2 on page 62). Interest expense on debt was up 12%, largely a result of higher rates of interest on commercial paper debt. Earnings per share of $5.44 for 1995 were up 11% (14%, excluding the effects of the early retirement charge). DETAILED RESULTS OF OPERATIONS Railway Operating Revenues - -------------------------- Railway operating revenues were $4.1 billion in 1996, compared with $4.0 billion in 1995 and $3.9 billion in 1994. The $89.2 million improvement in 1996, compared with 1995, was the result of improvements in all market groups except paper/forest and agriculture. The $93.7 million improvement in 1995, compared with 1994, was primarily attributable to increases in the intermodal, automotive and metals/construction market groups. PAGE 38 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- The following table presents a three-year comparison of revenues by market group. RAILWAY OPERATING REVENUES BY MARKET GROUP ($ in millions)
1996 1995 1994 -------- -------- -------- Coal $1,304.7 $1,267.8 $1,290.2 Chemicals 555.9 536.5 534.7 Paper/forest 513.0 537.3 521.8 Automotive 488.7 449.1 429.0 Agriculture 393.3 393.7 379.5 Metals/construction 358.0 353.1 334.2 Intermodal 487.4 474.3 428.7 -------- -------- -------- Total $4,101.0 $4,011.8 $3,918.1 ======== ======== ======== Note: Revenues previously reported as "Other railway revenues" (principally switching and demurrage) have been reclassified into each of the commodity groups.
In 1996, increases in coal, automotive, intermodal and chemicals traffic offset decreases in the remaining market groups. For 1995 improvements in automotive, agriculture, metals/construction and intermodal traffic offset declines in the other groups. The traffic volume gains in both years accounted for most of the revenue improvement as shown in the table below. Average revenue per unit rose in both 1996 and 1995 due to moderate rate increases. RAILWAY OPERATING REVENUE VARIANCE ANALYSIS Increases (Decreases) ($ in millions)
1996 vs. 1995 1995 vs. 1994 ------------- ------------- Traffic volume $72.6 $62.6 Revenue per unit 16.6 31.1 ----- ----- Total $89.2 $93.7 ===== =====
PAGE 39 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Coal traffic volume increased 4%, and revenues increased 3% in 1996, primarily due to increased utility and export coal tonnage. Coal revenues represented almost 32% of total railway operating revenues in 1996, and 90% of coal shipments originated on NS' lines. Coal traffic volume declined 1%, and revenues were down 2% in 1995, compared with 1994, as coal tonnage by type remained relatively stable. TOTAL COAL, COKE AND IRON ORE TONNAGE (In millions of tons)
1996 1995 1994 ----- ----- ----- Utility 74.7 70.3 71.6 Export 27.0 25.8 25.2 Steel 20.6 22.1 21.6 Other 7.9 6.9 7.5 ----- ----- ----- Total 130.2 125.1 125.9 ===== ===== ===== Note: Certain prior year amounts have been reclassified to conform to the current year presentation.
Utility coal traffic increased 6% in 1996, compared with 1995. Several utility customers in the NS service region shifted more generation to coal-fired plants, as many nuclear power plants experienced downtime. In addition, NS gained market share at several Southeastern utilities. In 1995, utility coal traffic decreased slightly due to moderate weather throughout much of the NS service region during the first half of the year and to sustained periods of maximum generation from several Southeastern nuclear power plants. Partially mitigating these declines were increased shipments of both NS- and foreign-line-originated, low- sulfur coal related to utilities' compliance with Phase I of the Clean Air Act Amendments, which took effect on January 1, 1995. The near-term outlook for utility coal is positive, as a significant number of the mines served by NS produce coals that satisfy both Phase I and the more stringent Phase II requirements, which take effect on January 1, 2000. However, adoption of tighter restrictions on nitrous oxide particulate emissions, as proposed by the Environmental Protection Agency, could impose added cost burdens on some coal-fired plants. Utilities in the Southeast, NS' largest steam coal market, are expected to increase their demand for Central Appalachian coal. Utility deregulation is likely to affect the structure and development of that market. Specifically, it is widely anticipated that U.S. utilities will have greater flexibility in selling electricity to, and buying it from, other regional markets. At present, however, transmission line capacity is somewhat strained on the lines leading to and from the Southeastern U.S., and resistance by environmentalists and the high cost of adding new line capacity could deter its development. Less certain is the outlook for demand for Central Appalachian coal from utilities in the Midwest, as the delivered cost of Western coal tends to be lower. However, NS expects to participate in the movement of any Western coal that displaces NS-originated deliveries. Export coal traffic increased 5% in 1996, compared with 1995, as NS benefited from increased steam coal exports to Italy and greater metallurgical shipments to Germany, a result of reduced subsidies to German coal producers that enhanced the competitiveness of U.S. coal. Increased exports of U.S. coal to Brazil also contributed to the improvement. PAGE 40 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Export coal traffic increased 2% in 1995, benefiting from the continued recovery of European steel production. Demand from other parts of the world also improved. Brazil, Belgium, France, Romania and Japan took increased amounts of NS coal. In addition, NS began handling metallurgical coal for steel production in Mexico. Congestion and high barge rates on the Mississippi River caused an increase in movements over NS' coal piers in Norfolk, Va. Metallurgical coal exports are expected to experience slight to modest growth through the year 2000, as continued reductions in European government subsidies to coal producers should benefit NS-served exporters. A gradual decline is projected in the long term, as new steel- making technologies replace those requiring coking coal. Demand for export steam coal is expected to increase, and NS is working to increase its participation in this market. Steel coal domestic traffic was down 7%, as aggressive producer pricing of higher volatile metallurgical coals not located on NS' lines resulted in a loss of traffic. In 1995, traffic was up 2% due to completion of extended coke oven work at one facility and continued strong demand for domestic coke for making steel. Advanced technologies that allow production of steel with little or no coke could cause this market to decline slowly over the long term. However, NS could participate in the movement of non-coking coal used by technologies such as pulverized coal injection. Other coal traffic, primarily steam coal shipped to manufacturing plants, increased 14% in 1996, compared with 1995, reflecting gains from other modes of transportation and more seasonal weather conditions in 1996. Traffic volume declined 8% in 1995, compared with 1994, resulting from lower demand for in-plant use of electricity due to mild weather. In addition, some industries have switched to natural gas as a fuel source. This market is expected to remain stable in coming years, as growth through innovative packaged delivery services offsets losses from natural gas conversions. COAL (Shown as a Graph in the Annual Report to Stockholders) This group comprises utility coal, export coal, domestic metallurgical coal, industrial coal, coke and iron ore. ($ in millions)
1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- $1,304.7 $1,267.8 $1,290.2 $1,239.2 $1,324.1 $1,357.5
MERCHANDISE traffic volume in 1996 decreased slightly, compared with 1995, as increases in automotive, intermodal and chemicals traffic were more than offset by declines in the remaining commodity groups. However, increased average revenues for most commodity groups resulted in a 2% improvement in revenues. In 1995, merchandise traffic volume increased 5%, driven by increases in intermodal, automotive and agriculture traffic. Merchandise revenues in 1995 increased 4%, compared with 1994. CHEMICALS traffic and revenues grew 3% and 4%, respectively, for 1996. Fertilizer and plastics markets strengthened during 1996, which resulted in increased traffic and revenues for these two groups. In addition, the harsh winter resulted in greater movements of liquid petroleum gas, and industrial chemicals remained strong throughout the year. These 1996 results compared favorably with relatively flat carloads and revenues in 1995, as increases for general chemicals were overshadowed by weakness in the plastics and fertilizer markets. The chemicals market group is expected to continue to show moderate growth through 1997, as NS expands its Thoroughbred Bulk Distribution facilities and chemicals production nationwide is expected to increase. PAGE 41 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- CHEMICALS (Shown as a Graph in the Annual Report to Stockholders) This group comprises fertilizers, sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, industrial chemicals, chemical wastes and bulk products. ($ in millions)
1996 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ $555.9 $536.5 $534.7 $499.0 $498.9 $476.7
PAPER/FOREST traffic and revenues each declined 5% in 1996, due to the overall downturn in the paper and forest products industry. Early in 1995, the paper industry enjoyed record price levels and associated volumes, but growth slowed and inventories of paper products swelled in late 1995 and into 1996. To correct the inventory problems, many large paper producers operated mills well below capacity and shut down mills to balance capacity with demand. This compares to a 1% decrease in volume and a 3% increase in revenues for 1995. Paper and pulpwood products traffic in 1995 was about even with 1994, while lumber traffic suffered from weak housing starts. These markets are expected to begin a slight turnaround by mid-1997. PAPER/FOREST (Shown as a Graph in the Annual Report to Stockholders) This group comprises lumber and wood products, pulpboard and paper products, wood fibers, woodpulp, scrap paper and clay. ($ in millions)
1996 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ $513.0 $537.3 $521.8 $522.2 $517.2 $495.6
AUTOMOTIVE traffic rose 8%, and revenues increased 9%, both the highest in this group's history. Auto parts provided the majority of the growth as volume increased 21%, while vehicle traffic increased 3%. NS opened two just-in-time (JIT) rail centers at Hagerstown, Md., and near Buffalo, N.Y., in 1996 for distribution of vehicle parts for GM. Also, GM awarded NS another JIT rail center to be constructed in 1997 near Dayton, Ohio. These three centers are expected to handle over 23,000 carloads annually by 1998. 1996 also marked the first time in several years that all NS-served assembly plants were on-line. GM's Wentzville, Mo., assembly plant returned to production early in the year after a two-year retooling, and GM's Doraville, Ga., plant returned midyear from a one- year retooling. In 1996, BMW's new plant at Greer, S.C., reached full production. In 1995, automotive traffic increased 4%, and revenues were up 5%. Strong production at selected plants that produce popular cars and trucks mitigated the effects of several plants' being shut down or operated at reduced capacity. Good market growth is expected in 1997, supported by the new JIT rail centers, full production levels at existing plants, the start of production at the new Mercedes plant in Tuscaloosa, Ala., and the expansion of Toyota's plant in Georgetown, Ky. Supporting long-term growth, Ford awarded NS a 12-year contract in 1996 to handle approximately 3 million new vehicles annually through four mixing centers to be built in 1997. When operational in 1998, NS expects to increase its motor vehicle business with Ford by 60%. In addition, Toyota's new Princeton, Ind., truck plant may add to 1998-1999 traffic. For the automotive industry as a whole, annual production increases are forecast through 2002, as transplants bring production to North America, exports continue to rise and the Mexican and Canadian economies improve. PAGE 42 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- AUTOMOTIVE (Shown as a Graph in the Annual Report to Stockholders) This group comprises finished vehicles for BMW, Chrysler, Ford, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and parts for Chrysler, Ford, General Motors and Toyota. ($ in millions)
1996 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ $488.7 $449.1 $429.0 $425.8 $391.6 $310.6
AGRICULTURE traffic declined 4% and revenues were flat in 1996. Despite strong demand for feed grains in the Southeast, grain traffic suffered, as poor crops and strong export demand left NS receivers competing for limited supplies. Slight average revenue growth occurred, resulting primarily from longer hauls, as receivers reached farther west for grain supplies. In 1995, agriculture traffic rose 2%, and revenues increased 4%, due to higher grain shipments from the Midwest to the Southeast poultry industry. Moderate growth is expected in 1997, as 1996 crops should provide abundant supplies throughout the year, and demand from the poultry market for feed grain continues to grow. Also for 1997, a full year of new business is expected from two feed mills which were ramping up production in 1996, and from a new major grain elevator located on a line purchased during 1996 from Conrail. AGRICULTURE (Shown as a Graph in the Annual Report to Stockholders) This group comprises grain, soybeans, wheat, corn, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners and consumer products. ($ in millions)
1996 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ $393.3 $393.7 $379.5 $357.0 $344.4 $342.5
METALS/CONSTRUCTION traffic declined 2%, but revenues were up 1% for 1996. Construction carloads fell behind in early 1996 due to inclement weather and were flat the rest of the year; however, higher average revenues more than offset the volume decline. In the metals market, NS' shipments remained strong due to a healthy domestic steel market, which has added capacity through improved efficiency at integrated mills and new mini-mills. In 1995, metals/construction traffic was up slightly, and revenues increased 6%, as increases in the steel and aluminum markets were somewhat offset by reduced demand for construction products. Moderate growth is expected for 1997. New steel production facilities in Decatur, Ala., and Memphis, Tenn., are expected to contribute to growth in late 1997. Although construction starts are expected to decrease in 1997 versus 1996, projects already begun, such as at the Chesapeake Bay Bridge Tunnel, the opening of new cement terminals and the expansion of various on-line plants, are expected to produce moderate growth for construction in 1997 and beyond. PAGE 43 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- METALS/CONSTRUCTION (Shown as a Graph in the Annual Report to Stockholders) This group comprises steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks, minerals and municipal wastes. ($ in millions)
1996 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ $358.0 $353.1 $334.2 $310.9 $289.4 $288.6
INTERMODAL traffic volume increased 5% and revenues increased 3%, both reaching record levels in 1996, driven by increased domestic container and Triple Crown Services Company (TCSC) volume. EMP, the container equipment-sharing arrangement with Union Pacific and Conrail, contributed significantly to domestic growth. International container volume declined only slightly, despite an industry slowdown that began in the spring and lasted until the fall. NS' overall market share improved slightly due to new international business and the continued domestic container and TCSC growth. Intermodal volume rose 12%, and revenues increased 11% in 1995. Although intermodal traffic levels nationwide declined in 1995, NS intermodal achieved record levels of volume, revenues and profitability, led by container shipments in both domestic and international service. During 1995, a seven-year agreement with Hanjin Shipping Company was signed under which NS will handle nearly all of Hanjin's international container business in NS' territory east of the Mississippi River. EMP contributed significantly to domestic growth. Almost all the increase in international container business was attributable to new services, thereby increasing NS' market share. Domestic business also was augmented by growth in the trucking segment, as both truckload and less- than-truckload companies increased their use of NS intermodal. Additionally, intermodal marketing companies increased their business on NS. NS' intermodal volume is expected to remain strong, resulting from continued domestic container and TCSC volume growth and the recovery in the international market. Higher wages in the trucking industry may encourage shippers to use NS' intermodal and TCSC networks. In addition, growth of steamship companies' use of Suez Canal services may have a positive impact on international container shipments into and out of Southeast ports. INTERMODAL (Shown as a Graph in the Annual Report to Stockholders) This group handles trailers, containers and Triple Crown (RT) equipment tendered by intermodal marketing companies, international steamship lines and truckers. ($ in millions)
1996 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ $487.4 $474.3 $428.7 $391.8 $411.4 $382.5
PAGE 44 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Railway Operating Expenses - -------------------------- Railway operating expenses in 1996 decreased slightly; however, 1995's expenses included a $33.6 million charge for an early retirement program (see Note 10 on page 69). Excluding that early retirement charge, railway operating expenses increased 1%, despite a 2% increase in traffic volume. Railway operating expenses in 1995 were up 3% (up 1%, excluding the early retirement charge) on a 3% increase in traffic volume. As a result, the NS railway operating ratio, which measures the percentage of railway revenues consumed by expenses, was a record 71.6 in 1996, compared with 73.5 (72.7 excluding the early retirement charge) in 1995 and 73.4 in 1994. NS' railway operating ratio continues to be the best among the major railroads in the United States. The following table shows the changes in railway operating expenses summarized by major classifications. RAILWAY OPERATING EXPENSES Increases (Decreases) ($ in millions)
1996 vs. 1995 1995 vs. 1994 ------------- ------------- Compensation and benefits $(81.3) * $108.9* Materials, services and rents 5.9 (41.9) Depreciation 18.9 14.7 Diesel fuel 43.6 1.5 Casualties and other claims 2.0 (13.7) Other (3.0) 5.7 ------ ------ Total $(13.9) $ 75.2 ====== ====== *Includes the $33.6 million early retirement charge in 1995.
COMPENSATION AND BENEFITS, which represents about half of total railway operating expenses, decreased 5% in 1996 and increased 8% in 1995. Excluding the 1995 early retirement charge, compensation and benefits expenses were down 3% in 1996 and up 5% in 1995. The 1996 decrease (excluding the effect of the 1995 early retirement charge) was principally attributable to: (1) reduced employment resulting from the 1995 early retirement program and productivity improvements due to ongoing reductions in train crew sizes and train efficiencies and (2) lower costs for fringe benefits, principally medical costs for salaried employees. These decreases were somewhat offset by increases attributable to higher volume and increased wage rates resulting from new labor agreements. The 1995 increase was primarily a result of: (1) higher wages; (2) increased performance-based compensation accruals, particularly those linked to the market price of NS stock, which rose nearly $19 per share in 1995; and (3) higher health care costs for agreement employees. As of the end of 1996, NS had negotiated labor agreements with all of its unions, except the American Train Dispatchers which represents about 200 employees. The accords with the 12 other union organizations, which include compensation settlements in line with other major industries, will not be due for change until after January 1, 2000. PAGE 45 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- MATERIALS, SERVICES AND RENTS includes items used for the maintenance of the railroads' lines, structures and equipment; the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads; and the net cost of equipment rentals. This category of expenses increased 1% in 1996 and decreased 6% in 1995. The increase in 1996 resulted from higher intermodal expenses due to increased volume, as well as higher equipment rent costs, that more than offset lower locomotive and car repair costs. Equipment rents, which represent the cost to NS of using equipment (mostly freight cars) owned by other railroads or private owners, less the rent paid to NS for the use of its equipment, were up 10% in 1996. This increase was due to a variety of factors, including increased intermodal container traffic, lower receipts from short-term leases of locomotives to various railroads and increased freight car leases to meet customer requirements. These increased costs were somewhat offset by lower net costs for multilevel equipment. Locomotive repair costs continued to be reduced as a result of the replacement of older units with newer ones. NS expects to acquire 120 new locomotives in 1997. Freight car repair costs continued to benefit from the effects of initiatives launched in 1995 to improve asset utilization that resulted in the re-engineering of maintenance practices, facilitating the closure of two repair facilities in 1995 and the disposition of 17,000 excess freight cars, which was substantially completed in 1996. The decrease in "Materials, services and rents" in 1995 reflected initial results from the initiatives to improve asset utilization, as well as reduced locomotive repair costs and lower net equipment rental expense. The reduction in equipment rents in 1995 was due to the short- term leasing of certain older locomotives to other railroads and the deregulation of car-hire rates among railroads, which began in 1994. These favorable results were somewhat offset by increased expenses related to the 12% growth in intermodal traffic. DEPRECIATION expense (see Note 1, "Properties," on page 60 for NS' depreciation policy) was up 5% in 1996 and 4% in 1995. Both increases were due to property additions, reflecting substantial levels of capital spending over the last several years. DIESEL FUEL costs rose 23% in 1996, but were up less than 1% in 1995. The increase in 1996 was due to a 20% increase in the average price per gallon, as prices reached levels unseen since 1991 during and following the Persian Gulf Crisis. Consumption was up 3% on a similar increase in carloadings. The 1995 increase was primarily due to a small increase in the average price per gallon. CASUALTIES AND OTHER CLAIMS (including estimates of costs related to personal injury, property damage and environmental matters) increased 2% in 1996, but declined 10% in 1995. In 1996, higher accruals for environmental remediation costs more than offset reduced accruals for personal injury liabilities and the effects of a nonrecurring liability insurance premium refund. The 1995 decrease was primarily attributable to environmental costs in 1994 associated with a tankcar leak. The largest component of "Casualties and other claims" is personal injury expense. NS continued to benefit from a reduction in the number of reportable injuries in 1996; however, as in prior years, much of that benefit was offset by an increase in the cost of third-party injury claims and by the continuing costs associated with the handling of non- accidental "occupational" claims. NS continues to work actively to reduce the risk of all accidents. The rail industry remains uniquely susceptible to litigation involving job-related accidental injury and occupational claims because of an outmoded law, the Federal Employers' Liability Act (FELA), originally passed in 1908 and applicable only to railroads. This law, which covers employees' claims for on-the-job injuries, promotes an adversarial claim settlement environment and produces results that are unpredictable and inconsistent, at far greater cost to the rail industry than the no-fault workers' compensation system to which non-rail PAGE 46 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- competitors are universally subject. The railroads have been unsuccessful so far in efforts to persuade Congress to replace FELA with a no-fault workers' compensation system. OTHER expenses were down 2% in 1996, but were up 4% in 1995. The 1995 increase was due to higher sales, use and franchise taxes. NS expects to complete work to make its software year-2000 compliant by the end of 1998. It is anticipated that the total cost of conversion will not be material to NS' financial statements. Motor Carrier Results - --------------------- Motor carrier operating income was $32.1 million in 1996, compared with $24.5 million in 1995 and $22.1 million in 1994. In 1996 and 1995, because certain expenses were below original estimates, $4.1 million and $3.9 million, respectively, of reserves related to a former division were reversed. The on-going operations, comprising Relocation Services (RS) and High Value Products (HVP), produced operating income of $28.0 million in 1996, $20.6 million in 1995, and $22.1 million in 1994. The following table presents a three-year comparison of revenues by division. MOTOR CARRIER OPERATING REVENUES BY DIVISION ($ in millions)
1996 1995 1994 ------ ------ ------ Relocation Services $304.0 $310.9 $325.5 High Value Products 365.0 345.3 337.7 ------ ------ ------ Total $669.0 $656.2 $663.2 ====== ====== ======
RS' revenues depend on four primary segments of household goods transportation: corporate, individual, military and international shipments. RS' revenues decreased 2% in 1996 and 4% in 1995. In 1996, domestic shipments declined 4% due to weakness in all segments, and international shipments were down 1%. However, these decreases were somewhat offset by a 3% gain in average revenue per shipment. The total number of industrywide moves of domestic household goods increased about 2% in 1996; over the previous six years, it had declined about 1% per year on average. In 1995, international business was up 6% and domestic corporate account business was up 5%. However, these increases were more than offset by lower volume in individual and military business. Average revenue per shipment improved about 3%. There are six major van lines in this market, and competition is likely to remain intense. HVP's main line of business is the distribution of office products, sensitive equipment, and exhibits and displays. A Customized Logistics Services (CLS) segment provides integrated logistics services. A Blanketwrap segment provides specialized handling of uncartoned truckload freight. Two international subsidiaries provide HVP and logistics services in Europe. HVP's revenues increased 6% in 1996 and 2% in 1995. Traditional HVP business, Blanketwrap, CLS and International, all experienced growth with their major customers in 1996 and 1995. During 1996, CLS business grew by nearly 11%, due to new customer programs and expansion of the emergency parts service business. In 1995, gains in the major business segments were partially offset by a decrease in air freight revenues due to the rationalization of certain service centers. Continued growth in the CLS segment is possible, as more shippers look to sophisticated logistics providers like NAVL to provide integrated supply chain management to reduce overall shipping and handling costs. PAGE 47 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Motor carrier operating expenses as a percentage of revenues were 95.8%, 96.9% and 96.7% in 1996, 1995 and 1994, respectively, excluding the reversals related to a former division. The improvement in 1996 was partly due to a favorable appeals decision on certain aspects of a legal claim that was reserved in 1992. Also, the CLS segment reduced its costs as it moved out of the start-up phase of several of its logistics and parts distribution programs. The increase in the 1995 operating ratio was due, in large measure, to costs associated with closing operations in Panama and discontinuing certain subsidiary operations in Canada. Both of these moves were completed in order to streamline operations and reduce costs over the long term. The costs of these programs offset other gains in operating efficiency, primarily achieved in the HVP distribution operations. Intense competition in the motor carrier industry is likely to keep margins at a modest level and will require carriers to continue to focus on cost reductions. Income Taxes - ------------ Income tax expense in 1996 was $426.5 million for an effective rate of 35.6%, compared with an effective rate of 36.1% in 1995 and 36.3% in 1994. The effective rates in 1996 and 1995 were below the statutory federal and state rates as a result of investments in corporate-owned life insurance and coal-seam gas properties and from favorable adjustments upon filing the prior year tax returns. In addition, 1996 benefited from favorable adjustments resulting from settlement of federal income tax years 1990-1992. The effective rate in 1994 also was below the statutory federal and state rates due to favorable adjustments resulting from settlement of federal income tax years 1988 and 1989, an adjustment to the valuation allowance for deferred tax assets and a favorable adjustment upon filing the 1993 tax return. Deferred tax expense was an unusually high portion of total tax expense in 1994. A corresponding reduction is reflected in 1994's current tax expense for the effects of expenditures that affect book and tax accounts in different years, primarily in the areas of compensation, motor carrier restructuring and property. Accounting Changes and New Accounting Pronouncements - ---------------------------------------------------- As discussed in Note 1 under "Required Accounting Changes" on page 60, effective January 1, 1996, NS adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which had no material effect on NS' financial statements. On October 10, 1996, the AICPA issued Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which is effective for fiscal years beginning after December 15, 1996. SOP 96-1 provides guidance with respect to recognition and measurement of environmental remediation liabilities and disclosure of such liabilities in financial statements. SOP 96-1 is not expected to have a material effect on NS' financial statements. PAGE 48 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES FINANCIAL CONDITION refers to the assets, liabilities and stockholders' equity of an organization (see Consolidated Balance Sheets on page 57). LIQUIDITY refers to the ability of an organization to generate adequate amounts of cash, principally from operating results or through borrowing power, to meet its short-term and long-term cash requirements (see Consolidated Statements of Cash Flows on page 58). CAPITAL RESOURCES refers to the ability of an organization to raise funds through the sale of either debt or equity (stock) securities.
($ in millions) 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Cash and short-term investments $403.4 $329.0 $306.7 $258.2 $378.1 Current assets to current liabilities 1.2 1.1 1.2 1.3 1.2 Debt-to-total capitalization 27.6% 25.9% 26.2% 27.4% 29.8% Return on average stockholders' equity 15.7% 15.4%* 14.4% 13.7%* 13.4% * Excluding unusual items: In 1995, the early retirement charge; and, in 1993, the cumulative effects of required accounting changes and the prior years' effect of the federal income tax rate increase.
CASH PROVIDED BY OPERATING ACTIVITIES, NS' principal source of liquidity, decreased $32.7 million, or 3%, in 1996 and increased $93.1 million, or 8%, in 1995. Since the consolidation in 1982, cash provided by operating activities has been sufficient to fund dividend requirements, debt repayments and a significant portion of capital spending. The decrease in 1996 was largely attributable to lump-sum wage payments associated with labor contract settlements and higher income tax payments related to the settlement of federal income tax years 1990-1992. The improvement in 1995 was primarily a result of increased income from operations (excluding the early retirement charge, a non-cash item) and improved billing and collection of receivables. CASH PROVIDED BY OPERATIONS (Shown as a Graph in the Annual Report to Stockholders) ($ in millions)
1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- $1,204.7 $1,237.4 $1,144.3 $ 874.6 $ 958.2 $ 762.4
PAGE 49 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- CASH USED FOR INVESTING ACTIVITIES decreased 6% in 1996, and was up 16% in 1995. Property additions account for most of the spending in this category. The following tables show capital spending, track and equipment statistics for the past five years. CAPITAL EXPENDITURES -------------------- (Also Shown as a Graph in the Annual Report to Stockholders)
($ in millions) 1996* 1995* 1994 1993 1992 ------ ------ ------ ------ ------ Road $437.8 $385.7 $384.6 $417.9 $426.5 Equipment 332.1 344.3 245.9 240.5 281.3 Other property 26.1 33.4 82.4 10.8 8.3 ------ ------ ------ ------ ------ Total $796.0 $763.4 $712.9 $669.2 $716.1 ====== ====== ====== ====== ====== * Includes non-cash equipment expenditures of $107.8 million in 1996 and $104.5 million in 1995 (see Note 6 on page 65).
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE) ----------------------------------------------------
1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Track miles of rail installed 401 403 480 574 660 Miles of track surfaced 4,686 4,668 4,760 5,048 5,690 New crossties installed (millions) 1.9 2.0 1.7 1.6 1.9
AVERAGE AGE OF RAILWAY EQUIPMENT --------------------------------
(Years) 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Freight cars 22.3 22.0 21.9 21.3 20.9 Locomotives 15.4 15.7 15.8 15.1 14.5 Retired locomotives 24.4 22.6 23.6 24.7 24.0
Since 1988, NS has rebodied about 23,000 coal cars and plans to continue that program, although at a slower rate, in 1997. This work, performed at NS' Roanoke Car Shop, converts hopper cars into high- capacity steel gondolas or hoppers. As a result, the remaining service life of the freight car fleet is greater than may be inferred from the increasing average age shown in the table above. Efforts to hold down capital spending while increasing business are ongoing as NS seeks to maximize utilization of its assets. In this connection, NS began an orderly disposition of approximately 17,000 freight cars in October 1994. This was substantially completed in 1996 with total proceeds of $92 million included in"Property sales and other transactions" in the 1996 and 1995 Consolidated Statements of Cash Flows. PAGE 50 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- In 1996 and 1995, this line item also reflected proceeds from large land sales (see Note 2 on page 62). For 1997, NS is planning $792 million of capital spending, of which $781 million is for railway projects and $11 million is for motor carrier property. Barring unforeseen events and excluding any capital spending related to the proposed Conrail transaction (see "Proposed Acquisition of Conrail"), total capital spending is expected to continue to be similar to 1995 and 1996 levels. In 1994, large borrowings on corporate-owned life insurance, reflected in "Investment sales and other transactions" in the Consolidated Statements of Cash Flows, offset much of the use of cash for property additions in that year. CASH USED FOR FINANCING ACTIVITIES declined 20% in 1996 and 3% in 1995. The reduction in 1996 resulted from amounts received in connection with the issuance of $200 million principal amount of medium-term notes (see Note 6 on page 65). The reduction in 1995 was primarily attributable to lower debt repayments; 1994 had included the maturity of a large mortgage. On January 22, 1997, NS filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 covering the issuance of up to $1.25 billion principal amount of debt or equity securities. Cash spent to purchase and retire stock was $389.4 million in 1996, $338.2 million in 1995 and $344.8 million in 1994. On October 23, 1996, NS announced that the share purchase program had been suspended (see also Note 13 on page 75). CUMULATIVE PURCHASES OF STOCK (Shown as a Graph in the Annual Report to Stockholders) ($ in millions)
1996 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- $3,250.5 $2,865.4 $2,531.5 $2,181.8 $2,041.9 $1,862.8
Hedging Activities - ------------------ As discussed under "Capital Leases" in Note 6 on page 65, NS has made limited use of interest rate swaps in connection with certain equipment financings. PROPOSED ACQUISITION OF CONRAIL As discussed in Note 15 on page 76, NS commenced an all-cash tender offer for all Shares of Conrail Inc. (Conrail), on October 24, 1996, in response to the October 15, 1996, announcement that Conrail had entered into a merger agreement with CSX. On February 11, 1997, NS acquired 8.2 million shares of Conrail stock (approximately 9.9%), representing the approximate maximum number of Shares NS can buy without triggering Conrail's current anti-takeover defenses, at a cost of $115 per Share, or $943 million in the aggregate. The purchase was financed with commercial paper backed by a portion of the debt commitments secured for the transaction. These Shares have been placed in a voting trust and under certain circumstances might have to be sold at a loss. PAGE 51 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- On February 12, 1997, NS commenced a second tender offer for the remaining Shares and has notified Conrail of its intention to conduct a proxy contest in connection with Conrail's 1997 Annual Meeting of shareholders, currently scheduled for December 19, 1997, seeking, among other things, to remove certain of the current members of the Conrail Board and to elect a new slate of nominees designated by NS. Pursuant to an amendment to the merger agreement between CSX and Conrail announced on March 7, 1997, CSX has offered to purchase all Shares for $115 per Share in cash and CSX is permitted to enter into negotiations with other parties, including NS, concerning the acquisition of the securities or assets, or concessions relating to the assets or operations, of Conrail. NS and CSX are negotiating a comprehensive resolution of the issues confronting the eastern railroads based on the proposal submitted by NS to both CSX and Conrail on February 24, 1997. Such a resolution could involve a joint acquisition of Shares by NS and CSX. However, unless and until such negotiations are successfully concluded, NS intends to continue in effect its tender offer for all Shares not owned by NS. For additional information concerning NS' pending tender offer for Shares not owned by NS, reference is made to NS' Tender Offer Statement on Schedule 14D-1, together with the exhibits thereto, initially filed with the Securities and Exchange Commission on February 12, 1997, as amended. NS expects future cash flows of the combined entity would be sufficient to service and retire the acquisition and related debt. However, as a result of the proposed transaction and the related debt commitments, NS has been placed on the credit watch list of two major rating agencies. Furthermore, in connection with the acquisition of 8.2 million Shares, some of NS' debt ratings have already been downgraded. ENVIRONMENTAL MATTERS NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a liability where such liability or loss is probable and can be reasonably estimated. Claims, if any, against third parties for recovery of clean-up costs incurred by NS are reflected as receivables in the balance sheet and are not netted against the associated NS liability. Environmental engineers participate in ongoing evaluations of all identified sites, and--after consulting with counsel--any necessary adjustments to initial liability estimates are made. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy. Operating expenses for environmental protection totaled approximately $25 million in 1996 and are anticipated to increase somewhat in 1997. Capital expenditures for environmental projects amounted to approximately $6 million in 1996 and are expected to be at the same level in 1997. As of December 31, 1996, NS' balance sheet included a reserve for environmental exposures in the amount of $53 million (of which $12 million is accounted for as a current liability), which is NS' estimate of the probable costs based on available information at 111 identified locations. On that date, nine sites accounted for $19 million of the reserve, and no individual site was considered to be material. NS anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period. PAGE 52 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- At many of the 111 locations, certain NS subsidiaries, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for clean-up costs. At one such site, the EPA alleged in 1995 that The Alabama Great Southern Railroad Company (AGS), a subsidiary of NS' rail subsidiary, is responsible, along with several other entities believed to be financially solvent, for past and future clean-up and monitoring costs at the Bayou Bonfouca NPL Superfund site located in Slidell, La. The EPA bases its claim of NS' responsibility primarily on the alleged activities in the 1880s of a company not at the time owned or controlled by an NS rail subsidiary, but acquired in 1916. Liability has been contested. Because the amount of liability that the EPA may assert against NS or AGS is not known, the materiality of such amount to NS' financial position, results of operation or liquidity in a particular quarter or year cannot be assessed at this time. The EPA has indicated that it has expended or expects to expend a total of approximately $130 million at the site. With respect to known environmental sites (whether identified by NS or by the EPA or comparable state authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available clean-up techniques, the likely development of new clean-up technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant's share of any estimated loss (and that participant's ability to bear it) and evolving statutory and regulatory standards governing liability. The risk of incurring environmental liability--for acts and omissions, past, present and future--is inherent in the railroad business. Some of the commodities, particularly those classified as hazardous materials, in NS' traffic mix can pose special risks that NS and its subsidiaries work diligently to minimize. In addition, several NS subsidiaries own, or have owned in the past, land holdings used as operating property, or which are leased or may have been leased and operated by others, or held for sale. Because certain conditions may exist on these properties related to environmental problems that are latent or undisclosed, there can be no assurance that NS will not incur liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably now. Moreover, lawsuits and claims involving these and other now-unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter. However, based on its assessments of the facts and circumstances now known and, after consulting with its legal counsel, Management believes that it has recorded the probable costs based on available information for those environmental matters of which the Corporation is aware. Further, Management believes that it is unlikely that any identified matters, either individually or in aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity. PAGE 53 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- INFLATION Generally accepted accounting principles require the use of historical cost in preparing financial statements. This approach disregards the effects of inflation on the replacement cost of property. NS, a capital-intensive company, has approximately $14 billion invested in such assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost. TRENDS - - Utility Deregulation--The potential deregulation of the electrical utility industry is expected to increase competition among electric power generators; deregulation in time would permit wholesalers and possibly retailers of electric power to sell or purchase increasing quantities of power to or from far-distant generators. The effects of deregulation on NS and on its patrons cannot be predicted with certainty; however, NS serves a number of efficient power producers and is working diligently to assure that its customers remain competitive in this evolving environment. - - FELA--NS and the rail industry are continuing their efforts to replace the FELA with no-fault workers' compensation laws comparable to those covering employees in other industries. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and projections. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements. PAGE 54 Item 8. Financial Statements and Supplementary Data. - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited)
Three Months Ended ----------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- (In millions of dollars except per share amounts) 1996 ---- Transportation operating revenues $1,161.5 $1,217.3 $1,211.3 $1,179.9 Income from operations 261.0 310.5 315.7 309.8 Net income 168.1 199.5 202.3 200.5 Earnings per share $ 1.31 $ 1.57 $ 1.61 $ 1.60 1995 ---- Transportation operating revenues $1,138.7 $1,190.2 $1,183.9 $1,155.2 Income from operations 249.1 290.1 292.1 255.0 Net income 170.7 181.2 183.9 176.9 Earnings per share $ 1.29 $ 1.38 $ 1.40 $ 1.37
PAGE 55 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- Index to Financial Statements: Page ----------------------------- ---- Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994 56 Consolidated Balance Sheets As of December 31, 1996 and 1995 57 Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 58 Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1996, 1995 and 1994 59 Notes to Consolidated Financial Statements 60 Independent Auditors' Report 79 The Index to Consolidated Financial Statement Schedule appears in Item 14 on page 81. PAGE 56 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Income
Years ended December 31, 1996 1995 1994 -------- -------- -------- ($ in millions, except earnings per share) Transportation operating revenues: Railway $4,101.0 $4,011.8 $3,918.1 Motor carrier 669.0 656.2 663.2 -------- -------- -------- Total transportation operating revenues 4,770.0 4,668.0 4,581.3 -------- -------- -------- Transportation operating expenses: Railway: Compensation and benefits (Note 10) 1,398.7 1,480.0 1,371.1 Materials, services and rents 624.4 618.5 660.4 Depreciation 407.9 389.0 374.3 Diesel fuel 233.4 189.8 188.3 Casualties and other claims 123.4 121.4 135.1 Other 148.3 151.3 145.6 -------- -------- -------- Total railway operating expenses 2,936.1 2,950.0 2,874.8 Motor carrier 636.9 631.7 641.1 -------- -------- -------- Total transportation operating expenses 3,573.0 3,581.7 3,515.9 -------- -------- -------- Income from operations 1,197.0 1,086.3 1,065.4 Other income - net (Note 2) 115.6 141.8 85.2 Interest expense on debt (Note 5) 115.7 113.4 101.6 -------- -------- -------- Income before income taxes 1,196.9 1,114.7 1,049.0 Provision for income taxes (Note 3) 426.5 402.0 381.2 -------- -------- -------- Net income $ 770.4 $ 712.7 $ 667.8 ======== ======== ======== Earnings per share (Note 13) $ 6.09 $ 5.44 $ 4.90 See accompanying notes to consolidated financial statements.
PAGE 57 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
As of December 31, 1996 1995 --------- --------- ($ in millions) Assets Current assets: Cash and cash equivalents $ 209.2 $ 67.7 Short-term investments 194.2 261.3 Accounts receivable net of allowance for doubtful accounts of $16.3 million and $19.1 million, respectively 704.3 703.5 Materials and supplies 63.0 61.7 Deferred income taxes (Note 3) 158.9 144.7 Other current assets 127.2 103.9 --------- --------- Total current assets 1,456.8 1,342.8 --------- --------- Investments (Note 4) 274.7 231.7 Properties less accumulated depreciation (Note 5) 9,529.1 9,258.8 Other assets (Note 15) 155.8 71.5 --------- --------- Total assets $11,416.4 $10,904.8 ========= ========= Liabilities and stockholders' equity Current liabilities: Short-term debt (Note 6) $ 44.0 $ 45.2 Accounts payable (Note 7) 708.9 732.8 Income and other taxes 178.7 190.8 Other current liabilities (Note 7) 202.7 151.3 Current maturities of long-term debt (Note 6) 56.0 85.7 --------- --------- Total current liabilities 1,190.3 1,205.8 --------- --------- Long-term debt (Note 6) 1,800.3 1,553.3 Other liabilities (Note 9) 987.1 965.5 Minority interests 49.5 52.2 Deferred income taxes (Note 3) 2,411.6 2,299.0 --------- --------- Total liabilities 6,438.8 6,075.8 --------- --------- Stockholders' equity: Common stock $1.00 per share par value, 450,000,000 shares authorized; issued 132,350,009 shares and 136,285,530 shares, respectively 132.4 136.3 Other capital 462.1 430.9 Retained income 4,403.7 4,282.4 Less treasury stock at cost, 7,252,634 shares (20.6) (20.6) --------- --------- Total stockholders' equity 4,977.6 4,829.0 --------- --------- Total liabilities and stockholders' equity $11,416.4 $10,904.8 ========= ========= See accompanying notes to consolidated financial statements.
PAGE 58 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years ended December 31, 1996 1995 1994 -------- -------- -------- ($ in millions) Cash flows from operating activities: Net income $ 770.4 $ 712.7 $ 667.8 Reconciliation of net income to net cash provided by operating activities: Special charge payments (18.0) (29.3) (41.9) Depreciation 429.2 413.5 403.8 Deferred income taxes 97.1 66.7 112.7 Nonoperating gains and losses on properties and investments (56.8) (71.8) (17.0) Changes in assets and liabilities affecting operations: Accounts receivable (0.8) 28.1 (12.9) Materials and supplies (1.3) 0.2 8.4 Other current assets (9.1) 1.4 (17.8) Current liabilities other than debt (5.5) 84.2 55.5 Other - net (0.5) 31.7 (14.3) -------- -------- -------- Net cash provided by operating activities 1,204.7 1,237.4 1,144.3 Cash flows from investing activities: Property additions (688.2) (658.9) (712.9) Property sales and other transactions 131.1 129.5 86.1 Investments (82.0) (67.1) (58.7) Investment sales and other transactions 37.8 36.9 272.0 Short-term investments - net 65.6 (8.3) (74.4) -------- -------- -------- Net cash used for investing activities (535.7) (567.9) (487.9) Cash flows from financing activities: Dividends (283.7) (273.5) (262.7) Common stock issued - net 28.6 19.1 9.8 Purchase and retirement of common stock (389.4) (338.2) (344.8) Proceeds from long-term borrowings 209.6 7.6 41.4 Debt repayments (92.6) (73.8) (123.6) -------- -------- -------- Net cash used for financing activities (527.5) (658.8) (679.9) Net increase (decrease) in cash and cash equivalents 141.5 10.7 (23.5) Cash and cash equivalents: At beginning of year 67.7 57.0 80.5 -------- -------- -------- At end of year $ 209.2 $ 67.7 $ 57.0 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Interest (net of amounts capitalized) $ 127.5 $ 119.4 $ 114.3 Income taxes $ 324.1 $ 282.9 $ 226.4 See accompanying notes to consolidated financial statements.
PAGE 59 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity
Common Other Retained Treasury Stock Capital Income Stock Total ------ ------- -------- -------- -------- ($ in millions) Balance December 31, 1993 $145.7 $417.1 $4,078.5 $(20.6) $4,620.7 Net income - 1994 667.8 667.8 Dividends on common stock $1.92 per share (262.7) (262.7) Purchase and retirement of common stock (5.5) (16.3) (327.8) (349.6) Other 0.2 9.6 (1.2) 8.6 ------ ------ -------- ------ -------- Balance December 31, 1994 140.4 410.4 4,154.6 (20.6) 4,684.8 Net income - 1995 712.7 712.7 Dividends on common stock $2.08 per share (273.5) (273.5) Purchase and retirement of common stock (4.8) (14.3) (314.8) (333.9) Other 0.7 34.8 3.4 38.9 ------ ------ -------- ------ -------- Balance December 31, 1995 136.3 430.9 4,282.4 (20.6) 4,829.0 Net income - 1996 770.4 770.4 Dividends on common stock $2.24 per share (283.7) (283.7) Purchase and retirement of common stock (4.6) (14.8) (365.7) (385.1) Other 0.7 46.0 0.3 47.0 ------ ------ -------- ------ -------- Balance December 31, 1996 $132.4 $462.1 $4,403.7 $(20.6) $4,977.6 ====== ====== ======== ====== ======== See accompanying notes to consolidated financial statements.
PAGE 60 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The following notes (which--with the exception of Note 16--are identical to those contained in the Corporation's 1996 Annual Report to Stockholders) are an integral part of the consolidated financial statements. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - ----------------------- Norfolk Southern Corporation is a Virginia-based holding company engaged principally in the transportation of freight by rail, primarily in the Southeast and Midwest, and the operation of a motor carrier providing household moving and specialized freight handling services in the United States and Canada. The consolidated financial statements include Norfolk Southern Corporation (Norfolk Southern) and its majority- owned and controlled subsidiaries (collectively NS). The major subsidiaries are Norfolk Southern Railway Company and North American Van Lines, Inc. (NAVL). All significant intercompany balances and transactions have been eliminated in consolidation. Rail freight consists of raw materials, intermediate products and finished goods classified in the following market groups: coal, paper/forest, chemicals, automotive, agriculture, metals/construction and intermodal. All groups are approximately equal in size based on revenues except for coal, which accounts for almost one third of total railway operating revenues. Ultimate destinations for some of the freight and a portion of the coal shipped are outside the United States. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates. Cash Equivalents - ---------------- "Cash equivalents" are highly liquid investments purchased three months or less from maturity. Investments - ----------- Marketable equity and debt securities are reported at amortized cost or fair value depending upon their classification as held-to-maturity, trading or available-for-sale securities. At December 31, 1996 and 1995, all "Short-term investments," consisting primarily of United States government and federal agency securities, were designated as available for sale. Accordingly, unrealized gains and losses, net of taxes, are recognized in "Stockholders' equity." Materials and Supplies - ---------------------- "Materials and supplies," consisting mainly of fuel oil and items for maintenance of property and equipment, are stated at average cost. The cost of materials and supplies expected to be used in capital additions or improvements is included in "Properties." PAGE 61 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Properties - ---------- "Properties" are stated principally at cost and are depreciated using group depreciation. Rail is primarily depreciated on the basis of use measured by gross ton miles. The effect of this method is to depreciate these assets over 42 years on average. Other properties are depreciated generally using the straight-line method over estimated service lives at annual rates that range from 1% to 25%. In 1996, the overall depreciation rate averaged 2.8% for roadway and 4.1% for equipment. NS capitalizes interest on major capital projects during the period of their construction. Maintenance expense is recognized when repairs are performed. When properties, other than land and non-rail assets, are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation rather than recognized through income. Gains and losses on disposal of land and non-rail assets are included in other income (see Note 2). Revenue Recognition - ------------------- Revenue is recognized proportionally as a shipment moves from origin to destination. Earnings Per Share - ------------------ The number reported as "Earnings per share" in any period is computed by dividing net income by the weighted average number of common shares outstanding during that period. Decreases in the number of shares outstanding are the result of stock purchase programs as described in Note 13. Required Accounting Changes - --------------------------- 1996 -- Effective January 1, 1996, NS adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 establishes the accounting and reporting requirements for recognizing and measuring impairment of long-lived assets either to be held and used or to be held for disposal. SFAS 121 did not have a material effect on NS' financial statements. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This standard, effective for fiscal years beginning after December 15, 1995, defines a fair-value-based method of accounting for stock-based compensation plans. However, the standard also allows measurement of compensation cost using the intrinsic- value-based method of accounting prescribed in Accounting Principles Board Opinion No. 25 (APB 25). Companies that choose to retain APB 25 for measurement purposes are required to provide certain additional footnote disclosures. NS has elected to continue recording stock-based compensation costs based on APB 25 and to provide additional disclosures. PAGE 62 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 2. OTHER INCOME - NET
1996 1995 1994 ------ ------ ------ ($ in millions) Interest income $ 22.5 $ 27.9 $ 25.5 Royalties from coal 58.8 58.6 61.0 Gains from sale of properties and investments 56.8 41.3 17.0 Gain from partial redemption of partnership interest -- 30.5 -- Rental income 20.1 20.8 19.6 Corporate-owned life insurance - net 5.6 7.1 7.7 Other interest expense (31.1) (23.5) (19.7) Non-rail depletion and depreciation (11.0) (10.2) (11.6) Taxes on nonoperating property (8.4) (6.9) (8.2) Other - net 2.3 (3.8) (6.1) ------ ------ ------ Total $115.6 $141.8 $ 85.2 ====== ====== ======
3. INCOME TAXES Provision for Income Taxes - --------------------------
1996 1995 1994 ------ ------ ------ ($ in millions) Current: Federal $287.8 $282.6 $226.4 State 41.6 52.7 42.1 ------ ------ ------ Total current taxes 329.4 335.3 268.5 Deferred: Federal 79.2 57.8 99.0 State 17.9 8.9 13.7 ------ ------ ------ Total deferred taxes 97.1 66.7 112.7 ------ ------ ------ Provision for income taxes $426.5 $402.0 $381.2 ====== ====== ======
PAGE 63 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 3. INCOME TAXES (continued) Reconciliation of Statutory Rate to Effective Rate - -------------------------------------------------- Total income taxes as reflected in the Consolidated Statements of Income differ from the amounts computed by applying the statutory federal corporate tax rate as follows:
1996 1995 1994 -------------- -------------- -------------- Amount % Amount % Amount % -------- ----- -------- ----- -------- ----- ($ in millions) Federal income tax at statutory rate $418.9 35.0 $390.1 35.0 $367.2 35.0 State income taxes, net of federal tax benefit 38.6 3.2 40.0 3.6 36.1 3.4 Corporate-owned life insurance (15.4) (1.3) (17.0) (1.5) (10.5) (1.0) Other - net (15.6) (1.3) (11.1) (1.0) (11.6) (1.1) ------ ---- ------ ---- ------ ---- Provision for income taxes $426.5 35.6 $402.0 36.1 $381.2 36.3 ====== ==== ====== ==== ====== ====
Internal Revenue Service (IRS) Reviews - -------------------------------------- Consolidated federal income tax returns have been examined and Revenue Agent Reports have been received for all years up to and including 1992. The consolidated federal income tax returns for 1993 and 1994 are being audited by the IRS. Management believes that adequate provision has been made for any additional taxes and interest thereon that might arise as a result of these examinations. Tax Benefit Leases - ------------------ In January 1995, the United States Tax Court issued a preliminary decision that would disallow some of the tax benefits a subsidiary of NS purchased from a third party pursuant to a safe harbor lease agreement in 1981. Management continues to believe that NS ultimately should incur no loss from this decision, because the lease agreement provides for full indemnification if any such disallowance is sustained. Deferred Tax Assets and Liabilities - ----------------------------------- Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities were recorded in recognition of these differences. PAGE 64 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 3. INCOME TAXES (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
December 31, 1996 1995 --------- --------- ($ in millions) Deferred tax assets: Reserves, including casualty and other claims $ 172.0 $ 189.3 Employee benefits 187.5 196.1 Retiree health and death benefit obligation 147.4 148.3 Taxes, including state and property 179.7 170.3 Other 79.8 59.1 --------- --------- Total gross deferred tax assets 766.4 763.1 Less valuation allowance (2.1) (1.5) --------- --------- Net deferred tax assets 764.3 761.6 --------- --------- Deferred tax liabilities: Property (2,902.9) (2,821.5) Other (114.1) (94.4) --------- --------- Total gross deferred tax liabilities (3,017.0) (2,915.9) --------- --------- Net deferred tax liability (2,252.7) (2,154.3) Net current deferred tax assets 158.9 144.7 --------- --------- Net long-term deferred tax liability $(2,411.6) $(2,299.0) ========= =========
Except for amounts for which a valuation allowance is provided, Management believes the deferred tax assets will be realized. The net change in the total valuation allowance was a $0.6 million increase for 1996, a $0.1 million increase for 1995 and a $9.5 million decrease for 1994. PAGE 65 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 4. INVESTMENTS
December 31, 1996 1995 ------ ------ ($ in millions) Corporate-owned life insurance at net cash surrender value $211.5 $175.2 Marketable equity securities 6.4 5.2 Other 56.8 51.3 ------ ------ Total $274.7 $231.7 ====== ======
5. PROPERTIES
December 31, 1996 1995 --------- --------- ($ in millions) Transportation property: Road $ 8,488.7 $ 8,235.7 Equipment 4,848.0 4,775.7 Other property 591.2 573.7 --------- --------- 13,927.9 13,585.1 Less: Accumulated depreciation 4,398.8 4,326.3 --------- --------- Net properties $ 9,529.1 $ 9,258.8 ========= =========
Capitalized Interest - -------------------- Total interest cost incurred on debt in 1996, 1995 and 1994 was $127.6 million, $127.4 million and $119.4 million, respectively, of which $11.9 million, $14.0 million and $17.8 million was capitalized. 6. DEBT Commercial Paper Program - ------------------------ NS' commercial paper debt totaled $516.1 million and $518.0 million as of December 31, 1996 and 1995, respectively. Commercial paper debt is due within one year, but $500 million has been classified as long-term because NS has the ability through a revolving credit back-up facility to convert this obligation into longer term debt. NS intends to refinance the commercial paper either by issuing additional commercial paper or by replacing commercial paper notes with long-term debt. The credit facility provides for interest on borrowings at prevailing rates and contains customary financial covenants, including an initial minimum net worth requirement of $4.0 billion. In connection with the tender offer to purchase up to 8.2 million shares of Conrail stock, NS has arranged for additional commercial paper debt (see Note 15). PAGE 66 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 6. DEBT (continued) Short-Term Debt - ---------------
December 31, 1996 1995 ----- ----- ($ in millions) Commercial paper notes $16.1 $18.0 Other notes 27.2 27.2 Subsidiaries' credit lines 0.7 -- ----- ----- Total $44.0 $45.2 ===== =====
Shelf Registration - ------------------ In 1991, NS filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 covering the issuance of up to $750 million principal amount of unsecured debt securities. Through the end of 1996, $700 million principal amount of debt has been issued and sold under this shelf registration. These notes are not redeemable prior to maturity and are not entitled to any sinking fund.
December 31, 1996 1995 ------ ------ ($ in millions) 9% notes issued March 1991, due March 1, 2021 $250 $250 7.875% notes issued February 1992, due February 15, 2004 250 250 7.4% notes issued September 1996, due September 15, 2006 100 -- 7.22% notes issued September 1996, due September 15, 2006 100 -- ---- ---- Total $700 $500 ==== ====
Capital Lease Obligations - ------------------------- During 1996 and 1995, an NS rail subsidiary entered into capital leases covering new locomotives. The related capital lease obligations totaling $107.8 million in 1996 and $104.5 million in 1995 were reflected in the Consolidated Balance Sheets as debt and, because they were non- cash transactions, were excluded from the Consolidated Statements of Cash Flows. The lease obligations carry an average stated interest rate of 6.5% for those entered into in 1996 and 8.4% for those entered into in 1995. All were converted to variable rate obligations using interest rate swap agreements. The interest rates on these obligations are based on the six-month London Interbank Offered Rate and are reset every six months with changes in interest rates accounted for as an adjustment of interest expense over the terms of the leases. As a result, NS is exposed to the market risk associated with fluctuations in interest rates. To date, while such rate fluctuations have been nominal, their effects have been favorable. Counterparties to the interest rate swap agreements are major financial institutions believed by Management to be credit-worthy. NS' use of interest rate swaps has been limited to those discussed above. PAGE 67 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 6. DEBT (continued) Long-Term Debt - --------------
December 31, 1996 1995 -------- -------- ($ in millions) Railroad equipment obligations at an average rate of 7.9% maturing to 2009 $ 396.4 $ 444.6 Notes at an average rate of 8.1% maturing to 2021 700.0 500.0 Commercial paper classified as long-term debt at an average rate of 5.4% 500.0 500.0 Capitalized leases at an average rate of 5.9% maturing to 2015 197.0 100.9 Other debt at an average rate of 8.7% maturing to 2015 62.9 93.5 -------- -------- Total long-term debt 1,856.3 1,639.0 -------- -------- Less: Current maturities 56.0 85.7 -------- -------- Long-term debt less current maturities $1,800.3 $1,553.3 ======== ======== Long-term debt matures as follows: 1998 $ 114.6 1999 127.2 2000 57.7 2001 51.8 2002 and subsequent years 1,449.0 -------- Total $1,800.3 ========
A substantial portion of NS' properties and certain investments in affiliated companies are pledged as collateral for much of the secured debt. PAGE 68 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 7. CURRENT LIABILITIES
December 31, 1996 1995 ------ ------ ($ in millions) Accounts payable: Accounts and wages payable $349.6 $385.2 Casualty and other claims 199.6 197.4 Vacation liability 76.8 74.4 Equipment rents payable - net 60.9 62.0 Other 22.0 13.8 ------ ------ Total $708.9 $732.8 ====== ====== Other current liabilities: Prepaid amounts on forwarded traffic $ 62.7 $ 69.7 Accrued acquisition costs (Note 15) 60.7 -- Interest payable 38.9 42.8 Retiree health and death benefit obligation (Note 11) 23.7 25.3 Other 16.7 13.5 ------ ------ Total $202.7 $151.3 ====== ======
8. LEASE COMMITMENTS NS is committed under long-term lease agreements, which expire on various dates through 2067, for equipment, lines of road and other property. Future minimum lease payments are as follows:
Operating Leases Capital Leases ---------------- -------------- ($ in millions) 1997 $ 64.4 $ 28.6 1998 56.3 28.6 1999 42.1 28.6 2000 35.9 28.5 2001 33.7 28.0 2002 and subsequent years 643.2 143.1 ------ ------ Total $875.6 285.4 ------ Less imputed interest on capital leases at an average rate of 7.4% 88.4 ------ Present value of minimum lease payments included in debt $197.0 ======
PAGE 69 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 8. LEASE COMMITMENTS (continued) Operating Lease Expense - -----------------------
1996 1995 1994 ------ ------ ------ ($ in millions) Minimum rents $ 77.4 $ 67.8 $ 56.1 Contingent rents 38.3 36.0 45.4 ------ ------ ------ Total $115.7 $103.8 $101.5 ====== ====== ======
9. OTHER LIABILITIES
December 31, 1996 1995 ------ ------ ($ in millions) Casualty and other claims $274.2 $286.5 Net pension obligation (Note 10) 89.2 102.2 Retiree health and death benefit obligation (Note 11) 306.6 307.4 Other 317.1 269.4 ------ ------ Total $987.1 $965.5 ====== ======
10. PENSION PLANS Norfolk Southern and certain subsidiaries have defined benefit pension plans that principally cover salaried employees. Pension benefits are based primarily on years of creditable service with NS and compensation rates near retirement. Contributions to the plans are made on the basis of not less than the minimum funding standards set forth in the Employee Retirement Income Security Act of 1974, as amended. Assets in the plans consist mainly of common stocks. Pension Cost (Benefit) Components - ---------------------------------
1996 1995 1994 ------- ------- ------- ($ in millions) Service cost-benefits earned during the year $ 14.5 $ 11.5 $ 12.5 Interest cost on projected benefit obligation 69.6 68.0 62.6 Actual return on assets in plans (174.9) (263.4) (17.0) Net amortization and deferral 85.4 177.0 (62.8) ------- ------- ------- Net pension benefit (5.4) (6.9) (4.7) Cost of early retirement benefits -- 23.4 -- ------- ------- ------- Total $ (5.4) $ 16.5 $ (4.7) ======= ======= =======
PAGE 70 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 10. PENSION PLANS (continued) Pension cost is determined based on an actuarial valuation that reflects appropriate assumptions as of the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. A summary of the major assumptions follows:
1996 1995 1994 ----- ----- ----- Discount rate for determining funded status 7.75% 7.25% 8.50% Future salary increases 5.25% 6% 6% Return on assets in plans 9% 9% 9%
The funded status of the plans and the amounts reflected in the accompanying balance sheets were as follows:
December 31, --------------------------------------- 1996 1995 ------------------- ------------------- Funded Unfunded Funded Unfunded Plans Plans Plans Plans -------- -------- -------- -------- ($ in millions) Actuarial present value of benefit obligations: Vested benefits $ 784.3 $ 58.9 $ 812.5 $ 51.7 Non-vested benefits 8.1 -- 6.6 0.3 -------- ------ -------- ------ Accumulated benefit obligation 792.4 58.9 819.1 52.0 Effect of expected future salary increases 68.9 5.6 115.3 11.5 -------- ------ -------- ------ Projected benefit obligation 861.3 64.5 934.4 63.5 Fair value of assets in plans 1,191.0 -- 1,088.8 -- -------- ------ -------- ------ Funded status 329.7 (64.5) 154.4 (63.5) Unrecognized initial net asset (29.4) -- (35.9) -- Unrecognized (gain) loss (336.9) 21.0 (169.2) 21.5 Unrecognized prior service cost (11.8) 2.7 (12.8) 3.3 -------- ------ -------- ------ Net pension liability included in the balance sheets $ (48.4) $(40.8) $ (63.5) $(38.7) ======== ====== ======== ======
Early Retirement Program in 1995 - -------------------------------- During 1995, NS completed a voluntary early retirement program for certain salaried employees. The principal benefit for those who participated in this program was enhanced pension benefits, which are reflected in the accumulated benefit obligation. The charge for the 272 employees who accepted the offer is included in PAGE 71 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 10. PENSION PLANS (continued) "Compensation and benefits" expense and totaled $33.6 million (including $8.3 million related to postretirement benefits other than pensions). 401(k) Plans - ------------ Norfolk Southern and certain subsidiaries provide 401(k) savings plans for employees. Under the plans, NS matches a portion of employee contributions, subject to applicable limitations. NS' expenses under these plans were $8.1 million, $7.0 million and $5.1 million in 1996, 1995 and 1994, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Norfolk Southern and certain subsidiaries provide specified health care and death benefits to eligible retired employees and their dependents. Under the present plans, which may be amended or terminated at NS' option, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided by other group insurance policies. The cost of such health care coverage to a retiree may be determined, in part, by the retiree's years of creditable service with NS prior to retirement. Death benefits are determined based on various factors, including, in some cases, salary at time of retirement. NS continues to fund benefit costs principally on a pay-as-you-go basis. However, in 1991, NS established a Voluntary Employee Beneficiary Association (VEBA) account to fund a portion of the cost of future health care benefits for retirees. NS last made a corporate contribution of $10 million in 1994 to the VEBA. Effective January 1, 1994, NS amended the attribution period for postretirement health care benefits. The amendment generally provides for benefits to be determined ratably over a 10-year period based on creditable service commencing at age 45, or from date of hire if employment began after age 45. The amendment reduced the accumulated postretirement health care benefit obligation by $90 million, which will be amortized as a reduction in annual cost on a pro rata basis over a six- year period. A summary of the postretirement benefit cost follows:
1996 1995 1994 ------ ------ ------ ($ in millions) Service cost-benefits attributable to service during the year $ 11.1 $ 10.2 $ 14.5 Interest cost on accumulated postretirement benefit obligation 25.1 28.6 25.0 Actual return on plan assets (13.7) (17.6) -- Net amortization and deferral (5.2) 0.9 (14.6) ------ ------ ------ Net postretirement benefit cost $ 17.3 $ 22.1 $ 24.9 Cost of early retirement benefits -- 8.3 -- ------ ------ ------ Total $ 17.3 $ 30.4 $ 24.9 ====== ====== ======
PAGE 72 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) The following table sets forth these plans' total accumulated postretirement benefit obligation, reconciled with the accrued postretirement benefit obligation:
December 31, 1996 1995 ------------------ ------------------ Health Health Care Death Care Death Benefits Benefits Benefits Benefits -------- -------- -------- -------- ($ in millions) Accumulated postretire- ment benefit obligation: Retirees $ 170.2 $ 83.1 $ 225.6 $ 83.8 Fully eligible active plan participants 23.0 7.2 23.9 8.0 Other active plan participants 46.4 12.1 52.7 12.8 ------- ------- ------- ------- Total 239.6 102.4 302.2 104.6 Plan assets at fair value 85.8 -- 72.1 -- ------- ------- ------- ------- Funded status (153.8) (102.4) (230.1) (104.6) Unrecognized loss (gain) (23.7) (2.6) 59.4 4.1 Unrecognized prior service cost (benefit) (47.7) (0.1) (61.5) -- ------- ------- ------- ------- Accrued postretire- ment benefit obligation $(225.2) $(105.1) $(232.2) $(100.5) ======= ======= ======= =======
For measurement purposes, a 10.4% increase in the per capita cost of covered health care benefits was assumed for 1997. The rate was assumed to decrease gradually to an ultimate rate of 5.5% and remain at that level for 2005 and thereafter. The health care cost trend rate has a significant effect on the amounts reported in the financial statements. To illustrate, increasing the assumed trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by about $27 million and the aggregate of the service and interest cost components of net postretirement benefit cost for the year 1996 by about $4 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation, the salary increase assumption and the long-term rate of return on plan assets are the same as those used for the pension plans (see table of rate assumptions in Note 10). The VEBA trust holding the plan assets is not expected to be subject to federal income taxes, as the assets are invested entirely in trust- owned life insurance. Under collective bargaining agreements, NS and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and amounted to $3.6 million, $3.7 million and $4.8 million in 1996, 1995 and 1994, respectively. PAGE 73 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 12. LONG-TERM INCENTIVE PLAN Under the stockholder-approved Long-Term Incentive Plan, a committee of non-employee directors of the Board may grant stock options, stock appreciation rights (SARs) and performance share units (PSUs), up to a maximum 17,675,000 shares of Norfolk Southern common stock. Options may be granted for a term not to exceed 10 years but may not be exercised prior to the first anniversary of the date of grant. Options are exercisable at the fair market value of Norfolk Southern Common Stock on the date of grant. The plan also permits the payment--on a current or a deferred basis and in cash or in stock--of dividend equivalents on shares of common stock covered by options or PSUs granted after December 31, 1989, in an amount commensurate with dividends paid on common stock. Tax absorption payments, in an amount estimated to equal the federal and state income taxes applicable to shares of common stock issued subject to a share retention agreement, also are authorized. Plan participants surrendered, without cash or other consideration, all outstanding SARs granted after 1988 because of regulations issued by the Securities and Exchange Commission in 1991. Future grants of SARs are not anticipated at this time. SARs outstanding as of each year end were: 32,648 in 1996; 46,562 in 1995; and 74,519 in 1994. Accounting Method - ----------------- NS applies APB Opinion 25 and related interpretations in accounting for awards made under the plan. Accordingly, SARs, PSUs, tax absorption and dividend equivalents result in charges to earnings, while stock options have no effect on earnings. Compensation costs were $35.4 million, $42.9 million and $14.3 million for 1996, 1995 and 1994, respectively. Had compensation cost been determined based on SFAS 123 using the Black-Scholes option-pricing model, net income would have been reduced no more than $10 million in each year. Based on current and anticipated use of stock-based compensation, it is not envisioned that the effect of SFAS 123's accounting provisions would be material in any future period. PAGE 74 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 12. LONG-TERM INCENTIVE PLAN (continued) Stock Option Activity - ---------------------
Weighted Average Option Shares Exercise Price ------------- ---------------- Balance 12/31/93 2,895,407 $47.44 Granted 703,750 72.94 Exercised (93,383) 35.37 Surrendered for SAR (7,472) 26.63 Cancelled -- -- --------- Balance 12/31/94 3,498,302 52.94 Granted 718,250 62.50 Exercised (656,743) 43.82 Surrendered for SAR (13,440) 23.94 Cancelled (3,750) 69.46 --------- Balance 12/31/95 3,542,619 56.66 Granted 685,000 78.06 Exercised (549,581) 53.87 Surrendered for SAR (5,000) 22.25 Cancelled (46,859) 58.85 --------- Balance 12/31/96 3,626,179 $61.15
Except for those granted during the year, all outstanding options were exercisable at December 31. The difference between the weighted average exercise prices for all outstanding options and those exercisable at December 31 was not significant. Stock Options Outstanding - -------------------------
Exercise Price ------------------------------- Number Weighted Average Weighted Outstanding Remaining Range Average at 12/31/96 Contractual Life -------------------- -------- ----------- ---------------- $22.25 $22.25 56,620 0.9 years 33.06 to 42.75 38.84 747,359 3.3 years 56.44 to 72.94 64.63 2,149,200 6.8 years 78.06 78.06 673,000 9.1 years --------- $22.25 to $78.06 $61.15 3,626,179 6.4 years =========
Performance Share Units - ----------------------- PSUs were added to the Long-Term Incentive Plan as approved in 1989 and amended in 1995. PSUs entitle participants to earn shares of common stock at the end of a three-year performance cycle based upon achievement of certain predetermined corporate performance goals. PSU grants and grant-date fair values were 200,400 and $78.06 in 1996; 252,500 and $62.50 in 1995; and 163,000 and $72.94 in 1994, respectively. Shares earned and issued may be subject to share retention agreements and held by NS for up to five years. PAGE 75 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 12. LONG-TERM INCENTIVE PLAN (continued) Shares Available and Issued - --------------------------- Shares of stock available for future grants or issued in connection with all features of the Long-Term Incentive Plan were as follows:
1996 1995 1994 --------- --------- --------- Available for future grants 12/31 6,325,584 7,143,126 2,060,796 Shares of common stock issued 690,872 807,760 190,060
13. STOCK PURCHASE PROGRAMS Since 1987, the Board of Directors has authorized the purchase and retirement of up to 95 million shares of common stock. Purchases under the programs have been made with internally generated cash, and with proceeds from the sale of commercial paper notes and from the issuance of long-term debt. Since the first purchases in December 1987 and through October 22, 1996, NS had purchased and retired 68,545,000 shares of its common stock under these programs at a cost of $3.2 billion. On October 23, 1996, NS announced that the stock purchase program had been suspended (see also Note 15). Future purchase decisions are dependent on the outcome of the proposed Conrail acquisition, the economy, cash needs and alternative investment opportunities. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of "Cash and cash equivalents," "Short-term investments," "Accounts receivable," "Short-term debt" and "Accounts payable" approximate carrying values because of the short maturity of these financial instruments. The fair value of long-term "Investments" approximated $353 million and $297 million at December 31, 1996 and 1995, respectively (see Note 4 for carrying values of "Investments"). The fair value of corporate-owned life insurance approximates carrying value. Quoted market prices were used to determine the fair value of marketable equity securities which are recorded at fair value. Marketable securities reflect $3.4 million and $3.5 million of unrealized holding gains at December 31, 1996 and 1995, respectively. Underlying net assets were used to estimate the fair value of other investments; however, if any such investment was sold after the end of the year, its sale price determined its fair value for these purposes. The fair value of "Long-term debt," including current maturities, approximated $1.95 billion at December 31, 1996, and $1.77 billion at December 31, 1995. The fair values of debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating and remaining maturity (see Note 6 for carrying values of "Long-term debt"). The fair value of interest rate swaps is immaterial. PAGE 76 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 15. COMMITMENTS AND CONTINGENCIES Proposed Acquisition of Conrail - ------------------------------- On October 23, 1996, NS announced its intention to commence an all- cash tender offer for all shares of Conrail Inc. (Conrail), a Pennsylvania corporation. On October 24, 1996, Atlantic Acquisition Corporation, a Pennsylvania corporation and a wholly owned subsidiary of NS, offered to purchase all outstanding shares of Conrail's common stock and Series A ESOP Convertible Junior Preferred Stock (collectively, the Shares), including, in each case, the associated Common Stock Purchase Rights, at a price of $100 per Share--approximately $9.1 billion in the aggregate. Shares tendered in the offer or acquired in any subsequent merger would be held in a voting trust pending regulatory approval by the STB. The offer followed the October 15 announcement that Conrail had entered into a merger agreement with CSX Corporation (CSX), whereby Conrail stockholders would receive $92.50 in cash per Share for up to 40 percent of their Shares and receive CSX common stock for the balance of their Shares. On November 6, 1996, CSX and Conrail announced that CSX had raised the cash portion of its offer to $110 per Share and left unchanged the ratio pursuant to which certain Conrail stockholders would receive shares of CSX common stock. On November 8, 1996, NS announced that it had increased its all-cash offer to $110 per Share--approximately $10.0 billion in the aggregate. On December 19, 1996, CSX and Conrail announced that CSX was adding preferred stock (convertible into CSX common stock) to its offer--a feature said to be worth $16 per Share. On December 20, NS increased its all-cash offer to $115 per Share-- approximately $11 billion in the aggregate--and on January 13, 1997, NS announced that it would offer to purchase up to 8.2 million Shares (approximately 9.9%), the approximate maximum number of Shares NS can buy without triggering Conrail's current anti-takeover defenses, for $115 per Share, if Conrail stockholders disapproved at a special meeting certain management recommendations designed to facilitate the merger with CSX. At that special meeting on January 17, 1997, Conrail stockholders did disapprove those recommendations. Accordingly, on January 22, 1997, NS amended its pending all-cash tender offer by reducing the number of Shares sought to 8.2 million; on February 11, 1997, it acquired 8.2 million Shares for a total of $943 million, pursuant to that amended offer. These Shares have been placed in a voting trust and under certain circumstances might have to be sold at a loss. The Conrail board repeatedly has affirmed its commitment to a merger with CSX. On February 12, 1997, NS commenced a second tender offer for the remaining Shares. NS' second tender offer is conditioned upon, among other things, the valid tender of at least Shares sufficient, with those already owned by NS, to constitute at least a majority of the Shares on a fully diluted basis, Subchapter 25F of Pennsylvania's Business Corporation Law not being applicable to the offer, Conrail's Rights Agreement (or poison pill) having been redeemed or otherwise made inapplicable to NS' tender offer, the merger agreement between CSX and Conrail having been terminated in accordance with its terms or otherwise, and other conditions. NS has received a favorable opinion from the STB regarding the use of a voting trust and has obtained sufficient financing commitments (see below). The STB has proposed a schedule for handling Conrail control applications which could result in an STB decision in late 1997 or early 1998. If the STB does not approve NS' application or if NS deems any conditions imposed by the STB too onerous, NS would have the right and obligation to sell all Shares held in the voting trust. Such a disposition could result in a significant loss. Through December 31, 1996, NS had incurred $76 million of costs associated with the proposed acquisition. These costs, most of which are debt commitment fees, are reflected in the Consolidated Balance Sheet in "Other assets" and, for the portion accrued, in "Other current liabilities" (see Note 7). See also Note 16. PAGE 77 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 15. COMMITMENTS AND CONTINGENCIES (continued) Debt Commitments - ---------------- In connection with the proposed acquisition of Conrail, NS has secured debt commitments sufficient for the tender offer and subsequent merger. The commitments expire on August 1, 1997, except for a portion of a revolving credit facility expiring on August 1, 1998. The total commitment fees will approximate $200 million if the entire facility is used. At December 31, 1996, $57 million of commitment fees had been incurred. In connection with the purchase of the 8.2 million Shares, NS arranged for additional commercial paper debt in an aggregate amount not to exceed $1.0 billion. All or part of this amount could be refinanced either by issuing additional commercial paper or through drawing on the debt commitment that has been arranged in connection with the all-cash $115 per share tender offer for all Shares. Lawsuits - -------- Norfolk Southern and certain subsidiaries are defendants in numerous lawsuits relating principally to railroad operations. While the final outcome of these lawsuits cannot be predicted with certainty, it is the opinion of Management, after consulting with its legal counsel, that the amount of NS' ultimate liability will not materially affect NS' consolidated financial position. Environmental Matters - --------------------- NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a liability where such liability or loss is probable and can be reasonably estimated. Claims, if any, against third parties for recovery of clean-up costs incurred by NS are reflected as receivables in the balance sheet and are not netted against the associated NS liability. Environmental engineers participate in ongoing evaluations of all identified sites, and--after consulting with counsel--any necessary adjustments to initial liability estimates are made. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy. As of December 31, 1996, NS' balance sheet included a reserve for environmental exposures in the amount of $53 million (of which $12 million is accounted for as a current liability), which is NS' estimate of the probable costs at 111 identified locations based on available information. On that date, nine sites accounted for $19 million of the reserve, and no individual site was considered to be material. NS anticipates that the majority of this liability will be paid out over five years; however, some costs will be paid out over a longer period. At many of the 111 locations, certain NS subsidiaries, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for clean-up costs. With respect to known environmental sites (whether identified by NS or by the EPA or comparable state authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available clean-up techniques, the likely development of new clean-up technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant's share of any estimated loss (and that participant's ability to bear it) and evolving statutory and regulatory standards governing liability. PAGE 78 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 15. COMMITMENTS AND CONTINGENCIES (continued) The risk of incurring environmental liability--for acts and omissions, past, present and future--is inherent in the railroad business. Some of the commodities, particularly those classified as hazardous materials, in NS' traffic mix can pose special risks that NS and its subsidiaries work diligently to minimize. In addition, several NS subsidiaries own, or have owned in the past, land holdings used as operating property, or which are leased or may have been leased and operated by others, or held for sale. Because certain conditions may exist on these properties related to environmental problems that are latent or undisclosed, there can be no assurance that NS will not incur liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably now. Moreover, lawsuits and claims involving these and other now-unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter. However, based on its assessments of the facts and circumstances now known and, after consulting with its legal counsel, Management believes that it has recorded the probable costs based on available information for those environmental matters of which the Corporation is aware. Further, Management believes that it is unlikely that any identified matters, either individually or in aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity. Change-in-Control Arrangements - ------------------------------ Norfolk Southern has compensation agreements with officers and certain key employees, which become operative only upon a change in control of the Corporation, as defined in those agreements. The agreements provide generally for payments based on compensation at the time of a covered individual`s involuntary or other specified termination and for certain other benefits. Capital Expenditure Commitment - ------------------------------ In connection with a long-term transportation contract entered into during 1996, NS has committed to construct and operate four motor vehicle distribution centers. These facilities are scheduled for completion in 1998. Debt Guarantees - --------------- As of December 31, 1996, certain Norfolk Southern subsidiaries are contingently liable as guarantors with respect to $50.7 million of indebtedness of related entities. 16. EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT-CONRAIL DEVELOPMENTS (UNAUDITED) Pursuant to an amendment to the merger agreement between CSX and Conrail announced on March 7, 1997, CSX has offered to purchase all Shares for $115 per Share in cash and CSX is permitted to enter into negotiations with other parties, including NS, concerning the acquisition of the securities or assets, or concessions relating to the assets or operations, of Conrail. NS and CSX are negotiating a comprehensive resolution of the issues confronting the eastern railroads based on the proposal submitted by NS to both CSX and Conrail on February 24, 1997. Such a resolution could involve a joint acquisition of Shares by NS and CSX. However, unless and until such negotiations are successfully concluded, NS intends to continue in effect its tender offer for all Shares not owned by NS. PAGE 79 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Norfolk Southern Corporation: We have audited the consolidated financial statements of Norfolk Southern Corporation and subsidiaries as listed in the index in Item 8. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule listed in Item 14(a)2. These consolidated financial statements and this consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and this consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 Norfolk Southern Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP Norfolk, Virginia January 28, 1997, except as to the second and third paragraphs of Note 15, which are as of February 12, 1997 PAGE 80 Item 9. Changes in and Disagreements with Accountants on Accounting - ------- ----------------------------------------------------------- and Financial Disclosure. ------------------------ None. PART III Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- Item 11. Executive Compensation. - ------- ---------------------- Item 12. Security Ownership of Certain Beneficial Owners - ------- ----------------------------------------------- and Management. -------------- and Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- In accordance with General Instruction G(3), the information called for by Part III is incorporated herein by reference from Norfolk Southern's definitive Proxy Statement, to be dated April 1, 1997, for the Norfolk Southern Annual Meeting of Stockholders to be held on May 8, 1997, which definitive Proxy Statement will be filed electronically with the Commission pursuant to Regulation 14A. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I hereof beginning on page 25 under "Executive Officers of the Registrant." PAGE 81 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------ Form 8-K. -------- (a) The following documents are filed as part of this report: 1. Index to Consolidated Financial Statements: Page ------------------------------------------ ---- Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994 56 Consolidated Balance Sheets As of December 31, 1996 and 1995 57 Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 58 Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1996, 1995 and 1994 59 Notes to Consolidated Financial Statements 60 Independent Auditors' Report 79 2. Financial Statement Schedule: The following consolidated financial statement schedule should be read in connection with the consolidated financial statements: Index to Consolidated Financial Statement Schedule Page -------------------------------------------------- ---- Schedule II - Valuation and Qualifying Accounts 88 Schedules other than the one listed above are omitted either because they are not required or are inapplicable or because the information is included in the consolidated financial statements or related notes. PAGE 82 Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------- Form 8-K. (continued) -------- 3. Exhibits Exhibit Number Description - ------- -------------------------------------------------- 3 Articles of Incorporation and Bylaws - 3(i) The Restated Articles of Incorporation of Norfolk Southern Corporation are incorporated herein by reference from Exhibit 3(i) to Norfolk Southern's 1995 Annual Report in Form 10-K. 3(ii) The Bylaws of Norfolk Southern Corporation, as amended July 23, 1996, are incorporated herein by reference from Norfolk Southern's Form 10-Q report for the quarter ended September 30, 1996. 4 Instruments Defining the Rights of Security Holders, Including Indentures - In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of instruments of Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. 10 Material Contracts - (a) The Supplementary Agreement, entered into as of January 1, 1987, between the Trustees of the Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific Railway Company (the latter a wholly owned subsidiary of Norfolk Southern Railway) - extending and amending a Lease, dated as of October 11, 1881 (both the Lease and Supplementary Agreement, formerly incorporated by reference from Exhibit 10(b) to Southern's 1987 Annual Report on Form 10-K) - is incorporated herein by reference from Exhibit 10(a) to Norfolk Southern's 1994 Annual Report on Form 10-K. Management Compensation Plans ----------------------------- (b) The Norfolk Southern Corporation Management Incentive Plan, as amended effective January 1, 1996, is incorporated herein by reference from Exhibit 10(b) to Norfolk Southern's 1995 Annual Report on Form 10-K. PAGE 83 Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------- Form 8-K. (continued) -------- Exhibit Number Description - ------- -------------------------------------------------- (c) The Norfolk Southern Corporation Executive Management Incentive Plan, effective January 1, 1996, is incorporated herein by reference from Exhibit 10(c) to Norfolk Southern's 1995 Annual Report on Form 10-K. (d) The Norfolk Southern Corporation Long-Term Incentive Plan as amended effective January 23, 1996, is incorporated herein by reference from Exhibit 10(d) to Norfolk Southern's 1995 Annual Report on Form 10-K. (e) The Norfolk Southern Corporation Officers' Deferred Compensation Plan is incorporated herein by reference from Exhibit 10(g) to Norfolk Southern's 1993 Annual Report on Form 10-K. (f) The Directors' Deferred Fee Plan of Norfolk Southern Corporation, as amended effective May 9, 1996, is incorporated herein by reference from Exhibit 10(f) to Norfolk Southern's Form 10-Q Report for the quarter ended June 30, 1996. (g) The Norfolk Southern Corporation Directors' Restricted Stock Plan effective January 1, 1994, is incorporated herein by reference from Exhibit 99 to Norfolk Southern's Form S-8 filed electronically on January 26, 1994. (h) Form of Severance Agreement, dated as of June 1, 1996, between Norfolk Southern Corporation and certain executive officers (including those defined as "named executive officers" and identified in the Corporation's Proxy Statement for the 1997 Annual Meeting of Stockholders) is incorporated herein by reference from Exhibit 10 to Norfolk Southern's Form 10-Q Report for the quarter ended June 30, 1996. (i) Norfolk Southern Corporation Supplemental (formerly, Excess) Benefit Plan, as amended January 28, 1997, with such amendment to be effective as of January 1, 1996, subject to receipt of Internal Revenue Service approval of a coordinating provision in the Retirement Plan of Norfolk Southern Corporation and Participating Subsidiary Companies, is filed herewith. PAGE 84 Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------- Form 8-K. (continued) -------- Exhibit Number Description - ------- -------------------------------------------------- (j) The Norfolk Southern Corporation Directors' Charitable Award Program, effective February 1, 1996, is incorporated herein by reference from Exhibit 10(j) to Norfolk Southern's Form 10-Q Report for the quarter ended June 30, 1996. (k) The Norfolk Southern Corporation Directors' Pension Plan, as amended effective June 1, 1996, is incorporated herein by reference from Exhibit 10(k) to Norfolk Southern's Form 10-Q Report for the quarter ended June 30, 1996. (l) The Norfolk Southern Corporation Directors' Deferred Stock Unit Program, effective May 9, 1996, is incorporated herein by reference from Exhibit 10(l) to Norfolk Southern's Form 10-Q Report for the quarter ended June 30, 1996. (m) The Excess Long-Term Disability Plan of Norfolk Southern Corporation and Participating Subsidiary Companies, effective October 1, 1995, is incorporated herein by reference from Exhibit 10(m) to Norfolk Southern's Form 10-Q Report for the quarter ended June 30, 1996. 11 Statement re: Computation of Per Share Earnings. 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant. 23 Consents of Experts and Counsel - Consent of Independent Auditors. 27 Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed for the three months ended December 31, 1996. (c) Exhibits. The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed herewith or incorporated herein by reference. PAGE 85 Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------- Form 8-K. (continued) -------- Exhibit Number Description - ------- -------------------------------------------------- (d) Financial Statement Schedules. Financial statement schedules and separate financial statements specified by this Item are included in Item 14(a)2 or are otherwise not required or are not applicable. PAGE 86 POWER OF ATTORNEY ----------------- Each person whose signature appears below under "SIGNATURES" hereby authorizes Henry C. Wolf and James C. Bishop, Jr., or either of them, to execute in the name of each such person, and to file, any amendment to this report and hereby appoints Henry C. Wolf and James C. Bishop, Jr., or either of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file, any and all amendments to this report. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Norfolk Southern Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 25th day of March, 1997. NORFOLK SOUTHERN CORPORATION By /s/ David R. Goode ----------------------------------------- (David R. Goode, Chairman, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 25th day of March, 1997, by the following persons on behalf of Norfolk Southern Corporation and in the capacities indicated. Signature Title --------- ----- /s/ David R. Goode - ------------------------------ Chairman, President and Chief (David R. Goode) Executive Officer and Director (Principal Executive Officer) /s/ Henry C. Wolf - ------------------------------ Executive Vice President-Finance (Henry C. Wolf) (Principal Financial Officer) /s/ John P. Rathbone - ------------------------------ Vice President and Controller (John P. Rathbone) (Principal Accounting Officer) /s/ Gerald L. Baliles - ------------------------------ Director (Gerald L. Baliles) PAGE 87 Signature Title --------- ----- /s/ Carroll A. Campbell, Jr. - ------------------------------ Director (Carroll A. Campbell, Jr.) - ------------------------------ Director (Gene R. Carter) /s/ L. E. Coleman - ------------------------------ Director (L. E. Coleman) /s/ T. Marshall Hahn, Jr. - ------------------------------ Director (T. Marshall Hahn, Jr.) /s/ Landon Hilliard - ------------------------------ Director (Landon Hilliard) /s/ E. B. Leisenring, Jr. - ------------------------------ Director (E. B. Leisenring, Jr.) /s/ Arnold B. McKinnon - ------------------------------ Director (Arnold B. McKinnon) /s/ Jane Margaret O'Brien - ------------------------------ Director (Jane Margaret O'Brien) /s/ Harold W. Pote - ------------------------------ Director (Harold W. Pote) PAGE 88 Schedule II Page 1 of 2 Norfolk Southern Corporation and Subsidiaries --------------------------------------------- Valuation and Qualifying Accounts Years Ended December 31, 1994, 1995 and 1996 (In millions of dollars)
Additions charged to -------------------- Beginning Other Ending Balance Expenses Accounts Deductions Balance --------- -------- -------- ---------- ------- Year ended December 31, 1994 - ---------------------------- Valuation allowance (included net in deferred tax liability) for deferred tax assets $ 10.9 $ -- $ -- $ 9.5 $ 1.4 Casualty and other claims included in other liabilities $321.2 $120.2 $ 2.5 $138.9 $305.0 Current portion of casualty and other claims included in accounts payable $185.1 $ 49.9 $163.7 $207.5 $191.2 Year ended December 31, 1995 - ---------------------------- Valuation allowance (included net in deferred tax liability) for deferred tax assets $ 1.4 $ -- $ 0.1 $ -- $ 1.5 Casualty and other claims included in other liabilities $305.0 $ 99.5 $ 3.1 $121.1 $286.5 Current portion of casualty and other claims included in accounts payable $191.2 $ 63.6 $172.6 $230.0 $197.4 Includes revenue overcharges provided through charges to operating revenues, and transfers from other accounts. Payments and reclassifications to/from accounts payable. Payments and reclassifications to/from other liabilities. (continued)
PAGE 89 Schedule II Page 2 of 2 Norfolk Southern Corporation and Subsidiaries --------------------------------------------- Valuation and Qualifying Accounts Years Ended December 31, 1994, 1995 and 1996 (continued) (In millions of dollars)
Additions charged to -------------------- Beginning Other Ending Balance Expenses Accounts Deductions Balance --------- -------- -------- ---------- ------- Year ended December 31, 1996 - ---------------------------- Valuation allowance (included net in deferred tax liability) for deferred tax assets $ 1.5 $ 0.6 $ -- $ -- $ 2.1 Casualty and other claims included in other liabilities $286.5 $115.4 $ 4.0 $131.7 $274.2 Current portion of casualty and other claims included in accounts payable $197.4 $ 61.4 $157.2 $216.4 $199.6 Includes revenue overcharges provided through charges to operating revenues, and transfers from other accounts. Payments and reclassifications to/from accounts payable. Payments and reclassifications to/from other liabilities.
PAGE 90 EXHIBIT INDEX ------------- Electronic Submission Exhibit Page Number Description Number - ---------- ------------------------------------------------- ------ 10(i) Norfolk Southern Corporation Supplemental (formerly, Excess) Benefit Plan. 91-95 11 Statement re: Computation of Per Share Earnings. 96-97 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 98 21 Subsidiaries of Norfolk Southern Corporation. 99-101 23 Consent of Independent Auditors. 102 27 Financial Data Schedule (This exhibit is required to be submitted electronically pursuant to the rules and regulations of the Securities and Exchange Commission and shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934). 103 Exhibits 10(i) and 27 are not included in copies assembled for public dissemination. If you have a need for this type of information, we will be pleased to send it to you. Write to: Office of Corporate Secretary Norfolk Southern Corporation Three Commercial Place Norfolk, Virginia 23510-9211 EX-10.I 2 NS SUPP. (FORMERLY EXCESS) BENEFIT PLAN-01/28/97 PAGE 91 EXHIBIT 10(i), Page 1 of 5 SUPPLEMENTAL BENEFIT PLAN OF NORFOLK SOUTHERN CORPORATION AND PARTICIPATING SUBSIDIARY COMPANIES (as last amended January 28, 1997) ARTICLE I. INTRODUCTION This Supplemental Benefit Plan ("Plan"), formerly the Excess Benefit Plan, was established by Norfolk Southern Corporation effective June 1, 1982, ("Effective Date") to provide retirement benefits to eligible employees in excess of those provided for by the Retirement Plan of Norfolk Southern Corporation and Participating Subsidiary Companies. This Plan is the successor to and supersedes, as of the Effective Date, the following plans: Excess Benefit Plan of Norfolk and Western Railway Company Southern Railway System Supplemental Retirement Plan Norfolk and Western Railway Company Executives Contingent Compensation Plan Pension Resolution ARTICLE II. DEFINITIONS: NSC Norfolk Southern Corporation, a Virginia corporation. Pension The Pension Committee of the Board of Directors Committee of NSC. Retirement Retirement Plan of Norfolk Southern Corporation Plan and Participating Subsidiary Companies. Member A person entitled to participate in the Retirement Plan. Participating Each subsidiary or affiliated company of NSC Subsidiary which is a Participating Subsidiary in the Retirement Plan shall automatically participate in the Plan. Participant A Member of the Retirement Plan who is eligible to participate under Article III. Deferred Amounts the receipt of which a Participant elects Compensation to defer under the: Deferred Compensation Plan of Norfolk and Western Railway Company Southern Railway System Executive, General or Middle Management Incentive Plan PAGE 92 SUPPLEMENTAL BENEFIT PLAN OF EXHIBIT 10(i), Page 2 of 5 NORFOLK SOUTHERN CORPORATION AND PARTICIPATING SUBSIDIARY COMPANIES (as last amended January 28, 1997) Norfolk Southern Corporation Management Incentive Plan Norfolk Southern Corporation Executive Management Incentive Plan Norfolk Southern Corporation Officers' Deferred Compensation Plan NW Pension Resolutions adopted by the Board of Directors of Resolutions Norfolk and Western Railway Company at its meetings held on January 23, 1968, June 24, 1969, November 25, 1969, January 26, 1971, and April 23, 1974, authorizing the respective payments of additional pension benefits to five Members. Average Final Compensation as defined in Article II of the Compensation Retirement Plan. ARTICLE III. ELIGIBILITY 1. The following Members of the Retirement Plan shall be eligible to participate in the Plan on or after the Effective Date: (a) Any Member of the Retirement Plan whose benefit computed under Article VI of the Retirement Plan without regard to the maximum limitation on benefits imposed by Section 415 of the Internal Revenue Code exceeds such maximum limitation on benefits; (b) Any Member of the Retirement Plan whose benefit computed under Article VI of the Retirement Plan disregards amounts of Deferred Compensation in the computation of his Average Final Compensation; (c) Any Member of the Retirement Plan entitled to receive a pension benefit, in excess of the benefit computed under the provisions of the Retirement Plan, pursuant to an NW Pension Resolution; (d) Any Member of the Retirement Plan entitled to receive a pension benefit, in excess of the benefit computed under the provisions of the Retirement Plan, pursuant to a resolution adopted by the Board of Directors of NSC; (e) Any Member of the Retirement Plan whose Compensation exceeds the limitation contained in Section 401(a)(17) of the Internal Revenue Code; (f) Any Member protected by the Pension Benefits Standard Act of Canada whose benefit computed under Article VI of the Retirement Plan exceeds $60,000; or PAGE 93 SUPPLEMENTAL BENEFIT PLAN OF EXHIBIT 10(i), Page 3 of 5 NORFOLK SOUTHERN CORPORATION AND PARTICIPATING SUBSIDIARY COMPANIES (as last amended January 28, 1997) (g) Any Member of the Retirement Plan entitled to receive a pension benefit in excess of the benefit computed under the provisions of the Retirement Plan, pursuant to the provisions of any agreement between a Participant and NSC providing benefits upon "Termination" of a Participant's employment following a "Change in Control" (as the terms "Termination" and "Change in Control" are defined in any such agreement). 2. Any participant of the Excess Benefit Plan of Norfolk and Western Railway Company or the Southern Railway System Supplemental Retirement Plan or any individual covered by the Norfolk and Western Railway Company Executives Contingent Compensation Plan Pension Resolution, dated September 24, 1968, shall become a Participant on the Effective Date. ARTICLE IV. SUPPLEMENTAL BENEFIT 1. A Participant shall, upon retirement under the Retirement Plan, be entitled to receive a monthly benefit equal to the excess of (a) the monthly benefit under Article VI of the Retirement Plan if such benefit had been computed (i) without regard to the limitation imposed by Section 415 of the Internal Revenue Code and provided for in Section 1 of Article VII of the Retirement Plan; (ii) without regard to the limitation of Compensation imposed by Section 401(a)(17) of the Internal Revenue Code; (iii) without regard to the $60,000 limitation on benefits payable to Members protected by the Pension Benefits Standard Act of Canada; (iv) by including in the calculation of Average Monthly Final Compensation amounts of Deferred Compensation, if any; (v) by including service credits and applying any offsets provided for under any NW Pension Resolution, if any; and (vi) by including the service credits and compensation to which a Participant is entitled pursuant to the provisions of any agreement providing the benefits described in Article III, Section 1(g), hereof; and PAGE 94 SUPPLEMENTAL BENEFIT PLAN OF EXHIBIT 10(i), Page 4 of 5 NORFOLK SOUTHERN CORPORATION AND PARTICIPATING SUBSIDIARY COMPANIES (as last amended January 28, 1997) (vii) by excluding the Additional Retirement Benefit provided under Article VI of the Retirement Plan, as set forth in Schedule A of the Retirement Plan, over (b) the monthly benefit actually payable under the Retirement Plan. 2. A Participant shall, upon retirement under the Retirement Plan, be entitled to receive a monthly benefit, in excess of the benefit otherwise payable under the Retirement Plan and in addition to any amount payable pursuant to Section 1 of this Article IV, in an amount so provided by a resolution adopted by the Board of Directors of NSC, if any. 3. Any survivorship option which has been elected or is in force under Article VIII of the Retirement Plan at the time of a Participant's death shall be deemed to have been elected or be in force under this Plan. 4. The payment of excess benefits under the Plan shall be made in a manner consistent with the provisions of the Retirement Plan, and shall continue for the same period of time. ARTICLE V. FUNDING The benefits under the Plan shall be paid in cash from the general funds of NSC or its Participating Subsidiary, and no special or separate fund shall be established or other segregation of assets made to assure such payments. Nothing contained in the Plan shall create or be construed to create a trust of any kind. To the extent that any person acquires a right to receive payments under the terms of the Plan, such right shall be no greater than the right of an unsecured creditor of NSC or its Participating Subsidiary. ARTICLE VI. ADMINISTRATION 1. The Plan shall be administered by the Pension Committee, which is composed of three or more NSC directors appointed by the NSC Board who are not eligible to participate in the Plan and who shall serve at the pleasure of the Board. Each member of the Pension Committee, while serving as such, shall be considered to be acting in his capacity as a director of NSC. 2. The Pension Committee shall from time to time adopt rules and regulations determined to be necessary to ensure the effective implementation of the Plan. PAGE 95 SUPPLEMENTAL BENEFIT PLAN OF EXHIBIT 10(i), Page 5 of 5 NORFOLK SOUTHERN CORPORATION AND PARTICIPATING SUBSIDIARY COMPANIES (as last amended January 28, 1997) 3. The Pension Committee shall have the power to interpret the Plan. Any disputed question arising under the Plan, including questions of construction and interpretation, shall be determined conclusively and finally by the Pension Committee. ARTICLE VII. RIGHTS AND RESTRICTIONS 1. Participants in the Plan shall have only those rights in respect of the Plan specifically set forth herein. 2. This Plan shall not be deemed to constitute a contract between NSC or any Participating Company and any Participant or surviving spouse of a deceased Participant, nor shall it be construed to be consideration for or an inducement or condition of the employment of any Participant. Nothing contained herein shall be deemed to give any Participant the right to continued employment. 3. Benefits payable hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to accomplish any of these mentioned acts shall be void. Benefits shall not be subjected to attachment or other legal process or debts of the retired Participant or surviving spouse. ARTICLE VIII. AMENDMENTS AND TERMINATIONS The Plan may be amended at any time, and retroactively, if deemed necessary or appropriate, by any proper officer of NSC to effect changes which are, in his or her sole discretion, ministerial, substantively administrative, or necessary to comply with statutory or other legally mandated requirements, and the implementation of which does not result in a material cost to NSC. The Board or Directors of NSC, in its sole discretion, may at any time modify or amend any provisions of the Plan or may suspend or terminate the Plan, in whole or in part, but no such action shall retroactively impair or otherwise adversely affect the rights of any person to benefits under the Plan which have accrued prior to the date of such action, as determined by the Pension Committee. /s/ Paul N. Austin ------------------------------------ P. N. Austin Vice President Personnel EX-11 3 EX-11 NS COMPUTATION OF PER SHARE EARNINGS PAGE 96 EXHIBIT 11 PAGE 1 of 2 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In millions except per share amounts)
1996 1995 1994 ---- ---- ---- Computation for Statements of Income - ------------------------------------ Net income per statements of income $770.4 $712.7 $667.8 ------ ------ ------ Weighted average number of shares outstanding 126.5 131.0 136.3 ------ ------ ------ Primary earnings per share $ 6.09 $ 5.44 $ 4.90 ====== ====== ====== Additional Primary Computation - ------------------------------ Net income per statements of income $770.4 $712.7 $667.8 ------ ------ ------ Adjustment to weighted average number of shares outstanding: Weighted average number of shares outstanding per primary computation above 126.5 131.0 136.3 Dilutive effect of outstanding options, stock appreciation rights (SARs) and performance share units (PSUs) (as determined by the application of the treasury stock method) 1.5 1.3 1.1 ------ ------ ------ Weighted average number of shares outstanding, as adjusted 128.0 132.3 137.4 ====== ====== ====== Primary earnings per share, as adjusted $ 6.02 $ 5.39 $ 4.86 ====== ====== ====== See Note 12 of Notes to Consolidated Financial Statements on page 73 for a description of the Long-Term Incentive Plan. These calculations are submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because they result in dilution of less than 3 percent.
PAGE 97 EXHIBIT 11 PAGE 2 of 2 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In millions except per share amounts)
1996 1995 1994 ---- ---- ---- Fully Diluted Computation - ------------------------- Net income per statements of income $770.4 $712.7 $667.8 Adjustment to increase earnings to requisite level to earn maximum PSUs, net of tax effect 95.6 55.3 93.0 ------ ------ ------ Net income, as adjusted 866.0 $768.0 $760.8 ====== ====== ====== Adjustment to weighted average number of shares outstanding, as adjusted for additional primary calculation: Weighted average number of shares outstanding, as adjusted per additional primary computation on page 1 128.0 132.3 137.4 Additional dilutive effect of outstanding options and SARs (as determined by the application of the treasury stock method using period end market price) 0.1 0.3 -- Additional shares issuable at maximum level for PSUs 0.1 0.1 0.1 ------ ------ ------ Weighted average number of shares, as adjusted 128.2 132.7 137.5 ------ ------ ------ Fully diluted earnings per share $ 6.76 $ 5.79 $ 5.53 ====== ====== ====== These calculations are submitted in accordance with Regulation S-K item 601(b)(11) although they are contrary to paragraph 40 of APB Opinion No. 15 because they produce an anti-dilutive result.
EX-12 4 EX-12 COMPUTATION-RATIO/EARNINGS TO FIXED CHARGES PAGE 98 EXHIBIT 12 PAGE 1 of 1 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Millions of Dollars)
Year ended December 31 ------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- EARNINGS Income before income taxes as reported $1,196.9 $1,114.7 $1,049.0 $ 898.6 $ 875.3 Add: Total interest expenses (as detailed below) 186.4 174.9 159.9 160.7 161.6 Income (loss) of partially owned entities 1.1 0.1 0.6 (2.6) 2.0 Subsidiaries' preferred dividend requirement 2.5 2.6 2.7 2.7 2.7 -------- -------- -------- -------- -------- Income before income taxes, as adjusted $1,386.9 $1,292.3 $1,212.2 $1,059.4 $1,041.6 ======== ======== ======== ======== ======== FIXED CHARGES Interest expense on debt $ 115.7 $ 113.4 $ 101.6 $ 98.6 $ 109.0 Other interest expense 38.9 31.5 31.8 38.7 33.0 Calculated interest portion of rent expense 31.8 30.0 26.5 23.4 19.6 -------- -------- -------- -------- -------- Total interest expenses 186.4 174.9 159.9 160.7 161.6 Capitalized interest 11.9 14.0 17.8 21.7 17.9 Subsidiaries' preferred dividend requirement on a pretax basis 4.1 4.1 4.2 4.3 4.2 -------- -------- -------- -------- -------- Total fixed charges $ 202.4 $ 193.0 $ 181.9 $ 186.7 $ 183.7 ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 6.85 6.70 6.66 5.67 5.67 Includes 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.
EX-21 5 1996 10-K405 EX-21 NSC LISTING OF SUBSIDIARIES PAGE 99 EXHIBIT 21 PAGE 1 of 3 NAME AND STATE OF INCORPORATION OF SUBSIDIARIES OF NORFOLK SOUTHERN CORPORATION AS OF MARCH 1, 1997 Agency Media Services, Inc., Indiana Atlantic Acquisition Corporation, Pennsylvania Atlantic Investment Company, Delaware Norfolk Southern Properties, Inc., Virginia Norfolk Southern Railway Company, Virginia North American Van Lines, Inc., Delaware NS Crown Services, Inc., Virginia NS Fiber Optics, Inc., Virginia NS Transportation Brokerage Corporation, Virginia Pocahontas Development Corporation, Kentucky Pocahontas Land Corporation, Virginia TCS Leasing, Inc., Oklahoma Norfolk Southern Railway Company subsidiaries: Airforce Pipeline, Inc., North Carolina Alabama Great Southern Railroad Company, The; Alabama Atlantic and East Carolina Railway Company, North Carolina Camp Lejeune Railroad Company, North Carolina Central of Georgia Railroad Company, Georgia Chesapeake Western Railway, Virginia Cincinnati, New Orleans and Texas Pacific Railway Company, The; Ohio Citico Realty Company, Virginia Georgia Southern and Florida Railway Company, Georgia High Point, Randleman, Asheboro and Southern Railroad Company, North Carolina Interstate Railroad Company, Virginia Lamberts Point Barge Company, Inc., Virginia Memphis and Charleston Railway Company, Mississippi Mobile and Birmingham Railroad Company, Alabama Norfolk and Portsmouth Belt Line Railroad Company, Virginia Norfolk and Western Railway Company, Virginia North Carolina Midland Railroad Company, The; North Carolina Rail Investment Company, Delaware Shenandoah-Virginia Corporation, Virginia South Western Rail Road Company, The; Georgia Southern Rail Terminals, Inc., Georgia Southern Rail Terminals of North Carolina, Inc., North Carolina Southern Region Coal Transport, Inc., Alabama Southern Region Materials Supply, Inc., Georgia Southern Region Motor Transport, Inc., Georgia State University Railroad Company, North Carolina Tennessee, Alabama & Georgia Railway Company, Delaware Tennessee Railway Company, Tennessee Virginia and Southwestern Railway Company, Virginia Yadkin Railroad Company, North Carolina PAGE 100 EXHIBIT 21 PAGE 2 of 3 Norfolk Southern Properties, Inc. subsidiaries: Alexandria-Southern Properties, Inc., Virginia Arrowood-Southern Company, North Carolina Arrowood Southern Executive Park, Inc., North Carolina Carlyle CA Corporation, Virginia Carlyle Development Corporation, Virginia Charlotte-Southern Corporation, North Carolina Charlotte-Southern Hotel Corporation, North Carolina Lambert's Point Docks, Incorporated, Virginia NS-Charlotte Tower Corporation, North Carolina Nickel Plate Improvement Company, Inc., The; Indiana NKPI Management, Inc., Indiana Norfolk Southern Industrial Development Corp., Virginia NS Gas Properties, Inc., Virginia NS Gas Properties, II, Inc., Virginia Sandusky Dock Corporation, Virginia Southern Region Industrial Realty, Inc., Georgia Virginia Holding Corporation, Virginia North American Van Lines, Inc. domestic subsidiaries: A Five Star Forwarding, Inc., Delaware A Three Rivers Forwarding, Inc., Indiana Alaska USA Van Lines, Inc., Indiana Americas Quality Van Lines, Inc., Indiana City Storage & Transfer, Inc., Colorado Fleet Insurance Management, Inc., Indiana FrontRunner Worldwide, Inc., Delaware Great Falls North American, Inc., Montana Move Management Services, Inc., Indiana NACAL, Inc., California NALOG, Inc., Delaware NAVTRANS Container Lines, Inc., Florida NAVTRANS International Freight Forwarding, Inc., Indiana NorAm Forwarding, Inc., Indiana North American Distribution Systems, Inc., Indiana North American Forwarding, Inc., Indiana North American Logistics, Ltd., Indiana North American Moving & Storage, Inc., Indiana North American Transport Insurance Company, Indiana North American Van Lines of Texas, Inc., Texas Relocation Management Systems, Inc., Delaware PAGE 101 EXHIBIT 21 PAGE 3 of 3 North American Van Lines, Inc. foreign subsidiaries: Cavalier Moving & Storage Co. Ltd., Canada Cold Lake Moving & Storage Ltd., Alberta Curry Moving & Storage Ltd., Ontario midi-Data Logistik GmbH, Germany NAVTRANS International Speditions GmbH, Germany North American Van Lines Ltd., United Kingdom North American Van Lines Canada Ltd., Canada North American Van Lines (Alberta) Ltd., Alberta North American Van Lines (Atlantic) Ltd., Nova Scotia Star Storage Ltd., Manitoba Tru-Flite Transportation Systems Inc., Canada Westlake Moving & Storage, Ltd., Ontario Westmount Moving & Storage, Inc. (Demanagement Et Entreposage Westmount), Quebec 153843 Canada Inc., Canada NOTE: Of the above subsidiaries, each of which is more than 50% owned, only Norfolk Southern Railway Company and Norfolk and Western Railway Company meet the Commission's "significant subsidiary" test. EX-23 6 1996 10-K405 EX-23 CONSENT OF INDEPENDENT AUDITORS PAGE 102 EXHIBIT 23 PAGE 1 of 1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Norfolk Southern Corporation: We consent to incorporation by reference in Registration Statements Nos. 33-44188, 33-61317, 33-556, 33-52031, and 33-57417 on Form S-8 and Registration Statements Nos. 33-38595 and 333-20203 on Form S-3 of Norfolk Southern Corporation of our report dated January 28, 1997, except as to the second and third paragraphs of Note 15, which are as of February 12, 1997, relating to the consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows and the related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K405 of Norfolk Southern Corporation. /s/ KPMG Peat Marwick LLP Norfolk, Virginia March 25, 1997 EX-27 7 YEAR END 1996 10-K405 EX-27 NSC FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1996 DEC-31-1996 209 194 720 16 63 1,457 13,928 4,399 11,416 1,190 1,800 132 0 0 4,846 11,416 0 4,770 0 3,573 (116) 0 116 1,197 427 770 0 0 0 770 6.09 0
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