<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, 1998.
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 26, 1999: $10,656,426,108.
The number of shares outstanding of each of the registrant's classes
of common stock, as of February 26, 1999: 379,739,015 (excluding
21,627,904 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, 1999), 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 17
4. Submission of Matters to a Vote of Security
Holders 17
Executive Officers of the Registrant 18
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters 23
6. Selected Financial Data 24
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 31
7A. Quantitative and Qualitative Disclosures
about Market Risk 51
8. Financial Statements and Supplementary Data 52
9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 84
Part III 10. Directors and Executive Officers of the
Registrant 85
11. Executive Compensation 85
12. Security Ownership of Certain Beneficial
Owners and Management 85
13. Certain Relationships and Related
Transactions 85
Part IV 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K 86
Index to Consolidated Financial Statement
Schedule 86
Power of Attorney 91
Signatures 91
Exhibit Index 95
<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).
Effective Sept. 1, 1998, NW was merged with and into Norfolk Southern
Railway. As of Dec. 31, 1998, 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 March 28, 1998, Norfolk Southern closed the sale of its
motor carrier company, North American Van Lines, Inc. (NAVL) (see
"Discontinued Operations" on page 42 and Note 3 on page 66). NAVL's
results of operations, 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., the owner
of Consolidated Rail Corporation, the major freight railroad in the
Northeast. Norfolk Southern Railway will begin providing rail freight
services on portions of Conrail's route system after the Closing Date,
which NS and CSX have agreed will be June 1, 1999 (see "Joint
Acquisition of Conrail" on page 44 and Note 2 on page 62).
Implementation of the Conrail transaction will expand NS' railroads'
service area considerably, adding approximately 7,200 route-miles
through an operating agreement, and giving them access to most of the
major ports on the East Coast, to New York City and the Northeast, and
to the Midwest. In addition, the equipment fleet will be augmented by
approximately 1,100 locomotives, 27,200 freight cars, and 1,200
intermodal containers that Norfolk Southern Railway will lease from a
Conrail subsidiary on the Closing Date.
<PAGE> PAGE 5
CONTINUING OPERATIONS:
RAILROAD OPERATIONS - As of Dec. 31, 1998, 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
Virginia, and in the Province of Ontario, Canada. Of this total,
12,115 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 10,780 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), the U.S. District Court in
Raleigh ruled that there was no quorum at the stockholders' meeting
where the agreement had been approved 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. 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' railroads 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. They 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
<PAGE> PAGE 6
the port cities of Miami, West Palm Beach, and Fort Lauderdale. The
system's lines also reach many individual industries, mines (in
western Virginia, eastern Kentucky, and southern West Virginia) and
businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include
those from the Appalachian coal fields of Virginia, West Virginia, and
Kentucky, to Norfolk and Sandusky, Ohio; Buffalo to Chicago and Kansas
City; Chicago to Jacksonville (via Cincinnati, Chattanooga, and
Atlanta); and Washington, D.C./Hagerstown, Maryland, to New Orleans
(via Atlanta and Birmingham).
Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City,
Memphis, New Orleans, and St. Louis are major gateways for
interterritorial system traffic.
NS' railroads and other railroads have entered into service
interruption agreements, effective 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, NS' 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
NS and Conrail are equal partners. RoadRailer(RT) equipment owned or
leased by TCS (which was renamed TCS Leasing, Inc.) is operated by
TCSC. The revenues of TCSC since April 1, 1993, have not been
consolidated with the results of NS; however, beginning with the
Closing Date (see "Joint Acquisition of Conrail" on page 44), NS
expects to gain control of TCSC, and, therefore, include TCSC's
results in its consolidated financial statements. 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.
<PAGE> PAGE 7
<TABLE>
RAILWAY OPERATING REVENUES - NS' total railway operating
revenues were $4.2 billion in 1998. 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 1998 1997 1996 1995 1994
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
<S> <C> <C> <C> <C> <C>
COAL
Revenues $1,252 $1,301 $1,305 $1,268 $1,290
% of total revenues 30% 31% 32% 32% 33%
Shipments 1,310 1,324 1,310 1,267 1,274
% of total shipments 27% 28% 29% 29% 30%
Revenue Yield $ 956 $ 983 $ 996 $1,001 $1,013
CHEMICALS
Revenues $ 574 $ 585 $ 560 $ 541 $ 538
% of total revenues 13% 14% 14% 14% 14%
Shipments 401 405 385 374 376
% of total shipments 8% 8% 8% 8% 9%
Revenue Yield $1,431 $1,446 $1,456 $1,447 $1,433
AUTOMOTIVE
Revenues $ 566 $ 492 $ 489 $ 449 $ 429
% of total revenues 13% 11% 12% 11% 11%
Shipments 487 361 354 328 317
% of total shipments 10% 8% 8% 7% 7%
Revenue Yield $1,162 $1,364 $1,379 $1,368 $1,352
PAPER/CLAY/FOREST
Revenues $ 534 $ 539 $ 513 $ 537 $ 522
% of total revenues 13% 13% 12% 13% 13%
Shipments 445 457 438 459 464
% of total shipments 9% 9% 10% 10% 11%
Revenue Yield $1,200 $1,178 $1,171 $1,170 $1,124
AGRI./CONSUMER/GOVT.
Revenues $ 383 $ 391 $ 393 $ 394 $ 380
% of total revenues 9% 9% 9% 10% 10%
Shipments 355 366 376 391 383
% of total shipments 8% 8% 8% 9% 9%
Revenue Yield $1,079 $1,065 $1,045 $1,007 $ 992
METALS/CONSTRUCTION
Revenues $ 373 $ 368 $ 354 $ 349 $ 330
% of total revenues 9% 9% 9% 8% 8%
Shipments 372 374 359 367 366
% of total shipments 8% 8% 8% 8% 8%
Revenue Yield $1,003 $ 985 $ 986 $ 951 $ 902
</TABLE>
<PAGE> PAGE 8
<TABLE>
<CAPTION>
Year Ended December 31,
Principal Sources of ------------------------------------------
Railway Operating
Revenues 1998 1997 1996 1995 1994
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
<S> <C> <C> <C> <C> <C>
INTERMODAL
(Trailers, Containers,
and RoadRailers)
Revenues $ 539 $ 547 $ 487 $ 474 $ 429
% of total revenues 13% 13% 12% 12% 11%
Shipments 1,443 1,472 1,331 1,263 1,127
% of total shipments 30% 31% 29% 29% 26%
Revenue Yield $ 374 $ 372 $ 366 $ 376 $ 380
Total Railway Operating
Revenues $4,221 $4,223 $4,101 $4,012 $3,918
Total Railway Shipments 4,813 4,759 4,553 4,449 4,307
Railway Revenue Yield $ 877 $ 887 $ 901 $ 902 $ 910
</TABLE>
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.
<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 1998 and
handled a total of 134 million tons. Originated tonnage and total
tons handled remained stable compared with 1997. Revenues from coal,
coke, and iron ore account for about 30 percent of NS' total railway
operating revenues.
The following table shows total coal, coke, and iron ore
tonnage originated on line, received from connections, and handled for
the past five years:
<TABLE>
Tons of Coal, Coke, and Iron Ore (Millions)
--------------------------------------------
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Originated 119 119 117 114 115
Received 15 15 13 11 11
--- --- --- --- ---
Handled 134 134 130 125 126
=== === === === ===
</TABLE>
<TABLE>
Of the 119 million tons of coal, coke, and iron ore
originated on NS' railroads' lines in 1998, the approximate breakdown
by origin state was as follows:
<CAPTION>
Origin State Millions of Tons
------------ ----------------
<S> <C>
West Virginia 41
Virginia 34
Kentucky 27
Indiana 7
Alabama 5
Illinois 3
Tennessee 1
Other 1
---
119
===
</TABLE>
Of the 134 million tons handled, approximately 25 million
moved for export, principally through NS' pier facilities at Norfolk
(Lamberts Point), Virginia; 18 million moved to domestic and Canadian
steel industries; 83 million of steam coal moved to electric
utilities; and 8 million moved to other industrial and miscellaneous
users.
NS' railroads moved 6 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.
Total coal handled through all system ports in 1998 was
39 million tons. Of this total, 69 percent, or 27 million tons
(including coastwise traffic), moved through Lamberts Point, a
16 percent decrease, compared with the 32 million tons handled in
1997.
<PAGE> PAGE 10
The quantities of NS export coal handled through Lamberts
Point for the past five years were as follows:
<TABLE>
Export Coal through Lamberts Point
(Millions of tons)
----------------------------------
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
24 28 26 25 24
</TABLE>
See the discussion of coal traffic, by type of coal, in
Part II, Item 7, "Management's Discussion and Analysis."
Merchandise Traffic - The merchandise traffic group consists
of intermodal and general merchandise, which consists of five major
commodity groupings: chemicals; automotive; paper, clay, and forest
products; agriculture, consumer products, and government; and metals
and construction. Total merchandise revenues in 1998 were
$3.0 billion, a 2 percent increase, compared with 1997. Merchandise
carloads and intermodal units handled in 1998 were 3.50 million,
compared with 3.43 million handled in 1997, an increase of 2 percent.
In 1998, 113 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 only two of the six market groups comprising
merchandise traffic improved in 1998. The only large gain was in the
automotive group, up $74 million.
See the discussion of general merchandise rail traffic by
commodity group and intermodal rail traffic in Part II, Item 7,
"Management's Discussion and Analysis."
<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,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ton miles
(billions) 133 136 130 127 122
Freight train miles
traveled (millions) 53.0 49.7 49.4 48.5 46.0
Revenue per ton mile $0.0316 $0.0311 $0.0316 $0.0317 $0.0320
Revenue tons per train 2,517 2,732 2,625 2,611 2,655
Revenue ton miles
per man-hour worked 2,635 2,905 2,764 2,679 2,579
Percentage ratio of
railway operating
expenses to railway
operating revenues 75.1% 71.3% 71.6% 73.5% 73.4%
</TABLE>
<PAGE> PAGE 11
FREIGHT RATES - In 1998, 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 currently economically regulated by
the government. In general, market forces have been substituted for
government regulation and now are the primary determinant of rail
service prices.
In 1998, NS' railroads were found by the STB to be "revenue
adequate" based on results for the year 1997. 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.
After the Closing Date (see "Joint Acquisition of Conrail"
on page 44), Norfolk Southern Railway will operate that portion of
Conrail's routes and assets allocated to Conrail's wholly owned
subsidiary, Pennsylvania Lines LLC. As a result, Norfolk Southern
Railway will provide freight service over lines with significant
ongoing Amtrak and commuter passenger operations, and will conduct
freight operations over some trackage owned by Amtrak or by commuter
entities.
NONCARRIER OPERATIONS - NS' 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 1998, 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. 131.
<PAGE> PAGE 12
RAILWAY PROPERTY:
<TABLE>
EQUIPMENT - As of Dec. 31, 1998, 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 2,094 0 2,094 6,798,350
Switching 110 0 110 162,300
Auxiliary units 60 0 60 0
------ ------ ------ ---------
Total locomotives 2,264 0 2,264 6,960,650
====== ====== ====== =========
Freight Cars: (Tons)
Hopper 20,668 1,302 21,970 2,306,342
Box 19,047 758 19,805 1,559,165
Covered Hopper 12,154 2,231 14,385 1,568,234
Gondola 28,236 1,053 29,289 3,150,884
Flat 4,250 858 5,108 383,976
Caboose 197 0 197 0
Other 1,027 0 1,027 75,234
------ ------ ------ ---------
Total freight cars 85,579 6,202 91,781 9,043,835
====== ====== ====== =========
Other:
Work equipment 6,275 3 6,278
Vehicles 3,546 0 3,546
Highway trailers
and containers 1,901 2,548 4,449
RoadRailers(RT) 329 0 329
Miscellaneous 1,495 1,798 3,293
------ ------ ------
Total other 13,546 4,349 17,895
====== ====== ======
</TABLE>
* Includes equipment leased to outside parties and equipment subject
to equipment trusts, condition sale agreements, and capitalized
leases.
<PAGE> PAGE 13
<TABLE>
The following table indicates the number and year of
purchase for locomotives and freight cars owned at Dec. 31, 1998:
<CAPTION>
Year Built
-------------------------------------------------------
1988- 1982- 1981 &
1998 1997 1996 1995 1994 1993 1987 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Locomotives:
Number of
units 116 120 119 125 25 288 396 1,075 2,264
Percent of
fleet 5 5 5 6 1 13 17 48 100%
Freight cars:
Number of
units 1,105 531 787 1,036 780 6,595 2,599 72,146 85,579
Percent of
fleet 1 1 1 1 1 8 3 84 100%
</TABLE>
The average age of the freight car fleet at Dec. 31, 1998,
was 23.6 years. During 1998, 1,338 freight cars were retired. As of
Dec. 31, 1998, the average age of the locomotive fleet was 15.4 years.
During 1998, 52 locomotives, the average age of which was 20.6 years,
were retired. The average age of retired locomotives decreased in
1998 due to: (1) a disproportionate share of early retirements due to
casualties and service failures, and (2) retention of older units in
anticipation of the Closing Date. Since 1988, about 27,000 coal cars
have been rebodied. As a result, the remaining serviceability of the
freight car fleet is greater than may be inferred from the high
percentage of freight cars built in earlier years.
Ongoing freight car and locomotive maintenance programs are
intended to ensure the highest standards of safety, reliability,
customer satisfaction, and equipment marketability. In past years,
the 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 overage 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 1997, the locomotive bad order ratio had
returned to a more historic level.
<TABLE>
Annual Average Bad Order Ratio
--------------------------------
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freight Cars (excluding cabooses):
NS Rail 4.1% 4.6% 4.8% 5.8% 6.7%
Locomotives:
NS Rail 4.3% 5.0% 4.5% 4.7% 4.7%
</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 22,382 miles
of track maintained as of Dec. 31, 1998, 15,955 were laid with welded
rail.
<TABLE>
The density of traffic on running tracks (main line trackage
plus passing tracks) during 1998 was as follows:
<CAPTION>
Gross tons of
freight carried
per track mile Track miles of Percent
(Millions) running tracks* of total
--------------- -------------- --------
<S> <C> <C> <C>
0-4 4,334 27
5-19 5,050 31
20 and over 6,709 42
------ ---
16,093 100
====== ===
</TABLE>
* Excludes trackage rights.
<TABLE>
The following table summarizes certain information about NS'
track roadway additions and replacements during the past five years:
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles of rail
installed 429 451 401 403 480
Miles of track surfaced 4,715 4,703 4,686 4,668 4,760
New crossties installed
(millions) 2.0 2.2 1.9 2.0 1.7
</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, Georgia. 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
<PAGE> PAGE 15
providing current information on the location of every train and
each car on line, as well as related waybill and other train and car
movement data. 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 under way a project to review, and modify as
necessary, computer and other systems for Year-2000 compliance. See
discussion of Year-2000 compliance efforts on page 46 in Part II,
Item 7, "Management's Discussion and Analysis."
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 $725 million as of Dec. 31, 1998, and $601 million at
Dec. 31, 1997.
CAPITAL EXPENDITURES - Capital expenditures for road,
equipment, and other property for the past five years were as follows
(including capitalized leases):
<TABLE>
Capital Expenditures
----------------------------------------
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Road $ 612 $ 599 $ 438 $ 386 $ 385
Equipment 442 306 326 338 240
Other property 6 24 25 33 82
------ ------ ------ ------ ------
Total $1,060 $ 929 789 $ 757 $ 707
====== ====== ====== ====== ======
</TABLE>
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient, and
reliable transportation services. For 1999, NS has budgeted
$1.07 billion of capital spending, of which $300 million are initial
outlays for facilities and equipment related to the Conrail
transaction. Capital spending is expected to remain at historically
high levels, as projects related to the operation of Conrail's routes
and assets will continue after the Closing Date.
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 48 in Part II, Item 7, "Management's Discussion and Analysis,"
and in Note 16 to the Consolidated Financial Statements on page 80.
<PAGE> PAGE 16
EMPLOYEES - NS employed an average of 24,300 employees in
1998, compared with an average of 25,817 (which includes 2,407 NAVL
employees) in 1997. The approximate average cost per employee during
1998 was $49,700 in wages and $17,600 in employee benefits.
Approximately 85 percent of NS' railroad employees are
represented by labor unions under collective bargaining agreements
with 15 different labor organizations. The agreements currently in
force will remain in effect through Dec. 31, 1999, and thereafter
until new agreements are reached or until the Railway Labor Act's
procedures are exhausted.
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 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 1999 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.
COMPETITION - There is continuing strong competition among
rail, water, and highway carriers. Price is usually only one factor
of importance as shippers and receivers choose a transport mode and
specific hauling company. Inventory carrying costs, service
reliability, ease of handling, and the desire to avoid loss and damage
during transit are increasingly important considerations, especially
for higher valued finished goods, machinery, and consumer products.
Even for raw materials, semi-finished goods, and work-in-process,
users are increasingly sensitive to transport arrangements which
minimize problems at successive production stages.
<PAGE> PAGE 17
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.
Item 3. Legal Proceedings.
- ------ -----------------
None.
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 1998.
<PAGE> PAGE 18
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, 1999, relating to
these officers:
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -----------------------------------
David R. Goode, 58, Present position since September
Chairman, President, and 1992.
Chief Executive Officer
L. I. Prillaman, 55, Present position since August 1,
Vice Chairman and 1998. Served as Executive Vice
Chief Marketing Officer President-Marketing from October
1995 to August 1998, and prior
thereto was Vice President-
Properties.
Stephen C. Tobias, 54, Present position since August 1,
Vice Chairman and 1998. Served as Executive Vice
Chief Operating Officer President-Operations from July
1994 to August 1998, and prior
thereto was Senior Vice President-
Operations.
Henry C. Wolf, 56, Present position since August 1,
Vice Chairman and 1998; prior thereto was
Chief Financial Officer Executive Vice President-Finance.
James C. Bishop, Jr., 62, Present position since March
Executive Vice President- 1996; prior thereto was Vice
Law President-Law.
R. Alan Brogan, 58, Present position since April 1,
Executive Vice President- 1998; prior thereto was Executive
Corporate Vice President-Transportation
Logistics.
John F. Corcoran, 58, Present position since August
Senior Vice President- 1997; prior thereto was Vice
Public Affairs President-Public Affairs.
<PAGE> PAGE 19
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -----------------------------------
Jon L. Manetta, 60, Present position since August 1,
Senior Vice President- 1998. Served as Vice President-
Operations Transportation & Mechanical from
December 1995 to August 1998,
Vice President-Transportation
from June 1994 to December 1995,
and prior thereto was Assistant
Vice President-Transportation.
James W. McClellan, 59, Present position since August 1,
Senior Vice President- 1998; prior thereto was Vice
Planning President-Strategic Planning.
Phillip R. Ogden, 58, Present position since August 1,
Senior Vice President- 1998; prior thereto was Vice
Engineering President-Engineering.
Paul N. Austin, 55, Present position since September 22,
Vice President- 1998. Served as Vice President-
Human Resources and Personnel and Assistant to
Assistant to Chairman Chairman from September 1, 1998,
to September 21, 1998, Vice
President-Personnel from June
1994 to September 1998, and prior
thereto was Assistant Vice
President-Personnel.
David A. Cox, 63, Present position since December
Vice President- 1995; prior thereto was Assistant
Properties Vice President-Industrial
Development.
Timothy P. Dwyer, 49, Present position since August 23,
Vice President- 1998. Served as Senior Vice
Marketing Services President-Operations of Conrail
from June 1998 to August 1998,
Senior Vice President-Unit Train
Service Group of Conrail from
November 1994 to June 1998, and
prior thereto was Vice President-
Unit Train Service Group of
Conrail.
Thomas L. Finkbiner, 46, Present position since August 1993.
Vice President-
Intermodal
Nancy S. Fleischman, 51, Present position since August
Vice President 1997; prior thereto was Assistant
Vice President-Strategic
Planning.
<PAGE> PAGE 20
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -----------------------------------
Robert C. Fort, 54, Present position since December
Vice President- 1996; prior thereto was Assistant
Public Relations Vice President-Public Relations.
John W. Fox, Jr., 51, Present position since October
Vice President- 1995; prior thereto was Assistant
Coal Marketing Vice President-Coal Marketing.
James L. Granum, 62, Present position since March 1992.
Vice President-
Public Affairs
Lewis D. Hale, Jr., 52, Present position since August 1,
Vice President- 1998. Served as Assistant Vice
Transportation President-Mechanical from
December 1995 to August 1998, and
prior thereto was General Manager
Western Region.
James A. Hixon, 45, Present position since June 1993.
Vice President-
Taxation
Thomas C. Hostutler, 62, Present position since August 16,
Vice President- 1998; prior thereto was Senior
Internal Audit Assistant Vice President-
Corporate Accounting.
H. Craig Lewis, 54, Present position since August 1,
Vice President- 1998. Served as Regional Vice
Corporate Affairs President from August 1997 to
August 1998, and prior thereto
was a partner in a Pennsylvania
law firm.
Mark D. Manion, 46, Present position since August 1,
Vice President- 1998. Served as General Manager
Mechanical Western Region from December 1995
to August 1998, Assistant Vice
President-Transportation from
July 1994 to December 1995, and
prior thereto was Division
Superintendent, Lake Division.
Harold C. Mauney, Jr., 60, Present position since August 1997.
Vice President- Served as Vice President-
Public Affairs Operations Planning and Budget
from December 1996 to August
1997, and prior thereto was Vice
President-Quality Management.
<PAGE> PAGE 21
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -----------------------------------
Donald W. Mayberry, 55, Present position since December
Vice President- 1995; prior thereto was Vice
Research and Tests President-Mechanical.
Kathryn B. McQuade, 42, Present position since August 16,
Vice President- 1998; prior thereto was Vice
Financial Planning President-Internal Audit.
Charles W. Moorman, 47, Present position since October
Vice President- 1993.
Information Technology
John P. Rathbone, 47, Present position since December
Vice President and 1992.
Controller
William J. Romig, 54, Present position since April 1992.
Vice President and
Treasurer
John M. Samuels, 55, Present position since January
Vice President- 1998. Served as Vice President-
Operations Planning Operating Assets of Conrail from
and Budget 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, 46, Present position since August 1993.
Vice President-
Merchandise Marketing
Robert S. Spenski, 64, Present position since June 1994;
Vice President- prior thereto was Senior
Labor Relations Assistant Vice President-Labor
Relations.
Rashe W. Stephens, Jr., 57, Present position since December
Vice President- 1996; prior thereto was Assistant
Quality Management Vice President-Public Affairs.
Charles J. Wehrmeister, 49, Present position since August 1,
Vice President- 1998. Served as Assistant Vice
Safety and Environmental President-Safety and
Environmental from January 1995
to August 1998, and prior thereto
was Division Superintendent,
Virginia Division.
<PAGE> PAGE 22
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -----------------------------------
William C. Wooldridge, 56, Present position since March 1996;
Vice President- prior thereto was General
Law Counsel-Corporate.
Dezora M. Martin, 51, Present position since April 1995;
Corporate Secretary prior thereto was Assistant
Corporate Secretary-NS.
<PAGE> PAGE 23
PART II
Item 5. Market for Registrant's Common Stock and Related
- ------ ------------------------------------------------
Stockholder Matters.
-------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
STOCK PRICE AND DIVIDEND INFORMATION
(Unaudited)
<TABLE>
The common stock of Norfolk Southern Corporation, owned by
51,727 stockholders of record as of Dec. 31, 1998, 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 1998 and 1997, after restatement for the Sept. 5, 1997,
three-for-one stock split.
<CAPTION>
Quarter
----------------------------------------------
1998 1st 2nd 3rd 4th
---- --- --- --- ---
<S> <C> <C> <C> <C>
Market price
High $ 41-3/4 $ 39-1/16 $ 31-1/2 $ 34-15/16
Low 29-1/2 28-5/8 27-7/16 27-7/16
Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20
1997 1st 2nd 3rd 4th
---- --- --- --- ---
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
</TABLE>
<PAGE> PAGE 24
Item 6. Selected Financial Data.
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1995 - 1998
Page One
<CAPTION>
1998 1997(1) 1996 1995
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Railway operating revenues $ 4,221 $ 4,223 $ 4,101 $ 4,012
Railway operating expenses 3,169 3,010 2,936 2,950
--------- --------- --------- ---------
Income from
railway operations 1,052 1,213 1,165 1,062
Other income - net 309 170 117 140
Interest expense on debt 516 385 116 113
--------- --------- --------- ---------
Income from continuing
operations before
income taxes 845 998 1,166 1,089
Provision for income taxes 215 299 413 391
--------- --------- --------- ---------
Income from continuing
operations before
accounting changes 630 699 753 698
Discontinued operations (2) 104 22 17 15
Cumulative effect
of accounting changes -- -- -- --
--------- --------- --------- ---------
Net income $ 734 $ 721 $ 770 $ 713
========= ========= ========= =========
PER SHARE DATA:
Net income - Basic $ 1.94 $ 1.91 $ 2.03 $ 1.81
Net income - Diluted $ 1.93 $ 1.90 $ 2.01 $ 1.80
Dividends $ 0.80 $ 0.80 $0.74-2/3 $0.69-1/3
Stockholders' equity
at year-end $ 15.61 $ 14.44 $ 13.26 $ 12.47
</TABLE>
<PAGE> PAGE 25
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1995 - 1998
Page Two
<CAPTION>
1998 1997(1) 1996 1995
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Total assets $ 18,180 $ 17,350 $ 11,234 $ 10,718
Total long-term debt,
including current
maturities $ 7,624 $ 7,459 $ 1,856 $ 1,638
Stockholders' equity $ 5,921 $ 5,445 $ 4,977 $ 4,829
OTHER:
Capital expenditures $ 1,060 $ 929 $ 789 $ 757
Average number of shares
outstanding (thousands) 378,749 376,593 379,372 392,987
Number of stockholders
at year-end 51,727 50,938 50,748 53,401
Average number of employees:
Rail 24,185 23,323 23,361 24,488
Nonrail (2) 115 2,494 2,469 2,456
--------- --------- --------- ---------
Total 24,300 25,817 25,830 26,944
========= ========= ========= =========
</TABLE>
All share and per share amounts have been restated to reflect the
Sept. 5, 1997, three-for-one stock split.
NOTES:
(1) 1998 and 1997 results include several Conrail-related items.
These principally consist of: (1) interest expense of $402
million in 1998 and $264 million in 1997 on debt issued to
finance NS' share of the NS/CSX joint acquisition of Conrail
stock, (2) NS' equity in earnings of Conrail, net of
amortization, of $194 million in 1998 and $117 million in 1997,
(3) integration costs of $119 million in 1998 and $3 million in
1997, and (4) credit facility costs including a $77 million
charge in 1997 incurred in conjunction with certain now-
terminated commitments that provided financing for NS' then-
proposed acquisition of all Conrail stock. These items reduced
net income by $156 million, or 41 cents per diluted share, in
1998, and $107 million, or 29 cents per diluted share, in 1997.
(2) In 1998, NS sold all the common stock of its motor carrier
subsidiary, North American Van Lines, Inc. (NAVL), for $207
million, and recorded a $90 million pretax ($105 million, or 28
cents per diluted share, after-tax) gain. Accordingly, NAVL's
results of operations, financial position, and cash flows are
presented as "Discontinued operations."
<PAGE> PAGE 26
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1991 - 1994
Page One
<CAPTION>
1994 1993(3) 1992 1991(4)
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Railway operating revenues $ 3,918 $ 3,746 $ 3,777 $ 3,654
Railway operating expenses 2,875 2,831 2,851 3,345
--------- --------- --------- ---------
Income from
railway operations 1,043 915 926 309
Other income - net 86 135 97 131
Interest expense on debt 101 98 109 99
--------- --------- --------- ---------
Income from continuing
operations before
income taxes 1,028 952 914 341
Provision for income taxes 372 370 328 112
--------- --------- --------- ---------
Income from continuing
operations before
accounting changes 656 582 586 229
Discontinued operations (2) 12 (33) (28) (199)
Cumulative effect
of accounting changes -- 223 -- --
--------- --------- --------- ---------
Net income $ 668 $ 772 $ 558 $ 30
========= ========= ========= =========
PER SHARE DATA:
Net income - Basic $ 1.63 $ 1.85 $ 1.31 $ 0.07
Net income - Diluted $ 1.62 $ 1.83 $ 1.30 $ 0.07
Dividends $ 0.64 $ 0.62 $ 0.60 $0.53-1/3
Stockholders' equity
at year-end $ 11.73 $ 11.12 $ 10.05 $ 9.55
</TABLE>
<PAGE> PAGE 27
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1991 - 1994
Page Two
<CAPTION>
1994 1993(3) 1992 1991(4)
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
FINANCIAL POSITION:
Total assets $ 10,403 $ 10,301 $ 10,188 $ 9,959
Total long-term debt,
including current
maturities $ 1,619 $ 1,594 $ 1,648 $ 1,387
Stockholders' equity $ 4,685 $ 4,621 $ 4,233 $ 4,093
OTHER:
Capital expenditures $ 707 $ 639 $ 628 $ 688
Average number of shares
outstanding (thousands) 408,904 418,243 424,378 443,276
Number of stockholders
at year-end 52,442 51,884 51,200 53,725
Average number of employees:
Rail 24,710 25,531 25,650 27,366
Nonrail 2,458 3,773 4,485 4,586
--------- --------- --------- ---------
Total 27,168 29,304 30,135 31,952
========= ========= ========= =========
</TABLE>
All share and per share amounts have been restated to reflect the
Sept. 5, 1997, three-for-one stock split.
NOTES:
(3) 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. "Discontinued operations" includes a $50 million pretax
restructuring charge for the disposition of two NAVL businesses.
Net income also reflects two accounting changes, the cumulative
effect of which increased 1993 net income by $223 million, or
53 cents per diluted share: a change in accounting for income
taxes increased net income by $467 million, with a corresponding
reduction in deferred taxes, and changes in accounting for
postretirement and postemployment benefits decreased net income
by $244 million.
(4) 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 $1.12 per diluted share.
<PAGE> PAGE 28
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1988 - 1990
Page One
<CAPTION>
1990 1989 1988
---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Railway operating revenues $ 3,786 $ 3,694 $ 3,617
Railway operating expenses 2,969 2,864 2,680
--------- --------- ---------
Income from
railway operations 817 830 937
Other income - net 142 155 103
Interest expense on debt 78 50 53
--------- --------- ---------
Income from continuing
operations before
income taxes 881 935 987
Provision for income taxes 316 323 358
--------- --------- ---------
Income from continuing
operations before
accounting changes 565 612 629
Discontinued operations (2) (9) (6) 6
Cumulative effect
of accounting changes -- -- --
--------- --------- ---------
Net income $ 556 $ 606 $ 635
========= ========= =========
PER SHARE DATA:
Net income - Basic $ 1.14 $ 1.16 $ 1.17
Net income - Diluted $ 1.14 $ 1.15 $ 1.17
Dividends $0.50-2/3 $ 0.46 $ 0.42
Stockholders' equity
at year-end $ 10.52 $ 10.15 $ 9.58
</TABLE>
<PAGE> PAGE 29
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1988 - 1990
Page Two
<CAPTION>
1990 1989 1988
---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C>
FINANCIAL POSITION:
Total assets $ 10,326 $ 10,049 $ 9,845
Total long-term debt,
including current
maturities $ 1,122 $ 838 $ 778
Stockholders' equity $ 4,912 $ 5,169 $ 5,153
OTHER:
Capital expenditures $ 605 $ 620 $ 482
Average number of shares
outstanding (thousands) 486,284 523,109 543,113
Number of stockholders
at year-end 56,187 61,630 64,974
Average number of employees:
Rail 28,697 29,667 30,330
Nonrail 4,584 4,645 4,209
--------- --------- ---------
Total 33,281 34,312 34,539
========= ========= =========
</TABLE>
All share and per share amounts have been restated to reflect the
Sept. 5, 1997, three-for-one stock split.
<PAGE> PAGE 30
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 two (2) separate
graphs with the Eleven-Year Financial Review in the 1998 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>
(Percent) 1993 1994 1995 1996 1997 1998
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RETURN ON AVERAGE
STOCKHOLDERS'
EQUITY 13.7%* 14.4% 15.4%* 15.7% 13.8%* 12.9*
* 1993 excludes the cumulative effect of required
accounting changes and the prior years' effect of a
federal tax rate increase. 1995 excludes a charge for
an early retirement program. 1997 and 1998 include
Conrail-related items. Return on average stockholders'
equity, excluding Conrail-related items, would have
been 15.7% in 1997 and 15.2% in 1998.
(Dollars) 1993 1994 1995 1996 1997 1998
- --------- ---- ---- ---- ---- ---- ----
DIVIDENDS PER
SHARE $0.62 $0.64 $0.69-1/3 $0.74-2/3 $0.80 $0.80
</TABLE>
Since 1983, NS' first full year after consolidation,
the annual dividend has grown at a compound annual rate
of 6.5%. Stockholders received a dividend yield of 2.5%
in 1998, compared with less than 1.2% for all S&P 500
stocks.
<PAGE> PAGE 31
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 and Notes beginning on
page 54 and the Eleven-Year Financial Review beginning on page 24.
SUMMARIZED RESULTS OF OPERATIONS
1998 Compared with 1997
- -----------------------
Net income in 1998 was $734 million, an increase of 2%, and
includes a $105 million gain from the sale of NS' former motor carrier
subsidiary, North American Van Lines, Inc. (NAVL) (see Note 3 on
page 66). Income from continuing operations, which excludes both
NAVL's results of operations prior to its sale and the gain from its
sale, was $630 million, a decrease of 10%. Included in both of these
results were Conrail-related items that are estimated to have reduced
income from continuing operations by $156 million in 1998 and
$107 million in 1997 (see Note 2 on page 62). Excluding the effects of
these items, income from continuing operations would have been down
2%, attributable to a decline in income from railway operations.
Diluted earnings per share of $1.93 were up 2%. Diluted earnings
per share from continuing operations of $1.65 were down 10%. Excluding
the effects of the Conrail-related items, diluted earnings per share
from continuing operations would have been down 3%.
1997 Compared with 1996
- -----------------------
Net income in 1997 was $721 million, a decrease of 6%. Income
from continuing operations was $699 million, down 7%. Excluding the
effects of Conrail-related items, net income would have been up 8%
over 1996's record result, and income from continuing operations would
have been up 7%. Income from railway operations increased 4%.
Increased nonoperating income (see Note 4 on page 67) and a lower
effective income tax rate (see Note 5 on page 67) also contributed to
the improvement in net income.
Diluted earnings per share of $1.90 were down 5%. Diluted
earnings per share from continuing operations of $1.84 were down 6%.
Excluding the effects of the Conrail-related items, both earnings per
share amounts would have been up 9% over 1996's record result.
<TABLE>
INCOME FROM RAILWAY OPERATIONS
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998* 1997* 1996 1995* 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$1,052 $1,213 $1,165 $1,096 $1,043 $ 915
</TABLE>
Excluding Conrail-related items, income from railway
operations decreased 4% in 1998, compared with the record
result of 1997.
*1998 and 1997 include Conrail-related integration expenses.
Excluding such expenses, income from railway operations would
have been $1,171 million in 1998 and $1,216 million in 1997.
1995 excludes a $34 million charge for an early retirement
program.
<PAGE> PAGE 32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $4.2 billion in 1998, compared
with $4.2 billion in 1997 and $4.1 billion in 1996. The following
table presents a three-year comparison of revenues by market group.
<TABLE>
RAILWAY OPERATING REVENUES BY MARKET GROUP
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Coal $1,252 $1,301 $1,305
General merchandise:
Chemicals 574 585 560
Automotive 566 492 489
Paper/clay/forest 534 539 513
Agriculture/consumer/
government 383 391 393
Metals/construction 373 368 354
------ ------ ------
General merchandise 2,430 2,375 2,309
Intermodal 539 547 487
------ ------ ------
Total $4,221 $4,223 $4,101
====== ====== ======
</TABLE>
In 1998, revenue increases in the automotive and metals and
construction groups were offset by revenue decreases in the remaining
market groups. As shown in the following table, volume gains were more
than offset by lower revenue per unit. However, almost all of the
volume increase and revenue per unit decrease reflect the effects of
the new mixing centers (see the discussion under the "Automotive"
caption, below). Revenues for the remaining market groups declined
$76 million, $58 million of which resulted from lower traffic volume
and $18 million of which resulted from lower revenue per unit. In
1997, revenues increased or remained steady for all market groups, and
volume gains produced all of the revenue improvement.
<TABLE>
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
<CAPTION>
($ in millions) 1998 vs. 1997 1997 vs. 1996
--------------- ------------- -------------
<S> <C> <C>
Volume $ 114 $ 130
Revenue per unit (116) (8)
----- -----
Total $ (2) $ 122
===== =====
</TABLE>
Following the Closing Date of the Conrail transaction (see "Joint
acquisition of Conrail," on page 44), total railway operating revenues
are expected to increase by about one-half: coal revenues are expected
to increase by about one-third; general merchandise revenues are
expected to increase by about one-half; and intermodal revenues are
expected to about double.
<PAGE> PAGE 33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
COAL tonnage was unchanged in 1998, but revenues decreased 4%; an
increase in utility tonnage, especially shorter-haul (lower average
revenue) traffic, offset decreases in longer-haul (higher average
revenue) export and domestic metallurgical traffic. Coal revenues
represented 30% of total railway operating revenues in 1998, and 89%
of coal shipments originated on NS' lines. In 1997, coal tonnage
increased 3%, primarily due to increased export and utility tonnage;
however, revenues decreased slightly as a result of shorter hauls.
<TABLE>
TOTAL COAL, COKE, AND IRON ORE TONNAGE
<CAPTION>
(In millions of tons) 1998 1997 1996
--------------------- ---- ---- ----
<S> <C> <C> <C>
Utility 83 76 75
Export 25 29 27
Steel 18 21 20
Other 8 8 8
--- --- ---
Total 134 134 130
=== === ===
</TABLE>
Utility coal traffic increased 9% in 1998, due to rising
electricity production in NS' service area, the return of some traffic
to rail, and increased business from several customers.
In 1997, utility coal traffic increased 2%. Several of NS'
utility customers 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.
The near-term outlook for utility coal remains positive. U.S.
demand for electricity continues to increase at a rate greater than
generation capacity is being added, and coal-fired generation
continues to be the cheapest marginal source of electricity. Increased
price competition resulting from utility deregulation could cause
utilities to seek to reduce costs and increase plant utilization.
These factors, coupled with excess capacity at certain low-cost, coal-
fired generating plants, could provide an opportunity for utility coal
volume growth. However, competitive pressures on utilities to reduce
costs also could put price pressure on generation source fuels,
including NS-delivered coal.
Moreover, many of the mines served by NS produce coals that
satisfy both the Phase I and Phase II requirements of the Clean Air
Act Amendments. In addition, an increasing bank of sulfur dioxide
allowances held by many NS-served utilities should continue to provide
a market for other NS-served mines for nearly a decade. However,
several recently adopted or proposed environmental regulations could
increase the cost of coal-fired generation.
After the Closing Date, NS will gain direct access to 27 utility
plants and to mines with an abundant supply of low-cost, high-quality
steam coal located on Conrail lines.
Export coal tonnage decreased 14% in 1998, due to weak economies
in Asia and a strong U.S. dollar. The dollar gained 20% or more
compared with the currencies of countries (such as Australia, South
Africa, and Indonesia) that provide the primary competition for U.S.
export coal. A significant decline in Asian demand for coal created
supplies that competed at deeply discounted prices with U.S. export
coal in Europe and South America. Steam coal exports declined to
0.4 million tons in 1998, compared with 1.7 million tons in 1997. U.S.
low-sulfur coals were not price-competitive due to the strength of the
dollar. In addition, natural gas has displaced much of the coal-fired
generation in Europe.
<PAGE> PAGE 34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1997, export coal tonnage increased 7%, reaching the highest
level since 1992. Higher metallurgical coal demand 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.
The same factors that led to the decrease in 1998 volume are
expected to continue in 1999. The Asian recession in steel production
showed signs of moving into Europe in late 1998. In addition,
competition from Australian coal is expected to intensify, and U.S.
coal exports may drop further if demand decreases for blast furnace
raw materials in Western Europe. Finally, the recent Kyoto Protocol on
climate change, if adopted, could put added downward pressure,
worldwide, on coal-fired power demand.
Conrail and its coal-producing customers are well established in
the export steam coal market, which might 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 both Baltimore, Md., and Norfolk, Va.
Steel coal domestic traffic declined 14% in 1998, due to plant
closures, reduced blast furnace operations, and the continuation of
aggressive producer pricing of higher volatile metallurgical coals not
located on NS' lines.
In 1997, steel coal domestic traffic increased 5%, due to growth
in coke and iron ore shipments that more than offset decreased
metallurgical coal shipments.
Steel coal domestic traffic is expected to be adversely affected
by competition in domestic and foreign steel markets. Producers in
weak markets such as Russia, Japan, and Brazil are exporting much of
their steel at low prices to the United States and Canada.
Furthermore, with the reduction in 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 in the long term. However,
alternative uses for steel coal are increasing, and NS continues to
pursue opportunities for the movement of noncoking coal used in
alternative iron-making technologies.
With its access to the Northeast after the Closing Date, NS
expects to increase its participation in shipments of raw materials
for the steel industry by gaining single-line access to most domestic
integrated steel plants and merchant coke plants.
Other coal traffic, primarily steam coal shipped to manufacturing
plants, was largely unchanged in 1998 and 1997.
<TABLE>
COAL
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Export $ 314 $ 380 $ 374 $ 353 $ 340 $ 366
Domestic 938 921 931 915 950 873
------ ------ ------ ------ ------ ------
$1,252 $1,301 $1,305 $1,268 $1,290 $1,239
====== ====== ====== ====== ====== ======
</TABLE>
Revenues decreased 4% in 1998 due to lower export
traffic. Total tonnage handled in 1998 was equal to
1997, as increased utility coal tonnage offset
decreased export and steel coal tonnage. This group
includes utility coal, export coal, domestic
metallurgical coal, industrial coal, coke, and iron
ore.
<PAGE> PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
GENERAL MERCHANDISE traffic volume increased 5%, and revenues
increased 2%, in 1998, driven by higher automotive revenues. In 1997,
both general merchandise traffic volume and revenues increased 3%, as
all market groups, except the agriculture, consumer products, and
government group posted revenue gains.
Chemicals traffic volume decreased 1%, and revenues decreased 2%,
in 1998, the first decline since 1989. The weak economies in Asia and
softness in certain domestic markets adversely affected shipments of
products for the vinyl, polyester, and pulp markets. In addition,
nationwide rail service problems, particularly early in the year,
caused some customers to divert traffic to truck and barge. However,
several NS-served facilities with new and expanded plant capacity
increased shipments of plastics and petroleum products, somewhat
offsetting these negative effects. NS also increased traffic through
its Thoroughbred Bulk Transfer (TBT) facilities that handle chemicals
and bulk commodities to customers not located on its lines.
In 1997, chemicals traffic volume increased 5%, 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 is expected to rebound in 1999,
supported by plant expansions, expected increases in U.S. chemical
production, and extended market reach made possible by new TBT
facilities.
After the Closing Date, NS will gain a competitive route 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>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 574 $ 585 $ 560 $ 541 $ 538 $ 501
</TABLE>
Revenues decreased $11 million, or 2%, in 1998, the
only decline this decade. This group includes
fertilizers, sulfur, and related chemicals, petroleum
products, chlorine and bleaching compounds, plastics,
industrial chemicals, chemical wastes, and municipal
wastes.
Automotive carloads increased 35%, and revenues increased 15%, in
1998, exceeding the record levels achieved in 1997. Finished vehicles
led the growth, as carloads increased 54% and revenues increased 19%,
primarily due to new business through the Ford mixing centers. Full
production volume at the Mercedes-Benz plant in Vance, Ala., and the
Toyota minivan line at Georgetown, Ky., also contributed to the
increases. Vehicle parts traffic volume and revenues remained steady
despite the effects of the mid-year strike at General Motors.
A substantial portion of the 1998 increase in carloads resulted
from the nature of the mixing centers. Previously, carloads of
vehicles went from plant to distribution center, where vehicles were
classified and loaded onto trucks for transport to dealers. Now,
carloads of vehicles, mostly in unit-train service, go from plant to
the mixing centers, where vehicles are sorted by destination and
loaded onto other trains in a mix suitable for direct transport to
dealers. As a result, carload counts have been increased: each vehicle
that is handled through the centers arrives on one carload and departs
on another carload. This hub-and-spoke method of distribution is
intended to improve Ford's delivery logistics and reduce its inventory
costs and order-to-delivery times.
<PAGE> PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1997, automotive traffic volume increased 2%, and revenues
rose 1%. A 12% increase in auto parts traffic volume more than offset
a 3% decline in vehicles traffic that resulted from industrywide
railcar shortages, rail traffic congestion, unexpected downtime at
certain plants, and modest sales for some of the models transported by
NS.
The automotive market group is expected to continue to experience
growth in 1999, supported by the Ford mixing centers, a new Toyota
truck assembly plant at Princeton, Ind., two new just-in-time rail
parts distribution facilities, and the introduction of a new BMW sport
utility vehicle to be produced at Greer, S.C.
After the Closing Date, NS will gain direct access to 15 assembly
plants, and NS will serve 32 of the 58 rail-served assembly plants in
the United States. NS' network of auto distribution terminals will
increase from 26 to 38.
<TABLE>
AUTOMOTIVE
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 566 $ 492 $ 489 $ 449 $ 429 $ 426
</TABLE>
Revenues increased $74 million, or 15%, in 1998. Since
1993, revenues have increased $140 million, or 33%.
This group includes finished vehicles for BMW,
DaimlerChrysler, Ford, General Motors, Honda, Isuzu,
Jaguar, Land Rover, Mazda, Mitsubishi, Nissan, Saab,
Subaru, Suzuki, Toyota, and Volkswagen, and auto parts
for Ford, DaimlerChrysler, General Motors, and Toyota.
Since 1988, eight of 11 major new automotive plants in
the East have located on NS lines.
Paper, clay, and forest products traffic volume decreased 3%, and
revenues declined 1%, in 1998. Traffic volume increases in the first
three quarters were offset by a sudden and pronounced weakness in the
paper industry in the fourth quarter, adversely affecting shipments of
paper, wood fiber, and kaolin clay. Decreased domestic and foreign
demand resulted in both widespread paper mill downtime late in the
year and indefinite closure of several NS-served paper mills.
Shipments of lumber and wood products partially offset the effects of
these declines, posting record carloads and revenues due to continued
strong demand from the housing construction industry.
In 1997, paper, clay, and forest products traffic volume rose 4%,
and revenues increased 5%. Shipments of wood chips increased, as did
lumber traffic, supported by demand for southern yellow pine to
replace timber from Pacific Northwest sources. Kaolin clay traffic
also increased, and shipments of paper products were up slightly.
The paper industry is expected to continue to experience reduced
demand in 1999, due to the weak economies in Asia and consolidation
within the industry. Moreover, growth in lumber is expected to slow,
as housing starts are forecast to decline from the record levels of
1998.
After the Closing Date, NS will have direct access to 33 paper
mills and 26 lumber reload centers located on Conrail lines.
<PAGE> PAGE 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
PAPER, CLAY, AND FOREST PRODUCTS
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 534 $ 539 $ 513 $ 537 $ 522 $ 522
</TABLE>
Revenues decreased $5 million, or 1%, in 1998. This
group includes lumber and wood products, pulpboard and
paper products, wood fibers, woodpulp, scrap paper, and
clay. NS serves 50 paper mills, more than 30 lumber
reload centers, and numerous general commodity
warehouses.
Agriculture, consumer products, and government traffic volume
declined 3%, and revenues decreased 2%, in 1998. Weak export and
soybean meal markets adversely affected shipments. Sweeteners volume
and revenues declined, as a strong beet sugar crop negatively affected
cane sugar shipments out of the South. Increased revenues from grain,
soybeans, and feed ingredients from the longer-haul Southeast feed and
corn processing markets somewhat offset the effects of the declines.
In 1997, agriculture, consumer products, and government traffic
volume decreased 3%, and revenues decreased 1%. Most of the decline
resulted from decreases in the bulk agriculture commodities. Weak
export markets, declines in corn shipments to processors, and an
unfavorable soybean market resulting from higher prices led to traffic
declines that began early in the year.
Moderate growth is expected in 1999; low prices and an abundant
supply should continue to increase domestic consumption of corn for
feed and processing. In addition, moderating worldwide competition
should lead to a small recovery in the U.S. export market.
After the Closing Date, NS expects to increase its direct-line
accessed grain elevator capacity by about 10%.
<TABLE>
AGRICULTURE, CONSUMER PRODUCTS, AND GOVERNMENT
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 383 $ 391 $ 393 $ 394 $ 380 $ 357
</TABLE>
Revenues decreased $8 million, or 2%, in 1998. This
group includes grain, soybeans, animal feed, feed
ingredients, sweeteners, food oils, flour, beverages,
canned goods, consumer products, and items for the
military.
Metals and construction traffic volume was unchanged, and
revenues increased 1%, in 1998. The strong performance in the metals
market during 1997 was repeated in the first half of 1998, due to
improved efficiency at integrated mills and the continued growth of
new mini-mills and steel processors in NS' service territory. However,
the domestic metals market weakened in the second half of 1998, due to
an increase in the supply of lower-priced, imported steel.
Construction traffic and revenues increased, due to increased highway
and housing construction activity in the Southeast.
In 1997, both traffic and revenues in metals and construction
increased 4%. Construction traffic benefited from increased highway
building activity in the Southeast. Metals traffic increased due to
gains in domestic sheet steel movements resulting from record steel
production and increased pipe shipments.
<PAGE> PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The metals and construction market group is expected to grow
moderately in 1999. Production at new industries locating on NS' lines
is expected to mitigate traffic losses attributable to imports of
steel and scrap metal. Traffic is expected to continue to benefit from
increased highway construction activity.
After the Closing Date, NS will have direct access to 43 steel
production facilities and 38 metal distribution centers located on
Conrail lines.
<TABLE>
METALS AND CONSTRUCTION
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 373 $ 368 $ 354 $ 349 $ 330 $ 309
</TABLE>
Revenues increased $5 million, or 1%, in 1998, marking
the seventh consecutive year of growth. Since 1993,
revenues have increased $64 million, or 21%. This group
includes steel, aluminum products, machinery, scrap
metals, cement, aggregates, bricks, and minerals.
INTERMODAL traffic volume decreased 2%, and revenues decreased
1%, in 1998. The decline, which was the first in 12 years, resulted
from a service network redesign that was implemented in August. The
redesign is expected to improve on-time performance and eliminate
complexity, thereby positioning NS to achieve the traffic volume
anticipated from the Conrail transaction. As a result, trailer traffic
volume declined 16%, but this decrease was largely offset by increases
in both container traffic volume and revenues (respectively, 2% and
5%) and Triple Crown Services Company (TCSC) traffic volume and
revenues (respectively, 5% and 9%). NS' intermodal revenues includes
rail-haul services performed for TCSC (a partnership in which
subsidiaries of NS and Conrail are equal partners). After the Closing
Date, NS expects to gain control of TCSC and, therefore, include
TCSC's results in its consolidated financial statements.
In 1997, intermodal traffic volume increased 11%, and revenues
increased 12%, each setting a record. 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, and NS
outperformed the market in all intermodal traffic segments. Container
traffic volume increased 12%, supported by new steamship business
under contract.
Intermodal revenues are expected to increase in 1999, supported
by the redesigned service network, expanded terminal capacity, and
extension of NS' double-stack services.
After the Closing Date, NS will gain direct-line access to the
Northeast consumer markets and most major East Coast ports. This,
along with the inclusion of TCSC's revenues in NS' reported revenues,
is expected nearly to double NS' intermodal revenues.
<PAGE> PAGE 39
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
INTERMODAL
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 539 $ 547 $ 487 $ 474 $ 429 $ 392
</TABLE>
Revenues decreased $8 million, or 1%, in 1998, the
first decline in 12 years. This group handles trailers,
domestic and international containers, Triple Crown
equipment, and equipment for intermodal marketing
companies, international steamship lines, truckers, and
other shippers.
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 5% in 1998, while
carloadings increased 1%. The expense increase was mostly attributable
to Conrail-related integration expenses, and additional expenses,
including start-up costs, related to the Ford mixing centers. Railway
operating expenses increased only 3% in 1997, despite a 5% increase in
traffic volume.
As a result, the railway operating ratio, which measures the
percentage of railway revenues consumed by railway expenses, was 75.1%
in 1998, compared with the record-low 71.3% in 1997 and 71.6% in 1996.
NS' railway operating ratio continues to be the best among the major
railroads in the United States.
In addition to reflecting Conrail-related integration expenses,
the railway operating ratio in 1998 was also adversely affected by a
change in traffic mix related to growth in automotive traffic coupled
with the change in coal traffic mix. Automotive traffic includes some
of NS' most time-sensitive and resource-intensive business, requiring
more trains, increased handling costs, and higher equipment rents.
The railway operating ratio is expected to be even higher in
1999, due to expenses associated with the portion of Conrail's routes
and assets that NS will operate, as well as additional integration
expenses, prior to and after the Closing Date, and because the Closing
Date is later than previously anticipated.
The following table shows the changes in railway operating
expenses summarized by major classifications.
<TABLE>
RAILWAY OPERATING EXPENSES
Increases (Decreases)
<CAPTION>
($ in millions) 1998 vs. 1997 1997 vs. 1996
--------------- ------------- -------------
<S> <C> <C>
Compensation and
benefits $ 87 $ 5
Materials, services,
and rents 121 61
Depreciation 16 13
Diesel fuel (53) (6)
Casualties and other
claims (28) --
Other 16 1
----- -----
Total $ 159 $ 74
===== =====
</TABLE>
Compensation and benefits, which represents about half of total
railway operating expenses, increased 6% in 1998, and only slightly in
1997.
<PAGE> PAGE 40
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1998, higher wages and salaries -- results of additional
staffing in anticipation of the Closing Date and union wage increases,
including the effect of an increase in the BLE bonus fund -- were
offset somewhat by lower accruals for pension benefits, due to
favorable investment returns on pension plan assets. Also contributing
to the increase were new FRA train inspection requirements and a
higher Railroad Unemployment Tax rate.
In 1997, higher wages resulting from union 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. To a large extent, productivity improvements and
train efficiencies offset the effects of the higher traffic volume.
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 18% in 1998 and 10% in 1997.
The 1998 increase was principally due to Conrail-related
integration costs and higher-than-anticipated mixing center costs
associated with the increase in automotive traffic. Higher equipment
rents and locomotive repair expenses also contributed to the increase.
The 1997 increase resulted primarily from higher volume-related
intermodal expenses, as well as from higher equipment rents, partially
a result of a change in the mix of received versus forwarded traffic.
Higher locomotive repair expenses and costs for contract programmers
to make computer processes Year-2000 compliant (see "Year-2000
compliance" discussion under "Other matters," below) also contributed
to the increase.
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
18% in 1998 and 11% in 1997. The 1998 increase was due to: (1) rents
for equipment needed to support the increase in automotive traffic;
(2) reduced rents received from the leasing of owned locomotives; and
(3) increased lease expenses for equipment obtained to meet
anticipated demand after the Closing Date. These increases were
somewhat offset by higher receipts on NS-owned freight cars and auto
racks.
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 were
mitigated somewhat by higher receipts from short-term leases of
locomotives to various railroads.
Locomotive repair costs increased in 1998 and 1997 due to the
higher traffic levels and an increase in the average number of
locomotives in service, reflecting retention of older units.
Depreciation expense (see Note 1, "Properties," on page 61 for
NS' depreciation policy) was up 4% in 1998 and 3% in 1997. Increases
in both years were due to property additions, reflecting recent
substantial levels of capital spending.
Diesel fuel costs declined 23% in 1998 and 3% in 1997. The 1998
decrease was due to a 26% drop in the average price per gallon, which
was the lowest since 1988, somewhat offset by a 3% increase in
consumption. The 1997 decrease was due to the net effect of a 5% drop
in the average price per gallon and a 3% increase in consumption.
<PAGE> PAGE 41
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Casualties and other claims expenses (including the estimates of
costs related to personal injury, property damage, and environmental
matters) decreased 23% in 1998 and were unchanged in 1997. The 1998
decline was due to cost recoveries from third parties and lower
accruals for environmental remediation costs and to reduced personal
injury expenses. In 1997, a reduction in personal injury expenses was
offset by higher freight damage costs.
The largest component of casualties and other claims expense is
personal injury costs. Although NS experienced an increase in the
number of reportable employee injuries in 1998, the number of claims
declined, compared with 1997. Costs associated with employee and third-
party injuries were lower in 1998, continuing the favorable trend
experienced in recent years. However, these improvements were
partially offset by an increase in costs related to so-called
"occupational" injuries. Within the past decade, there has been a
dramatic increase in the number of these types of claims. In 1998,
almost two-thirds of the total employee injury cases settled and one-
third of settlement payments made were related to occupational claims.
These claims do not generally relate to a specific accident or event,
but rather result from a claimed exposure over time to some condition
of employment. As a result, many of these claims are asserted by
employees who have retired or who no longer work for NS. NS continues
to work actively to eliminate all accidents and exposure risks and to
control 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 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
nonrail competitors and other employers 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. In
1998, in recognition of ever-increasing jury awards, NS elected to
increase the limit of liability insurance maintained, which did not
result in a significant increase in premium expense.
Other expenses increased 11% in 1998 and 1% in 1997. The 1998
increase was principally due to: (1) higher property and other taxes,
due to the effects of favorable adjustments in prior years resulting
from settlements with taxing authorities, and (2) increased travel
expenses, mostly attributable to planning for the Conrail transaction.
Income Taxes
- ------------
Income tax expense in 1998 was $215 million, for an effective
rate of 25%, compared with an effective rate of 30% in 1997 and 35% in
1996. Excluding the equity in Conrail's after-tax earnings, the
effective rate was 33% in 1998 and 34% in 1997.
The effective rates in all three years were below the statutory
federal and state rates -- results of investments in corporate-owned
life insurance and in coal-seam gas properties and of favorable
adjustments upon filing the prior year tax returns. In addition, 1998
benefited from favorable adjustments resulting from settlement of
federal income tax years 1993-1994. 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.
<PAGE> PAGE 42
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Discontinued Operations
- -----------------------
Income from discontinued operations includes the $105 million
after-tax gain from the sale of NAVL (see Note 3 on page 66). Motor
carrier operations in 1998 (January 1 through March 28) produced a
$1 million loss; these same operations produced income of $22 million
in 1997 and $17 million in 1996.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of
liquidity, decreased $260 million, or 23%, in 1998, and $48 million,
or 4%, in 1997. Since consolidation in 1982, cash provided by
operating activities has been sufficient to fund dividend
requirements, debt repayments, and a significant portion of capital
spending. The decrease in 1998 was principally the result of the
decline in income from operations and higher interest payments related
to the debt issued in mid-1997 in connection with the Conrail
transaction. The decrease in 1997 was primarily the result of higher
interest payments.
<TABLE>
CASH PROVIDED BY OPERATIONS
(Shown as a graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1998* 1997* 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 890 $1,150 $1,198 $1,234 $1,144 $ 875
</TABLE>
Cash provided by operations declined in 1998, due to Conrail-
related items that consumed a substantial amount of cash.
* Excluding Conrail-related items, cash provided by operations
would have been $1,240 million in 1998 and $1,241 million in
1997.
Cash used for investing activities in 1998, 1997, and 1996
includes costs related to NS' acquisition in 1997 of a 58% economic
interest in Conrail, and 1998 includes proceeds from the sale of NAVL.
Excluding the investment in Conrail and NAVL sale proceeds, cash used
for investing activities increased 8% in 1998 and 50% in 1997. Property
additions account for most of the recurring spending in this category.
The following tables show capital spending, track, and equipment
statistics for the past five years. Capital expenditures include
amounts relating to capitalized leases, which are excluded from the
Consolidated Statements of Cash Flows (see Note 8 "Capital lease
obligations" on page 72).
<TABLE>
CAPITAL EXPENDITURES
(Also shown as a graph in the Annual Report to Stockholders)
<CAPTION>
($ in millions) 1998 1997 1996 1995 1994
--------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Road $ 612 $ 599 $ 438 $ 386 $ 385
Equipment 442 306 326 338 240
Other property 6 24 25 33 82
------ ------ ------ ------ ------
Total $1,060 $ 929 $ 789 $ 757 $ 707
====== ====== ====== ====== ======
</TABLE>
NS' capital expenditures have increased 66% since 1993 --
demonstrating commitment to make the investments necessary
to support safe, efficient operations and revenue growth.
<PAGE> PAGE 43
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Capital expenditures increased 14% in 1998 and 18% in 1997. The
increase in 1998 was due to significant outlays for roadway projects
and equipment in anticipation of the Closing Date. The increase in
1997 was due to higher roadway additions that included construction
costs for four Ford mixing centers.
<TABLE>
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles of
rail installed 429 451 401 403 480
Miles of track
surfaced 4,715 4,703 4,686 4,668 4,760
New crossties
installed
(millions) 2.0 2.2 1.9 2.0 1.7
</TABLE>
<TABLE>
AVERAGE AGE OF RAILWAY EQUIPMENT
<CAPTION>
(Years) 1998 1997 1996 1995 1994
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freight cars 23.6 23.0 22.3 22.0 21.9
Locomotives 15.4 15.3 15.4 15.7 15.8
Retired locomotives 20.6 23.3 24.4 22.6 23.6
</TABLE>
The 1998 decrease in the average age of retired locomotives
resulted from: (1) a disproportionate share of early retirements due
to casualties and service failures, and (2) retention of older units
in anticipation of the Closing Date.
Since 1988, NS has rebodied about 27,000 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, and "Property sales
and other transactions" in the 1997 and 1996 Consolidated Statements
of Cash Flows includes proceeds from such dispositions.
For 1999, NS has budgeted $1.07 billion of capital expenditures,
of which $300 million is related to Conrail properties to be operated
by NS after the Closing Date. Some of the Conrail-related projects may
be constructed by Conrail, which would reduce NS' capital spending.
Approximately $650 million of the total projected spending is for
roadway projects, including nearly $400 million for rail and bridge
program work. Also included are projects to improve signaling and
communications; track improvements, such as installation of second
main lines and passing sidings to increase line capacity and upgrade
service; and new and expanded intermodal and auto distribution
terminals.
Equipment purchases of almost $390 million include 138 six-axle,
high-adhesion locomotives; multi-level automobile racks; high-cubic
capacity, 60-foot boxcars for automotive parts; and covered coil cars
to handle steel traffic. Also included in equipment spending is
$87 million to support ongoing programs to improve equipment
utilization, including the coal car rebody program and rebuilding of
multi-level automobile racks, high-cubic capacity boxcars, covered
hopper cars, and open-top coil cars.
Capital expenditures are expected to remain at historically high
levels, as projects related to the operation of Conrail's routes and
assets will continue after the Closing Date.
<PAGE> PAGE 44
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Cash used for financing activities was $252 million in 1998 and
included proceeds from the sale of additional commercial paper and
equipment trust certificates. 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.
Also included was $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 1998 and 1997 included repayment of some commercial
paper. NS' debt-to-total capitalization ratio was 56% at the end of
1998 and 58% at the end of 1997.
Cash spent to purchase and retire common stock was $389 million
in 1996. On Oct. 23, 1996, NS announced that the share purchase
program had been suspended (see Note 13 on page 78).
NS currently has in place a $2.8 billion credit facility to
support its commercial paper program. In addition, NS registered
$1 billion of securities on Form S-3 (see Note 8 on page 70). During
1999, as in prior years, NS expects to finance a portion of its
equipment acquisitions using equipment trusts and other traditional
mechanisms.
JOINT ACQUISITION OF CONRAIL
NS and CSX, through a jointly owned entity, control Conrail (see
Note 2 on page 62). NS will begin providing rail freight services on
portions of Conrail's route system after the Closing Date, which NS
and CSX have agreed will be June 1, 1999. Selection of that date
permits additional programming and testing of information technology
and other systems necessary for safe and efficient integration of
operations -- matters as to which the parties must give assurances
required under the STB's order approving the transaction.
NS has negotiated (or has out for ratification) all but two of
the labor implementing agreements necessary for closing. Arbitration
awards (which set forth the implementing agreement provisions) have
been received in the remaining two cases.
NS plans to implement its own information technology systems on
the portion of Conrail's routes and assets it will operate. While some
systems will be operational on the Closing Date, others --
particularly the transportation systems -- will be integrated
geographically over a period of several months after the Closing Date.
Accordingly, some of Conrail's systems are being modified to be
compatible with NS' systems. Most of this programming is completed,
and testing has begun. Moreover, in the Shared Assets Areas, many of
Conrail's existing systems will continue to be used and, therefore,
must be able to work with both NS' and CSX's systems and be made
Year-2000 compliant (see also the discussion on page 46 concerning
Conrail's Year-2000 compliance efforts).
In anticipation of the Closing Date, NS has accumulated resources
to enable it to operate its portion of Conrail's routes and assets.
This has included maintaining or increasing its work force
(particularly hiring and training additional train crews and
management employees), acquiring or leasing equipment based on
projected requirements, and beginning expansions to its facilities.
These actions have resulted in increased operating expenses in 1998,
and expenses of this type are anticipated to continue even after the
Closing Date.
The Closing Date marks the point at which Norfolk Southern
Railway Company (NSR) actually can begin to operate certain of the
assets and routes of Conrail, thereby permitting NS to begin to
realize many of the anticipated transaction benefits. Realization of
these benefits is dependent upon, among other things: (1) successful
integration of NS' portion of Conrail's system into its railroad
system; (2) successful operations within the Shared Assets Areas; and
(3) successful coordination of NSR's (and CSXT's) operations with the
<PAGE> PAGE 45
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Shared Assets Areas' operations. In addition, increased rail
competition in the Northeast could affect the extent of benefits
realized. A failure by NS or CSX to integrate successfully their
respective portions of Conrail, including information technology
systems, could have a substantial impact on NS' financial position,
results of operations, or liquidity.
Conrail's Results of Operations, Financial Condition, and Liquidity
- -------------------------------------------------------------------
Conrail's net income was $267 million in 1998, compared with
$7 million in 1997. Both years included transactions related to the
acquisition and control of Conrail by NS and CSX that were excluded in
determining NS' equity in earnings of Conrail.
Conrail's operating revenues increased $98 million, or 3%, in
1998, due to a 4% increase in traffic volume, as all market groups
except automotive posted increases for the year.
Conrail's operating expenses decreased $95 million, or 3%, in
1998, and included a $170 million charge ($105 million after taxes)
for severance benefits covering nonunion employees and $132 million
($82 million after taxes) of other charges and reserves. Operating
expenses in 1997 included a $221 million charge in conjunction with
the termination of the Conrail ESOP (which had no related income tax
effect) and a $173 million charge ($142 million after taxes) for stock
compensation and executive severance costs related to the change in
ownership. In addition, Conrail's operating expenses reflect
transition-related expenses of $149 million in 1998 (principally
technology integration costs and employee stay bonuses) and
$114 million in 1997 (principally investment banking, legal and
consulting fees and employee stay bonuses). Excluding the effects of
the acquisition-related compensation and transition costs, operating
expenses increased 3%, compared with the 4% increase in traffic
volume. Volume-related expense increases and higher casualty and other
claims expenses were offset somewhat by lower diesel fuel costs.
Conrail's cash provided by operations decreased $157 million, or
18%, in 1998, principally due to the higher incentive compensation
payments and transition-related costs. Cash generated from operations
has been the principal source of liquidity and is primarily used for
capital expenditures and debt repayments. Capital expenditures totaled
$550 million in 1998, and included $214 million for track program work
and $198 million of equipment acquisitions. Debt repayments in 1998
were $119 million.
Conrail had a working capital deficit of $202 million at Dec. 31,
1998, compared with a deficit of $254 million at Dec. 31, 1997. The
deficit at year-end 1998 includes $234 million of employee-related
liabilities, such as severance and stay bonus accruals, which are
expected to be funded using assets from an employee benefits trust and
Conrail's over-funded pension plan.
During 1998, Conrail terminated its status as an SEC registrant
and, therefore, it presently cannot issue any publicly traded
securities. Conrail also terminated its $440 million uncollateralized
bank credit facility that was used for general corporate purposes and
to support its now-terminated commercial paper program. Conrail should
continue to have sufficient cash flow to meet its ongoing obligations
both before and after the integration of rail operations with NS and
CSX.
NS' equity in earnings of Conrail, net of amortization, was
$194 million in 1998, and $117 million in 1997 (see Note 2).
<PAGE> PAGE 46
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
OTHER MATTERS
Year-2000 Compliance
- --------------------
General -- In October 1995, NS initiated a project to review and
modify, as necessary, its computer applications, hardware, and other
equipment to make them Year-2000 compliant. NS has engaged outside
consultants and independent contractors to assist with its Year-2000
project. The progress of the project is reviewed regularly by NS'
senior management and by the Board's Audit Committee. The project is
organized into three principal areas: mainframe systems, nonmainframe
systems, and enterprise systems (operations and embedded processors),
and for each such system involves: inventory, assessment, remediation,
testing, and implementation. NS expects to have all business-critical
systems remediated, tested, and implemented by mid-1999.
State of readiness -- For mainframe systems (data center
infrastructure, purchased or leased software, and mainframe
applications), remediation and unit testing for business-critical
systems are in the final stages. Systems testing and implementation
began in February 1999, and both are expected to be substantially
completed in June 1999 but require use of the same resources needed
for testing related to the Conrail transaction (see "Joint
acquisition of Conrail," above).
For most business-critical nonmainframe and enterprise systems,
assessment has been completed. Remediation of some systems has begun,
and completion for all business-critical systems is expected by April
1999. Testing and implementation will follow with expected completion
for business-critical systems by mid-year 1999.
NS also has initiated formal communications with third parties
having a substantial relationship to its business (including other
railroads, significant suppliers, larger customers, and financial
institutions) to determine the extent to which NS may be vulnerable to
any such third party's failure to achieve Year-2000 compliance. Thus
far, NS has no information that indicates that a significant third
party may be unable to provide goods or services or to request NS'
services because of Year-2000 issues.
Cost -- NS has allocated existing information technology
resources and has incurred incremental costs, mostly for contract
programmers and consultants, in connection with its Year-2000
compliance project. Since the project began, Management estimates that
up to 10% of NS' in-house programming resources have been used for
Year-2000 compliance efforts. The effects of deferring other
information technology projects to accommodate the Year-2000 effort
have been minor. Incremental costs incurred through Dec. 31, 1998,
which were expensed, are immaterial to NS' results of operations.
Total incremental costs are expected to be approximately $25 million.
Contingency plans -- In all areas, the project includes extensive
testing to ensure that remediation successfully addresses Year-2000
compliance. Rather than adopting contingency plans, NS has established
a series of initiatives to focus on business-critical systems to
ensure continued operations in the event of a Year-2000 problem. If
contingency plans for business-critical systems are warranted, they
will be developed as needed.
Conrail -- As a part of its preparations to integrate its
railroad system with a portion of Conrail's system, NS is working with
Conrail and CSX to ensure that certain Conrail computer applications,
hardware, and other equipment are Year-2000 compliant. Conrail's core
transportation system is being made Year-2000 compliant, with a
projected completion date for all programming and testing of September
1999. Conrail's other information technology systems are expected to
<PAGE> PAGE 47
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
be replaced by NS and CSX systems within six months after the
Closing Date, or by Dec. 1, 1999. A delay in replacing these systems,
which are not Year-2000 compliant, could result in their failure.
Conrail also has under way a project to inventory, assess, and
remediate all of its business-critical enterprise systems that
will continue to operate after the Closing Date. This Conrail
project is scheduled for completion in June 1999.
Risks -- Failure to achieve Year-2000 compliance -- by NS, other
railroads, its principal suppliers and customers, and certain
financial institutions with which it has relationships -- could
negatively affect NS' ability to conduct business for an extended
period. Unanticipated delays in either the Conrail systems integration
effort or the Year-2000 project could adversely affect NS' ability to
complete the other. Management believes that NS will be successful in
its Year-2000 compliance effort; however, there can be no assurance
that all NS information technology systems and components will be
fully Year-2000 compliant. In addition, other companies on which NS
systems and operations rely may or may not be fully compliant on a
timely basis, and any such failure could have a material adverse
effect on NS' financial position, results of operations, or liquidity.
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 8 on page 70), all is
fixed-rate debt, except for commercial paper and $348 million of
capital leases. As a result, NS' debt subject to interest rate
exposure totaled $2.2 billion on Dec. 31, 1998. A 1% increase in
interest rates would increase NS' total annual interest expense
related to all its variable debt by approximately $22 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.
The average interest rate on commercial paper was 6.0% on
Dec. 31, 1998 and 1997. During 1998, interest rates on NS' commercial
paper ranged from 5.2% to 6.4%.
The capital leases, which carry an average fixed rate of 7.1%,
were effectively converted to variable rate obligations using interest
rate swap agreements. On Dec. 31, 1998, the average pay rate under
these agreements was 6.1%, and the average receive rate was 7.1%.
During 1998, 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. Counterparties to the interest rate swaps and
Japanese banks holding yen deposits are major financial institutions
believed by Management to be creditworthy.
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 (SFAS)
No. 130, "Reporting Comprehensive Income," and SFAS No. 132,
"Employers' Disclosures About Pension and Other Postretirement
Benefits," in 1998.
During 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and AICPA Statement of Position 98-1
(SOP 98-1), "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," were issued. NS expects to adopt
SFAS 133 effective Jan. 1, 2000, and SOP 98-1 effective Jan. 1, 1999.
Neither adoption is expected to have a material effect on NS'
consolidated financial statements.
<PAGE> PAGE 48
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 nonjury
trial on liability, which the Corporation vigorously defended,
concluded in June 1997, and the matter is with the court for
requesting briefs and decision. In the meantime, the parties have
begun mediation of the case.
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 of 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.
As of Feb. 19, 1999, the trial court had not ruled on motions
filed by defendants seeking relief from the jury's verdicts. The trial
court has, however, ordered that another case involving 20 plaintiffs
be set for trial on March 22, 1999. The defendants are challenging in
the Louisiana Supreme Court the trial court's action in setting
additional cases for trial prior to a final determination of the
validity of the original trial.
Management will continue to monitor the progress of this
litigation, and will, if necessary, pursue appropriate appeals.
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 its amount can be estimated
reasonably. Claims, if any, against third parties for recovery of
clean-up costs incurred by NS are reflected as receivables (when
collection is probable) 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.
Operating expenses for environmental matters totaled
approximately $4 million in 1998, $21 million in 1997, and $25 million
in 1996, and capital expenditures totaled approximately $7 million in
1998 and $6 million in both 1997 and 1996. Operating expenses were
substantially lower in 1998 compared with recent years, principally due
<PAGE> PAGE 49
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
to a combination of increased recoveries from third parties of amounts
paid by NS in prior years for environmental clean-up and remediation,
and favorable development experience on identified sites.
Operating expenses in 1999 are expected to return to a level more
consistent with that experienced prior to 1998. Capital expenditures
in 1999 are expected to be somewhat higher than in 1998.
As of Dec. 31, 1998, 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 clean-up and remediation costs based on
available information at 132 identified locations. On that date,
15 sites accounted for $23 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 some of the 132 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 AGS and certain
other potentially responsible parties (PRP) were responsible for past
and future clean-up and monitoring costs at the Bayou Bonfouca NPL
Superfund site located in Slidell, La. The EPA indicated that it has
expended $140 million at the site and expects to expend still more in
connection with its groundwater "pump and treat" program. Because all
other solvent PRP had settled or been dismissed, and because of an
unfavorable district court ruling in February 1999, NS agreed to
settle all claims by the EPA and Louisiana for $13 million, thereby
avoiding litigation and possible appeal costs.
With respect to known environmental sites (whether identified by
NS or by the EPA or comparable state authorities), estimates of NS'
ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available clean-up techniques, the
likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
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, 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 dealing with 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 50
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Labor Agreements
- ----------------
Approximately 85% of NS' railroad employees are represented by
labor unions under collective bargaining agreements with 15 different
labor organizations. The agreements currently in force will remain in
effect through Dec. 31, 1999, and thereafter until new agreements are
reached or the Railway Labor Act's procedures are exhausted.
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 most of its capital
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 may be made in 1999 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 customers 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
<PAGE> PAGE 51
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 Year-2000
compliance and to the realization and the timing of benefits
expected to result from consummation of the Conrail transaction.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
- ------- ----------------------------------------------------------
The information required by this item is included in Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 47 under the heading "Market Risks and
Hedging Activities."
<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)
<S> <C> <C> <C> <C>
1998
----
Railway operating
revenues $1,066 $1,079 $1,048 $1,028
Income from railway
operations 251 293 258 250
Income from continuing
operations 132 187 151 160
Net income 229 187 158 160
Earnings per share - Basic $ 0.61 $ 0.49 $ 0.42 $ 0.42
- Diluted $ 0.61 $ 0.48 $ 0.42 $ 0.42
1997
----
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
- Diluted $ 0.34 $ 0.50 $ 0.47 $ 0.59
</TABLE>
NOTE: All per share amounts have been restated to reflect the
Sept. 5, 1997, three-for-one stock split.
<PAGE> PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996 54
Consolidated Balance Sheets
As of December 31, 1998 and 1997 55
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996 57
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996 59
Notes to Consolidated Financial Statements 60
Independent Auditors' Report 83
The Index to Consolidated Financial Statement Schedule appears
in Item 14 on page 86.
<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,
1998 1997 1996
---- ---- ----
($ in millions, except earnings per share)
<S> <C> <C> <C>
RAILWAY OPERATING REVENUES $ 4,221 $ 4,223 $ 4,101
RAILWAY OPERATING EXPENSES
Compensation and benefits 1,492 1,405 1,400
Materials, services, and rents 806 685 624
Depreciation 437 421 408
Diesel fuel 174 227 233
Casualties and other claims 95 123 123
Other 165 149 148
------- ------- -------
Total railway operating
expenses 3,169 3,010 2,936
------- ------- -------
Income from railway
operations 1,052 1,213 1,165
Equity in earnings of Conrail
(Note 2) 194 117 --
Charge for credit facility costs
(Note 2) -- (77) --
Other income - net (Note 4) 115 130 117
Interest expense on debt (Note 6) (516) (385) (116)
------- ------- -------
Income from continuing
operations before income
taxes 845 998 1,166
Provision for income taxes
(Note 5) 215 299 413
------- ------- -------
Income from continuing
operations 630 699 753
Discontinued operations (Note 3):
Income (loss) from motor carrier
operations, net of taxes (1) 22 17
Gain on sale of motor carrier,
net of taxes 105 -- --
------- ------- -------
Income from discontinued
operations 104 22 17
------- ------- -------
NET INCOME $ 734 $ 721 $ 770
======= ======= =======
EARNINGS PER SHARE (NOTE 14)
Income from continuing
operations - Basic $ 1.66 $ 1.85 $ 1.98
- Diluted $ 1.65 $ 1.84 $ 1.96
Net income - Basic $ 1.94 $ 1.91 $ 2.03
- Diluted $ 1.93 $ 1.90 $ 2.01
</TABLE>
See accompanying notes to consolidated financial statements.
<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,
1998 1997
---- ----
($ in millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5 $ 34
Short-term investments 58 125
Accounts receivable, net of allowance
for doubtful accounts of $4 million
and $3 million, respectively 519 552
Materials and supplies 59 58
Deferred income taxes (Note 5) 141 114
Other current assets 131 119
Net assets of discontinued operations -- 101
------- -------
Total current assets 913 1,103
------- -------
Investment in Conrail (Note 2) 6,210 5,888
Properties less accumulated depreciation
(Note 6) 10,477 9,904
Other assets 580 455
------- -------
TOTAL ASSETS $18,180 $17,350
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 7) $ 600 $ 624
Income and other taxes 151 169
Other current liabilities (Note 7) 225 212
Current maturities of long-term debt
(Note 8) 141 61
Short-term debt (Note 8) -- 27
------- -------
Total current liabilities 1,117 1,093
------- -------
Long-term debt (Note 8) 7,483 7,398
Other liabilities (Note 10) 1,065 885
Minority interests 49 49
Deferred income taxes (Note 5) 2,545 2,480
------- -------
TOTAL LIABILITIES 12,259 11,905
------- -------
</TABLE>
(continued)
<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,
1998 1997
---- ----
($ in millions)
<S> <C> <C>
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized (Note 13);
issued 401,031,994 shares and 398,912,698
shares, respectively 401 399
Additional paid-in capital 296 241
Accumulated other comprehensive income
(Note 13) (8) 5
Retained income 5,252 4,821
Less treasury stock at cost, 21,627,904
shares and 21,757,902 shares,
respectively (20) (21)
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,921 5,445
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $18,180 $17,350
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
($ in millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 734 $ 721 $ 770
Reconciliation of net income to
net cash provided by continuing
operations:
Depreciation 450 432 419
Deferred income taxes 114 75 92
Equity in earnings of Conrail (194) (117) --
Charge for credit facility costs -- 77 --
Nonoperating gains and losses
on properties and investments (51) (63) (57)
Income from discontinued operations (104) (22) (17)
Changes in assets and liabilities
affecting continuing operations:
Accounts receivable 33 (23) (1)
Materials and supplies (1) 3 (1)
Other current assets (16) (8) (13)
Current liabilities other than debt (23) 115 (8)
Other - net (50) (44) (16)
------- ------- -------
Net cash provided by continuing
operations 892 1,146 1,168
Net cash provided by (used for)
discontinued operations (2) 4 30
------- ------- -------
Net cash provided by operating
activities 890 1,150 1,198
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (956) (875) (680)
Property sales and other transactions 83 74 130
Investment in Conrail (40) (5,741) (10)
Investments, including short-term (116) (185) (209)
Investment sales and other transactions 155 217 245
Proceeds from sale of motor carrier 207 -- --
------- ------- -------
Net cash used for investing
activities (667) (6,510) (524)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (303) (301) (284)
Common stock issued - net 34 24 29
Purchase and retirement of common stock -- -- (389)
Commercial paper proceeds 129 1,540 --
Credit facility costs paid -- (72) (5)
Proceeds from long-term borrowings 67 4,241 209
Debt repayments (179) (245) (93)
------- ------- -------
Net cash provided by (used for)
financing activities (252) 5,187 (533)
Net increase (decrease) in cash
and cash equivalents (29) (173) 141
</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,
1998 1997 1996
---- ---- ----
($ in millions)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS
At beginning of year 34 207 66
------- ------- -------
At end of year $ 5 $ 34 $ 207
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amounts capitalized) $ 519 $ 379 $ 128
Income taxes $ 76 $ 209 $ 324
</TABLE>
See accompanying notes to consolidated financial statements.
<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>
Accumu-
lated
Addi- Other
tional Compre-
Common Paid-In hensive Retained Treasury
Stock Capital Income Income Stock Total
------- ------- ------- ------- -------- -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31,
1995 $ 136 $ 431 $ 3 $4,280 $ (21) $4,829
Comprehensive income
- 1996
Net income 770 770
Other comprehen-
sive income
(Note 13) -- --
------
Total compre-
hensive income 770
Dividends on Common
Stock (284) (284)
Purchase and retire-
ment of Common
Stock (5) (15) (365) (385)
Other 1 46 47
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1996 132 462 3 4,401 (21) 4,977
Comprehensive income
- 1997
Net income 721 721
Other comprehen-
sive income
(Note 13) 2 2
------
Total compre-
hensive income 723
Dividends on Common
Stock (301) (301)
3-for-1 stock split,
effective Sept. 5 266 (266) -- --
Other 1 45 46
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1997 399 241 5 4,821 (21) 5,445
Comprehensive income
- 1998
Net income 734 734
Other comprehen-
sive income
(Note 13) (13) (13)
------
Total compre-
hensive income 721
Dividends on Common
Stock (303) (303)
Other 2 55 1 58
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1998 $ 401 $ 296 $ (8) $5,252 $ (20) $5,921
====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<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,
currently operating approximately 14,400 route miles primarily in the
Southeast and Midwest. After the Closing Date (see Note 2), operations
will extend into the Northeast. The consolidated financial statements
include Norfolk Southern Corporation (Norfolk Southern) and its
majority-owned and controlled subsidiaries (collectively NS). Norfolk
Southern's major subsidiary is Norfolk Southern Railway Company (NSR).
Financial results of a former 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.
The railroad transports raw materials, intermediate products, and
finished goods classified in the following market groups: coal; paper,
clay, and forest products; chemicals; automotive; agriculture,
consumer products, and government; metals and construction; and
intermodal. Except for coal, all groups are approximately equal in
size based on revenues; coal accounts for about 30% of total railway
operating revenues. Ultimate points of origination or destination for
some of the freight (particularly coal bound for export and intermodal
containers) are outside the United States.
Through a jointly owned entity, Norfolk Southern and CSX
Corporation (CSX) own the stock of Conrail Inc., which owns the major
freight railroad in the Northeast that operates approximately 10,800
route miles. Norfolk Southern has a 58% economic and 50% voting
interest in the jointly owned entity (see Note 2).
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 securities
"held-to-maturity," "trading," or "available-for-sale." On Dec. 31,
1998 and 1997, 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 "Accumulated other
comprehensive income."
<PAGE> PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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."
Properties
- ----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is depreciated primarily 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 17%. In 1998, the
overall depreciation rate averaged 2.8% for roadway and 4.0% 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
nonrail 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 nonrail 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 has entered
into a limited number of derivative agreements to hedge interest rate
exposures on certain components of its debt portfolio. All of these
derivative instruments are designated as hedges, have high correlation
with the underlying exposure, and are highly effective in offsetting
underlying price movements. Accordingly, payments made or received
under interest rate swap agreements are recorded in the income
statement with the corresponding interest expense. Payments made to
hedge interest rate exposure related to the anticipated issuance of
debt were deferred as a reduction of the debt proceeds and are being
amortized to interest expense over the life of the underlying debt.
Required Accounting Changes
- ---------------------------
Effective Jan. 1, 1998, NS adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). This statement requires presentation of comprehensive
income (net income plus all other changes to net assets from nonowner
sources) and its components in the financial statements. NS presents
comprehensive income in its Consolidated Statements of Changes in
Stockholders' Equity and has reclassified prior years' amounts to
conform to the new presentation. Adoption of SFAS 130 had no impact on
total stockholders' equity or net income (see Note 13).
<PAGE> PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NS adopted Statement of Financial Accounting Standards No. 132
(SFAS 132), "Employers' Disclosures about Pension and Other
Postretirement Benefits," in its 1998 Annual Report. SFAS 132 revises
disclosures about pension and other postretirement benefit plans, but
does not change the measurement or recognition of liabilities
associated with such plans (see Note 11).
Reclassifications
- -----------------
Certain amounts in the financial statements and notes thereto
have been reclassified to conform to the 1998 presentation.
2. JOINT ACQUISITION OF CONRAIL
Background and Overview
- -----------------------
On April 8, 1997, NS and CSX agreed jointly to acquire Conrail
Inc. (Conrail), the owner of Consolidated Rail Corporation, the major
freight railroad in the Northeast.
On May 23, 1997, NS and CSX, through a jointly owned entity,
completed the acquisition of tendered Conrail stock which they placed
in a voting trust pending the issuance and effectiveness of the
Surface Transportation Board's (STB) written decision approving their
joint application to control Conrail. NS has a 58% economic and 50%
voting interest in the jointly owned entity, and CSX has the remainder
of the economic and voting interests.
On June 17, 1997, NS and CSX executed the Transaction Agreement,
dated as of June 10, 1997, which generally outlined the methods of
governing and operating Conrail and its subsidiaries when they became
subject to NS' and CSX's joint control.
On Aug. 22, 1998, the STB's written decision approving the
control application became effective (the "Control Date"). As a
result, NS and CSX: (1) dissolved the voting trust, and (2) are
authorized, among other things, to implement the transactions
contemplated in the Transaction Agreement. A new Conrail Board of
Directors was elected which consists of an equal number of NS-
appointed and CSX-appointed directors.
It is expected that Conrail's operations will continue
substantially unchanged until NS and CSX commence operating the
respective Conrail properties that will be leased to their railroad
subsidiaries, an event that NS and CSX have agreed will occur on June
1, 1999 (the "Closing Date"). A failure by NS or CSX to integrate
successfully their respective portions of Conrail, including
information technology systems, could have a substantial impact on NS'
financial position, results of operations, and liquidity.
After the Closing Date, NS and CSX will provide substantially all
rail freight services on Conrail's route system, perform or be
responsible for performance of most services incident to customer
freight contracts, and employ the majority of Conrail's work force.
From time to time, NS and CSX, as the indirect owners of Conrail, may
need to fund Conrail's cash requirements through capital
contributions, loans, or advances.
Until the Closing Date, NS' railroad subsidiaries will continue
to have transactions in the normal course of business with Conrail's
railroad subsidiary.
The Transaction Agreement and Operating Agreements
- --------------------------------------------------
The Transaction Agreement provides, among other things, that
after the Closing Date, the railroads of NS and CSX (Norfolk Southern
Railway Company [NSR] and CSX Transportation, Inc. [CSXT],
respectively) will: (1) separately operate, pursuant to operating and
lease agreements with two limited liability companies (Pennsylvania
Lines LLC [PRR] and New York Central Lines LLC [NYC]) that will be
wholly owned by Conrail, portions of the routes and assets now owned
<PAGE> PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. JOINT ACQUISITION OF CONRAIL (continued)
and operated by Conrail (the "Allocated Assets"), and (2) have joint
and exclusive access to other Conrail properties that will continue
to be owned and operated by Conrail (the "Shared Assets Areas"). Conrail
will continue to provide certain system support operations for the
benefit of itself, NSR, and CSXT. All pre-existing Conrail obligations,
including environmental liabilities, will remain obligations of Conrail
(or, in some cases, of PRR or NYC).
The Operating Agreement between NSR and PRR, which governs all
nonequipment assets to be used by NSR, will have an initial 25-year
term, renewable at the option of NSR for two 10-year terms; payments
under that agreement will be fair market rental values that are
subject to adjustment every six years to reflect changes in such
values. NSR also will lease from PRR a number of equipment assets at
fair market rentals. NS' payments to PRR under the Operating Agreement
and equipment lease agreements will be significant in amount. In
addition, all costs necessary to operate the PRR assets will be borne
by NSR.
CSXT will enter into an Operating Agreement and lease agreements
with NYC that contain terms and conditions identical to those in the
comparable agreements between NSR and PRR, and it will bear all costs
necessary to operate the NYC assets.
NSR also will pay a portion of the costs (CSXT will pay the
remainder) to operate over the Shared Assets Areas, which will be
based on fair value and percentage usage.
Many employees of Conrail will be employed by NS or NSR, and, in
some cases, relocated at NS' or NSR's cost. Some Conrail employees not
hired by either NS or CSX will remain at Conrail and perform services
in the Shared Assets Areas or carry out general corporate functions.
Other Conrail employees were or will be separated from service, after
a transition period, and will be entitled to contractual or
STB-imposed severance benefits. The Transaction Agreement provides
that: (1) separation costs related to Conrail's nonunion employees are
to be borne by Conrail, and (2) separation costs related to Conrail's
union employees are to be borne primarily by either NSR or CSXT.
NS will direct the appointment of the directors of PRR, and CSX
will direct the appointment of the directors of NYC. It is expected
that the directors of PRR and NYC will have control over the daily
operations of these companies, but certain key decisions, including
all modifications and changes to either Operating Agreement, must be
made by the Conrail board. By virtue of their indirect ownership of
Conrail, NS and CSX will each have an indirect economic interest of
58% and 42%, respectively, in both PRR and NYC.
Investment in Conrail
- ---------------------
<TABLE>
NS is applying the equity method of accounting to its investment
in Conrail in accordance with APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock." In August 1998, the
effective date of the STB decision, NS' investment in Conrail exceeded
its 58% of Conrail's net equity by $4.1 billion. This excess has been
allocated to the fair values of Conrail's assets and liabilities,
using the principles of purchase accounting, as follows:
<CAPTION>
($ in millions)
---------------
<S> <C>
Property, equipment, and investments in
railroads $6,514
Other assets, principally pension and
other employee benefit plans and trusts 274
Debt revaluation and other liabilities (85)
Deferred taxes (2,579)
------
Total $4,124
======
</TABLE>
<PAGE> PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. JOINT ACQUISITION OF CONRAIL (continued)
NS is amortizing this excess based principally on the estimated
remaining useful lives of Conrail's property and equipment, net of the
related deferred tax effect of the differences in tax and accounting
bases for certain assets. At Dec. 31, 1998, the difference between NS'
investment in Conrail and its share of Conrail's underlying net equity
was $4.1 billion, and the related amortization amounted to $72 million
annually.
NS' investment in Conrail includes $165 million ($101 million
after taxes) of costs that will be paid by NS. These costs consist
principally of: (1) contractual obligations to Conrail employees
imposed by the STB when it approved the transaction, and (2) costs to
relocate Conrail employees. Most of NS' costs are expected to be paid
in the two years following the Closing Date, and $60 million of such
are classified on NS' balance sheet as "Current liabilities." However,
certain contractual obligations by their terms will be paid out over a
longer period and are classified as "Other liabilities" on NS' balance
sheet. In 1998, NS charged $5 million of costs to these liabilities.
Conrail's underlying net equity reflects liabilities recognized
by Conrail primarily for separations of nonunion employees and for
change-in-control obligations. In 1997 and 1998, Conrail recorded $550
million of after-tax charges for these liabilities (see "Summary
financial information -- Conrail," below).
The liabilities recorded by NS and Conrail are based on
preliminary estimates of separation, relocation, and other labor-
related contractual obligations to Conrail employees. These liability
estimates, along with the fair value allocation, may be modified as
more information becomes available, as Management's integration plans
evolve, and as labor implementing agreements are negotiated. Severance
and relocation plans are expected to be finalized shortly after the
Closing Date. As a consequence, amounts ultimately included in the
allocation could differ from the original estimates; however, any such
differences are not now expected to be material to NS' financial
position, results of operations, or liquidity. As definitive plans are
determined and communicated, costs, if any, for severing or relocating
NS employees and for disposing of NS facilities will be charged to
operating expense.
Income and Pro Forma Effects
- ----------------------------
Since May 23, 1997 (the date on which NS and CSX completed their
joint acquisition of Conrail stock), NS' financial statements have
reflected its 58% economic interest in Conrail, using the equity
method of accounting. NS' Consolidated Statements of Income for the
years ended Dec. 31, 1998 and 1997, include several Conrail-related
items. Increasing NS' income over these periods is its equity in the
earnings of Conrail, net of amortization, adjusted for the effects of
certain transactions related to the acquisition and control of Conrail
by NS and CSX. Decreasing NS' income over the same periods are
principally: (1) interest expense on debt issued to finance NS' share
of the joint acquisition of Conrail stock, (2) credit facility costs,
including a $77 million charge expensed in the first quarter of 1997
related to a previous attempt to acquire 100% of Conrail's stock, and
(3) integration expenses (which have been included in "Railway
operating expenses").
<PAGE> PAGE 65
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. JOINT ACQUISITION OF CONRAIL (continued)
Had NS acquired its investment in Conrail on Jan. 1, 1997, NS'
net income and diluted earnings per share for the year ended Dec. 31,
1997, would have been $671 million and $1.77, respectively. These pro
forma results reflect only the application of the equity method of
accounting and the specific financing costs previously identified.
They reflect neither costs of operating PRR's assets nor any synergies
expected to result from NS' operation of PRR's assets and access to
the Shared Assets Areas. Accordingly, such results do not include or
otherwise take into account any potential increase in NS' revenues or
operating income, estimated cost savings, effects of increased
competition in the Northeast, or future integration costs. The effects
of the foregoing will be substantial. As a result, this pro forma
information is not, and is not intended to be, indicative of the
results of operations after the Closing Date. Following the Closing
Date and commencement of operations over lines leased from PRR and in
the Shared Assets Areas, NS will begin to report rail operating
revenues and expenses associated with these leased assets in its
financial statements.
Summary Financial Information -- Conrail
- ----------------------------------------
The following summary financial information was provided by
Conrail's Management and should be read in conjunction with Conrail's
audited financial statements included as an exhibit to NS' Annual
Report on Form 10-K for 1998 filed with the Securities and Exchange
Commission.
<TABLE>
Summarized Consolidated Statements of Income -- Conrail
- -------------------------------------------------------
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Operating revenues $3,863 $3,765 $3,714
Operating expenses 3,348 3,443 3,113
------ ------ ------
Operating income 515 322 601
Other - net (81) (87) (70)
------ ------ ------
Income before income taxes 434 235 531
Provision for income taxes 167 228 189
------ ------ ------
Net income $ 267 $ 7 $ 342
====== ====== ======
</TABLE>
Note: This Conrail financial information includes the effects of the
following transactions that related to the acquisition and control of
Conrail by NS and CSX, and, accordingly, were excluded in determining
NS' equity in Conrail's net income. Conrail's operating expenses for
1998 include a $187 million after-tax charge for the following:
(1) $105 million for estimated nonunion severance obligations and
(2) $82 million of other charges and reserves. Conrail's operating
expenses for 1997 included the following: (1) a $221 million (no
related tax effect) charge in conjunction with the termination of the
Conrail ESOP and (2) a $142 million after-tax charge for transaction-
related stock compensation costs and change-in-control benefits.
<PAGE> PAGE 66
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. JOINT ACQUISITION OF CONRAIL (continued)
<TABLE>
Summarized Consolidated Balance Sheets -- Conrail
- -------------------------------------------------
<CAPTION>
December 31,
($ in millions) 1998 1997
--------------- ---- ----
<S> <C> <C>
Assets:
Current assets $1,005 $ 954
Noncurrent assets 7,895 7,530
------ ------
Total assets $8,900 $8,484
====== ======
Liabilities and
stockholders' equity:
Current liabilities $1,207 $1,208
Noncurrent liabilities 4,037 4,111
Stockholders' equity 3,656 3,165
------ ------
Total liabilities and
stockholders' equity $8,900 $8,484
====== ======
</TABLE>
3. DISCONTINUED OPERATIONS -- MOTOR CARRIER
On March 28, 1998, NS sold all the common stock of North American
Van Lines, Inc. (NAVL), its motor carrier subsidiary. Total proceeds
from the sale were $207 million, resulting in a $90 million pretax
gain ($105 million, or 28 cents per basic and diluted share, after
taxes). The higher after-tax gain was the result of differences
between book and tax bases and the realization of deferred tax
benefits.
<TABLE>
NAVL's results of operations, financial position, and cash flows
are presented as "Discontinued operations" in the accompanying
financial statements. A summary of NAVL's results of operations
follows:
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Motor carrier revenues $ 207 $ 942 $ 930
Motor carrier expenses 208 907 898
Other income (expense) -- -- (1)
Provision for income taxes -- 13 14
------ ------ ------
Income (loss) from
operations (1) 22 17
Gain on sale, net of taxes 105 -- --
------ ------ ------
Income from
discontinued operations $ 104 $ 22 $ 17
------ ------ ------
Earnings per share (basic
and diluted) from discon-
tinued operations $ 0.28 $ 0.06 $ 0.05
====== ====== ======
</TABLE>
"Net assets of discontinued operations" of $101 million at
Dec. 31, 1997, consisted of $192 million of current assets,
$100 million of long-term assets, $130 million of current liabilities,
and $61 million of long-term liabilities.
<PAGE> PAGE 67
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
4. OTHER INCOME -- NET
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Royalties from coal $ 57 $ 58 $ 59
Gains from sale of properties
and investments 51 56 57
Rental income 26 22 20
Interest income 12 30 22
Corporate-owned life insurance
- net 11 7 6
Gain from partial redemption
of partnership interest -- 7 --
Other interest expense (21) (27) (29)
Nonoperating depletion
and depreciation (13) (11) (11)
Taxes on nonoperating property (4) (5) (8)
Other - net (4) (7) 1
------ ------ ------
Total $ 115 $ 130 $ 117
====== ====== ======
</TABLE>
5. INCOME TAXES
<TABLE>
Provision for Income Taxes
- --------------------------
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 89 $ 197 $ 280
State 12 27 41
------ ------ ------
Total current taxes 101 224 321
Deferred:
Federal 100 78 75
State 14 (3) 17
------ ------ ------
Total deferred taxes 114 75 92
------ ------ ------
Provision for income
taxes $ 215 $ 299 $ 413
====== ====== ======
</TABLE>
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
<TABLE>
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:
<PAGE> PAGE 68
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
5. INCOME TAXES (continued)
<CAPTION>
1998 1997 1996
($ in millions) Amount % Amount % Amount %
--------------- ------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at
statutory rate $296 35 $349 35 $408 35
State income taxes, net of
federal tax benefit 17 2 16 2 37 3
Equity in earnings of
Conrail (68) (8) (41) (4) -- --
Corporate-owned life
insurance (11) (1) (10) (1) (15) (1)
Other - net (19) (3) (15) (2) (17) (2)
---- -- ---- -- ---- --
Provision for
income taxes $215 25 $299 30 $413 35
==== == ==== == ==== ==
</TABLE>
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that disallowed some of the tax benefits a subsidiary of NS
purchased from a third party pursuant to a safe harbor lease agreement
in 1981. The Tax Court finalized this decision in February 1997, and
all avenues of appeal have been exhausted. NS has requested payment
and filed suit to collect from the third party in accordance with
indemnification provisions of the lease agreement, and Management
believes that this receivable will be collected.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences. Except for amounts
for which a valuation allowance is provided, Management believes the
deferred tax assets will be realized.
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
<PAGE> PAGE 69
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
5. INCOME TAXES (continued)
<CAPTION>
December 31,
($ in millions) 1998 1997
--------------- ---- ----
<S> <C> <C>
Deferred tax assets:
Reserves, including casualty
and other claims $ 157 $ 144
Employee benefits 209 155
Retiree health and death
benefit obligation 127 133
Taxes, including state and
property 173 171
Other 41 52
------- -------
Total gross deferred
tax assets 707 655
Less valuation allowance (3) (2)
------- -------
Net deferred tax assets 704 653
------- -------
Deferred tax liabilities:
Property (3,023) (2,925)
Other (85) (94)
------- -------
Total gross deferred
tax liabilities (3,108) (3,019)
------- -------
Net deferred tax
liability (2,404) (2,366)
Net current deferred tax
assets 141 114
------- -------
Net long-term deferred
tax liability $(2,545) $(2,480)
======= =======
</TABLE>
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1994. The consolidated federal income tax returns for 1995
and 1996 are being audited by the IRS. Management believes that
adequate provision has been made for any additional taxes and interest
thereon that might arise as a result of IRS examinations.
<TABLE>
6. PROPERTIES
<CAPTION>
December 31,
($ in millions) 1998 1997
--------------- ---- ----
<S> <C> <C>
Railway property:
Road $ 9,267 $ 8,853
Equipment 5,157 4,881
Other property 639 605
------- -------
15,063 14,339
Less: Accumulated depreciation 4,586 4,435
------- -------
Net properties $10,477 $ 9,904
======= =======
</TABLE>
<PAGE> PAGE 70
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
6. PROPERTIES (continued)
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 1998, 1997, and 1996 was
$537 million, $402 million, and $128 million, respectively, of which
$21 million, $17 million, and $12 million was capitalized.
<TABLE>
7. CURRENT LIABILITIES
<CAPTION>
December 31,
($ in millions) 1998 1997
--------------- ---- ----
<S> <C> <C>
Accounts payable:
Accounts and wages payable $ 283 $ 281
Casualty and other claims 144 172
Vacation liability 81 80
Equipment rents payable - net 72 67
Other 20 24
------ ------
Total $ 600 $ 624
====== ======
Other current liabilities:
Interest payable $ 91 $ 115
Accrued Conrail-related costs
(Note 2) 67 25
Liabilities for forwarded
traffic 27 31
Retiree health and death
benefit obligation (Note 11) 24 23
Other 16 18
------ ------
Total $ 225 $ 212
====== ======
</TABLE>
8. DEBT
Shelf Registration
- ------------------
In November 1998, NS filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 covering the
issuance of up to $1 billion of securities; as of Dec. 31, 1998, no
such securities had been issued.
<PAGE> PAGE 71
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
8. DEBT (continued)
<TABLE>
Long-Term Debt
- --------------
<CAPTION>
December 31,
($ in millions) 1998 1997
--------------- ---- ----
<S> <C> <C>
Commercial paper classified as
long-term debt at an average
rate of 6.0% $1,889 $1,871
Notes at average rates and
maturities as follows:
6.85%, maturing 2000 to 2002 1,097 1,096
7.45%, maturing 2004 to 2007 1,192 1,191
8.10%, maturing 2017 to 2021 798 798
7.80%, maturing 2027 792 792
7.05%, maturing 2037 746 745
7.90%, maturing 2097 350 350
Railroad equipment obligations
at an average rate of 7.4%,
maturing to 2009 376 355
Capitalized leases at an average
rate of 6.1%, maturing to 2015 349 246
Other debt at an average rate of
5.4%, maturing to 2015 35 15
------ ------
Total long-term debt 7,624 7,459
------ ------
Less: current maturities 141 61
------ ------
Long-term debt less
current maturities $7,483 $7,398
====== ======
Long-term debt matures as follows:
2000 $ 472
2001 267
2002 563
2003 65
2004 and subsequent years 6,116
------
Total $7,483
======
</TABLE>
The railroad equipment obligations and the capitalized leases are
secured by liens on the underlying equipment.
<PAGE> PAGE 72
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
8. DEBT (continued)
Commercial Paper
- ----------------
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 credit agreement to convert this obligation into longer term
debt. The credit agreement expires in 2002 and provides for interest
on borrowings at prevailing rates. NS intends to refinance the
commercial paper either by issuing additional commercial paper or by
replacing commercial paper notes with long-term debt.
Capital Lease Obligations
- -------------------------
During 1998, 1997, and 1996, NSR entered into capital leases
covering new locomotives. The related capital lease obligations,
totaling $127 million in 1998, $64 million in 1997, and $108 million
in 1996, were reflected in the Consolidated Balance Sheets as debt,
and, because they were noncash transactions, were excluded from the
Consolidated Statements of Cash Flows. The lease obligations carry an
average stated interest rate of 6.5% for those entered into in 1998,
7.0% for those entered into in 1997, and 6.5% for those entered into
in 1996. All were effectively converted to variable rate obligations
using interest rate swap agreements. The interest rates on these
obligations are based on the six-month London Interbank Offered Rate
and are reset every six months with changes in interest rates
accounted for as an adjustment of interest expense over the terms of
the leases. As of Dec. 31, 1998, the average interest rate on these
locomotive leases was 6.1%. As a result, NS is exposed to the market
risk associated with fluctuations in interest rates. To date, the
effects of the rate fluctuations have been favorable and not material.
Counterparties to the interest rate swap agreements are major
financial institutions believed by Management to be creditworthy.
Debt Covenants
- --------------
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement and certain restrictions on issuance of further debt. At
Dec. 31, 1998, NS believes it was in compliance with all debt
covenants.
9. LEASE COMMITMENTS
NS is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road, and other
property. Future minimum lease payments are as follows (these amounts
do not include payments under the Operating Agreement and lease
agreements with PRR - see Note 2):
<PAGE> PAGE 73
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
9. LEASE COMMITMENTS (continued)
<CAPTION>
($ in millions) Operating Leases Capital Leases
--------------- ---------------- --------------
<S> <C> <C>
1999 $ 76 $ 47
2000 69 47
2001 44 47
2002 37 47
2003 36 46
2004 and subsequent years 605 232
------ ------
Total $ 867 466
======
Less imputed interest on capital
leases at an average rate
of 7.1% 117
------
Present value of minimum lease
payments included in debt $ 349
======
</TABLE>
<TABLE>
Operating lease expense
- -----------------------
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Minimum rents $ 75 $ 68 $ 65
Contingent rents 40 43 38
------ ------ ------
Total $ 115 $ 111 $ 103
====== ====== ======
</TABLE>
<TABLE>
10. OTHER LIABILITIES
<CAPTION>
December 31,
($ in millions) 1998 1997
--------------- ---- ----
<S> <C> <C>
Casualty and other claims $ 271 $ 253
Retiree health and death benefit
obligation (Note 11) 268 281
Accrued Conrail-related costs 100 --
Pension benefit liability
(Note 11) 72 57
Other 354 294
------ ------
Total $1,065 $ 885
====== ======
</TABLE>
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
<TABLE>
Norfolk Southern and certain subsidiaries have both funded and
unfunded defined benefit pension plans covering principally salaried
employees. Norfolk Southern and certain subsidiaries also 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 under other group
insurance policies.
<PAGE> PAGE 74
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
<CAPTION>
Pension Benefits Other Benefits
($ in millions) 1998 1997 1998 1997
--------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT
OBLIGATIONS
Benefit obligation at
beginning of year $ 956 $ 892 $ 360 $ 329
Service cost 13 11 10 9
Interest cost 67 66 24 25
Amendment 40 -- -- --
Actuarial (gains) losses 61 62 (9) 18
Benefits paid (74) (75) (23) (21)
------ ------ ------ ------
Benefit obligation
at end of year 1,063 956 362 360
------ ------ ------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year 1,360 1,158 111 86
Actual return on plan
assets 253 273 28 25
Employer contribution 5 4 23 21
Benefits paid (74) (75) (23) (21)
------ ------ ------ ------
Fair value of plan
assets at end of
year 1,544 1,360 139 111
------ ------ ------ ------
Funded status 481 404 (223) (249)
Unrecognized initial net
asset (16) (23) -- --
Unrecognized (gain) loss (517) (442) (57) (30)
Unrecognized prior
service cost (benefit) 44 4 (12) (25)
------ ------ ------ ------
Net amount
recognized $ (8) $ (57) $ (292) $ (304)
====== ====== ====== ======
Amounts recognized in
the Consolidated
Balance Sheets consist
of:
Prepaid benefit cost $ 41 $ -- $ -- $ --
Accrued benefit
liability (72) (57) (292) (304)
Accumulated other
comprehensive income 23 -- -- --
------ ------ ------ ------
Net amount
recognized $ (8) $ (57) $ (292) $ (304)
====== ====== ====== ======
</TABLE>
Of the pension plans included above, the nonqualified pension
plans were the only plans with an accumulated benefit obligation in
excess of plan assets. These plans' accumulated benefit obligations
were $72 million at Dec. 31, 1998, and $62 million at Dec. 31, 1997.
These plans' projected benefit obligations were $77 million at
Dec. 31, 1998, and $66 million at Dec. 31, 1997. Because of the nature
of such plans, there are no plan assets in the nonqualified plans.
After the Closing Date, when Conrail employees are hired by NS,
should any pension obligation be assumed by NS that was earned under
the Conrail plan, such obligation will be transferred to the NS plans,
along with pension assets.
<PAGE> PAGE 75
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
NS amended its qualified pension plans, effective after the
Closing Date, to conform certain provisions of its plan with the
Conrail plan and to provide prior service credit to Conrail employees
for benefits under the NS plan. The amendment, as it relates to NS
employees, increased the pension benefit obligation at Dec. 31, 1998,
by $40 million. The amendment, as it will relate to former Conrail
employees hired by NS, will result in a further increase to the
pension benefit obligation.
<TABLE>
Pension and other postretirement benefit costs are determined
based on actuarial valuations that reflect appropriate assumptions as
of the beginning of each year. The funded status of the plans is
determined using appropriate assumptions as of each year end. A
summary of the major assumptions follows:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Funded status:
Discount rate 6.75% 7.25% 7.75%
Future salary increases 5% 5.25% 5.25%
Pension cost:
Discount rate 7.25% 7.75% 7.25%
Return on assets in plans 9% 9% 9%
Future salary increases 5.25% 5.25% 6%
</TABLE>
<TABLE>
Pension and Other Postretirement Benefit Costs Components
- ---------------------------------------------------------
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
PENSION BENEFITS
Service cost $ 13 $ 11 $ 12
Interest cost 67 66 67
Expected return on plan
assets (106) (90) (83)
Amortization of prior service
cost 1 1 1
Amortization of initial net
asset (7) (6) (7)
Recognized net actuarial (gain)
loss (12) (7) 2
------ ------ ------
Net cost (benefit) $ (44) $ (25) $ (8)
====== ====== ======
OTHER POSTRETIREMENT BENEFITS
Service cost $ 10 $ 9 $ 10
Interest cost 24 25 24
Expected return on plan assets (9) (7) (6)
Amortization of prior service
cost (12) (12) (12)
Recognized net actuarial (gain)
loss (2) -- --
------ ------ ------
Net cost $ 11 $ 15 $ 16
====== ====== ======
</TABLE>
For measurement purposes, increases in the per capita cost of
covered health care benefits were assumed to be 8.0% for 1999 and 9.8%
for 1998. The rate was assumed to decrease gradually to an ultimate
rate of 5.0% for 2003 and remain at that level thereafter.
<TABLE>
Assumed health care cost trend rates have a significant effect on
the amounts reported in the financial statements. To illustrate, a
one-percentage-point change in assumed health care cost trend would
have the following effects:
<PAGE> PAGE 76
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
<CAPTION>
One percentage point
($ in millions) Increase Decrease
--------------- -------- --------
<S> <C> <C>
Increase (decrease) in:
Total service and interest cost
components $ 4 $ (3)
Postretirement benefit obligation $ 28 $ (24)
</TABLE>
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 $5 million in 1998 and $4 million
in each of 1997 and 1996.
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 $10 million in 1998, $9 million in 1997, and
$8 million in 1996.
12. LONG-TERM INCENTIVE PLAN
Under the stockholder-approved Long-Term Incentive Plan, a
committee of nonemployee 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 ("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 Common Stock on the date of grant.
The plan also permits the payment -- on a current or a deferred
basis and in cash or in stock -- of dividend equivalents on shares of
Common Stock covered by options or PSUs granted after Dec. 31, 1989,
in an amount commensurate with dividends paid on Common Stock. Tax
absorption payments, in amounts 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.
Accounting Method
- -----------------
NS applies APB Opinion 25 and related interpretations in
accounting for awards made under the plan. Accordingly, PSUs,
restricted stock, dividend equivalents, tax absorption payments, and
SARs result in charges to net income, while stock options have no
effect on net income. Related compensation costs were $25 million in
1998, $29 million in 1997, and $35 million in 1996. Had such
compensation costs been determined in accordance with SFAS 123, net
income would have been $718 million in 1998, $714 million in 1997, and
$763 million in 1996; basic earnings per share would have been $1.90
in 1998, $1.90 in 1997, and $2.01 in 1996; and diluted earnings per
share would have been $1.89 in 1998, $1.89 in 1997, and $1.99 in 1996.
These pro forma amounts include compensation costs as calculated using
the Black-Scholes option-pricing model with an expected option life of
five years; risk-free interest rates of 5.5% in 1998, 6.3% in 1997,
and 5.2% in 1996; stock-price volatilities of 15% in 1998, 16% in
1997, and 18% in 1996; and, because dividend equivalents are paid, no
dividend yield was assumed.
<PAGE> PAGE 77
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. LONG-TERM INCENTIVE PLAN (continued)
<TABLE>
Stock Option Activity
- ---------------------
<CAPTION>
Weighted Average
Option Shares Exercise Price
------------- ---------------
<S> <C> <C>
Balance 12/31/95 10,627,857 $ 18.89
Granted 2,061,000 26.02
Exercised (1,648,743) 17.96
Surrendered for SAR (15,000) 7.42
Cancelled (140,577) 19.62
----------
Balance 12/31/96 10,884,537 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 11,373,418 22.32
Granted 3,625,000 32.16
Exercised (1,908,370) 19.22
Cancelled (31,000) 29.46
----------
Balance 12/31/98 13,059,048 25.48
==========
</TABLE>
Except for those granted during 1998, all outstanding options
were exercisable on Dec. 31, 1998. The difference between the weighted
average exercise prices for all outstanding options and those
exercisable on Dec. 31, 1998, was not significant.
<TABLE>
Stock Options Outstanding
- -------------------------
<CAPTION>
Exercise Price Number Weighted Average
------------------------------- Outstanding Remaining
Range Weighted Average at 12/31/98 Contractual Life
----- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$11.02 to $14.25 $13.57 1,078,848 1.7 years
18.81 to 21.08 20.40 3,449,700 4.6 years
24.31 to 26.02 25.22 3,122,500 6.2 years
29.46 to 32.16 31.25 5,408,000 8.7 years
----------
$11.02 to $32.16 $25.48 13,059,048 6.5 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 565,500 and $32.16
in 1998; 529,500 and $29.46 in 1997; and 601,200 and $26.02 in 1996,
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.
<PAGE> PAGE 78
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. LONG-TERM INCENTIVE PLAN (continued)
Shares Available and Issued
- ---------------------------
<TABLE>
Shares of stock available for future grants issued in connection
with all features of the Long-Term Incentive Plan are as follows:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Available for future
grants 12/31 16,233,600 19,928,853 22,391,937
Shares of common
stock issued 2,212,323 1,933,703 2,072,616
</TABLE>
13. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income
- --------------------------------------
<TABLE>
"Accumulated other comprehensive income" reported in
"Stockholders' equity" included unrealized gains, net of taxes, on
securities of $6 million at Dec. 31, 1998, $5 million at Dec. 31,
1997, and $3 million at Dec. 31, 1996, and minimum pension liability
of $14 million at Dec. 31, 1998. "Other comprehensive income" reported
in the Consolidated Statements of Changes in Stockholders' Equity
consisted of the following:
<CAPTION>
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Unrealized gains on securities $ 1 $ 4 $ --
Minimum pension liability (23) -- --
Income taxes 9 (2) --
---- ---- ----
Other comprehensive income $(13) $ 2 $ --
==== ==== ====
</TABLE>
"Unrealized gains on securities" included reclassification
adjustments for gains realized in income from the sale of the
securities of less than $1 million in each year.
Undistributed Earnings of Equity Investees
- ------------------------------------------
"Retained income" includes undistributed earnings of equity
investees, principally attributable to NS' equity in the earnings of
Conrail, of $314 million at Dec. 31, 1998, and $120 million at
Dec. 31, 1997.
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 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. All share and per share amounts in this report
have been restated to reflect the split.
<PAGE> PAGE 79
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. STOCKHOLDERS' EQUITY (continued)
Stock Purchase Programs
- -----------------------
Since 1987, the Board of Directors has authorized the purchase
and retirement of up to 285 million shares of Common Stock. Purchases
under the programs have been made with internally generated cash, and
with proceeds from the sale of commercial paper notes and from the
issuance of long-term debt.
Since the first purchases in December 1987 and through Oct. 22,
1996, NS had purchased and retired 205.6 million shares of its Common
Stock under these programs at a cost of $3.2 billion.
On Oct. 23, 1996, NS announced that the stock purchase program
had been suspended. Reinstatement of the program and any purchases
thereunder are dependent on the economy, cash needs, and alternative
investment opportunities.
14. EARNINGS PER SHARE
<TABLE>
The following table sets forth the calculation of basic and
diluted earnings per share:
<CAPTION>
($ in millions except per share,
shares in millions) 1998 1997 1996
------------------------------- ---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Income available to common
stockholders for basic and
diluted computations $ 734 $ 721 $ 770
----- ----- -----
Weighted-average shares
outstanding 379 377 379
----- ----- -----
Basic earnings per share $1.94 $1.91 $2.03
----- ----- -----
Diluted earnings per share:
Weighted-average shares
outstanding per above 379 377 379
Dilutive effect of outstanding
options, PSUs, and SARs (as
determined by the application
of the treasury stock method) 2 3 5
----- ----- -----
Adjusted weighted-average
shares outstanding 381 380 384
----- ----- -----
Diluted earnings per share $1.93 $1.90 $2.01
===== ===== =====
</TABLE>
The options granted in 1998 were excluded from the calculation of
diluted earnings per share in the third and fourth quarters because
their exercise price exceeded the average market price of Common
Stock.
There are no adjustments to "Net income" or "Income from
continuing operations" for the diluted earnings per share
computations.
<PAGE> PAGE 80
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
The fair values of "Cash and cash equivalents," "Accounts
receivable," "Short-term debt," and "Accounts payable" approximate
carrying values because of the short maturity of these financial
instruments. The fair value of corporate-owned life insurance
approximates carrying value. The carrying amounts and estimated fair
values of other financial instruments, excluding investments accounted
for under the equity method in accordance with APB Opinion No. 18,
consisted of the following at December 31:
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
--------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
Investments $ 100 $ 105 $ 170 $ 170
Long-term debt 7,624 8,182 7,459 7,890
Interest rate swaps -- 20 -- 10
</TABLE>
Quoted market prices were used to determine the fair value of
marketable securities, all of which were classified as "available-for-
sale." Underlying net assets were used to estimate the fair value of
other investments. 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. The fair value of interest rate swaps were estimated based
on discounted cash flows, reflecting the difference between estimated
future variable-rate payments and future fixed-rate receipts.
Carrying amounts of marketable securities reflect unrealized
holding gains of $9 million on Dec. 31, 1998, and $8 million on
Dec. 31, 1997. Sales of "available-for-sale" securities were
immaterial for years ended Dec. 31, 1998 and 1997.
16. 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 its amount can be estimated
reasonably. 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 81
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
As of Dec. 31, 1998, 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 clean-up and remediation costs based on
available information at 132 identified locations. On that date, 15
sites accounted for $23 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 some of the 132 locations, certain NS subsidiaries, usually in
conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, or
comparable state statutes, which often impose joint and several
liability for clean-up costs.
With respect to known environmental sites (whether identified by
NS or by the EPA or comparable state authorities), estimates of NS'
ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available clean-up techniques, the
likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
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, 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 dealing with 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 that 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, 1998, certain Norfolk Southern subsidiaries are
contingently liable as guarantors with respect to $113 million of
indebtedness of related entities.
<PAGE> PAGE 82
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
Year-2000 Compliance
- --------------------
NS has under way a project to review and modify, as necessary,
its computer applications, hardware, and other equipment to make them
Year-2000 compliant. NS has also initiated formal communications with
third parties having a substantial relationship to its business,
including other railroads, significant suppliers, larger customers,
and financial institutions, to determine the extent to which NS may be
vulnerable to such third parties' failures to achieve Year-2000
compliance.
Failure to achieve Year-2000 compliance -- by NS, or by any such
third party, including Conrail and CSXT -- could negatively affect NS'
ability to conduct business for an extended period. There can be no
assurance that all NS information technology systems and components
will be fully Year-2000 compliant; in addition, other companies on
which NS' systems and operations rely may or may not be fully
compliant on a timely basis, and any such failure could have a
material adverse effect on NS' financial position, results of
operations, or liquidity.
<PAGE> PAGE 83
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 have also 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,
1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1998, 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 LLP
Norfolk, Virginia
January 26, 1999
<PAGE> PAGE 84
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
<PAGE> PAGE 85
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,
1999, for the Norfolk Southern Annual Meeting of Stockholders to be
held on May 13, 1999, 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 18 under
"Executive Officers of the Registrant."
<PAGE> PAGE 86
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, 1998, 1997, and 1996 54
Consolidated Balance Sheets
As of December 31, 1998 and 1997 55
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996 57
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996 59
Notes to Consolidated Financial Statements 60
Independent Auditors' Report 83
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 93
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 87
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 26, 1999, are filed herewith.
4 Instruments Defining the Rights of Security Holders,
Including Indentures -
Indentures related to the issuance of notes in the
principal amount of $4.3 billion are incorporated herein
by reference from Exhibits 4.1 and 4.2 to Norfolk Southern
Corporation's Amendment No. 3 to Form S-3, Registration No.
333-24051 filed on May 12, 1997.
In accordance with Item 601(b)(4)(iii) of Regulation S-K,
copies of other 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.
<PAGE> PAGE 88
Item 14. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- --------------------------------------------------
(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.
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 November 24, 1998, is filed
herewith.
(f) The Norfolk Southern Corporation Officers' Deferred
Compensation Plan, as amended effective November 24,
1998, is filed herewith.
(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, as restated
November 24, 1998, is filed herewith.
<PAGE> PAGE 89
Item 14. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- --------------------------------------------------
(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.
(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 incorporated herein by reference
from Exhibit 10(m) to Norfolk Southern's 1997 Annual
Report on Form 10-K.
(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.
(o) Description of Norfolk Southern Corporation's
1999 Special Incentive Bonus Program, adopted
November 24, 1998, is filed herewith.
<PAGE> PAGE 90
Item 14. Exhibits, Financial Statement Schedule, and Reports on
- ------- -------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- --------------------------------------------------
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 LLP.
(b) Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99 Conrail Inc. 1998 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, 1998.
(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 91
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 23rd day of March, 1999.
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 23rd day of March,
1999, 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
- ------------------------------ Vice Chairman and
(Henry C. Wolf) Chief Financial Officer
(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 93
Signature Title
- --------- -----
/s/ Carroll A. Campbell, Jr.
- ------------------------------ Director
(Carroll A. Campbell, Jr.)
/s/ Gene R. Carter
- ------------------------------ Director
(Gene R. Carter)
/s/ L. E. Coleman
- ------------------------------ Director
(L. E. Coleman)
/s/ Steven F. Leer
- ------------------------------ Director
(Steven F. Leer)
/s/ T. Marshall Hahn, Jr.
- ------------------------------ Director
(T. Marshall Hahn, Jr.)
/s/ Landon Hilliard
- ------------------------------ Director
(Landon Hilliard)
/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 93
Schedule II
Page 1 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
<TABLE>
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1997 and 1998
(In millions of dollars)
<CAPTION>
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
- ----------------------
1996
----
Valuation allowance
(included net in
deferred tax
liability) for
deferred tax
assets $ 1 $ 1 $ -- $ -- $ 2
Casualty and other
claims included in
other liabilities $ 257 $ 116 $ 4(1) $ 129(2) $ 248
Current portion of
casualty and other
claims included in
accounts payable $ 165 $ 16 $ 154(1) $ 169(3) $ 166
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(1) $ 105(2) $ 253
Current portion of
casualty and other
claims included in
accounts payable $ 166 $ 14 $ 170(1) $ 178(3) $ 172
</TABLE>
(1) Includes revenue overcharges provided through charges to operating
revenues, and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) 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)
<PAGE> PAGE 94
Schedule II
Page 2 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
<TABLE>
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1997 and 1998 (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,
- ----------------------
1998
----
Valuation allowance
(included net in
deferred tax
liability) for
deferred tax
assets $ 2 $ -- $ -- $ -- $ 2
Casualty and other
claims included in
other liabilities $ 253 $ 86 $ 22(1) $ 90(2) $ 271
Current portion of
casualty and other
claims included in
accounts payable $ 172 $ 11 $ 149(1) $ 188(3) $ 144
</TABLE>
(1) Includes revenue overcharges provided through charges to
operating revenues, and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) 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.
<PAGE> PAGE 95
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit Page
Number Description Number
- ---------- ------------------------------------------------- ------
3 (ii) The Bylaws of Norfolk Southern Corporation,
as amended January 26, 1999, and effective
May 14, 1998. 96-106
10 (e) The Norfolk Southern Corporation Long-Term
Incentive Plan, as amended effective
November 24, 1998. 107-126
10 (f) The Norfolk Southern Corporation Officers'
Deferred Compensation Plan, as amended
effective November 24, 1998. 127-134
10 (h) The Norfolk Southern Corporation Directors'
Restricted Stock Plan, as restated
November 24, 1998. 135-136
10 (o) Description of Norfolk Southern Corporation's
1999 Special Incentive Bonus Program,
adopted November 24, 1998. 137
12 Statement re: Computation of Ratio of Earnings
to Fixed Charges. 138
21 Subsidiaries of Norfolk Southern Corporation. 139-140
23 (a) Consent of KPMG LLP. 141
23 (b) Consent of PricewaterhouseCoopers LLP. 142
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). 143
99 Conrail Inc. 1998 Annual Report to Stockholders. 144-173
Exhibits 3(ii), 10(e), 10(f), 10(h), 10(o), 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 96
EXHIBIT 3(ii), Page 1 of 11
TITLE PAGE
B Y L A W S
OF
NORFOLK SOUTHERN CORPORATION
AS AMENDED
JANUARY 26, 1999
<PAGE> PAGE 97
EXHIBIT 3(ii), Page 2 of 11
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.
<PAGE> PAGE 98
EXHIBIT 3(ii), Page 3 of 11
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.
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
<PAGE> PAGE 99
EXHIBIT 3(ii), Page 4 of 11
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 directors shall be eleven, 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.
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.
<PAGE> PAGE 100
EXHIBIT 3(ii), Page 5 of 11
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
<PAGE> PAGE 101
EXHIBIT 3(ii), Page 6 of 11
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.
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,
<PAGE> PAGE 102
EXHIBIT 3(ii), Page 7 of 11
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.
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.
<PAGE> PAGE 103
EXHIBIT 3(ii), Page 8 of 11
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 depositories 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 104
EXHIBIT 3(ii), Page 9 of 11
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
<PAGE> PAGE 105
EXHIBIT 3(ii), Page 10 of 11
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.
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
<PAGE> PAGE 106
EXHIBIT 3(ii), Page 11 of 11
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 107
EXHIBIT 10(e), Page 1 of 20
NORFOLK SOUTHERN CORPORATION
LONG-TERM INCENTIVE PLAN
AS AMENDED EFFECTIVE NOVEMBER 24, 1998
SECTION 1. PURPOSE
- --------- -------
The purpose of the Long-Term Incentive Plan, as amended (the
"Plan"), is to promote the success of Norfolk Southern
Corporation (the "Corporation") and to provide an opportunity for
officers and other key employees of the Corporation and its
Subsidiary Companies (as hereinafter defined) to acquire or
increase a proprietary interest in the Corporation and thereby to
provide an additional incentive to officers and other key
employees to devote their maximum efforts and skills to the
advancement, betterment, and prosperity of the Corporation and
its shareholders. The Plan provides for the grant of incentive
stock options, non-qualified stock options, stock appreciation
rights, performance share units, performance shares, and shares
of the Corporation's common stock (restricted pursuant to the
provisions of Section 9 of the Plan), in accordance with the
terms and conditions set forth below.
SECTION 2. DEFINITIONS
- --------- -----------
The terms used herein shall have the following meanings unless
otherwise specified or unless a different meaning is clearly
required by the context:
Award Any one or more of the following: Incentive
Stock Option; Non-Qualified Stock Option;
Stock Appreciation Right; Restricted Shares;
Performance Share Units; and Performance
Shares.
Beneficiary The person or persons designated in
writing by the Participant as his Beneficiary
in respect of Awards or, in the absence of
such a designation or if the designated
person or persons predecease the Participant,
the person or persons who shall acquire the
Participant's rights in respect of Awards by
bequest or inheritance in accordance with the
applicable laws of descent and distribution.
In order to be effective, a Participant's
designation of a Beneficiary must be on file
with the Corporation before the Participant's
death. Any such designation may be revoked
<PAGE> PAGE 108
EXHIBIT 10(e), Page 2 of 20
and a new designation substituted therefor by the
Participant at any time before his death
without the consent of the previously
designated Beneficiary.
Board of Directors The Board of Directors of the Corporation.
Code The Internal Revenue Code of 1986, as amended
from time to time.
Committee The Compensation and Nominating Committee of
the Board of Directors.
Common Stock The Common Stock of the Corporation.
Disability A disability that enables the Participant to
be eligible for and receive a disability
benefit under the Long-Term Disability Plan
of the Corporation or a long-term disability
plan of a Subsidiary Company (whichever is
applicable), as amended from time to time.
Exercise Gain With respect to a Stock Appreciation Right,
Shares all of the shares of Common Stock received
upon exercise of the Stock Appreciation
Right.
With respect to an Option, the portion of the
shares of Common Stock received upon exercise
of the Option equal to the excess of the Fair
Market Value, as of the exercise date, over
the Option price, multiplied by the number of
shares purchased under the Option on the
exercise date, divided by such Fair Market
Value, and rounded down to the nearest whole
number of shares.
Fair Market Value The value of Common Stock on a particular
date as measured by the mean of the high and
low prices at which it 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 Common
Stock was traded.
Incentive Stock An Option that complies with the terms and
Option conditions set forth in Section 422(b) of the
Code and is designated by the Committee as an
Incentive Stock Option.
<PAGE> PAGE 109
EXHIBIT 10(e), Page 3 of 20
Non-Qualified An Option granted under the Plan other than an
Stock Option Incentive Stock Option.
Option Any option to purchase Common Stock granted
pursuant to the provisions of Section 6 or
Section 7 of the Plan.
Optionee A Participant who is the holder of an Option.
Participant Any officer or key employee of the
Corporation or a Subsidiary Company selected
by the Committee to participate in the Plan.
Performance Cycle The period of time, designated by the
Committee, over which Performance Shares may
be earned.
Performance Shares of Common Stock granted pursuant to
Shares Section 10 of the Plan, which may be made
subject to the restrictions and other terms
and conditions prescribed in Section 11 of
the Plan.
Performance Share Contingent rights to receive Performance
Units Shares pursuant to Section 10 of the Plan.
Restricted Shares Shares of Common Stock granted pursuant to
Section 9 of the Plan and subject to the
restrictions and other terms and conditions
set forth therein.
Restriction Period A period of time not less than twenty-four
(24) nor more than sixty (60) months, to be
determined within those limits by the
Committee in its sole discretion, commencing
on the date as of which Restricted Shares are
granted, during which the restrictions
imposed by paragraph (b) of Section 9 of the
Plan shall apply. The Committee shall
determine the length of the Restriction
Period at the time that the Restricted Shares
are granted.
Retirement Retirement from the Corporation or a
Subsidiary Company pursuant to the provisions
of the Retirement Plan of the Corporation or a
<PAGE> PAGE 110
EXHIBIT 10(e), Page 4 of 20
retirement plan of a Subsidiary Company
(whichever is applicable), as amended from
time to time.
Share Retention An agreement entered into pursuant to
Agreement Section 11 of the Plan.
Stock Appreciation The right, granted pursuant to the provisions
Right of Section 8 of the Plan, to receive a payment
equal to the excess of the Fair Market Value of
Common Stock over the Option price of such
Common Stock, as specified in Section 8 of the Plan.
Subsidiary Company A corporation of which at least
eighty percent (80%) of the total combined
voting power of all classes of stock entitled
to vote is owned, directly or indirectly, by
the Corporation.
SECTION 3. ADMINISTRATION
- --------- --------------
The Plan shall be administered by the Committee, which, subject
to the limitations set forth herein, shall have the full and
complete authority and sole discretion from time to time to
construe and interpret the Plan; to select the officers and other
key employees who shall be granted Awards under the Plan; to
determine the type, size, terms, and conditions of the Award or
Awards to be granted to each such Participant; to authorize the
grant of such Awards pursuant to the Plan; to give a Participant
an election to surrender an Award in exchange for the grant of a
new Award; to adopt, amend and rescind rules and regulations
relating to the Plan; and to make all other determinations and
take all other action it may deem necessary or advisable for the
implementation and administration of the Plan. The Committee may
authorize the grant of more than one type of Award, and Awards
subject to differing terms and conditions, to any eligible
employee. The Committee's decision to authorize the grant of an
Award to an employee at any time shall not require the Committee
to authorize the grant of an Award to that employee at any other
time or to any other employee at any time; nor shall its
determination with respect to the size, type, or terms and
conditions of the Award to be granted to an employee at any time
require it to authorize the grant of an Award of the same type or
size or with the same terms and conditions to that employee at
any other time or to any other employee at any time. The
<PAGE> PAGE 111
EXHIBIT 10(e), Page 5 of 20
Committee shall not be precluded from authorizing the grant of an
Award to any eligible employee solely because the employee previously
may have been granted an Award of any kind under the Plan.
All determinations of the Committee shall be by a majority of its
members and shall be final, conclusive and binding. Each member
of the Committee, while serving as such, shall be considered to
be acting in his capacity as a director of the Corporation, and
no member of the Committee shall be liable for any action taken
or decision made in good faith with respect to the implementation
or administration of the Plan.
SECTION 4. ELIGIBILITY
- --------- -----------
To be eligible for selection by the Committee to participate in
the Plan, an individual must be a full-time salaried officer or
key employee of the Corporation, or of a Subsidiary Company, on
the date on which the Committee authorizes the grant to such
individual of an Award. A director of the Corporation shall not
be eligible to participate in the Plan unless he is a full-time
salaried officer of the Corporation or a Subsidiary Company.
SECTION 5. SHARES AVAILABLE
- --------- ----------------
Subject to the provisions of Section 13 of the Plan, no more than
an aggregate of 39,878,604 shares of Common Stock may be issued
pursuant to the Plan. Such shares shall be provided from shares
of Common Stock authorized but not issued. Any shares of Common
Stock which were subject to an Option, a Stock Appreciation
Right, or a Performance Share Unit, and which were not issued
prior to the expiration of the Award shall thereafter again be
available for award under the Plan. Upon the forfeiture of any
Restricted Shares, the forfeited shares of Common Stock shall
thereafter be available for award under the Plan.
Notwithstanding any other provision to the contrary, no
Participant may be awarded a grant in any one year, which, when
added to any other grant of Options, Restricted Shares, and
Performance Share Units in the same year, shall exceed 750,000
shares of Common Stock. If an Option is canceled, the canceled
Option continues to count against the maximum number of shares
for which Options may be granted to a Participant in any year.
<PAGE> PAGE 112
EXHIBIT 10(e), Page 6 of 20
SECTION 6. INCENTIVE STOCK OPTIONS
- --------- -----------------------
(a) General
-------
The Committee may authorize the grant of Incentive Stock
Options subject to the terms and conditions set forth in
this Section 6. The grant of an Incentive Stock Option
shall be evidenced by a written Incentive Stock Option
Agreement between the Corporation and the Optionee, setting
forth the number of shares of Common Stock subject to the
Incentive Stock Option evidenced thereby and the terms,
conditions, and restrictions applicable thereto. The
issuance of shares of Common Stock pursuant to an Incentive
Stock Option also shall be subject to the provisions of any
Share Retention Agreement that may be required by the
Committee under Section 11 of the Plan.
(b) Option Price
------------
The Committee shall determine the Option price for each
share of Common Stock purchased under an Option, but,
subject to the provisions of Section 13 of the Plan, in no
event shall the Option price be less than one-hundred
percent (100%) of the Fair Market Value of the Common Stock
on the date the Option is granted.
(c) Duration of Options
-------------------
The Committee shall fix the term or duration of Options,
provided that such term shall not exceed ten (10) years from
the date the Option is granted, and that such term shall be
subject to earlier termination pursuant to the provisions of
paragraph (g) of this Section 6 or paragraph (e) of
Section 8 of the Plan.
(d) Non-Transferability of Options
------------------------------
Options are not transferable other than by will or the
applicable laws of descent and distribution following the
death of the Optionee. Options may be exercised during the
lifetime of the Optionee only by him, and following his
death only by his Beneficiary.
<PAGE> PAGE 113
EXHIBIT 10(e), Page 7 of 20
(e) Exercise of Options
-------------------
The Committee shall determine the time or times at which
Options may be exercised; provided that such time or times
shall not occur before the latest of:
(i) the first anniversary of the date on which the Option
was granted;
(ii) approval of the Plan, as hereby amended, by the
stockholders of the Corporation in the manner
provided under Section 15(a) of the Plan; and
(iii) the effectiveness of any registration statement
required to be filed under the Securities Act of 1933
for the registration of the Common Stock to be issued
upon exercise of the Option.
(f) Payment of Option Price
-----------------------
The purchase price of Common Stock upon exercise of an
Option shall be paid in full to the Corporation at the time
of the exercise of the Option in cash or, at the discretion
of the Committee and subject to any limitations or
requirements that the Committee may adopt, by the surrender
to the Corporation of shares of previously acquired Common
Stock, which have been held by the Optionee for at least
twelve (12) months and which shall be valued at Fair Market
Value on the date that the Option is exercised, or, at the
discretion of the Committee, by a combination of cash and
such Common Stock.
(g) Termination of Options
----------------------
No Option shall be exercisable after it expires. Each
Option shall expire upon the earliest of:
(i) the expiration of the term for which the Option was
granted;
(ii) (A) Except as otherwise provided by the Committee, in
the case of an Optionee whose employment with the
Corporation or a Subsidiary Company is terminated
due to Retirement, Disability or death, the
expiration of thirty-six (36) months after such
termination of employment, or
<PAGE> PAGE 114
EXHIBIT 10(e), Page 8 of 20
(B) in the case of an Optionee whose employment with
the Corporation or a Subsidiary Company is
terminated for any reason other than Retirement,
Disability, or death, at the close of business on
the last day of active service by the Optionee
with the Corporation or a Subsidiary Company; or
(iii) with the Optionee's consent, the grant of a new Award
to replace the Option.
(h) Limitation on Exercisability
----------------------------
The aggregate Fair Market Value (determined as of the time
the Incentive Stock Option is granted) of the Common Stock
with respect to which Incentive Stock Options (granted on or
after January 1, 1987) are exercisable for the first time by
the Optionee during any calendar year shall not exceed
$100,000.
(i) Order of Exercise
-----------------
An Incentive Stock Option granted prior to January 1, 1987,
shall not be exercisable while there is outstanding any
Incentive Stock Option which was granted to the Optionee
before the grant of the first-mentioned Incentive Stock
Option. For this purpose, an Incentive Stock Option shall
be treated as outstanding until it is exercised in full or
expires in accordance with paragraph (c) of this Section 6.
As used in paragraphs (h) and (i) of this Section 6, the term
Incentive Stock Option shall mean an option to purchase stock
which is granted pursuant to the provisions of this Plan or of
any other plan of the Corporation or of a parent or subsidiary
corporation (as defined by Section 424(f) of the Code) and which
complies with the terms and conditions set forth in
Section 422(b) of the Code.
SECTION 7. NON-QUALIFIED STOCK OPTIONS
- --------- ---------------------------
The Committee may authorize the grant of Non-Qualified Stock
Options subject to the terms and conditions specified in this
Section 7. The grant of a Non-Qualified Stock Option shall be
evidenced by a written Non-Qualified Stock Option Agreement
between the Corporation and the Optionee, setting forth the
number of shares of Common Stock subject to the Non-Qualified
Stock Option evidenced thereby and the terms, conditions, and
restrictions applicable thereto. Non-Qualified Stock Options
<PAGE> PAGE 115
EXHIBIT 10(e), Page 9 of 20
granted pursuant to the provisions of this Section 7 shall be
subject to the terms, conditions, and restrictions set forth in
paragraphs (b) and (d) through (g) of Section 6 of the Plan. The
limitations set forth in paragraphs (c), (h) and (i) of Section 6
of the Plan shall not apply to Non-Qualified Stock Options. The
issuance of shares of Common Stock pursuant to a Non-Qualified
Stock Option also shall be subject to the provisions of any Share
Retention Agreement that may be required by the Committee under
Section 11 of the Plan.
SECTION 8. STOCK APPRECIATION RIGHTS
- --------- -------------------------
(a) General
-------
The Committee may grant a Stock Appreciation Right to a
Participant in connection with an Option, or portion thereof
as determined by the Committee, subject to the terms and
conditions set forth in this Section 8. The Stock
Appreciation Right may be granted at the time of grant of
the related Option and shall be subject to the same terms
and conditions as the related Option, except as this
Section 8 may otherwise provide. The grant of a Stock
Appreciation Right shall be evidenced either by provisions
in the Option agreement evidencing the related Option or by
a written Stock Appreciation Right Agreement between the
Corporation and the Optionee, identifying the related
Option, specifying the number of shares of Common Stock
subject thereto, and setting forth the terms and conditions
applicable to the Stock Appreciation Right.
(b) Exercise
--------
A Stock Appreciation Right shall be exercisable only at such
time or times, to such extent, and by such persons, as the
Option to which it relates shall be exercisable; provided
that:
(i) if the Committee determines that all or part of a
payment in respect of a Stock Appreciation Right
shall be made in cash, the Stock Appreciation Right
shall not be exercised before the expiration of
one (1) year from the date on which it was granted;
provided, however, that this subparagraph (i) shall
not apply if the death or Disability of the Optionee
occurs within one (1) year after the grant of the
Stock Appreciation Right;
<PAGE> PAGE 116
EXHIBIT 10(e), Page 10 of 20
(ii) if the Committee determines that all or part of a
payment in respect of a Stock Appreciation Right
shall be made in cash, such exercise may occur only
on a day that is at least three (3) and no more than
twelve (12) business days after the date on which the
Corporation first made publicly available its most
recent regular quarterly or annual financial
statements; and
(iii) a Stock Appreciation Right granted in connection with
an Incentive Stock Option may not be exercised on any
date on which the Fair Market Value of a share of
Common Stock is less than or equal to the Option
price per share under the related Incentive Stock
Option.
A Stock Appreciation Right shall be exercised by
surrendering the related Option, or the portion thereof
pertaining to the shares with respect to which the Stock
Appreciation Right is exercised, and providing the
Corporation with a written notice in such form and
containing such information (including the number of shares
of Common Stock with respect to which the Stock Appreciation
Right is being exercised) as the Committee may specify. The
date on which the Corporation receives such notice shall be
the date on which the related Option, or portion thereof,
shall be deemed surrendered and the Stock Appreciation Right
shall be deemed exercised.
(c) Payment
-------
Upon exercise of a Stock Appreciation Right in the manner
provided in paragraph (b) of this Section 8, the Optionee
shall be entitled to receive Exercise Gain Shares equal to
the number of shares of Common Stock that have an aggregate
Fair Market Value on the exercise date equal to the amount
by which the Fair Market Value of a share of Common Stock on
the exercise date exceeds the Option price per share of the
related Option, multiplied by the number of shares covered
by the related Option, or portion thereof, surrendered in
connection with the exercise of the Stock Appreciation
Right. The Exercise Gain Shares shall be subject to the
provisions of any Share Retention Agreement that may be
required by the Committee under Section 11 of the Plan. In
the sole discretion of the Committee, all or part of the
payment in respect of a Stock Appreciation Right may be made
in cash in lieu of Exercise Gain Shares.
(d) Termination of Right
--------------------
A Stock Appreciation Right shall expire, unless previously
exercised or canceled, upon the expiration of the Option to
which it relates.
<PAGE> PAGE 117
EXHIBIT 10(e), Page 11 of 20
(e) Effect of Exercise
------------------
A Stock Appreciation Right shall be canceled when, and to
the extent that, the related Option is exercised, and an
Option shall be canceled when, and to the extent that, the
Option is surrendered to the Corporation upon the exercise
of a related Stock Appreciation Right.
SECTION 9. RESTRICTED SHARES
- --------- -----------------
(a) General
-------
The Committee, in its sole discretion, may from time to time
authorize the grant of Restricted Shares to a Participant.
A certificate or certificates representing the number of
Restricted Shares granted shall be registered in the name of
the Participant. Until the expiration of the Restriction
Period or the lapse of restrictions in the manner provided
in paragraph (d) or paragraph (e) of this Section 9, the
certificate or certificates shall be held by the Corporation
for the account of the Participant, and the Participant
shall have beneficial ownership of the Restricted Shares,
including the right to receive dividends on, and the right
to vote, the Restricted Shares.
(b) Restrictions
------------
Until the expiration of the Restriction Period or the lapse
of restrictions in the manner provided in paragraph (d) or
paragraph (e) of this Section 9, Restricted Shares shall be
subject to the following restrictions and any additional
restrictions that the Committee, in its sole discretion, may
from time to time deem desirable in furtherance of the
objectives of the Plan:
(i) the Participant shall not be entitled to receive the
certificate or certificates representing the
Restricted Shares;
(ii) the Restricted Shares may not be sold, transferred,
assigned, pledged, conveyed, hypothecated, or
otherwise disposed of; and
(iii) the Restricted Shares may be forfeited immediately as
provided in paragraph (d) of this Section 9.
<PAGE> PAGE 118
EXHIBIT 10(e), Page 12 of 20
(c) Distribution of Restricted Shares
---------------------------------
If a Participant to whom Restricted Shares have been granted
remains in the continuous employment of the Corporation or a
Subsidiary Company during the entire Restriction Period,
upon the expiration of the Restriction Period all
restrictions applicable to the Restricted Shares shall
lapse, and the certificate or certificates representing the
shares of Common Stock that were granted to the Participant
in the form of Restricted Shares shall be delivered to the
Participant.
(d) Termination of Employment
-------------------------
If the employment of a Participant is terminated for any
reason other than the Retirement, Disability, or death of
the Participant in service before the expiration of the
Restriction Period, the Restricted Shares shall be forfeited
immediately and all rights of the Participant to such shares
shall terminate immediately without further obligation on
the part of the Corporation or any Subsidiary Company. If
the Participant's employment is terminated by reason of the
Retirement, Disability, or death of the Participant in
service before the expiration of the Restriction Period, the
number of Restricted Shares held by the Corporation for the
Participant's account shall be reduced by the proportion of
the Restriction Period remaining after the Participant's
termination of employment; the restrictions on the balance
of such Restricted Shares shall lapse on the date the
Participant's employment terminated; and the certificate or
certificates representing the shares of Common Stock upon
which the restrictions have lapsed shall be delivered to the
Participant (or, in the event of the Participant's death, to
his Beneficiary).
(e) Waiver of Restrictions
----------------------
The Committee, in its sole discretion, may waive any or all
restrictions with respect to Restricted Shares.
SECTION 10. PERFORMANCE SHARES
- ---------- ------------------
The Committee, in its sole discretion, may from time to time
authorize the grant of Performance Share Units to a Participant.
Performance Share Units shall entitle the Participant to
Performance Shares (or cash in lieu thereof) upon the achievement
of such performance goals as may be established by the Committee
at the time of grant for three equally weighted performance
criteria: (a) the Corporation's total stockholder return as
compared to the S&P 500 Index; (b) the Corporation's operating
<PAGE> PAGE 119
EXHIBIT 10(e), Page 13 of 20
ratio; and (c) the Corporation's return on average capital
invested. At such time as it is certified by the Committee that
the performance goals established by the Committee have been
attained or otherwise satisfied, the Committee shall authorize
the payment of cash in lieu of Performance Shares or the issuance
of Performance Shares registered in the name of the Participant,
subject to the provisions of any Share Retention Agreement that
may be required by the Committee under Section 11 of the Plan, or
both.
If the Participant's employment with the Corporation or a
Subsidiary Company is terminated before the end of a Performance
Cycle for any reason other than Retirement, Disability, or death,
the Participant shall forfeit all rights with respect to any
Performance Shares that were being earned during the Performance
Cycle. The Committee, in its sole discretion, may establish
guidelines providing that if a Participant's employment is
terminated before the end of a Performance Cycle by reason of
Disability, or death, the Participant shall be entitled to a
prorated payment with respect to any Performance Shares that were
being earned during the Performance Cycle. If the Participant's
employment is terminated before the end of a Performance Cycle by
reason of Retirement, the Participant's rights with respect to
any Performance Shares being earned during the Performance Cycle
shall, subject to the other provisions of this Section 10,
continue as if the Participant's employment had continued through
the end of the Performance Cycle.
SECTION 11. SHARE RETENTION AGREEMENTS
- ---------- --------------------------
(a) General
-------
The Committee, in its sole discretion, may require as a
condition of an Award of an Option, Stock Appreciation
Right, or Performance Share Unit that the Participant and
the Corporation enter into a Share Retention Agreement,
which shall provide that the certificate or certificates
representing any Exercise Gain Shares or Performance Shares,
when issued, shall be held by the Secretary of the
Corporation for the benefit of the Participant until such
time as the retention period specified by the Share
Retention Agreement has expired or has been waived by the
Committee, whichever occurs first. Each Share Retention
Agreement may include some or all of the terms, conditions
and restrictions set forth in paragraphs (b) through (g) of
this Section 11.
<PAGE> PAGE 120
EXHIBIT 10(e), Page 14 of 20
(b) Retention Period
----------------
Exercise Gain Shares and Performance Shares that are subject
to the Share Retention Agreement may not be sold,
transferred, assigned, pledged, conveyed, hypothecated or
otherwise disposed of within such period of time, of not
less than twenty-four (24) months and not more than
sixty (60) months following the date of exercise (in the
case of Exercise Gain Shares) or the date of issuance (in
the case of Performance Shares), as shall be prescribed by
the Committee.
(c) Tax Absorption Payment
----------------------
The Corporation may make a cash payment, either directly to
the Participant or on the Participant's behalf, in an amount
that the Committee estimates to be equal (after taking into
account any Federal and state taxes that the Committee
estimates to be applicable to such cash payment) to any
additional Federal and state income taxes that are imposed
upon the Participant as a result of the issuance of the
Exercise Gain Shares or Performance Shares that are subject
to the Share Retention Agreement. In determining the amount
to be paid pursuant to this paragraph (c), the Committee may
adopt such methods and assumptions as it considers
appropriate, and it shall not be required to examine the
individual tax liability of each Participant who has entered
into a Share Retention Agreement.
(d) Termination of Employment
-------------------------
If a Participant's employment with the Corporation or a
Subsidiary Company is terminated for any reason other than
Retirement, Disability, or death, Exercise Gain Shares or
Performance Shares subject to the Share Retention Agreement
shall continue to be held, following the Participant's
termination of employment, until the expiration of the
retention period specified by the Share Retention Agreement.
If the Participant's employment is terminated by reason of
Retirement or Disability, Exercise Gain Shares and
Performance Shares then held subject to the Share Retention
Agreement shall continue to be held until the expiration of
the applicable retention period following termination of
employment, but any such retention period shall cease upon
the earlier of the Participant's attainment of age 65 or the
expiration of two (2) years after the Participant's
Retirement or Disability, if either of those events occurs
before the expiration of the applicable retention period.
If the Participant dies while Exercise Gain Shares or
Performance Shares are subject to a retention period under
the Share Retention Agreement, such retention period shall
expire immediately at the time of death.
<PAGE> PAGE 121
EXHIBIT 10(e), Page 15 of 20
(e) Change in Control
-----------------
Upon a Change in Control, the retention periods specified by
all Share Retention Agreements shall immediately expire.
A Change in Control shall occur if:
(i) any person, other than the Corporation or a Subsidiary
Company or any employee benefit plan sponsored by the
Corporation or a Subsidiary Company, shall become the
beneficial owner of, or obtain voting control over,
20% or more of the Corporation's outstanding Common
Stock;
(ii) the stockholders of the Corporation shall approve
(A) any consolidation or merger of the Corporation in
which the Corporation is not the continuing or
surviving corporation or pursuant to which shares of
Common Stock would be converted into cash,
securities, or other property, other than a merger of
the Corporation in which holders of Common Stock
immediately prior to the merger have the same
proportionate ownership of common stock of the
surviving corporation immediately after the merger as
immediately before, or (B) any sale, lease, exchange,
or other transfer (in one transaction or a series of
related transactions) of all or substantially all the
assets of the Corporation; or
(iii) there shall have been a change in the composition of
the Board of Directors such that within any period of
two (2) consecutive years or less individuals who at
the beginning of such period constituted such Board,
together with any new directors whose election, or
nomination for election by the Corporation's
stockholders, was approved by a vote of at least
two-thirds of the directors then in office who were
directors at the beginning of such period, shall for
any reason no longer constitute a majority of the
directors of the Corporation.
If the expiration of a Share Retention Agreement pursuant to
this paragraph (e) causes a Participant to be subject to an
excise tax under Section 4999 of the Code, or any successor
provision thereto (the "Excise Tax"), the Corporation shall
make a cash payment, either directly to the Participant or
on the Participant's behalf, in an amount that the Committee
estimates to be equal (after taking into account any Federal
and state taxes, including interest and penalties, that the
Committee estimates to be applicable to the additional cash
payment) to the additional Excise Tax imposed on the
<PAGE> PAGE 122
EXHIBIT 10(e), Page 16 of 20
Participant as a result of the expiration of the Share
Retention Agreement. In determining the amount to be paid
pursuant to this subparagraph, the Committee may adopt such
methods and assumptions as it considers appropriate, and it
shall not be required to examine the individual tax
liability of each Participant to whom this subparagraph
applies.
(f) Waiver of Requirements
----------------------
The Committee, in its sole discretion, may waive any or all
retention periods or other restrictions in the Share
Retention Agreement.
(g) Distribution of Shares
----------------------
The Secretary of the Corporation shall promptly distribute
the certificate or certificates representing the Exercise
Gain Shares or Performance Shares subject to a Share
Retention Agreement upon expiration of the retention period
or other termination or waiver of the restrictions under
this Section 11.
SECTION 12. DIVIDEND EQUIVALENT PAYMENTS
- ---------- ----------------------------
The Committee may authorize the immediate or deferred payment of
dividend equivalents on some or all of the shares of Common Stock
covered by Options or Performance Share Units granted after
January 1, 1989, in an amount equal to, and commensurate with,
dividends declared by the Board of Directors and paid on Common
Stock. Dividend equivalents payable on Option shares or on
Performance Share Units under this Section 12 may be paid in cash
or in Common Stock at the discretion of the Committee. The
Committee may authorize the immediate payment of dividend
equivalents under this Section 12 with respect to any Option for
all or some portion of its term by including a specific
provision, authorizing such immediate payment, in the Incentive Stock
Option Agreement required under Section 6(a) of the Plan or the
Non-Qualified Stock Option Agreement required under Section 7 of
the Plan. The Committee may authorize the immediate payment of
dividend equivalents under this Section 12 with respect to any
Performance Share Unit for all or some portion of its term as a
term and condition of the Performance Share Unit grant. The
Committee also may authorize the deferred payment of dividend
equivalents under this Section 12 with respect to any Option for
all or some portion of its term by including a specific provision
authorizing such deferred payment (including the manner in which
such payment will be credited to Optionees and subsequently paid)
in the Incentive Stock Option Agreement required under
Section 6(a) of the Plan or the Non-Qualified Stock Option
<PAGE> PAGE 123
EXHIBIT 10(e), Page 17 of 20
Agreement required under Section 7 of the Plan. The Committee
may authorize the deferred payment of dividend equivalents under
this Section 12 with respect to any Performance Share Unit for
all or some portion of its term by including a specific provision
authorizing such deferred payment (including the manner in which
such deferred payment will be credited to Optionees and
subsequently paid) as a term and condition of the Performance
Share Unit grant.
SECTION 13. CAPITAL ADJUSTMENTS
- ---------- -------------------
In the event of a recapitalization, stock split, stock dividend,
exchange, combination, or reclassification of shares, merger,
consolidation, reorganization, or other change in or affecting
the capital structure or capital stock of the Corporation, the
Board of Directors, upon the recommendation of the Committee, may
make appropriate adjustments in the number of shares of Common
Stock authorized for the Plan and in the annual limitation
imposed by Section 5 of this Plan; and the Committee may make
appropriate adjustments in the number of shares subject to
outstanding Options, Stock Appreciation Rights, Restricted Stock,
or Performance Share Unit grants, and in the Option price of any
then outstanding Options, as it deems equitable, in its absolute
discretion, to prevent dilution or enlargement of the rights of
Participants.
SECTION 14. REGULATORY APPROVALS
- ---------- --------------------
The exercise of each Option and Stock Appreciation Right, and the
grant or distribution of Restricted Shares and Performance
Shares, shall be subject to the condition that if at any time the
Corporation shall determine in its discretion that the
satisfaction of withholding tax or other tax liabilities, or the
listing, registration, or qualification of any shares of Common
Stock upon any securities exchange or under any Federal or state
law, or the consent or approval of any regulatory body, is
necessary or desirable as a condition of, or in connection with,
such exercise, grant, or distribution, then in any such event
such exercise, grant, or distribution shall not be effective
unless such liabilities have been satisfied or such listing,
registration qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the
Corporation.
<PAGE> PAGE 124
EXHIBIT 10(e), Page 18 of 20
SECTION 15. EFFECTIVE DATE AND TERM OF THE PLAN
- ---------- -----------------------------------
(a) Effective Date
--------------
The Plan, as hereby amended, shall be effective when
approved by the Board of Directors, and Options, Stock
Appreciation Rights, and Performance Share Units may be
granted immediately thereafter; provided, that no Option or
Stock Appreciation Right may be exercised and no Restricted
Shares or Performance Shares may be granted under the Plan
unless and until the Plan, as hereby amended, is approved by
the vote of the holders of a majority of the shares of
Common Stock present or represented and entitled to vote at
a meeting of the stockholders of the Corporation, at which a
quorum is present, held within twelve (12) months after the
date of adoption of the Plan, as hereby amended, by the
Board of Directors.
(b) Term of the Plan
----------------
Awards may be granted from time to time under the terms and
conditions of the Plan, but no Incentive Stock Option may be
granted after the expiration of ten (10) years from the date
of adoption of the Plan, as hereby amended, by the Board of
Directors; provided, that any future amendment to the Plan
that is approved by the stockholders of the Corporation in
the manner provided under paragraph (a) of this Section 15
shall be regarded as creating a new Plan, and an Incentive
Stock Option may be granted under such new Plan until the
expiration of ten (10) years from the earlier of the
approval by the Board of Directors, or the approval by the
stockholders of the Corporation, of such new Plan.
Incentive Stock Options theretofore granted may extend
beyond the expiration of that ten-year period, and the terms
and conditions of the Plan shall continue to apply thereto
and to shares of Common Stock acquired upon the subsequent
exercise of an Incentive Stock Option or related Stock
Appreciation Right.
SECTION 16. AMENDMENT OR TERMINATION OF THE PLAN
- ---------- ------------------------------------
The Board of Directors may at any time and from time to time
alter or amend, in whole or in part, any or all of the provisions
of the Plan, or may at any time suspend or terminate the Plan,
provided that no change in any Awards theretofore granted to any
Participant may be made which would impair or diminish the rights
of the Participant without the Participant's consent, and
provided further, that no alteration or amendment may be made
without the approval of the holders of a majority of the Common
<PAGE> PAGE 125
EXHIBIT 10(e), Page 19 of 20
Stock then outstanding and entitled to vote if such stockholder
approval is necessary to comply with the requirements of any rules
promulgated under Section 16 of the Securities Exchange Act of
1934 or such other Federal or state laws or regulations as may be
applicable.
SECTION 17. MISCELLANEOUS
- ---------- -------------
(a) Fractional Shares
-----------------
The Corporation shall not be required to issue or deliver
any fractional share of Common Stock upon the exercise of an
Option or Stock Appreciation Right, the award of Performance
Shares, or the payment of a dividend equivalent in Common
Stock pursuant to Section 12 of the Plan, but may pay, in
lieu thereof, an amount in cash equal to the Fair Market
Value of such fractional share.
(b) Withholding
-----------
The Corporation and its Subsidiary Companies shall have the
right, to the extent permitted by law, to deduct from any
payment of any kind otherwise due to a Participant any
Federal, state or local taxes of any kind required by law to
be withheld with respect to Awards under the Plan, and to
the extent any such withholding requirements are not
satisfied, each Participant shall pay to the Corporation any
Federal, state or local taxes of any kind required by law to
be withheld with respect to Awards under the Plan.
(c) Stockholder Rights
------------------
No person shall have any rights of a stockholder by virtue
of an Option, Stock Appreciation Right, or Performance Share
Unit except with respect to shares of Common Stock actually
issued to him, and the issuance of shares of Common Stock
shall confer no retroactive right to dividends.
(d) No Contract of Employment
-------------------------
This Plan shall not be deemed to be an employment contract
between the Corporation or any Subsidiary Company and any
Participant or other employee. Nothing contained herein, or
in any agreement, certificate or other document evidencing,
providing for, or setting forth the terms and conditions
applicable to any Awards shall be deemed to confer upon any
Participant or other employee a right to continue in the
employment of the Corporation or any Subsidiary Company, or
to interfere with the right of the Corporation or any
Subsidiary Company to terminate the employment of such
Participant or employee at any time.
<PAGE> PAGE 126
EXHIBIT 10(e), Page 20 of 20
(e) Unfunded Plan
-------------
Except as may otherwise be provided in the Plan, the Plan
shall be unfunded. Neither the Corporation nor any
Subsidiary Company shall be required to segregate any assets
that may be represented by Options, Stock Appreciation
Rights, or Performance Share Units, and neither the
Corporation nor any Subsidiary Company shall be deemed to be
a trustee of any amounts to be paid under an Option, Stock
Appreciation Right, or Performance Share Unit. Any
liability of the Corporation to pay any Participant or
Beneficiary with respect to an Option, Stock Appreciation
Right, or Performance Share Unit shall be based solely upon
any contractual obligations created pursuant to the
provisions of the Plan; no such obligation shall be deemed
to be secured by any pledge or encumbrance on any property
of the Corporation or a Subsidiary Company.
(f) Applicable Law
--------------
The Plan, its validity, interpretation, and administration,
and the rights and obligations of all persons having an
interest therein, shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia,
except to the extent that such laws may be preempted by
Federal law.
(g) Gender and Number
-----------------
Wherever used in the Plan, words in the masculine form shall
be deemed to refer to females as well as to males, and words
in the singular or plural shall be deemed to refer also to
the plural or singular, respectively, as the context may
require.
<PAGE> PAGE 127
EXHIBIT 10(f), Page 1 of 8
NORFOLK SOUTHERN CORPORATION
OFFICERS' DEFERRED COMPENSATION PLAN
ARTICLE I. NAME AND PURPOSE OF THE PLAN
- --------- ----------------------------
The name of the plan is the Norfolk Southern Corporation Officers'
Deferred Compensation Plan (the "Plan"). The purpose of the Plan
is to provide retirement and death benefits to those officers of
Norfolk Southern Corporation (the "Corporation") or a
Participating Subsidiary who elect to participate in the Plan.
ARTICLE II. DEFINITIONS
- ---------- -----------
Account The total of the amount of Deferrals by a
Participant together with Interest as provided in
Article V.
Agreement The "Deferral Agreement" between each Participant
and the Corporation.
Beneficiary The person or persons designated as Beneficiary
pursuant to Article XII.
Board of The Board of Directors of the Corporation.
Directors
Committee The Compensation and Nominating Committee of the
Board of Directors.
Compensation The fixed salary payable in the form of cash
(including vacation pay) of the Participant before
any reduction for contributions to the Thrift and
Investment Plan of Norfolk Southern Corporation and
Participating Subsidiary Companies, as amended from
time to time, and before any deferrals under this
Plan.
Deferral A Deferred Bonus and/or a Monthly Deferred Amount.
Deferred That amount set forth in the Agreement which shall be
Bonus deferred from a Participant's MIP incentive award
(and any other annual cash incentive award payable
to participants in MIP) or EMIP incentive award
(and any other annual cash incentive award approved
by the Board of Directors and payable to
participants in EMIP), or the bonus program of a
Participating Subsidiary, if the deferral of such
incentive award or bonus under the Plan is
authorized by the Corporation.
<PAGE> PAGE 128
EXHIBIT 10(f), Page 2 of 8
Disability A disability that enables the Participant to be
eligible for a disability benefit under the
Long-Term Disability Plan of Norfolk Southern
Corporation and Participating Subsidiaries, as
amended from time to time, or under any such
similar plan of a Participating Subsidiary.
EMIP Norfolk Southern Corporation Executive Management
Incentive Plan.
MIP Norfolk Southern Corporation Management Incentive
Plan.
Monthly That amount set forth in the Agreement which shall be
Deferred deferred monthly from a Participant's salary pursuant
Amount to the Plan.
Participant Any employee of the Corporation or a Participating
Subsidiary eligible to participate under Article IV
of the Plan.
Participating Each subsidiary or affiliated company of the
Subsidiary Corporation which adopts the Plan and is approved
for participation in the Plan as provided in
Article XVIII.
Plan The Executive Vice President-Administration of the
Administrator Corporation or the successor officer who performs
substantially similar duties.
Plan Year Any calendar year during which deferrals under this
Plan are made.
Retirement Retirement from the Corporation or a Participating
Subsidiary pursuant to the provisions of the
retirement plan of the Corporation or of a
Participating Subsidiary (whichever is applicable),
as amended from time to time.
ARTICLE III. ADMINISTRATION
- ----------- --------------
The Plan Administrator shall administer, construe, and interpret
this Plan and, from time to time, adopt such rules and regulations
and make such recommendations to the Committee concerning Plan
changes as are deemed necessary to ensure effective implementation
of this Plan. The administration, construction, and interpretation
by the Plan Administrator may be appealed to the Committee, and the
decision of the Committee shall be final and conclusive, except
that any claim for benefits with respect to a Participant shall be
subject to the claims procedure set forth in Section 503 of the
Employee Retirement Income Security Act of 1974. The Plan
Administrator may correct errors and, so far as practicable, may
<PAGE> PAGE 129
EXHIBIT 10(f), Page 3 of 8
adjust any benefit or payment or credit accordingly. Neither the
Plan Administrator nor any member of the Committee shall be liable
for any act done or determination made in good faith.
ARTICLE IV. ELIGIBILITY AND PARTICIPATION
- ---------- -----------------------------
Any nonagreement employee with at least 830 salary administration
points assigned to his position shall be eligible to participate
in the Plan. However, only those Participants with annual
Compensation in excess of ninety thousand dollars ($90,000) shall
be eligible to defer Compensation under this Plan, and only 20% of
monthly Compensation in excess of seven thousand five hundred
dollars ($7,500) shall qualify for deferral hereunder. A
nonagreement employee who elects to become a Participant in the
Plan and defer a portion of his monthly Compensation thereby
consents to the reduction in his monthly Compensation by the
Monthly Deferred Amount as specified in the Agreement. An
election to participate in the Plan must be made annually by
December 22 of the year prior to each Plan Year. Benefits payable
hereunder shall be in addition to any other compensation or
benefits to which a Participant may be entitled from the
Corporation or a Participating Subsidiary.
A Participant may elect to defer a portion of any incentive bonus
which may be awarded to him pursuant to MIP or EMIP or the
authorized bonus program of a Participating Subsidiary. A
Participant who elects to defer any of his incentive bonus thereby
consents to a reduction in his bonus by the Deferred Bonus as
specified in the Agreement, commencing with the incentive bonus
award earned after December 31, 1986. By December 22 of the year
prior to each Plan Year, a Participant may elect to defer any
incentive bonus which may be earned by him during that Plan Year,
either in whole or in part, in increments of twenty-five percent
(25%).
ARTICLE V. INTEREST EQUIVALENT
- --------- -------------------
Unless otherwise stated herein or determined by the Board of
Directors, an amount equivalent to interest ("Interest") shall
accrue and be compounded annually on all Deferrals. For purposes
of calculating the appropriate Interest only, the Deferred Bonus
is deemed to occur on the date on which the incentive bonus is
paid. Interest shall accrue and be compounded annually at rates
in accordance with the schedule below on the basis of the
Participant's age attained during the Plan Year for which the
Deferral is made:
Age Rate
--- ----
Up to 45 7%
45 - 54 10%
55 - 60 11%
Over 60 12%
<PAGE> PAGE 130
EXHIBIT 10(f), Page 4 of 8
Interest on each Deferral shall continue to accrue at the rate
determined by the Participant's age attained during the Plan Year
for which the Deferral is made until all benefits payable
hereunder have been distributed to, or with respect to, the
Participant.
ARTICLE VI. BENEFITS
- ---------- --------
(a) Retirement
----------
When a Participant ceases active service due to his
Retirement, he shall be paid a monthly annuity commencing in
January of the first calendar year following such Retirement
for a period of years in accordance with the schedule below:
Age at
Time of Distribution
Deferral Period
-------- ------------
Up to 50 5 Years
50 or Over 10 Years
The amount of the monthly annuity payable under this
Article VI(a), shall be an amount sufficient to amortize the
Participant's Account together with Interest over the
applicable period.
(b) Disability
----------
When a Participant ceases active service due to Disability,
he shall be paid a monthly annuity commencing in January of
the first calendar year following such Disability for a
period of fifteen (15) years in an amount sufficient to
amortize the Participant's Account together with Interest
over that period.
(c) Death
-----
If a Participant dies while in active service, the
Corporation shall pay the amount of the Participant's Account
to the Participant's Beneficiary in a single payment as soon
as practicable after the date of death. If a Participant
dies after Retirement or Disability but prior to receiving
all benefits payable thereunder, the monthly payments shall
be paid to the Participant's Beneficiary for the scheduled
annuity period.
(d) Termination of Employment
-------------------------
If a Participant ceases active service other than by reason
of leave of absence granted pursuant to the Family and
Medical Leave Act, Retirement, Disability or Death, he shall
be paid the balance of his Account as of the date of his
separation from service as soon as practicable after such
separation from service.
<PAGE> PAGE 131
EXHIBIT 10(f), Page 5 of 8
(e) Lump Sum or Other Settlement
----------------------------
Notwithstanding the foregoing provisions of this Article VI,
the Committee, in its sole discretion, may authorize and
direct the Corporation to make payments after termination of
employment of a Participant to such Participant or his
Beneficiary in a lump sum or over a period other than that
provided for in this Article VI, and to charge such payments
against the Participant's Account. Such accelerated
distribution may be made only (1) in the event of a financial
emergency which is beyond the control of the Participant if
disallowance of the accelerated distribution would result in
severe financial hardship to the Participant or Beneficiary,
and only in an amount necessary to satisfy the financial
emergency, or (2) if in the written opinion of counsel,
payment in accordance with this Article VI could create a
conflict of interest for the Participant or Beneficiary;
provided, that all amounts due to a Participant or
Beneficiary under this Plan shall in all events be paid to
the Participant or Beneficiary by the end of the appropriate
period referred to in this Article VI. No Participant or
Beneficiary who is also a member of the Committee shall
participate in any decision of the Committee to make
accelerated payments under this Article VI.
(f) Change in Mandatory Distribution Schedule
-----------------------------------------
Notwithstanding the foregoing provisions of this Article VI,
the Committee may, without the consent of any Participant or
Beneficiary, direct that all benefits payable thereafter
pursuant to paragraph (a), (b), or (c) above (including
benefits that accrued prior to the issuance of the direction)
shall be paid under a schedule that differs from that
prescribed by paragraph (a), (b), or (c). Any such direction
shall apply to all Participants, without differentiating
among individual Participants, except to the extent otherwise
provided by paragraph (e), above. No Participant or
Beneficiary who is also a member of the Committee shall
participate in any decision of the Committee to make a change
in the distribution schedule.
ARTICLE VII. NATURE AND SOURCE OF PAYMENTS
- ----------- -----------------------------
The obligation to pay benefits under Article VI with respect to
each Participant shall constitute a liability of the Corporation to
the Participant and any death Beneficiaries in accordance with the
terms of the Plan. All benefits payable hereunder shall be made
from the general funds of the Corporation, and nothing herein shall
be deemed to create a trust of any kind or a fiduciary relationship
between the Corporation and any Participant or other person. No
special or separate fund need be established or other segregation
of assets made to assure payments hereunder, and no Participant or
Beneficiary shall have any interest in any particular asset of the
<PAGE> PAGE 132
EXHIBIT 10(f), Page 6 of 8
Corporation by virtue of the existence of the Plan or an Agreement.
Participants and Beneficiaries shall stand in the position of unsecured
creditors of the Corporation, and all rights hereunder are subject
to the claims of creditors of the Corporation.
ARTICLE VIII. EXPENSES OF ADMINISTRATION
- ------------ --------------------------
All expenses of administering the Plan shall be borne by the
Corporation, and no part thereof shall be charged against the
benefit of any Participant.
ARTICLE IX. AMENDMENT TO AND TERMINATION OF PLAN
- ---------- ------------------------------------
The Corporation reserves the right at any time by a resolution duly
adopted by its Board of Directors to amend this Plan in any manner
or to terminate it at any time, except that no such amendment or
termination shall deprive a Participant or his Beneficiary of any
rights hereunder theretofore legally accrued, and no such
termination shall be effective for the year in which such
resolution is adopted.
ARTICLE X. RECALCULATION EVENTS
- ---------- --------------------
The Corporation's commitment to accrue and pay Interest as provided
in Article V is facilitated by the purchase of corporate-owned life
insurance purchased on the lives of eligible Participants. If the
Board of Directors, in its sole discretion, determines that any
change whatsoever in Federal, State or local law, or in its
application or interpretation, has materially affected, or will
materially affect, the ability of the Corporation to recover the
cost of providing the benefits otherwise payable under the Plan,
then, if the Board of Directors so elects, a Recalculation Event
shall be deemed to have occurred. If a Recalculation Event occurs,
then Interest shall be recalculated and restated using a lower rate
of Interest determined by the Board of Directors, but which shall
be not less than one-half (1/2) the rate of Interest provided for
in Article V.
ARTICLE XI. GOVERNING LAW
- ---------- -------------
This Plan and the Agreements are subject to the laws of the
Commonwealth of Virginia.
ARTICLE XII. DESIGNATION OF BENEFICIARY
- ----------- --------------------------
For the purpose of this Plan, a beneficiary shall be either (1) the
named Beneficiary or Beneficiaries designated as hereinafter
provided for by the Participant, or (2) in the absence of any such
designation, his estate. A Participant may designate both primary
<PAGE> PAGE 133
EXHIBIT 10(f), Page 7 of 8
and contingent Beneficiaries. A Participant may revoke or change
any designation. To be effective, the designation of a named
Beneficiary or Beneficiaries, or any change in or revocation of any
designation, must be on a form provided by the Corporation, signed
by the Participant and filed with the Office of the Plan
Administrator prior to the death of such Participant. Any such
designation, change or revocation shall not invalidate any cash
payment made or other action taken by the Corporation pursuant to
the Plan prior to its receipt by the Corporation. The
determination by the Corporation of a Beneficiary or Beneficiaries,
or the identity thereof, or evidence satisfactory to the
Corporation shall be conclusive as to the liability of the
Corporation and any payment made in accordance therewith shall
discharge the Corporation of all its obligations under the Plan for
such payment.
ARTICLE XIII. SUCCESSORS, MERGERS, CONSOLIDATIONS
- ------------ -----------------------------------
The terms and conditions of this Plan and each Agreement shall
inure to the benefit of and bind the Corporation, the Participants,
their successors, assigns, and personal representatives. If
substantially all the assets of the Corporation are acquired by
another corporation or entity or if the Corporation is merged into,
or consolidated with, another corporation or entity, then the
obligations created hereunder and as a result of the Corporation's
acceptance of Agreements shall be obligations of the successor
corporation or entity.
ARTICLE XIV. WITHHOLDING FOR TAXES
- ----------- ---------------------
The Participant agrees as a condition of participation hereunder
that the Corporation may withhold applicable Federal, State, and
local income taxes and Social Security or Railroad Retirement taxes
from any distribution or benefit paid hereunder.
ARTICLE XV. NON-ALIENATION OF BENEFITS
- ---------- --------------------------
No benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, and any attempt at such shall be void; nor
shall any such benefit be in any way subject to the debts,
contracts, liabilities, engagements, or torts of the person who
shall be entitled to such benefit; nor shall it be subject to
attachment or legal process for or against such person.
ARTICLE XVI. FACILITY OF PAYMENT
- ----------- -------------------
If the Plan Administrator shall find that any individual to whom
any amount is payable under the Plan is unable to care for his
affairs because of illness or accident, or is a minor or other
person under legal disability, any payment due such individual
<PAGE> PAGE 134
EXHIBIT 10(f), Page 8 of 8
(unless a prior claim therefore shall have been made by a duly
appointed guardian, committee, or other legal representative)
may be paid to the spouse, a child, a parent, or a brother or sister
of such individual or to any other person deemed by the Plan Administrator
to have incurred expenses of such individual, in such manner and
proportions as the Plan Administrator may determine. Any such
payment shall be a complete discharge of the liabilities of the
Corporation with respect thereto under the Plan or the Agreement.
ARTICLE XVII. CONTINUED EMPLOYMENT
- ------------ --------------------
Nothing contained herein or in an Agreement shall be construed as
conferring upon any Participant the right nor imposing upon him the
obligation to continue in the employment of the Corporation or a
Participating Subsidiary in any capacity.
ARTICLE XVIII. PARTICIPATION BY SUBSIDIARY COMPANIES
- ------------- -------------------------------------
Conditional upon prior approval by the Corporation, any company
which is a subsidiary of or affiliated with the Corporation may
adopt and participate in this Plan as a Participating Subsidiary.
Each Participating Subsidiary shall make, execute and deliver such
instruments as the Corporation and/or the Plan Administrator shall
deem necessary or desirable, and shall constitute the Corporation
and/or the Plan Administrators as its agents to act for it in all
transactions in which the Corporation and/or the Plan
Administrators believe such agency will facilitate the
administration of this Plan.
ARTICLE XIX. MISCELLANEOUS
- ----------- -------------
Whenever used in the Plan, words in the masculine form shall be
deemed to refer to females as well as to males, and words in the
singular or plural shall be deemed to refer also to the plural or
singular, respectively, as the context may require.
ARTICLE XX. EFFECTIVE DATE
- ---------- --------------
The effective date of the Plan is January 1, 1987, as amended
effective November 24, 1998.
<PAGE> PAGE 135
EXHIBIT 10(h), Page 1 of 2
NORFOLK SOUTHERN CORPORATION
DIRECTORS' RESTRICTED STOCK PLAN
I. Effective January 1, 1994, as restated November 24,
Date: 1998.
II. Purpose: To increase the ownership of common stock of
Norfolk Southern Corporation ("Corporation")
by nonemployee directors so as to align
further their ownership interest in the
Corporation with that of the stockholders.
III. Eligibility: Any nonemployee director of the Corporation
as of the Effective Date and any nonemployee
director of the Corporation who begins his or
her term as director on or after the
Effective Date ("Eligible Director"). A
"nonemployee director" is a director who is
not an officer of the Corporation or any of
its subsidiaries.
IV. Benefits: (1) An Eligible Director shall be granted
three thousand (3,000) shares of
Corporation common stock ("Restricted
Shares") on the later of the Effective
Date of the Registration Statement
registering the grant of common stock
under this Plan or the date a person
becomes an Eligible Director.
(2) Restricted Shares shall be restricted as
hereinafter provided for a period
("Restriction Period") commencing on the
date of grant and ending on the date that
is the earlier of the death of the
Eligible Director or 6 months after the
Eligible Director ceases to be a director
by reason of disability or retirement.
During the Restriction Period, the
Eligible Director shall have the entire
beneficial interest in and all rights and
privileges of a stockholder as to the
Restricted Shares, including the right to
receive dividends and the right to vote
such shares, subject to the following
conditions: (a) the Eligible Director
shall not be entitled to delivery of the
stock certificate until expiration of the
Restriction Period; (b) none of the
Restricted Shares may be sold,
transferred, assigned, pledged or
otherwise encumbered or disposed of
<PAGE> PAGE 136
EXHIBIT 10(h), Page 2 of 2
during the Restriction Period; and (c) all
Restricted Shares shall be forfeited and
all rights of the Eligible Director in
and to such shares shall terminate unless
the Eligible Director remains a director
of the Corporation until death,
disability or retirement.
(3) For purposes of this Plan, "retirement"
of an Eligible Director means termination
of service as a director of the
Corporation, if (a) the Eligible Director
at the time of termination was ineligible
to continue serving as a director under
the Corporation's Retirement Policy for
Directors or (b) the Eligible Director
had served as a director of the
Corporation for at least two consecutive
years, and such termination is (i) due to
the Eligible Director's taking a position
with or providing services to a
governmental, charitable or educational
institution whose policies prohibit
continued service as a director of the
Corporation, or (ii) due to the fact that
continued service as a director would be
a violation of law, or (iii) not due to
the voluntary resignation or refusal to
stand for reelection by the Eligible
Director.
(4) The Board of Directors of the Corporation
may make such adjustments in the number
and kind of shares authorized by the Plan
and the number and kind of shares or
other securities or property covered by
outstanding awards as are 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: A maximum of 66,000 shares of Corporation
common stock may be granted under this Plan.
This Plan may be amended (but not more than
once every six months, other than to comply
with changes in the Internal Revenue Code) or
terminated by the Board of Directors of the
Corporation.
<PAGE> PAGE 137
EXHIBIT 10(o), Page 1 of 1
NORFOLK SOUTHERN CORPORATION
DESCRIPTION OF
1999 SPECIAL INCENTIVE BONUS PROGRAM
At its meeting on November 24, 1998, the Board of Directors of
Norfolk Southern Corporation (NS) adopted the 1999 Special
Incentive Bonus Program (Program) to provide cash incentives to a
large number of NS nonagreement employees (including the persons
named in the Summary Compensation Table of the Proxy Statement
for the 1999 Annual Meeting of Stockholders and other executive
officers [collectively Executive Officers]) based on the 1999
NS Operating Ratio.
Payment of Special Incentive Bonus awards to participants,
including the Executive Officers, is authorized only if the 1999
NS Operating Ratio meets a designated threshold; if the 1999
NS Operating Ratio is better than the designated threshold, the
Program authorizes payments of increasing Special Incentive Bonus
awards, based on a predetermined sliding scale, to all
participants, including the Executive Officers.
Specifically, if the threshold is met exactly, the Program
authorizes payment to each Executive Officer of a Special
Incentive Bonus award that is equal to 1/12th of that
individual's maximum 1999 opportunity under the NS Executive
Management Incentive Plan; the largest Special Incentive Bonus
award that may be paid to each Executive Officer under this
Program is an amount equal to 1/2 of that individual's maximum
1999 opportunity under the NS Executive Management Incentive
Plan.
As a general rule, each participant, including an Executive
Officer, must be in active service on December 31, 1999, to
receive a payment. Exceptions -- and related provision for
pro-rata payment of earned Special Incentive Bonus awards -- are
made in the cases of an otherwise-eligible participant's death,
retirement or total disability, and in other specified
circumstances.
As in the case of other NS incentive programs, authority exists
under this Program to reduce or eliminate a special incentive
bonus award to any employee, including an Executive Officer, for
work performance that is inconsistent with the Program's purposes
and objectives.
<PAGE> PAGE 138
EXHIBIT 12, Page 1 of 1
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
<TABLE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
<CAPTION>
Year ended December 31
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing
operations before income
taxes as reported $ 845 $ 998 $1,166 $1,089 $1,028
Add:
Total interest expenses
(as detailed below) 688 530 182 173 156
Amortization of
capitalized interest 3 3 3 2 2
Income (loss) of
partially owned
entities (1) 165 113 1 -- 1
Subsidiaries' preferred
dividend requirement 2 2 2 3 3
------ ------ ------ ------ ------
Income before
income taxes,
as adjusted $1,703 $1,646 $1,354 $1,267 $1,190
====== ====== ====== ====== ======
FIXED CHARGES
Interest expense on debt $ 516 $ 385 $ 116 $ 113 $ 101
Other interest expense 27 32 36 31 30
Calculated interest
portion of rent expense 31 30 30 29 25
NS' share of Conrail
interest 114 83 -- -- --
------ ------ ------ ------ ------
Total interest
expenses 688 530 182 173 156
Capitalized interest 21 17 12 14 18
Subsidiaries' preferred
dividend requirement
on a pretax basis 4 4 4 4 4
------ ------ ------ ------ ------
Total fixed charges $ 713 $ 551 $ 198 $ 191 $ 178
====== ====== ====== ====== ======
RATIO OF EARNINGS TO
FIXED CHARGES 2.39 2.99 6.84 6.63 6.69
</TABLE>
(1) Includes: (a) the distributed income of 20%-49% owned entities,
net of equity recorded in undistributed income and the minority
income of consolidated entities which have fixed charges; 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.
<PAGE> PAGE 139
EXHIBIT 21, Page 1 of 2
NAME AND STATE OF INCORPORATION OF SUBSIDIARIES
OF NORFOLK SOUTHERN CORPORATION
AS OF MARCH 1, 1999
Agency Media Services, Inc., Indiana
Atlantic Acquisition Corporation, Pennsylvania
Atlantic Investment Company, Delaware
Norfolk Southern Properties, Inc., Virginia
Norfolk Southern Railway Company, Virginia
Northmont Limited Partnership, Georgia
NS Crown Services, Inc., Virginia
NS Fiber Optics, Inc., Virginia
NS Transportation Brokerage Corporation, Virginia
Pocahontas Development Corporation, Kentucky
Pocahontas Land Corporation, Virginia
TCS Leasing, Inc., Oklahoma
Norfolk Southern Railway Company subsidiaries:
Airforce Pipeline, Inc., North Carolina
Alabama Great Southern Railroad Company, The; Alabama
Atlantic and East Carolina Railway Company, North Carolina
Camp Lejeune Railroad Company, North Carolina
Central of Georgia Railroad Company, Georgia
Chesapeake Western Railway, Virginia
Cincinnati, New Orleans and Texas Pacific Railway Company, The;
Ohio
Citico Realty Company, Virginia
Georgia Southern and Florida Railway Company, Georgia
High Point, Randleman, Asheboro and Southern Railroad
Company, North Carolina
Interstate Railroad Company, Virginia
Lamberts Point Barge Company, Inc., Virginia
Memphis and Charleston Railway Company, Mississippi
Mobile and Birmingham Railroad Company, Alabama
Norfolk and Portsmouth Belt Line Railroad Company, Virginia
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 140
EXHIBIT 21, Page 2 of 2
Norfolk Southern Properties, Inc. subsidiaries:
Alexandria-Southern Properties, Inc., Virginia
Arrowood-Southern Company, North Carolina
Arrowood Southern Executive Park, Inc., North Carolina
Carlyle CA Corporation, Virginia
Carlyle Development Corporation, Virginia
Charlotte-Southern Corporation, North Carolina
Charlotte-Southern Hotel Corporation, North Carolina
Lambert's Point Docks, Incorporated, Virginia
Nickel Plate Improvement Company, Inc., The; Indiana
NKPI Management, Inc., Indiana
Norfolk Southern Industrial Development Corp., Virginia
Norfolk Southern Tower, LLC, Washington, D.C.
NS-Charlotte Tower Corporation, North Carolina
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
NOTE: Of the above subsidiaries, each of which is more than
50% owned, only Norfolk Southern Railway Company meets
the Commission's "significant subsidiary" test. This
list does not include CRR Holdings, LLC, in which
Norfolk Southern Corporation has 50% voting control;
Conrail Inc. and Consolidated Rail Corporation are
subsidiaries of CRR Holdings, LLC.
<PAGE> PAGE 141
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
Statement No. 333-67937 on Form S-3 and Registration Statements
Nos. 33-61317, 33-52031, 333-40993, 33-57417, and 333-71321 on
Form S-8 of Norfolk Southern Corporation of our report dated
January 26, 1999, relating to the consolidated balance sheets of
Norfolk Southern Corporation and subsidiaries as of December 31,
1998 and 1997, 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, 1998, which report
appears in the December 31, 1998, Annual Report on Form 10-K405
of Norfolk Southern Corporation.
/s/ KPMG LLP
Norfolk, Virginia
March 23, 1999
<PAGE> PAGE 142
EXHIBIT 23(b), Page 1 of 1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
INDEPENDENT ACCOUNTANTS
The Board of Directors
Norfolk Southern Corporation:
We hereby consent to the incorporation by reference in the
Prospectus constituting part of the Registration Statement on Form S-3
(No. 333-67937), and in the Registration Statements on Form S-8
(Nos. 33-61317, 33-52031, 333-40993, 33-57417, and 333-71321) of
Norfolk Southern Corporation of our report dated January 19, 1999
on the consolidated financial statements of Conrail Inc. and
subsidiaries for the year ended December 31, 1998, which appears
in the Annual Report on Form 10-K of Norfolk Southern Corporation
for the year ended December 31, 1998.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5
<SECURITIES> 58
<RECEIVABLES> 523
<ALLOWANCES> 4
<INVENTORY> 59
<CURRENT-ASSETS> 913
<PP&E> 15,063
<DEPRECIATION> 4,586
<TOTAL-ASSETS> 18,180
<CURRENT-LIABILITIES> 1,117
<BONDS> 7,483
0
0
<COMMON> 401
<OTHER-SE> 5,520
<TOTAL-LIABILITY-AND-EQUITY> 18,180
<SALES> 0
<TOTAL-REVENUES> 4,221
<CGS> 0
<TOTAL-COSTS> 3,169
<OTHER-EXPENSES> (309)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516
<INCOME-PRETAX> 845
<INCOME-TAX> 215
<INCOME-CONTINUING> 630
<DISCONTINUED> 104
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 734
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.93
</TABLE>
<PAGE> PAGE 144
EXHIBIT 99, Page 1 of 30
TITLE PAGE
CONRAIL INC.
1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> Page 145
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 Company's Board of Directors was reconstituted on August 22, 1998,
the effective date of the Surface Transportation Board's written
decision approving the acquisition of the Company by Norfolk Southern
Corporation ("NSC") and CSX Corporation ("CSX"). The new Board of
Directors, which is comprised of an equal number of directors from NSC
and CSX, pursues its oversight responsibilities for the financial
statements and corporate conduct through periodic meetings with and
written reports from the Company's management.
/s/ Timothy T. O'Toole
Timothy T. O'Toole
President and Chief
Executive Officer
/s/ John A. McKelvey
John A. McKelvey
Senior Vice President-
Finance & Administration
January 19, 1999
<PAGE> Page 146
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, 1998 and
1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 19, 1999
<PAGE> Page 147
EXHIBIT 99, Page 4 of 30
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
------------------------
($ In Millions Except Per Share Data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 3,863 $ 3,765 $ 3,714
------- ------- -------
Operating Expenses
Way and structures 467 458 462
Equipment 776 776 803
Transportation 1,342 1,388 1,385
General and administrative (Note 3) 444 313 312
Transition and acquisition-related
compensation costs (Note 3) 251 222
Transition and merger costs (Note 3) 68 65 16
ESOP termination charge (Note 3) 221
Voluntary separation programs (Note 10) 135
------- ------- -------
Total operating expenses 3,348 3,443 3,113
------- ------- -------
Income from operations 515 322 601
Interest expense (153) (170) (182)
Other income, net (Note 11) 72 83 112
------- ------- -------
Income before income taxes 434 235 531
Income taxes (Note 7) 167 228 189
------- ------- -------
Net income $ 267 $ 7 $ 342
======= ======= =======
Net income per common share (Note 1)
Basic $ -- $ -- $ 4.29
Diluted -- -- 3.91
Ratio of earnings to fixed charges
(Note 1) 3.11x 1.98x 3.19x
</TABLE>
See accompanying notes.
<PAGE> Page 148
EXHIBIT 99, Page 5 of 30
<TABLE>
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
------------
($ In Millions) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 138 $ 97
Accounts receivable 580 623
Deferred tax assets (Note 7) 182 115
Material and supplies 92 104
Other current assets 13 15
------ ------
Total current assets 1,005 954
Property and equipment, net (Note 4) 7,151 6,830
Other assets 744 700
------ ------
Total assets $8,900 $8,484
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt (Note 6) 113 112
Accounts payable 130 113
Wages and employee benefits 403 366
Casualty reserves 139 141
Accrued and other current liabilities
(Note 5) 422 476
------ ------
Total current liabilities 1,207 1,208
Long-term debt (Note 6) 1,609 1,732
Casualty reserves 215 198
Deferred income taxes (Note 7) 1,564 1,453
Special income tax obligation (Note 7) 223 283
Other liabilities 426 445
------ ------
Total liabilities 5,244 5,319
------ ------
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 2, 3 and 9)
Common stock ($1 par value; 100 and
250,000,000 shares authorized,
respectively; 100 and 6,320,349
shares issued, respectively;
100 shares outstanding) -- 6
Additional paid-in capital 2,291 3,006
Unearned ESOP compensation (75) (155)
Employee benefits trust (144) (274)
Retained earnings 1,584 1,324
------ ------
3,656 3,907
Treasury stock, at cost -- (742)
------ ------
Total stockholders' equity 3,656 3,165
------ ------
Total liabilities and stockholders'
equity $8,900 $8,484
====== ======
</TABLE>
See accompanying notes.
<PAGE> Page 149
EXHIBIT 99, Page 6 of 30
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Addi-
Series A Unearned tional Employee
($ in Millions Preferred ESOP Com- Common Paid-in Benefits Retained Treasury
Except Per Share Data) Stock pensation Stock Capital Trust Earnings Stock
- ---------------------- --------- --------- ------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 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)
Net income 267
Common dividends (7)
Employee benefits trust
transactions, net 21 (21)
Payments as a result of
Conrail acquisition
(Notes 3 and 9) 151
Allocation of unearned
ESOP compensation 80
Common shares reclassified
as unissued (Note 9) (6) (736) 742
------ ------ ------ ------ ------ ------ ------
Balance, December 31, 1998 $ -- $ (75) $ -- $2,291 $ (144) $1,584 $ --
====== ====== ====== ====== ====== ====== ======
</TABLE
See accompanying notes.
<PAGE> Page 150
EXHIBIT 99, Page 7 of 30
</TABLE>
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
------------------------
($ In Millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 267 $ 7 $ 342
Adjustments to reconcile net income
to net cash provided by
operating activities:
Transition and acquisition-related
charges (Note 3) 302 -- --
Transition and acquisition-related
compensation costs 66 159 --
ESOP termination charge -- 221 --
Voluntary separation programs -- -- 135
Depreciation and amortization 310 293 283
Deferred income taxes 30 152 183
Special income tax obligation (60) (63) (94)
Gains from sales of property (21) (23) (24)
Pension credit (63) (61) (46)
Changes in (net of effect of transition,
acquisition and merger-related items):
Accounts receivable 33 7 (16)
Accounts and wages payable (33) 42 (18)
Deferred tax assets (67) 178 40
Settlement of tax audit -- 6 (39)
Other (37) (34) (77)
------ ------ ------
Net cash provided by operating
activities 727 884 669
------ ------ ------
Cash flows from investing activities
Property and equipment acquisitions (537) (439) (387)
Proceeds from disposals of properties 19 25 34
Other (32) (31) (46)
------ ------ ------
Net cash used in investing activities (550) (445) (399)
------ ------ ------
Cash flows from financing activities
Payment of long-term debt (119) (238) (184)
Payment of debt consent fees (10) -- --
Repurchase of common stock -- -- (156)
Net proceeds from (repayments of)
short-term borrowings -- (99) 10
Proceeds from long-term debt -- -- 26
Loans from and redemptions of insurance
policies -- -- 95
Dividends on common stock (7) (40) (146)
Dividends on Series A preferred stock -- (3) (25)
Proceeds from stock options and other -- 8 67
------ ------ ------
Net cash used in financing activities (136) (372) (313)
------ ------ ------
Increase(decrease) in cash and cash
equivalents 41 67 (43)
Cash and cash equivalents
Beginning of year 97 30 73
------ ------ ------
End of year $ 138 $ 97 $ 30
====== ====== ======
</TABLE>
See accompanying notes.
<PAGE> Page 151
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"). The operations of CRC will substantially
change after NSC and CSX begin operating the Conrail properties
under operating agreements (the "Closing Date") (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 152
EXHIBIT 99, Page 9 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998 and 1997 as a
result of the joint acquisition of the Company's common stock by
NSC and CSX 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 ("NYSE") and
deregistered with the Securities and Exchange Commission ("SEC").
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 were not materially
different than those previously presented by the Company for
1996.
<TABLE>
For 1996, basic earnings per share were 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
assumed conversion of the previously outstanding 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 were
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 were not
considered outstanding for computing earnings per share. The
weighted average number of shares of common stock outstanding
during the year ended December 31, 1996 were as follows:
<CAPTION>
1996
----
<S> <C>
Basic weighted
average shares 76,903,665
Diluted weighted
average shares 87,022,413
</TABLE>
<PAGE> Page 153
EXHIBIT 99, Page 10 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits"
("SFAS 132") which revises and standardizes disclosures
previously required by other pronouncements related to these two
types of employee benefit programs. SFAS 132 is effective during
1998 and therefore the Company has incorporated the disclosure
requirements of this pronouncement into its employee benefits
disclosures (Note 8). The Company had no material items required
to be disclosed by SFAS 130, "Reporting Comprehensive Income",
which also became effective during 1998. Also, in 1998, the FASB
issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which is effective for all
fiscal quarters for all fiscal years beginning after June 15,
1999. The Company has determined that adoption of SFAS 133 will
not have a material impact on its consolidated financial
position, results of operations or cash flows.
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.
2. Acquisition of Conrail Inc.
---------------------------
On May 23, 1997, the CSX-NSC joint tender offer for the remaining
outstanding shares of Conrail's common and ESOP Stock was
concluded, and on June 2, 1997, Conrail became the surviving
corporation in a merger with Green Merger Corp. and remained the
only subsidiary of Green Acquisition Corp., an entity jointly-
owned by CSX and NSC. As a result, the remaining outstanding
capital stock of Conrail was acquired by NSC and CSX.
Simultaneous with the merger, Conrail's common stock was delisted
<PAGE> Page 154
EXHIBIT 99, Page 11 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from the NYSE and, through the filing of a Form 15, deregistered
with the SEC. The Conrail stock acquired by NSC and CSX was held
in a voting trust pending approval of the joint acquisition by
the Surface Transportation Board ("STB").
On June 8, 1998, the STB approved the application of CSX and NSC
to control Conrail. On July 23, 1998, the STB issued a written
opinion that permitted those companies to exercise operating
control of Conrail beginning August 22, 1998.
NSC and CSX will not formally begin to exercise operating control
until Closing Date, which is expected to occur on June 1, 1999.
Subsequent to the Closing Date, the majority of CRC's routes and
assets will be segregated into separate subsidiaries of CRC, and
NSC and CSX will operate their respective portions under
operating arrangements requiring payments which represent the
fair market rental values of the assets being operated. Other
CRC routes and assets will be operated by CRC for the benefit of
NSC and CSX.
After the Closing Date, the Company's major sources of revenue
will be operating income and lease rentals from NSC and CSX
instead of freight line haul revenues. The nature of the
Company's operating expenses will also reflect this change in
operations. Therefore, the Company's future operating results
will be significantly different than those currently reported.
In the course of normal business, the Company currently
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.
3. Transition, Acquisition and Merger-Related Costs
------------------------------------------------
In connection with its joint acquisition by NSC and CSX, the
Company has incurred pre-tax transition, acquisition and merger-
related costs totaling $68 million ($42 million after income
taxes) and $65 million ($41 million after income taxes) during
1998 and 1997, respectively. Merger costs of $16 million
($10 million after income taxes) were incurred during 1996
related to the previously proposed merger of Conrail with CSX. In
1997 and 1996, these amounts primarily included costs for
investment banking, legal and consulting services related to the
acquisition of Conrail, and in 1998, included costs to facilitate
the integration of the Company's activities into those of CSX and
NSC.
<PAGE> Page 155
EXHIBIT 99, Page 12 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 1998, the Company recorded charges
totaling $302 million ($187 million after income taxes),
primarily for separation benefits of $170 million covering
certain non-union employees, included in "transition and
acquisition-related compensation costs", and $132 million of
other costs, such as the effects of changing to an actuarial
method of valuing certain components of the Company's casualty
reserves, included in "general and administrative" expenses.
The charge for non-union separation benefits represents
termination payments to be made to approximately 1,300 non-union
employees whose non-executive positions will be eliminated as a
result of the joint acquisition of Conrail. It is anticipated
that most of these termination payments will be made in the form
of supplemental retirement benefits from the Company's overfunded
pension plan.
During 1998 and 1997, the Company recorded charges totaling
$66 million ($41 million after income taxes) and $49 million
($31 million after income taxes), respectively, representing
amounts to be paid to certain non-union employees as incentive to
continue their employment with the Company through August 22,
1998, the effective date of the STB approval of the joint
acquisition of Conrail ("Control Date"), and the subsequent
transition period. At December 31, 1998, the remaining liability
for these incentive payments, included in "wages and employee
benefits" in the balance sheet, is $31 million, however, such
liability is being funded from the Conrail employee benefits
trust ("EBT") and therefore does not require use of the Company's
cash.
The Company has also recorded $15 million ($9 million after
income taxes) for payments made to certain middle management
employees as provided in the amended merger agreement.
During 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 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, the balance of
which is $75 million at December 31, 1998, is being reduced as
the cash proceeds, held by the ESOP as a result of selling its
ESOP Stock in the joint tender offer, are allocated to eligible
ESOP participants.
<PAGE> Page 156
EXHIBIT 99, Page 13 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, the Company recorded a charge of $110 million
($103 million after income taxes) in connection with employment
"change in control" agreements with certain executives, which
became operative as a result of the joint acquisition of Conrail.
A portion of the benefits under these agreements, $68 million,
has been paid in 1998 from the EBT.
Also, as a result of the joint acquisition of Conrail, all
outstanding performance shares and all outstanding unvested stock
options, restricted shares and phantom shares vested during 1997.
The Company paid all of the amounts due employees under these
arrangements and recorded a $63 million charge ($39 million after
income taxes).
<TABLE>
4. Property and Equipment
----------------------
<CAPTION>
December 31,
1998 1997
---- ----
(In Millions)
<S> <C> <C>
Roadway $ 7,255 $ 7,167
Equipment 1,593 1,398
Less: Accumulated depreciation (2,029) (2,128)
------- -------
6,819 6,437
------- -------
Capital leases (primarily equipment) 793 869
Accumulated amortization (461) (476)
------- -------
332 393
------- -------
$ 7,151 $ 6,830
======= =======
</TABLE>
Conrail acquired equipment and incurred related long-term debt
under various capital leases of $79 million in 1997 and
$82 million in 1996. In 1995 and 1991, the Company recorded
allowances for disposition for the sale or abandonment of certain
under-utilized rail lines and other facilities. However,
subsequent to Control Date, NSC and CSX determined that all such
assets will initially continue to be used in operations.
Therefore, amounts related to these allowances have been
reclassified to accumulated depreciation.
<PAGE> Page 157
EXHIBIT 99, Page 14 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
5. Accrued and Other Current Liabilities
-------------------------------------
<CAPTION>
December 31,
1998 1997
---- ----
(In Millions)
<S> <C> <C>
Freight settlements due others $ 42 $ 43
Equipment rents (primarily car hire) 78 74
Unearned freight revenue 59 77
Property and corporate taxes 33 55
Other 210 227
------ ------
$ 422 $ 476
====== ======
</TABLE>
6. Long-Term Debt
--------------
<TABLE>
Long-term debt outstanding, including the weighted average
interest rates at December 31, 1998, is composed of the
following:
<CAPTION>
December 31,
1998 1997
---- ----
(In Millions)
<S> <C> <C>
Capital leases $ 391 $ 465
Medium-term notes payable,
6.27%, due 1999 30 60
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, 6.79% 257 275
------- -------
1,722 1,844
Less current portion (113) (112)
------- -------
$ 1,609 $ 1,732
======= =======
</TABLE>
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 $1,637 million and
$1,607 million at December 31, 1998 and 1997, respectively,
compared with carrying values of $1,331 million and
$1,379 million at December 31, 1998 and 1997, respectively.
<PAGE> Page 158
EXHIBIT 99, Page 15 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $332 million at December 31, 1998.
<TABLE>
Minimum commitments, exclusive of executory costs borne by the
Company, are:
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(In Millions)
<S> <C> <C>
1999 $ 92 $ 111
2000 76 85
2001 60 76
2002 57 72
2003 52 70
2004 - 2018 194 417
----- -----
Total 531 $ 831
=====
Less interest portion (140)
-----
Present value $ 391
=====
</TABLE>
Operating lease rent expense was $121 million in 1998,
$122 million in 1997 and $127 million in 1996.
Equipment and other obligations mature in 1999 through 2043 and
are collateralized by assets with a net book value of
$249 million at December 31, 1998. Maturities of long-term debt
other than capital leases are $48 million in 1999, $268 million
in 2000, $19 million in 2001, $18 million in 2002, $18 million in
2003 and $960 million in total from 2004 through 2043.
The shelf registration established in 1993, which enabled 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, is no longer available as a financing source at
December 31, 1998. CRC and the Company have each filed a Form 15
with the SEC, terminating their status as SEC registrants and
their ability to issue any securities under a shelf registration.
<PAGE> Page 159
EXHIBIT 99, Page 16 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective December 31, 1998, at the request of NSC and CSX, CRC
terminated its $440 million uncollateralized bank credit
agreement with a group of banks which was used for general
corporate purposes and to support CRC's commercial paper program,
which is no longer in effect.
Interest payments were $153 million in 1998, $163 million in 1997
and $170 million in 1996.
7. Income Taxes
------------
<TABLE>
The provisions for income taxes are composed of the following:
<CAPTION>
1998 1997 1996
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Current
Federal $ 173 $ 122 $ 90
State 24 17 10
----- ----- -----
197 139 100
----- ----- -----
Deferred
Federal 24 115 151
State 6 37 32
----- ----- -----
30 152 183
----- ----- -----
Special income tax obligation
Federal (51) (54) (80)
State (9) (9) (14)
----- ----- -----
(60) (63) (94)
----- ----- -----
$ 167 $ 228 $ 189
===== ===== =====
</TABLE>
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 the
estimated effective federal and state income tax rates at that
time.
<PAGE> Page 160
EXHIBIT 99, Page 17 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The nondeductibility of the ESOP termination charge and certain
transition and acquisition-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").
<TABLE>
Reconciliations of the U.S. statutory tax rates with the
effective tax rates are as follows:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.2 3.2 3.4
ESOP termination charge 36.3
Nondeductible transition
and acquisition-related
compensation costs 14.9
Effect of state tax increase
on deferred taxes 9.3
Other .3 (1.7) (2.8)
----- ----- -----
Effective tax rate 38.5% 97.0% 35.6%
===== ===== =====
</TABLE>
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 $196 million
in 1998, $120 million in 1997 and $145 million in 1996 (excluding
tax settlement).
<PAGE> Page 161
EXHIBIT 99, Page 18 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Significant components of the Company's special income tax
obligation and deferred income tax liabilities (assets) are as
follows:
<CAPTION>
December 31,
------------
1998 1997
---- ----
(In Millions)
<S> <C> <C>
Current assets $ (22) $ (10)
Current liabilities (152) (97)
Miscellaneous (8) (8)
------- -------
Current deferred tax asset, net $ (182) $ (115)
======= =======
Noncurrent liabilities:
Property and equipment 1,839 1,877
Other long-term assets (primarily
prepaid pension asset) 106 90
Miscellaneous 117 130
------- ------
2,062 2,097
------- ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (239) (200)
Tax benefit transfer receivable (36) (36)
Miscellaneous -- (125)
------- ------
(275) (361)
------- ------
Special income tax obligation and
deferred income tax liabilities, net $ 1,787 $ 1,736
======= =======
</TABLE>
8. Employee and Postretirement Benefits
------------------------------------
Postretirement Benefits
-----------------------
The Company and its subsidiaries sponsor several qualified and
nonqualified pension plans and other postretirement benefit plans
for its employees.
<TABLE>
The following tables provide a reconciliation of the changes in
the plans' benefit obligations and fair value of assets over the
two-year period ending December 31, 1998, and a statement of the
funded status as of December 31 of both years:
<PAGE> Page 162
EXHIBIT 99, Page 19 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
(In Millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit
obligation
Net benefit obligation
at beginning of year $ 699 $ 734 $ 57 $ 64
Service cost 13 8 -- --
Interest cost 52 50 4 4
Plan amendments 59 -- -- --
Actuarial (gains)losses 65 (11) 1 (6)
Gross benefits paid (64) (82) (6) (5)
------ ------ ------ ------
Net benefit obligation
at end of year $ 824 $ 699 $ 56 $ 57
Change in plan assets
Fair value of plan
assets at beginning
of year $1,308 $1,187 $ 10 $ 10
Actual return on plan
assets 211 205 -- 1
Gross benefit payments (78) (84) (1) (1)
------ ------ ------ ------
Fair value of plan
assets at end of year $1,441 $1,308 $ 9 $ 10
Funded status at
end of year $ 617 $ 609 $ (47) $ (47)
Unrecognized transition
asset (54) (72) -- --
Unrecognized prior
service cost 88 33 -- --
Unrecognized actuarial
(gains)losses (373) (343) -- (7)
------ ------ ------ ------
Net amount recognized
at year end $ 278 $ 227 $ (47) $ (54)
====== ====== ====== ======
</TABLE>
<TABLE>
The following amounts have been recognized in the balance sheets
as of December 31:
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
(In Millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid pension cost $ 278 $ 227 -- --
Accrued benefit cost -- -- $ (47) $ (54)
</TABLE>
<PAGE> Page 163
EXHIBIT 99, Page 20 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All of the Company's plans for postretirement benefits other than
pensions have no plan assets except for the retiree life
insurance plan which has $9 million of assets. The aggregate
benefit obligation for the postretirement plans other than
pensions is $56 million and $57 million at December 31, 1998 and
1997, respectively.
<TABLE>
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
<CAPTION>
Other Postretirement
Pension Benefits Benefits
----------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 6.50% 7.00% 6.50% 7.00%
Expected return on
plan assets 9.00% 9.00% 8.00% 8.00%
Rate of compensation
increase 5.00% 6.00% 5.00% 6.00%
</TABLE>
The Company's pension plan was amended during 1998 to include
certain enhanced benefits for qualifying Conrail employees. The
effect of the amendment was to increase the Conrail plan's
projected benefit obligation by $59 million. The Company's
pension plan was also amended during 1998 to allow for payment of
non-union supplemental retirement benefits to the extent
consistent with applicable Internal Revenue Service Tax Code
provisions. Both of these liabilities are accrued in "wages and
employee benefits" in the balance sheet (Note 3).
A 7% annual rate of increase in the per capital cost of covered
health care benefits was assumed for 1999, gradually decreasing
to 6% by the year 2007.
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. The effect of a
one percentage point increase and (decrease) in the assumed
health care cost trend rate on accumulated postretirement benefit
obligation is $2 million and $(2) million, respectively, and
would have an immaterial effect on the net periodic
postretirement benefit cost for 1998.
<PAGE> Page 164
EXHIBIT 99, Page 21 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
The components of the Company's net periodic benefit cost for the
plans are as follows:
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------- -------------------
(In Millions) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 13 $ 8 $ 9 $ -- $ -- $ --
Interest cost 52 50 51 4 4 5
Expected return
on assets (109) (98) (91) (1) (1) (1)
Amortization of:
Transition asset (18) (18) (18) -- -- --
Prior service cost 4 3 4 -- -- --
Actuarial gain (5) (6) (1) (1) (1) --
----- ----- ----- ----- ----- -----
$ (63) $ (61) $ (46) $ 2 $ 2 $ 4
===== ===== ===== ===== ===== =====
</TABLE>
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 contract provisions. Savings plan expense
was $1 million in 1997 and $4 million in 1996.
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 and $40 million in 1996.
<PAGE> Page 165
EXHIBIT 99, Page 22 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Compensation expense related to the Non-union ESOP was $2 million
in 1997 and $11 million in 1996.
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
and $20 million in 1996. Preferred dividend payments of
$3 million and $25 million were made in 1997 and 1996,
respectively.
9. Capital Stock
-------------
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 a portion of the proceeds
it received from the sale of the common stock it held. The Trust
currently funds, and is expected to continue 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 transition and acquisition-
related compensation, 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. Currently, interest earned on the proceeds received
from the joint tender offer increases both the Trust balance and
<PAGE> Page 166
EXHIBIT 99, Page 23 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 remaining shares
of treasury stock at December 31, 1997, were recorded as canceled
and retired during 1998.
<TABLE>
The activity and status of treasury stock follow:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Shares, beginning of year 6,320,249 5,523,455 3,297,717
Acquired 2,225,738
Effects of Conrail
acquisition (6,320,249) 796,794
---------- --------- ---------
Shares, end of year -- 6,320,249 5,523,455
========= ========= =========
</TABLE>
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 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 (Notes 2 and 3).
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
<PAGE> Page 167
EXHIBIT 99, Page 24 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
<TABLE>
The activity and status of stock options under the incentive
plans follow:
<CAPTION>
Non-qualified Stock Options
------------------------------------
Option Price Shares
Per Share Under Option
------------------ ------------
<S> <C> <C>
Balance, January 1, 1996 $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, 1998 and 1997 --
============
</TABLE>
The weighted average exercise prices of options granted during
1996 was $70.130 per share. The weighted average exercise price
of options exercised during 1996 was $48.32 per share.
<TABLE>
Pro forma disclosures of net income and earnings per share as if
the Company had adopted the cost recognition requirements under
SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123) in 1996 are presented below ($ in millions except per
share data):
<CAPTION>
1996
----
<S> <C>
Net income as reported $ 342
Net income pro forma 335
Basic earnings per share $4.29
Basic earnings per share pro forma 4.20
Diluted earnings per share $3.91
Diluted earnings per share pro forma 3.82
</TABLE>
<PAGE> Page 168
EXHIBIT 99, Page 25 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was
$16.00 per share.
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. The weighted-average fair value for the
phantom shares and restricted stock granted during 1996 was
$68.02 per share. As a result of its acquisition, the Company
paid all of the amounts due to employees under stock-related
compensation arrangements during 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 169
EXHIBIT 99, Page 26 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
11. Other Income, Net
-----------------
<CAPTION>
1998 1997 1996
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Interest income $ 7 $ 13 $ 29
Rental income 42 41 50
Property sales 21 23 23
Other, net 2 6 10
---- ---- ----
$ 72 $ 83 $112
==== ==== ====
</TABLE>
12. 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 governmental
agencies with respect to other potential environmental issues.
At December 31, 1998, 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
138 locations. However, based on currently available
information, the Company believes CRC may have some potential
responsibility at only 45 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.
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, 1998, the Company had accrued $81
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.
<PAGE> Page 170
EXHIBIT 99, Page 27 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company spent $10 million in 1998, $9 million in 1997 and
$11 million in 1996 for environmental remediation and related
costs. In addition, the Company's capital expenditures for
environmental control and abatement projects were approximately
$8 million in 1998, $7 million in 1997 and $6 million in 1996.
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.
CRC had an average of 19,808 employees in 1998, approximately 88%
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, 1998.
CRC currently guarantees the principal and interest payments in
the amount of $42 million on Equipment Trust Certificates for
Locomotive Management Services, a general partnership of which
CRC holds a fifty percent interest.
The Company has taken actions to resolve anticipated year 2000
issues related to certain of its computer systems. Conrail
believes that all of its year 2000 issues will be resolved either
by the certain actions taken by the Company or by the integration
of its systems with those of CSX and NSC on or following the
Closing Date. The Company believes that failure to integrate its
systems with those of CSX and NSC could result in a material
financial risk and serious disruption in its operations. The
Company has developed contingency plans related to the year 2000
in the event the integration does not occur. While it is not
possible, at this time, to quantify the overall cost of
implementing such contingency plans, the Company believes that it
would be material to its results of operations during the
implementation period.
<PAGE> Page 171
EXHIBIT 99, Page 28 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
13. Condensed Quarterly Data (Unaudited)
------------------------------------
<CAPTION>
First Second Third Fourth
--------- --------- --------- ---------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
($ In Millions Except Per Share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $927 $906 $983 $937 $976 $944 $977 $978
Income (loss) from
operations 160 116 206 (231) (82) 218 231 219
Net income (loss) 85 61 115 (273) (65) 101 132 118
Net income (loss) per
common share:
Basic -- .74 -- -- -- -- -- --
Diluted -- .70 -- -- -- -- -- --
Ratio of earnings to
fixed charges 3.44x 2.52x 4.53x -- -- 4.82x 6.02x 4.76x
Dividends per common
share -- .475 -- -- -- -- -- --
Market prices per
common share
(New York Stock
Exchange)
High -- 113-1/4 -- -- -- -- -- --
Low -- 98-1/2 -- -- -- -- -- --
</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.
The Company recorded pre-tax transition and acquisition-related
costs of $29 million ($18 million after income taxes),
$43 million ($27 million after income taxes), $215 million ($133
million after income taxes) and $32 million ($19 million after
income taxes) during the first, second, third and fourth quarters
of 1998, respectively. During the third quarter of 1998, the
Company recorded charges totaling $302 million ($187 million
after income taxes), primarily for separation benefits of $170
million covering certain non-union employees, included in the
third quarter of 1998 transition and acquisition-related costs,
and $132 million of other costs included in general and
administrative expense (Note 3). After the transition and
acquisition-related costs were recognized during the third
quarter of 1998, earnings available for fixed charges were
inadequate by $109 million.
The Company recorded pre-tax transition, acquisition and 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 transition, acquisition and merger-related costs
(Note 3).
<PAGE> Page 172
EXHIBIT 99, Page 29 of 30
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After the transition, acquisition and 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).
<PAGE> Page 173
EXHIBIT 99, Page 30 of 30
Schedule II
<TABLE>
CONRAIL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(In Millions)
<CAPTION>
Additions
Balance Charged Charged Balance
at Begin- to Costs to Other at End
ning of and Accounts Deduc- of
Description Period Expenses (1) tions Period
- ----------- ------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
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 disposi-
tion of property and
equipment (4)........... 408 16 392
1998
Casualty reserves
Current.............. 141 17 19(2) 139
Noncurrent........... 198 140 11 134(3) 215
Allowance for disposi-
tion of property and
equipment (4)(5)......... 392 392 --
</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 $31 million, $16 million and $25 million in
1996, 1997 and 1998, respectively, represent net losses on
asset dispositions.
(5) At December 31, 1998, the Company reclassified the remaining
balance of $367 million from the allowance for disposition to
accumulated depreciation since subsequent to Control Date,
Norfolk Southern Corporation and CSX Corporation determined
that all assets included in the reserve will initially
continue to be used in operations.
