<PAGE> 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> 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> 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> 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> 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> 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> 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> 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.
<TABLE>
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:
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE> PAGE 9
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE> 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.
<TABLE>
The following table shows total coal, coke and iron ore
tonnage originated on line, received from connections and handled for
the past five years:
<CAPTION>
Tons of Coal, Coke and Iron Ore (Millions)
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
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:
<CAPTION>
Origin State Millions of Tons
------------ ----------------
<S> <C>
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
=====
</TABLE>
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> 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.
<TABLE>
The quantities of NS export coal handled through Lamberts
Point for the past five years were as follows:
<CAPTION>
Export Coal through Lamberts Point
(Millions of tons)
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Originated 26.3 25.4 23.9 24.6 30.8
Handled 26.4 25.5 24.1 24.9 31.2
</TABLE>
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> 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> PAGE 13
<TABLE>
RAIL OPERATING STATISTICS - The following table sets forth
certain statistics relating to NS' railroads' operations for the past
five years:
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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> 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> PAGE 15
RAILWAY PROPERTY:
<TABLE>
EQUIPMENT - As of December 31, 1996, NS owned or leased the
following units of equipment:
<CAPTION>
Number of Units
-------------------------------- Capacity
Owned* Leased Total of Equipment
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
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
========= ======= ======== ===========
<S> <C> <C> <C> <C>
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
========= ======= ======== ===========
<S> <C> <C> <C>
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.
</TABLE>
<PAGE> PAGE 16
<TABLE>
The following table indicates the number and year of
purchase for locomotives and freight cars owned at December 31, 1996:
<CAPTION>
Year Built
---------------------------------------------------------
1986- 1980- 1979 &
1996 1995 1994 1993 1992 1991 1985 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
Annual Average Bad Order Ratio
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE> 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.
<TABLE>
The density of traffic on running tracks (main line trackage
plus passing tracks) during 1996 was as follows:
<CAPTION>
Gross tons of
freight carried
per track mile Track miles Percent
(Millions) of running tracks* of total
---------------- ----------------- --------
<S> <C> <C>
0-4 4,837 30
5-19 4,682 29
20 and over 6,529 41
------ ---
16,048 100
* Excludes trackage rights.
</TABLE>
<TABLE>
The following table summarizes certain information about NS'
track roadway additions and replacements during the past five years:
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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> 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> 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.
<TABLE>
CAPITAL EXPENDITURES - Capital expenditures for road,
equipment and other property for the past five years were as follows:
<CAPTION>
Capital Expenditures
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ======
</TABLE>
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> 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> 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> 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> 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> 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> 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> 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> 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> 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> PAGE 29
PART II
Item 5. Market for Registrant's Common Stock and Related
- ------- ------------------------------------------------
Stockholder Matters.
-------------------
<TABLE>
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.
<CAPTION>
Quarter
--------------------------------------
1996 1st 2nd 3rd 4th
---- --- --- --- ---
<S> <C> <C> <C> <C>
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
---- --- --- --- ---
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> PAGE 30
Item 6. Selected Financial Data.
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1993 - 1996
Page One
<CAPTION>
1996 1995 1994 1993<F1>
--------- --------- --------- ---------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
<PAGE> PAGE 31
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1993 - 1996
Page Two
<CAPTION>
1996 1995 1994 1993<F1>
--------- --------- --------- ---------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
<FN>
<F1> 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 $244 million.
</FN>
</TABLE>
<PAGE> PAGE 32
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1989 - 1992
Page One
<CAPTION>
1992 1991<F2> 1990 1989
--------- --------- --------- ---------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
<PAGE> PAGE 33
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1989 - 1992
Page Two
<CAPTION>
1992 1991<F2> 1990 1989
--------- --------- --------- ---------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
<FN>
<F2> 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 $3.37 per share.
</FN>
</TABLE>
<PAGE> PAGE 34
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1986 - 1988
Page One
<CAPTION>
1988 1987<F3> 1986
--------- --------- ---------
($ in millions, except per share amounts)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
<PAGE> PAGE 35
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1986 - 1988
Page Two
<CAPTION>
1988 1987<F3> 1986
--------- --------- ---------
($ in millions, except per share amounts)
<S> <C> <C> <C>
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
========= ========= =========
<FN>
<F3> 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 $1.86
per share.
</FN>
</TABLE>
<PAGE> PAGE 36
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Table of Graphs
Included with the
Eleven-Year Financial Review
The following financial information appears as three (3)
separate graphs with the Eleven-Year Financial Review in the 1996 Norfolk
Southern Corporation Annual Report to Stockholders.
<CAPTION>
1996 1995 1994 1993 1992 1991
-------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
INCOME FROM RAILWAY
OPERATIONS
(Railway operating
revenues less
railway operating
expenses)
($ millions) $1,164.9 $1,095.4* $1,043.3 $915.3 $926.2 $791.8***
<S> <C> <C> <C> <C> <C> <C>
RETURN ON EQUITY
(Net income divided
by average
stockholders'
equity) 15.7% 15.4%* 14.4% 13.7%** 13.4% 11.1%***
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE> 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
$93.7 million improvement in 1995, compared with 1994, was primarily
attributable to increases in the intermodal, automotive and
metals/construction market groups.
<PAGE> PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
The following table presents a three-year comparison of revenues by
market group.
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions)
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
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 $3,918.1
======== ======== ========
Note: Revenues previously reported as "Other railway
revenues" (principally switching and demurrage) have
been reclassified into each of the commodity groups.
</TABLE>
In 1996, increases in coal, automotive, intermodal and chemicals
traffic offset decreases in the remaining market groups. For 1995
improvements in automotive, agriculture, metals/construction and
intermodal traffic offset declines in the other groups. The traffic
volume gains in both years accounted for most of the revenue improvement
as shown in the table below. Average revenue per unit rose in both 1996
and 1995 due to moderate rate increases.
<TABLE>
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions)
<CAPTION>
1996 vs. 1995 1995 vs. 1994
------------- -------------
<S> <C> <C>
Traffic volume $72.6 $62.6
Revenue per unit 16.6 31.1
----- -----
Total $89.2 $93.7
===== =====
</TABLE>
<PAGE> 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.
<TABLE>
TOTAL COAL, COKE AND IRON ORE TONNAGE
(In millions of tons)
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
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.
</TABLE>
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> 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.
<TABLE>
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)
<CAPTION>
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$1,304.7 $1,267.8 $1,290.2 $1,239.2 $1,324.1 $1,357.5
</TABLE>
MERCHANDISE traffic volume in 1996 decreased slightly, compared with
1995, as increases in automotive, intermodal and chemicals traffic were
more than offset by declines in the remaining commodity groups. However,
increased average revenues for most commodity groups resulted in a 2%
improvement in revenues. In 1995, merchandise traffic volume increased
5%, driven by increases in intermodal, automotive and agriculture
traffic. Merchandise revenues in 1995 increased 4%, compared with 1994.
CHEMICALS traffic and revenues grew 3% and 4%, respectively, for
1996. Fertilizer and plastics markets strengthened during 1996, which
resulted in increased traffic and revenues for these two groups. In
addition, the harsh winter resulted in greater movements of liquid
petroleum gas, and industrial chemicals remained strong throughout the
year. These 1996 results compared favorably with relatively flat carloads
and revenues in 1995, as increases for general chemicals were
overshadowed by weakness in the plastics and fertilizer markets. The
chemicals market group is expected to continue to show moderate growth
through 1997, as NS expands its Thoroughbred Bulk Distribution facilities
and chemicals production nationwide is expected to increase.
<PAGE> PAGE 41
Item 7. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
CHEMICALS
(Shown as a Graph in the Annual Report to Stockholders)
This group comprises fertilizers, sulfur and related chemicals,
petroleum products, chlorine and bleaching compounds, plastics,
industrial chemicals, chemical wastes and bulk products.
($ in millions)
<CAPTION>
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
$555.9 $536.5 $534.7 $499.0 $498.9 $476.7
</TABLE>
PAPER/FOREST traffic and revenues each declined 5% in 1996, due to
the overall downturn in the paper and forest products industry. Early in
1995, the paper industry enjoyed record price levels and associated
volumes, but growth slowed and inventories of paper products swelled in
late 1995 and into 1996. To correct the inventory problems, many large
paper producers operated mills well below capacity and shut down mills to
balance capacity with demand. This compares to a 1% decrease in volume
and a 3% increase in revenues for 1995. Paper and pulpwood products
traffic in 1995 was about even with 1994, while lumber traffic suffered
from weak housing starts. These markets are expected to begin a slight
turnaround by mid-1997.
<TABLE>
PAPER/FOREST
(Shown as a Graph in the Annual Report to Stockholders)
This group comprises lumber and wood products, pulpboard and
paper products, wood fibers, woodpulp, scrap paper and clay.
($ in millions)
<CAPTION>
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
$513.0 $537.3 $521.8 $522.2 $517.2 $495.6
</TABLE>
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> PAGE 42
Item 7. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
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)
<CAPTION>
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
$488.7 $449.1 $429.0 $425.8 $391.6 $310.6
</TABLE>
AGRICULTURE traffic declined 4% and revenues were flat in 1996.
Despite strong demand for feed grains in the Southeast, grain traffic
suffered, as poor crops and strong export demand left NS receivers
competing for limited supplies. Slight average revenue growth occurred,
resulting primarily from longer hauls, as receivers reached farther west
for grain supplies. In 1995, agriculture traffic rose 2%, and revenues
increased 4%, due to higher grain shipments from the Midwest to the
Southeast poultry industry.
Moderate growth is expected in 1997, as 1996 crops should provide
abundant supplies throughout the year, and demand from the poultry market
for feed grain continues to grow. Also for 1997, a full year of new
business is expected from two feed mills which were ramping up production
in 1996, and from a new major grain elevator located on a line purchased
during 1996 from Conrail.
<TABLE>
AGRICULTURE
(Shown as a Graph in the Annual Report to Stockholders)
This group comprises grain, soybeans, wheat, corn, animal and poultry
feed, food oils, flour, beverages, canned goods, sweeteners and consumer
products.
($ in millions)
<CAPTION>
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
$393.3 $393.7 $379.5 $357.0 $344.4 $342.5
</TABLE>
METALS/CONSTRUCTION traffic declined 2%, but revenues were up 1% for
1996. Construction carloads fell behind in early 1996 due to inclement
weather and were flat the rest of the year; however, higher average
revenues more than offset the volume decline. In the metals market, NS'
shipments remained strong due to a healthy domestic steel market, which
has added capacity through improved efficiency at integrated mills and
new mini-mills. In 1995, metals/construction traffic was up slightly, and
revenues increased 6%, as increases in the steel and aluminum markets
were somewhat offset by reduced demand for construction products.
Moderate growth is expected for 1997. New steel production
facilities in Decatur, Ala., and Memphis, Tenn., are expected to
contribute to growth in late 1997. Although construction starts are
expected to decrease in 1997 versus 1996, projects already begun, such as
at the Chesapeake Bay Bridge Tunnel, the opening of new cement terminals
and the expansion of various on-line plants, are expected to produce
moderate growth for construction in 1997 and beyond.
<PAGE> PAGE 43
Item 7. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
METALS/CONSTRUCTION
(Shown as a Graph in the Annual Report to Stockholders)
This group comprises steel, aluminum products, machinery, scrap metals,
cement, aggregates, bricks, minerals and municipal wastes.
($ in millions)
<CAPTION>
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
$358.0 $353.1 $334.2 $310.9 $289.4 $288.6
</TABLE>
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.
<TABLE>
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)
<CAPTION>
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
$487.4 $474.3 $428.7 $391.8 $411.4 $382.5
</TABLE>
<PAGE> 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 $33.6 million charge for an early retirement
program (see Note 10 on page 69). Excluding that early retirement charge,
railway operating expenses increased 1%, despite a 2% increase in traffic
volume. Railway operating expenses in 1995 were up 3% (up 1%, excluding
the early retirement charge) on a 3% increase in traffic volume.
As a result, the NS railway operating ratio, which measures the
percentage of railway revenues consumed by expenses, was a record 71.6 in
1996, compared with 73.5 (72.7 excluding the early retirement charge) in
1995 and 73.4 in 1994. NS' railway operating ratio continues to be the
best among the major railroads in the United States.
<TABLE>
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions)
<CAPTION>
1996 vs. 1995 1995 vs. 1994
------------- -------------
<S> <C> <C>
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.
</TABLE>
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> 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> 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 $22.1 million in 1994.
<TABLE>
The following table presents a three-year comparison of revenues by
division.
MOTOR CARRIER OPERATING REVENUES BY DIVISION
($ in millions)
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Relocation Services $304.0 $310.9 $325.5
High Value Products 365.0 345.3 337.7
------ ------ ------
Total $669.0 $656.2 $663.2
====== ====== ======
</TABLE>
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> 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> 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.
<TABLE>
<CAPTION>
($ in millions) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES, NS' principal source of
liquidity, decreased $32.7 million, or 3%, in 1996 and increased
$93.1 million, or 8%, in 1995. Since the consolidation in 1982, cash
provided by operating activities has been sufficient to fund dividend
requirements, debt repayments and a significant portion of capital
spending. The decrease in 1996 was largely attributable to lump-sum wage
payments associated with labor contract settlements and higher income tax
payments related to the settlement of federal income tax years 1990-1992.
The improvement in 1995 was primarily a result of increased income from
operations (excluding the early retirement charge, a non-cash item) and
improved billing and collection of receivables.
<TABLE>
CASH PROVIDED BY OPERATIONS
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$1,204.7 $1,237.4 $1,144.3 $ 874.6 $ 958.2 $ 762.4
</TABLE>
<PAGE> 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.
<TABLE>
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)
<CAPTION>
($ in millions) 1996* 1995* 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
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).
</TABLE>
<TABLE>
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
----------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
AVERAGE AGE OF RAILWAY EQUIPMENT
--------------------------------
<CAPTION>
(Years) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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> 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 $344.8 million in 1994. On October 23, 1996,
NS announced that the share purchase program had been suspended (see also
Note 13 on page 75).
<TABLE>
CUMULATIVE PURCHASES OF STOCK
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$3,250.5 $2,865.4 $2,531.5 $2,181.8 $2,041.9 $1,862.8
</TABLE>
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> 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> 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> 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> PAGE 54
Item 8. Financial Statements and Supplementary Data.
- ------- -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(In millions of dollars except per share amounts)
1996
----
<S> <C> <C> <C> <C>
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
----
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> 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> PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<CAPTION>
Years ended December 31,
1996 1995 1994
-------- -------- --------
($ in millions,
except earnings per share)
<S> <C> <C> <C>
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.
</TABLE>
<PAGE> PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
As of December 31,
1996 1995
--------- ---------
($ in millions)
<S> <C> <C>
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 $10,904.8
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
1996 1995 1994
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
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.
</TABLE>
<PAGE> PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Common Other Retained Treasury
Stock Capital Income Stock Total
------ ------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C> <C>
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
------ ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
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
------ ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE> 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> 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> PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
<TABLE>
2. OTHER INCOME - NET
<CAPTION>
1996 1995 1994
------ ------ ------
($ in millions)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
3. INCOME TAXES
<TABLE>
Provision for Income Taxes
- --------------------------
<CAPTION>
1996 1995 1994
------ ------ ------
($ in millions)
<S> <C> <C> <C>
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 $381.2
====== ====== ======
</TABLE>
<PAGE> PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
3. INCOME TAXES (continued)
<TABLE>
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory federal
corporate tax rate as follows:
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
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 $381.2 36.3
====== ==== ====== ==== ====== ====
</TABLE>
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1992. The consolidated federal income tax returns for 1993 and
1994 are being audited by the IRS. Management believes that adequate
provision has been made for any additional taxes and interest thereon
that might arise as a result of these examinations.
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that would disallow some of the tax benefits a subsidiary of NS
purchased from a third party pursuant to a safe harbor lease agreement in
1981. Management continues to believe that NS ultimately should incur no
loss from this decision, because the lease agreement provides for full
indemnification if any such disallowance is sustained.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences.
<PAGE> PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
3. INCOME TAXES (continued)
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities were as follows:
<CAPTION>
December 31,
1996 1995
--------- ---------
($ in millions)
<S> <C> <C>
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)
========= =========
</TABLE>
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 $9.5 million decrease for
1994.
<PAGE> PAGE 65
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
<TABLE>
4. INVESTMENTS
<CAPTION>
December 31,
1996 1995
------ ------
($ in millions)
<S> <C> <C>
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 $231.7
====== ======
</TABLE>
<TABLE>
5. PROPERTIES
<CAPTION>
December 31,
1996 1995
--------- ---------
($ in millions)
<S> <C> <C>
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
========= =========
</TABLE>
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 $4.0 billion.
In connection with the tender offer to purchase up to 8.2 million
shares of Conrail stock, NS has arranged for additional commercial paper
debt (see Note 15).
<PAGE> PAGE 66
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
6. DEBT (continued)
<TABLE>
Short-Term Debt
- ---------------
<CAPTION>
December 31,
1996 1995
----- -----
($ in millions)
<S> <C> <C>
Commercial paper notes $16.1 $18.0
Other notes 27.2 27.2
Subsidiaries' credit lines 0.7 --
----- -----
Total $44.0 $45.2
===== =====
</TABLE>
<TABLE>
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, $700 million principal amount of debt has been issued and
sold under this shelf registration. These notes are not redeemable prior
to maturity and are not entitled to any sinking fund.
<CAPTION>
December 31,
1996 1995
------ ------
($ in millions)
<S> <C> <C>
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
==== ====
</TABLE>
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 $104.5 million in 1995 were reflected
in the Consolidated Balance Sheets as debt and, because they were non-
cash transactions, were excluded from the Consolidated Statements of Cash
Flows. The lease obligations carry an average stated interest rate of
6.5% for those entered into in 1996 and 8.4% for those entered into in
1995. All were converted to variable rate obligations using interest rate
swap agreements. The interest rates on these obligations are based on the
six-month London Interbank Offered Rate and are reset every six months
with changes in interest rates accounted for as an adjustment of interest
expense over the terms of the leases. As a result, NS is exposed to the
market risk associated with fluctuations in interest rates. To date,
while such rate fluctuations have been nominal, their effects have been
favorable. Counterparties to the interest rate swap agreements are major
financial institutions believed by Management to be credit-worthy. NS'
use of interest rate swaps has been limited to those discussed above.
<PAGE> PAGE 67
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
6. DEBT (continued)
<TABLE>
Long-Term Debt
- --------------
<CAPTION>
December 31,
1996 1995
-------- --------
($ in millions)
<S> <C> <C>
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 $1,800.3
========
</TABLE>
A substantial portion of NS' properties and certain investments in
affiliated companies are pledged as collateral for much of the secured
debt.
<PAGE> PAGE 68
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
<TABLE>
7. CURRENT LIABILITIES
<CAPTION>
December 31,
1996 1995
------ ------
($ in millions)
<S> <C> <C>
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 $151.3
====== ======
</TABLE>
8. LEASE COMMITMENTS
<TABLE>
NS is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road and other
property. Future minimum lease payments are as follows:
<CAPTION>
Operating Leases Capital Leases
---------------- --------------
($ in millions)
<S> <C> <C>
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 $197.0
======
</TABLE>
<PAGE> PAGE 69
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
8. LEASE COMMITMENTS (continued)
<TABLE>
Operating Lease Expense
- -----------------------
<CAPTION>
1996 1995 1994
------ ------ ------
($ in millions)
<S> <C> <C> <C>
Minimum rents $ 77.4 $ 67.8 $ 56.1
Contingent rents 38.3 36.0 45.4
------ ------ ------
Total $115.7 $103.8 $101.5
====== ====== ======
</TABLE>
<TABLE>
9. OTHER LIABILITIES
<CAPTION>
December 31,
1996 1995
------ ------
($ in millions)
<S> <C> <C>
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 $965.5
====== ======
</TABLE>
10. PENSION PLANS
Norfolk Southern and certain subsidiaries have defined benefit
pension plans that principally cover salaried employees. Pension benefits
are based primarily on years of creditable service with NS and
compensation rates near retirement. Contributions to the plans are made
on the basis of not less than the minimum funding standards set forth in
the Employee Retirement Income Security Act of 1974, as amended. Assets
in the plans consist mainly of common stocks.
<TABLE>
Pension Cost (Benefit) Components
- ---------------------------------
<CAPTION>
1996 1995 1994
------- ------- -------
($ in millions)
<S> <C> <C> <C>
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)
======= ======= =======
</TABLE>
<PAGE> PAGE 70
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
10. PENSION PLANS (continued)
<TABLE>
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:
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
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%
</TABLE>
<TABLE>
The funded status of the plans and the amounts reflected in the
accompanying balance sheets were as follows:
<CAPTION>
December 31,
---------------------------------------
1996 1995
------------------- -------------------
Funded Unfunded Funded Unfunded
Plans Plans Plans Plans
-------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C>
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)
======== ====== ======== ======
</TABLE>
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> 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 $90 million, which will
be amortized as a reduction in annual cost on a pro rata basis over a six-
year period.
<TABLE>
A summary of the postretirement benefit cost follows:
<CAPTION>
1996 1995 1994
------ ------ ------
($ in millions)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
<PAGE> PAGE 72
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
<TABLE>
The following table sets forth these plans' total accumulated
postretirement benefit obligation, reconciled with the accrued
postretirement benefit obligation:
<CAPTION>
December 31,
1996 1995
------------------ ------------------
Health Health
Care Death Care Death
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C>
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)
======= ======= ======= =======
</TABLE>
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> 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> PAGE 74
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
12. LONG-TERM INCENTIVE PLAN (continued)
<TABLE>
Stock Option Activity
- ---------------------
<CAPTION>
Weighted Average
Option Shares Exercise Price
------------- ----------------
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
Stock Options Outstanding
- -------------------------
<CAPTION>
Exercise Price
------------------------------- Number Weighted Average
Weighted Outstanding Remaining
Range Average at 12/31/96 Contractual Life
-------------------- -------- ----------- ----------------
<C> <C> <C> <C> <C>
$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
=========
</TABLE>
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> PAGE 75
Item 8. Financial Statements and Supplementary Data. (continued)
- ------- -------------------------------------------
12. LONG-TERM INCENTIVE PLAN (continued)
<TABLE>
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:
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
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> 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> 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> 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> 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> 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> 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> 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> 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> 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> 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> 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> 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> PAGE 88
Schedule II
Page 1 of 2
<TABLE>
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1994, 1995 and 1996
(In millions of dollars)
<CAPTION>
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
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<F1> $138.9<F2> $305.0
Current portion of
casualty and other
claims included
in accounts payable $185.1 $ 49.9 $163.7<F1> $207.5<F3> $191.2
<S> <C> <C> <C> <C> <C>
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<F1> $121.1<F2> $286.5
Current portion of
casualty and other
claims included
in accounts payable $191.2 $ 63.6 $172.6<F1> $230.0<F3> $197.4
<FN>
<F1> Includes revenue overcharges provided through charges to operating
revenues, and transfers from other accounts.
<F2> Payments and reclassifications to/from accounts payable.
<F3> Payments and reclassifications to/from other liabilities.
</FN>
(continued)
</TABLE>
<PAGE> PAGE 89
Schedule II
Page 2 of 2
<TABLE>
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1994, 1995 and 1996 (continued)
(In millions of dollars)
<CAPTION>
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
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<F1> $131.7<F2> $274.2
Current portion of
casualty and other
claims included
in accounts payable $197.4 $ 61.4 $157.2<F1> $216.4<F3> $199.6
<FN>
<F1> Includes revenue overcharges provided through charges to
operating revenues, and transfers from other accounts.
<F2> Payments and reclassifications to/from accounts payable.
<F3> Payments and reclassifications to/from other liabilities.
</FN>
</TABLE>
<PAGE> 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
<PAGE> 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> 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> 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> 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> 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
<PAGE> PAGE 96
EXHIBIT 11 PAGE 1 of 2
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In millions except per share amounts)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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) <F1> 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 <F2> $ 6.02 $ 5.39 $ 4.86
====== ====== ======
<FN>
<F1> See Note 12 of Notes to Consolidated Financial Statements on page 73
for a description of the Long-Term Incentive Plan.
<F2> 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.
</FN>
</TABLE>
<PAGE> PAGE 97
EXHIBIT 11 PAGE 2 of 2
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In millions except per share amounts)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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 <F3> $ 6.76 $ 5.79 $ 5.53
====== ====== ======
<FN>
<F3> 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.
</FN>
</TABLE>
<PAGE> PAGE 98
EXHIBIT 12 PAGE 1 of 1
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
<CAPTION>
Year ended December 31
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
EARNINGS
<S> <C> <C> <C> <C> <C>
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 <F1> 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
<S> <C> <C> <C> <C> <C>
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
<FN>
<F1> 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.
</FN>
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.
</TABLE>
<PAGE> 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> 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> 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.
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 209
<SECURITIES> 194
<RECEIVABLES> 720
<ALLOWANCES> 16
<INVENTORY> 63
<CURRENT-ASSETS> 1,457
<PP&E> 13,928
<DEPRECIATION> 4,399
<TOTAL-ASSETS> 11,416
<CURRENT-LIABILITIES> 1,190
<BONDS> 1,800
<COMMON> 132
0
0
<OTHER-SE> 4,846
<TOTAL-LIABILITY-AND-EQUITY> 11,416
<SALES> 0
<TOTAL-REVENUES> 4,770
<CGS> 0
<TOTAL-COSTS> 3,573
<OTHER-EXPENSES> (116)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116
<INCOME-PRETAX> 1,197
<INCOME-TAX> 427
<INCOME-CONTINUING> 770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 770
<EPS-PRIMARY> 6.09
<EPS-DILUTED> 0
</TABLE>
