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, 1997.
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 (I.R.S. Employer
incorporation 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, 1998: $13,018,725,432
The number of shares outstanding of each of the registrant's classes
of common stock, as of February 28, 1998: 378,039,214 (excluding
21,757,902 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, 1998), 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 21
Executive Officers of the Registrant 22
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters 26
6. Selected Financial Data 27
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 34
8. Financial Statements and Supplementary Data 52
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 81
Part III 10. Directors and Executive Officers of the
Registrant 81
11. Executive Compensation 81
12. Security Ownership of Certain Beneficial
Owners and Management 81
13. Certain Relationships and Related
Transactions 81
Part IV 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 82
Index to Consolidated Financial Statement
Schedule 82
Power of Attorney 87
Signatures 87
Exhibit Index 91
<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 Dec. 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
Dec. 31, 1997, 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 17) designed to enhance its opportunities to return to
profitability. On Jan. 12, 1998, NS announced that it signed an
agreement to sell all the common stock of NAVL. The transaction is
subject to customary closing conditions and is expected to be
consummated before May 31, 1998; NS expects to report a gain on this
sale. NAVL's results of operation, financial position and cash flows
are presented as "Discontinued operations" in the accompanying
financial statements.
Unless indicated otherwise, Norfolk Southern and its
subsidiaries are referred to collectively as NS.
JOINT ACQUISITION OF CONRAIL INC. - During 1997, NS and CSX
Corporation (CSX) completed the acquisition of Conrail Inc. equity
(see "Joint Acquisition of Conrail" on page 47).
CONTINUING OPERATIONS:
RAILROAD OPERATIONS - As of Dec. 31, 1997, NS' railroads
operated approximately 14,400 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
<PAGE> PAGE 5
Virginia, and in the Province of Ontario, Canada. Of this total,
12,101 miles are owned with the balance operated under lease or
trackage rights; most of this total is main line track. In addition,
its railroads operate 10,838 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 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 and the compensation therefor. 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
<PAGE> PAGE 6
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.
Implementation of the Conrail transaction should expand
NS' service area considerably, giving it access to most of the major
ports on the East Coast, to New York City and the Northeast, and to
the Midwest. Additional information is provided in "Management's
Discussion and Analysis," beginning on page 34, and in Note 2 to the
Consolidated Financial Statements.
NS' railroads and other railroads have entered into
service interruption agreements, effective Dec. 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.
TRIPLE CROWN OPERATIONS - Until April 1993, Norfolk
Southern's intermodal subsidiary, Triple Crown Services, Inc. (TCS),
offered intermodal service using RoadRailer (Registered Trademark
hereinafter abbreviated 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. NS expects to succeed to
Conrail's interest in TCSC, if its joint control application with CSX
is approved.
<PAGE> PAGE 7
<TABLE>
RAILWAY OPERATING REVENUES - NS' total railway operating
revenues were $4.2 billion in 1997. Revenue, shipments and revenue
yield by principal railway operating revenue sources for the past five
years are set forth in the following table:
<CAPTION>
Year Ended December 31,
Principal Sources of -----------------------------------------------
Railway Operating
Revenues 1997 1996 1995 1994 1993
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipments)
<S> <C> <C> <C> <C> <C>
COAL
Revenues $1,301 $1,305 $1,268 $1,290 $1,239
% of total revenues 31% 32% 32% 33% 33%
Shipments 1,324 1,310 1,267 1,274 1,209
% of total shipments 28% 29% 29% 30% 30%
Revenue Yield $ 983 $ 996 $1,001 $1,013 $1,025
CHEMICALS
Revenues $ 585 $ 560 $ 541 $ 538 $ 501
% of total revenues 14% 14% 14% 14% 14%
Shipments 405 385 374 376 343
% of total shipments 8% 8% 8% 9% 8%
Revenue Yield $1,446 $1,456 $1,447 $1,433 $1,459
PAPER/CLAY/FOREST
Revenues $ 539 $ 513 $ 537 $ 522 $ 522
% of total revenues 13% 12% 13% 13% 14%
Shipments 457 438 459 464 466
% of total shipments 9% 10% 10% 11% 12%
Revenue Yield $1,178 $1,171 $1,170 $1,124 $1,120
AUTOMOTIVE
Revenues $ 492 $ 489 $ 449 $ 429 $ 426
% of total revenues 11% 12% 11% 11% 11%
Shipments 361 354 328 317 318
% of total shipments 8% 8% 7% 7% 8%
Revenue Yield $1,364 $1,379 $1,368 $1,352 $1,340
AGRI./GOVT./CONSUMER
Revenues $ 391 $ 393 $ 394 $ 380 $ 357
% of total revenues 9% 9% 10% 10% 10%
Shipments 366 376 391 383 359
% of total shipments 8% 8% 9% 9% 9%
Revenue Yield $1,065 $1,045 $1,007 $ 992 $ 994
METALS/CONSTRUCTION
Revenues $ 368 $ 354 $ 349 $ 330 $ 309
% of total revenues 9% 9% 8% 8% 8%
Shipments 374 359 367 366 338
% of total shipments 8% 8% 8% 8% 8%
Revenue Yield $ 985 $ 986 951 $ 902 $ 915
</TABLE>
<PAGE> PAGE 8
<TABLE>
<CAPTION>
Year Ended December 31,
Principal Sources of -----------------------------------------------
Railway Operating
Revenues 1997 1996 1995 1994 1993
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipments)
<S> <C> <C> <C> <C> <C>
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $ 547 $ 487 $ 474 $ 429 $ 374
% of total revenues 13% 12% 12% 11% 10%
Shipments 1,472 1,331 1,263 1,127 995
% of total shipments 31% 29% 29% 26% 25%
Revenue Yield $ 372 $ 366 $ 376 $ 380 $ 376
OTHER INTERMODAL RELATED*
Revenues $ -- $ -- $ -- $ -- $ 18
% of total revenues -- -- -- -- --
------ ------ ------ ------ ------
Total Railway Operating
Revenues $4,223 $4,101 $4,012 $3,918 $3,746
Total Railway Shipments 4,759 4,553 4,449 4,307 4,028
Railway Revenue Yield $ 887 $ 901 $ 902 $ 910 $ 930
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
and intermodal rail and RoadRailer(RT) units.
* See discussion on page 6 regarding TCSC revenues.
</TABLE>
<PAGE> PAGE 9
COAL TRAFFIC - Coal, coke and iron ore -- most of which is
bituminous coal -- is NS' railroads' principal commodity group. They
originated 119 million tons of coal, coke and iron ore in 1997 and
handled a total of 134 million tons. Originated tonnage increased
2 percent from 117 million tons in 1996, and total tons handled
increased 3 percent from 130 million tons in 1996. Revenues from
coal, coke and iron ore account for about 31 percent of NS' total
railway 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)
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Originated 119 117 114 115 112
Received 15 13 11 11 6
---- ---- ---- ---- ----
Handled 134 130 125 126 118
</TABLE>
<TABLE>
Of the 119 million tons of coal, coke and iron ore
originated on NS' railroads' lines in 1997, the approximate breakdown
by origin state was as follows:
<CAPTION>
Origin State Millions of Tons
------------ ----------------
<S> <C>
West Virginia 43
Virginia 35
Kentucky 28
Alabama 5
Indiana 3
Illinois 2
Tennessee 2
Other 1
---
Total 119
===
</TABLE>
Of this 119 million tons, approximately 28 million moved for
export, principally through NS' pier facilities at Norfolk (Lamberts
Point), Virginia; 19 million moved to domestic and Canadian steel
industries; 64 million of steam coal moved to electric utilities; and
8 million moved to other industrial and miscellaneous users.
NS' railroads moved 9 million tons of originated coal, coke
and iron ore to various docks on the Ohio River, and 5 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 10
Total coal handled through all system ports in 1997 was
45 million tons. Of this total, 71 percent, or 32 million tons
(including coastwise traffic), moved through Lamberts Point, a
7 percent increase, compared with the 30 million tons handled in 1996.
<TABLE>
The quantities of NS export coal handled through Lamberts
Point for the past five years were as follows:
Export Coal through Lamberts Point
(Millions of tons)
----------------------------------
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
28 26 25 24 25
</TABLE>
See the discussion of coal traffic, by type of coal, in
Part II, Item 7, "Management's Discussion and Analysis," on page 34.
MERCHANDISE TRAFFIC - The merchandise traffic group consists
of Intermodal and five major commodity groupings: Paper, Clay, and
Forest Products; Chemicals; Automotive; Agriculture, Government, and
Consumer Products; and Metals and Construction. Total merchandise
revenues in 1997 were $2.92 billion, a 5 percent increase, compared
with 1996. Merchandise carloads handled in 1997 were 3.43 million,
compared with 3.24 million handled in 1996, an increase of 6 percent.
Intermodal results, for 1993 and later, reflect the effect
of the formation, in April 1993, of TCSC, a partnership between
subsidiaries of NS and Conrail (see also page 6). This partnership
provides RoadRailer(RT) service previously offered by a wholly owned
subsidiary of NS. Because NS currently 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 1997, 111 million tons of merchandise freight, or
approximately 67 percent of total merchandise tonnage handled by NS,
originated on line. The balance of merchandise traffic was received
from connecting carriers, 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 five of the six market groups comprising
merchandise traffic improved in 1997. The largest gains were in
Intermodal, up $60 million; Paper, Clay, and Forest Products, up
$26 million; and Chemicals, up $25 million.
See the discussion of merchandise rail traffic by commodity
group in Part II, Item 7, "Management's Discussion and Analysis," on
page 34.
<PAGE> PAGE 11
<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,
-------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue ton miles
(billions) 136 130 127 122 112
Freight train miles
traveled (millions) 49.7 49.4 48.5 46.0 43.3
Revenue per ton mile $0.0311 $0.0316 $0.0317 $0.0320 $0.0336
Revenue tons per train 2,732 2,625 2,611 2,655 2,577
Revenue ton miles
per man-hour worked 2,905 2,764 2,679 2,579 2,304
Percentage ratio of
railway operating
expenses to railway
operating revenues 71.3 71.6 73.5 73.4 75.6
</TABLE>
FREIGHT RATES - In 1997, 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 1997, NS' railroads were found by the STB to be
"revenue adequate" based on results for the year 1996. 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.
PASSENGER OPERATIONS - Regularly scheduled passenger
operations on NS' lines consist of Amtrak trains operating between
Alexandria and New Orleans, and between Charlotte and Selma, North
Carolina. Commuter trains are operated on the NS line between
Manassas and Alexandria under contract with two transportation
commissions of the Commonwealth of Virginia. Both of these services
are under contracts providing for reimbursement of related expenses
incurred by NS. NS also leases the Chicago to Manhattan, Illinois,
line to the Commuter Rail Division of the Regional Transportation
Authority of Northeast Illinois.
Should the Conrail transaction become effective as
proposed, NS will accommodate substantially increased Amtrak and
commuter passenger mileage and will conduct significant freight
operations over trackage owned by Amtrak or by commuter entities.
<PAGE> PAGE 12
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 1997,
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.
RAILWAY PROPERTY:
<TABLE>
EQUIPMENT - As of Dec. 31, 1997, 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 2,027 0 2,027 6,472,600
Switching 112 0 112 163,950
Auxiliary units 61 0 61 0
--------- ------- -------- ------------
Total locomotives 2,200 0 2,200 6,636,550
========= ======= ======== ============
Freight Cars: (Tons)
Hopper 22,639 331 22,970 2,425,379
Box 18,789 666 19,455 1,520,443
Covered Hopper 12,400 1,890 14,290 1,550,683
Gondola 26,140 0 26,140 2,797,632
Flat 3,967 825 4,792 346,931
Caboose 207 0 207 0
Other 1,438 0 1,438 95,840
--------- ------- -------- ------------
Total freight cars 85,580 3,712 89,292 8,736,908
========= ======= ======== ============
Other:
Work equipment 6,745 3 6,748
Vehicles 3,649 0 3,649
Highway trailers
and containers 2,043 2,785 4,828
RoadRailers(RT) 922 0 922
Miscellaneous 1,498 1,799 3,297
--------- ------- --------
Total other 14,857 4,587 19,444
========= ======= ========
* Includes equipment leased to outside parties and equipment subject
to equipment trusts, condition sale agreements and capitalized
leases.
</TABLE>
<PAGE> PAGE 13
<TABLE>
The following table indicates the number and year of
purchase for locomotives and freight cars owned at Dec. 31, 1997:
<CAPTION>
Year Built
---------------------------------------------------------
1987- 1981- 1980 &
1997 1996 1995 1994 1993 1992 1986 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Locomotives:
Number of
units 120 120 125 25 31 292 420 1,067 2,200
Percent of
fleet 5 5 6 1 1 13 19 50 100
Freight cars:
Number of
units 499 787 1,034 779 931 6,122 6,632 68,796 85,580
Percent of
fleet 1 1 1 1 1 7 8 80 100
</TABLE>
The average age of the freight car fleet at Dec. 31, 1997,
was 23.0 years. During 1997, 2,250 freight cars were retired. As of
Dec. 31, 1997, the average age of the locomotive fleet was 15.3 years.
During 1997, 78 locomotives, the average age of which was 23.3 years,
were retired. Since 1988, more than 25,100 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 freight car 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 completed in 1997. The locomotive bad order ratio
rose in 1997, particularly in the early months of the year as older
units required additional servicing and some new units were
out-of-service related to warranty work. By year-end, the
locomotive bad order ratio had returned to a more historic level.
<TABLE>
<CAPTION>
Annual Average Bad Order Ratio
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freight Cars (excluding cabooses):
NS Rail 4.6% 4.8% 5.8% 6.7% 7.3%
Locomotives:
NS Rail 5.0% 4.5% 4.7% 4.7% 4.3%
</TABLE>
<PAGE> PAGE 14
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 22,427 miles
of track maintained as of Dec. 31, 1997, 15,878 were laid with welded
rail.
<TABLE>
The density of traffic on running tracks (main line trackage
plus passing tracks) during 1997 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 4,470 28
5-19 4,708 29
20 and over 6,893 43
------ ---
16,071 100
* Excludes trackage rights.
</TABLE>
<TABLE>
The following table summarizes certain information about NS'
track roadway additions and replacements during the past five years:
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles of rail installed 451 401 403 480 574
Miles of track surfaced 4,703 4,686 4,668 4,760 5,048
New crossties
installed (millions) 2.2 1.9 2.0 1.7 1.6
</TABLE>
MICROWAVE SYSTEM - The NS microwave system, consisting of
7,610 radio path miles, 417 active stations and 4 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 12,784 road miles operated
by NS, excluding trackage rights over foreign lines, 5,400 road miles
are governed by centralized traffic control systems (of which
560 miles are controlled by data radio from 43 microwave site
locations) and 2,500 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
<PAGE> PAGE 15
well as related waybill and other train and car movement data.
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.
NS has underway a project to review, and modify as
necessary, computer and other systems for Year-2000 compliance. As of
December 1997, most of NS' mainframe computer programs have been
reviewed. This mainframe project is expected to be completed by the
end of 1998. Failure to achieve Year-2000 compliance -- by NS, other
railroads, its suppliers, and its customers -- could negatively affect
NS' ability to conduct business for an extended period. Management
believes that NS' project will be completed on time and that the
chance of failure is remote.
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.
ENCUMBRANCES - Certain railroad equipment is subject to the
prior lien of equipment financing obligations amounting to
approximately $601 million as of Dec. 31, 1997, and $594 million at
Dec. 31, 1996. In addition, a portion of NS' properties is subject to
liens securing, as of Dec. 31, 1997, and 1996, approximately
$1 million and $51 million of mortgage debt, respectively.
<TABLE>
CAPITAL EXPENDITURES - Capital expenditures for road,
equipment and other property for the past five years were as follows:
<CAPTION>
Capital Expenditures
-----------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Road $ 599 $ 438 $ 386 $ 385 $ 418
Equipment 306 326 338 240 217
Other property 24 25 33 82 4
----- ----- ----- ----- -----
Total $ 929 789 $ 757 $ 707 $ 639
===== ===== ===== ===== =====
</TABLE>
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient and reliable
transportation services. For 1998, NS has budgeted $903 million of
capital spending, of which $149 million are initial outlays for
facilities and equipment related to the Conrail transaction. Capital
spending is expected to be affected significantly by Conrail-related
expenditures, which are anticipated to add approximately $500 million
(net of predicted savings) over the next three years.
<PAGE> PAGE 16
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" on page 49 in
Part II, Item 7, "Management's Discussion and Analysis" beginning on
page 34, and in Note 17 to the Consolidated Financial Statements on
page 78.
EMPLOYEES - NS employed an average of 25,817 employees in
1997, compared with an average of 25,830 in 1996. The approximate
average cost per employee during 1997 was $46,604 in wages and $17,279
in employee benefits. Approximately 74 percent of these employees are
represented by various labor organizations.
As of the end of 1997, NS had negotiated labor agreements
with all of its unions. The accords with the 13 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 Jan. 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, has
continued under the STB and additional rail business could 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.
Efforts will be made in 1998 to re-subject the rail industry
to unwarranted federal economic regulation. The Staggers Rail Act of
1980, which substantially reduced such regulation, encouraged and
enabled rail carriers to innovate and to compete for business, thereby
contributing to the economic health of the nation and to the
revitalization of the industry. Accordingly, NS and other rail
carriers vigorously will oppose these counterproductive efforts to re-
impose or to authorize re-imposing such economic regulation.
<PAGE> PAGE 17
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.
NS' primary rail competitor is the CSX system; both operate
throughout much of the same territory, and implementation of the
Conrail transaction should extend the area in which they compete.
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.
Certain cooperative strategies between railroads and between
railroads and motor carriers enable carriers to compete more
effectively in specific markets.
DISCONTINUED OPERATIONS - MOTOR CARRIER:
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 33 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
Dec. 31, 1993.
During 1997, the RS and HVP divisions conducted operations
through a network of approximately 380 agents with over 600 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).
<PAGE> PAGE 18
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 138 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
350 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.
<TABLE>
As a result of the agreement to sell NAVL, motor carrier
results are presented, net of taxes, as "Discontinued operations," in
the Consolidated Financial Statements; see also Note 3 on page 64.
The following table presents a five-year comparison of revenues.
<CAPTION>
Year ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
MOTOR CARRIER *
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
Revenues * $ 942 $ 930 $ 896 $ 891 $ 952
Shipments (domestic) 392 383 381 379 550
Revenue Yield $2,403 $2,428 $2,352 $2,351 $1,731
* Certain motor carrier expenses previously reported net in revenues
have been reclassified to motor carrier expenses. Income from
motor carrier operations is not affected by this change in
presentation.
</TABLE>
MOTOR CARRIER TRAFFIC - Motor carrier revenues increased
1 percent to $942 million in 1997, due to gains in all segments of the
HVP Division. These HVP gains were partly offset by shortfalls in RS
attributable to volume declines. In 1996, motor carrier revenues were
$930 million, up 4 percent from 1995, attributable to gains in both
divisions.
DOMESTIC OPERATIONS are conducted through NAVL's RS and HVP
divisions. In 1997, total domestic shipments for these divisions were
392,455, up 2 percent from 1996.
RS - Domestic shipments of used household goods transported
by the RS Division fall into three market categories. Approximately
53 percent of the domestic shipment volume comes from the sale of
moving services to individual consumers. Another 37 percent comes
<PAGE> PAGE 19
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
1997 represented 25 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 1996,
and represented 52 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 1997, including TL and
LTL, represented 75 percent of the NAVL domestic motor carrier
shipments transported by the two primary divisions. Revenues from
this division were up 6 percent from 1996 levels and represented
40 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 $77 million in 1997, down 2 percent
from 1996. Revenues from foreign operations represented 8 percent of
NAVL's total revenues.
FREIGHT 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
Dec. 31, 1997, domestic contract carriage agreements accounted for
33 percent of RS Division shipments and 68 percent of HVP Division
shipments.
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.
<PAGE> PAGE 20
As of Dec. 31, 1997, agents and owner-operators together
supplied 3,352 tractors, representing 98 percent of the U.S. power
equipment operated in NAVL service. Also as of Dec. 31, 1997,
NAVL owned 2,915 trailer units, representing 54 percent of the U.S.
trailer fleet in NAVL service. The remaining 46 percent was provided
mainly by agents and owner-operators. Agents and owner-operators also
provided 997 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 1997, approximately 24,000 work orders
were completed at NAVL's facility in Fort Wayne. As of Dec. 31, 1997,
the average age of trailer equipment in the NAVL fleet was 8.5 years.
ENCUMBRANCES - 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 Dec. 31,
1997, NAVL had $19 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.
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.
GOVERNMENT REGULATION - 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 - 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.
<PAGE> PAGE 21
Item 3. Legal Proceedings.
- ------ -----------------
The Conrail-related litigation (and related negotiations)
reported previously by NS in Part II, Item 1, of its Form 10-Q
Report for the quarter ending Sept. 30, 1996, and in Part I,
Item 3, of its Form 10-K Report for the year ending Dec. 31,
1996, either have been terminated or are believed to have been
rendered moot by the various agreements reached with CSX during the
year concerning the operation of certain Conrail assets and routes.
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 1997.
<PAGE> PAGE 22
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, 1998, relating to
these officers:
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- -----------------------------------
David R. Goode, 57, Present position since September
Chairman, President and 1992.
Chief Executive Officer
James C. Bishop, Jr., 61, Present position since March
Executive Vice President-Law 1996; prior thereto was Vice
President-Law.
R. Alan Brogan, 57, Present position since December
Executive Vice President- 1992.
Transportation Logistics
(and President-North American
Van Lines, Inc.)
L. I. Prillaman, 54, Present position since October
Executive Vice President- 1995; prior thereto was Vice
Marketing President-Properties.
Stephen C. Tobias, 53, Present position since July 1994.
Executive Vice President- Served as Senior Vice President-
Operations Operations from October 1993 to
July 1994, and prior thereto was
Vice President-Strategic
Planning.
Henry C. Wolf, 55, Present position since June 1993;
Executive Vice President- prior thereto was Vice President-
Finance Taxation.
John F. Corcoran, 57, Present position since August 1,
Senior Vice President- 1997; prior thereto was Vice
Public Affairs President-Public Affairs.
<PAGE> PAGE 23
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- -----------------------------------
Paul N. Austin, 54, Present position since June 1994.
Vice President-Personnel Served as Assistant Vice
President-Personnel from
February 1993 to June 1994, and
prior thereto was Director-
Compensation.
David A. Cox, 61, Present position since December
Vice President-Properties 1995; prior thereto was
Assistant Vice President-
Industrial Development.
Thomas L. Finkbiner, 45, 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.
Nancy S. Fleischman, 50, Present position since August
Vice President 1997. Served as Assistant Vice
President-Strategic Planning
from November 1993 to August
1997, and prior thereto was
Senior General Attorney.
Robert C. Fort, 53, Present position since December
Vice President- 1996; prior thereto was Assistant
Public Relations Vice President-Public Relations.
John W. Fox, Jr., 50, Present position since October
Vice President- 1995. Served as Assistant Vice
Coal Marketing President-Coal Marketing from
August 1993 to October 1995, and
prior thereto was General Manager-
Eastern Region.
Thomas J. Golian, 64, 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, 61, Present position since March 1992.
Vice President-
Public Affairs
<PAGE> PAGE 24
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- -----------------------------------
James A. Hixon, 44, Present position since June 1993;
Vice President-Taxation prior thereto was Assistant Vice
President-Tax Counsel.
Jon L. Manetta, 59, Present position since December
Vice President- 1995. Served as Vice President-
Transportation & 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., 59, Present position since August 1,
Vice President- 1997. Served as Vice President-
Public Affairs Operations Planning and Budget
from December 1996 to August
1997, and prior thereto was Vice
President-Quality Management.
Donald W. Mayberry, 54, Present position since December
Vice President- 1995; prior thereto was Vice
Research and Tests President-Mechanical.
James W. McClellan, 58, Present position since October
Vice President- 1993; prior thereto was Assistant
Strategic Planning Vice President-Corporate Planning.
Kathryn B. McQuade, 41, Present position since December
Vice President-Internal Audit 1992.
Charles W. Moorman, 46, Present position since October
Vice President- 1993; prior thereto was Vice
Information Technology President-Employee Relations.
Phillip R. Ogden, 57, Present position since December
Vice President-Engineering 1992.
John P. Rathbone, 46, Present position since December
Vice President and 1992.
Controller
William J. Romig, 53, Present position since April 1992.
Vice President and
Treasurer
<PAGE> PAGE 25
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- -----------------------------------
John M. Samuels, 54, Present position since January 16,
Vice President-Operations 1998. Served as Vice President-
Planning and Budget Operating Assets of Conrail from
January 1996 to January 1998,
Vice President-Mechanical of
Conrail from November 1994 to
January 1996, and prior thereto
was Vice President-Engineering
of Conrail.
Donald W. Seale, 45, Present position since August 1993;
Vice President- prior thereto was Assistant Vice
Merchandise Marketing President-Sales and Service.
Robert S. Spenski, 63, Present position since June 1994;
Vice President- prior thereto was Senior
Labor Relations Assistant Vice President-Labor
Relations.
Rashe W. Stephens, Jr., 56, Present position since December
Vice President- 1996. Served as Assistant Vice
Quality Management President-Public Affairs from
February 1993 to December 1996,
and prior thereto was Director,
EEO and Manpower Planning.
William C. Wooldridge, 54, Present position since March 1996;
Vice President-Law prior thereto was General
Counsel-Corporate.
Dezora M. Martin, 50, 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 26
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
50,938 stockholders of record as of Dec. 31, 1997, 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 1997 and 1996, after restatement for the Sept. 5, 1997,
three-for-one stock split.
<CAPTION>
Quarter
----------------------------------------------
1997 1st 2nd 3rd 4th
---- --- --- --- ---
<S> <C> <C> <C> <C>
Market price
High $ 32-3/4 $ 35-1/8 $ 38-1/8 $ 34-7/8
Low 28-3/8 28-3/16 31-9/16 29-7/16
Dividends per share $0.20 $0.20 $0.20 $0.20
1996 1st 2nd 3rd 4th
---- --- --- --- ---
<S> <C> <C> <C> <C>
Market price
High $ 29-5/16 $29-15/16 $ 30-9/16 $ 32-3/16
Low 25-7/16 26-11/16 26-1/8 28-3/16
Dividends per share $0.18-2/3 $0.18-2/3 $0.18-2/3 $0.18-2/3
</TABLE>
<PAGE> PAGE 27
Item 6. Selected Financial Data.
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1994 - 1997
Page One
<CAPTION>
1997<F1> 1996 1995 1994
-------- -------- -------- --------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Railway operating revenues $ 4,223 $ 4,101 $ 4,012 $ 3,918
Railway operating expenses 3,010 2,936 2,950 2,875
-------- -------- -------- --------
Income from
railway operations 1,213 1,165 1,062 1,043
Other income - net 170 117 140 86
Interest expense on debt 385 116 113 101
-------- -------- -------- --------
Income from continuing
operations before
income taxes 998 1,166 1,089 1,028
Provision for income taxes 299 413 391 372
-------- -------- -------- --------
Income from continuing
operations before
accounting changes 699 753 698 656
Discontinued operations <F2> 22 17 15 12
Cumulative effect
of accounting changes -- -- -- --
-------- -------- -------- --------
Net income $ 721 $ 770 $ 713 $ 668
======== ======== ======== ========
<S> <C> <C> <C> <C>
PER SHARE DATA:
Income from continuing
operations before
accounting changes - basic $ 1.85 $ 1.98 $ 1.78 $ 1.60
Income from continuing
operations before
accounting changes - diluted $ 1.84 $ 1.96 $ 1.77 $ 1.59
Net income - basic $ 1.91 $ 2.03 $ 1.81 $ 1.63
Net income - diluted $ 1.90 $ 2.01 $ 1.80 $ 1.62
Dividends $ 0.80 $0.74-2/3 $0.69-1/3 $ 0.64
Stockholders' equity
at year-end $ 14.44 $ 13.26 $ 12.47 $ 11.73
</TABLE>
<PAGE> PAGE 28
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1994 - 1997
Page Two
<CAPTION>
1997<F1> 1996 1995 1994
-------- -------- -------- --------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Total assets $ 17,350 $ 11,234 $ 10,718 $ 10,403
Total long-term debt,
including current
maturities $ 7,459 $ 1,856 $ 1,638 $ 1,619
Stockholders' equity $ 5,445 $ 4,977 $ 4,829 $ 4,685
OTHER:
Capital expenditures $ 929 $ 789 $ 757 $ 707
Average number of shares
outstanding (thousands) 376,593 379,372 392,987 408,904
Number of stockholders
at year-end 50,938 50,748 53,401 52,442
Average number of employees:
Rail 23,323 23,361 24,488 24,710
Nonrail 2,494 2,469 2,456 2,458
-------- -------- -------- --------
Total 25,817 25,830 26,944 27,168
======== ======== ======== ========
All share and per share amounts have been restated to reflect the
Sept. 5, 1997, three-for-one stock split.
<FN>
NOTES
<F1> 1997 results include several Conrail-related items. These
principally consist of: (1) $264 million of interest expense
on debt issued to finance NS' share of the NS/CSX joint
acquisition of Conrail stock, (2) $117 million for the equity
in earnings of Conrail net of amortization, (3) credit
facility costs including a $77 million charge incurred in
conjunction with certain now-terminated commitments that
provided financing for NS' then-proposed acquisition of all
Conrail stock, and (4) $3 million of identified integration
costs. These items reduced net income by $107 million, or 29
cents per diluted share.
<F2> On Jan. 12, 1998, NS announced that it signed an agreement to
sell all the common stock of its motor carrier subsidiary,
NAVL. Accordingly, NAVL's results of operation, financial
position, and cash flows are presented as "Discontinued
operations."
</TABLE>
<PAGE> PAGE 29
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1990 - 1993
Page One
<CAPTION>
1993<F3> 1992 1991<F4> 1990
-------- -------- -------- --------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Railway operating revenues $ 3,746 $ 3,777 $ 3,654 $ 3,786
Railway operating expenses 2,831 2,851 3,345 2,969
-------- -------- -------- --------
Income from
railway operations 915 926 309 817
Other income - net 135 97 131 142
Interest expense on debt 98 109 99 78
-------- -------- -------- --------
Income from continuing
operations before
income taxes 952 914 341 881
Provision for income taxes 370 328 112 316
-------- -------- -------- --------
Income from continuing
operations before
accounting changes 582 586 229 565
Discontinued operations <F2> (33) (28) (199) (9)
Cumulative effect
of accounting changes 223 -- -- --
-------- -------- -------- --------
Net income $ 772 $ 558 $ 30 $ 556
======== ======== ======== ========
<S> <C> <C> <C> <C>
PER SHARE DATA:
Income from continuing
operations before
accounting changes - basic $ 1.39 $ 1.38 $ 0.52 $ 1.16
Income from continuing
operations before
accounting changes - diluted $ 1.37 $ 1.37 $ 0.52 $ 1.16
Net income - basic $ 1.85 $ 1.31 $ 0.07 $ 1.14
Net income - diluted $ 1.83 $ 1.30 $ 0.07 $ 1.14
Dividends $ 0.62 $ 0.60 $0.53-1/3 $0.50-2/3
Stockholders' equity
at year-end $ 11.12 $ 10.05 $ 9.55 $ 10.52
</TABLE>
<PAGE> PAGE 30
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1990 - 1993
Page Two
<CAPTION>
1993<F3> 1992 1991<F4> 1990
-------- -------- -------- --------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Total assets $ 10,301 $ 10,188 $ 9,959 $ 10,326
Total long-term debt,
including current
maturities $ 1,594 $ 1,648 $ 1,387 $ 1,122
Stockholders' equity $ 4,621 $ 4,233 $ 4,093 $ 4,912
OTHER:
Capital expenditures $ 639 $ 628 $ 688 $ 605
Average number of shares
outstanding (thousands) 418,243 424,378 443,276 486,284
Number of stockholders
at year-end 51,884 51,200 53,725 56,187
Average number of employees:
Rail 25,531 25,650 27,366 28,697
Nonrail 3,773 4,485 4,586 4,584
-------- -------- -------- --------
Total 29,304 30,135 31,952 33,281
======== ======== ======== ========
All share and per share amounts have been restated to reflect the
Sept. 5, 1997, three-for-one stock split.
<FN>
NOTES
<F3> 1993 results include an 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 13 cents
per diluted share. 1993 "Discontinued operations" includes a
$50 million pretax restructuring charge for the disposition
of two NAVL businesses. 1993 also includes two accounting
changes; the cumulative effect of accounting changes
increased 1993 net income by $223 million, or 53 cents per
diluted 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.
<F4> 1991 operating expenses include a $483 million special charge
primarily for labor force reductions. "Discontinued
operations" includes a $197 million charge primarily for the
write-down of the goodwill portion of NS' investment in NAVL.
These charges reduced net income by $498 million, or $1.12
per diluted share.
</TABLE>
<PAGE> PAGE 31
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1987 - 1989
Page One
<CAPTION>
1989 1988 1987<F5>
-------- -------- --------
($ in millions, except per share amounts)
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Railway operating revenues $ 3,694 $ 3,617 $ 3,336
Railway operating expenses 2,864 2,680 3,269
-------- -------- --------
Income from
railway operations 830 937 67
Other income - net 155 103 228
Interest expense on debt 50 53 58
-------- -------- --------
Income from continuing
operations before
income taxes 935 987 237
Provision for income taxes 323 358 87
-------- -------- --------
Income from continuing
operations before
accounting changes 612 629 150
Discontinued operations <F2> (6) 6 22
Cumulative effect
of accounting changes -- -- --
-------- -------- --------
Net income $ 606 $ 635 $ 172
======== ======== ========
<S> <C> <C> <C>
PER SHARE DATA:
Income from continuing
operations before
accounting changes - basic $ 1.17 $ 1.16 $ 0.26
Income from continuing
operations before
accounting changes - diluted $ 1.16 $ 1.16 $ 0.26
Net income - basic $ 1.16 $ 1.17 $ 0.30
Net income - diluted $ 1.15 $ 1.17 $ 0.30
Dividends $ 0.46 $ 0.42 $ 0.40
Stockholders' equity
at year-end $ 10.15 $ 9.58 $ 8.83
</TABLE>
<PAGE> PAGE 32
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1987 - 1989
Page Two
<CAPTION>
1989 1988 1987<F5>
-------- -------- --------
($ in millions, except per share amounts)
<S> <C> <C> <C>
FINANCIAL POSITION:
Total assets $ 10,049 $ 9,845 $ 9,622
Total long-term debt,
including current
maturities $ 838 $ 778 $ 791
Stockholders' equity $ 5,169 $ 5,153 $ 4,979
OTHER:
Capital expenditures $ 620 $ 482 $ 521
Average number of shares
outstanding (thousands) 523,109 543,113 568,391
Number of stockholders
at year-end 61,630 64,974 68,121
Average number of employees:
Rail 29,667 30,330 32,563
Nonrail 4,645 4,209 3,539
-------- -------- --------
Total 34,312 34,539 36,102
======== ======== ========
All share and per share amounts have been restated to reflect the
Sept. 5, 1997, three-for-one stock split.
<FN>
NOTES
<F5> 1987 operating expenses include a $616 million special charge
principally related to railroad restructuring costs and a $4
million restructuring charge in "Discontinued operations."
These charges reduced net income by $352 million, or 62 cents
per diluted share.
</TABLE>
<PAGE> PAGE 33
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Table of Graphs
Included with the
Eleven-Year Financial Review
<TABLE>
The following financial information appears as three (3)
separate graphs with the Eleven-Year Financial Review in the 1997 Norfolk
Southern Corporation Annual Report to Stockholders. All per share
amounts have been restated to reflect the Sept. 5, 1997, three-for-one
stock split.
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RETURN ON AVERAGE
STOCKHOLDERS'
EQUITY 15.7%* 15.7% 15.4%** 14.4% 13.7%*** 13.4%
1997's return on average stockholders' equity equaled 1996's record,
which marked the sixth consecutive year of year-over-year improvement.
*Excludes effect of Conrail-related items. Return on average
stockholders' equity including the effect of Conrail-related items
was 13.8%.
**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.
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
DIVIDENDS PER SHARE
(dollars) $0.80 $0.74-2/3 $0.69-1/3 $0.64 $0.62 $0.60
Since 1983, NS' first full year after consolidation, the annual dividend
has grown at a compound annual rate of 7%. Stockholders received a
dividend yield of 2.6% in 1997, compared with less than 1.6% for all S&P
500 stocks.
</TABLE>
<PAGE> PAGE 34
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 should be read in conjunction with
the Consolidated Financial Statements (beginning on page 54) and Notes
(beginning on page 60) and the Eleven-Year Financial Review (beginning on
page 27).
SUMMARIZED RESULTS OF OPERATIONS
1997 Compared With 1996
- -----------------------
Net income in 1997 was $721 million, a decrease of 6%. However,
1997's results reflect several Conrail-related items, primarily interest
expense on the $5.8 billion of debt incurred to finance the acquisition,
which reduced net income by $107 million (see Note 2 on page 62).
Excluding the effects of these items, net income was up 8% over 1996's
record result. Income from railway operations increased 4%. Increased
nonoperating income (see Note 4 on page 64) and a lower effective income
tax rate (see Note 5 on page 65) also contributed to the improvement in
net income.
As required by a new accounting pronouncement, NS is reporting two
earnings per share amounts on the face of the income statement: basic and
diluted. "Basic" earnings per share is calculated by dividing net income
by the average number of shares outstanding during the period. "Diluted"
earnings per share reflects the dilutive effect of all unexercised stock
options and projected performance awards under the Long-Term Incentive
Plan.
Diluted earnings per share of $1.90 were down 5%. Excluding the
effects of the Conrail-related items, diluted earnings per share were up
9% over 1996's record result.
On Jan. 12, 1998, NS announced that it had reached an agreement to
sell all the common stock of its motor carrier subsidiary, North American
Van Lines, Inc. (NAVL) (see Note 3 on page 64). Accordingly, NAVL's
results are presented, net of taxes, as "Discontinued operations," and
all prior period amounts have been reclassified to conform to this
presentation. NS expects to report a gain upon consummation of the NAVL
sale in 1998.
1996 Compared With 1995
- -----------------------
Net income in 1996 was a record $770 million, an increase of 8%.
However, 1995's results included a $34 million early retirement charge
that reduced net income by $20 million. Excluding the effects of that
charge, 1996 net income was up 5%. The improvement was due to increased
income from railway operations, reflecting a 2% increase in railway
operating revenues and a less than 1% increase in railway operating
expenses (excluding the early retirement charge), which more than
compensated for decreased nonoperating income. Included in 1995
nonoperating income was a $31 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 debt issued in September
1996.
Record diluted earnings per share of $2.01 for 1996 were up 12% (8%,
excluding the effects of the early retirement charge). The greater
improvement in earnings per share compared with net income was the result
of the stock purchase program, which was suspended on Oct. 23, 1996, and
to date has not been resumed (see Note 15 on page 77).
<PAGE> PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
<TABLE>
INCOME FROM RAILWAY OPERATIONS
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995* 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C>
$1,213 $1,165 $1,095 $1,043 $ 915 $ 926
Income from railway operations increased 4% in 1997,
marking the fourth consecutive year of record-breaking
results. Income from railway operations has increased 31%
above 1992's results.
* 1995 excludes a $34 million charge for an early
retirement program.
</TABLE>
DETAILED RESULTS OF CONTINUING OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $4.2 billion in 1997, compared with
$4.1 billion in 1996, and $4.0 billion in 1995. The following table
presents a three-year comparison of revenues by market group.
<TABLE>
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions)
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Coal $1,301 $1,305 $1,268
Chemicals 585 560 541
Paper/clay/forest 539 513 537
Automotive 492 489 449
Agriculture/government/consumer 391 393 394
Metals/construction 368 354 349
Intermodal 547 487 474
------ ------ ------
Total $4,223 $4,101 $4,012
====== ====== ======
</TABLE>
In 1997, revenues increased or remained steady for all market
groups. In 1996, revenues increased in all market groups except in the
paper, clay, and forest products group, and the agriculture, government,
and consumer products group. As shown in the following table, volume
gains produced all of the revenue improvement in 1997 and most of the
improvement in 1996.
<TABLE>
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions)
<CAPTION>
1997 vs. 1996 1996 vs. 1995
------------- -------------
<S> <C> <C>
Volume $ 130 $ 73
Revenue per unit (8) 16
----- -----
Total $ 122 $ 89
===== =====
</TABLE>
<PAGE> PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Coal tonnage increased 3% in 1997, primarily due to increased export
and utility tonnage; however, revenues decreased slightly as a result of
a shorter length of haul. Coal revenues represented 31% of total railway
operating revenues in 1997, and 89% of coal shipments originated on NS'
lines. In 1996, coal tonnage increased 4%, and revenues increased 3%,
principally due to increased utility and export tonnage.
<TABLE>
TOTAL COAL, COKE, AND IRON ORE TONNAGE
(In millions of tons)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Utility 76 75 70
Export 29 27 26
Steel 21 20 22
Other 8 8 7
--- --- ---
Total 134 130 125
=== === ===
</TABLE>
Utility coal traffic increased 2% in 1997, despite the unusually
cool weather in late spring and early summer that moderated demand for
domestic steam coal. Several utility customers in the NS service region
shifted more generation to coal-fired plants, as some nuclear power
plants experienced downtime. New business resulting from innovative
marketing efforts also contributed to the increase.
In 1996, utility coal traffic volume increased 6%, primarily due to
nuclear generator downtime and market share gains in the Southeast.
The near-term outlook for utility coal remains positive, as coal-
fired generation continues to be the cheapest marginal source of
electricity. Normalized U.S. electricity demand continues to increase at
a rate greater than generation capacity is being added. Increased
electricity price competition expected from utility deregulation could
cause utilities to seek to reduce costs and increase plant utilization.
These factors, coupled with excess capacity at low-cost, coal-fired
generation plants, could provide an opportunity for coal volume growth.
However, competitive pressures on utilities to reduce costs also could
transfer price pressure to generation source fuels, including NS-
delivered coal.
Moreover, a significant number of the mines served by NS produce
coals that satisfy both the Phase I and Phase II requirements of the
Clean Air Act Amendments. Adoption of tighter restrictions on the
emission of nitrous oxides, as proposed by the Environmental Protection
Agency, however, could impose added cost burdens on some coal-fired
plants. Furthermore, if implemented, the greenhouse gas emission targets
proposed for the United States at the Global Climate Summit in Kyoto,
Japan, in December 1997 also could increase the cost of coal-fired
generation and adversely affect coal traffic.
The portion of Conrail's properties that NS proposes to operate
serves 27 coal-fired utility plants and mines with an abundant supply of
low-cost, high-quality steam coal.
Export coal tonnage increased 6% in 1997, reaching the highest
level since 1992. Higher metallurgical coal demand and increased sales
from NS-served producers caused growth in shipments to Japan. Increased
metallurgical coal exports to Holland and Romania and increased shipments
to Brazil early in the year also contributed to the improvement.
Export coal tonnage increased 5% in 1996, as NS benefited from
increases in steam coal exports to Italy and 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 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Metallurgical coal exports are expected to remain stable through
2000. The high-quality coking coals from mines on NS should keep its
export metallurgical coal competitive. However, the current relative
strength of the U.S. dollar vs. the currencies of several other major
coal-producing nations has put U.S. coal at a price disadvantage. A
gradual decline in export metallurgical coal tonnage is projected over
the long term, as new steel-making technologies take market share from
traditional coke-based producers. Export demand for steam coal is
expected to increase over the long term, and NS is working to increase
its participation in this market.
Conrail and its coal-producing customers are well established in
the export steam coal market, which, assuming approval of the Conrail
transaction, should help NS achieve greater levels of participation.
Furthermore, current NS and Conrail coal exporters should benefit from
being able to ship their coal single-line through Baltimore, Md., and
Norfolk, Va.
Steel coal domestic traffic increased 4% in 1997, due to growth in
coke and iron ore shipments. Metallurgical coal traffic declined,
primarily due to prolonged aggressive producer pricing of higher volatile
metallurgical coals not located on NS' lines. In 1996, traffic decreased
7%, a result of the aggressive high-volatile coal pricing.
With the reduction in U.S. blast-furnace capacity, coke production
in the United States continues to decline. Advanced technologies that
allow production of steel using little or no coke could cause this market
to decline slowly over the long term. However, NS is working to
participate in the movement of non-coking coal used by technologies such
as pulverized coal injection and coal-based, direct-reduced iron, in
order to mitigate the potential decline in traditional metallurgical
shipments.
The Conrail transaction, if approved, should increase NS'
participation in shipments of raw materials for the steel industry by
means of new single-line routes with access to most domestic integrated
steel plants and merchant coke plants.
Other coal traffic, primarily steam coal shipped to manufacturing
plants, decreased 3% in 1997, principally due to the unusually cool late
spring and early summer weather and to allocation of equipment to other
markets. Other coal traffic increased 14% in 1996, mostly reflecting
gains from other modes of transportation. This market is expected to
remain stable in coming years.
<TABLE>
COAL
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Export $ 380 $ 374 $ 353 $ 340 $ 366 $ 478
Domestic 921 931 915 950 873 846
------- ------- ------- ------- ------- -------
$ 1,301 $ 1,305 $ 1,268 $ 1,290 $ 1,239 $ 1,324
======= ======= ======= ======= ======= =======
Revenues decreased slightly in 1997. Since 1992, revenues
have decreased $23 million, or 2%, mostly due to lower
export coal traffic. Total tonnage handled in 1997 was 7%
above 1992's volume. This group includes utility coal,
export coal, domestic metallurgical coal, industrial coal,
coke, and iron ore.
</TABLE>
<PAGE> PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
MERCHANDISE traffic volume and revenues each increased 3% in 1997,
as all market groups, except the agriculture, government, and consumer
products group, posted gains. In 1996, merchandise volume decreased
slightly, as gains in automotive, intermodal, and chemicals traffic were
more than offset by declines in the remaining market groups. However,
higher average revenues in 1996 resulted in a 2% revenue improvement.
CHEMICALS traffic increased 5%, and revenues increased 4% in 1997.
Plastics, chlor-alkali, and nonhazardous waste markets strengthened
during 1997. Petroleum and industrial chemicals volume also increased. In
1996, chemicals traffic volume grew 3%, and revenues increased 4%, as
fertilizer and plastics markets strengthened. In addition, the harsh
winter resulted in increased movements of liquid petroleum gas, and
industrial chemicals remained strong throughout the year.
The chemicals market group should continue to show moderate growth
through 1998, based on industrial expansion projects and expected
increases in national chemical production.
If approved, the Conrail transaction should give NS a competitive
route from the southwest to northern New Jersey, where Conrail currently
originates or terminates annually about 40,000 carloads of chemicals.
<TABLE>
CHEMICALS
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$ 585 $ 560 $ 541 $ 538 $ 501 $ 500
Revenues increased $25 million, or 4%, in 1997. Since 1992,
revenues have increased $85 million, or 17%. This group
includes fertilizers, sulfur and related chemicals,
petroleum products, chlorine, and bleaching compounds,
plastics, industrial chemicals, chemical wastes, and
municipal wastes.
</TABLE>
PAPER, CLAY, AND FOREST products traffic rose 4%, and revenues
increased 5% in 1997. Shipments of wood chips led the growth, as three
major on-line wood-chip plants began full production. Lumber traffic also
increased as Southern yellow pine from NS' service territory continued to
replace timber from Pacific Northwest sources. Kaolin clay traffic
increased, and shipments of paper products were up slightly in a mature
industry where strong competition continues between rail and truck
transportation. In 1996, paper, clay, and forest products revenues and
traffic each declined 5%, due to the overall downturn in the paper and
forest products industry.
The paper, clay, and forest products market group is expected to
experience modest growth in 1998, bolstered by increased printing paper
production in the Southeast and increased wood-chip volume when two
additional plants come on line.
The Conrail transaction, if approved, will give NS access to 35
additional paper mills and 39 additional lumber reload centers.
<PAGE> PAGE 39
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
<TABLE>
PAPER, CLAY, AND FOREST PRODUCTS
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$ 539 $ 513 $ 537 $ 522 $ 522 $ 517
Revenues increased $26 million, or 5%, in 1997. Since 1992,
revenues have increased $22 million, or 4%. This group
includes lumber and wood products, pulpboard and paper
products, wood fibers, woodpulp, scrap paper, and clay. NS
serves 50 paper mills, 20 paper distribution centers, and
more than 30 lumber reload centers.
</TABLE>
AUTOMOTIVE traffic increased 2%, and revenues rose 1% in 1997, both
reaching the highest levels in this group's history. Auto parts drove the
growth as volume increased 12%. Vehicle traffic decreased 3%, due to
industrywide railcar shortages, service disruptions in the West,
unexpected downtime at certain plants and modest sales for some of the
models transported by NS. In 1996, automotive traffic rose 8%, and
revenues increased 9%. Auto parts traffic increased 21% and vehicle
traffic increased 3%, largely a result of new just-in-time rail centers
and all NS-served assembly plants being on-line.
The automotive group is expected to experience growth in 1998. When
fully operational, the Ford mixing centers are expected to increase NS'
vehicle business with Ford. Full production at the Mercedes-Benz plant in
Vance, Ala., and Toyota's new minivan line at Georgetown, Ky., also
should support growth. Parts traffic is expected to continue to grow,
supported by increased volumes on NS' just-in-time network, specifically
less-than-truckload traffic moving from Detroit to Mexico.
If approved, the Conrail transaction will provide NS access to 13
additional assembly plants with an annual production of more than 2.6
million vehicles, and NS' network of automobile distribution facilities
will increase from 22 to 39.
<TABLE>
AUTOMOTIVE
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$ 492 $ 489 $ 449 $ 429 $ 426 $ 392
Revenues increased $3 million, or 1%, in 1997. Since 1992,
revenues have increased $100 million, or 26%. This group
includes finished vehicles for BMW, Chrysler, Ford, General
Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mercedes,
Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota, and
Volkswagen, and auto parts for Ford, General Motors,
Mercedes, and Toyota. In the past 10 years, eight of 11
major automotive plants in the East have located on NS
lines.
</TABLE>
AGRICULTURE, GOVERNMENT, AND CONSUMER products traffic decreased
3%, and revenues decreased 1% in 1997. Most of the decline resulted from
decreases in the bulk agriculture commodities. Weak export markets,
declines in corn shipments to processors, and an unfavorable soybean
market resulting from higher prices led to traffic declines that began
early in the year. In 1996, agriculture, government, and consumer
products traffic declined 4%, and revenues were flat. Despite strong
demand for feed grains in the Southeast, grain traffic was affected
<PAGE> PAGE 40
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
adversely by poor crops and strong export demand that left NS receivers
competing for limited supplies. Slight average revenue growth occurred,
resulting primarily from longer hauls, as receivers obtained grain
supplies from the West.
The agriculture, government, and consumer products group is
expected to experience moderate growth in 1998 due to improved soybean
and corn crops. NS also should benefit from the on-line location of one
new feed mill and three new wheat mills during the year.
The Conrail transaction, if approved, is expected to increase NS-
accessed grain elevator capacity by about 10%.
<TABLE>
AGRICULTURE, GOVERNMENT, AND CONSUMER PRODUCTS
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$ 391 $ 393 $ 394 $ 380 $ 357 $ 344
Revenues decreased $2 million, or 1%, in 1997. Since 1992,
revenues have increased $47 million, or 14%. This group
includes soybeans, wheat, corn, animal and poultry feed,
food oils, flour, beverages, canned goods, sweeteners,
consumer products, and items for the military.
</TABLE>
METALS AND CONSTRUCTION traffic and revenues each increased 4% in
1997. Construction traffic on NS experienced strong gains in 1997,
primarily due to increased highway building activity in the Southeast.
Metals traffic increased due to gains in domestic sheet steel movements
resulting from record steel production and increased pipe shipments. In
1996, metals and construction traffic declined 2%, but revenues were up
1%. Construction carloads fell behind in early 1996 due to inclement
weather and were flat the rest of the year; however, higher average
revenues more than offset the volume decline. In the metals market, NS'
shipments remained strong due to a healthy domestic steel market, which
has added capacity, as efficiency at integrated mills and new steel
processing facilities has improved.
Moderate growth is expected in 1998, supported by several new
metals projects coming on-line, and continued growth in construction
traffic.
If approved, the Conrail transaction will give NS access to 11
additional steel mills.
<TABLE>
METALS AND CONSTRUCTION
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$ 368 $ 354 $ 349 $ 330 $ 309 $ 289
Revenues increased $14 million, or 4%, in 1997. Since 1992,
revenues have increased $79 million, or 27%. This group
includes steel, aluminum products, machinery, scrap metals,
cement, aggregates, bricks, and minerals.
</TABLE>
<PAGE> PAGE 41
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
INTERMODAL traffic volume increased 11%, and revenues increased 12%
in 1997, each exceeding the records set in 1996. Capacity expansions on
major terminals and trains, combined with a healthy domestic and
international economy, enabled NS to achieve the third year of double-
digit growth in four years. Volume increases were balanced, allowing NS
to outperform the market in all traffic segments. Container traffic
volume increased 12%, supported by strength in new steamship business
under contract.
In 1996, driven by increased domestic container and Triple Crown
Services Company (TCSC) volume, intermodal traffic volume increased 5%,
and revenues increased 3%, each reaching a record level. EMP, the
container equipment-sharing arrangement with Union Pacific and Conrail,
contributed significantly to the 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.
NS' intermodal volume is expected to remain strong, although growth
in 1998 is not expected to equal the double-digit performance of 1997.
New train services between Greensboro and Chicago, and St. Louis and
Atlanta are expected to attract less-than-truckload and other premium
service customers. Rate actions to improve balance and margin are
expected to be implemented throughout the year and to contribute to
traffic moderation.
The Conrail transaction, if approved, should result in significant
growth in intermodal revenues, as NS will benefit from direct access to
most major East Coast ports.
<TABLE>
INTERMODAL
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$ 547 $ 487 $ 474 $ 429 $ 392 $ 411
Revenues increased $60 million, or 12%, in 1997. Since
1992, revenues have increased $136 million, or 33%. This
group handles trailers, domestic and international
containers, Triple Crown equipment, and equipment for
intermodal marketing companies, international steamship
lines, truckers, and other shippers.
</TABLE>
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 3% in 1997, despite a 5%
increase in traffic volume. In 1996, railway operating expenses decreased
slightly; however, 1995's expenses included a $34 million charge for an
early retirement program (see Note 12 on page 71). Excluding that charge,
1996 railway operating expenses increased 1% on a 2% increase in traffic
volume.
As a result, the railway operating ratio, which measures the
percentage of railway revenues consumed by railway expenses, was a record
71.3 in 1997, compared with 71.6 in 1996, and 73.5 (72.7 excluding the
early retirement charge) in 1995. NS' railway operating ratio continues
to be the best among the major railroads in the United States.
Even before the Conrail transaction is approved, NS expects to
incur expenses related to integration efforts, and, as a result, the
railway operating ratio is anticipated to be higher in 1998.
<PAGE> PAGE 42
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
<TABLE>
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions)
<CAPTION>
1997 vs. 1996 1996 vs. 1995
------------- -------------
<S> <C> <C>
Compensation and benefits $ 5 $(80)*
Materials, services and rents 61 5
Depreciation 13 19
Diesel fuel (6) 43
Casualties and other claims -- 2
Other 1 (3)
---- ----
Total $ 74 $(14)
==== ====
*Reflects the $34 million early retirement charge in 1995.
</TABLE>
COMPENSATION AND BENEFITS, which represents about half of total
railway operating expenses, increased slightly in 1997, but decreased 5%
(3% excluding the effect of the early retirement charge) in 1996.
In 1997, higher wages resulting from contract wage increases and
additional train and engine employees were offset by lower fringe benefit
and incentive compensation costs. The decline in fringe benefit costs was
largely due to favorable investment experience on pension plan assets.
Productivity improvements and train efficiencies offset the effects of
the higher traffic volume to a large extent.
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)
reduced 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.
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 10% in
1997 and 1% in 1996.
The 1997 increase resulted principally from higher volume-related
intermodal expenses, as well as higher equipment rent costs, partially a
result of a change in the mix of received vs. forwarded traffic. Higher
locomotive repair expenses and costs for contract programmers to make
computer processes Year-2000 compliant (discussed below) also contributed
to the increase. The 1996 increase also resulted from higher volume-
related intermodal expenses, 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 11% in 1997 and
10% in 1996. The 1997 increase was due to a 5% increase in overall
traffic and a shift in traffic mix. Carloadings in other railroads' and
privately owned freight cars were up 7%, due to growth in traffic
received from other railroads. Trailer and container loadings, moving
mostly on privately owned flatcars, were up 11%. These increased costs
<PAGE> PAGE 43
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
were mitigated somewhat by higher receipts from short-term leases of
locomotives to various railroads. The 1996 increase resulted from higher
container traffic, lower receipts from short-term leases of locomotives,
and more freight car leases necessary to meet customer requirements.
These increased costs were somewhat offset by lower net costs for
multilevel equipment.
Locomotive repair costs increased in 1997, a result of higher
traffic levels and an increase in the average number of locomotives in
service throughout the year.
In October 1995, NS initiated a project to review, and modify as
necessary, computer and other systems for Year-2000 compliance. As of
December 1997, most of NS' mainframe computer programs have been
reviewed. This mainframe project is expected to be completed by the end
of 1998. NS has redeployed existing information technology resources and
has incurred incremental costs, mostly for contract programmers.
Incremental costs through 1997, which were expensed, were less than $10
million, and the total incremental costs of the entire project are
expected to be less than $25 million. Failure to achieve Year-2000
compliance -- by NS, other railroads, its suppliers, and its customers --
could negatively affect NS' ability to conduct business for an extended
period. Management believes that NS' project will be completed on time
and that the chance of failure is remote.
DEPRECIATION expense (see Note 1, "Properties," on page 61 for NS'
depreciation policy) was up 3% in 1997 and 5% in 1996. Increases in both
years were due to property additions, reflecting recent substantial
levels of capital spending.
DIESEL FUEL costs declined 3% in 1997, but increased 23% in 1996.
The 1997 decrease was due to a 5% drop in the average price per gallon,
somewhat offset by a 3% rise in consumption. The 1996 increase was due to
a 20% rise in the average price per gallon, as prices reached levels
unseen since the Persian Gulf Crisis in 1991, and to a 3% increase in
consumption.
CASUALTIES AND OTHER CLAIMS (including estimates of costs related to
personal injury, property damage, and environmental matters) were
unchanged in 1997, but increased 2% in 1996. In 1997, a reduction in
personal injury expenses was offset by higher freight damage costs. 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 largest component of casualties and other claims expense is
personal injury costs. NS experienced another reduction in the number of
reportable injuries in 1997, with a consequent reduction in the cost of
personal injury claims. NS continues to work actively to reduce all
accidents and to control the associated costs.
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 employee claims for job-related injuries, promotes an
adversarial claim settlement environment and produces results that are
unpredictable and inconsistent, at a far greater cost to the rail
industry than the no-fault workers' compensation system to which non-rail
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.
NS maintains substantial amounts of commercial insurance for
potential third-party liability and property damage losses. However, it
also retains reasonable levels of risk through self-insurance.
OTHER expenses increased 1% in 1997, but decreased 2% in 1996.
<PAGE> PAGE 44
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Income Taxes
- ------------
Income tax expense in 1997 was $299 million for an effective rate of
30%, compared with an effective rate of 35% in 1996 and 36% in 1995.
Excluding the equity in Conrail's after-tax earnings, the effective rate
for 1997 was 34%.
The effective rates in all three years were below the statutory
federal and state rates as a result of investments in corporate-owned
life insurance and in coal-seam gas properties and favorable adjustments
upon filing the prior year tax returns. In addition, 1997 benefited from
favorable adjustments of accrued liabilities for state income taxes. 1996
benefited from favorable adjustments resulting from settlement of federal
income tax years 1990-1992.
DETAILED RESULTS OF DISCONTINUED OPERATIONS - MOTOR CARRIER
As a result of the agreement to sell NAVL, motor carrier results are
presented, net of taxes, as "Discontinued operations" (see Note 3 on
page 64).
Income from motor carrier operations, net of taxes, was $22 million
in 1997, compared with $17 million in 1996, and $15 million in 1995.
Motor carrier operating income was $35 million in 1997, compared with $32
million in 1996, and $25 million in 1995. Because certain expenses were
below original estimates, $4 million of reserves related to a former
division were reversed in each of the three years. The Relocation
Services (RS) and High Value Products (HVP) divisions generated operating
income of $31 million in 1997, $28 million in 1996, and $21 million in
1995.
<TABLE>
The following table presents a three-year comparison of revenues by
division.
MOTOR CARRIER REVENUES BY DIVISION
($ in millions)
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Relocation Services $ 519 $ 528 $ 517
High Value Products 423 402 379
----- ----- -----
Total $ 942 $ 930 $ 896
===== ===== =====
Note: Certain motor carrier expenses previously
reported net in revenues have been reclassified to
motor carrier expenses. Income from motor carrier
operations is not affected by this change in
presentation.
</TABLE>
RS' revenues decreased 2% in 1997, but increased 2% in 1996. In
1997, domestic shipments declined 6% due to weakness in all segments and
the loss of the largest sales agent. International commercial shipments
were down 3%. The effects of the volume decreases were mitigated by a 3%
gain in average revenue per domestic shipment. In 1996, domestic
shipments declined 4% due to weakness in all segments, and international
shipments were down 1%. Average revenue per shipment increased 3%.
HVP's revenues increased 5% in 1997 and 6% in 1996, as all business
units experienced growth in both years. Customized Logistics Services
(CLS) volume posted the largest percentage gains, due in part to new
customer programs as well as the continued expansion of its commercial
air freight operations and the expansion of the emergency parts service
business.
<PAGE> PAGE 45
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Motor carrier operating expenses as a percentage of revenues were
97% in 1997, 96% in 1996, and 97% in 1995, 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 for which
a reserve had been established 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.
ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
As discussed in Note 1 under "Required Accounting Changes" on page
61, NS adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," for the year ended December 31, 1997, and AICPA
Statement of Position 96-1, "Environmental Remediation Liabilities," (SOP
96-1) effective January 1, 1997. The adoption of SOP 96-1 did not have a
material effect on NS' financial statements.
During 1997, Statements of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," and No. 131, "Disclosures About
Segments of an Enterprise and Related Information," were issued. Neither
statement is expected to have a material effect on NS' financial
statements.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of
liquidity, decreased $48 million, or 4%, in 1997, and $36 million, or 3%,
in 1996. Since consolidation in 1982, cash provided by operating
activities has been sufficient to fund dividend requirements, debt
repayments, and a significant portion of capital spending. The decrease
in 1997 was principally the result of interest on the debt issued to
finance NS' portion of the cost of the acquisition of Conrail stock. The
increase in "Current liabilities other than debt" is primarily due to
interest accruals. The decrease in 1996 was largely attributable to lump-
sum wage payments associated with labor contract settlements and higher
income tax payments related to the settlement of federal income tax years
1990-1992.
<TABLE>
CASH PROVIDED BY OPERATIONS*
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$1,241* $1,198 $1,234 $1,144 $ 875 $ 958
Cash provided by operations in 1997 exceeded $1 billion for
the fourth consecutive year and was sufficient to fund
dividend requirements, debt repayments, and a significant
portion of capital expenditures.
* 1997 excludes Conrail-related items that reduced cash
provided by operations $91 million.
</TABLE>
Cash used for investing activities increased substantially in 1997
with NS' acquisition of a 58% economic interest in Conrail and decreased
6% in 1996. Property additions account for most of the recurring spending
in this category.
The following tables show capital spending, track, and equipment
statistics for the past five years.
<PAGE> PAGE 46
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
<TABLE>
CAPITAL EXPENDITURES
--------------------
(Also shown as a graph in the Annual Report to Stockholders)
<CAPTION>
($ in millions) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Road $599 $438 $386 $385 $418
Equipment 306 326 338 240 217
Other property 24 25 33 82 4
---- ---- ---- ---- ----
Total $929 $789 $757 $707 $639
==== ==== ==== ==== ====
</TABLE>
Capital expenditures increased 18% in 1997 and 4% in 1996. The
increase in 1997 was due to higher roadway additions that included
construction costs for four motor vehicle distribution facilities
scheduled to be completed early in 1998.
<TABLE>
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
----------------------------------------------------
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles of
rail installed 451 401 403 480 574
Miles of track
surfaced 4,703 4,686 4,668 4,760 5,048
New crossties
installed
(millions) 2.2 1.9 2.0 1.7 1.6
</TABLE>
<TABLE>
AVERAGE AGE OF RAILWAY EQUIPMENT
--------------------------------
<CAPTION>
(Years) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freight cars 23.0 22.3 22.0 21.9 21.3
Locomotives 15.3 15.4 15.7 15.8 15.1
Retired
locomotives 23.3 24.4 22.6 23.6 24.7
</TABLE>
Since 1988, NS has rebodied about 25,000 coal cars and plans to
continue that program. 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
corresponding table.
NS began an orderly disposition of approximately 17,000 freight cars
in October 1994. This was completed in 1997, with total proceeds of $104
million included in "Property sales and other transactions" in the 1997,
1996, and 1995 Consolidated Statements of Cash Flows. In 1995 and 1996,
this line item also reflected greater proceeds from land sales.
<PAGE> PAGE 47
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
For 1998, NS has budgeted $903 million of capital expenditures, of
which $149 million are initial outlays for facilities and equipment
related to the Conrail transaction. Capital spending is expected to be
affected significantly by Conrail-related expenditures, which are
expected to incrementally add approximately $500 million over the next
three years.
Cash provided by financing activities in 1997 included net proceeds
from the issuance of $4.3 billion principal amount of unsecured notes and
proceeds from the sale of commercial paper to finance NS' share of the
cost of acquiring Conrail stock (see "Joint Acquisition of Conrail,"
below, Note 2 on page 62, and Note 9 on page 68). Also included is $72
million of credit facility costs related to certain now-terminated
commitments under credit agreements that were in place to support NS'
tender offer for all shares of Conrail. "Debt repayments" in 1997
included repayment of some of the commercial paper. NS' debt-to-total
capitalization ratio was 58% at the end of 1997.
In 1996, cash used for financing activities declined 20%, a result
of amounts received in connection with the issuance of $200 million
principal amount of medium-term notes.
Cash spent to purchase and retire common stock was $389 million in
1996 and $338 million in 1995. On Oct. 23, 1996, NS announced that the
share purchase program had been suspended (see Note 15 on page 77).
NS currently has in place a $2.8 billion credit facility to support
its commercial paper program. During 1998, as in prior years, NS expects
to finance a portion of its equipment acquisitions.
JOINT ACQUISITION OF CONRAIL
On May 23, 1997, NS and CSX completed the acquisition of Conrail
stock that was tendered in response to the NS/CSX tender offer (see Note
2). On June 2, 1997, a merger subsidiary jointly controlled by NS and CSX
was merged into Conrail. Pursuant to the merger, all previously issued
Conrail stock either was canceled or converted into the right to receive
$115 per share in cash. NS' total cost for its portion of the
acquisition, including NS' fees, was $5.8 billion. On June 23, 1997, NS
and CSX filed a joint application with the Surface Transportation Board
(STB) for control and division of the use and operations of Conrail's
assets and for authority to implement the transaction. The application
addresses projected traffic flows, proposed operations, and related
matters; outlines the capital investments NS and CSX each plan to make in
new connections and facilities and to increase capacity on critical
routes; and details operating savings and other public benefits resulting
from the transaction. The application also contains certain historical
and pro forma financial information required by the STB. The joint
application is a public document, available for review in its entirety at
the office of the STB, located at 1925 K Street, NW, Washington, D.C.
20423-0001.
In May 1997, the STB issued a scheduling order providing for
issuance of a final STB decision no later than June 8, 1998, to become
effective 30 days thereafter. On Nov. 3, 1997, the STB extended the
period for issuing its final decision by 45 days, to July 23, 1998, to
become effective 30 days thereafter. This extension was in conjunction
with a new requirement that NS and CSX comply with the STB's order to
submit detailed safety integration plans, and it is likely to delay
realization of the expected transaction benefits.
No assurance can be given with respect to the receipt of STB
approval or as to modifications or conditions that may be imposed in
connection therewith, or their impact, if any, on the expected
transaction benefits. The STB has the authority to modify contract terms
and impose additional conditions, including divestitures, grants of
trackage rights, modification of other proposed aspects of operations,
and requirements that could affect the timing of implementation and
realization of benefits.
<PAGE> PAGE 48
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Until NS and CSX are permitted by the STB to assume control over
Conrail (the "Control Date"), Conrail will continue to be managed by its
current Board of Directors and Management. Following the Closing Date,
which will occur as soon as practicable after the Control Date, various
agreements between NS and CSX provide, among other things, for each of
the parties: (1) separately to operate pursuant to lease agreements
portions of the routes and assets now owned and operated by Conrail, and
(2) jointly to operate other Conrail properties. The closing is
contingent upon, among other things, attainment of necessary labor
implementing agreements and is expected to occur as soon as practicable
after satisfaction of those contingencies and consistent with ensuring
safe and efficient operations.
NS is in the process of negotiating necessary implementing
agreements with representatives of the affected employees. The United
Transportation Union, the nation's largest rail union, and the
Brotherhood of Locomotive Engineers have advised the STB that they have
withdrawn their opposition and have agreed to support the transaction.
Employees represented by these two unions make up 44% of the NS work
force covered by labor agreements.
The NS/CSX agreements also provide for the allocation of
responsibility for certain known and contingent Conrail liabilities.
Until the STB renders a final decision on the control application filed
by NS and CSX, NS will not have complete access to Conrail's related
books, records, and physical assets, and will not know precisely which
Conrail properties NS will have responsibility for or control over
pursuant to its agreements with CSX. As a consequence, it is not possible
at this time for NS to state or to assess with precision the amount of
its share of Conrail assets and liabilities.
During 1997, the dilutive effect of Conrail on net income was higher
than earlier expected. As a result of the intensive efforts under way to
plan for the integration of NS' portion of Conrail's assets, the timing
of integration expenses has accelerated; moreover, because of
uncertainties concerning both the conditions that the STB may impose and
the timing of other matters, the anticipated transaction synergies may be
realized later than originally believed. As a result, the dilutive effect
is likely to be higher in 1998 than earlier expected.
Certain of the foregoing are forward-looking statements, and
attention is called to the related cautionary language at the end of
Management's Discussion and Analysis.
OTHER MATTERS
Market Risks And Hedging Activities
- -----------------------------------
NS does not engage in the trading of derivatives. NS manages its
overall exposure to fluctuations in interest rates by issuing both fixed-
and floating-rate debt instruments and by entering into interest-rate
hedging transactions to achieve a targeted mix within its debt portfolio.
Of NS' total debt outstanding (see Note 9 on page 68), all is fixed-rate
debt, except for commercial paper and $244 million of capital leases.
The average interest rate on commercial paper was 5.4% on Dec. 31,
1996, and 6.0% on Dec. 31, 1997. During 1997, NS' commercial paper
interest rates ranged from a low of 5.2% to a high of 6.5%.
The capital leases, which carry an average fixed rate of 7.4%, were
converted to variable rate obligations using interest rate swap
agreements. On Dec. 31, 1997, the average pay rate was 6.1% and the
average receive rate was 7.4% under these agreements. During 1997, the
effect of the swaps was to reduce interest expense by $3 million. A
portion of the lease obligations is payable in Japanese yen. NS hedged
the associated exchange rate risk at the inception of each lease with a
yen deposit in Japan sufficient to fund the yen-denominated obligation.
As a result, NS is exposed to financial market risk relative to Japan.
<PAGE> PAGE 49
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Counterparties to the interest rate swaps and Japanese banks holding yen
deposits are major financial institutions believed by Management to be
creditworthy.
NS' debt subject to interest rate exposure totaled $2.1 billion on
Dec. 31, 1997. A 1% increase in interest rates would increase NS' total
annual interest expense related to all its variable debt by approximately
$20 million. Management considers it unlikely that interest rate
fluctuations applicable to these instruments will result in a material
adverse effect on NS' financial position, results of operations, or
liquidity.
Lawsuits
- --------
Norfolk Southern and certain subsidiaries are defendants in numerous
lawsuits relating principally to railroad operations.
The Corporation is the defendant in a class action suit filed in
federal district court in Birmingham, Ala., on behalf of African
Americans currently employed or working since Dec. 16, 1989, who allege
that the Corporation has discriminated against them in promotion to
nonagreement positions because of their race. The non-jury trial on
liability, which the Corporation vigorously defended, concluded in June
1997, and the parties await the setting of a briefing schedule.
On Sept. 8, 1997, a state court jury in New Orleans returned a
verdict awarding $175 million in punitive damages against The Alabama
Great Southern Railroad Company (AGS), a subsidiary of Norfolk Southern
Railway Company, all the common stock of which is owned by NS. The
verdict was returned in a class action suit involving some
8,000 individuals who claim to have been damaged as the result of an
explosion and fire that occurred in New Orleans on Sept. 9, 1987, when a
chemical called butadiene leaked from a tankcar.
The jury verdict awarded a total of nearly $3.2 billion in punitive
damages against four other defendants in the same case: two rail
carriers, the owner of the car, and the shipper. Previously, the jury had
awarded nearly $2 million in compensatory damages to 20 individuals.
Shortly after the trial, the Supreme Court of Louisiana ruled that under
the Louisiana Class Action Statute, the trial court cannot enter a
judgment for punitive damages until all compensatory damages have been
determined. In view of the number of individual plaintiffs claiming
compensatory damages, this process could take years.
Management will continue to monitor the progress of this litigation.
If the jury verdict is not vacated or modified in an acceptable manner,
appropriate appeals will be pursued. Management believes that the jury
verdicts are both grossly excessive and without factual or legal
justification.
While the final outcome of these matters and other lawsuits cannot
be predicted with certainty, it is the opinion of Management, based on
known facts and circumstances, that the amount of NS' ultimate liability
is unlikely to have a material adverse effect on NS' financial position,
results of operations, or liquidity.
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 regularly
participate in ongoing evaluations of all identified sites and in
determining any necessary adjustments to initial liability estimates. NS
also has established an Environmental Policy Council, composed of senior
managers, to oversee and interpret its environmental policy.
<PAGE> PAGE 50
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Operating expenses for environmental matters totaled approximately
$21 million in 1997, and capital expenditures totaled approximately $6
million. Both are expected to be at similar levels in 1998. As of Dec.
31, 1997, NS' balance sheet included a reserve for environmental
exposures in the amount of $56 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,
11 sites accounted for $25 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.
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 four other parties believed to be financially
solvent and with two of which the EPA and state authorities have reached
settlements -- for past and future clean-up and monitoring costs at the
Bayou Bonfouca NPL Superfund site located in Slidell, La. The EPA
indicates that it has expended or expects to expend a total of
approximately $130 million at the site. NS continues to contest liability
on a variety of grounds, and trial now is scheduled to begin on Feb. 22,
1999. The EPA bases its claim of NS' liability on (a) 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, and (b) certain servitudes
possessed by that subsidiary only for a rail right-of-way.
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 in NS' traffic mix, particularly those
classified as hazardous materials, 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 used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale. Because environmental problems may exist on
these properties that are latent or undisclosed, there can be no
assurance that NS will not incur environmentally related liabilities or
costs with respect to one or more of them, the amount and materiality of
which cannot be estimated reliably at this time. 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, Management believes that it has recorded the probable costs 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 the aggregate, will have a material adverse
effect on NS' financial position, results of operations, or liquidity.
<PAGE> PAGE 51
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
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
- ------
- - Federal Economic Regulation - Efforts will be made in 1998 to re-
subject the rail industry to unwarranted federal economic regulation.
The Staggers Rail Act of 1980, which substantially reduced such
regulation, encouraged and enabled rail carriers to innovate and to
compete for business, thereby contributing to the economic health of
the nation and to the revitalization of the industry. Accordingly, NS
and other rail carriers vigorously will oppose these counterproductive
efforts to re-impose or to authorize re-imposing such economic
regulation.
- - Reduction of "Greenhouse" Gases - In December 1997, international
environmental officials meeting in Kyoto, Japan, agreed to reduce
substantially the emission of so-called "greenhouse" gases by 2010.
Agreement on such reductions was reached on the basis of questionable
scientific evidence and in spite of the fact that the burden of the
reduction regimen will be borne disproportionally by developed nations
such as the United States. NS, the rail industry, and a wide variety
of other affected constituencies in the United States expect to assure
that, prior to a Senate vote on the proposed treaty, the public and
governmental authorities have available to them additional scientific
information and data concerning other effects that are likely to
result from implementation.
- - Utility Deregulation - Deregulation of the electrical utility industry
is expected to increase competition among electric power generators;
deregulation over time would permit wholesalers and possibly retailers
of electric power to sell or purchase increasing quantities of power
to or from far-distant parties. 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.
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. Such forward-looking statements reflect
Management's good-faith evaluation of information currently available.
However, because such statements are based upon, and therefore can be
influenced by, a number of external variables over which Management has
no, or incomplete, control, they are not, and should not be read as
being, guarantees of future performance or of actual future results; nor
will they necessarily prove to be accurate indications of the times at or
by which any such performance or result will be achieved. Accordingly,
actual outcomes and results may differ materially from those expressed in
such forward-looking statements. This caveat has particular importance in
the context of all such statements that relate to the realization and the
timing of benefits expected to result from consummation of the Conrail
transaction.
<PAGE> PAGE 52
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)
1997
----
<S> <C> <C> <C> <C>
Railway operating
revenues $1,046 $1,067 $1,048 $1,062
Income from railway
operations 281 321 297 314
Income from continuing
operations 125 186 169 219
Net income 128 190 179 224
Earnings per share-basic $0.34 $0.51 $0.47 $0.59
Earnings per share-diluted $0.34 $0.50 $0.47 $0.59
1996
----
<S> <C> <C> <C> <C>
Railway operating
revenues $1,017 $1,038 $1,020 $1,026
Income from railway
operations 262 300 300 303
Income from continuing
operations 169 193 193 198
Net income 168 200 202 200
Earnings per share-basic $0.44 $0.52 $0.54 $0.53
Earnings per share-diluted $0.43 $0.52 $0.53 $0.53
NOTE:All per share amounts have been restated to reflect the Sept. 5,
1997, three-for-one stock split.
</TABLE>
<PAGE> PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995 54
Consolidated Balance Sheets
As of December 31, 1997 and 1996 55
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 57
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 59
Notes to Consolidated Financial Statements 60
Independent Auditors' Report 80
The Index to Consolidated Financial Statement Schedule appears
in Item 14 on page 82.
<PAGE> PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
<CAPTION>
Years ended December 31,
1997 1996 1995
------- ------- -------
($ in millions, except earnings per share)
<S> <C> <C> <C>
Railway Operating Revenues $ 4,223 $ 4,101 $ 4,012
Railway Operating Expenses
Compensation and benefits (Note 12) 1,405 1,400 1,480
Materials, services, and rents 685 624 619
Depreciation 421 408 389
Diesel fuel 227 233 190
Casualties and other claims 123 123 121
Other 149 148 151
------- ------- -------
Total railway operating expenses 3,010 2,936 2,950
------- ------- -------
Income from railway operations 1,213 1,165 1,062
Equity in earnings of Conrail (Note 2) 117 -- --
Charge for credit facility costs (Note 2) (77) -- --
Other income - net (Note 4) 130 117 140
Interest expense on debt (Note 7) (385) (116) (113)
------- ------- -------
Income from continuing
operations before income taxes 998 1,166 1,089
Provision for income taxes (Note 5) 299 413 391
------- ------- -------
Income from continuing operations 699 753 698
Discontinued operations - motor carrier,
net of taxes (Note 3) 22 17 15
------- ------- -------
Net Income $ 721 $ 770 $ 713
======= ======= =======
Earnings Per Share (Note 15)
Income from continuing
operations - Basic $ 1.85 $ 1.98 $ 1.78
- Diluted $ 1.84 $ 1.96 $ 1.77
Net income - Basic $ 1.91 $ 2.03 $ 1.81
- Diluted $ 1.90 $ 2.01 $ 1.80
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
As of December 31,
1997 1996
------- -------
($ in millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 34 $ 207
Short-term investments 125 194
Accounts receivable net of allowance
for doubtful accounts of $3 million and
$4 million, respectively 552 558
Materials and supplies 58 61
Deferred income taxes (Note 5) 114 132
Other current assets 119 121
Net assets of discontinued operations 101 83
------- -------
Total current assets 1,103 1,356
------- -------
Investment in Conrail (Note 2) 5,888 --
Other investments (Note 6) 333 275
Properties less accumulated depreciation (Note 7) 9,904 9,472
Other assets 122 131
------- -------
Total Assets $17,350 $11,234
======= =======
Liabilities And Stockholders' Equity
Current liabilities:
Short-term debt (Note 9) $ 27 $ 43
Accounts payable (Note 8) 624 594
Income and other taxes 169 166
Other current liabilities (Note 8) 212 201
Current maturities of long-term debt (Note 9) 61 56
------- -------
Total current liabilities 1,093 1,060
------- -------
Long-term debt (Note 9) 7,398 1,800
Other liabilities (Note 11) 885 927
Minority interests 49 50
Deferred income taxes (Note 5) 2,480 2,420
------- -------
Total Liabilities 11,905 6,257
------- -------
(continued)
</TABLE>
<PAGE> PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
<CAPTION>
As of December 31,
1997 1996
------- -------
($ in millions)
<S> <C> <C>
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized (Note 15);
issued 398,912,698 shares (265,847,132 issued
for stock split)and 132,350,009 shares,
respectively 399 132
Additional paid-in capital (Note 15) 241 462
Retained income 4,826 4,404
Less treasury stock at cost, 21,757,902 shares
(14,505,268 issued for stock split)
and 7,252,634 shares, respectively (21) (21)
------- -------
Total Stockholders' Equity 5,445 4,977
------- -------
Total Liabilities And Stockholders' Equity $17,350 $11,234
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
<CAPTION>
Years ended December 31,
1997 1996 1995
------- ------- -------
($ in millions)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 721 $ 770 $ 713
Reconciliation of net income to net cash
provided by continuing operations:
Depreciation 432 419 399
Deferred income taxes 75 92 73
Equity in earnings of Conrail (117) -- --
Charge for credit facility costs 77 -- --
Nonoperating gains and losses
on properties and investments (63) (57) (72)
Income from discontinued operations (22) (17) (15)
Changes in assets and liabilities
affecting continuing operations:
Accounts receivable (23) (1) 12
Materials and supplies 3 (1) (1)
Other current assets (8) (13) (2)
Current liabilities other than debt 115 (8) 64
Other - net (44) (16) 15
------- ------- -------
Net cash provided by
continuing operations 1,146 1,168 1,186
Net cash provided by
discontinued operations 4 30 48
------- ------- -------
Net cash provided by
operating activities 1,150 1,198 1,234
Cash Flows From Investing Activities
Property additions (875) (680) (652)
Property sales and other transactions 74 130 128
Investment in Conrail (5,741) (10) --
Investments, including short-term (185) (209) (260)
Investment sales and other transactions 217 245 224
------- ------- -------
Net cash used for
investing activities (6,510) (524) (560)
Cash Flows From Financing Activities
Dividends (301) (284) (274)
Common stock issued - net 24 29 19
Purchase and retirement of common stock -- (389) (338)
Commercial paper proceeds 1,540 -- --
Credit facility costs paid (72) (5) --
Proceeds from long-term borrowings 4,241 209 8
Debt repayments (245) (93) (74)
------- ------- -------
Net cash provided by
(used for) financing activities 5,187 (533) (659)
Net increase (decrease) in cash
and cash equivalents (173) 141 15
(continued)
</TABLE>
<PAGE> PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows (continued)
<CAPTION>
Years ended December 31,
1997 1996 1995
------- ------- -------
($ in millions)
<S> <C> <C> <C>
Cash And Cash Equivalents
At beginning of year 207 66 51
------- ------- -------
At end of year $ 34 $ 207 $ 66
======= ======= =======
Supplemental Disclosures Of Cash Flow Information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 379 $ 128 $ 119
Income taxes $ 209 $ 324 $ 283
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>
Additional
Common Paid-In Retained Treasury
Stock Capital Income Stock Total
----- ---------- ------- ------- -------
($ in millions)
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 140 $ 411 $4,155 $(21) $4,685
Net income - 1995 713 713
Dividends on common stock
$0.69 1/3 per share (274) (274)
Purchase and retirement of
common stock (5) (15) (314) (334)
Other 1 35 3 39
----- ----- ------ ---- ------
Balance December 31, 1995 136 431 4,283 (21) 4,829
Net income - 1996 770 770
Dividends on common stock
$0.74 2/3 per share (284) (284)
Purchase and retirement of
common stock (5) (15) (365) (385)
Other 1 46 -- 47
----- ----- ------ ---- ------
Balance December 31, 1996 132 462 4,404 (21) 4,977
Net income - 1997 721 721
Dividends on common stock
$0.80 per share (301) (301)
3-for-1 stock split,
effective September 5 266 (266) -- --
Other 1 45 2 48
----- ----- ------ ---- ------
Balance December 31, 1997 $ 399 $ 241 $4,826 $(21) $5,445
===== ===== ====== ==== ======
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 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. The consolidated financial statements
include Norfolk Southern Corporation (Norfolk Southern) and its majority-
owned and controlled subsidiaries (collectively NS). The major subsidiary
is Norfolk Southern Railway Company. Financial results of a motor carrier
subsidiary, North American Van Lines, Inc. (NAVL), are reflected as
"Discontinued operations" (see Note 3). 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,
clay, and forest products; chemicals; automotive; agriculture,
government, and consumer products; metals and 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. On Dec. 31, 1997 and 1996, 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 20%. In 1997, 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. Additions to properties, including those
under lease, are capitalized. 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 4).
NS reviews the carrying amount of properties whenever events or
changes in circumstances indicate that such carrying amount may not be
recoverable based on future undiscounted cash flows or estimated net
realizable value. Assets that are deemed impaired as a result of such
review are recorded at the lower of carrying amount or fair value.
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from origin
to destination.
Derivatives
- -----------
NS does not engage in the trading of derivatives. NS is a party to a
limited number of derivative agreements that hedge interest rate
exposures on certain components of its debt portfolio. Differentials paid
or received as a result of fluctuations in market interest rates are
recognized in interest expense over the outstanding lives of the related
obligations. Unamortized balances are included in "Long-term debt" in the
Consolidated Balance Sheets.
Required Accounting Changes
- ---------------------------
NS adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), for the year ended Dec. 31, 1997. Basic
earnings per share as calculated in accordance with SFAS 128 excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
for the period. For NS, basic earnings per share corresponds to earnings
per share as calculated and shown in previous Consolidated Statements of
Income. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised, converted, or otherwise resulted in the issuance of common
stock that then shared in NS' earnings.
Effective Jan. 1, 1997, NS adopted AICPA Statement of Position 96-1,
"Environmental Remediation Liabilities" (SOP 96-1), which provides
guidance with respect to recognition and measurement of environmental
remediation liabilities and disclosure of such liabilities in financial
statements. The adoption of SOP 96-1 did not have a material effect on
NS' financial statements.
<PAGE> PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. JOINT ACQUISITION OF CONRAIL
On May 23, 1997, NS and CSX Corporation (CSX), through a jointly
owned entity, completed the acquisition of Conrail Inc. (Conrail) stock
that was tendered in response to the NS/CSX tender offer. On June 2,
1997, a merger subsidiary jointly controlled by NS and CSX was merged
into Conrail. Pursuant to the merger, all previously outstanding Conrail
stock either was canceled or was converted into the right to receive $115
per share in cash. NS' share of the cost of the acquisition, plus NS'
fees, totaled $5.8 billion. NS has a 58% economic and 50% voting interest
in the entity that owns Conrail. All Conrail stock owned by NS and CSX
remains in a voting trust pending approval of the transaction by the
Surface Transportation Board (STB). STB approval, while anticipated,
cannot be assured, and a final decision is not expected to be effective
prior to Aug. 22, 1998 (the "Control Date"). Should the STB not approve
the transaction, NS could incur a significant loss on the disposition of
its investment in Conrail.
On June 10, 1997, NS, CSX, and Conrail entered into an agreement
(the Transaction Agreement) covering division of Conrail's operations and
use of Conrail's assets (collectively, the Transaction). The Transaction
Agreement provides, among other things, for NS and CSX after the Control
Date: (1) separately to operate, pursuant to lease agreements, portions
of the routes and assets now owned and operated by Conrail, and (2)
jointly to operate other Conrail properties. In addition, Conrail will
continue certain operations as agent for NS and CSX. The Transaction
Agreement and various other agreements between and among NS, CSX, and
Conrail also provide for the allocation between NS and CSX of
responsibility for certain known and contingent Conrail liabilities. The
Transaction will be consummated as soon as practicable after STB
approval. Closing is contingent upon, among other things, attainment of
necessary labor implementing agreements, and a determination that
implementation can be accomplished safely and without service
disruptions, either of which might delay closing and realization of the
expected transaction benefits. The STB has the authority to modify
contract terms and impose conditions, including divestitures, grants of
trackage rights, and limitations upon proposed operations.
Until the Control Date, Conrail will continue to be managed by its
current Board of Directors and Management, and, due to regulatory
constraints, NS will not have complete access to Conrail's related books,
records, and physical assets. Further, until the STB renders its final
decision, NS will not know with certainty which Conrail properties it
will have responsibility for or control over pursuant to its agreements
with CSX and Conrail, or the effects of any other conditions that may be
imposed by the STB.
The equity method of accounting has been applied to NS' investment
in Conrail in accordance with APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock." As a result, the Dec. 31,
1997, Consolidated Balance Sheet includes $5.9 billion comprising: (1)
the amounts paid and accrued to acquire Conrail stock, including related
fees and expenses, and (2) NS' equity in the undistributed earnings of
Conrail, which is net of $44.5 million amortization of the difference
between NS' investment in Conrail and the underlying equity in net
assets. NS is amortizing the difference between the purchase price for
its investment in Conrail and its equity in the underlying net assets of
Conrail based on preliminary estimates of: (1) the fair values of
Conrail's property and equipment, (2) their remaining useful lives, (3)
the fair values of other Conrail assets and liabilities, and (4) the
deferred tax effect of the bases differences.
The Consolidated Statement of Income for the year ended Dec. 31,
1997, includes several Conrail-related items. These principally consist
of: (1) interest expense on debt issued to finance NS' share of the
NS/CSX joint acquisition of Conrail stock, (2) equity in the earnings of
Conrail, net of amortization, (3) credit facility costs, including a $77
million charge incurred in conjunction with certain now-terminated
commitments that provided financing for NS' then-proposed acquisition of
all Conrail stock, and (4) identified integration costs.
<PAGE> PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. JOINT ACQUISITION OF CONRAIL (continued)
<TABLE>
The following summary financial information was provided by
Conrail's Management and should be read in conjunction with Conrail's
audited financial statements included as an exhibit to NS' Annual Report
for the year ended Dec. 31, 1997, on Form 10-K filed with the Securities
and Exchange Commission (SEC) and Consolidated Rail Corporation's latest
Annual Report on Form 10-K filed with the SEC.
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME - CONRAIL
<CAPTION>
($ in millions) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating revenues $ 3,765 $ 3,714 $ 3,686
Operating expenses 3,443 3,113 3,230
------- ------- -------
Operating income 322 601 456
Other - net (87) (70) (64)
------- ------- -------
Income before
income taxes 235 531 392
Provision for
income taxes 228 189 128
------- ------- -------
Net income $ 7 $ 342 $ 264
======= ======= =======
Note: Conrail's operating expenses for 1997
included the following: (1) a $221 million charge
in conjunction with the termination of the Conrail
ESOP that NS treated as a cost of the acquisition
of Conrail stock, and (2) $173 million
($142 million after taxes) for merger-related stock
compensation costs and severance benefits that NS
treated as a cost of the acquisition of Conrail
stock.
</TABLE>
<TABLE>
SUMMARIZED CONSOLIDATED BALANCE SHEETS - CONRAIL
<CAPTION>
December 31,
-------------------
($ in millions) 1997 1996
-------- --------
<S> <C> <C>
Assets
Current assets $ 954 $ 1,117
Noncurrent assets 7,530 7,285
------- -------
Total assets $ 8,484 $ 8,402
======= =======
Liabilities and Stockholders' Equity
Current liabilities $ 1,208 $ 1,092
Noncurrent liabilities 4,111 4,203
Stockholders' equity 3,165 3,107
------- -------
Total liabilities and
stockholders' equity $ 8,484 $ 8,402
======= =======
</TABLE>
<PAGE> PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
3. DISCONTINUED OPERATIONS - MOTOR CARRIER
<TABLE>
On Jan. 12, 1998, NS announced that it signed an agreement to sell
all the common stock of North American Van Lines, Inc. (NAVL), its motor
carrier subsidiary. The transaction is subject to customary closing
conditions and is expected to be consummated before May 31, 1998. NS
expects to report a gain on the consummated sale. NAVL's results of
operation, financial position, and cash flows are presented as
"Discontinued operations" in the accompanying financial statements. A
summary of the results of operations and the net assets of discontinued
operations follows:
<CAPTION>
($ in millions) 1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Motor carrier revenue $ 942 $ 930 $ 896
Motor carrier expenses $ 907 $ 898 $ 871
Other income (expense) -- (1) --
Provision for income taxes 13 14 10
----- ----- -----
Income from discontinued operations 22 17 15
----- ----- -----
Earnings per share (basic and
diluted) from discontinued
operations $0.06 $0.05 $0.03
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------
($ in millions) 1997 1996
----- -----
<S> <C> <C>
Current assets $ 192 $ 196
Long-term assets 100 88
Current liabilities (130) (140)
Long-term liabilities (61) (61)
----- -----
Net assets of discontinued
operations $ 101 $ 83
===== =====
</TABLE>
<TABLE>
4. OTHER INCOME - NET
<CAPTION>
($ in millions) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Royalties from coal $ 58 $ 59 $ 59
Gains from sale of properties
and investments 56 57 41
Interest income 30 22 26
Rental income 22 20 21
Gain from partial redemption of
partnership interest 7 -- 31
Corporate-owned life insurance - net 7 6 7
Other interest expense (27) (29) (23)
Nonoperating depletion
and depreciation (11) (11) (10)
Taxes on nonoperating property (5) (8) (7)
Other - net (7) 1 (5)
------ ------ ------
Total $ 130 $ 117 $ 140
====== ====== ======
</TABLE>
<PAGE> PAGE 65
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
5. INCOME TAXES
<TABLE>
Provision For Income Taxes
- --------------------------
<CAPTION>
($ in millions) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ 197 $ 280 $ 267
State 27 41 51
----- ----- -----
Total current taxes 224 321 318
Deferred:
Federal 78 75 65
State (3) 17 8
----- ----- -----
Total deferred taxes 75 92 73
----- ----- -----
Provision for income taxes $ 299 $ 413 $ 391
===== ===== =====
</TABLE>
<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>
1997 1996 1995
----------- ----------- -----------
($ in millions) Amount % Amount % Amount %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
at statutory rate $ 349 35 $ 408 35 $ 381 35
State income taxes, net
of federal tax benefit 16 2 37 3 39 4
Equity in earnings
of Conrail (41) (4) -- -- -- --
Corporate-owned
life insurance (10) (1) (15) (1) (17) (2)
Other - net (15) (2) (17) (2) (12) (1)
----- -- ----- -- ----- --
Provision for
income taxes $ 299 30 $ 413 35 $ 391 36
===== == ===== == ===== ==
</TABLE>
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. The Tax Court finalized this decision in February 1997. This
decision has been appealed, and 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.
<PAGE> PAGE 66
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
5. INCOME TAXES (continued)
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. Except for amounts for
which a valuation allowance is provided, Management believes the deferred
tax assets will be realized.
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
<CAPTION>
December 31,
-----------------------
($ in millions) 1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserves, including casualty and
other claims $ 144 $ 149
Employee benefits 155 175
Retiree health and death benefit
obligation 133 138
Taxes, including state and property 171 176
Other 52 77
------- -------
Total gross deferred
tax assets 655 715
Less valuation allowance (2) (2)
------- -------
Net deferred tax assets 653 713
------- -------
Deferred tax liabilities:
Property (2,925) (2,892)
Other (94) (109)
------- -------
Total gross deferred
tax liabilities (3,019) (3,001)
------- -------
Net deferred tax liability (2,366) (2,288)
Net current deferred
tax assets 114 132
------- -------
Net long-term deferred
tax liability $(2,480) $(2,420)
======= =======
</TABLE>
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1992. The consolidated federal income tax returns for 1993 and
1994 are being audited by the IRS. Management believes that adequate
provision has been made for any additional taxes and interest thereon
that might arise as a result of IRS examinations.
<PAGE> PAGE 67
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
6. OTHER INVESTMENTS
<CAPTION>
December 31,
----------------------
($ in millions) 1997 1996
------- -------
<S> <C> <C>
Corporate-owned life insurance
at net cash surrender value $ 247 $ 212
Marketable equity securities 10 6
Other 76 57
----- -----
Total $ 333 $ 275
===== =====
</TABLE
</TABLE>
<TABLE>
7. PROPERTIES
<CAPTION>
December 31,
-----------------------
($ in millions) 1997 1996
-------- --------
<S> <C> <C>
Railway property:
Road $ 8,853 $ 8,439
Equipment 4,881 4,716
Other property 605 591
------- -------
14,339 13,746
Less: Accumulated depreciation 4,435 4,274
------- -------
Net properties $ 9,904 $ 9,472
======= =======
</TABLE>
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 1997, 1996, and 1995 was
$402 million, $128 million, and $127 million, respectively, of which $17
million, $12 million, and $14 million was capitalized.
<PAGE> PAGE 68
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
8. CURRENT LIABILITIES
<CAPTION>
December 31,
---------------------
($ in millions) 1997 1996
------ ------
<S> <C> <C>
Accounts payable:
Accounts and wages payable $ 281 $ 270
Casualty and other claims 172 166
Vacation liability 80 75
Equipment rents payable - net 67 61
Other 24 22
----- -----
Total $ 624 $ 594
===== =====
Other current liabilities:
Interest payable $ 115 $ 39
Liabilities for forwarded traffic 31 63
Accrued acquisition costs (Note 2) 25 61
Retiree health and death benefit
obligation (Note 12) 23 23
Other 18 15
----- -----
Total $ 212 $ 201
===== =====
</TABLE>
9. DEBT
<TABLE>
Long-Term Debt
- --------------
<CAPTION>
December 31,
-----------------
($ in millions) 1997 1996
------- -------
<S> <C> <C>
Commercial paper classified as long-term
debt at an average rate of 6.0% $ 1,871 $ 500
Notes at average rates and maturities
as follows:
6.85%, maturing 2000 to 2002 1,096 --
7.45%, maturing 2004 to 2007 1,191 449
8.10%, maturing 2017 to 2021 798 248
7.80%, maturing 2027 792 --
7.05%, maturing 2037 745 --
7.90%, maturing 2097 350 --
Railroad equipment obligations at an
average rate of 7.8% maturing to 2009 355 397
Capitalized leases at an average rate of
6.1% maturing to 2015 246 197
Other debt at an average rate of 7.0%
maturing to 2015 15 65
------- -------
Total long-term debt 7,459 1,856
------- -------
Less: Current maturities 61 56
------- -------
Long-term debt less current
maturities $ 7,398 $ 1,800
======= =======
</TABLE>
<PAGE> PAGE 69
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
9. DEBT (continued)
<TABLE>
<CAPTION>
Long-term debt matures as follows:
<S> <C>
1999 $ 131
2000 462
2001 256
2002 551
2003 and subsequent years 5,998
-------
Total $ 7,398
=======
</TABLE>
The railroad equipment obligations and the capitalized leases are
secured by liens on the underlying equipment.
Unsecured Notes Issued In 1997
- ------------------------------
On May 19, 1997, NS issued and sold $4.3 billion of unsecured term
notes to finance part of the cost of the Conrail acquisition. None of the
notes are entitled to any sinking fund. If certain tax laws are changed,
NS has the right to shorten the maturity of the 2097 notes. NS is subject
to various financial covenants while the notes are outstanding.
On May 14, 1997, NS terminated $1.25 billion notional amount of
contracts and agreements previously entered into to hedge its exposure to
changes in interest rates in anticipation of issuing certain Conrail-
related debt. The related costs were capitalized and are being amortized
as interest expense over the life of the underlying debt.
Commercial Paper
- ----------------
NS' commercial paper debt totaled $1,871 million and $516 million as
of Dec. 31, 1997, and Dec. 31, 1996, respectively. Most all of the
increase was related to the Conrail acquisition.
Commercial paper debt is due within one year but has been classified
as long-term because NS has the ability through a $2.8 billion, 5-year
credit agreement 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 agreement provides for interest on borrowings at
prevailing rates and contains customary financial covenants, including an
initial minimum net worth requirement of $4 billion.
<TABLE>
Short-Term Debt
- ---------------
<CAPTION>
December 31,
----------------
($ in millions) 1997 1996
------ ------
<S> <C> <C>
Commercial paper notes $ -- $ 16
Other notes 27 27
----- -----
Total $ 27 $ 43
===== =====
</TABLE>
<PAGE> PAGE 70
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
9. DEBT (continued)
Capital Lease Obligations
- -------------------------
During 1997 and 1996, an NS rail subsidiary entered into capital
leases covering new locomotives. The related capital lease obligations,
totaling $64 million in 1997 and $108 million in 1996, were reflected in
the Consolidated Balance Sheets as debt and, because they were non-cash
transactions, were excluded from the Consolidated Statements of Cash
Flows. The lease obligations carry an average stated interest rate of
7.0% for those entered into in 1997 and 6.5% for those entered into in
1996. All were converted to variable rate obligations using interest rate
swap agreements. The interest rates on these obligations are based on the
six-month London Interbank Offered Rate and are reset every six months
with changes in interest rates accounted for as an adjustment of interest
expense over the terms of the leases. As of Dec. 31, 1997, the average
interest rate on these locomotive leases was 6.1%. As a result, NS is
exposed to the market risk associated with fluctuations in interest
rates. To date, the effects of the rate fluctuations have been favorable
and not material. Counterparties to the interest rate swap agreements are
major financial institutions believed by Management to be creditworthy.
10. LEASE COMMITMENTS
<TABLE>
NS is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road, and other
property. Future minimum lease payments are as follows:
<CAPTION>
($ in millions) Operating Leases Capital Leases
---------------- --------------
<S> <C> <C>
1998 $ 50 $ 35
1999 47 35
2000 39 35
2001 35 34
2002 32 34
2003 and subsequent years 627 164
---- ----
Total $830 337
====
Less imputed interest
on capital leases at an
average rate of 7.4% 91
----
Present value of minimum
lease payments included
in debt $246
====
</TABLE>
<TABLE>
Operating Lease Expense
- -----------------------
<CAPTION>
($ in millions) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Minimum rents $ 68 $ 65 $ 59
Contingent rents 43 38 36
----- ----- -----
Total $ 111 $ 103 $ 95
===== ===== =====
</TABLE>
<PAGE> PAGE 71
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
11. OTHER LIABILITIES
<CAPTION>
December 31,
----------------
($ in millions) 1997 1996
------ ------
<S> <C> <C>
Casualty and other claims $ 253 $ 248
Net pension obligation (Note 12) 57 82
Retiree health and death benefit
obligation (Note 13) 281 288
Other 294 309
----- -----
Total $ 885 $ 927
===== =====
</TABLE>
12. 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>
($ in millions) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 11 $ 12 $ 10
Interest cost on projected
benefit obligation 66 67 65
Actual return on assets in plans (273) (170) (257)
Net amortization and deferral 171 83 172
----- ----- -----
Net pension benefit (25) (8) (10)
Cost of early retirement benefits -- -- 23
----- ----- -----
Total $ (25) $ (8) $ 13
===== ===== =====
</TABLE>
<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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Discount rate for determining
funded status 7.25% 7.75% 7.25%
Future salary increases 5.25% 5.25% 6%
Return on assets in plans 9% 9% 9%
</TABLE>
<PAGE> PAGE 72
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. PENSION PLANS (continued)
<TABLE>
The funded status of the plans and the amounts reflected in the
accompanying balance sheets are as follows:
<CAPTION>
December 31,
-------------------------------------
1997 1996
----------------- -----------------
Funded Unfunded Funded Unfunded
($ in millions) Plans Plans Plans Plans
------- -------- ------- --------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $ 810 $ 62 $ 759 $ 59
Non-vested benefits 2 -- 1 --
------ ------ ------ ------
Accumulated benefit
obligation 812 62 760 59
Effect of expected future
salary increases 78 4 68 5
------ ------ ------ ------
Projected benefit
obligation 890 66 828 64
Fair value of assets in plans 1,360 -- 1,158 --
------ ------ ------ ------
Funded status 470 (66) 330 (64)
Unrecognized initial
net asset (23) -- (30) --
Unrecognized (gain) loss (466) 24 (344) 21
Unrecognized prior
service cost (benefit) 9 (5) 2 3
------ ------ ------ ------
Net pension liability
included in the
balance sheets $ (10) $ (47) $ (42) $ (40)
====== ====== ====== ======
</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 "Compensation and
benefits" expense and totaled $34 million (including $8 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 $9 million, $8 million, and $7 million in 1997, 1996,
and 1995, respectively.
<PAGE> PAGE 73
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Norfolk Southern and certain subsidiaries provide specified health
care and death benefits to eligible retired employees and their
dependents. Under the present plans, which may be amended or terminated
at NS' option, a defined percentage of health care expenses is covered,
reduced by any deductibles, co-payments, Medicare payments and, in some
cases, coverage provided by other group insurance policies. The cost of
such health care coverage to a retiree may be determined, in part, by the
retiree's years of creditable service with NS prior to retirement. Death
benefits are determined based on various factors, including, in some
cases, salary at time of retirement.
NS continues to fund benefit costs principally on a pay-as-you-go
basis. However, in 1991, NS established a Voluntary Employee Beneficiary
Association (VEBA) account to fund a portion of the cost of future health
care benefits for retirees.
The VEBA trust holding the plan assets is not expected to be subject
to federal income taxes, as the assets are invested entirely in trust-
owned life insurance. NS last made a corporate contribution to the VEBA
in 1994.
<TABLE>
Postretirement Benefit Cost Components
- --------------------------------------
<CAPTION>
($ in millions) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits
attributable to service
during the year $ 9 $ 10 $ 9
Interest cost on accumulated
postretirement benefit
obligation 25 24 28
Actual return on plan assets (25) (14) (18)
Net amortization and deferral 6 (4) 2
----- ----- -----
Net postretirement
benefit cost $ 15 $ 16 $ 21
Cost of early retirement
benefits -- -- 8
----- ----- -----
Total $ 15 $ 16 $ 29
===== ===== =====
</TABLE>
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 12).
<PAGE> PAGE 74
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. 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,
-------------------------------------------
1997 1996
------------------ ------------------
Health Health
Care Death Care Death
($ in millions) Benefits Benefits Benefits Benefits
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Accumulated postretire-
ment benefit obligation:
Retirees $ 163 $ 85 $ 164 $ 83
Fully eligible active
plan participants 32 9 21 7
Other active plan
participants 54 17 42 12
----- ----- ----- -----
Total 249 111 227 102
Plan assets at fair value 111 -- 86 --
----- ----- ----- -----
Funded status (138) (111) (141) (102)
Unrecognized loss (gain) (33) 3 (27) (3)
Unrecognized prior
service cost (benefit) (25) -- (38) --
----- ----- ----- -----
Accrued postretire-
ment benefit
obligation $(196) $(108) $(206) $(105)
===== ===== ===== =====
</TABLE>
For measurement purposes, increases in the per capita cost of
covered health care benefits were assumed to be 9.8% for 1998 and 10.4%
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 Dec. 31, 1997, by about $32
million and the aggregate of the service and interest cost components of
net postretirement benefit cost for 1997 by about $4 million.
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
agreement employees. Premiums under this plan are expensed as incurred
and amounted to $4 million in each of 1997, 1996, and 1995.
14. 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), restricted stock, and performance share units
(PSUs), up to a maximum 53,025,000 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.
<PAGE> PAGE 75
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
14. LONG-TERM INCENTIVE PLAN (continued)
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 Dec. 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 SEC in 1991. Future grants of SARs are not anticipated at this time.
SARs outstanding as of each year end were: none in 1997; 97,944 in 1996;
and 139,686 in 1995.
Accounting Method
- -----------------
NS applies APB Opinion 25 and related interpretations in accounting
for awards made under the plan. Accordingly, SARs, PSUs, restricted
stock, tax absorption, and dividend equivalents result in charges to net
income, while stock options have no effect on net income. Compensation
costs were $29 million, $35 million, and $43 million for 1997, 1996, and
1995, respectively. Had compensation costs been determined in accordance
with SFAS 123, net income would have been $714 million in 1997, $763
million in 1996, and $704 million in 1995; basic earnings per share would
have been $1.90 in 1997, $2.01 in 1996, and $1.79 in 1995; and diluted
earnings per share would have been $1.88 in 1997, $1.99 in 1996, and
$1.78 in 1995. These pro forma amounts include compensation costs as
calculated using the Black-Scholes option-pricing model with an expected
option life of 5 years; risk-free interest rates of 6.3% in 1997, 5.2% in
1996, and 7.5% in 1995; stock-price volatility of 0.16 in 1997, 0.18 in
1996, and 0.21 in 1995; and, because dividend equivalents are paid, no
dividend yield was assumed.
<TABLE>
Stock Option Activity
- ---------------------
<CAPTION>
Weighted Average
Option Shares Exercise Price
-------------- ----------------
<S> <C> <C>
Balance 12/31/94 10,494,906 $ 17.65
Granted 2,154,750 20.83
Exercised (1,970,229) 14.61
Surrendered for SAR (40,320) 7.98
Cancelled (11,250) 23.15
----------
Balance 12/31/95 10,627,857 18.89
Granted 2,058,750 26.02
Exercised (1,648,743) 17.96
Surrendered for SAR (15,000) 7.42
Cancelled (140,577) 19.62
----------
Balance 12/31/96 10,882,287 20.38
Granted 1,986,000 29.46
Exercised (1,477,226) 17.62
Surrendered for SAR (6,393) 7.42
Cancelled (13,500) 29.46
----------
Balance 12/31/97 11,371,168 $ 22.32
</TABLE>
Except for those granted during 1997, all outstanding options were
exercisable on Dec. 31, 1997. The difference between the weighted average
exercise prices for all outstanding options and those exercisable on Dec.
31, 1997, was not significant.
<PAGE> PAGE 76
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
14. LONG-TERM INCENTIVE PLAN (continued)
<TABLE>
Stock Options Outstanding
- -------------------------
<CAPTION>
Exercise Price Number Weighted Average
--------------------- Weighted Outstanding Remaining
Range Average at 12/31/97 Contractual Life
--------------------- -------- ----------- ----------------
<C> <C> <C> <C> <C>
$ 11.02 $11.02 381,828 1.1 years
12.56 to 18.81 15.77 2,435,640 3.3 years
20.83 to 24.31 22.17 4,705,950 6.2 years
26.02 to 29.46 27.78 3,847,750 8.6 years
----------
$ 11.02 to $ 29.46 $22.32 11,371,168 6.2 years
==========
</TABLE>
Performance Share Units
- -----------------------
PSUs provide for awards based upon achievement of certain
predetermined corporate performance goals at the end of a three-year
cycle. PSU grants and grant-date fair values were 529,500 and $29.46 in
1997; 601,200 and $26.02 in 1996; and 757,500 and $20.83 in 1995,
respectively. PSUs may be paid in the form of shares of common stock,
cash, or a combination. Shares earned and issued may be subject to share
retention agreements and held by NS for up to five years.
<TABLE>
Shares Available And Issued
- ---------------------------
Shares of stock available for future grants or issued in connection
with all features of the Long-Term Incentive Plan are as follows:
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Available for future
grants 12/31 19,931,103 22,394,187 24,840,933
Shares of common
stock issued 1,933,703 2,072,616 2,423,280
</TABLE>
<PAGE> PAGE 77
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. COMMON STOCK
<TABLE>
Earnings Per Share
- ------------------
The following table sets forth the calculation of basic and diluted
earnings per share:
<CAPTION>
($ in millions except per share,
shares in millions) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Basic earnings per share:
Income available to common
stockholders for basic and
diluted computations $ 721 $ 770 $ 713
Weighted-average shares
outstanding 377 379 394
------ ------ ------
Basic earnings per share $ 1.91 $ 2.03 $ 1.81
Diluted earnings per share:
Weighted-average shares
outstanding per above 377 379 394
Diluted effect of outstanding
options, SARs, and PSUs (as
determined by the application
of the treasury stock method) 3 5 3
Adjusted weighted-average
shares outstanding 380 384 397
------ ------ ------
Diluted earnings per share $ 1.90 $ 2.01 $ 1.80
====== ====== ======
</TABLE>
There are no adjustments to "Net income" or "Income from continuing
operations" for the diluted earnings per share computations.
Stock Split
- -----------
On July 22, 1997, the Board of Directors approved an amendment of
the Articles of Incorporation to increase the number of authorized shares
of Common Stock from 450 million to 1,350 million in connection with a
three-for-one common stock split to stockholders of record on Sept. 5,
1997. This stock split, with no change in the par value of $1 per share,
resulted in the issuance of approximately 266 million additional shares
of Common Stock. The effect of the split was reflected within
"Stockholders' equity" by transferring the par value of the additional
shares issued from "Additional paid-in capital" to "Common stock." Unless
otherwise noted, all share and per share amounts in this report have been
restated to reflect the split.
Stock Purchase Programs
- -----------------------
Since 1987, the Board of Directors has authorized the purchase and
retirement of up to 285 million shares (post-split) 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 Oct. 22,
1996, NS had purchased and retired 205.6 million shares (post-split) of
its Common Stock under these programs at a cost of $3.2 billion.
On Oct. 23, 1996, NS announced that the stock purchase program had
been suspended. Future purchase decisions are dependent on the economy,
cash needs, and alternative investment opportunities.
<PAGE> PAGE 78
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. 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 carrying and fair values of long-term investments, excluding
those accounted for under the equity method in accordance with APB
Opinion No. 18, were $293 million and approximately $366 million on Dec.
31, 1997, and $275 million and approximately $315 million on Dec. 31,
1996, respectively. The fair value of corporate-owned life insurance
approximates carrying value. Quoted market prices were used to determine
the fair value of marketable securities that are recorded at fair value.
Marketable securities reflect $8 million and $3 million of unrealized
holding gains on Dec. 31, 1997, and Dec. 31, 1996, respectively.
Underlying net assets were used to estimate the fair value of other
investments.
The fair value of "Long-term debt," including current maturities,
approximated $7.89 billion on Dec. 31, 1997, and $1.95 billion on Dec.
31, 1996. 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 9
for carrying values of "Long-term debt"). The fair value of interest rate
swaps is immaterial.
17. COMMITMENTS AND CONTINGENCIES
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, based on known facts and circumstances, that the
amount of NS' ultimate liability is unlikely to have a material adverse
effect on NS' financial position, results of operations, or liquidity.
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 regularly
participate in ongoing evaluations of all identified sites and in
determining any necessary adjustments to initial liability estimates. NS
also has established an Environmental Policy Council, composed of senior
managers, to oversee and interpret its environmental policy.
As of Dec. 31, 1997, NS' balance sheet included a reserve for
environmental exposures in the amount of $56 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, 11 sites accounted for $25 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.
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.
<PAGE> PAGE 79
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
17. COMMITMENTS AND CONTINGENCIES (continued)
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 in NS' traffic mix, particularly those
classified as hazardous materials, 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 used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale. Because environmental problems may exist on
these properties that are latent or undisclosed, there can be no
assurance that NS will not incur environmentally related liabilities or
costs with respect to one or more of them, the amount and materiality of
which cannot be estimated reliably at this time. 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, Management believes that it has recorded the probable costs 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 the 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.
Debt Guarantees
- ---------------
As of Dec. 31, 1997, certain Norfolk Southern subsidiaries are
contingently liable as guarantors with respect to $77 million of
indebtedness of related entities.
<PAGE> PAGE 80
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, 1997 and
1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, 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 27, 1998
<PAGE> PAGE 81
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, 1998, for the Norfolk Southern Annual Meeting of Stockholders
to be held on May 14, 1998, 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 22 under
"Executive Officers of the Registrant."
<PAGE> PAGE 82
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, 1997, 1996 and 1995 54
Consolidated Balance Sheets
As of December 31, 1997 and 1996 55
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 57
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 59
Notes to Consolidated Financial Statements 60
Independent Auditors' Report 80
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 89
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 83
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 January 27, 1998, and effective May 14, 1998,
are filed herewith.
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 Transaction Agreement, dated as of June 10, 1997,
by and among CSX, CSX Transportation, Inc., Registrant,
Norfolk Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation and CRR Holdings LLC,
with certain schedules thereto, is incorporated herein
by reference from Exhibit 10 to Norfolk Southern
Corporation's Form 8-K filed electronically on
June 30, 1997.
(b) 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.
<PAGE> PAGE 84
Item 14. Exhibits, Financial Statement Schedule, and Reports on
- ------- -------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- --------------------------------------------------
Management Compensation Plans
-----------------------------
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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 and 1998
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.
<PAGE> PAGE 85
Item 14. Exhibits, Financial Statement Schedule, and Reports on
- ------- -------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- --------------------------------------------------
(j) Norfolk Southern Corporation Supplemental
(formerly, Excess) Benefit Plan, effective
as of January 1, 1996, is incorporated herein
by reference from Exhibit 10(i) to Norfolk
Southern Corporation's 1996 Annual Report on
Form 10-K.
(k) 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.
(l) 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.
(m) The Norfolk Southern Corporation Outside
Directors' Deferred Stock Unit Program, as amended
on September 23, 1997, is filed herewith.
(n) 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.
12 Statement re: Computation of Ratio of Earnings to
Fixed Charges.
21 Subsidiaries of the Registrant.
23 Consents of Experts and Counsel -
(a) Consent of KPMG Peat Marwick LLP.
(b) Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
99 Conrail Inc. 1997 Annual Report to Stockholders
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K for
the three months ended December 31, 1997.
<PAGE> PAGE 86
Item 14. Exhibits, Financial Statement Schedule, and Reports on
- ------- -------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- --------------------------------------------------
(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.
(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 87
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 24th day of March, 1998.
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 24th day of March,
1998, 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 88
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 89
<TABLE>
Schedule II
Page 1 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1995, 1996 and 1997
(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, 1995
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $264 $100 $ 3 <F1> $110 <F2> $257
Current portion of
casualty and other
claims included
in accounts payable $166 $ 21 $164 <F1> $186 <F3> $165
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 1 $ 1 $ -- $ -- $ 2
Casualty and other
claims included in
other liabilities $257 $116 $ 4 <F1> $129 <F2> $248
Current portion of
casualty and other
claims included in
accounts payable $165 $ 16 $154 <F1> $169 <F3> $166
<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.
Note: Prior year amounts have been conformed with the current year
presentation, which excludes valuation and qualifying accounts
of discontinued operations.
(continued)
</TABLE>
<PAGE> PAGE 90
<TABLE>
Schedule II
Page 2 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1995, 1996 and 1997 (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, 1997
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax
assets $ 2 $ -- $ -- $ -- $ 2
Casualty and other
claims included in
other liabilities $248 $108 $ 2 <F1> $105 <F2> $253
Current portion of
casualty and other
claims included in
accounts payable $166 $ 14 $170 <F1> $178 <F3> $172
<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.
Note: Prior year amounts have been conformed with the current year
presentation, which excludes valuation and qualifying accounts
of discontinued operations.
</TABLE>
<PAGE> PAGE 91
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit Page
Number Description Number
- ---------- ------------------------------------------------ --------
3(ii) The Bylaws of Norfolk Southern Corporation, as
amended January 27, 1998, and effective
May 14, 1998. 92-99
10(m) The Norfolk Southern Corporation Outside
Directors' Deferred Stock Unit Program,
as amended on September 23, 1997. 100-102
12 Statement re: Computation of Ratio of
Earnings to Fixed Charges. 103
21 Subsidiaries of Norfolk Southern Corporation. 104-106
23(a) Consent of KPMG Peat Marwick LLP 107
23(b) Consent of Price Waterhouse LLP 108
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). 109
99 Conrail Inc. Annual Report to Stockholders 110-139
Exhibits 3(ii), 10(m), 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 23510-9219
<PAGE> PAGE 92
EXHIBIT 3(ii) TITLE PAGE
B Y L A W S
OF
NORFOLK SOUTHERN CORPORATION
AS AMENDED
JANUARY 27, 1998
EFFECTIVE MAY 14, 1998
<PAGE> PAGE 93
EXHIBIT 3(ii) Page 1 of 7
BYLAWS
OF
NORFOLK SOUTHERN CORPORATION
ARTICLE I
Stockholders' Meetings
SECTION 1. Annual Meeting. The annual meeting of the
stockholders of the corporation shall be held on such date in March,
April, May or June as the board of directors may designate. If the date
of the annual meeting shall be a legal holiday, the meeting shall be held
on the next succeeding day not a legal holiday.
SECTION 2. Special Meetings. Special meetings of the
stockholders shall be held whenever called by the chief executive officer
or by a majority of the directors.
SECTION 3. Time and Place. All meetings of the stockholders
shall be held at the time and place stated in the notice of meeting.
SECTION 4. Quorum. The holders of a majority of the
outstanding shares of capital stock entitled to vote, represented in
person or by proxy, shall constitute a quorum at any meeting of the
stockholders. If less than a quorum is present at an annual or special
meeting, then a majority in interest of the stockholders present in
person or by proxy may from time to time adjourn the meeting to a fixed
time and place, no further notice of any adjourned meeting being
required. Each stockholder shall be entitled to one vote in person
or by proxy for each share entitled to vote then outstanding in his
name on the books of the corporation.
SECTION 5. Record Date. The board of directors may fix in
advance a date as the record date for a determination of stockholders for
any purpose, such date to be not more than seventy days before the
meeting or action requiring a determination of stockholders.
SECTION 6. Conduct of Meetings. The chief executive officer,
or any officer or director he may designate, shall preside over all
meetings of the stockholders. The secretary of the corporation, or an
assistant secretary, shall act as secretary of all the meetings, if
present. If the secretary or an assistant secretary is not present, the
chairman of the meeting shall appoint a secretary.
<PAGE> PAGE 94
EXHIBIT 3(ii) Page 2 of 7
The board of directors, prior to the annual meeting of the
stockholders each year, shall appoint one or more inspectors of election
to act at such annual meeting and at all other meetings of stockholders
held during the ensuing year. In the event of the failure of the board
to make such appointment or if any inspector of election shall for any
reason fail to attend and to act at such meeting, an inspector or
inspectors of election, as the case may be, may be appointed by the
chairman of the meeting. The inspectors of election shall determine the
qualification of voters, the validity of proxies and the results of
ballots.
SECTION 7. Proposals by Stockholders. No business may be
transacted at an annual or special meeting of stockholders other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the board of
directors, (b) otherwise properly brought before the meeting by or at the
direction of the board of directors or (c) otherwise properly brought
before the meeting by a stockholder (i) who is a stockholder on the date
of the giving of the notice provided for in this Section 7 and on the
record date for the determination of stockholders entitled to vote at
such meeting and (ii) who gives to the corporation notice in writing of
the proposal, provided that such written notice is received at the
principal executive office of the corporation, addressed to the Corporate
Secretary, (A) in the case of an annual meeting, not less than ninety
(90) nor more than one hundred sixty (160) calendar days prior to the
anniversary date of the immediately preceding annual meeting and, (B) in
the case of a special meeting, not later than the tenth calendar day next
following the date on which notice of the holding of the special meeting
is mailed to stockholders or public disclosure of the date of the special
meeting was made, whichever first occurs. The written notice given to
the corporation shall include (i) the specific language on which
stockholders will be asked to vote, (ii) the name and address of such
stockholder, (iii) the class or series and number of shares of the
capital stock of the corporation which are owned beneficially and/or of
record by such stockholder, (iv) a representation as to the existence and
nature of any agreement or understanding between the proposing
stockholder and any other person or persons (including their identities)
in connection with bringing the proposal, and (v) a representation as to
any material interest of the proposing stockholder (and the other person
or persons) in the subject matter of the proposal. The requirements of
this Section 7 are in addition to any other applicable requirements.
ARTICLE II
Board of Directors
SECTION 1. Election, Number and Term. The board of directors
shall be chosen at the annual meeting of the stockholders. The number of
the directors shall be ten, and the directors shall be classified and
shall hold office for terms as provided in the articles of incorporation.
This number may be increased or decreased at any time by amendment of
these bylaws, but shall always be a number of not less than three.
Directors need not be stockholders. Directors shall hold office until
their successors are elected.
<PAGE> PAGE 95
EXHIBIT 3(ii) Page 3 of 7
SECTION 2. Quorum. A majority of the number of directors
fixed by these bylaws shall constitute a quorum. If less than a quorum
is present at a meeting, then a majority of those present may adjourn the
meeting to a fixed time and place, no further notice of any adjourned
meeting being required.
SECTION 3. Vacancies. Any vacancy arising among the
directors, including a vacancy resulting from an increase by not more
than thirty percent in the number of directors last elected by the
stockholders, may be filled by a majority vote of the remaining directors
though less than a quorum unless sooner filled by the stockholders.
SECTION 4. Meetings. Meetings of the board of directors
shall be held at times fixed by resolution of the board or upon the call
of the chief executive officer or of one-third of the members of the
board. Notice of any meeting not held at a time fixed by a resolution of
the board shall be given to each director at least two days before the
meeting at his residence or business address or by delivering such notice
to him or by telephoning or telegraphing it to him at least one day
before the meeting. Any such notice shall contain the time and place of
the meeting. Meetings may be held without notice if all the directors
are present or those not present waive notice before or after the
meeting. The chief executive officer, or any director he may designate,
shall preside over all meetings.
SECTION 5. Committees. The board of directors may by
resolution designate an executive committee and one or more other
committees, each of which shall consist of two or more directors. Any
such committee, to the extent provided in the resolution of the board of
directors and except as otherwise provided by law, shall have and may
exercise the powers and authority of the board of directors in the
management of the business and affairs of the corporation.
SECTION 6. Nominations of Directors. Except as otherwise
provided in the Articles of Incorporation, only persons who are nominated
in accordance with the following procedures shall be eligible for
election as directors. Nominations of persons for election to the board
of directors may be made at any annual meeting of the stockholders (a) by
or at the direction of the board of directors or (b) by any stockholder
(i) who is a stockholder on the date of the giving of the notice provided
for in this Section 6 and on the record date for the determination of
stockholders entitled to vote at such meeting and (ii) who gives to the
corporation notice in writing of the nomination, provided that such
written notice is received at the principal executive office of the
corporation, addressed to the Corporate Secretary, not less than ninety
(90) nor more than one hundred sixty (160) calendar days prior to the
anniversary date of the immediately preceding annual meeting. The
written notice given to the corporation shall include all the information
about the nominee that would be required by applicable rules and
regulations of the Securities and Exchange Commission to be included for
nominees listed in the proxy statement for such meeting and shall include
(i) the name and address of such stockholder and (ii) the class or series
and number of shares of the capital stock of the corporation which are
owned beneficially and/or of record by such stockholder. Such notice
must be accompanied by a written consent of each proposed nominee to
being named as a nominee and to serve as a director if elected.
<PAGE> PAGE 96
EXHIBIT 3(ii) Page 4 of 7
ARTICLE III
Officers
SECTION 1. Election, Number and Term. The board of
directors, promptly after its election in each year, may elect a chairman
of the board and shall elect a president (one of whom shall be designated
chief executive officer), a secretary and a treasurer, and may elect one
or more vice chairmen and vice presidents and may appoint such other
officers as it may deem proper. Any officer may hold more than one
office except that the same person shall not be president and secretary.
Each officer shall hold office until his successor is elected or until
his death or until he resigns or is removed in the manner hereinafter
provided.
SECTION 2. Removal. Any officer may be removed at any time
by the vote of the board of directors and any officer or agent appointed
otherwise than by the board of directors may be removed by any officer
having authority to appoint that officer or agent.
SECTION 3. Vacancies. Vacancies among the officers elected
by the board of directors shall be filled by the directors.
SECTION 4. The Chief Executive Officer. The chief executive
officer, subject to the control of the board of directors, shall in
general supervise and control all of the business and affairs of the
corporation. All officers and agents, other than officers or agents
elected or appointed by the board of directors, shall be appointed by the
chief executive officer or by the heads of departments, subject to the
approval of the chief executive officer. Unless otherwise specifically
provided in these bylaws or by direction of the board of directors, the
chief executive officer or, at his direction, any officer, employee or
agent of the corporation designated by him, may sign and execute all
representations, securities, conveyances of real and personal property,
leases, licenses, releases, contracts and other obligations and
instruments in the name of the corporation.
SECTION 5. The Vice Chairmen and Vice Presidents. The vice
chairmen and the vice presidents shall perform such duties as from time
to time may be assigned to them by the chief executive officer or by the
board of directors. In the absence of the chief executive officer, or in
the event of his death, inability or refusal to act, the officer
designated by the chief executive officer or the board of directors shall
perform the duties of the chief executive officer, and, when so acting,
shall have all the powers of and be subject to all the restrictions upon
the chief executive officer. Any vice chairman or vice president may
sign, with the secretary or an assistant secretary, certificates for
shares of the corporation.
<PAGE> PAGE 97
EXHIBIT 3(ii) Page 5 of 7
SECTION 6. The Secretary. The secretary shall: (a) keep the
minutes of the meetings of the stockholders and the board of directors in
one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these bylaws or as
required by law; (c) be custodian of the corporate records and of the
seal of the corporation and see that the seal of the corporation is
affixed to all documents the execution of which on behalf of the
corporation under its seal is duly authorized; (d) keep a register of the
post office address of each stockholder which shall be furnished to the
secretary by such stockholders; (e) sign with the chairman of the board,
a vice chairman, the president, or a vice president, certificates for
shares of the corporation, the issuance of which shall have been
authorized by resolution of the board of directors; (f) have general
charge of the stock transfer books of the corporation; and (g) in general
perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the chief executive
officer or by the board of directors.
SECTION 7. The Treasurer. If required by the board of
directors, the treasurer shall give a bond for the faithful discharge of
his duties in such sum and with such surety or sureties as the board of
directors shall determine. He shall: (a) have charge and custody of and
be responsible for all funds and securities of the corporation; receive
and give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the
corporation in such banks, trust companies or other depositaries as shall
be selected in accordance with the provisions of Article IV of these
bylaws; (b) when duly authorized, disperse all moneys belonging or coming
to the corporation; and (c) in general perform all the duties incident to
the office of treasurer and such other duties as from time to time may be
assigned to him by the chief executive officer or by the board of
directors.
SECTION 8. Assistant Secretaries and Assistant Treasurers.
The assistant secretaries, when authorized by the board of directors, may
sign with the chairman of the board, a vice chairman, the president or a
vice president certificates for shares of the corporation the issuance of
which shall have been authorized by a resolution of the board of
directors. The assistant treasurers shall respectively, if required by
the board of directors, give bonds for the faithful discharge of their
duties in such sums and with such sureties as the board of directors
shall determine. The assistant secretaries and assistant treasurers, in
general, shall perform such duties as shall be assigned to them by the
secretary or the treasurer, respectively, or by the chief executive
officer or the board of directors.
SECTION 9. Salaries. The salaries of the officers elected by
the board of directors shall be fixed by the board of directors. The
salaries of all other officers shall be fixed by the chief executive
officer or by the heads of departments, subject to the approval of the
chief executive officer.
<PAGE> PAGE 98
EXHIBIT 3(ii) Page 6 of 7
ARTICLE IV
Checks and Deposits
SECTION 1. Checks and Drafts. All checks, drafts or
other orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the corporation, shall be signed by
such officer or officers, agent or agents of the corporation and in such
manner as shall from time to time be determined by resolution of the
board of directors.
SECTION 2. Deposits. All funds of the corporation not
otherwise employed shall be deposited from time to time to the credit of
the corporation in such banks, trust companies or other depositories as
may be selected in a manner authorized by the board of directors.
ARTICLE V
Certificate of Stock
Each stockholder shall be entitled to a certificate or
certificates of stock in such form as may be approved by the board of
directors signed by the chairman of the board, a vice chairman, the
president or a vice president and by the secretary or an assistant
secretary or the treasurer or any assistant treasurer.
All transfers of stock of the corporation shall be made upon
its books by surrender of the certificate for the shares transferred
accompanied by an assignment in writing by the holder and may be
accomplished either by the holder in person or by a duly authorized
attorney in fact.
In case of the loss, mutilation or destruction of a
certificate of stock, a duplicate certificate may be issued upon such
terms not in conflict with law as the board of directors may prescribe.
The board of directors may also appoint one or more transfer
agents and registrars and may require stock certificates to be
countersigned by a transfer agent or registered by a registrar or may
require stock certificates to be both countersigned by a transfer agent
and registered by a registrar. If certificates of capital stock of the
corporation are signed by a transfer agent or by a registrar (other than
the corporation itself or one of its employees), the signature thereon of
the officers of the corporation and the seal of the corporation thereon
may be facsimiles, engraved or printed. In case any officer or officers
who shall have signed, or whose facsimile signature or signatures shall
have been used on, any such certificate or certificates shall cease to be
such officer or officers of the corporation, whether because of death,
resignation or otherwise, such certificate or certificates may
nevertheless be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures shall have been used thereon had not ceased to be such officer
or officers of the corporation.
<PAGE> PAGE 99
EXHIBIT 3(ii) Page 7 of 7
ARTICLE VI
Seal
The seal of the corporation shall be a flat-faced circular
die, of which there may be any number of counterparts, with the word
"SEAL" and the name of the corporation and the state and year of
incorporation engraved thereon.
ARTICLE VII
Fiscal Year
The fiscal year of the corporation shall begin on the first
day of January and end on the thirty-first day of December in each year.
ARTICLE VIII
Voting of Stock Held
Unless otherwise ordered by the board of directors, the chief
executive officer, or his designee, shall have full power and authority
in behalf of the corporation to attend and to act and to vote at any
meetings of stockholders of any corporation in which the corporation may
hold stock, and at any such meeting shall possess and may exercise any
and all the rights and powers incident to the ownership of such stock,
which, as the owner thereof, the corporation might have possessed and
exercised if present, and may sign proxies on behalf of the corporation
with respect to any such meeting or sign consents on behalf of the
corporation with respect to corporate actions permitted without a meeting
of stockholders. The board of directors, by resolution, from time to
time, may confer like powers upon any other person or persons.
ARTICLE IX
Amendments
These bylaws may be altered, amended or repealed and new
bylaws may be adopted by the board of directors at any regular or special
meeting of the board of directors.
<PAGE> PAGE 100
EXHIBIT 10(m), Page 1 of 3
NORFOLK SOUTHERN CORPORATION
Outside Directors' Deferred Stock Unit Program
I. Effective Date: May 9, 1996 (effective at the Organization
Meeting of the Board of Directors), amended to
and including September 23, 1997.
II. Purpose: To align further each outside director's
ownership interest in Norfolk Southern
Corporation ("Corporation") with that of
stockholders generally.
III. Eligibility: Each outside director of the Corporation serving
on the Effective Date and any such outside
director whose term as director begins after the
Effective Date ("Eligible Director"). For
purposes of this Program, an "outside director"
is a director who is not an officer of the
Corporation or any of its subsidiaries.
IV. Benefits: (1) Each Eligible Director shall be granted
from time to time such deferred stock units
(each such stock unit representing at the time
of grant the value of one share of Norfolk
Southern Corporation Common Stock) ("Stock
Units"), as the Board of Directors may
authorize. Each Eligible Director's Stock Units
will be recorded in an individual memorandum
account ("Account") maintained by the Corporate
Secretary or designated agent. On each dividend
payment date, an amount equivalent to the
dividend paid on the Common Stock ("Dividend
Equivalent") will be credited for each Stock
Unit and each fraction thereof in the Account
and converted into additional Stock Units and
fractions thereof (rounded to four decimal
places) based on the Fair Market Value of the
Common Stock on the dividend payment date.
For purposes of this Program, "Fair Market
Value" on a particular date is the mean of the
high and low prices at which the Common Stock is
traded on such date as reported in the Composite
Transactions for such date by The Wall Street
Journal or, if Common Stock was not traded on
such date, on the next preceding day on which
the Common Stock was traded.
<PAGE> PAGE 101
NORFOLK SOUTHERN CORPORATION EXHIBIT 10(m), Page 2 of 3
Outside Directors' Deferred
Stock Unit Program
(2) Each outside director of the Corporation
serving on June 1, 1996, also shall have
credited to the Account the number of Stock
Units, including fractions thereof to which such
director is entitled under the Norfolk Southern
Corporation Directors' Pension Plan. Such Stock
Units will be accounted for separately from any
Stock Units credited under paragraph (1) above
but will be treated the same in all other
respects.
(3) Each Eligible Director may make an election
at any time up to one year prior to leaving the
Board of Directors to receive in cash any Stock
Units in the Account either in a lump sum or in
10 annual installments upon leaving the Board of
Directors for any reason. The most current
election on file with the Corporate Secretary
shall become irrevocable one year prior to the
eligible Director leaving the Board of
Directors. Failure to make a valid election
will result in the Account being distributed in
a lump sum. Separate elections will be made for
Stock Units credited under paragraphs (1) and
(2) above. A lump-sum payment will be valued
based on the Fair Market Value of Common Stock
on the last market day of the month following a
director's termination of service and will be
paid to an Eligible Director or beneficiary as
soon as practicable thereafter. The first
distribution under an election to receive
installment payments will be made in January
following the year in which the Eligible
Director terminates service; Stock Units at any
time remaining in the Account will be credited
with Dividend Equivalents until the final
installment has been paid. Each annual
distribution will be valued based on the Fair
Market Value of the Common Stock on the third
business day after the date in January that the
Corporation first makes publicly available its
most recent regular annual financial statements.
The first such installment will be an amount
equal to one tenth of the total value of the
Stock Units in the Account at that time; the
second installment, one ninth of the remaining
total value; the third installment, one eighth;
and so forth, until the Account is depleted with
payment of the tenth installment.
<PAGE> PAGE 102
NORFOLK SOUTHERN CORPORATION EXHIBIT 10(m), Page 3 of 3
Outside Directors' Deferred
Stock Unit Program
(4) The Board of Directors may make such
adjustments in the number of Stock Units as may
be required by any change in the corporate
structure or shares of the Corporation,
including but not limited to, recapitalization,
stock splits, stock dividends, combination or
exchange of shares, mergers, consolidations,
rights offerings, separations, reorganizations
and liquidations.
V. Miscellaneous: (1) Each Eligible Director may designate in
writing the person or persons ("Beneficiary")
who shall acquire the rights of the Eligible
Director to the Account in the event of the
Eligible Director's death before final
distribution. In order to be effective, an
Eligible Director's designation of a Beneficiary
must be on file with the Corporate Secretary
before the Eligible Director's death. Any such
designation may be revoked and a new designation
substituted therefor by the Eligible Director at
any time before death.
If the named Beneficiary does not survive the
Eligible Director, or if there is no named
Beneficiary, then the rights with respect to an
Eligible Director's Account shall be acquired by
the person or persons who shall acquire the
Eligible Director's rights to the Account by
bequest or inheritance in accordance with the
applicable laws of descent and distribution.
(2) This Program may be amended or terminated by
the Board of Directors of the Corporation at any
time; however, no such amendment or termination
shall deprive an Eligible Director of any Stock
Units previously credited to his or her Account.
<PAGE> PAGE 103
<TABLE>
EXHIBIT 12 PAGE 1 of 1
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
<CAPTION>
Year ended December 31
-----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
EARNINGS
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before income
taxes as reported $ 998 $1,166 $1,089 $1,028 $ 952
Add:
Total interest expenses
(as detailed below) 530 182 173 156 158
Amortization of
capitalized interest 3 3 2 2 1
Income (loss) of
partially owned
entities <F1> 113 1 -- 1 (3)
Subsidiaries' preferred
dividend requirement 2 2 3 3 3
------ ------ ------ ------ ------
Income before income
taxes, as adjusted $1,646 $1,354 $1,267 $1,190 $1,111
====== ====== ====== ====== ======
FIXED CHARGES
Interest expense on debt $ 385 $ 116 $ 113 $ 101 $ 98
Other interest expense 32 36 31 30 38
Calculated interest
portion of rent expense 30 30 29 25 22
NS' share of Conrail
interest 83 -- -- -- --
------ ------ ------ ------ ------
Total interest
expenses 530 182 173 156 158
Capitalized interest 17 12 14 18 22
Subsidiaries' preferred
dividend requirement
on a pretax basis 4 4 4 4 4
------ ------ ------ ------ ------
Total fixed charges $ 551 $ 198 $ 191 $ 178 $ 184
====== ====== ====== ====== ======
RATIO OF EARNINGS TO
FIXED CHARGES 2.99 6.84 6.63 6.69 6.04
<FN>
<F1>Includes: (a) the distributed income of 20%-49% owned entities, net
of equity recorded in undistributed income and the minority income
of consolidated entities which have fixed charges; and (b) NS' share
of Conrail's income before income taxes, net of equity in earnings
of Conrail included in NS' income from continuing operations before
taxes as reported.
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 104
EXHIBIT 21 PAGE 1 of 3
NAME AND STATE OF INCORPORATION OF SUBSIDIARIES
OF NORFOLK SOUTHERN CORPORATION
AS OF MARCH 1, 1998
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
CRR Holdings LLC
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 105
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
Crosspoint Disposition LLC
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
Manufacturing Support Services, L.L.C., Delaware
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 106
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
midiData Logistik GmbH, Germany
midiData Spedition Systems, Inc., 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 107
EXHIBIT 23(a) 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. 33-61317, 33-52031, 333-40993, 33-57417. and 33-556 on Form S-8
of Norfolk Southern Corporation of our report dated January 27, 1998,
relating to the consolidated balance sheets of Norfolk Southern
Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997, which report appears in the
December 31, 1997 annual report on Form 10-K405 of Norfolk Southern
Corporation.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
March 24, 1998
<PAGE> PAGE 108
EXHIBIT 23(b) PAGE 1 of 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 33-61317, 33-52031,
333-40993, 33-57417, and 33-556) of Norfolk Southern Corporation
of our report dated January 19, 1998 on the consolidated financial
statements of Conrail Inc. and subsidiaries for the year ended
December 31, 1997, which appears in the Annual Report on Form 10-K
of Norfolk Southern Corporation filed as of March 24, 1998.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Philadelphia, PA
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996<F1> DEC-31-1995<F1>
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 34 207 65
<SECURITIES> 125 194 262
<RECEIVABLES> 555 562 552
<ALLOWANCES> 3 4 3
<INVENTORY> 58 61 60
<CURRENT-ASSETS> 1,103 1,356 1,243
<PP&E> 14,339 13,746 13,396
<DEPRECIATION> 4,435 4,274 4,198
<TOTAL-ASSETS> 17,350 11,234 10,718
<CURRENT-LIABILITIES> 1,093 1,060 1,069
<BONDS> 7,398 1,800 1,553
0 0 0
0 0 0
<COMMON> 399 132 136
<OTHER-SE> 5,046 4,845 4,693
<TOTAL-LIABILITY-AND-EQUITY> 17,350 11,234 10,718
<SALES> 0 0 0
<TOTAL-REVENUES> 4,223 4,101 4,012
<CGS> 0 0 0
<TOTAL-COSTS> 3,010 2,936 2,950
<OTHER-EXPENSES> (170) (117) (140)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 385 116 113
<INCOME-PRETAX> 998 1,166 1,089
<INCOME-TAX> 299 413 391
<INCOME-CONTINUING> 699 753 698
<DISCONTINUED> 22 17 15
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 721 770 713
<EPS-PRIMARY> 1.91 2.03 1.81
<EPS-DILUTED> 1.90 2.01 1.80
<FN>
<F1> Financial data schedules for 1996 and 1995 are restated to reflect
discontinued operations and the effect of adoption of Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
</FN>
</TABLE>
<PAGE> PAGE 110
EXHIBIT 99, Page 1 of 30
COVER PAGE FOR
CONRAIL INC.
1997 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> PAGE 111
EXHIBIT 99, Page 2 of 30
REPORT OF MANAGEMENT
The Stockholders
Conrail Inc.
Management is responsible for the preparation, integrity and
objectivity of the Company's financial statements. The financial
statements are prepared in conformity with generally accepted
accounting principles and include amounts based on management's best
estimates and judgment.
The Company maintains a system of internal accounting controls and
procedures which is continually reviewed and supported by written
policies and guidelines and supplemented by a corporate staff of
internal auditors. The system provides reasonable assurance that
assets are safeguarded against loss from unauthorized use and that the
books and records reflect the transactions of the Company and are
reliable for the preparation of financial statements. The concept of
reasonable assurance recognizes that the cost of a system of internal
accounting controls should not exceed the benefits derived and also
recognizes that the evaluation of these factors necessarily requires
estimates and judgments by management.
The Company's financial statements are audited by its independent
accountants. Their audit is conducted in accordance with generally
accepted auditing standards and includes a study and evaluation of the
Company's system of internal accounting controls to determine the
nature, timing and extent of the auditing procedures required for
expressing an opinion on the Company's financial statements.
The Board of Directors pursues its oversight responsibilities for the
financial statements and corporate conduct through its Audit and
Ethics Committees. Each Committee consists of Directors who are not
employees of the Company. The Audit Committee recommends the
appointment of the independent accountants, and meets several times a
year with management, the internal auditors and the independent
accountants. The independent accountants and internal auditors have
unrestricted access to the Audit Committee to discuss audit scope, the
results of their audits, the adequacy of internal accounting controls
and financial reporting. The Ethics Committee meets several times a
year with management to review matters of public interest, including
safety, equal employment and compliance with environmental
regulations.
/s/ David M. LeVan
- -----------------------
David M. LeVan
Chairman, President and
Chief Executive Officer
/s/ John A. McKelvey
- -----------------------
John A. McKelvey
Senior Vice President-
Finance
January 19, 1998
<PAGE> PAGE 112
EXHIBIT 99, Page 3 of 30
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Conrail Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of Conrail Inc. and subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for the opinion expressed above.
Our audits of the consolidated financial statements of Conrail Inc.
and subsidiaries also included an audit of the Financial Statement
Schedule, Schedule II - Valuation and Qualifying Accounts. In our
opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 19, 1998
<PAGE> PAGE 113
EXHIBIT 99, Page 4 of 30
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31,
---------------------------
($ In Millions Except Per Share Data) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues $3,765 $3,714 $3,686
------ ------ ------
Operating expenses
Way and structures 458 462 485
Equipment 776 803 766
Transportation 1,388 1,385 1,324
General and administrative 313 312 370
ESOP termination charge (Note 3) 221
Merger-related compensation costs
(Note 3) 222
Merger costs (Note 3) 65 16
Voluntary separation programs (Note 10) 135
Asset disposition charge (Note 11) 285
------ ------ ------
Total operating expenses 3,443 3,113 3,230
------ ------ ------
Income from operations 322 601 456
Interest expense (170) (182) (194)
Other income, net (Note 12) 83 112 130
------ ------ ------
Income before income taxes 235 531 392
Income taxes (Note 7) 228 189 128
------ ------ ------
Net income $ 7 $ 342 $ 264
====== ====== ======
Net income per common share (Note 1)
Basic $ - $ 4.29 $ 3.21
Diluted - 3.91 2.94
Ratio of earnings to fixed charges
(Note 1) 1.98x 3.19x 2.51x
</TABLE>
See accompanying notes.
<PAGE> PAGE 114
EXHIBIT 99, Page 5 of 30
<TABLE>
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
----------------
($ In Millions) 1997 1996
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 97 $ 30
Accounts receivable 623 630
Deferred tax assets (Note 7) 115 293
Material and supplies 104 139
Other current assets 15 25
------ ------
Total current assets 954 1,117
Property and equipment, net (Note 4) 6,830 6,590
Other assets 700 695
------ ------
Total assets $8,484 $8,402
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings - 99
Current maturities of long-term debt (Note 6) 112 130
Accounts payable 113 135
Wages and employee benefits 366 143
Casualty reserves 141 141
Accrued and other current liabilities (Note 5) 476 444
------ ------
Total current liabilities 1,208 1,092
Long-term debt (Note 6) 1,732 1,876
Casualty reserves 198 190
Deferred income taxes (Note 7) 1,453 1,478
Special income tax obligation (Note 7) 283 346
Other liabilities 445 313
------ ------
Total liabilities 5,319 5,295
------ ------
Commitments and contingencies (Note 13)
Stockholders' equity (Notes 2, 3 and 9)
Preferred stock (no par value; 15,000,000
shares authorized; no shares issued)
Series A ESOP convertible junior preferred
stock (no par value; 10,000,000 shares
authorized; 0 and 7,303,920 shares
issued and outstanding, respectively) - 211
Unearned ESOP compensation (155) (222)
Common stock ($1 par value; 250,000,000
shares authorized; 6,320,349 and 87,768,428
shares issued, respectively; 100 and
82,244,973 shares outstanding, respectively) 6 88
Additional paid-in capital 3,006 2,404
Employee benefits trust (0 and
3,394,988 shares, respectively) (274) (384)
Retained earnings 1,324 1,357
------ ------
3,907 3,454
Treasury stock, at cost (742) (347)
------ ------
Total stockholders' equity 3,165 3,107
------ ------
Total liabilities and stockholders' equity $8,484 $8,402
====== ======
</TABLE>
See accompanying notes.
<PAGE> PAGE 115
EXHIBIT 99, Page 6 of 30
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Series A Unearned Additional Employee
Preferred ESOP Common Paid-in Benefits Retained Treasury
($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock
--------- ------------ ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 283 $(243) $80 $1,848 $1,056 $ (99)
Amortization 10
Net income 264
Common dividends, $1.60 per share (129)
Preferred dividends, $2.165 per share (21)
Common shares acquired (92)
Exercise of stock options 6
Establishment of employee benefits trust 5 245 $(250)
Employee benefits trust transactions, net 84 (79)
Other (1) 4 6
----- ----- --- ------ ----- ------ -----
Balance, December 31, 1995 282 (233) 85 2,187 (329) 1,176 (191)
Amortization 11
Net income 342
Common dividends, $1.80 per share (146)
Preferred dividends, $2.165 per share (20)
Common shares acquired (156)
Exercise of stock options 29 53
Employee benefits trust transactions, net 128 (116)
Effects of voluntary separation programs (8) 8
Effects of CSX tender offer (63) 3 60
Other 5
----- ---- --- ------ ----- ------ -----
Balance, December 31, 1996 211 (222) 88 2,404 (384) 1,357 (347)
Amortization 2
Net income 7
Common dividends, $.475 per share (40)
Preferred dividends, $.541 per share (3)
Exercise of stock options 2 11
Employee benefits trust transactions, net (5) 9
Effects of Conrail acquisition, net
(Notes 2 and 3) (209) (82) 594 90 (393)
Allocation of unearned ESOP compensation 65
Other (2) 11 3 (2)
----- ----- --- ------ ----- ------ -----
Balance, December 31, 1997 $ - $(155) $ 6 $3,006 $(274) $1,324 $(742)
===== ===== === ====== ===== ====== =====
</TABLE>
See accompanying notes.
<PAGE> PAGE 116
EXHIBIT 99, Page 7 of 30
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------
($ In Millions) 1997 1996 1995
<CAPTION> ----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 7 $ 342 $ 264
Adjustments to reconcile net income to
net cash provided by operating activities:
ESOP termination charge 221
Merger-related compensation costs 159
Voluntary separation programs 135
Asset disposition charge 285
Depreciation and amortization 293 283 293
Deferred income taxes 152 183 108
Special income tax obligation (63) (94) (73)
Gains from sales of property (23) (24) (27)
Pension credit (61) (46) (43)
Changes in:
Accounts receivable 7 (16) 32
Accounts and wages payable 42 (18) 8
Deferred tax assets 178 40 (84)
Settlement of tax audit 6 (39)
Other (34) (77) 10
----- ----- -----
Net cash provided by operating
activities 884 669 773
----- ----- -----
Cash flows from investing activities
Property and equipment acquisitions (439) (387) (415)
Proceeds from disposals of properties 25 34 38
Other (31) (46) (59)
----- ----- -----
Net cash used in investing activities (445) (399) (436)
----- ----- -----
Cash flows from financing activities
Repurchase of common stock (156) (92)
Net proceeds from (repayments of)
short-term borrowings (99) 10 (23)
Proceeds from long-term debt 26 85
Payment of long-term debt (238) (184) (134)
Loans from and redemptions of
insurance policies 95
Dividends on common stock (40) (146) (129)
Dividends on Series A preferred stock (3) (25) (21)
Proceeds from stock options and other 8 67 7
----- ----- -----
Net cash used in financing
activities (372) (313) (307)
----- ----- -----
Increase(decrease) in cash and cash equivalents 67 (43) 30
Cash and cash equivalents
Beginning of year 30 73 43
----- ----- -----
End of year $ 97 $ 30 $ 73
===== ===== =====
</TABLE>
See accompanying notes.
<PAGE> PAGE 117
EXHIBIT 99, Page 8 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Industry
--------
Conrail Inc. ("Conrail") is a holding company of which the
principal subsidiary is Consolidated Rail Corporation ("CRC"), a
freight railroad which operates within the northeast and midwest
United States and the Province of Quebec. Conrail has been
acquired by CSX Corporation ("CSX") and Norfolk Southern
Corporation ("NSC"), however, the transaction is pending the
approval of the Surface Transportation Board ("STB") (Notes 2
and 3).
Principles of Consolidation
---------------------------
The consolidated financial statements include Conrail and
majority-owned subsidiaries. Investments in 20% to 50% owned
companies are accounted for by the equity method.
Cash Equivalents
----------------
Cash equivalents consist of commercial paper, certificates of
deposit and other liquid securities purchased with a maturity of
three months or less, and are stated at cost which approximates
market value.
Material and Supplies
---------------------
Material and supplies consist mainly of fuel oil and items for
maintenance of property and equipment, and are valued at the
lower of cost, principally weighted average, or market.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is
provided using the composite straight-line method. The cost (net
of salvage) of depreciable property retired or replaced in the
ordinary course of business is charged to accumulated
depreciation and no gain or loss is recognized.
Asset Impairment
----------------
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Expected future cash flows from
the use and disposition of long-lived assets are compared to the
current carrying amounts to determine the potential impairment
loss.
<PAGE> PAGE 118
EXHIBIT 99, Page 9 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
-------------------
Revenue is recognized proportionally as a shipment moves on the
Conrail system from origin to destination.
Earnings Per Share
------------------
Earnings per share are not presented for 1997 as a result of the
acquisition of the Company's common stock which was completed on
May 23, 1997 (Notes 2 and 3). Following that acquisition, the
Company's common stock was delisted from the New York Stock
Exchange and deregistered with the Securities and Exchange
Commission.
The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" (SFAS 128) to be effective for periods
ending after December 15, 1997. SFAS 128 requires all prior-
period earnings per share data presented to be restated to
conform with the provisions of this pronouncement. SFAS 128
replaces primary earnings per share with the presentation of
basic earnings per share and fully diluted earnings per share
with diluted earnings per share. The earnings per share amounts
resulting from the application of SFAS 128 are not materially
different than those previously presented by the Company for
1996 and 1995.
For 1996 and 1995, basic earnings per share are based on net
income adjusted for the effects of preferred dividends net of
income tax benefits, divided by the weighted average number of
shares outstanding during the period. Diluted earnings per
share assume conversion of Series A ESOP Convertible Junior
Preferred Stock ("ESOP Stock") to Conrail common stock and the
dilutive effects of stock options. Net income amounts
applicable to diluted earnings per share have been adjusted by
the increase, net of income tax benefits, in ESOP-related
expenses assuming conversion of all ESOP Stock to common stock.
Shares in the Conrail Employee Benefits Trust are not considered
outstanding for computing earnings per share. The weighted
average number of shares of common stock outstanding during each
of the two years ended December 31, 1996 are as follows:
1996 1995
---------- ----------
Basic weighted
average shares 76,903,665 78,144,694
Diluted weighted
average shares 87,022,413 88,533,558
<PAGE> PAGE 119
EXHIBIT 99, Page 10 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Ratio of Earnings to Fixed Charges
----------------------------------
Earnings used in computing the ratio of earnings to fixed charges
represent income before income taxes plus fixed charges, less
equity in undistributed earnings of 20% to 50% owned companies.
Fixed charges represent interest expense together with interest
capitalized and a portion of rent under long-term operating
leases representative of an interest factor.
New Accounting Standards
------------------------
During 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The Company
has determined that adoption of these statements will not impact
its consolidated financial position, results of operations or
cash flows. Both pronouncements are effective for fiscal years
beginning after December 15, 1997.
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 and 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.
Reclassification of Prior-Year Data
-----------------------------------
Certain amounts have been reclassified in the consolidated
financial statements to conform to the current year presentation.
2. Acquisition of Conrail Inc.
--------------------------
On April 8, 1997, Conrail and CSX entered into the Fourth
Amendment (the "Fourth Amendment") to the Agreement and Plan of
Merger (as amended through the Fourth Amendment, the "Merger
Agreement") which facilitated CSX and NSC entering into an
agreement with respect to their joint acquisition of Conrail as
contemplated by the Third Amendment to the Merger Agreement,
dated as of March 7, 1997. The terms of the CSX-NSC Agreement
are embodied in a letter agreement dated as of April 8, 1997
(the "CSX/NSC Letter Agreement") and the Transaction Agreement
dated as of June 10, 1997 among Conrail, CSX and NSC.
<PAGE> PAGE 120
EXHIBIT 99, Page 11 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The CSX/NSC Letter Agreement provided, among other things, (i)
for the termination of the NSC's outstanding offer to purchase
Conrail shares and the dismissal of litigation between CSX and
NSC, (ii) that Conrail would, after the effective time of its
merger into a wholly-owned subsidiary of CSX, become a direct
or indirect jointly-owned subsidiary of CSX and NSC, (iii) that
CSX and NSC would jointly acquire, for $115 in cash, all
Conrail shares not already owned by CSX and NSC through a
tender offer that closed on May 23, 1997 and subsequent merger,
and (iv) that Conrail would continue to be managed by its
existing Board of Directors until the requisite approval of the
STB is obtained, at which time CSX and NSC will be separately
allocated certain of Conrail's railroad assets and will jointly
operate certain other railroad activities of Conrail.
The Fourth Amendment also provided that, following April 8,
1997, Conrail's Board of Directors would not declare, and
Conrail would not pay, any dividend on Conrail's capital stock
with a record date on or prior to May 30, 1997.
On May 23, 1997, the CSX-NSC joint tender offer for the remaining
outstanding shares of Conrail's common and ESOP Stock was
concluded, with 53.4 million shares having been tendered. On June
2, 1997, Conrail became the surviving corporation in a merger with
Green Acquisition Corp., a jointly-owned, indirect subsidiary of
CSX and NSC, as a result of which the remaining outstanding
capital stock of Conrail was acquired by NSC and CSX.
Simultaneous with the merger, Conrail's common stock was delisted
from the New York Stock Exchange and, through the filing of a Form
15, deregistered with the Securities and Exchange Commission. The
Conrail stock acquired by NSC and CSX is being held in a voting
trust pending approval of the joint acquisition by the STB, which
is expected to occur in the third quarter of 1998.
In the course of normal business, the Company interchanges freight
with both NSC and CSX for transport to destinations both within
and outside of Conrail's service region. The Company shares
ownership interests with either one or both railroads in various
transportation-related entities, all of which are immaterial to
the Company's operating results and financial position.
<PAGE> PAGE 121
EXHIBIT 99, Page 12 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Merger-Related Costs
--------------------
In connection with its joint acquisition by NSC and CSX, the
Company has incurred pre-tax merger-related costs totaling $65
million ($41 million after income taxes) during 1997. Merger
costs of $16 million ($10 million after income taxes) were
incurred during 1996 related to the previously proposed merger of
Conrail with CSX. Merger costs incurred during both years are
composed primarily of fees for investment banking, legal and
consulting services.
In the second quarter of 1997, the Company recorded a charge of
$221 million (no related income tax effect) for the termination
of its Non-union Employee Stock Ownership Plan ("ESOP") as a
result of the repayment of the ESOP note payable of $291 million
and related accrued interest to the Company. The Company had
recorded a long-term liability of $221 million related to the
ESOP termination charge, which is not expected to require future
use of the Company's cash for settlement. Such liability is
being reduced as the cash proceeds, which the ESOP currently
holds as a result of selling its ESOP Stock in the joint tender
offer, are allocated to eligible ESOP participants.
During the second quarter of 1997, the Company recorded a charge
of $110 million ($103 million after income taxes) in connection
with employment agreements with certain executives, which became
operative upon a change in control as defined in such
agreements. The agreement with CSX permits Conrail to enter
into new agreements with executives to pay some or all of these
benefits upon the earlier of the STB's approval or disapproval
of the transaction or May 31, 1998, if the executives are
employed on that date. Severance benefits to be paid to other
Company employees will be determined and accrued when the
employees adversely affected by the transaction are identified,
which is expected to occur near the time of the STB decision.
During 1997, the Company recorded cumulative charges totaling
$49 million ($31 million after income taxes) representing a
portion of an amount to be paid to certain non-union employees
as an incentive to continue their employment with the Company
through the effective date of the requisite STB approval of the
transaction and subsequent transition period. The total amount
of these incentive payments is expected to be approximately $125
million and will continue to be accrued ratably through the
fourth quarter of 1998. The Company has recorded a short-term
liability of $159 million included in "wages and employee
benefits" on the 1997 balance sheet related to the above-
mentioned merger-related compensation costs through December 31,
1997, however, such liability is not expected to require future
use of the Company's cash for settlement as funding is expected
from other sources, including the Employee Benefits Trust.
<PAGE> PAGE 122
EXHIBIT 99, Page 13 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Also, as a result of the acquisition of Conrail, all outstanding
performance shares and all outstanding unvested stock options,
restricted shares and phantom shares vested during the second
quarter of 1997. The Company paid all of the amounts due
employees under these arrangements and recorded a $63 million
charge ($39 million after income taxes).
4. Property and Equipment
----------------------
December 31,
-----------------
1997 1996
------- -------
(In Millions)
Roadway $ 7,167 $ 7,021
Equipment 1,398 1,231
Less: Accumulated depreciation (1,736) (1,654)
Allowance for disposition (392) (408)
------- -------
6,437 6,190
------- -------
Capital leases (primarily equipment) 869 908
Accumulated amortization (476) (508)
------- -------
393 400
------- -------
$ 6,830 $ 6,590
======= =======
Conrail acquired equipment and incurred related long-term debt
under various capital leases of $79 million in 1997, $82 million
in 1996 and $71 million in 1995. In 1995 (Note 11) and 1991, the
Company recorded allowances for disposition for the sale or
abandonment of certain under-utilized rail lines and other
facilities.
5. Accrued and Other Current Liabilities
-------------------------------------
December 31,
-----------------
1997 1996
---- ----
(In Millions)
Freight settlements due others $ 43 $ 48
Equipment rents (primarily car hire) 74 74
Unearned freight revenue 77 79
Property and corporate taxes 55 49
Other 227 194
---- ----
$476 $444
==== ====
<PAGE> PAGE 123
EXHIBIT 99, Page 14 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Long-Term Debt
--------------
Long-term debt outstanding, including the weighted average
interest rates at December 31, 1997, is composed of the
following:
December 31,
------------------
1997 1996
------ ------
(In Millions)
Capital leases $ 465 $ 491
Medium-term notes payable,
7.50%, due 1998 to 1999 60 109
Notes payable, 9.75%, due 2000 250 250
Debentures payable, 7.88%, due 2043 250 250
Debentures payable, 9.75%, due 2020 544 544
Equipment and other obligations, 6.66% 275 262
Commercial paper - 100
------ ------
1,844 2,006
Less current portion (112) (130)
------ ------
$1,732 $1,876
====== ======
Using current market prices when available, or a valuation based
on the yield to maturity of comparable debt instruments having
similar characteristics, credit rating and maturity, the total
fair value of the Company's long-term debt, including the current
portion, but excluding capital leases, is $1,607 million and
$1,685 million at December 31, 1997 and 1996, respectively,
compared with carrying values of $1,379 million and $1,515
million at December 31, 1997 and 1996, respectively.
The Company's noncancelable long-term leases generally include
options to purchase at fair value and to extend the terms.
Capital leases have been discounted at rates ranging from 3.09%
to 14.26% and are collateralized by assets with a net book value
of $393 million at December 31, 1997.
<PAGE> PAGE 124
EXHIBIT 99, Page 15 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Minimum commitments, exclusive of executory costs borne by the
Company, are:
Capital Operating
Leases Leases
------- ---------
(In Millions)
1998 $ 107 $119
1999 99 94
2000 76 83
2001 60 74
2002 57 68
2003 - 2017 239 476
----- ----
Total 638 $914
====
Less interest portion (173)
-----
Present value $ 465
=====
Operating lease rent expense was $122 million in 1997, $127
million in 1996 and $130 million in 1995.
In June 1993, the Company and CRC filed a shelf registration
statement on Form S-3 to enable CRC to issue up to $500 million in
debt securities or the Company to issue up to $500 million in
convertible debt and equity securities. The remaining balance
under this shelf registration was $312 million at December 31,
1997, although restrictions arising from the Company's acquisition
may prevent its use.
In January 1997, CRC assumed $31 million of Equipment Trust
Certificates, at an interest rate of 8.31%, due 2012, to finance
the lease buyout of 20 locomotives from Locomotive Management
Services, a general partnership of which the Company holds a fifty
percent interest.
Equipment and other obligations mature in 1998 through 2043 and
are collateralized by assets with a net book value of $266 million
at December 31, 1997. Maturities of long-term debt other than
capital leases are $48 million in 1998, $48 million in 1999, $268
million in 2000, $19 million in 2001, $18 million in 2002 and $978
million in total from 2003 through 2043.
During 1997, CRC repaid all of its commercial paper, and no
commercial paper remains outstanding at December 31, 1997.
<PAGE> PAGE 125
EXHIBIT 99, Page 16 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CRC maintains a $440 million uncollateralized bank credit agree-
ment with a group of banks which is used for general corporate
purposes and to support CRC's commercial paper program. The
agreement matures in 2000 and requires interest to be paid on
amounts borrowed at rates based on various defined short-term
rates and an annual maximum fee of .110% of the facility amounts.
The agreement contains, among other conditions, restrictive
covenants relating to a debt ratio and consolidated tangible net
worth. During 1997, CRC had no borrowings under this agreement.
Interest payments were $163 million in 1997, $170 million in 1996
and $177 million in 1995.
7. Income Taxes
------------
The provisions for income taxes are composed of the following:
1997 1996 1995
---- ---- -----
(In Millions)
Current
Federal $122 $ 90 $ 78
State 17 10 15
---- ---- ----
139 100 93
---- ---- ----
Deferred
Federal 115 151 110
State 37 32 (2)
---- ---- ----
152 183 108
---- ---- ----
Special income tax obligation
Federal (54) (80) (61)
State (9) (14) (12)
---- ---- ----
(63) (94) (73)
---- ---- ----
$228 $189 $128
==== ==== ====
In conjunction with the public sale in 1987 of the 85% of the
Company's common stock then owned by the U.S. Government, federal
legislation was enacted which resulted in a reduction of the tax
basis of certain of the Company's assets, particularly property
and equipment, thereby substantially decreasing tax depreciation
deductions and increasing future federal income tax payments.
Also, net operating loss and investment tax credit carryforwards
were canceled. As a result of the sale-related transactions, a
special income tax obligation was recorded in 1987 based on an
estimated effective federal and state income tax rate of 37.0%.
<PAGE> PAGE 126
EXHIBIT 99, Page 17 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The nondeductibility of the ESOP termination charge and certain
merger-related compensation costs for federal and state income
tax purposes, has resulted in a significant difference between
the Company's statutory and effective tax rates for 1997
(Note 3).
A tax law was enacted during the third quarter of 1997 by a state
in which CRC operates which changed the Company's method of
computing taxes and resulted in a tax rate increase. Income tax
expense for 1997 was increased by $22 million representing the
effects of adjusting deferred income taxes and the special income
tax obligation for the rate increase as required by SFAS 109,
"Accounting for Income Taxes" ("SFAS 109").
As a result of a decrease in a state income tax rate enacted
during 1995, income tax expense for that year was reduced by $21
million representing the effects of adjusting deferred income
taxes and the special income tax obligation for the rate decrease
as required by SFAS 109.
Reconciliations of the U.S. statutory tax rates with the
effective tax rates are as follows:
1997 1996 1995
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.2 3.4 3.5
ESOP termination charge 36.3
Nondeductible merger-related
compensation costs 14.9
Effect of state tax increase
(decrease) on deferred taxes 9.3 (5.3)
Other (1.7) (2.8) (.5)
---- ---- ----
Effective tax rate 97.0% 35.6% 32.7%
==== ==== ====
In 1996, the Company reached a settlement with the Internal
Revenue Service ("IRS") related to the audit of the Company's
consolidated federal income tax returns for the fiscal years 1990
through 1992. The Company made a payment of $39 million pending
resolution of the final interest determination related to the
settlement, of which $6 million was refunded to the Company in
1997. The Company's consolidated federal income tax returns for
fiscal years 1993 through 1995 are currently being examined by
the IRS. Federal and state income tax payments were $120 million
in 1997, $145 million in 1996 (excluding tax settlement) and $109
million in 1995.
<PAGE> PAGE 127
EXHIBIT 99, Page 18 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's special income tax
obligation and deferred income tax liabilities (assets) are as
follows:
December 31,
-----------------
1997 1996
------ ------
(In Millions)
Current assets $ (10) $ (9)
Current liabilities (97) (245)
Miscellaneous (8) (39)
------ ------
Current deferred tax asset, net $ (115) $ (293)
====== ======
Noncurrent liabilities:
Property and equipment 1,877 1,939
Other long-term assets (primarily prepaid
pension asset) 90 92
Miscellaneous 130 98
------ ------
2,097 2,129
------ ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (200) (174)
Tax benefit transfer receivable (36) (36)
Miscellaneous (125) (95)
------ ------
(361) (305)
------ ------
Special income tax obligation and
deferred income tax liabilities, net $1,736 $1,824
====== ======
<PAGE> PAGE 128
EXHIBIT 99, Page 19 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Employee Benefits
-----------------
Pension Plans
-------------
The Company and certain subsidiaries maintain defined benefit
pension plans which are noncontributory for all non-union
employees and generally contributory for participating union
employees. Benefits are based primarily on credited years of
service and the level of compensation near retirement. Funding
is based on the minimum amount required by the Employee
Retirement Income Security Act of 1974.
Pension credits include the following components:
1997 1996 1995
----- ---- ----
(In Millions)
Service cost - benefits earned during the period $ 8 $ 9 $ 8
Interest cost on projected benefit obligation 50 51 51
Return on plan assets - actual (197) (138) (254)
- deferred 99 47 167
Net amortization and deferral (21) (15) (15)
----- ---- ----
$ (61) $(46) $(43)
===== ==== ====
The funded status of the pension plans and the amounts
reflected in the balance sheets are as follows:
1997 1996
------ -----
(In Millions)
Accumulated benefit obligation ($605 million
and $655 million vested, respectively) $ 610 $ 661
====== ======
Market value of plan assets 1,308 1,187
Projected benefit obligation (699) (734)
------ ------
Plan assets in excess of projected
benefit obligation 609 453
Unrecognized prior service cost 33 36
Unrecognized transition net asset (72) (90)
Unrecognized net gain (343) (231)
------ ------
Net prepaid pension cost $ 227 $ 168
====== ======
<PAGE> PAGE 129
EXHIBIT 99, Page 20 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The assumed weighted average discount rates used in 1997 and 1996
are 7.0% and 7.5%, respectively, and the rate of increase in
future compensation levels used in determining the actuarial
present value of the projected benefit obligation as of
December 31, 1997 and 1996 is 6.0%. The expected long-term rate
of return on plan assets (primarily equity securities) in 1997
and 1996 is 9.0%.
Savings Plans
-------------
The Company and certain subsidiaries provide 401(k) savings plans
for union and non-union employees. However, in connection with
the close of the CSX-NSC joint tender offer for Conrail, the
Company's Non-union ESOP was terminated with the repayment of the
ESOP note payable of $291 million and related accrued interest in
the second quarter of 1997, resulting in a charge of $221 million
(no related income tax effect) (Notes 2 and 3). Under the Non-
union ESOP, 100% of employee contributions were matched in the
form of ESOP Stock for the first 6% of a participating employee's
base pay. There is no Company match provision under the union
employee plan except for three unions which negotiated a Company
match as part of their new contract provisions. Savings plan
expense was $1 million in 1997 and $4 million in 1996 and 1995.
In connection with the formation of the Non-union ESOP in
1990, the Company issued 9,979,562 of the authorized 10 million
shares of its ESOP Stock to the Non-union ESOP in exchange for a
20 year promissory note from the Non-union ESOP in the principal
amount of approximately $290 million. In addition, unearned ESOP
compensation in the same amount was recognized as a charge to
stockholders' equity coincident with the Non-union ESOP's
issuance of its promissory note to the Company. The debt of the
Non-union ESOP was recorded by the Company and offset against the
promissory note from the Non-union ESOP. The Company received
debt service payments from the Non-union ESOP of $11 million in
1997, $40 million in 1996 and $31 million in 1995.
Prior to the close of the joint tender offer (Notes 2 and 3),
unearned ESOP compensation was charged to expense as shares of
ESOP Stock were allocated to participants. An amount equivalent
to the preferred dividends declared on the ESOP Stock had
partially offset compensation and interest expense related to the
Non-union ESOP through the close of the joint tender offer.
Interest expense incurred by the Non-union ESOP on its debt to
the Company was $9 million in 1997 and $24 million in 1996 and
1995. Compensation expense related to the Non-union ESOP was $2
million in 1997, $11 million in 1996 and $10 million in 1995.
<PAGE> PAGE 130
EXHIBIT 99, Page 21 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to its acquisition, the Company made dividend payments at a
rate of 7.51% on the ESOP Stock and additional contributions in
an aggregate amount sufficient to enable the Non-union ESOP to
make the required interest and principal payments on its note to
the Company. Preferred dividends declared were $3 million in
1997, $20 million in 1996 and $21 million in 1995. Preferred
dividend payments of $3 million, $25 million and $21 million were
made in 1997, 1996 and 1995, respectively.
Postretirement Benefits Other Than Pensions
-------------------------------------------
The Company provides health and life insurance benefits to
certain retired non-union employees. Certain non-union employees
are eligible for retiree medical benefits, while substantially
all non-union employees are eligible for retiree life insurance
benefits. Generally, company-provided health care benefits
terminate when individuals reach age 65.
Retiree life insurance plan assets consist of a retiree life in-
surance reserve held in the Company's group life insurance
policy. There are no plan assets for the retiree health benefits
plan.
The following sets forth the plans' funded status reconciled with
amounts reported in the Company's balance sheets:
1997 1996
----------------- -----------------
Life Life
Medical Insurance Medical Insurance
Plan Plan Plan Plan
(In Millions)
Accumulated postretirement
benefit obligation:
Retirees $28 $20 $44 $20
Fully eligible active plan
participants 1 1
Other active plan participants 5 3
--- --- --- ---
Accumulated benefit obligation 29 25 45 23
Market value of plan assets (10) (10)
--- --- --- ---
Accumulated benefit obligation
in excess of plan assets 29 15 45 13
Unrecognized gains and (losses) 9 1 (1) 2
--- --- --- ---
Accrued benefit cost recognized
in the Consolidated Balance
Sheet $38 $16 $44 $15
=== === === ===
Net periodic postretirement
benefit cost, primarily
interest cost $ 1 $ 1 $ 3 $ 1
=== === === ===
<PAGE> PAGE 131
EXHIBIT 99, Page 22 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
An 8% percent rate of increase in per capita costs of covered
health care benefits was assumed for 1998, gradually decreasing
to 6% percent by the year 2007. Increasing the assumed health
care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1997 by $2 million and would have an immaterial
effect on the net periodic postretirement benefit cost for 1997.
Discount rates of 7.0% and 7.5% were used to determine the
accumulated postretirement benefit obligations for both the
medical and life insurance plans in 1997 and 1996, respectively.
The assumed rate of compensation increase was 6% in both 1997
1996.
Retiree medical benefits are funded by a combination of Company and
retiree contributions. Retiree life insurance benefits are
provided by insurance companies whose premiums are based on claims
paid during the year.
9. Capital Stock
-------------
Preferred Stock
---------------
The Company is authorized to issue 25 million shares of
preferred stock with no par value. The Board of Directors has
the authority to divide the preferred stock into series and to
determine the rights and preferences of each. All of the
Company's shares of ESOP Stock were converted to common shares
when tendered as part of the joint acquisition of the Company's
common stock (Notes 2 and 3).
Employee Benefits Trust
-----------------------
In 1995, the Company issued approximately 4.7 million shares of
its common stock to the Conrail Employee Benefits Trust (the
"Trust") in exchange for a promissory note of $250 million at an
interest rate of 6.9%. As a result of the joint tender offer
(Notes 2 and 3) for the Company's common stock, the Trust repaid
$90 million of the promissory loan with proceeds it received
from the sale of a portion of the common stock it held. The
Trust is expected to fund the payment of employee benefits with
the remaining proceeds it currently holds.
The Trust was intended to fund certain employee benefits and
other forms of compensation over its fifteen-year term. The
amount representing unearned employee benefits is recorded as a
deduction from stockholders' equity and is reduced as benefits
and compensation, including future severance benefits, are paid
from the Trust. Before the close of the joint tender offer for
the Company's common stock, the shares owned by the Trust were
valued at the closing market price as of the end of each
reporting period, with corresponding changes in the balance of
the Trust reflected in additional paid-in capital. Shares held
by the Trust were not considered outstanding for earnings per
share computations until released by the Trust, but did have
voting and dividend rights.
<PAGE> PAGE 132
EXHIBIT 99, Page 23 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Treasury Stock
--------------
As a result of the acquisition of Conrail, the Company's common
stock repurchase program was terminated in the fourth quarter of
1996. The activity for 1997 is related to the repurchase of
common stock in connection with the repayment of $90 million of
the Trust promissory loan described above. The activity and
status of treasury stock follow:
1997 1996 1995
---------- --------- ---------
Shares, beginning of year 5,523,455 3,297,717 1,789,164
Acquired 2,225,738 1,508,553
Effects of Conrail
acquisition 796,794
---------- --------- ----------
Shares, end of year 6,320,249 5,523,455 3,297,717
========== ========= ==========
Stock Plans
-----------
The Company has applied APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in
accounting for the Conrail plans. Accordingly, no compensation
cost was recognized for the Conrail fixed stock option plans
prior to Conrail's acquisition. However, in connection with the
acquisition of Conrail, all outstanding performance shares and
all outstanding unvested stock options, restricted shares and
phantom shares vested during the second quarter of 1997. The
Company paid all of the amounts due under these arrangements and
recorded a $63 million charge ($39 million after income taxes)
for the related compensation expense.
The Company's 1987 and 1991 Long-Term Incentive Plans authorized
the granting to officers and other key employees of up to
4 million and 6.6 million shares of common stock, respectively,
through stock options, stock appreciation rights, phantom stock
and awards of restricted or performance shares. A stock option
was exercisable for a specified term commencing after grant at a
price not less than the fair market value of the stock on the
date of grant. The vesting of awards made pursuant to these
plans was contingent upon one or more of the following:
continued employment, passage of time or financial and other
performance goals.
<PAGE> PAGE 133
EXHIBIT 99, Page 24 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The activity and status of stock options under the incentive
plans follow:
Non-qualified Stock Options
-----------------------------------
Option Price Shares
Per Share Under Option
------------------- ------------
Balance, January 1, 1995 $14.000 - $ 66.938 1,363,955
Granted $50.688 - $ 68.563 516,757
Exercised $14.000 - $ 53.875 (200,940)
Canceled $42.625 - $ 53.875 (123,560)
------------
Balance, December 31, 1995 $14.000 - $ 68.563 1,556,212
Granted $68.563 - $ 96.063 551,038
Exercised $14.000 - $ 73.250 (1,268,085)
Canceled $42.625 - $ 70.031 (3,984)
------------
Balance, December 31, 1996 $14.000 - $ 96.063 835,181
Granted $42.625 - $104.438 416,190
Exercised $14.000 - $104.438 (267,294)
Canceled $42.625 - $ 50.688 (6,625)
Purchased due to Conrail
acquisition $14.000 - $104.438 (977,452)
------------
Balance, December 31, 1997 -
============
Available for future grants
December 31, 1996 3,969,317
============
December 31, 1997 -
============
The weighted average exercise prices of options granted during 1996
and 1995 were $70.130 per share and $51.204 per share,
respectively. The weighted average exercise prices of options
exercised during 1996 and 1995 were $48.32 per share and $31.16 per
share, respectively.
Pro forma disclosures of net income and earnings per share as if
the Company had adopted the cost recognition requirements under
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123)
in 1996 and 1995 are presented below ($ in millions except per
share data):
1996 1995
----- -----
Net income as reported $ 342 $ 264
Net income pro forma 335 262
Basic earnings per share $4.29 $3.21
Basic earnings per share pro forma 4.20 3.19
Diluted earnings per share $3.91 $2.94
Diluted earnings per share pro forma 3.82 2.92
<PAGE> PAGE 134
EXHIBIT 99, Page 25 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of each option granted during 1996 was estimated on
the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: (1) dividend yield of
2.43%, (2) expected volatility of 25.25%, (3) risk-free interest
rate of 5.51%, and (4) expected life of 4 years. The weighted
average fair value of options granted during 1996 and 1995 was
$16.00 per share and $13.12 per share, respectively.
Prior to its acquisition, the Company had granted phantom shares
and restricted stock under its non-union employee bonus plans to
eligible employees who elected to defer all or a portion of
their annual bonus in a given year. The number of shares
granted depended on the length of the deferral period. Grants
were made at the market price of the Company's common stock at
the date of grant. The Company had granted 148,749 shares and
337,329 shares of phantom and restricted stock, respectively,
under its non-union employee bonus plans through its acquisition
date of May 23, 1997. The Company had also granted 201,945
performance shares under its 1991 Long-Term Incentive Plan
through its acquisition date. Compensation expense related to
these plans was $2 million in 1996 and $3 million in 1995. The
weighted-average fair value for the phantom shares and
restricted stock granted during 1996 and 1995 was $68.02 per
share and $52.88 per share, respectively. As a result of its
acquisition, the Company paid all of the amounts due to
employees under stock-related compensation arrangements during
the second quarter of 1997 (Note 3).
10. Voluntary Separation Programs
-----------------------------
During 1996, the Company recorded a charge of $135 million
(before tax benefits of $52 million) consisting of $102 million
in termination benefits to be paid to non-union employees
participating in the voluntary retirement and separation
programs ("voluntary separation programs") and losses of $33
million on non-cancelable leases for office space no longer
required as a result of the reduction in the Company's
workforce. Over 840 applications were accepted from eligible
employees under the voluntary separation programs. Approximately
$90 million in benefits are being paid from the Company's
overfunded pension plan.
<PAGE> PAGE 135
EXHIBIT 99, Page 26 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Asset Disposition Charge
------------------------
Included in 1995 operating expenses is an asset disposition
charge of $285 million, which reduced net income by $176 million.
The asset disposition charge resulted from a review of the
Company's route system and other operating assets to determine
those that no longer effectively and economically supported
current and expected operations. The Company identified and
planned to sell 1,800 miles of rail lines that were expected to
provide proceeds substantially less than net book value. In
addition, other assets, principally yards and side tracks,
identified for disposition were written down to estimated net
realizable value (See Note 1 "Asset Impairment"). Currently, the
asset disposition program is under review as a result of the
Conrail acquisition (Note 2).
12. Other Income, Net
-----------------
1997 1996 1995
---- ---- ----
(In Millions)
Interest income $13 $ 29 $ 33
Rental income 41 50 57
Property sales 23 23 27
Other, net 6 10 13
--- ---- ----
$83 $112 $130
=== ==== ====
13. Commitments and Contingencies
-----------------------------
Environmental
-------------
The Company is subject to various federal, state and local laws
and regulations regarding environmental matters. CRC is a party
to various proceedings brought by both regulatory agencies and
private parties under federal, state and local laws, including
Superfund laws, and has also received inquiries from govern-
mental agencies with respect to other potential environmental
issues. At December 31, 1997, CRC has received, together with
other companies, notices of its involvement as a potentially
responsible party or requests for information under the
Superfund laws with respect to cleanup and/or removal costs due
to its status as an alleged transporter, generator or property
owner at 135 locations. However, based on currently available
information, the Company believes CRC may have some potential
responsibility at only 60 of these sites. Due to the number of
parties involved at many of these sites, the wide range of costs
of possible remediation alternatives, the changing technology and
the length of time over which these matters develop, it is often
not possible to estimate CRC's liability for the costs associated
with the assessment and remediation of contaminated sites.
<PAGE> PAGE 136
EXHIBIT 99, Page 27 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting
period if CRC were held principally liable in certain of these
actions, at December 31, 1997, the Company had accrued $48
million, an amount it believes is sufficient to cover the
probable liability and remediation costs that will be incurred at
Superfund sites and other sites based on known information and
using various estimating techniques. The Company believes the
ultimate liability for these matters will not materially affect
its consolidated financial condition.
The Company spent $9 million in 1997, $11 million in 1996 and
$14 million in 1995 for environmental remediation and related
costs and anticipates spending an amount comparable to that
spent in 1997 during 1998. In addition, the Company's capital
expenditures for environmental control and abatement projects
were approximately $7 million in 1997 and $6 million in 1996
and 1995, and are anticipated to be approximately $11 million
in 1998.
The Environmental Quality Department is charged with promoting
the Company's compliance with laws and regulations affecting
the environment and instituting environmentally sound operating
practices. The department monitors the status of the sites
where the Company is alleged to have liability and continually
reviews the information available and assesses the adequacy of
the recorded liability.
Other
-----
The Company is involved in various legal actions, principally
relating to occupational health claims, personal injuries,
casualties, property damage and damage to lading. The Company
has recorded liabilities for amounts sufficient to cover the
expected payments for such actions.
The Company may be contingently liable for approximately $50
million at December 31, 1997 under indemnification provisions
related to sales of tax benefits.
CRC had an average of 19,802 employees in 1997, approximately
86% of whom are represented by 14 different labor organizations
and are covered by 21 separate collective bargaining agreements.
The Company was not engaged in any collective bargaining at
December 31, 1997.
CRC currently guarantees the principal and interest payments in
the amount of $48 million on Equipment Trust Certificates for
Locomotive Management Services, a general partnership of which
CRC holds a fifty percent interest.
<PAGE> PAGE 137
EXHIBIT 99, Page 28 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CRC has received an adverse jury verdict related to a railroad
crossing accident in Ohio that includes a significant punitive
damage award that approximates $15 million. CRC believes the
punitive damage award in this case is improper and that it has
meritorious defenses, which it is pursuing on appeal.
The Company, currently, has not taken actions to resolve
anticipated year 2000 issues related to its computer systems since
it believes that such issues will be resolved in connection with
the proposed integration of its systems with those of CSX and NSC
following the requisite STB approval of the Conrail acquisition.
In the event that the STB does not approve the sale of Conrail,
the Company is developing a contingency plan to enable it to
continue to operate into the year 2000 and beyond. While it is
not possible, at this time, to quantify the overall cost of
implementing this contingency plan, the Company believes that it
would be material to its results of operations during the
implementation period. In addition, were the STB to disapprove
the sale of Conrail, the Company believes that failure to develop
and implement such a plan could result in a material financial
risk and serious disruption in its operations.
14. Condensed Quarterly Data (Unaudited)
-----------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
-------------- -------------- --------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------ ------ ------
($ In Millions Except Per Share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $906 $889 $ 937 $949 $944 $933 $978 $943
Income (loss) from operations 116 69 (231) 54 218 235 219 243
Net income (loss) 61 31 (273) 26 101 138 118 147
Net income (loss) per common share:
Basic .74 .36 - .30 - 1.76 - 1.87
Diluted .70 .35 - .29 - 1.58 - 1.70
Ratio of earnings to fixed charges 2.52x 1.75x - 1.57x 4.82x 4.77x 4.76x 4.91x
Dividends per common share .475 .425 - .425 - .475 - .475
Market prices per common share
(New York Stock Exchange)
High 113 1/4 77 1/4 - 73 1/4 - 74 5/8 - 100 7/8
Low 98 1/2 67 5/8 - 66 1/4 - 63 3/4 - 68 1/2
</TABLE>
Due to the acquisition of Conrail (Notes 2 and 3), per share data
are not presented for periods subsequent to the first quarter of
1997.
<PAGE> PAGE 138
EXHIBIT 99, Page 29 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recorded pre-tax merger-related costs of $22 million
($14 million after income taxes), $440 million ($390 million
after income taxes), $23 million ($16 million after income taxes)
and $23 million ($15 million after income taxes) during the
first, second, third and fourth quarters of 1997, respectively.
A $221 million ESOP termination charge (no income tax effect) is
included in the second quarter of 1997 merger-related costs (Note
3). After the merger-related costs were recognized during the
second quarter of 1997, earnings available for fixed charges were
inadequate by $259 million.
A tax law was enacted during the third quarter of 1997 by a state
in which the Company operates which changed the Company's method
of computing taxes and resulted in a tax rate increase. Income
tax expense for the third quarter was increased by $22 million
representing the effects of adjusting deferred income taxes and
the special income tax obligation for the rate increase as
required by SFAS 109 (Note 7).
During the second quarter of 1996, the Company recorded a one-
time charge of $135 million for the non-union employee voluntary
early retirement and separation programs and related costs, which
reduced net income by $83 million (Note 10). During the fourth
quarter of 1996, the Company recorded merger-related costs of $16
million ($10 million after income taxes) (Note 3).
<PAGE> PAGE 139
EXHIBIT 99, Page 30 of 30
<TABLE>
Schedule II
CONRAIL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(In Millions)
<CAPTION>
Additions
----------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other At End
Description of Period Expenses Accounts Deductions of Period
- ----------- ------------ ---------- --------- ------------ -----------
(1)
<S> <C> <C> <C> <C> <C>
1995
Casualty reserves
Current............... $103 $ 3 $ (4) (2) $110
Noncurrent............ 212 $171 14 180 (3) 217
Allowance for disposition
of property and
equipment (4)(5)........ 241 261 63 439
1996
Casualty reserves
Current............... 110 (31) (2) 141
Noncurrent............ 217 165 11 203 (3) 190
Allowance for disposition
of property and
equipment (4) .......... 439 31 408
1997
Casualty reserves
Current............... 141 1 1 (2) 141
Noncurrent............ 190 127 14 133 (3) 198
Allowance for disposition
of property and
equipment (4)............ 408 16 392
</TABLE>
(1) Includes charges to property accounts in connection with
construction projects and the recording of receivables from third
parties.
(2) Includes net transfers from noncurrent.
(3) Includes net transfers to current.
(4) Deductions of $63 million, $31 million and $16 million in 1995,
1996 and 1997, respectively, represent net losses on asset
dispositions.
(5) In 1995, the Company recorded an asset disposition charge, which
resulted from a review of the Company's route system and other
operating assets to determine those that no longer effectively and
economically support current and expected operations. The Company
identified and planned to sell 1,800 miles of rail lines that were
expected to provide proceeds substantially less than net book value.
In addition, other assets, principally yards and side tracks,
identified for disposition have been written down to estimated net
realizable value.(See Note 11 to the Consolidated Financial
Statements.)
