-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WWeQXZ+ojf0xfej0coXMcIXLmKMsMYfLKmCGdJurZ8TLAWyUpqkRl/tWG9eMjs/1 33tOXHvWI8v25i8oF69lyw== 0000702165-96-000017.txt : 19960328 0000702165-96-000017.hdr.sgml : 19960328 ACCESSION NUMBER: 0000702165-96-000017 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORFOLK SOUTHERN CORP CENTRAL INDEX KEY: 0000702165 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 521188014 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08339 FILM NUMBER: 96539094 BUSINESS ADDRESS: STREET 1: THREE COMMERCIAL PL CITY: NORFOLK STATE: VA ZIP: 23510-2191 BUSINESS PHONE: 8046292680 10-K405 1 NORFOLK SOUTHERN CORPORATION 10-K405 FYE 12/31/95 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, 1995. 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 (804) 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 29, 1996: $10,445,649,457 The number of shares outstanding of each of the registrant's classes of common stock, as of February 29, 1996: 128,175,173 (excluding 7,252,634 shares held by registrant's consolidated subsidiaries) PAGE 2 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive proxy statement (to be dated April 1, 1996) to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year are incorporated by reference in Part III. PAGE 3 TABLE OF CONTENTS ----------------- Item Page ---- ---- Part I 1. Business 4 2. Properties 4 3. Legal Proceedings 22 4. Submission of Matters to a Vote of Security Holders 22 Executive Officers of the Registrant 23 Part II 5. Market for Registrant's Common Stock and Related Stockholder Matters 27 6. Selected Financial Data 28 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 35 8. Financial Statements and Supplementary Data 50 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 77 Part III 10. Directors and Executive Officers of the Registrant 77 11. Executive Compensation 77 12. Security Ownership of Certain Beneficial Owners and Management 77 13. Certain Relationships and Related Transactions 77 Part IV 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 78 Index to Consolidated Financial Statement Schedule 78 Power of Attorney 82 Signatures 82 Exhibit Index 86 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 related Plans of Merger, and with the approval of the transaction by the Interstate Commerce Commission (ICC), each issued share of NW's common stock was converted into one share of Norfolk Southern Common Stock and each issued share of Southern common stock was converted into l.9 shares of Norfolk Southern Common Stock. The outstanding shares of Southern's preferred stock remained outstanding without change. Effective December 31, 1990, Norfolk Southern transferred all the common stock of NW to Southern, and Southern's name was changed to Norfolk Southern Railway Company (Norfolk Southern Railway). As of February 29, 1996, all the common stock of NW (100 percent voting control) is owned by Norfolk Southern Railway, and all the common stock of Norfolk Southern Railway and 12 percent of its voting preferred stock (resulting in 94.6 percent voting control) are owned directly by Norfolk Southern. On June 21, 1985, Norfolk Southern acquired control of North American Van Lines, Inc. and its subsidiaries (NAVL), a diversified motor carrier. In accordance with an Acquisition Agreement dated May 2, 1984, and with the approval of the transaction by the ICC, Norfolk Southern acquired all the issued and outstanding common stock of NAVL. During 1993, NAVL underwent a restructuring (see discussion on page 6 and in Note 15 of Notes to Consolidated Financial Statements on page 73) designed to enhance its opportunities to return to profitability. Unless indicated otherwise, Norfolk Southern and its subsidiaries are referred to collectively as NS. RAILROAD OPERATIONS - As of December 31, 1995, NS' railroads operated more than 14,500 miles of road in the states of Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia, and the Province of Ontario, Canada. Of this total, 12,208 miles are owned with the balance operated under lease or trackage rights; most of this total are main line track. In addition, NS' railroads operate approximately 11,000 miles of passing, industrial, yard and side tracks. PAGE 5 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. Following extensive negotiations, the terms of renewal contained in a Lease Extension Agreement were approved by the respective parties' boards of directors in August 1995, and, subject to a court challenge as to the presence of the required quorum of private stockholders ("Quorum Challenge"), by the stockholders of North Carolina Railroad Company (NCRR) at their meeting in December. Also, certain NCRR stockholders earlier had filed four separate, and still-pending, derivative actions challenging the adequacy of the new rental terms, which provide for an annual rental of $8.0 million in 1995, with adjustments for inflation in each of the succeeding years of the lease. Pending resolution of the Quorum Challenge, NS' railroads continue to operate over NCRR lines under the rental terms contained in the Lease Extension Agreement. If the Quorum Challenge is successful, and if the NCRR is unable to obtain stockholder approval of the Lease Extension Agreement at a subsequent meeting, NS' railroads could be required to operate over these NCRR lines under conditions prescribed by regulatory authority, or they might operate over one or more alternate routes. Whatever the ultimate resolution of this matter, it is not expected to have a material effect on NS' consolidated financial position. NS' lines carry raw materials, intermediate products and finished goods primarily in the Southeast and Midwest and to and from the rest of the United States and parts of Canada. These lines also transport overseas freight through several Atlantic and Gulf Coast ports. Atlantic ports served by NS include: Norfolk, Va.; Morehead City, N.C.; Charleston, S.C.; Savannah and Brunswick, Ga.; and Jacksonville, Fl. Gulf Coast ports served include: Mobile, Al., and New Orleans, La. The lines of NS' railroads reach most of the larger industrial and trading centers of the Southeast and Midwest, with the exception of those in central and southern Florida. Atlanta, Birmingham, New Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago, Detroit, Cincinnati, Buffalo, Norfolk, Charleston, Savannah and Jacksonville are among the leading centers originating and terminating freight traffic on the system. In addition, a haulage arrangement with the Florida East Coast Railway allows NS' railroads to provide single-line service to and from south Florida, including the port cities of Miami, West Palm Beach and Fort Lauderdale. The system's lines also reach many individual industries, mines (in western Virginia, eastern Kentucky and southern West Virginia) and businesses located in smaller communities in its service area. The traffic corridors carrying the heaviest volumes of freight include those from the Appalachian coal fields of Virginia, West Virginia and Kentucky to Norfolk and Sandusky, Oh.; Buffalo to Chicago and Kansas City; Chicago to Jacksonville (via Cincinnati, Chattanooga and Atlanta); and Washington, D.C./Hagerstown, Md., to New Orleans (via Atlanta and Birmingham). PAGE 6 Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City, Memphis, New Orleans and St. Louis are major gateways for interterritorial system traffic. NS rail subsidiaries and other railroads have entered into service interruption agreements, effective December 30, 1994, providing indemnities to parties affected by a strike over specified industry issues. If NS were so affected, it could receive daily indemnities from non-affected parties; if parties other than NS were affected, NS could be required to pay indemnities to those parties. If NS were required to pay the maximum amount of indemnities required of it under these agreements--an event considered unlikely at this time--such liability should not exceed approximately $85 million. MOTOR CARRIER OPERATIONS - DOMESTIC OPERATIONS - NAVL's principal transportation activity is the domestic, irregular route common and contract carriage of used household goods and special commodities between points in the United States. NAVL also operates as an intrastate carrier of property in 19 states. Prior to its restructuring in 1993, NAVL's domestic motor carrier business was organized into three primary divisions: Relocation Services (RS) specializing in residential relocation of used household goods; High Value Products (HVP) specializing in office and industrial relocations and transporting exhibits; and Commercial Transport (CT) specializing in the transportation of truckload shipments of general commodities. In 1993, NAVL underwent a restructuring involving termination of the CT Division and sale of the operations of Tran-Star, Inc. (Tran-Star), NAVL's refrigerated trucking subsidiary. In 1993, NAVL discontinued CT's operations, transferred some parts of CT's business to other divisions and began selling CT's assets that were not needed in NAVL's other operations. The sale of Tran-Star's operations was completed on December 31, 1993. During 1995, the RS and HVP divisions conducted operations through a network of over 400 agents at approximately 700 locations in the United States. Agents are local moving and storage companies that provide NAVL with such services as solicitation, packing and warehousing in connection with the movement of household goods and specialized products. NAVL's future domestic operations are expected to be conducted principally through the RS and HVP divisions. Customized Logistics Services (CLS) was established in 1993 as an operating unit of the HVP Division. CLS' business is to focus NAVL's resources to respond to a variety of customer needs for integrated logistics services. The services include emergency parts order fulfillment, time-definite transportation and in-transit merge programs. FOREIGN OPERATIONS - NAVL's foreign operations are conducted through the RS and HVP Divisions and through foreign subsidiaries, including North American Van Lines Canada, Ltd. The latter subsidiary provides motor carrier service for the transportation of used household goods and specialized commodities between most points in Canada through a network of approximately 170 agent locations. NAVL's international operations consist primarily of forwarding used household goods to and from the United States and between foreign countries through a network of approximately 330 foreign agents PAGE 7 and representatives. NAVL's international operations are structurally aligned with the services provided by its domestic operating divisions. All international household goods operations and related subsidiaries in Alaska and Canada are assigned to the RS Division. The remaining international operations, which include subsidiaries in the United States, Germany and the United Kingdom, are involved in the transportation of selected general and specialized commodities and are assigned to the HVP Division. TRIPLE CROWN OPERATIONS - Until April 1993, Norfolk Southern's intermodal subsidiary, Triple Crown Services, Inc. (TCS), offered intermodal service using RoadRailer (Registered Trademark) (RT) equipment and domestic containers. RoadRailer(RT) units are enclosed vans which can be pulled over highways in tractor- trailer configuration and over the rails by locomotives. On April 1, 1993, the business, name and operations of TCS were transferred to Triple Crown Services Company (TCSC), a partnership in which subsidiaries of Norfolk Southern and Consolidated Rail Corporation (CR) are equal partners. RoadRailer(RT) equipment owned or leased by TCS (which was renamed TCS Leasing, Inc.) is operated by TCSC. Because NS indirectly owns only 50 percent of TCSC, the revenues of TCSC are not consolidated with the results of NS. TCSC offers door-to- door intermodal service using RoadRailer(RT) equipment and domestic containers in the corridors previously served by TCS, as well as service to the New York and New Jersey markets via CR. Major traffic corridors include those between New York and Chicago, Chicago and Atlanta, and Atlanta and New York. TRANSPORTATION OPERATING REVENUES - NS' total transportation operating revenues were $4.67 billion in 1995. These revenues were received for the transportation of revenue freight: 280.6 million tons by rail and 1.2 million tons by motor carrier. Of the rail tonnage, 219.4 million tons originated on line, 242.7 million tons terminated on line (including 187.1 million tons of local traffic -- originating and terminating on line) and approximately 5.6 million tons was overhead traffic (neither originating nor terminating on line). Revenue and revenue ton mile (one ton of freight moved one mile) contributions by principal transportation operating revenue sources for the period 1991 through 1995 are set forth in the following table:
Year Ended December 31, Principal Sources of ------------------------------------------------ Transportation Operating Revenues 1995 1994 1993 1992 1991 - -------------------- ---- ---- ---- ---- ---- (Revenues in Millions, and Revenue Ton Miles in Billions) COAL Revenues............... $1,240.3 $1,262.5 $1,213.3 $1,296.0 $1,330.3 % of total transportation operating revenues.... 26.6% 27.6% 27.2% 28.1% 29.9% Revenue ton miles...... 43.1 43.8 41.4 41.9 42.7 % of total revenue ton miles............. 33.5% 35.4% 36.2% 37.4% 39.5%
PAGE 8
Year Ended December 31, Principal Sources of ------------------------------------------------ Transportation Operating Revenues 1995 1994 1993 1992 1991 - -------------------- ---- ---- ---- ---- ---- (Revenues in Millions, and Revenue Ton Miles in Billions) PAPER/FOREST Revenues............... $ 519.8 $ 505.4 $ 502.7 $ 499.5 $ 476.1 % of total transportation operating revenues.... 11.1% 11.0% 11.3% 10.9% 10.7% Revenue ton miles...... 15.5 15.3 15.1 14.7 13.6 % of total revenue ton miles............. 12.0% 12.3% 13.2% 13.1% 12.6% CHEMICALS Revenues............... $ 513.5 $ 512.2 $ 472.9 $ 471.7 $ 449.7 % of total transportation operating revenues.... 11.0% 11.2% 10.6% 10.2% 10.1% Revenue ton miles...... 16.7 16.7 14.7 14.3 13.6 % of total revenue ton miles............. 13.0% 13.5% 12.8% 12.8% 12.6% AUTOMOTIVE Revenues............... $ 454.1 $ 432.1 $ 429.5 $ 401.5 $ 325.9 % of total transportation operating revenues.... 9.7% 9.4% 9.6% 8.7% 7.3% Revenue ton miles...... 4.3 4.2 4.2 3.7 3.0 % of total revenue ton miles............. 3.3% 3.4% 3.7% 3.3% 2.8% AGRICULTURE Revenues............... $ 359.0 $ 347.5 $ 319.7 $ 301.4 $ 293.6 % of total transportation operating revenues.... 7.7% 7.6% 7.2% 6.6% 6.6% Revenue ton miles...... 16.7 15.6 13.6 12.6 12.2 % of total revenue ton miles............. 13.0% 12.6% 11.9% 11.3% 11.3% METALS/CONSTRUCTION Revenues............... $ 339.5 $ 321.4 $ 296.1 $ 276.3 $ 274.0 % of total transportation operating revenues.... 7.3% 7.0% 6.7% 6.0% 6.1% Revenue ton miles...... 11.3 10.4 9.6 8.5 8.2 % of total revenue ton miles............. 8.8% 8.4% 8.4% 7.6% 7.6%
PAGE 9
Year Ended December 31, Principal Sources of ------------------------------------------------ Transportation Operating Revenues 1995 1994 1993 1992 1991 - -------------------- ---- ---- ---- ---- ---- (Revenues in Millions, and Revenue Ton Miles in Billions) INTERMODAL (Trailers and Containers) Revenues............... $ 470.5 $ 425.6 $ 372.0 $ 341.0 $ 324.6 % of total transportation operating revenues.... 10.1% 9.3% 8.3% 7.4% 7.3% Revenue ton miles...... 19.5 16.3 13.0 11.9 10.4 % of total revenue ton miles............. 15.1% 13.2% 11.4% 10.6% 9.6% OTHER INTERMODAL RELATED* Revenues............... $ -- $ -- $ 18.2 $ 67.9 $ 56.0 % of total transportation operating revenues.... -- -- 0.4% 1.5% 1.3% Revenue ton miles...... -- -- -- -- -- -------- -------- -------- -------- -------- Total Railway Freight Revenues.............. $3,896.7 $3,806.7 $3,624.4 $3,655.3 $3,530.2 Total Railway Revenue Ton Miles 127.1 122.3 111.6 107.6 103.7 OTHER RAILWAY OPERATING Revenues, principally switching and demurrage.............. $ 115.1 $ 111.4 $ 121.5 $ 121.7 $ 123.8 % of total transportation operating revenues.... 2.5% 2.4% 2.7% 2.6% 2.8% -------- -------- -------- -------- -------- Total Railway Operating Revenues.............. $4,011.8 $3,918.1 $3,745.9 $3,777.0 $3,654.0 MOTOR CARRIER** Revenues............... $ 656.2 $ 663.2 $ 714.2 $ 829.6 $ 797.3 % of total transportation operating revenues.... 14.0% 14.5% 16.0% 18.0% 17.9% Revenue Ton Miles...... 1.7 1.5 2.7 4.4 4.4 % of total revenue ton miles............. 1.3% 1.2% 2.4% 3.9% 4.0% -------- -------- -------- -------- -------- Total Transportation Operating Revenues..... $4,668.0 $4,581.3 $4,460.1 $4,606.6 $4,451.3 Total Revenue Ton Miles.. 128.8 123.8 114.3 112.0 108.1 Note: Revenue ton miles (RTMs) for 1991 and 1992 have been restated from a one-month delayed basis to a current-month basis. * See discussion on page 11 regarding TCSC revenues. ** See discussion on page 4 regarding motor carrier restructuring.
PAGE 10 COAL TRAFFIC - Coal, coke and iron ore--most of which is bituminous coal--is NS' railroads' principal commodity group. NS' railroads originated 114.2 million tons of coal, coke and iron ore in 1995 and handled a total of 125.1 million tons. Originated tonnage decreased 0.4 percent from 114.7 million tons in 1994, and total tons handled decreased 0.6 percent from 125.9 million tons in 1994. Revenues from coal, coke and iron ore, which accounted for 27 percent of NS' total transportation operating revenues and 34 percent of total revenue ton miles in 1995, were $1.24 billion, a decrease of 2 percent from $1.26 billion in 1994. The following table shows total coal tonnage originated on- line, received from connections and handled for the five years ended December 31, 1995:
Tons of Coal (Millions) --------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Originated 111.2 112.0 109.7 115.5 116.8 Received 10.8 11.1 5.9 6.3 6.5 ----- ----- ----- ----- ----- Handled 122.0 123.1 115.6 121.8 123.3
Of the 111.2 million tons of coal originating on NS railroad lines in 1995, the approximate breakdown by origin state is as follows: 41.2 million tons from West Virginia, 34.4 million tons from Virginia, 23.1 million tons from Kentucky, 7.1 million tons from Illinois, 3.6 million tons from Alabama, 1.6 million tons from Tennessee, and 0.2 million tons from Indiana. Of this NS-origin coal, approximately 25.7 million tons moved for export, principally through NS pier facilities at Norfolk (Lamberts Point), Va.; 18.6 million tons moved to domestic and Canadian steel industries; 58.7 million tons of steam coal moved to electric utilities; and 8.2 million tons moved to other industrial and miscellaneous users. NS' railroads moved 9.4 million tons of originated coal to various docks on the Ohio River for further movement by barge and 3.3 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 tonnage handled through all system ports in 1995 was 41.7 million. Of this total, 69 percent moved through the pier facilities at Lamberts Point. In 1995, total tonnage handled at Lamberts Point, including coastwise traffic, was 28.9 million tons, a 4 percent increase from the 27.8 million tons handled in 1994. PAGE 11 For the five years ended December 31, 1995, the quantities of NS coal handled only for export through Lamberts Point were as follows:
Export Coal through Lamberts Point (Millions of tons) ------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Originated 25.4 23.9 24.6 30.8 34.3 Handled 25.5 24.1 24.9 31.2 34.6
See the discussion of coal traffic, by type of coal, in Part II, Item 7, "Management's Discussion and Analysis," on page 35. MERCHANDISE RAIL TRAFFIC - The merchandise traffic group consists of Intermodal and five major commodity groupings (Paper/Forest; Chemicals; Automotive; Agriculture; and Metals/Construction). Total NS railroad merchandise revenues increased in 1995 to $2.66 billion, a 4 percent increase over 1994. Railroad merchandise carloads handled in 1995 were 3.18 million, compared with 3.03 million handled in 1994, an increase of 5 percent. Intermodal results, for 1993 and later, reflect the effect of the formation, in April 1993, of TCSC, a partnership between NS and Conrail subsidiaries (see also page 7). This partnership provides RoadRailer(RT) and domestic container services previously offered by a wholly owned subsidiary of NS. Because NS owns only 50 percent of TCSC, its revenues are not consolidated. NS' intermodal revenues include only revenues for rail service NS provides the partnership. Excluding this partnership effect, 1994 intermodal revenues increased 14%, compared with 1993. In 1995, 105.2 million tons of merchandise freight, or approximately 68 percent of total rail merchandise tonnage handled by NS, originated on line. The balance of NS' railroad merchandise traffic was received from connecting carriers (mostly railroads, with some truck, water and highway as well), usually at interterritorial gateways. The principal interchange points for NS-received traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St. Louis, and Louisville. Revenues in all six market groups comprising merchandise traffic improved in 1995 over 1994, and in 1994 over 1993. The biggest gains in 1995 were in Intermodal, up $44.9 million; Automotive, up $22.0 million; and Metals/Construction, up $18.1 million. See the discussion of merchandise rail traffic by commodity group in Part II, Item 7, "Management's Discussion and Analysis," on page 35. PAGE 12 MOTOR CARRIER TRAFFIC - Motor carrier revenues declined 1 percent to $656.2 million in 1995. Gains in the HVP division were offset by reductions in RS. In 1994, motor carrier revenues were $663.2 million, down 7 percent from 1993, which included six months of revenues from truckload operations prior to the restructuring of NAVL (see page 6). Adjusted for the effect of discontinued truckload operations in 1993, motor carrier operating revenues in 1994 increased 15 percent. DOMESTIC OPERATIONS now are conducted through NAVL's RS and HVP divisions. In 1995, total domestic shipments for these divisions were 381,121, up 0.5 percent from 1994. Further comments about each division follow. Domestic shipments of used household goods transported by the RS Division fall into three market categories. Approximately 51 percent of the domestic shipment volume comes from the sale of moving services to individual consumers. Another 38 percent comes from corporations and other businesses that pay for the relocation of their employees. The remaining 11 percent is derived from military, government and other sources. Total domestic RS Division shipments in 1995 represented 29 percent of the NAVL domestic motor carrier shipments transported by the two primary divisions. Total domestic revenues from this division were down 4 percent, compared with 1994, and represented 42 percent of total revenues from operations. The HVP Division specializes in providing transportation services in less-than-truckload (LTL) and truckload (TL) quantities of sensitive products. These products are divided into the following categories: office furniture and equipment, exhibits and displays, electronic equipment, industrial machinery, commercial relocation, LTL furniture and selected general commodities. Total HVP Division shipments transported in 1995, including TL and LTL, represented 71 percent of the NAVL domestic motor carrier shipments transported by the two primary divisions. Revenues from this division were down 2 percent from 1994 levels and represented 46 percent of total revenues from operations. FOREIGN OPERATIONS include NAVL's Canadian subsidiary, North American Van Lines Canada, Ltd., as well as operating subsidiaries in England and Germany. Foreign operations involving the transportation of used household goods and selected general and specialized commodities generated revenues of $81.8 million in 1995, up 15 percent from 1994. Revenues from foreign operations represented 12 percent of NAVL's total revenues. PAGE 13 RAIL OPERATING STATISTICS - The following table sets forth certain statistics relating to NS' railroad operations during the periods indicated:
Year Ended December 31, ---------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Rail revenue ton miles (billions) 127.1 122.3 111.6 107.6 103.7 Freight train miles traveled (millions) 48.5 46.0 43.3 41.1 37.8 Revenue per ton mile $0.0307 $0.0311 $0.0325 $0.0340 $0.0341 Revenue tons per train 2,622 2,655 2,577 2,618 2,743 Revenue ton miles per man-hour worked 2,690 2,579 2,304 2,184 2,023 Percentage ratio of railway operating expenses to railway operating revenues 73.5 73.4 75.6 75.5 78.3* * Excluding a special charge in 1991 which increased railway operating expenses by $483 million.
FREIGHT RATES - In 1995 NS' railroads continued their reliance on private contracts and exempt price quotes as their predominant pricing mechanisms. Thus, a major portion of NS' railroads' freight business is not economically regulated by the government. In general, market forces have been substituted for government regulation and now are the primary determinant of rail service prices. This situation is not expected to change in 1996 after the January 1 termination of the ICC and transfer of its functions to a new agency, the Surface Transportation Board (STB). In 1995, the ICC found NS' railroads "revenue inadequate" based on results for the year 1994. A railroad is "revenue inadequate" under the Interstate Commerce Act when its return on net investment does not exceed the rail industry's composite cost of capital. The revenue adequacy measure is used by the STB as one of the factors in its determination of reasonableness of regulated rates. Pricing and service flexibility afforded by the Motor Carrier Act of 1980 and the Household Goods Transportation Act of 1980 has resulted in NAVL's increased emphasis on innovative pricing action in order to remain competitive. Since 1980, NAVL has increasingly operated as a contract carrier. As of December 31, 1995, domestic contract carriage agreements accounted for the following percentage of shipments: RS Division, 31 percent and HVP Division, 81 percent. PAGE 14 PASSENGER OPERATIONS - Regularly scheduled passenger operations on NS' lines consist of Amtrak trains operating between Alexandria and New Orleans, and between Charlotte and Selma, N.C. Former Amtrak operations between East St. Louis and Centralia, Il., were discontinued by Amtrak on November 3, 1993. Commuter trains continued operations on the NS line between Manassas and Alexandria under contract with two transportation commissions of the Commonwealth of Virginia, providing for reimbursement of related expenses incurred by NS. During 1993, a lease of the Chicago to Manhattan, Il., line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois replaced an agreement under which NS had provided commuter rail service for the Authority. NONCARRIER OPERATIONS - Norfolk Southern's noncarrier subsidiaries engage principally in the acquisition and subsequent leasing of coal, oil, gas and timberlands, the development of commercial real estate and the leasing or sale of rail property and equipment. In 1995, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment set forth in Statement of Financial Accounting Standards No. 14. PAGE 15 RAILWAY PROPERTY: EQUIPMENT - As of December 31, 1995, NS owned or leased the following units of equipment:
Number of Units -------------------------------- Capacity Owned* Leased Total of Equipment ----- ------ ----- ------------ Type of Equipment - ----------------- Locomotives: (Horsepower) Multiple purpose 1,908 0 1,908 5,799,700 Switching 143 0 143 210,000 Auxiliary units 62 0 62 0 -------- ------- -------- ---------- Total locomotives 2,113 0 2,113 6,009,700 ======== ======= ======== ========== Freight Cars: (Tons) Hopper 29,780 41 29,821 2,943,996 Box 22,918 376 23,294 1,772,693 Covered Hopper 13,757 1,174 14,931 1,482,080 Gondola 21,388 105 21,493 2,259,854 Flat 4,234 825 5,059 360,061 Caboose 261 0 261 0 Other 2,065 4 2,069 143,590 -------- ------- -------- ---------- Total freight cars 94,403 2,525 96,928 8,962,274 ======== ======= ======== ========== Other: Work equipment 6,963 5 6,968 Vehicles 3,826 0 3,826 Highway trailers 2,182 1,986 4,168 RoadRailers(RT) 923 0 923 Miscellaneous 1,624 0 1,624 -------- ------- -------- Total other 15,518 1,991 17,509 ======== ======= ======== * Includes railroad equipment leased to outside parties and railroad equipment subject to equipment trusts, conditional sale agreements and capitalized leases.
PAGE 16 The following table indicates the number and age of locomo tives and freight cars owned by NS at December 31, 1995:
Year Built ---------------------------------------------------------------- 1985- 1979- 1978 & 1995 1994 1993 1992 1991 1990 1984 Before Total ---- ---- ---- ---- ---- ---- ---- ------ ----- Locomotives: Number of units 125 25 31 55 53 398 432 994 2,113 Percent of fleet 5.9 1.2 1.5 2.6 2.5 18.8 20.4 47.1 100.0 Freight cars: Number of units 931 845 935 580 786 5,000 14,253 71,073 94,403 Percent of fleet 1.0 0.9 1.0 0.6 0.8 5.3 15.1 75.3 100.0
The average age of the freight car fleet at December 31, 1995, was 22.0 years. During 1995, NS retired 7,247 freight cars. As of December 31, 1995, the average age of the locomotive fleet was 15.7 years. During 1995, NS retired 67 locomotives, the average age of which was 22.6 years. Since 1988, NS has rebodied more than 20,500 coal cars. As a result, the remaining serviceability of the freight car fleet is greater than is inferable from the high percentage of freight cars built in earlier years. NS continues freight car and locomotive maintenance programs to ensure the highest standards of safety, reliability, customer satisfaction and equipment marketability. In recent years, the bad order ratio reflects the storage of certain types of cars which are not in high demand. Funds were not spent to repair cars for which present and future customers' needs could be adequately met without such repair programs. Also, NS' own standards of what constitutes a "serviceable" car have risen, and NS continues its disposition program for underutilized, unserviceable and overage cars. In this connection, NS began an orderly disposition of up to 17,000 freight cars in October 1994. Through the end of 1995, 7,272 of these cars had been sold.
Annual Average* ------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Freight Cars (excluding cabooses): NS Rail 5.8% 6.7% 7.3% 7.6% 6.5% All Class I railroads 6.0* 7.3 7.1 7.5 7.3 Locomotives: NS Rail 4.7 4.7 4.3 4.4 4.3 * In 1995, the industry bad order ratio was as of June 1, 1995. Prior years' industry ratios were based on a monthly average.
PAGE 17 TRACKAGE - All NS trackage is standard gauge, and the rail in approximately 95 percent of the main line trackage (including first, second, third and branch main tracks, all excluding trackage rights) is rail ranging from 100 to 140 pounds per yard. Of the 22,514 miles of track maintained by NS as of December 31, 1995, 15,787 were laid with welded rail. The density of traffic on NS running tracks (main line trackage plus passing tracks) during 1995 was as follows:
Gross tons of freight carried per track mile Track miles Percent (Millions) of running tracks* of total --------------- ----------------- -------- 0-4 4,966 31 5-19 4,822 30 20 and over 6,387 39 ------ --- 16,175 100 * Excludes trackage rights.
The following table summarizes certain information about NS' track roadway additions and replacements during the last five years:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Track miles of rail installed 403 480 574 660 679 Miles of track surfaced 4,668 4,760 5,048 5,690 5,646 New crossties installed (millions) 2.0 1.7 1.6 1.9 1.9
MICROWAVE SYSTEM - The NS microwave system, consisting of 6,600 radio path miles, 376 active stations and 5 passive repeater stations, provides communications for Norfolk, Buffalo, Detroit, Fort Wayne, Chicago, Kansas City, St. Louis, Washington, D.C., Atlanta, New Orleans, Jacksonville, Memphis, Cincinnati and most operating locations between these cities. The microwave system provides service for approximately 17,200 individual telephone circuits. 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. Extension of microwave communications to low density or operations support facilities is accomplished via microwave interface to buried fiber-optic or copper cables. TRAFFIC CONTROL - Of a total of 12,885 road miles operated by NS, excluding trackage rights over foreign lines, 5,400 road miles are governed by centralized traffic control systems (of which 100 miles are controlled by data radio from eight microwave site locations) and 2,800 road miles are equipped for automatic block system operation. PAGE 18 COMPUTERS - Data processing facilities connect the yards, terminals, transportation offices, rolling stock repair points, sales offices and other key locations on NS to the central computer complex in Atlanta, Ga. System operating and traffic data are compiled and stored to provide customers with information on their shipments throughout the system. Data processing facilities are capable of providing current information on the location of every train and each car on line, as well as related waybill and other train and car movement data. Additionally, this facility affords substantial capacity for, and is utilized to assist management in the performance of, a wide variety of functions and services, including payroll, car and revenue accounting, billing, material management activities and controls, and special studies. OTHER - NS has extensive facilities for support of railroad operations, including freight depots, car construction shops, maintenance shops, office buildings, and signals and communications facilities. MOTOR CARRIER PROPERTY: REAL ESTATE - NAVL owns and leases real estate in support of its operations. Principal real estate holdings include NAVL's headquarters complex and warehouse and vehicle maintenance facilities in Fort Wayne, Indiana, vehicle maintenance facilities in Fontana, California, and terminal facilities in Grand Rapids, Michigan, and Great Falls, Montana. NAVL also leases facilities throughout the United States for sales offices, maintenance facilities and for warehouse, terminal and distribution center operations. EQUIPMENT - NAVL relies extensively on independent contractors (owner-operators) who supply the power equipment (tractors) used to pull NAVL trailers. Agents also provide a substantial portion of NAVL's equipment needs, particularly for the transportation of household goods, by furnishing tractors and trailers on either a permanent or an intermittent lease basis. As of December 31, 1995, agents and owner-operators together supplied 3,519 tractors, representing 97 percent of the U.S. power equipment operated in NAVL service. Also as of December 31, 1995, NAVL owned 3,097 trailer units, representing 54 percent of the U.S. trailer fleet in NAVL service. The remaining 46 percent was provided mainly by agents and owner-operators. Agents and owner-operators also provided 1,081 straight trucks, or 98 percent of such units in NAVL service. NAVL has an extensive program for the repair and maintenance of its trailer equipment. In 1995, approximately 14,000 work orders were completed at NAVL's facility in Fort Wayne. As of December 31, 1995, the average age of trailer equipment in the NAVL fleet was 8.4 years. COMPUTERS - NAVL relies extensively on data processing facilities for shipment planning and dispatch functions as well as shipment tracing. Data processing capabilities are also utilized in revenue processing functions, driver and agent account settlement activity, and internal accounting and record keeping service. PAGE 19 ENCUMBRANCES - Certain railroad equipment is subject to the prior lien of equipment financing obligations amounting to approximately $545.4 million as of December 31, 1995, and $521.9 million at December 31, 1994. In addition, a significant portion of NS' properties is subject to liens securing, as of December 31, 1995, and 1994, approximately $77.2 million and $83.9 million of mortgage debt, respectively. Many of the tractors utilized in NAVL service are purchased by NAVL from manufacturers and resold to agents and owner-operators under a NAVL-sponsored financing program. At December 31, 1995, NAVL had $18.4 million in such tractor contracts receivable. This program allows NAVL to generate the funds necessary to purchase the tractors and to resell them under favorable financing terms. The equipment is sold under conditional sales contracts with the agents and owner- operators. CAPITAL EXPENDITURES - During the five calendar years ended December 31, 1995, NS' capital expenditures for road, equipment and other property were as follows:
Capital Expenditures ------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In millions of dollars) Transportation property Road $ 385.7 $ 384.6 $ 417.9 $ 426.5 $ 395.4 Equipment 344.3 245.9 240.5 281.3 235.2 Other property 33.4 82.4 10.8 8.3 82.8 ------- ------- ------- ------- ------- Total $ 763.4 $ 712.9 $ 669.2 $ 716.1 $ 713.4 ======= ======= ======= ======= =======
NS' capital spending and maintenance programs are and have been designed to assure NS' ability to provide safe, efficient and reliable transportation services. For 1996, NS is planning $708 million of capital spending, of which $699 million will be for railway projects and $9 million for motor carrier property. NS anticipates that a portion of its locomotive acquisitions in 1996 will be financed using capitalized leases similar to the 1995 leases (see note 6 on page 63). In 1996, equipment financing needs may be somewhat lower than in 1995, as proceeds from the sale of freight cars will be used for some equipment acquisitions. Looking further ahead, total rail and motor carrier spending are expected to continue to be similar to 1994 and 1995 levels. A substantial portion of future capital spending is expected to be funded through internally generated cash, although debt financing will continue as the primary funding source for equipment acquisitions. PAGE 20 ENVIRONMENTAL MATTERS - Compliance with federal, state and local laws and regulations relating to the protection of the environment is a principal NS goal. To date, such compliance has not affected materially NS' capital additions, earnings, liquidity or competitive position. See the discussion of "Environmental Matters" in Part II, Item 7, "Management's Discussion and Analysis" on page 35, and in Note 17 to the Consolidated Financial Statements on page 74. EMPLOYEES - NS employed an average of 26,944 employees in 1995, compared with an average of 27,168 in 1994. The approximate average cost per employee during 1995 was $42,835 in wages and $17,792 in employee benefits. Approximately 74 percent of these employees are represented by various labor organizations. A tentative settlement was reached with the United Transportation Union, which represents the largest number of employees in the railroad industry. The settlement requires ratification by the members before acceptance. The negotiation of this settlement demonstrated that national handling produces the quickest path to agreement. Negotiations with the other unions are progressing. GOVERNMENT REGULATION - In addition to environmental, safety, securities and other regulations generally applicable to all businesses, NS' railroads are subject to regulation by the Surface Transportation Board (STB), which succeeded the ICC on January 1, 1996. The STB has jurisdiction over some rates, routes, conditions of service, and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by rail common carriers. The Department of Transportation regulates certain track and mechanical equipment standards. The relaxation of economic regulation of railroads, begun over a decade ago by the ICC under the Staggers Rail Act of 1980, is expected to continue under the STB. Thus it appears that additional rail business will be exempted from regulation in the future. Significant exemptions for NS' railroads are TOFC/COFC (i.e., "piggyback") business, rail boxcar traffic, lumber, manufactured steel, automobiles and certain bulk commodities such as sand, gravel, pulpwood and wood chips for paper manufacturing. Transportation contracts on regulated shipments, which no longer require regulatory approval, effectively remove those shipments from regulation as well. Over 80 percent of NS' freight revenues come from either exempt traffic or traffic moving under transportation contracts. For motor carrier operations conducted by NAVL, the Department of Transportation and the STB are the principal regulatory entities. The STB exercises jurisdiction over the relationship between carriers and owner-operators, and carrier practices and common carrier rates relating to the transportation of household goods. The primary focus of the Department of Transportation is on driver qualification and safety standards, including maximum trailer length and width. PAGE 21 COMPETITION - There is continuing strong competition among rail, water and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company. Inventory carrying costs, service reliability, ease of handling and the desire to avoid loss and damage during transit are increasingly important considerations, especially for higher valued finished goods, machinery and consumer products. Even for raw materials, semi-finished goods and work-in-process, users are increasingly sensitive to transport arrangements which minimize problems at successive production stages. NS' primary rail competitor is the CSX system; both operate throughout much of the same territory. 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. Increasingly, cooperative strategies between railroads (such as the TCSC partnership involving NS and CR, see page 7) and between railroads and motor carriers enable carriers to compete more effectively in specific markets. NAVL continues to face vigorous competition due to deregulation and overcapacity in the industry that will keep profits at a modest level. While service remains a key issue, many shippers now place greater emphasis on price. For the RS Division, contract carriage and volume discount programs dominate the corporate relocation segment, and guaranteed price options are common to the individual consumer segment. Contract carriage agreements are also utilized extensively by the HVP Division to meet the service and price requirements of its customers. PAGE 22 Item 3. Legal Proceedings. - ------ ----------------- North Carolina - Fiber Optic Cable. In October 1995, two individuals, on behalf of themselves and all others similarly situated, instituted an action in the United States District Court for the Western District of North Carolina against Sprint Communications Company, L.P. and Norfolk Southern Railway Company. Plaintiffs allege they sustained RICO and trespass damages in the amount of $100 million (trebled) as a result of the defendants' installing, pursuant to an agreement, fiber optic cable on property in which the plaintiffs further allege the Railway's only property right was an easement for railway operations. Management, after consulting with its legal counsel, is of the opinion that the Railway has meritorious defenses to both the RICO and trespass claims and that ultimate liability, should there be any, will not materially affect the consolidated financial position of NS. 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 1995. PAGE 23 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, 1996, relating to these officers: Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ David R. Goode, 55, Present position since September Chairman, President and 1992. Served as President from Chief Executive Officer October 1991 to September 1992, and prior thereto was Executive Vice President-Administration. John R. Turbyfill, 64, Present position since June 1993. Vice Chairman Served prior thereto as Executive Vice President- Finance. D. Henry Watts, 64, Present position since October Vice Chairman 1995. Served prior thereto as Executive Vice President- Marketing. James C. Bishop, Jr., 59, Present position since March 1, Executive Vice President-Law 1996. Served prior thereto as Vice President-Law. R. Alan Brogan, 55, Executive Present position since December Vice President-Transportation 1992. Served as Vice President- Logistics (and President-North Quality Management from April American Van Lines, Inc.) 1991 to December 1992, and prior thereto was Vice President- Material Management and Property Services. L. I. Prillaman, 52, Executive Present position since October Vice President-Marketing 1995. Served as Vice President- Properties from December 1992 to October 1995, and prior thereto was Vice President and Controller. Stephen C. Tobias, 51, Present position since July 1994. Executive Vice President- Served as Senior Vice President- Operations Operations from October 1993 to July 1994, Vice President- Strategic Planning from December 1992 to October 1993, and prior thereto was Vice President- Transportation. PAGE 24 Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ Henry C. Wolf, 53, Executive Present position since June 1993. Vice President-Finance Served prior thereto as Vice President-Taxation. William B. Bales, 61, Senior Present position since October Vice President-International 1995. Served as Vice President- Coal Marketing from August 1993 to October 1995, and prior thereto was Vice President-Coal and Ore Traffic. Paul N. Austin, 52, Vice Present position since June 1994. President-Personnel Served as Assistant Vice President-Personnel from February 1993 to June 1994, and prior thereto was Director Compensation. John F. Corcoran, 55, Vice Present position since March 1992. President-Public Affairs Served prior thereto as Assistant Vice President-Public Affairs. David A. Cox, 59, Vice Present position since December President-Properties 1995. Served prior thereto as Assistant Vice President- Industrial Development. Thomas L. Finkbiner, 43, Present position since August Vice President-Intermodal 1993. Served as Senior Assistant Vice President-International and Intermodal from April to August 1993, and prior thereto was Assistant Vice President- International and Intermodal. John W. Fox, Jr., 48, Vice Present position since October President-Coal Marketing 1995. Served as Assistant Vice President-Coal Marketing from August 1993 to October 1995, and prior thereto was General Manager Eastern Region. Thomas J. Golian, 62, Present position since October Vice President 1995. Served as Executive Assistant to the Chairman, President and CEO from April 1993 to October 1995, and prior thereto was Special Assistant to the President. PAGE 25 Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ James L. Granum, 59, Vice Present position since March 1992. President-Public Affairs Served prior thereto as Assistant Vice President-Public Affairs. James A. Hixon, 42, Vice Present position since June 1993. President-Taxation Served prior thereto as Assistant Vice President-Tax Counsel. Jon L. Manetta, 57, Vice Present position since December President-Transportation & 1995. Served as Vice President- Mechanical Transportation from June 1994 to December 1995, Assistant Vice President-Transportation from October 1993 to June 1994, Assistant Vice President- Strategic Planning from January to October 1993, Director Joint Facilities and Budget from March 1992 to January 1993, and prior thereto was Assistant Terminal Superintendent-Transportation. Harold C. Mauney, Jr., 57, Present position since December Vice President-Quality 1992. Served as Assistant Vice Management President-Quality Management from April 1991 to December 1992, and prior thereto was General Manager-Intermodal Transportation Services. Donald W. Mayberry, 52, Present position since December Vice President-Research and 1995. Served prior thereto as Tests Vice President-Mechanical. James W. McClellan, 56, Vice Present position since October President-Strategic Planning 1993. Served as Assistant Vice President-Corporate Planning from March 1992 to October 1993, and prior thereto was Director- Corporate Development. Kathryn B. McQuade, 39, Present position since December Vice President-Internal Audit 1992. Served as Director-Income Tax Administration from May 1991 to December 1992, and prior thereto was Director-Federal Income Tax Administration. PAGE 26 Business Experience during Name, Age, Present Position past 5 Years - --------------------------- ------------------------------------ Charles W. Moorman, 44, Vice Present position since October President-Information 1993. Served as Vice President- Technology Employee Relations from December 1992 to October 1993, Vice President-Personnel and Labor Relations from February to December 1992, Assistant Vice President-Stations, Terminals and Transportation Planning from March 1991 to February 1992, and prior thereto was Senior Director Transportation Planning. Phillip R. Ogden, 55, Vice Present position since December President-Engineering 1992. Served prior thereto as Assistant Vice President- Maintenance. Magda A. Ratajski, 45, Vice Present position since July 1984. President-Public Relations John P. Rathbone, 44, Vice Present position since December President and Controller 1992. Served prior thereto as Assistant Vice President- Internal Audit. William J. Romig, 51, Vice Present position since April 1992. President and Treasurer Served prior thereto as Assistant Vice President- Finance. Donald W. Seale, 43, Vice Present position since August President-Merchandise 1993. Served as Assistant Vice Marketing President-Sales and Service from May 1992 to August 1993, and prior thereto was Director- Metals, Waste and Construction. Robert S. Spenski, 61, Vice Present position since June 1994. President-Labor Relations Served prior thereto as Senior Assistant Vice President-Labor Relations. Dezora M. Martin, 48, Present position since April 1995. Corporate Secretary Served as Assistant Corporate Secretary-NS from October 1993 to April 1995, and prior thereto was Assistant Corporate Secretary-Planning. PAGE 27 PART II Item 5. Market for Registrant's Common Stock and Related - ------- ------------------------------------------------ Stockholder Matters. ------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES STOCK PRICE AND DIVIDEND INFORMATION (Unaudited) The common stock of Norfolk Southern Corporation, owned by 53,401 stockholders of record as of December 31, 1995, 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 1995 and 1994.
Quarter -------------------------------------- 1995 1st 2nd 3rd 4th ---- --- --- --- --- Market price High $ 68-1/8 $ 68-1/2 $ 77-3/8 $ 81-5/8 Low 60-1/2 62-3/4 67-1/8 72-1/4 Dividends per share $0.52 $0.52 $0.52 $0.52 1994 1st 2nd 3rd 4th ---- --- --- --- --- Market price High $ 74-3/4 $ 67-3/8 $ 65-1/2 $ 64-5/8 Low 62-3/4 59-3/4 58-1/2 59 Dividends per share $0.48 $0.48 $0.48 $0.48
PAGE 28 Item 6. Selected Financial Data. - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1992 - 1995 Page One
1995 1994 1993 (1) 1992 ---- ---- ---- ---- ($ in millions, except per share amounts) RESULTS OF OPERATIONS: Transportation operating revenues: Railway operating revenues $ 4,011.8 $ 3,918.1 $ 3,745.9 $ 3,777.0 Motor carrier operating revenues 656.2 663.2 714.2 829.6 --------- --------- --------- --------- Total transportation operating revenues 4,668.0 4,581.3 4,460.1 4,606.6 Transportation operating expenses: Railway operating expenses 2,950.0 2,874.8 2,830.6 2,850.8 Motor carrier operating expenses 631.7 641.1 769.1 869.3 Special charge -- -- -- -- --------- --------- --------- --------- Total transportation operating expenses 3,581.7 3,515.9 3,599.7 3,720.1 Income from operations 1,086.3 1,065.4 860.4 886.5 Other income - net 141.8 85.2 136.8 97.8 Interest expense on debt 113.4 101.6 98.6 109.0 --------- --------- --------- --------- Income before income taxes 1,114.7 1,049.0 898.6 875.3 Provision for income taxes 402.0 381.2 349.9 317.6 --------- --------- --------- --------- Income before accounting changes 712.7 667.8 548.7 557.7 Cumulative effect of accounting changes -- -- 223.3 -- --------- --------- --------- --------- Net income $ 712.7 $ 667.8 $ 772.0 $ 557.7 ========= ========= ========= =========
PAGE 29 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1992 - 1995 Page Two
1995 1994 1993 (1) 1992 ---- ---- ---- ---- ($ in millions, except per share amounts) PER SHARE DATA: Earnings $ 5.44 $ 4.90 $ 5.54 $ 3.94 Dividends $ 2.08 $ 1.92 $ 1.86 $ 1.80 Stockholders' equity at year end $ 37.42 $ 35.19 $ 33.36 $ 30.16 FINANCIAL POSITION: Total assets $10,904.8 $10,587.8 $10,519.8 $10,400.5 Total long-term debt, including current maturities $ 1,639.0 $ 1,619.8 $ 1,595.2 $ 1,648.9 Stockholders' equity $ 4,829.0 $ 4,684.8 $ 4,620.7 $ 4,232.6 OTHER: Capital expenditures $ 763.4 $ 712.9 $ 669.2 $ 716.1 Average number of shares outstanding (thousands) 130,996 136,301 139,414 141,459 Number of stockholders at year end 53,401 52,442 51,884 51,200 Average number of employees: Rail 24,488 24,710 25,531 25,650 Nonrail 2,456 2,458 3,773 4,485 --------- --------- --------- --------- Total 26,944 27,168 29,304 30,135 ========= ========= ========= ========= (1) 1993 results include a $54 million increase in the provision for income taxes reflecting a 1% increase in the federal income tax rate, which reduced net income by $54 million, or $0.39 per share (see Note 3 on page 60). 1993 motor carrier expenses include a $50 million restructuring charge for the disposition of two NAVL businesses (see Note 15 on page 73). The cumulative effect of accounting changes (see Note 1 on page 58) increased 1993 earnings by $223 million, or $1.60 per share.
PAGE 30 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1988 - 1991 Page One
1991 (2) 1990 1989 1988 ---- ---- ---- ---- ($ in millions, except per share amounts) RESULTS OF OPERATIONS: Transportation operating revenues: Railway operating revenues $ 3,654.0 $ 3,786.0 $ 3,694.1 $ 3,616.6 Motor carrier operating revenues 797.3 831.0 841.9 845.0 --------- --------- --------- --------- Total transportation operating revenues 4,451.3 4,617.0 4,536.0 4,461.6 Transportation operating expenses: Railway operating expenses 2,862.2 2,969.4 2,864.4 2,679.7 Motor carrier operating expenses 797.1 839.5 846.4 836.6 Special charge 680.0 -- -- -- --------- --------- --------- --------- Total transportation operating expenses 4,339.3 3,808.9 3,710.8 3,516.3 Income from operations 112.0 808.1 825.2 945.3 Other income - net 131.3 145.3 158.2 108.4 Interest expense on debt 99.7 78.0 50.7 53.1 --------- --------- --------- --------- Income before income taxes 143.6 875.4 932.7 1,000.6 Provision for income taxes 113.9 319.3 326.5 365.5 --------- --------- --------- --------- Income before accounting changes 29.7 556.1 606.2 635.1 Cumulative effect of accounting changes -- -- -- -- --------- --------- --------- --------- Net income $ 29.7 $ 556.1 $ 606.2 $ 635.1 ========= ========= ========= =========
PAGE 31 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1988 - 1991 Page Two
1991 (2) 1990 1989 1988 ---- ---- ---- ---- ($ in millions, except per share amounts) PER SHARE DATA: Earnings $ 0.20 $ 3.43 $ 3.48 $ 3.51 Dividends $ 1.60 $ 1.52 $ 1.38 $ 1.26 Stockholders' equity at year end $ 28.64 $ 31.57 $ 30.44 $ 28.74 FINANCIAL POSITION: Total assets $10,148.1 $10,523.0 $10,244.3 $10,059.1 Total long-term debt, including current maturities $ 1,389.2 $ 1,125.2 $ 841.1 $ 780.9 Stockholders' equity $ 4,093.4 $ 4,911.9 $ 5,168.6 $ 5,152.6 OTHER: Capital expenditures $ 713.4 $ 696.9 $ 651.7 $ 528.8 Average number of shares outstanding (thousands) 147,759 162,095 174,370 181,038 Number of stockholders at year end 53,725 56,187 61,630 64,974 Average number of employees: Rail 27,366 28,697 29,667 30,330 Nonrail 4,586 4,584 4,645 4,209 --------- --------- --------- --------- Total 31,952 33,281 34,312 34,539 ========= ========= ========= ========= (2) 1991 transportation operating expenses include a $680 million special charge, primarily comprised of costs for labor force reductions and the write-down of the goodwill portion of NS' investment in NAVL. This charge reduced net income by $498 million, or $3.37 per share.
PAGE 32 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1985 - 1987 Page One
1987 (3) 1986 1985 (4) ---- ---- ---- ($ in millions, except per share amounts) RESULTS OF OPERATIONS: Transportation operating revenues: Railway operating revenues $ 3,335.6 $ 3,327.8 $ 3,434.8 Motor carrier operating revenues 777.2 748.6 390.3 --------- --------- --------- Total transportation operating revenues 4,112.8 4,076.4 3,825.1 Transportation operating expenses: Railway operating expenses 2,652.8 2,665.9 2,740.1 Motor carrier operating expenses 734.5 708.5 366.0 Special charge 620.4 -- -- --------- --------- --------- Total transportation operating expenses 4,007.7 3,374.4 3,106.1 Income from operations 105.1 702.0 719.0 Other income - net 232.9 215.8 171.7 Interest expense on debt 58.5 61.8 68.5 --------- --------- --------- Income before income taxes 279.5 856.0 822.2 Provision for income taxes 107.1 337.3 322.0 --------- --------- --------- Income before accounting changes 172.4 518.7 500.2 Cumulative effect of accounting changes -- -- -- --------- --------- --------- Net income $ 172.4 $ 518.7 $ 500.2 ========= ========= =========
PAGE 33 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES ELEVEN-YEAR FINANCIAL REVIEW 1985 - 1987 Page Two
1987 (3) 1986 1985 (4) ---- ---- ---- ($ in millions, except per share amounts) PER SHARE DATA: Earnings $ 0.91 $ 2.74 $ 2.65 Dividends $ 1.20 $1.13-1/3 $1.13-1/3 Stockholders' equity at year end $ 26.48 $ 26.78 $ 25.20 FINANCIAL POSITION: Total assets $ 9,831.6 $ 9,752.4 $ 9,768.6 Total long-term debt, including current maturities $ 795.0 $ 891.3 $ 941.0 Stockholders' equity $ 4,979.4 $ 5,070.8 $ 4,761.5 OTHER: Capital expenditures $ 562.9 $ 698.4 $ 738.6 Average number of shares outstanding (thousands) 189,464 189,217 188,867 Number of stockholders at year end 68,121 65,832 71,325 Average number of employees: Rail 32,563 34,857 36,415 Nonrail 3,539 3,440 3,379 --------- --------- --------- Total 36,102 38,297 39,794 ========= ========= ========= (3) 1987 transportation operating expenses include a $620 million special charge, principally related to railroad restructuring costs. This charge reduced net income by $352 million, or $1.86 per share. (4) Includes NAVL from the acquisition date of June 21, 1985. All per share amounts have been restated to reflect the March 6, 1987, 3-for-1 stock split.
PAGE 34 Item 6. Selected Financial Data. (continued) - ------ ----------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Table of Graphs Included with the Eleven-Year Financial Review The following financial information appears as four (4) separate graphs following the Eleven-Year Financial Review in the 1994 Norfolk Southern Corporation Annual Report to Stockholders.
1995 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- INCOME FROM RAILWAY OPERATIONS (railway operating revenues - railway operating expenses) ($ millions) $1,095.4* $1,043.3 $915.3 $926.2 $791.8*** $816.6 RETURN ON EQUITY (net income divided by average stockholders' equity) 15.4%* 14.4% 13.7%** 13.4% 11.1%*** 11.0% DIVIDENDS PER SHARE (dollars) $ 2.08 $ 1.92 $ 1.86 $ 1.80 $ 1.60 $ 1.52 * Excludes $33.6 million ($20.4 million after-tax) charge for early retirement program. ** Excludes the cumulative effects of required accounting changes and the prior years' effect of the federal income tax increase. *** Excludes special charge.
10 5 1 Years Years Year ----- ----- ---- TOTAL RETURN TO STOCKHOLDERS (from dividends and appreciation) NS 15.1% 17.2% 34.0% S&P 500 14.9% 16.6% 37.6%
PAGE 35 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 52 and the Eleven-Year Financial Review beginning on page 28. SUMMARIZED RESULTS OF OPERATIONS 1995 Compared with 1994 - ----------------------- Net income in 1995 was a record $712.7 million, up 7% over 1994 earnings of $667.8 million. Excluding a $20.4 million after-tax charge for an early retirement program in 1995, net income would have been $733.1 million, up 10%. These results were driven primarily by improved income from railway operations, up $52.1 million, or 5% (excluding the early retirement charge), and by greater nonoperating income, up $56.6 million, or 66%. Railway operating revenues increased $93.7 million, or 2%, while railway operating expenses, excluding the early retirement charge, were up only $41.6 million, or 1%. Income from motor carrier operations of $24.5 million was $2.4 million, or 11%, higher than in 1994. Nonoperating income of $141.8 million was up $56.6 million, due to a $30.5 million ($18.8 million after-tax) gain resulting from the partial redemption of a real estate partnership interest and a $26.2 million increase in gains on property sales (see Note 2 on page 59). Interest expense on debt was up $11.8 million, or 12%, largely a result of higher rates of interest on commercial paper debt. 1994 Compared with 1993 - ----------------------- Net income was $667.8 million in 1994, compared with $772.0 million in 1993. However, 1993 net income was increased by $223.3 million, related to the implementation of required accounting changes (see Note 1 on page 57), and reduced by $46.2 million for the prior years' effect of a federal income tax rate increase (see Note 3 on page 60). Excluding the effects of the 1993 accounting changes and the tax rate increase, 1993 net income was $594.9 million, and 1994 net income was up 12%. Income from railway operations produced most of the improvement, increasing $128.0 million, or 14%. These results reflected a 5% increase in railway operating revenues (largely due to higher traffic volume) combined with only a 2% increase in railway operating expenses. Income from motor carrier operations improved to $22.1 million in 1994, compared with a $4.6 million loss in 1993, excluding the 1993 restructuring charge (see Note 15 on page 73). Nonoperating income was $85.2 million, compared with $136.8 million in 1993, principally a result of reduced gains on sales of stock and property. DETAILED RESULTS OF OPERATIONS Railway Operating Revenues - -------------------------- Railway operating revenues were $4.01 billion in 1995, compared with $3.92 billion in 1994 and $3.75 billion in 1993. The $93.7 million improvement in 1995, compared with 1994, was largely attributable to increases in the intermodal ($44.9 million), automotive ($22.0 million) and metals/construction ($18.1 million) market groups. The $172.2 million improvement in 1994, compared with 1993, was primarily attributable to increases in the intermodal, coal and chemicals market groups. PAGE 36 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------
The following table presents a three-year comparison of revenues by market group. RAILWAY OPERATING REVENUES BY MARKET GROUP ($ in millions) 1995 1994 1993 -------- -------- -------- Coal $1,240.3 $1,262.5 $1,213.3 Paper/forest 519.8 505.4 502.7 Chemicals 513.5 512.2 472.9 Automotive 454.1 432.1 429.5 Agriculture 359.0 347.5 319.7 Metals/construction 339.5 321.4 296.1 Intermodal 470.5 425.6 390.2 -------- -------- -------- Freight revenues 3,896.7 3,806.7 3,624.4 Other - principally switching and demurrage 115.1 111.4 121.5 -------- -------- -------- Total $4,011.8 $3,918.1 $3,745.9 ======== ======== ========
Traffic volume changes in 1995 were mixed, with improvements in automotive, agriculture, metals/construction and intermodal partially offsetting declines in the other three market groups. Traffic volume increased or remained steady for all market groups in 1994. These volume gains accounted for most of the revenue improvement in 1995 and all the improvement in 1994 as illustrated by the following table. RAILWAY OPERATING REVENUE VARIANCE ANALYSIS Increases (Decreases) ($ in millions)
1995 vs. 1994 1994 vs. 1993 ------------- ------------- Traffic volume $ 62.6 $ 195.1 Revenue per unit 31.1 (22.9) -------- -------- Total $ 93.7 $ 172.2 ======== ========
Average revenue per unit rose in 1995 due to moderate rate increases. The revenue per unit variance in 1994 was principally attributable to growth in shorter haul and double-stack business, both of which generally have lower average rates. COAL traffic volume declined 1%, and revenues were down 2%, from 1994. In 1995, coal revenues represented 31% of total railway operating revenues, and 91% of coal shipments originated on NS' lines. As shown in the following table, coal tonnage by type remained stable in 1995, compared with 1994. However, utility coal tonnage in 1994 increased significantly. PAGE 37 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- TOTAL COAL TONNAGE (In millions of tons)
1995 1994 1993 ----- ----- ----- Utility 69.1 70.2 60.6 Export 25.8 25.2 25.7 Steel 18.9 18.8 20.5 Other 8.2 8.9 8.8 ----- ----- ----- Total 122.0 123.1 115.6 ===== ===== =====
Utility coal traffic had been expected to grow in 1995, but instead decreased slightly due to moderate weather throughout much of the NS service region during the first half of the year and to sustained periods of maximum generation from several Southeastern nuclear power plants. The mild weather pattern actually began in third-quarter 1994, causing a number of NS' utility customers to start 1995 with high coal inventories. However, inventories began to normalize, as seasonal weather returned to the service region in midsummer, and nuclear plants began to power down for refueling and repairs in third-quarter 1995. Compliance with Phase I of the Clean Air Act Amendments, which took effect on January 1, 1995, increased shipments of both NS- and foreign-line-originated, low-sulfur coal. A significant proportion of the mines served by NS produce coal that satisfies both Phase I and the more stringent Phase II requirements, which take effect on January 1, 2000. In 1994, utility coal traffic was up early in the year as a result of bitter weather and the resulting depletion of coal stockpiles. The pace at which 1994 outperformed 1993 slowed as the weather normalized. New movements of western coal into Georgia also contributed to the 1994 increase. The near-term outlook for utility coal is favorable, as most NS- served utilities began 1996 with normal or somewhat low inventory levels. The long-term outlook is less certain due to the deregulation and ongoing restructuring of the utility industry, although low-sulfur coal traffic should increase with the approach of the Phase II deadline of the Clean Air Act. Export coal traffic in 1995 benefited from the continued recovery of the European steel-producing economy. Demand from other parts of the world also improved. Brazil, Belgium, France, Romania and Japan took increased amounts of NS coal. In addition, NS began handling metallurgical coal for steel production in Mexico. Congestion and high barge rates on the Mississippi River caused an increase in movements to NS' coal piers in Norfolk, Va. Export coal traffic at the beginning of 1994 reflected the poor demand also seen in 1993. Shipments remained somewhat depressed as a result of the weak European economy and strong competition from other producing countries. Economic recovery in Europe and Japan improved demand for steel and electricity, and the coal supply-demand situation tightened during 1994. As a result, delivery times were longer and prices rose during 1994. A recent softening in world demand for steel could limit near-term growth in export metallurgical coal shipments. However, demand for export steam coal is increasing, and NS is working to increase participation in this market. PAGE 38 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Steel coal domestic traffic was up slightly in 1995 due to completion of extended coke oven work at one facility and continued strong demand for domestic coke for making steel. In 1994, traffic was reduced by the closing of one coke battery. Advanced technologies that allow production of steel with little or no coke could cause this market to decline slowly over the long term. However, NS could participate in the movement of non-coking coal used by technologies such as pulverized coal injection. Other coal consists of traffic for industries that burn coal to generate energy used in manufacturing processes and often for the production of electricity for in-plant use and outside sales. Lower demand for electricity due to mild weather, as discussed above, continued to affect this market in 1995. In addition, some industries switched to natural gas as a fuel source. This market is expected to remain stable in coming years, as growth through innovative packaged delivery services offsets some additional loss to natural gas. COAL (Shown as a graph in the Annual Report to Stockholders) This group comprises utility coal, export coal, domestic metallurgical coal, industrial coal, coke and iron ore. ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- Export $ 338.3 $ 329.2 $ 351.9 $ 467.5 $ 522.9 $ 511.8 Domestic 902.0 933.3 861.4 828.5 807.4 897.0 -------- -------- -------- -------- -------- -------- $1,240.3 $1,262.5 $1,213.3 $1,296.0 $1,330.3 $1,408.8 ======== ======== ======== ======== ======== ========
MERCHANDISE traffic volume rose 5%, and revenues increased by $112.2 million, or 4%, compared with 1994. Merchandise traffic volume in 1994 increased 8%, and revenues, excluding, for comparative purposes, the effect of the Triple Crown Services Company (TCSC) partnership (see discussion on page 41), increased by $151.3 million, or 6%, compared with 1993. All six market groups comprising merchandise traffic reported increased revenues in 1995 over 1994 and in 1994 over 1993. PAPER/FOREST traffic declined 1%; however, revenues were up 3%, compared with 1994. Paper and pulpwood products traffic was even with 1994, while lumber traffic suffered from weak housing starts in 1995. For 1994, paper/forest volume and revenues were about even with 1993, reflecting weak paper production, severe winter weather and floods in south Georgia. Some of the weakness in paper was offset by a gain in lumber traffic due, in part, to the opening of five new lumber distribution centers in 1994. Moderate growth is expected for 1996 based on the anticipated completion of several wood-chip mills and an improvement in housing starts. PAPER/FOREST (Shown as a graph in the Annual Report to Stockholders) This group comprises lumber and wood products, pulpboard and paper products, wood fibers, woodpulp, scrap paper and clay. ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $ 519.8 $ 505.4 $ 502.7 $ 499.5 $ 476.1 $ 486.5
PAGE 39 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- CHEMICALS traffic and revenues showed little change compared with 1994. Increases for general chemicals were overshadowed by weakness in the plastics and fertilizer markets. However, 1994 showed a 9% traffic increase and an 8% revenue increase, compared with 1993. The demand for chemicals increased in 1994, and shipments of fertilizer and plastics were stronger than prior years. A resumption of moderate growth is expected for 1996, as the fertilizer and plastics markets strengthen and demand for liquefied petroleum gas grows. CHEMICALS (Shown as a graph in the Annual Report to Stockholders) This group comprises fertilizers, sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, industrial chemicals, chemical wastes and bulk products. ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $ 513.5 $ 512.2 $ 472.9 $ 471.7 $ 449.7 $ 443.9
AUTOMOTIVE traffic rose 3%, and revenues--their highest in NS' history--increased 5% over 1994. This growth occurred even though some plants served by NS were shut down or operating at reduced capacity. These effects were mitigated by strong production at selected plants that produce popular cars and trucks. In 1994, automotive traffic had remained steady, and revenues increased 1%, compared with 1993, due to retooling downtime at four plants. Moderate growth is expected to continue in 1996, as plant retoolings are completed and new plants come on line. The GM plant at Wentzville, Mo., should resume production early in 1996 after remaining down for two years. NS also should see more traffic from the expanded Toyota plant at Georgetown, Ky.; from BMW's new facility at Greer, S.C.; and in 1997, from the Mercedes plant under construction in Tuscaloosa, Ala. AUTOMOTIVE (Shown as a graph in the Annual Report to Stockholders) This group comprises finished vehicles for BMW, Chrysler, Ford, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and parts for Chrysler, Ford, General Motors and Toyota. ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $ 454.1 $ 432.1 $ 429.5 $ 401.5 $ 325.9 $ 367.9
AGRICULTURE traffic rose 2%, and revenues increased 3%, compared with a strong 1994. This growth was driven by a 6% increase in grain and soybean traffic, a result of higher shipments from the Midwest to the Southeast primarily for the poultry industry. Agriculture traffic in 1994 rose 7%, and revenues increased 9%. This performance reflected record corn and soybean harvests and improved car utilization through greater use of 50- and 100-car unit trains. This market group is expected to continue to grow as poultry consumption increases, with a commensurate rise in demand for feed grain. Industrial development efforts may bring several new feed mills on line in 1996. PAGE 40 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- AGRICULTURE (Shown as a graph in the Annual Report to Stockholders) This group comprises grain, soybeans, wheat, corn, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners and consumer products. ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $ 359.0 $ 347.5 $ 319.7 $ 301.4 $ 293.6 $ 299.6
METALS/CONSTRUCTION traffic rose slightly, and revenues were up 6%. Most of the revenue increase was in the steel and aluminum markets, driven by strong demand, improved pricing and traffic from a new steel mini-mill in Butler, Ind. These results were partially offset by reduced demand for construction products, reflecting postponement of some highway projects and general weakness in residential construction. Metals/construction traffic in 1994 was strong, with both volume and revenues increasing 9%, compared with 1993. Most of the revenue gain was in shipments of steel due to exceptionally strong industry demand. Increased housing starts and new projects, such as at the Chesapeake Bay Bridge Tunnel, may improve construction traffic in 1996. Moderate growth is expected for metals. METALS/CONSTRUCTION (Shown as a graph in the Annual Report to Stockholders) This group comprises steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks, minerals and municipal wastes. ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $ 339.5 $ 321.4 $ 296.1 $ 276.3 $ 274.0 $ 305.6
INTERMODAL volume rose 12%, and revenues increased 11%. Although intermodal traffic levels nationwide declined in 1995, NS intermodal achieved record levels of volume, revenues and profitability, led by container shipments in both domestic and international service. During 1995, a seven-year agreement with Hanjin Shipping Company was signed under which NS will handle nearly all of Hanjin's international container business in NS' territory east of the Mississippi River. EMP, the container equipment-sharing arrangement with Union Pacific and Conrail, contributed significantly to domestic growth. Almost all the increase in international container business was attributable to new services, thereby increasing NS' market share. Domestic business was augmented by growth in the trucking segment, as both truckload and less-than-truckload companies increased their use of NS intermodal. Additionally, intermodal marketing companies increased their business on NS. Service and facility improvements are expected to result in a further market-share increase in 1996. PAGE 41 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Intermodal traffic in 1994 rose 13%, and revenues rose 9%, compared with 1993. However, revenues reflect the effect of the formation in April 1993 of TCSC. This partnership provides RoadRailer (RT) and domestic container services previously offered by a wholly owned subsidiary of NS. Because NS owns only 50% of TCSC, its revenues are not consolidated. NS' intermodal revenues include only revenues for rail service NS provides the partnership. Excluding this partnership effect, 1994 intermodal revenues increased 14%, compared with 1993. As was the case in 1995, the 1994 growth in intermodal was led by an increase in container business. The export container segment improved, as the economies in Europe recovered and countries in the Asia/Pacific region experienced rapid growth in production. Revenues from domestic container movements also improved, as NS increased its market share. Much of this growth was related to aggressive facility and transit-time improvements, including expanding or upgrading five terminal facilities. INTERMODAL (Shown as a graph in the Annual Report to Stockholders) This group handles trailers, containers and Triple Crown (RT) equipment tendered by intermodal marketing companies, international steamship lines and truckers. ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $ 470.5 $ 425.6 $ 390.2 $ 408.9 $ 380.6 $ 350.9
Railway Operating Expenses - -------------------------- Railway operating expenses in 1995 totaled $2.95 billion, an increase of $75.2 million. However, 1995 expenses included a $33.6 million charge for an early retirement program (see Note 10 on page 67). Excluding the early retirement charge, 1995 railway operating expenses were up only $41.6 million, or 1%, on a 3% increase in traffic volume. Similarly, railway operating expenses in 1994 were $2.87 billion, a 2% increase, compared with 1993, despite a 7% increase in traffic volume. As a result, the NS railway operating ratio, which measures the percentage of revenues consumed by expenses, was a record 72.7 (excluding the early retirement charge) and continues to be the best among the major railroads in the United States. The following table shows the changes in railway operating expenses summarized by major classifications. RAILWAY OPERATING EXPENSES Increases (Decreases) ($ in millions)
1995 vs. 1994 1994 vs. 1993 ------------- ------------- Compensation and benefits $108.9* $(19.4) Materials, services and rents (41.9) 10.7 Depreciation 14.7 12.4 Diesel fuel 1.5 9.0 Casualties and other claims (13.7) 16.0 Other 5.7 15.5 ------ ------ Total $ 75.2 $ 44.2 ====== ====== *Includes $33.6 million early retirement charge.
PAGE 42 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- COMPENSATION AND BENEFITS, which represents about half of total railway operating expenses, increased 8% in 1995 and declined 1% in 1994. The 1995 increase was principally a result of: (1) the early retirement charge of $33.6 million; (2) higher wages; (3) increased performance-based compensation accruals, particularly those linked to the NS stock price, which rose nearly $19 per share in 1995; and (4) higher health care costs for agreement employees. The 1994 decline was principally due to (1) lower accruals for performance-based compensation plans as a result of a lower stock price; (2) reduced accruals for postretirement benefits resulting from a change in the benefit plan's creditable service period (see Note 11 on page 69); (3) the expiration of the Railroad Retirement Repayment Tax in June 1993; (4) the effect of the early retirement program in 1993 (see Note 10 on page 67); and (5) productivity improvements as a result of continuing reductions in train crew sizes. Materials, services and rents consists of items used for the maintenance of the railroad's lines, structures and equipment; the cost 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 decreased 6% in 1995 but increased 2% in 1994. The 1995 decrease of $41.9 million reflected initiatives to improve asset utilization that resulted in (1) re-engineering of rail-line and freight-car maintenance practices that reduced repair and maintenance expenses and facilitated the closure of two repair facilities; (2) reduced locomotive repair costs due to older locomotives' being replaced with new units; (3) disposition of excess freight cars (see "Cash used for investing activities" on page 46), resulting in a reduction in the number of freight cars to be maintained; and (4) short-term leasing of certain older locomotives to other railroads, which reduced net equipment rental expense. Also contributing to the improvement was a decline in equipment rental expenses, resulting from the partial deprescription (deregulation by the ICC) of car-hire rates among railroads, which began in 1994. These favorable results were somewhat offset by increased expenses related to the 12% growth in intermodal traffic. The 1994 increase of $10.7 million was principally due to higher joint-facility and leased-road costs and to increased locomotive repair costs, resulting mostly from higher traffic volume. However, a decrease in other railroads' use of NS' facilities also contributed to the increase in joint-facilities expense. Partially offsetting these increases was a decline in equipment rent expenses resulting from the partial deprescription of car-hire rates. Depreciation expense (see Note 1 "Properties" on page 57 for NS' depreciation policy) was up 4% in 1995 and 3% in 1994. The increases in both periods were due to property additions, reflecting substantial levels of capital spending over the last several years. Diesel fuel costs rose 1% in 1995 and 5% in 1994. The 1995 increase was primarily due to a small increase in the average price paid for diesel fuel. Because even fuel-efficient locomotives consume substantial quantities of diesel fuel, a slight price increase translates into large cost increases. The increase in 1994 diesel fuel costs was entirely driven by higher consumption, a result of a 7% increase in carloadings. On average, fuel prices in 1994 were slightly lower than in 1993. Casualties and other claims (including estimates of costs related to personal injury, property damage and environmental matters) decreased 10% in 1995 but increased 13% in 1994 over 1993. Both of these fluctuations primarily were attributable to environmental clean-up costs in 1994 associated with a tankcar leak. The largest component of "Casualties and other claims" is personal injury expense. Although there has been a favorable trend in the number of accidental injuries since 1990, much of the financial benefit from this decline unfortunately has been offset by higher costs related to non- accidental "occupational" claims and by an increase in the cost of third- party injury claims arising from accidents at grade crossings. NS is actively involved in efforts to reduce the risk of all accidents and is placing particular emphasis on programs involving grade-crossing safety. PAGE 43 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- The rail industry remains uniquely susceptible to job-related accidental injury and occupational claims because of an outmoded law, the Federal Employers' Liability Act (FELA), originally passed in 1908 and applicable only to railroads. This law, which covers employees' claims for on-the-job injuries, produces results that are unpredictable and inconsistent, at a far greater cost to the rail industry than the no- fault workers' compensation system to which non-rail competitors are universally subject. The railroads have been unsuccessful so far in efforts to persuade Congress to replace the FELA with a no-fault workers' compensation system. Other expenses increased 4% in 1995, and increased 12% in 1994. The 1995 increase was due to higher sales, use and franchise taxes. The 1994 increase was due to favorable property tax settlements in 1993 and to higher relocation expenses in 1994 related to new job assignments following the early retirement program in 1993. Motor Carrier Results - --------------------- Motor carrier operating income was $24.5 million, compared with $22.1 million in 1994 and with an operating loss of $54.9 million in 1993. The large loss reported in 1993 was almost entirely attributable to a restructuring of the business as described below. In 1995, because certain expenses were below original estimates, $3.9 million of the restructuring charge taken in 1993 was reversed. The ongoing operations, comprised of Relocation Services (RS) and High Value Products (HVP), produced operating income of $20.6 million in 1995, $22.1 million in 1994, and $14.4 million in 1993. A restructuring decision was made in 1993 due to persistently poor performance in the general commodities operations despite repeated turnaround efforts. The restructuring led to the liquidation of the Commercial Transport (CT) Division and the sale of Tran-Star (TS), a refrigerated carrier. A restructuring charge of $50.3 million was recorded in 1993 (see Note 15 on page 73). The following table presents a three-year comparison of revenues by principal operations. MOTOR CARRIER OPERATING REVENUES BY PRINCIPAL OPERATIONS ($ in millions)
1995 1994 1993 ------ ------ ------ Relocation Services (RS) $310.9 $325.5 $315.3 High Value Products (HVP) 345.3 337.7 262.2 Commercial Transport (CT) * -- -- 105.3 Tran-Star (TS) * -- -- 31.4 ------ ------ ------ Total $656.2 $663.2 $714.2 ====== ====== ====== * See restructuring discussion in Note 15 on page 73.
RS' revenues depend on four primary segments of household goods transportation: corporate relocation accounts, individual shipments, military, and international shipments. RS' 1995 revenues decreased 4% from 1994 after having increased 3% over 1993. In 1995, international shipments and domestic corporate account business gained 6% and 5%, respectively. These gains were more than offset, however, by lower individual business (6%), lower military volume (17%) and decreased Canadian volume, primarily military related (30%). Revenue per shipment improved nearly 3% in 1995. In 1994, volume gains were achieved in the military and C.O.D. segments, although prices were flat. Domestic market- share gains were partially offset by reduced revenues from PAGE 44 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Canadian operations. The total number of household-goods moves industry- wide has declined about 1% per year in each of the past six years. Changes in domestic and Canadian policy relating to military staffing levels may result in additional reduction in the overall number of moves available in the industry. There are six major van lines in this market, and competition is likely to remain intense. HVP's main line of business is transporting office products, sensitive equipment, and exhibits and displays. A Customized Logistics Services (CLS) segment provides integrated logistics services. A Blanketwrap segment, formerly part of the discontinued CT Division, provides specialized handling of uncartoned truckload freight. HVP's revenues increased 2%, compared with a strong 1994, and 29% in 1994, compared with 1993. Traditional HVP business, Blanketwrap and CLS experienced continued growth with their core accounts in 1995. These gains were partially offset by a decrease in air-freight revenue due to the rationalization of certain service centers. The increase in 1994 was due to (1) the inclusion of Blanketwrap, which was in HVP for only two months of 1993, and (2) to CLS, which was awarded a major logistics contract by IBM in third-quarter 1993. In an effort to improve timeliness and efficiency, HVP expanded its distribution network in 1995 and increased scheduled services. Additional growth in the CLS segment is possible, as more shippers look to logistics providers like NAVL to provide logistics expertise to reduce overall shipping and handling costs. Motor carrier operating expenses as a percentage of revenues were 96.3%, 96.7%, and 107.7%, respectively, in 1995, 1994 and 1993. The highly unfavorable 1993 operating ratio was principally related to losses sustained in the truckload operations and the restructuring charge associated with discontinuing those operations. NAVL's ongoing operations generated operating ratios of 96.9%, 96.7% and 97.5%, respectively, in 1995, 1994 and 1993. Intense price competition in the motor carrier industry is likely to keep margins at a modest level and will require carriers to continue to focus on cost reductions. Income Taxes - ------------ Income tax expense in 1995 was $402.0 million for an effective rate of 36.1%, compared with an effective rate of 36.3% in 1994 and 38.9% in 1993. Absent the federal income tax rate increase in 1993 (see Note 3 on page 60), income tax expense that year would have been $295.8 million for an effective rate of 32.9%. The below statutory rate in 1995 results from investments in corporate-owned life insurance and coal-seam gas properties, and favorable adjustments upon filing the 1994 tax returns. The below statutory rate in 1994 was due to favorable adjustments resulting from settlement of federal income tax years 1988 and 1989, an adjustment to the valuation allowance for deferred tax assets and a favorable adjustment upon filing the 1993 tax returns. Deferred tax expense was an unusually high proportion of total tax expense in 1994. A corresponding reduction is reflected in 1994 current tax expense for the effects of expenditures that affect book and tax accounts in different years, primarily in the areas of compensation, motor carrier restructuring and property. The low effective rate for 1993 (excluding the rate increase) was partially due to tax benefits related to the motor carrier restructuring (see Note 15 on page 73). Also in 1993, current tax expense increased and deferred tax expense decreased because of tax payments made in anticipation of Revenue Agent Reports for the 1988-1989 federal tax audit (see Note 3 on page 60 for the components of income tax expense). Accounting Changes and New Accounting Pronouncements - ---------------------------------------------------- 1994 - Effective January 1, 1994, NS adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 did not have a significant effect on NS (see also Note 1 on page 58). PAGE 45 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- 1993 - Effective January 1, 1993, NS adopted required accounting for postretirement benefits other than pensions, postemployment benefits and income taxes (see Note 1 on page 58 for a discussion of these accounting changes). The net cumulative effect of these non-cash adjustments increased 1993 net income by $223.3 million, or $1.60 per share. NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). This standard establishes the accounting and reporting requirements for recognizing and measuring impairment of long- lived assets to be either held and used or held for disposal. SFAS 121 is effective for years beginning after December 15, 1995. NS does not expect SFAS 121 to have a material effect on its financial statements. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This standard defines a fair-value- based method of accounting for stock-based compensation plans. However, the standard also allows measurement of compensation cost using the intrinsic-value-based method of accounting prescribed in Accounting Principles Board Opinion No. 25 (APB 25). Companies that choose to retain APB 25 for measurement will be required to provide pro forma footnote disclosures effective for 1996 financial statements. NS expects to continue recording stock-based compensation costs based on APB 25 and, beginning in 1996, to provide the pro forma disclosures required under SFAS 123. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES FINANCIAL CONDITION refers to the assets, liabilities and stockholders' equity of an organization (see Consolidated Balance Sheets on page 54). LIQUIDITY refers to the ability of an organization to generate adequate amounts of cash, principally from operating results or through borrowing power, to meet its short-term and long-term cash requirements (see Consolidated Statements of Cash Flows on page 55). CAPITAL RESOURCES refers to the ability of an organization to raise funds through the sale of either debt or equity (stock) securities.
($ in millions) 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Cash and short-term investments $329.0 $306.7 $258.2 $378.1 $464.7 Current assets to current liabilities 1.1 1.2 1.3 1.2 1.1 Debt-to-total capitalization 25.9% 26.2% 27.4% 29.8% 29.5% Return on average stockholders' equity 15.4%* 14.4% 13.7%* 13.4% 11.1%* * Excluding unusual items: In 1995, the early retirement charge; in 1993, the cumulative effects of required accounting changes and the prior years' effect of the federal income tax rate increase, and in 1991, the special charge.
CASH PROVIDED BY OPERATING ACTIVITIES, which is NS' principal source of liquidity, increased $93.1 million, or 8%, in 1995, compared with 1994 and $269.7 million, or 31%, in 1994, compared with 1993. Since the NS 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 improvement in 1995 was primarily a result of increased income from operations (excluding the early retirement charge, a non-cash item) and improved billing and collection of receivables. The 1994 increase was largely attributable to increased income from operations and to lower income tax payments. PAGE 46 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Implementation of the labor portion of the 1991 special charge also contributed to the fluctuations in cash provided by operations. In 1995, 1994 and 1993, $29.3 million, $41.9 million and $36.1 million, respectively, were for such labor costs. In 1993, failure to reach agreement on terms for certain further savings led to a partial reversal of the 1991 special charge (see Note 16 on page 74). Looking ahead, the labor portion of the special charge is expected to require approximately $30 million in 1996 to achieve productivity gains permitted by the agreements. NS regards this cash outflow as an investment because, in view of the high cost of labor and fringe benefits, these payments produce significant future savings. In 1995, it is estimated that NS' expenses were reduced by $160 million as a result of these programs and, upon full implementation, there should be additional savings of about $10 million per year. CASH PROVIDED BY OPERATIONS (Shown as a graph in the Annual Report to Stockholders) ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $1,237.4 $1,144.3 $ 874.6 $ 958.2 $ 762.4 $ 994.7
CASH USED FOR INVESTING ACTIVITIES increased 16% in 1995, compared with 1994, and was up 4% in 1994, compared with 1993. Property additions account for most of the spending in this category. The following tables show capital spending, track and equipment statistics for the past five years. CAPITAL EXPENDITURES -------------------- (Also Shown as a Graph in the Annual Report to Stockholders)
($ in millions) 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Road $ 385.7 $ 384.6 $ 417.9 $ 426.5 $ 395.4 Equipment 344.3 245.9 240.5 281.3 235.2 Other property 33.4 82.4 10.8 8.3 82.8 ------- ------- ------- ------- ------- Total $ 763.4 $ 712.9 $ 669.2 $ 716.1 $ 713.4 ======= ======= ======= ======= =======
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE) ----------------------------------------------------
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Track miles of rail installed 403 480 574 660 679 Miles of track surfaced 4,668 4,760 5,048 5,690 5,646 New crossties installed (millions) 2.0 1.7 1.6 1.9 1.9
PAGE 47 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- AVERAGE AGES OF RAILWAY EQUIPMENT ---------------------------------
(Years) 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Freight cars 22.0 21.9 21.3 20.9 20.2 Locomotives 15.7 15.8 15.1 14.5 14.2 Retired locomotives 22.6 23.6 24.7 24.0 27.1
Since 1988, NS has rebodied more than 20,500 coal cars and plans to continue that program at the rate of about 3,200 cars per year for the next several years. 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 is inferable from the increasing average age shown in the table above. Efforts to hold down capital spending while increasing business are ongoing as NS seeks to maximize utilization of its assets. In this connection, NS began an orderly disposition of up to 17,000 freight cars in October 1994. Through the end of 1995, 7,272 of these cars were sold, with proceeds of $42 million included in "Property sales and other transactions" in the Consolidated Statements of Cash Flows. In 1995 and 1993, this line item reflected proceeds from large land sales (see Note 2 on page 59). For 1996, NS is planning $708 million of capital spending, of which $699 million is for railway projects and $9 million is for motor carrier property. NS anticipates that a portion of its locomotive acquisitions will be financed using capitalized leases similar to the 1995 leases (see Note 6 on page 63). In 1996, equipment financing needs are expected to be somewhat lower than in 1995, as proceeds from the sale of freight cars may be used for some locomotive acquisitions. Barring unforeseen events, total rail and motor carrier capital spending are expected to continue to be similar to 1994 and 1995 levels. In 1994, large borrowings on corporate-owned life insurance, reflected in "Investment sales and other transactions" in the Consolidated Statements of Cash Flows, offset much of the use of cash for property additions in that year. CASH USED FOR FINANCING ACTIVITIES declined 3% in 1995, compared with 1994, but increased 56% in 1994, compared with 1993. The reduction in 1995 was primarily attributable to lower debt repayments; 1994 had included the maturity of a large mortgage (see Note 6 on page 63 for debt maturities). The 1994 increase was a result of increased purchases under the stock purchase program (see Note 13 on page 73). Cash spent since 1987 to purchase and retire stock totaled $2.9 billion, of which $338.2 million, $344.8 million and $138.1 million was spent in 1995, 1994 and 1993, respectively. Through December 31, 1995, NS had purchased 63.9 million of a total 65 million shares authorized under the stock purchase programs. On January 23, 1996, the NS Board authorized a new program to acquire up to 30 million additional shares of common stock. NS plans to complete these purchases, dependent on market conditions and other factors, by the end of the year 2000. Some debt is expected to be issued to finance a portion of these purchases. Also on January 23, 1996, NS increased its quarterly dividend, payable in March, from 52 cents to 56 cents per share. The effect of this 7.7% dividend increase on cash outflows will be offset, to some extent, by a reduction in the number of shares outstanding as a result of the stock purchase programs. CUMULATIVE PURCHASES OF STOCK (Shown as a graph in the Annual Report to Stockholders) ($ in millions)
1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- $2,865.4 $2,531.5 $2,181.8 $2,041.9 $1,862.8 $1,236.2
PAGE 48 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- Hedging Activities - ------------------ Certain NS subsidiaries have entered into hedging transactions relating to diesel fuel purchases, foreign exchange transactions and interest rate swaps. The notional amount of diesel fuel and foreign exchange agreements settled from 1993 through 1995 was less than $2 million, and outstanding agreements at December 31, 1995, were less than $5 million. As discussed under "Capital Leases" in Note 6 on page 63, NS has made limited use of interest rate swaps in connection with certain equipment financings. ENVIRONMENTAL MATTERS NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a liability where such liability or loss is probable and can be reasonably estimated. Claims, if any, against third parties for recovery of clean-up costs incurred by NS are reflected as receivables in the balance sheet and are not netted against the associated NS liability. Environmental engineers participate in ongoing evaluations of all identified sites, and--after consulting with counsel--any necessary adjustments to initial liability estimates are made. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy. Operating expenses for environmental protection totaled approximately $13 million in 1995 and are anticipated to increase somewhat in 1996. Capital expenditures for environmental projects amounted to approximately $8 million in 1995 and are expected to be at the same level in 1996. As of December 31, 1995, NS' balance sheet included a reserve for environmental exposures in the amount of $44 million (of which $12 million is accounted for as a current liability), which is NS' present best estimate of ultimate liability at 96 identified locations. On that date, eight sites accounted for $16 million of the reserve, and no individual site was considered to be material. NS anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period. At many of the 96 locations, certain NS subsidiaries, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for clean-up costs. At one such site, the EPA alleged in 1995 that The Alabama Great Southern Railroad Company ("AGS"), a subsidiary of NS' rail subsidiary, is responsible, along with several other entities believed to be financially solvent, for past and future clean-up and monitoring costs at the Bayou Bonfouca NPL Superfund site located in Slidell, La. The site was owned by the parent of an AGS predecessor from 1882 until 1902. Bridge timbers used in the 1882 construction of the predecessor's bridge across Lake Pontchartrain were treated at the site. On March 20, 1996, NS learned that the United States filed suit on March 11 to recover $100 million and other unspecified amounts from AGS and from some of--but not from all--the entities it earlier identified as potentially responsible parties. AGS believes it never owned, operated or had any other culpable connection to the site and denies responsibility; however, because the amount of liability, if any, that ultimately may be assessed against NS or AGS cannot be estimated reliably at this time, the materiality of such amount to NS' financial position, results of operation or liquidity in a particular quarter or year cannot be evaluated. 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 PAGE 49 Item 7. Management's Discussion and Analysis of Financial - ------- ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------- of currently available clean-up techniques, the likely development of new clean-up technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant's share of any estimated loss (and that participant's ability to bear it) and evolving statutory and regulatory standards governing liability. The risk of incurring environmental liability--for acts and omissions, past, present and future--is inherent in the railroad business. Some of the commodities, particularly those classified as hazardous materials, in NS' traffic mix can pose special risks that NS and its subsidiaries work diligently to minimize. In addition, several NS subsidiaries own or have owned in the past land holdings used as operating property, or which are leased or may have been leased and operated by others, or held for sale. Because certain conditions may exist on these properties related to environmental problems that are latent or undisclosed, there can be no assurance that NS will not incur liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably now. Moreover, lawsuits and claims involving these and other now-unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter. However, based on its assessments of the facts and circumstances now known and, after consulting with its legal counsel, Management believes that it has recorded appropriate estimates of liability for those environmental matters of which the Corporation is aware. Further, Management believes that it is unlikely that any identified matters, either individually or in aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity. INFLATION Generally accepted accounting principles require the use of historical cost in preparing financial statements. This approach disregards the effects of inflation on the replacement cost of property. NS, a capital-intensive company, has approximately $13.6 billion invested in such assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost. INDUSTRY TRENDS - - A tentative settlement was reached with the United Transportation Union, which represents the largest number of employees in the railroad industry. The settlement requires ratification by the members before acceptance. The negotiation of this settlement demonstrated that national handling produces the quickest path to agreement. Negotiations with the other unions are progressing. - - NS and other railroads are continuing to seek opportunities to share traffic routes and facilities, furthering the goals of providing seamless service to customers and maximizing efficiency of the respective railroads. - - NS is closely monitoring recent merger and consolidation activities within the railroad industry in light of its own long-term strategic objectives to protect the interests of its stockholders. - - NS and the rail industry are continuing their efforts to replace the FELA with no-fault workers' compensation laws comparable to those covering employees in other industries. PAGE 50 Item 8. Financial Statements and Supplementary Data. - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited)
Three Months Ended --------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (In millions of dollars except per share amounts) 1995 ---- Transportation operating revenues $1,138.7 $1,190.2 $1,183.9 $1,155.2 Income from operations 249.1 290.1 292.1 255.0 Net income 170.7 181.2 183.9 176.9 Earnings per share $1.29 $1.38 $1.40 $1.37 1994 ---- Transportation operating revenues $1,076.8 $1,161.4 $1,171.2 $1,171.9 Income from operations 222.3 278.3 277.5 287.3 Net income 144.9 178.5 168.3 176.1 Earnings per share $ 1.05 $ 1.30 $ 1.24 $ 1.31
PAGE 51 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- Index to Financial Statements: Page ----------------------------- ---- Consolidated Statements of Income Years ended December 31, 1995, 1994 and 1993 52 Consolidated Balance Sheets As of December 31, 1995 and 1994 54 Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 55 Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1995, 1994 and 1993 56 Notes to Consolidated Financial Statements 57 Independent Auditors' Report 76 The Index to Consolidated Financial Statement Schedule appears in Item 14 on page 78. PAGE 52 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Income
Years ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- ($ in millions, except earnings per share) Transportation operating revenues: Railway $4,011.8 $3,918.1 $3,745.9 Motor carrier (Note 15) 656.2 663.2 714.2 -------- -------- -------- Total transportation operating revenues 4,668.0 4,581.3 4,460.1 -------- -------- -------- Transportation operating expenses: Railway: Compensation and benefits (Notes 10 and 16) 1,480.0 1,371.1 1,390.5 Materials, services and rents 618.5 660.4 649.7 Depreciation 389.0 374.3 361.9 Diesel fuel 189.8 188.3 179.3 Casualties and other claims 121.4 135.1 119.1 Other 151.3 145.6 130.1 -------- -------- -------- Total railway operating expenses 2,950.0 2,874.8 2,830.6 Motor carrier (Note 15) 631.7 641.1 769.1 -------- -------- -------- Total transportation operating expenses 3,581.7 3,515.9 3,599.7 -------- -------- -------- Income from operations 1,086.3 1,065.4 860.4 Other income - net (Note 2) 141.8 85.2 136.8 Interest expense on debt (Note 5) 113.4 101.6 98.6 -------- -------- -------- Income before income taxes and accounting changes 1,114.7 1,049.0 898.6 Provision for income taxes (Note 3): Income taxes 402.0 381.2 303.7 Adjustment of net deferred tax liability for federal rate increase -- -- 46.2 -------- -------- -------- Total income taxes 402.0 381.2 349.9 -------- -------- -------- Income before accounting changes 712.7 667.8 548.7 Cumulative effect on years prior to 1993 of changes in accounting principles (Note 1) for: Income taxes -- -- 466.8 Postretirement benefits other than pensions; and postemployment benefits - net of taxes -- -- (243.5) -------- -------- -------- Net income $ 712.7 $ 667.8 $ 772.0 ======== ======== ========
PAGE 53 Item 8. Financial Statements and Supplementary Data. (continued) - ------- -------------------------------------------
Years ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- ($ in millions, except earnings per share) Earnings per share amounts (Note 13): Earnings per share before accounting changes $ 5.44 $ 4.90 $ 3.94 Cumulative effect on years prior to 1993 of changes in accounting principles for (Note 1): Income taxes -- -- 3.34 Postretirement benefits other than pensions; and postemployment benefits -- -- (1.74) -------- -------- -------- Earnings per share $ 5.44 $ 4.90 $ 5.54 ======== ======== ======== See accompanying notes to consolidated financial statements.
PAGE 54 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
As of December 31, 1995 1994 --------- --------- ($ in millions) Assets Current assets: Cash and cash equivalents $ 67.7 $ 57.0 Short-term investments 261.3 249.7 Accounts receivable net of allowance for doubtful accounts of $19.1 million and $21.9 million, respectively 703.5 726.6 Materials and supplies 61.7 61.9 Deferred income taxes (Note 3) 144.7 137.0 Other current assets 103.9 105.3 --------- --------- Total current assets 1,342.8 1,337.5 --------- --------- Investments (Note 4) 231.7 172.8 Properties less accumulated depreciation (Note 5) 9,258.8 8,987.1 Other assets 71.5 90.4 --------- --------- Total assets $10,904.8 $10,587.8 ========= ========= Liabilities and stockholders' equity Current liabilities: Short-term debt (Note 6) $ 45.2 $ 44.9 Accounts payable (Note 7) 732.8 704.1 Income and other taxes 190.8 168.5 Other current liabilities (Note 7) 151.3 142.3 Current maturities of long-term debt (Note 6) 85.7 72.0 --------- --------- Total current liabilities 1,205.8 1,131.8 --------- --------- Long-term debt (Note 6) 1,553.3 1,547.8 Other liabilities (Note 9) 965.5 961.9 Minority interests 52.2 53.5 Deferred income taxes (Note 3) 2,299.0 2,208.0 --------- --------- Total liabilities 6,075.8 5,903.0 --------- --------- Stockholders' equity: Common stock $1.00 per share par value, 450,000,000 shares authorized; issued 136,285,530 shares and 140,386,027 shares, respectively 136.3 140.4 Other capital 430.9 410.4 Retained income 4,282.4 4,154.6 Less treasury stock at cost, 7,252,634 shares (20.6) (20.6) --------- --------- Total stockholders' equity 4,829.0 4,684.8 --------- --------- Total liabilities and stockholders' equity $10,904.8 $10,587.8 ========= ========= See accompanying notes to consolidated financial statements.
PAGE 55 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years ended December 31, 1995 1994 1993 -------- -------- -------- ($ in millions) Cash flows from operating activities: Net income $ 712.7 $ 667.8 $ 772.0 Reconciliation of net income to net cash provided by operating activities: Net cumulative effect of changes in accounting principles -- -- (223.3) Special charge payments (29.3) (41.9) (36.1) Depreciation 413.5 403.8 405.5 Deferred income taxes 66.7 112.7 56.2 Nonoperating gains and losses on properties and investments (71.8) (17.0) (73.2) Changes in assets and liabilities affecting operations: Accounts receivable 28.1 (12.9) 18.1 Materials and supplies 0.2 8.4 9.8 Other current assets 1.4 (17.8) 4.0 Current liabilities other than debt 84.2 55.5 (37.4) Other - net 31.7 (14.3) (21.0) -------- -------- -------- Net cash provided by operating activities 1,237.4 1,144.3 874.6 Cash flows from investing activities: Property additions (658.9) (712.9) (669.2) Property sales and other transactions 129.5 86.1 124.4 Investments and loans (67.1) (58.7) (95.5) Investment sales and other transactions 36.9 272.0 81.6 Short-term investments - net (8.3) (74.4) 88.6 -------- -------- -------- Net cash used for investing activities (567.9) (487.9) (470.1) Cash flows from financing activities: Dividends (273.5) (262.7) (259.7) Common stock issued - net 19.1 9.8 15.7 Purchase and retirement of common stock (338.2) (344.8) (138.1) Commercial paper proceeds -- -- 1.3 Proceeds from long-term borrowings 7.6 41.4 53.6 Debt repayments (73.8) (123.6) (108.6) -------- -------- -------- Net cash used for financing activities (658.8) (679.9) (435.8) Net increase (decrease) in cash and cash equivalents 10.7 (23.5) (31.3) Cash and cash equivalents: At beginning of year 57.0 80.5 111.8 -------- -------- -------- At end of year $ 67.7 $ 57.0 $ 80.5 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Interest (net of amounts capitalized) $ 119.4 $ 114.3 $ 140.1 Income taxes $ 282.9 $ 226.4 $ 350.7 See accompanying notes to consolidated financial statements.
PAGE 56 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity
Common Other Retained Treasury Stock Capital Income Stock Total -------- -------- -------- -------- -------- ($ in millions) Balance December 31, 1992 $ 147.6 $ 407.8 $3,697.8 $ (20.6) $4,232.6 Net income - 1993 772.0 772.0 Dividends on common stock $1.86 per share (259.7) (259.7) Purchase and retirement of common stock (2.2) (6.1) (131.6) (139.9) Other 0.3 15.4 15.7 ------- ------- -------- ------- -------- Balance December 31, 1993 145.7 417.1 4,078.5 (20.6) 4,620.7 Net income - 1994 667.8 667.8 Dividends on common stock $1.92 per share (262.7) (262.7) Purchase and retirement of common stock (5.5) (16.3) (327.8) (349.6) Other 0.2 9.6 (1.2) 8.6 ------- ------- -------- ------- -------- Balance December 31, 1994 140.4 410.4 4,154.6 (20.6) 4,684.8 Net income - 1995 712.7 712.7 Dividends on common stock $2.08 per share (273.5) (273.5) Purchase and retirement of common stock (4.8) (14.3) (314.8) (333.9) Other 0.7 34.8 3.4 38.9 ------- ------- -------- ------- -------- Balance December 31, 1995 $ 136.3 $ 430.9 $4,282.4 $ (20.6) $4,829.0 ======= ======= ======== ======= ======== See accompanying notes to consolidated financial statements.
PAGE 57 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The following notes are an integral part of the consolidated financial statements. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - ----------------------- Norfolk Southern Corporation is a Virginia-based holding company engaged principally in the transportation of freight by rail, primarily in the Southeast and Midwest, and the operation of a motor carrier providing household moving and specialized freight handling services in the United States and Canada. The consolidated financial statements include Norfolk Southern Corporation (Norfolk Southern) and its majority- owned and controlled subsidiaries (collectively NS). The major subsidiaries are Norfolk Southern Railway Company and North American Van Lines, Inc. (NAVL). All significant intercompany balances and transactions have been eliminated in consolidation. Rail freight consists of raw materials, intermediate products and finished goods classified in the following market groups: coal, paper/forest, chemicals, automotive, agriculture, metals/construction and intermodal. All groups are approximately equal in size based on revenues except for coal, which accounts for about one third of railway revenues. Ultimate destinations for some of the freight and a portion of the coal shipped are outside the United States. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Cash Equivalents - ---------------- "Cash equivalents" are highly liquid investments purchased three months or less from maturity. Investments - ----------- "Investments" are reported at amortized cost or fair value depending upon their classification as held-to-maturity, trading or available-for- sale securities in accordance with SFAS No. 115 (see "Required Accounting Changes" below). Materials and Supplies - ---------------------- "Materials and supplies," consisting mainly of fuel oil and items for maintenance of property and equipment, are stated at average cost. The cost of materials and supplies expected to be used in capital additions or improvements is included in "Properties." PAGE 58 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Properties - ---------- "Properties" are stated principally at cost and are depreciated using group depreciation. Rail is primarily depreciated on the basis of use measured by gross ton miles. The effect of this method is to write off these assets over 42 years on average. Other properties are depreciated generally using the straight-line method over estimated service lives at annual rates that range from 1% to 25%. In 1995, the overall depreciation rate averaged 2.7% for roadway and 4.3% for equipment. NS capitalizes interest on major capital projects during the period of their construction. Maintenance expense is recognized when repairs are performed. When properties, other than land and non-rail assets, are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation rather than recognized through income. Gains and losses on disposal of land and non-rail assets are included in other income (see Note 2). Revenue Recognition - ------------------- Revenue is recognized proportionally as a shipment moves from origin to destination. Earnings Per Share - ------------------ "Earnings per share" in any period are computed by dividing net income by the weighted average number of common shares outstanding during that period. Decreases in the number of shares outstanding are the result of the stock purchase program described in Note 13. Required Accounting Changes - --------------------------- 1994 - Effective January 1, 1994, NS adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), which addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The implementation of SFAS 115 had no impact on earnings and resulted in a small change in stockholders' equity, reflecting unrealized market changes in certain investments, net of the related deferred taxes. 1993 - Effective January 1, 1993, NS adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), and Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS 112). SFAS 106 requires accrual of the cost of specified health care and death benefits over an employee's creditable service period rather than, as was the previously prevailing practice, accounting for such expenses on a pay-as-you-go basis. SFAS 112 requires recognition of the cost of benefits payable to former or inactive employees after employment but before retirement on an accrual basis. For NS, such postemployment benefits consist principally of obligations under the long- term disability plan. NS recognized the effects of these changes in accounting on the immediate recognition basis. The cumulative effect on years prior to 1993 of adopting SFAS 106 and SFAS 112 increased pretax expenses $360.2 million ($223.8 million after-tax), and $31.8 million ($19.7 million after-tax), respectively (see also Note 11). PAGE 59 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Also effective January 1, 1993, NS adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires a liability approach for measuring deferred tax assets and liabilities based on differences between the financial statement and tax bases of assets and liabilities at each balance sheet date using enacted tax rates in effect when those differences are expected to reverse. The cumulative effect on years prior to 1993 of adopting SFAS 109 increased net income $466.8 million (see also Note 3). The effect on net income and earnings per share of implementing the accounting changes was to increase net income and earnings per share $223.3 million and $1.60 per share, respectively. 2. OTHER INCOME - NET
1995 1994 1993 ------ ------ ------ ($ in millions) Interest income $ 27.9 $ 25.5 $ 25.1 Royalties from coal 58.6 61.0 55.7 Gains from sale of properties 43.2 17.0 38.6 Gain from partial redemption of partnership interest 30.5 -- -- Rental income 20.8 19.6 21.1 Corporate-owned life insurance - net 7.1 7.7 10.8 Other interest expense (23.5) (19.7) (27.4) Non-rail depletion and depreciation (10.2) (11.6) (8.9) Taxes on nonoperating property (6.9) (8.2) (7.7) Gains from sale of stocks -- -- 34.6 Other - net (5.7) (6.1) (5.1) ------ ------ ------ Total $141.8 $ 85.2 $136.8 ====== ====== ======
PAGE 60 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 3. INCOME TAXES Provision for Income Taxes - --------------------------
1995 1994 1993 ------- ------- ------- ($ in millions) Current: Federal $282.6 $226.4 $250.2 State 52.7 42.1 43.5 ------ ------ ------ Total current taxes 335.3 268.5 293.7 Deferred: Federal 57.8 99.0 (2.4) State 8.9 13.7 12.4 Adjustment of net deferred tax liability for federal rate increase -- -- 46.2 ------ ------ ------ Total deferred taxes 66.7 112.7 56.2 ------ ------ ------ Provision for income taxes $402.0 $381.2 $349.9 ====== ====== ======
1993 Federal Income Tax Rate Increase - ------------------------------------- In August 1993, Congress enacted the Revenue Reconciliation Act of 1993, which increased the federal corporate income tax rate from 34% to 35%, retroactive to January 1, 1993. The tax rate increase had two components that, as required by SFAS 109, were recognized in 1993 earnings. The first component relates to the increased income tax rate's effect on 1993 earnings, which increased the provision for income taxes and reduced net income by $7.9 million, or $0.06 per share. The second component increased the provision for the net deferred tax liability in the Consolidated Balance Sheet, which reduced that year's net income by $46.2 million, or $0.33 per share. Excluding this one-time, non-cash charge of $0.33 per share, 1993 earnings per share before accounting changes would have been $4.27. PAGE 61 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 3. INCOME TAXES (continued) Reconciliation of Statutory Rate to Effective Rate - -------------------------------------------------- Total income taxes as reflected in the Consolidated Statements of Income differ from the amounts computed by applying the statutory federal corporate tax rate as follows:
1995 1994 1993 --------------- --------------- --------------- Amount % Amount % Amount % -------- ---- -------- ---- -------- ---- ($ in millions) Federal income tax at statutory rate $ 390.1 35.0 $ 367.2 35.0 $ 314.5 35.0 State income taxes, net of federal tax benefit 40.0 3.6 36.1 3.4 37.2 4.1 Motor carrier restructuring -- -- -- -- (36.8) (4.1) Corporate-owned life insurance (17.0) (1.5) (10.5) (1.0) (9.8) (1.1) Other - net (11.1) (1.0) (11.6) (1.1) (1.4) (0.1) ------- ---- ------- ---- ------- ---- 402.0 36.1 381.2 36.3 303.7 33.8 Adjustment of net deferred tax lia- bility for federal rate increase -- -- -- -- 46.2 5.1 ------- ---- ------- ---- ------- ---- Provision for income taxes $ 402.0 36.1 $ 381.2 36.3 $ 349.9 38.9 ======= ==== ======= ==== ======= ====
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 1989. The consolidated federal income tax returns for 1990 through 1992 are being audited by the IRS. Management believes that adequate provision has been made for any additional taxes and interest thereon that might arise as a result of these examinations. Tax Benefit Leases - ------------------ In January 1995, the United States Tax Court issued a preliminary decision that would disallow some of the tax benefits a subsidiary of NS purchased from a third party pursuant to a safe harbor lease agreement in 1981. Management continues to believe that NS ultimately should incur no loss from this decision, because the lease agreement provides for full indemnification if any such disallowance is sustained. PAGE 62 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 3. INCOME TAXES (continued) Deferred Tax Assets and Liabilities - ----------------------------------- Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities were recorded in recognition of these differences in accordance with SFAS 109. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
December 31, ------------------------- 1995 1994 ---------- ---------- ($ in millions) Deferred tax assets: Reserves, including casualty and other claims $ 189.3 $ 204.0 Employee benefits 196.1 176.5 Postretirement benefits other than pension and postemployment benefits 148.3 142.1 Taxes, including state and property 170.3 165.2 Other 59.1 23.4 --------- --------- Total gross deferred tax assets 763.1 711.2 Less valuation allowance (1.5) (1.4) --------- --------- Net deferred tax assets 761.6 709.8 --------- --------- Deferred tax liabilities: Property (2,821.5) (2,744.3) Other (94.4) (36.5) --------- --------- Total gross deferred tax liabilities (2,915.9) (2,780.8) --------- --------- Net deferred tax liability (2,154.3) (2,071.0) Net current deferred tax assets 144.7 137.0 --------- --------- Net long-term deferred tax liability $(2,299.0) $(2,208.0) ========= =========
Except for amounts for which a valuation allowance is provided, Management believes the deferred tax assets will be realized. The valuation allowance for deferred tax assets as of January 1, 1993, was $9.8 million. The net change in the total valuation allowance was a $0.1 million increase for 1995, a $9.5 million decrease for 1994 and a $1.1 million increase for 1993. PAGE 63 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 4. INVESTMENTS
December 31, ------------------------- 1995 1994 ---------- ---------- ($ in millions) Corporate-owned life insurance at net cash surrender value $ 175.2 $ 138.6 Marketable equity securities 5.2 3.0 Other 51.3 31.2 --------- --------- Total $ 231.7 $ 172.8 ========= =========
5. PROPERTIES
December 31, ------------------------- 1995 1994 ---------- ---------- ($ in millions) Transportation property: Road $ 8,235.7 $ 8,019.6 Equipment 4,775.7 4,626.8 Other property 573.7 563.9 --------- --------- 13,585.1 13,210.3 Less: Accumulated depreciation 4,326.3 4,223.2 --------- --------- Net properties $ 9,258.8 $ 8,987.1 ========= =========
Capitalized Interest - -------------------- Total interest cost incurred on debt in 1995, 1994 and 1993 was $127.4 million, $119.4 million and $120.2 million, respectively, of which $14.0 million, $17.8 million and $21.6 million was capitalized. 6. DEBT Commercial Paper Program - ------------------------ NS' commercial paper debt totaled $518.0 million and $517.3 million as of December 31, 1995 and 1994, respectively. Commercial paper debt is due within one year, but $500 million has been classified as long-term because NS has the ability through its $500 million revolving credit back-up facility to convert this obligation into longer term debt. NS intends to refinance the commercial paper either by issuing additional commercial paper or by replacing commercial paper notes with long-term debt. The $500 million credit agreement is effective through 1999, provides for interest on borrowings at prevailing rates and contains customary financial covenants, including principally a minimum tangible net worth requirement of $3.3 billion and a restriction on the creation or assumption of certain liens. PAGE 64 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 6. DEBT (continued) Short-Term Debt - ---------------
December 31, --------------------- 1995 1994 ------ ------ ($ in millions) Commercial paper notes $ 18.0 $ 17.3 Other notes 27.2 27.2 Subsidiaries' credit lines -- 0.4 ------ ------ Total $ 45.2 $ 44.9 ====== ======
Shelf Registration - ------------------ In 1991, NS filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 covering the issuance of up to $750 million principal amount of unsecured debt securities. In March 1991, NS issued and sold $250 million principal amount of its 9% notes due March 1, 2021. In February 1992, NS issued and sold $250 million principal amount of its 7-7/8% notes due February 15, 2004. These notes are not redeemable prior to maturity and are not entitled to any sinking fund. Capital Leases Obligations - -------------------------- During the first quarter of 1995, an NS rail subsidiary entered into capital leases covering new locomotives. The related capital lease obligations totaling $104.5 million were reflected in the Consolidated Balance Sheet as debt and, because they were non-cash transactions, were excluded from the Consolidated Statement of Cash Flows. The lease obligations carry an average stated interest rate of 8.4% but were converted to variable rate obligations using interest rate swap agreements. The interest rates on these obligations are based on the six- month London Interbank Offered Rate and are reset every six months with changes in interest rates accounted for as an adjustment of interest expense. As a result, NS is exposed to the market risk associated with fluctuations in interest rates. To date, while such rate fluctuations have been nominal, their effects have been favorable. Counterparties to the interest rate swap agreements are major financial institutions believed by Management to be credit-worthy. NS' use of interest rate swaps has been limited to those discussed above. PAGE 65 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 6. DEBT (continued) Long-Term Debt - --------------
December 31, ------------------ 1995 1994 -------- -------- ($ in millions) Railroad equipment obligations at an average rate of 8.0% maturing to 2009 $ 444.6 $ 520.9 Notes at an average rate of 8.4% maturing to 2021 497.5 497.3 Commercial paper classified as long-term debt at an average rate of 5.9% 500.0 500.0 Capitalized leases at an average rate of 6.5% maturing to 2015 100.9 2.0 Mortgage bonds at an average rate of 4.2% maturing to 2003 27.5 33.9 Other debt at an average rate of 8.6% maturing to 2015 68.5 65.7 -------- -------- Total long-term debt 1,639.0 1,619.8 -------- -------- Less: Current maturities 85.7 72.0 -------- -------- Long-term debt less current maturities $1,553.3 $1,547.8 ======== ======== Long-term debt matures as follows: 1997 $ 49.5 1998 107.1 1999 119.4 2000 49.3 2001 and subsequent years 1,228.0 -------- Total $1,553.3 ========
A substantial portion of NS' properties and certain investments in affiliated companies are pledged as collateral for much of the secured debt. PAGE 66 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 7. CURRENT LIABILITIES
December 31, ------------------ 1995 1994 -------- -------- ($ in millions) Accounts payable: Accounts and wages payable $ 385.2 $ 363.2 Casualty and other claims 197.4 191.2 Vacation liability 74.4 72.7 Equipment rents payable - net 62.0 67.0 Other 13.8 10.0 ------- ------- Total $ 732.8 $ 704.1 ======= ======= Other current liabilities: Prepaid amounts on forwarded traffic $ 69.7 $ 72.8 Interest payable 42.8 38.3 Retiree health and death benefit obligation (Note 11) 25.3 22.0 Other 13.5 9.2 ------- ------- Total $ 151.3 $ 142.3 ======= =======
8. LEASE COMMITMENTS NS is committed under long-term lease agreements, which expire on various dates through 2067, for equipment, lines of road and other property. Future minimum lease payments are as follows:
Operating Leases Capital Leases ---------------- -------------- ($ in millions) 1996 $ 56.6 $ 15.0 1997 53.8 14.9 1998 45.5 14.9 1999 33.4 14.9 2000 31.8 14.8 2001 and subsequent years 583.8 80.5 ------- ------- Total $ 804.9 155.0 ======= Less imputed interest on capital leases at an average rate of 8.4% 54.1 ------- Present value of minimum lease payments included in debt $ 100.9 =======
PAGE 67 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 8. LEASE COMMITMENTS (continued) Operating Lease Expense - -----------------------
1995 1994 1993 -------- -------- -------- ($ in millions) Minimum rents $ 67.8 $ 56.1 $ 42.0 Contingent rents 36.0 45.4 36.1 ------- ------- ------- Total $ 103.8 $ 101.5 $ 78.1 ======= ======= =======
9. OTHER LIABILITIES
December 31, ------------------ 1995 1994 -------- -------- ($ in millions) Casualty and other claims $ 286.5 $ 305.0 Net pension obligation (Note 10) 102.2 91.6 Retiree health and death benefit obligation (Note 11) 307.4 300.5 Other 269.4 264.8 ------- ------- Total $ 965.5 $ 961.9 ======= =======
10. PENSION PLANS Norfolk Southern and certain subsidiaries have defined benefit pension plans that principally cover salaried employees. Pension benefits are based primarily on years of creditable service with NS and compensation rates near retirement. Contributions to the plans are made on the basis of not less than the minimum funding standards set forth in the Employee Retirement Income Security Act of 1974, as amended. Assets in the plans consist mainly of common stocks. Pension Cost (Benefit) Components - ---------------------------------
1995 1994 1993 -------- -------- -------- ($ in millions) Service cost-benefits earned during the year $ 11.5 $ 12.5 $ 13.3 Interest cost on projected benefit obligation 68.0 62.6 60.8 Actual return on assets in plans (263.4) (17.0) (107.4) Net amortization and deferral 177.0 (62.8) 29.5 ------- ------- ------- Net pension benefit (6.9) (4.7) (3.8) Cost of early retirement benefits 23.4 -- 38.7 ------- ------- ------- Total $ 16.5 $ (4.7) $ 34.9 ======= ======= =======
PAGE 68 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 10. PENSION PLANS (continued) Pension cost is determined based on an actuarial valuation that reflects appropriate assumptions as of the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year-end. A summary of the major assumptions follows:
1995 1994 1993 -------- -------- -------- Discount rate for determining funded status 7.25% 8.50% 7.25% Future salary increases 6% 6% 6% Return on assets in plans 9% 9% 9%
The funded status of the plans and the amounts reflected in the accompanying balance sheets were as follows:
December 31, ---------------------------------------- 1995 1994 ------------------ ------------------ Funded Unfunded Funded Unfunded Plans Plans Plans Plans -------- -------- -------- -------- ($ in millions) Actuarial present value of benefit obligations: Vested benefits $ 812.5 $ 51.7 $ 643.4 $ 41.2 Non-vested benefits 6.6 0.3 4.0 0.2 ------- ------- ------- ------- Accumulated benefit obligation 819.1 52.0 647.4 41.4 Effect of expected future salary increases 115.3 11.5 102.0 9.5 ------- ------- ------- ------- Projected benefit obligation 934.4 63.5 749.4 50.9 Fair value of assets in plans 1,088.8 -- 892.0 -- ------- ------- ------- ------- Funded status 154.4 (63.5) 142.6 (50.9) Unrecognized initial net asset (35.9) -- (42.4) -- Unrecognized (gain) loss (169.2) 21.5 (159.6) 10.1 Unrecognized prior service cost (12.8) 3.3 3.8 4.8 ------- ------- ------- ------- Net pension liability included in the balance sheets $ (63.5) $ (38.7) $ (55.6) $ (36.0) ======= ======= ======= =======
PAGE 69 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 10. PENSION PLANS (continued) Early Retirement Programs - ------------------------- During 1995 and 1993, NS completed voluntary early retirement programs for salaried employees. The principal benefit for those who participated in these programs was enhanced pension benefits, which are reflected in the accumulated benefit obligation. The charge for these programs is included in "Compensation and benefits" expense and was $33.6 million in 1995 (including $8.3 million related to postretirement benefits other than pensions) and $42.4 million in 1993. The 1995 program was accepted by 272 employees; the 1993 program, by 378 employees. 401(k) Plans - ------------ Norfolk Southern and certain subsidiaries provide 401(k) savings plans for employees. Under the plans, NS matches a portion of the employee contributions, subject to applicable limitations. NS' expenses under these plans were $7.0 million, $5.1 million and $5.2 million in 1995, 1994 and 1993, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Norfolk Southern and certain subsidiaries provide specified health care and death benefits to eligible retired employees and their dependents. Under the present plans, which may be amended or terminated at NS' option, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided by other group insurance policies. The cost of such health care coverage to a retiree may be determined, in part, by the retiree's years of creditable service with NS prior to retirement. Death benefits are determined based on various factors, including, in some cases, salary at time of retirement. NS continues to fund benefit costs principally on a pay-as-you-go basis. However, in 1991, NS established a Voluntary Employee Beneficiary Association (VEBA) account to fund a portion of the cost of future health care benefits for retirees. NS last made a corporate contribution of $10 million in 1994 to the VEBA. Effective January 1, 1994, NS amended the attribution period for postretirement health care benefits. The amendment generally provides for benefits to be determined ratably over a 10-year period based on creditable service commencing at age 45, or from date of hire if employment began after age 45. The amendment reduced the accumulated postretirement health care benefit obligation by $90 million, which will be amortized as a reduction in annual cost on a pro rata basis over a six- year period. PAGE 70 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) A summary of the postretirement benefit cost follows:
1995 1994 1993 -------- -------- -------- ($ in millions) Service cost-benefits attributable to service during the year $ 10.2 $ 14.5 $ 8.7 Interest cost on accumulated postretirement benefit obligation 28.6 25.0 29.1 Actual return on plan assets (17.6) -- (1.9) Net amortization and deferral 0.9 (14.6) (0.7) ------- ------- ------- Net postretirement benefit cost $ 22.1 $ 24.9 $ 35.2 Cost of early retirement benefits 8.3 -- -- ------- ------- ------- Total $ 30.4 $ 24.9 $ 35.2 ======= ======= =======
The following table sets forth these plans' total accumulated postretirement benefit obligation, reconciled with the accrued postretirement benefit obligation:
December 31, ----------------------------------------- 1995 1994 ------------------ ------------------ Health Health Care Death Care Death Benefits Benefits Benefits Benefits -------- -------- -------- -------- ($ in millions) Accumulated postretirement benefit obligation: Retirees $ 225.6 $ 83.8 $ 165.0 $ 77.2 Fully eligible active plan participants 23.9 8.0 13.5 4.7 Other active plan participants 52.7 12.8 36.9 11.2 ------- ------- ------- ------- Total 302.2 104.6 215.4 93.1 Plan assets at fair value 72.1 -- 54.5 -- ------- ------- ------- ------- Funded status (230.1) (104.6) (160.9) (93.1) Unrecognized loss (gain) 59.4 4.1 14.8 (4.5) Unrecognized prior service cost (benefit) (61.5) -- (78.7) (0.1) ------- ------- ------- ------- Accrued postretirement benefit obligation $(232.2) $(100.5) $(224.8) $ (97.7) ======= ======= ======= =======
PAGE 71 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) For measurement purposes, an 11% increase in the per capita cost of covered health care benefits was assumed for 1996. The rate was assumed to decrease gradually to an ultimate rate of 5.5% and remain at that level for 2005 and thereafter. The health care cost trend rate has a significant effect on the amounts reported in the financial statements. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, by about $35 million and the aggregate of the service and interest cost components of net postretirement benefit cost for the year 1995 by about $4 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation, the salary increase assumption and the long-term rate of return on plan assets are the same as those used for the pension plans (see table of rate assumptions in Note 10). The VEBA trust holding the plan assets is not expected to be subject to federal income taxes, as the assets are invested entirely in trust- owned life insurance. Under collective bargaining agreements, NS and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and amounted to $3.7 million, $4.8 million and $5.3 million in 1995, 1994 and 1993, respectively. 12. LONG-TERM INCENTIVE PLAN Under the Long-Term Incentive Plan approved by stockholders at their 1995 annual meeting, a disinterested committee of the Board of Directors may grant stock options, stock appreciation rights (SARs), and performance share units (PSUs), up to a maximum 17,675,000 shares of Norfolk Southern common stock. Grants of SARs and PSUs result in charges to earnings, while grants of stock options have no effect on earnings. Options may be granted for a term not to exceed 10 years but may not be exercised prior to the first anniversary date of grant. Options are exercisable at the fair market value of Norfolk Southern stock on the date of grant. The plan also permits the payment--on a current or a deferred basis and in cash or in stock--of dividend equivalents on shares of common stock covered by options or PSUs granted after December 31, 1989, in an amount commensurate with dividends paid on common stock. Tax absorption payments, in an amount estimated to equal the federal and state income taxes applicable to shares of common stock issued subject to a share retention agreement, also are authorized. Dividend equivalents and tax absorption payments, if made, result in charges to operating expenses. Through 1991, SARs were granted on a one-for-one basis in tandem with certain stock options. Upon the exercise of an SAR, the optionee receives in common stock or cash or both the amount by which the fair market value of common stock on the exercise date exceeds the option price. Exercise of an SAR or option cancels any related option/SAR. Because of regulations issued by the Securities and Exchange Commission in 1991, plan participants surrendered, without cash or other consideration, all outstanding SARs granted after 1988. Future grants of SARs are not anticipated at this time. SARs outstanding as of each year end were as follows: 46,562 in 1995; 74,519 in 1994; and 95,852 in 1993. PAGE 72 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 12. LONG-TERM INCENTIVE PLAN (continued) Stock Option Activity - ---------------------
Exercise Price Option Shares Range-Per Share ------------- ------------------------ Balance 12/31/92 2,513,472 $17.46 to $56.44 Granted 689,750 63.25 Exercised (278,083) 17.46 to 56.44 Surrendered for SAR (28,482) 22.25 to 28.79 Cancelled (1,250) 63.25 --------- Balance 12/31/93 2,895,407 17.46 to 63.25 Granted 703,750 72.94 Exercised (93,383) 17.46 to 63.25 Surrendered for SAR (7,472) 22.25 to 28.79 Cancelled -- -- to -- --------- Balance 12/31/94 3,498,302 22.25 to 72.94 Granted 718,250 62.50 Exercised (656,743) 22.25 to 72.94 Surrendered for SAR (13,440) 22.25 to 28.79 Cancelled (3,750) 62.50 to 72.94 --------- Balance 12/31/95 3,542,619 $22.25 to $72.94 Stock options exercisable 12/31: 1993 2,205,657 $17.46 to $56.44 1994 2,794,552 22.25 to 63.25 1995 2,825,619 22.25 to 72.94
Performance Share Units - ----------------------- PSUs were added to the Long-Term Incentive Plan as approved in 1989 and amended in 1995. PSUs entitle participants to earn shares of common stock at the end of a three-year performance cycle based upon achievement of certain predetermined corporate performance goals. PSU grants totaled 252,500 in 1995; 163,000 in 1994; and 160,500 in 1993. Shares earned and issued may be subject to share retention agreements and held by NS for up to five years. Shares of stock available for future grants or issued in connection with all features of the Long-Term Incentive Plan were as follows:
1995 1994 1993 --------- --------- --------- Available for future grants 12/31 7,143,126 2,060,796 2,835,862 Shares of common stock issued 807,760 190,060 352,248
PAGE 73 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 13. STOCK PURCHASE PROGRAMS Since 1987, the Board of Directors has authorized the purchase and retirement of up to 65 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. The decreases in the average number of outstanding common shares are the result of these purchase programs. Since the first purchases in December 1987 and through December 31, 1995, NS has purchased and retired 63,932,000 shares of its common stock under these programs at a cost of $2.9 billion. Future purchase decisions are dependent on market conditions, the economy, cash needs and alternative investment opportunities. On January 23, 1996, the NS Board authorized a new program to acquire up to 30 million additional shares of common stock. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of "Cash and cash equivalents," "Short-term investments," "Accounts receivable," "Short-term debt" and "Accounts payable" approximate carrying values because of the short maturity of these financial instruments. "Short-term investments" are reported at fair value in accordance with SFAS 115 (see Note 1). At December 31, 1995 and 1994, all "short-term investments" were designated as available for sale. The fair value of long-term "Investments" approximated $297 million and $261 million at December 31, 1995 and 1994, respectively. Quoted market prices were used to determine the fair value of marketable securities which, beginning in 1994 (see Note 1, "Required Accounting Changes"), were recorded at fair value. Marketable securities reflect $3.5 million of unrealized holding gains at December 31, 1995, and $2.0 million of unrealized holding losses at December 31, 1994. Underlying net assets were used to estimate the fair value of non-marketable investments; however, if any such investment was sold after the end of the year, its sales price determined its fair value for these purposes. For the remaining investments, consisting principally of corporate-owned life insurance, the carrying value approximates fair value (see Note 4 for carrying values of "Investments"). The fair value of "Long-term debt," including current maturities, approximated $1.77 billion at December 31, 1995, and $1.63 billion at December 31, 1994. The fair values of debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating and remaining maturity (see Note 6 for carrying values of "Long-term debt"). 15. MOTOR CARRIER RESTRUCTURING IN 1993 In mid-1993, NS began a restructuring of its motor carrier subsidiary by seeking buyers for the truckload freight portion of NAVL, which consisted of the Commercial Transport Division (CT), a nationwide truckload carrier, and Tran-Star (TS), a refrigerated carrier. The restructuring resulted in the liquidation or transfer to other divisions of most of CT's assets and, in December 1993, the sale of TS' operations. NAVL's revenues and expenses after June 30, 1993, reflect the results of its remaining operations. In 1993, as a result of these planned dispositions, NS recorded a $50.3 million pretax ($32.3 million after-tax) charge and recognized an additional tax benefit of $36.8 million. The proceeds from the December 31, 1993, sale of TS' operations are reflected in "Investment sales and other" in the 1993 Consolidated Statement of Cash Flows. PAGE 74 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 16. PARTIAL REVERSAL OF SPECIAL CHARGE IN 1993 Included in 1991 results was a $680 million special charge for labor force reductions and asset write-downs. However, based on NS' success in eliminating reserve board positions in 1992 and 1993, and on events occurring in the third quarter of 1993, the accrual included in the 1991 special charge related to labor was reduced by $46 million, which was reflected as a credit in "Compensation and benefits" expense. The principal factor contributing to the reversal was the failure in 1993 to reach agreement on terms for certain further labor savings. Accordingly, it became apparent that a surplus existed in the labor portion of the provision established in the 1991 special charge. 17. 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, after consulting with its legal counsel, that the amount of NS' ultimate liability will not materially affect NS' consolidated financial position. Debt Guarantees - --------------- As of December 31, 1995, certain Norfolk Southern subsidiaries are contingently liable as guarantors with respect to $66 million of indebtedness of related entities. Change-in-Control Arrangements - ------------------------------ Norfolk Southern has compensation agreements with officers and certain key employees, which become operative only upon a change in control of the Corporation, as defined in those agreements. The agreements provide generally for payments based on compensation at the time of a covered individual's involuntary or other specified termination and for certain other benefits. Environmental Matters - --------------------- NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a liability where such liability or loss is probable and can be reasonably estimated. Claims, if any, against third parties for recovery of clean-up costs incurred by NS are reflected as receivables in the balance sheet and are not netted against the associated NS liability. Environmental engineers participate in ongoing evaluations of all identified sites, and--after consulting with counsel--any necessary adjustments to initial liability estimates are made. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy. As of December 31, 1995, NS' balance sheet included a reserve for environmental exposures in the amount of $44 million (of which $12 million is accounted for as a current liability), which is NS' present best estimate of ultimate liability at 96 identified locations. On that date, eight sites accounted for $16 million of the reserve, and no individual site was considered to be material. NS anticipates that the majority of this liability will be paid out over five years; however, some costs will be paid out over a longer period. PAGE 75 Item 8. Financial Statements and Supplementary Data. (continued) - ------- ------------------------------------------- 17. CONTINGENCIES (continued) At many of the 96 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, particularly those classified as hazardous materials, in NS' traffic mix can pose special risks that NS and its subsidiaries work diligently to minimize. In addition, several NS subsidiaries own, or have owned in the past, land holdings used as operating property, or which are leased or may have been leased and operated by others, or held for sale. Because certain conditions may exist on these properties related to environmental problems that are latent or undisclosed, there can be no assurance that NS will not incur liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably now. Moreover, lawsuits and claims involving these and other now-unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter. However, based on its assessments of the facts and circumstances now known and, after consulting with its legal counsel, Management believes that it has recorded appropriate estimates of liability for those environmental matters of which the Corporation is aware. Further, Management believes that it is unlikely that any identified matters, either individually or in aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity. PAGE 76 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 Item 8. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule listed in Item 14(a)2. These consolidated financial statements and this consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and this consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, 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. As discussed in Note 1, the Company changed its methods of accounting in 1993 by adopting the provisions of the Financial Accounting Standards Board's Statement 109, Accounting for Income Taxes; Statement 106, Employers' Accounting for Postretirement Benefits Other than Pensions; and Statement 112, Employers' Accounting for Postemployment Benefits. /s/ KPMG Peat Marwick LLP Norfolk, Virginia January 23, 1996 PAGE 77 Item 9. Changes in and Disagreements with Accountants on Accounting - ------- ----------------------------------------------------------- and Financial Disclosure. ------------------------ None. PART III Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- Item 11. Executive Compensation. - ------- ---------------------- Item 12. Security Ownership of Certain Beneficial Owners - ------- ----------------------------------------------- and Management. -------------- and Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- In accordance with General Instruction G(3), the information called for by Part III is incorporated herein by reference from Norfolk Southern's definitive Proxy Statement, to be dated April 1, 1996, for the Norfolk Southern Annual Meeting of Stockholders to be held on May 9, 1996, 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 23 under "Executive Officers of the Registrant." PAGE 78 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 Financial Statements: Page ----------------------------- ---- Consolidated Statements of Income Years ended December 31, 1995, 1994 and 1993 52 Consolidated Balance Sheets As of December 31, 1995 and 1994 54 Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 55 Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1995, 1994 and 1993 56 Notes to Consolidated Financial Statements 57 Independent Auditors' Report 76 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 84 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 79 Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------ Form 8-K. -------- 3. Exhibits Exhibit Number Description - ------- ------------------------------------------------------ 3 Articles of Incorporation and Bylaws - 3(i) The Restated Articles of Incorporation of Norfolk Southern Corporation, formerly incorporated by reference from Exhibit 1 to Norfolk Southern's Form 10-Q report for the quarter ended September 30, 1989, are filed herewith electronically. 3(ii) The Bylaws of Norfolk Southern Corporation, as amended January 24, 1995, are incorporated herein by reference from Exhibit 4 to the Corporation's Registration Statement on Form S-8, filed electronically on January 25, 1995. 4 Instruments Defining the Rights of Security Holders, Including Indentures - In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of instruments of Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. 10 Material Contracts - (a) The Supplementary Agreement, entered into as of January 1, 1987, between the Trustees of the Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific Railway Company (the latter a wholly owned subsidiary of Norfolk Southern Railway) - extending and amending a Lease, dated as of October 11, 1881 (both the Lease and Supplementary Agreement, formerly incorporated by reference from Exhibit 10(b) to Southern's 1987 Annual Report on Form 10-K) - is incorporated herein by reference from Exhibit 10(a) to Norfolk Southern's 1994 Annual Report on Form 10-K. Management Compensation Plans ----------------------------- (b) The Norfolk Southern Corporation Management Incentive Plan, as amended effective January 1, 1996, is filed herewith electronically. PAGE 80 Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------ Form 8-K. (continued) -------- Exhibit Number Description - ------- ------------------------------------------------------ (c) The Norfolk Southern Corporation Executive Management Incentive Plan, effective January 1, 1996, is filed herewith electronically. (d) The Norfolk Southern Corporation Long-Term Incentive Plan as amended effective January 23, 1996, is filed herewith electronically. (e) The Norfolk Southern Corporation Officers' Deferred Compensation Plan is incorporated herein by reference from Exhibit 10(g) to Norfolk Southern's 1993 Annual Report on Form 10-K. (f) The Directors' Deferred Fee Plan of Norfolk Southern Corporation is incorporated herein by reference from Exhibit 10(h) to Norfolk Southern's 1993 Annual Report on Form 10-K. (g) The Norfolk Southern Corporation Directors' Restricted Stock Plan effective January 26, 1994, is incorporated herein by reference from Exhibit 99 to Norfolk Southern's Form S-8 filed electronically on January 26, 1994. (h) Form of Severance Agreement, dated as of September 1, 1994, 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 1996 Annual Meeting of Stockholders) is incorporated herein by reference from Exhibit 10 to Norfolk Southern's Form 10-Q Report for the quarter ended September 30, 1994. (i) The Excess Benefit Plan of Norfolk Southern Corporation and Participating Subsidiary Companies, is incorporated herein by reference from Exhibit 10(h) to Norfolk Southern's 1994 Annual Report on Form 10-K. (j) The Excess Long-Term Disability Plan of Norfolk Southern Corporation and Participating Subsidiary Companies, effective October 1, 1995, is filed herewith electronically. PAGE 81 Item 14. Exhibits, Financial Statement Schedule, and Reports on - ------- ------------------------------------------------------ Form 8-K. (continued) -------- Exhibit Number Description - ------- ----------------------------------------------------- 11 Statement re: Computation of Per Share Earnings. 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant. 23 Consents of Experts and Counsel - Consent of Independent Auditors. 27 Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed for the three months ended December 31, 1995. (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 82 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 26th day of March, 1996. 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 26th day of March, 1996, by the following persons on behalf of Norfolk Southern Corporation and in the capacities indicated. Signature Title --------- ----- /s/ David R. Goode - ------------------------------ Chairman, President and Chief (David R. Goode) Executive Officer and Director (Principal Executive Officer) /s/ Henry C. Wolf - ------------------------------ Executive Vice President-Finance (Henry C. Wolf) (Principal Financial Officer) /s/ John P. Rathbone - ------------------------------ Vice President and Controller (John P. Rathbone) (Principal Accounting Officer) /s/ Gerald L. Baliles - ------------------------------ Director (Gerald L. Baliles) PAGE 83 Signature Title --------- ----- /s/ Gene R. Carter - ------------------------------ Director (Gene R. Carter) /s/ L. E. Coleman - ------------------------------ Director (L. E. Coleman) /s/ T. Marshall Hahn, Jr. - ------------------------------ Director (T. Marshall Hahn, Jr.) /s/ Landon Hilliard - ------------------------------ Director (Landon Hilliard) /s/ E. B. Leisenring, Jr. - ------------------------------ Director (E. B. Leisenring, Jr.) /s/ Arnold B. McKinnon - ------------------------------ Director (Arnold B. McKinnon) /s/ Robert E. McNair - ------------------------------ Director (Robert E. McNair) /s/ Jane Margaret O'Brien - ------------------------------ Director (Jane Margaret O'Brien) /s/ Harold W. Pote - ------------------------------ Director (Harold W. Pote) PAGE 84 Schedule II Page 1 of 2 Norfolk Southern Corporation and Subsidiaries --------------------------------------------- Valuation and Qualifying Accounts Years Ended December 31, 1993, 1994 and 1995 (In millions of dollars)
Additions charged to -------------------- Beginning Other Ending Balance Expenses Accounts Deductions Balance --------- -------- -------- ---------- ------- Year ended December 31, 1993 - ---------------------------- Valuation accounts deducted from balance sheet assets - Reserves for adjustments of investment in affiliated and other companies $ 0.3 $ -- $ -- $ 0.3 $ -- Valuation allowance (included net in deferred tax liability) for deferred tax assets $ -- $ 10.9 $ -- $ -- $ 10.9 Casualty and other claims included in other liabilities $320.9 $125.1 $ 2.9 (1) $127.7 (2) $321.2 Current portion of casualty and other claims included in accounts payable $190.6 $ 53.1 $124.9 (1) $183.5 (3) $185.1 Year ended December 31, 1994 - ---------------------------- Valuation allowance (included net in deferred tax liability) for deferred tax assets $ 10.9 $ -- $ -- $ 9.5 $ 1.4 Casualty and other claims included in other liabilities $321.2 $120.2 $ 2.5 (1) $138.9 (2) $305.0 Current portion of casualty and other claims included in accounts payable $185.1 $ 49.9 $163.7 (1) $207.5 (3) $191.2 (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.
(continued) PAGE 85 Schedule II Page 2 of 2 Norfolk Southern Corporation and Subsidiaries --------------------------------------------- Valuation and Qualifying Accounts Years Ended December 31, 1993, 1994 and 1995 (continued) (In millions of dollars)
Additions charged to -------------------- Beginning Other Ending Balance Expenses Accounts Deductions Balance --------- -------- -------- ---------- ------- Year ended December 31, 1995 - ---------------------------- Valuation allowance (included net in deferred tax liability) for deferred tax assets $ 1.4 $ -- $ 0.1 $ -- $ 1.5 Casualty and other claims included in other liabilities $305.0 $ 99.5 $ 3.1 (1) $121.1 (2) $286.5 Current portion of casualty and other claims included in accounts payable $191.2 $ 63.6 $172.6 (1) $230.0 (3) $197.4 (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.
PAGE 86 EXHIBIT INDEX ------------- Electronic Submission Exhibit Page Number Description Number - ---------- ------------------------------------------------- ------ 3(i) The Restated Articles of Incorporation of Norfolk Southern Corporation, effective October 30, 1989. 87-95 10(b) The Norfolk Southern Corporation Management Incentive Plan, as amended effective January 1, 1996. 96-102 10(c) The Norfolk Southern Corporation Executive Management Incentive Plan, effective January 1, 1996. 103-106 10(d) The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective January 23, 1996. 107-122 10(j) The Excess Long-Term Disability Plan of Norfolk Southern Corporation and Participating Subsidiary Companies, effective October 1, 1995. 123-125 11 Statement re: Computation of Per Share Earnings. 126-129 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 130 21 Subsidiaries of Norfolk Southern Corporation. 131-133 23 Consent of Independent Auditors. 134 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). 135 EX-3.I 2 NSC RESTATED ARTICLES OF INCORPORATION PAGE 87 EXHIBIT 3(i) Page 1 of 9 NORFOLK SOUTHERN CORPORATION ARTICLES OF RESTATEMENT The following restatement of the Corporation's Articles of Incorporation, which contains as an amendment not requiring shareholder approval a new Article VII, was adopted by the Board of Directors at a meeting held on October 24, 1989: RESTATED ARTICLES OF INCORPORATION OF NORFOLK SOUTHERN CORPORATION ARTICLE I The name of the Corporation is NORFOLK SOUTHERN CORPORATION. ARTICLE II The purpose for which the Corporation is organized is to transact any lawful business not required to be specifically stated in the Articles of Incorporation. ARTICLE III The Corporation shall have authority to issue four hundred fifty million (450,000,000) shares of Common Stock, par value $1 per share, and twenty-five million (25,000,000) shares of Serial Preferred Stock, without par value. A. Serial Preferred Stock 1. Issuance in Series. The Board of Directors is hereby empowered to cause the Serial Preferred Stock of the Corporation to be issued in series with such of the variations permitted by clauses (a)- (h), both inclusive, of this Section 1 as shall have been fixed and determined by the Board of Directors with respect to any series prior to the issue of any shares of such series. The shares of the Serial Preferred Stock of different series may vary as to: (a) the number of shares constituting such series and the designation of such series, which shall be such as to distinguish the shares thereof from the shares of all other series and classes; (b) the rate of dividend, the time of payment and, if cumulative, the dates from which dividends shall be cumulative, and the extent of participation rights, if any; PAGE 88 EXHIBIT 3(i) Page 2 of 9 (c) any right to vote with holders of shares of any other series or class and any right to vote as a class, either generally or as a condition to specified corporate action; (d) the price at and the terms and conditions on which shares may be redeemed; (e) the amount payable upon shares in event of involuntary liquidation; (f) the amount payable upon shares in event of voluntary liquidation; (g) any sinking fund provisions for the redemption or purchase of shares; and (h) the terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion. The shares of all series of Serial Preferred Stock shall be identical except as, within the limitations set forth above in this Section 1, shall have been fixed and determined by the Board of Directors prior to the issuance thereof. 2. Dividends. The holders of the Serial Preferred Stock of each series shall be entitled to receive, if and when declared payable by the Board of Directors, dividends in lawful money of the United States of America, at the dividend rate for such series, and not exceeding such rate except to the extent of any participation right. Such dividends shall be payable on such dates as shall be fixed for such series. Dividends, if cumulative and in arrears, shall not bear interest. No dividends shall be declared or paid upon or set apart for the Common Stock or for stock of any other class hereafter created ranking junior to the Serial Preferred Stock in respect of dividends or assets (hereinafter called Junior Stock), and no shares of Serial Preferred Stock, Common Stock or Junior Stock shall be purchased, redeemed or otherwise reacquired for a consideration, nor shall any funds be set aside for or paid to any sinking fund therefor, unless and until (i) full dividends on the outstanding Serial Preferred Stock at the dividend rate or rates therefor, together with the full additional amount required by any participation right, shall have been paid or declared and set apart for payment with respect to all past dividend periods, to the extent that the holders of the Serial Preferred Stock are entitled to dividends with respect to any past dividend period, and the current dividend period, and (ii) all mandatory sinking fund payments that shall have become due in respect of any series of the Serial Preferred Stock shall have been made. Unless full dividends with respect to all past dividend periods on the outstanding Serial Preferred Stock at the dividend rate or rates therefor, to the extent that holders of the Serial Preferred Stock are entitled to dividends with respect to any particular past dividend period, together with the full additional amount required PAGE 89 EXHIBIT 3(i) Page 3 of 9 by any participation right, shall have been paid or declared and set apart for payment and all mandatory sinking fund payments that shall have become due in respect of any series of the Serial Preferred Stock shall have been made, no distributions shall be made to the holders of the Serial Preferred Stock of any series unless distributions are made to the holders of the Serial Preferred Stock of all series then outstanding in proportion to the aggregate amounts of the deficiencies in payments due to the respective series, and all payments shall be applied, first, to dividends accrued and in arrears, next, to any amount required by any participation right, and, finally, to mandatory sinking fund payments. The terms "current dividend period" and "past dividend period" mean, if two or more series of Serial Preferred Stock having different dividend periods are at the time outstanding, the current dividend period or any past dividend period, as the case may be, with respect to each such series. 3. Preference on Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the Serial Preferred Stock of each series shall be entitled to receive, for each share thereof, the fixed liquidation price for such series, plus, in case such liquidation, dissolution or winding up shall have been voluntary, the fixed liquidation premium for such series, if any, together in all cases with a sum equal to all dividends accrued or in arrears thereon and the full additional amount required by any participation right, before any distribution of the assets shall be made to holders of the Common Stock or Junior Stock; but the holders of the Serial Preferred Stock shall be entitled to no further participation in such distribution. If, upon any such liquidation, dissolution or winding up, the assets distributable among the holders of the Serial Preferred Stock shall be insufficient to permit the payment of the full preferential amounts aforesaid, then such assets shall be distributed among the holders of the Serial Preferred Stock then outstanding ratably in proportion to the full preferential amounts to which they are respectively entitled. For the purposes of this Section 3, the expression "dividends accrued or in arrears" means, in respect of each share of the Serial Preferred Stock of any series at a particular time, an amount equal to the product of the rate of dividend per annum applicable to the shares of such series multiplied by the number of years and any fractional part of a year that shall have elapsed from the date when dividends on such shares became cumulative to the particular time in question less the total amount of dividends actually paid on the shares of such series or declared and set apart for payment thereon; provided, however, that, if the dividends on such shares shall not be fully cumulative, such expression shall mean the dividends, if any, cumulative in respect of such shares for the period stated in the articles of serial designation creating such shares less all dividends paid in or with respect to such period. PAGE 90 EXHIBIT 3(i) Page 4 of 9 B. Common Stock 1. Subject to the provisions of law and the rights of holders of shares at the time outstanding of all classes of stock having prior rights as to dividends, the holders of Common Stock at the time outstanding shall be entitled to receive such dividends at such times and in such amounts as the Board of Directors may deem advisable. 2. In the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the Corporation, after the payment or provision for payment in full of all debts and other liabilities of the Corporation and all preferential amounts to which the holders of shares at the time outstanding of all classes of stock having prior rights thereto shall be entitled, the remaining net assets of the Corporation shall be distributed ratably among the holders of the shares at the time outstanding of Common Stock. 3. The holders of Common Stock shall be entitled to one vote per share on all matters. ARTICLE IV No holder of capital stock of the Corporation of any class shall have any preemptive right to subscribe to or purchase (i) any shares of capital stock of the Corporation, (ii) any securities convertible into such shares or (iii) any options, warrants or rights to purchase such shares or securities convertible into such shares. ARTICLE V The number of directors, unless otherwise fixed by the bylaws, shall be sixteen. The directors shall be divided into three classes, one of which shall be composed of six directors and two of which shall be composed of five directors. At each annual meeting of stockholders, the number of directors to be elected shall be equal to the number of directors whose terms of office then expire, except that, if the total number of directors shall have been increased or decreased, the number of directors then to be elected shall be as nearly as possible one-third of the total number of directors, and each director shall hold office until the third succeeding annual meeting after his election; provided, however, that at no election shall a greater number of directors be elected than the number of vacancies then existing, and provided further that, upon any increase in the total number of directors, the additional vacancies shall be so assigned by the Board of Directors to classes that the number of directors of each class shall be as nearly equal as possible and the vacancies shall be filled for terms corresponding to the classes to which the vacancies are so assigned. Each director shall hold office until his successor shall have been elected, and the terms of PAGE 91 EXHIBIT 3(i) Page 5 of 9 office of directors elected by the Board of Directors to succeed former directors shall expire at the next stockholders' meeting at which directors are elected. ARTICLE VI 1. In this Article: "expenses" includes, without limitation, counsel fees. "liability" means the obligation to pay a judgment, settlement, penalty, fine (including any excise tax assessed with respect to an employee benefit plan), or reasonable expenses incurred with respect to a proceeding. "party" includes, without limitation, an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. "proceeding" means any threatened, pending, or completed action, suit, or proceeding whether civil, criminal, administrative, or investigative and whether formal or informal. 2. To the full extent that the Virginia Stock Corporation Act, as it exists on the date hereof or as hereafter amended, permits the limitation or elimination of the liability of directors and officers, no director or officer of the Corporation made a party to any proceeding shall be liable to the Corporation or its stockholders for monetary damages arising out of any transaction, occurrence or course of conduct, whether occurring prior or subsequent to the effective date of this Article. 3. To the full extent permitted by the Virginia Stock Corporation Act, as it exists on the date hereof or as hereafter amended, the Corporation shall indemnify any person who was or is a party to any proceeding, including a proceeding brought by or in the right of the Corporation, by reason of the fact that he is or was a director or officer of the Corporation, or while serving as such director or officer, is or was serving at the request of the Corporation as a director, trustee, partner or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability incurred by him in connection with such proceeding. A person shall be considered to be serving an employee benefit plan at the Corporation's request if his duties to the Corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan. To the same extent, the Board of Directors is hereby empowered, by a majority vote of a quorum of disinterested directors, to enter into a contract to indemnify any director or officer against liability and/or to advance or reimburse his PAGE 92 EXHIBIT 3(i) Page 6 of 9 expenses in respect of any proceedings arising from any act or omission, whether occurring before or after the execution of such contract. 4. The provisions of this Article shall be applicable to all proceedings commenced after it becomes effective, arising from any act or omission, whether occurring before or after such effective date. No amendment or repeal of this Article shall impair or otherwise diminish the rights provided under this Article (including those created by contract) with respect to any act or omission occurring prior to such amendment or repeal. The Corporation shall promptly take all such actions and make all such determinations and authorizations as shall be necessary or appropriate to comply with its obligation to make any indemnity against liability, or to advance any expenses, under this Article and shall promptly pay or reimburse all reasonable expenses, including attorneys' fees, incurred by any such director or officer in connection with such actions and determinations or proceedings of any kind arising therefrom. 5. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the director or officer did not meet any standard of conduct that is a prerequisite to the limitation or elimination of liability provided in Section 2 or to his entitlement to indemnification under Section 3 of this Article. 6. Any indemnification under Section 3 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the proposed indemnitee has met any standard of conduct that is a prerequisite to his entitlement to indemnification under Section 3 of this Article. The determination shall be made: (a) By the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding; (b) If a quorum cannot be obtained under subsection (a) of this section, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding; (c) By special legal counsel: (i) Selected by the Board of Directors or its committee in the manner prescribed in subsection (a) or (b) of this section; or (ii) If a quorum of the Board of Directors cannot be obtained under subsection (a) of this section and a PAGE 93 EXHIBIT 3(i) Page 7 of 9 committee cannot be designated under subsection (b) of this section, selected by a majority vote of the full Board of Directors, in which selection directors who are parties may participate; or (d) By the stockholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is appropriate, except that if the determination is made by special legal counsel, such authorizations and evaluations shall be made by those entitled under subsection (c) of this section to select counsel. Notwithstanding the foregoing, in the event there has been a change in the composition of a majority of the Board of Directors after the date of the alleged act or omission with respect to which indemnification, an advance or reimbursement is claimed, any determination as to such indemnification, advance or reimbursement shall be made by special legal counsel agreed upon by the Board of Directors and the proposed indemnitee. If the Board of Directors and the proposed indemnitee are unable to agree upon such special legal counsel, the Board of Directors and the proposed indemnitee each shall select a nominee, and the nominees shall select such special legal counsel. 7. (a) The Corporation shall pay for or reimburse the reasonable expenses incurred by a director or officer (and may do so for a person referred to in Section 8 of this Article) who is a party to a proceeding in advance of final disposition of the proceeding or the making of any determination under Section 3 if the director, officer or person furnishes the Corporation: (i) a written statement, executed personally, of his good faith belief that he has met any standard of conduct that is a prerequisite to his entitlement to indemnification under Section 3 of this Article; and (ii) a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet such standard of conduct. (b) The undertaking required by paragraph (ii) of subsection (a) of this section shall be an unlimited general obligation but need not be secured and may be accepted without reference to financial ability to make repayment. (c) Authorizations of payments under this section shall be made by the persons specified in Section 6. PAGE 94 EXHIBIT 3(i) Page 8 of 9 8. The Board of Directors is hereby empowered, by majority vote of a quorum consisting of disinterested directors, to cause the Corporation to indemnify or contract to indemnify any person not specified in Section 3 of this Article who was, is or may become a party to any proceeding, by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, to the same or a lesser extent as if such person were specified as one to whom indemnification is granted in Section 3. The provisions of Sections 4 through 6 of this Article shall be applicable to any indemnification provided hereafter pursuant to this section. 9. The Corporation may purchase and maintain insurance to indemnify it against the whole or any portion of the liability assumed by it in accordance with this Article and may also procure insurance, in such amounts as the Board of Directors may determine, on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by him in any such capacity or arising from his status as such, whether or not the Corporation would have power to indemnify him against such liability under the provisions of this Article. 10. Every reference herein to directors, officers, employees or agents shall include former directors, officers, employees and agents and their respective heirs, executors and administrators. The indemnification hereby provided and provided hereafter pursuant to the power hereby conferred by this Article on the Board of Directors shall not be exclusive of any other rights to which any person may be entitled, including any right under policies of insurance that may be purchased and maintained by the Corporation or others, with respect to claims, issues or matters in relation to which the Corporation would not have the power to indemnify such person under the provisions of this Article. Nothing herein shall prevent or restrict the power of the Corporation to make or provide for any further indemnity, or provisions for determining entitlement to indemnity, pursuant to one or more indemnification agreements, bylaws, or other arrangements (including, without limitation, creation of trust funds or security interests funded by letters of credit or other means) approved by the Board of Directors (whether or not any of the directors of the Corporation shall be a party to or beneficiary of any such agreements, bylaws or arrangements); provided, however, that any provision of such agreements, bylaws or other arrangements shall not be effective if and to the extent that it is determined to be contrary to this Article or applicable laws of the Commonwealth of Virginia, but other provisions of any such agreements, bylaws or other arrangements shall not be affected by any such determination. PAGE 95 EXHIBIT 3(i) Page 9 of 9 11. Each provision of this Article shall be severable, and an adverse determination as to any such provision shall in no way affect the validity of any other provision. ARTICLE VII The shareholder vote required, of each voting group entitled to vote thereon, to approve an amendment to the Corporation's Articles of Incorporation is a majority of all votes entitled to be cast by that voting group, unless the Board of Directors conditions approval of such an amendment upon a greater vote. Dated: October 24, 1989 NORFOLK SOUTHERN CORPORATION By ------------------------------ Arnold B. McKinnon Chairman of the Board, President and Chief Executive Officer [SEAL] Attest -------------------------- Donald E. Middleton Secretary EX-10.B 3 NSC MANAGEMENT INCENTIVE PLAN A/O 1/1/96 PAGE 96 EXHIBIT 10(b) Page 1 of 7 NORFOLK SOUTHERN CORPORATION MANAGEMENT INCENTIVE PLAN AS AMENDED EFFECTIVE JANUARY 1, 1996 Section I. PURPOSE OF THE PLAN It is the purpose of the Norfolk Southern Corporation Management Incentive Plan (Plan) to enhance increased profitability for Norfolk Southern Corporation by rewarding executive personnel of Norfolk Southern Corporation and its affiliates with a bonus for collectively striving to attain and surpass profit objectives. Section II. ADMINISTRATION OF THE PLAN The Compensation and Nominating Committee of the Board of Directors of Norfolk Southern Corporation shall administer and interpret this Plan and, from time to time, adopt such rules and regulations and make such recommendations to the Board of Directors concerning Plan changes as are deemed necessary to insure effective implementation of this Plan. No executive may simultaneously participate in more than one Norfolk Southern Corporation Incentive Group. Section III. RECOMMENDATION TO THE BOARD OF DIRECTORS The Compensation and Nominating Committee shall recommend to the Board of Directors: A. The Incentive Groups for the incentive year, and B. The maximum bonus level for each Incentive Group for the incentive year. Section IV. TYPE OF INCENTIVE BONUS By December 22 of the year prior to the incentive year, each participant must elect to receive any incentive bonus which may be awarded to him or her for the incentive year either 100% cash or deferred in whole or in part. A participant shall be permitted to defer only 25%, 50%, 75% or 100% of the bonus for any incentive year. If the participant elects to receive 100% cash, the entire amount of the bonus for the incentive year shall be distributed to the participant, or his or her beneficiary, as hereinafter defined on or before March 1 of the year following the incentive year. If deferred in whole or in part, the amount deferred shall be allocated to the participant's deferred savings account on or before March 1 of the year following the incentive year PAGE 97 EXHIBIT 10(b) Page 2 of 7 and the remainder, if any, shall be distributed in cash to the participant or his or her beneficiary on or before March 2 of the year following the incentive year. However, all amounts deferred under this Plan shall be allocated to the Norfolk Southern Corporation Officers' Deferred Compensation Plan and such deferrals will be governed by the provisions of that plan. Failure on the part of the participant to elect a deferral by December 22 of the year prior to the incentive year, either in whole or in part for the incentive year, shall be deemed to constitute an election by such participant to receive the entire incentive bonus for the incentive year as a cash bonus. The Board of Directors shall have the right to reject all deferral elections if, in its sole discretion, it shall determine prior to the close of an incentive year that deferral has become inadvisable, and, if such right shall be exercised, all incentive bonuses earned under the Plan for such year shall be payable in cash, as provided for in the third sentence of this Article IV. Section V. INCENTIVE BONUS FUND A single bonus fund representing a combined fund for both this Plan and the Executive Management Incentive Plan shall be determined and made available annually for each incentive year equal to 0.75% of Pre-tax Net Income (Norfolk Southern's income before state and federal income taxes as reported in the annual consolidated financial statements for the incentive year plus interest expense on debt due after one year) when the return on Average Invested Capital (the average of Norfolk Southern stockholders' equity plus debt due after one year at the beginning and end of the incentive year) equals 10%, and 1.5% of Pre-Tax Net Income when the return on Average Invested Capital equals or exceeds 20%. At any intermediate level of return on Average Invested Capital between 10% and 20%, the bonus fund shall be calculated at an interpolated percentage of Pre-tax Net Income between the 0.75% minimum and 1.5% maximum levels. In computing Pre-tax Net Income, special charges and restructuring charges, and unusual or infrequent accounting adjustments which are significant, and restatements or reclassifications, all as determined in accordance with Generally Accepted Accounting Principles, which would have the effect of reducing Pre-tax Net Income, shall be excluded, but such Pre-tax Net Income shall be adjusted for any expenses attributable to bonuses paid or accrued under this Plan and the Executive Management Incentive Plan. The Compensation and Nominating Committee of the Board of Directors shall have the right to reduce the bonus fund for all or any portion of such excluded accounting adjustments, restatements or reclassifications, or by any other amount the Compensation and Nominating Committee deems appropriate. PAGE 98 EXHIBIT 10(b) Page 3 of 7 The portion of the total bonus fund available to be awarded under this Plan for the incentive year shall be determined by multiplying the total bonus fund by a fraction whose numerator is the sum of the maximum bonus payable to all Plan participants eligible to receive a bonus award and whose denominator is the sum of the maximum bonus payable to all employees eligible to receive a bonus award under this Plan or the Executive Management Incentive Plan. The Plan portion of the total bonus fund, determined for any incentive year, which is not absorbed fully by bonus awards pursuant to Article VI will be carried over to subsequent incentive years and may thereafter be later awarded under this Plan at the discretion of the Chief Executive Officer. Section VI. BONUS AWARDS The portion of the total bonus fund available to be awarded under this Plan for the incentive year pursuant to the formula set forth in Article V shall be divided among each Incentive Group under this Plan in proportion to the maximum bonus payable for that Incentive Group, and the percentage bonus allocable to each Incentive Group participant in this Plan shall be determined by multiplying the bonus fund allocated to that Incentive Group by the ratio of the participant's total salary paid during the incentive year to the total salaries paid to all participants in that Incentive Group. The Chief Executive Officer may review and adjust the bonus award of any Incentive Group participant between 0% and 125% based on the individual's performance, subject to the availability of bonus fund carryovers needed to absorb any net increase in the amount of awards for the applicable Incentive Group. In no event, however, may the total bonus award to all Incentive Groups for an incentive year exceed the maximum bonus levels for all Incentive Groups as determined by the Board of Directors upon the recommendation of the Compensation and Nominating Committee. If the employment of a participant who is employed by Norfolk Southern Corporation or its affiliates during the incentive year terminates prior to the end of such year by reason of (1) death, or (2) normal retirement, early retirement or total disability under applicable Norfolk Southern Corporation plans and policies, then the phrase "total salary paid during the incentive year" means base salary paid to the participant during that portion of such year of employment prior to his or her termination and through the end of the calendar month in which employment terminates but excludes any cash paid with respect to such participant's unused vacation. PAGE 99 EXHIBIT 10(b) Page 4 of 7 No incentive bonus for any incentive year shall be awarded or paid to any participant whose employment with Norfolk Southern Corporation and all its affiliates terminates before the end of such incentive year for a reason other than one of those specifically stated in the preceding sentence. If a participant becomes eligible for the Plan during the year or becomes eligible for a different Incentive Group, then the amount of the award shall be adjusted proportionally to reflect such changes. Section VII. CALCULATION OF CREDITS TO BE ALLOCATED The credit allocated to a participant's deferred savings account for any incentive year is calculated by dividing the actual dollar value of the deferred bonus for such year by the average of the closing prices for Norfolk Southern Corporation Common Stock on the New York Stock Exchange for all of the trading days in December of such year. Such credits were calculated to the nearest one hundredth of a credit. However, solely at the discretion of the Compensation and Nominating Committee, the calculation of all credits allocated to the deferred savings account of a participant in active service on January 1, 1987, may be changed from a credit based on the price of Norfolk Southern Corporation Common Stock to a cash credit. A one-time request for such a change in the method of calculating credits may be made by the participant by March 16, 1987, and, if approved by the Compensation and Nominating Committee, the balance of the participant's deferred savings account as of February 28, 1987, including amounts deferred for incentive year 1986, shall be converted to a cash credit based on the New York Stock Exchange closing price for Norfolk Southern Corporation Common Stock on February 27, 1987, and shall thereafter accrue an amount equivalent to interest (Interest), compounded annually, at the rate of fifteen percent (15%). All amounts deferred under this Plan are allocated to the Norfolk Southern Corporation Officers' Deferred Compensation Plan and are governed by the provisions thereof. Section VIII. NATURE OF DEFERRED SAVINGS ACCOUNT The deferred savings account is merely a bookkeeping account maintained by Norfolk Southern Corporation for the express purpose of recording a participant's deferred bonus credits and determining the amounts payable by Norfolk Southern Corporation under this Plan. The deferred savings account for a participant shall not be deemed to constitute either in whole or in part a trust fund for the benefit of such participant. PAGE 100 EXHIBIT 10(b) Page 5 of 7 Section IX. RESTRICTIONS ON DEFERRED SAVINGS ACCOUNT The credits allocated to a participant's deferred savings account under this Plan are restricted in that they shall not be sold, assigned, transferred or pledged as collateral for a loan or as security for the performance of any other obligation or for any other purpose, or exchanged or otherwise disposed of. Section X. CHANGES IN CREDIT Unless the Compensation and Nominating Committee has changed the calculation of credit under Article VII to an amount equivalent to Interest, if at any time a cash dividend is paid, or if a stock dividend, a stock split, a combination or other change occurs with respect to Norfolk Southern Corporation Common Stock, the number of credits in a participant's deferred savings account shall be increased or decreased so as to give effect to such cash dividend, stock dividend, stock split, combination or other change. Any such change shall be reflected in each such account during the calendar year in which it occurs. Any new or changed credits resulting therefrom shall be calculated to the nearest one hundredth of a credit and shall be subject to the restrictions and provisions set forth herein applicable thereto. Section XI. DISTRIBUTION WITH RESPECT TO DEFERRED CREDITS During the first 10 years following a participant's termination of employment, the credits in his or her deferred savings account shall be periodically converted into cash, as provided for below, and distributed to that participant, or to his or her beneficiary as hereinafter defined, pursuant to the following provisions. In any event, distribution of such cash to the participant shall be completed by the end of the 10-year period. 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, including absence by revocation of any previous designation, a legal representative of the participant, duly appointed in the case of incompetency or death of the participant. A participant may designate both primary and contingent named 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 Norfolk Southern Corporation signed by the participant and filed with the Office of the Vice President- Personnel, Norfolk Southern Corporation, prior to the death of such participant. Any such designation, change or revocation shall be ineffective to invalidate any cash payment made or other action taken by PAGE 101 EXHIBIT 10(b) Page 6 of 7 Norfolk Southern Corporation pursuant to this Plan prior to the receipt of same by Norfolk Southern Corporation. The determination by Norfolk Southern Corporation of a beneficiary or beneficiaries, or the identity thereof, or the rights of same, based on proof by affidavit or other written evidence satisfactory to Norfolk Southern Corporation shall be conclusive as to the liability of Norfolk Southern Corporation and any payment made in accordance therewith shall discharge Norfolk Southern Corporation of its obligation under this Plan for such payment. Norfolk Southern Corporation shall make a payment each calendar month within the 10-year period to the participant or his or her beneficiary, computed as follows: Upon termination of employment, the number of credits in the deferred savings account of such participant shall be ascertained. Thereafter, there shall be added to such account the number of additional credits, if any, due to be allocated thereto as a result of any incentive bonus awarded such participant for any incentive year, or portion of such year, preceding termination of employment. Any change in credits referred to in Article X occurring between such participant's termination of employment and the end of the 10-year period will be reflected in such account. Each monthly payment payable in any calendar year shall be an amount equal to the number of credits in such account as of January 1 that year, multiplied by the average of the closing prices for Norfolk Southern Corporation Common Stock on the New York Stock Exchange for all of the days in December of the previous calendar year for which there is a closing price, multiplied by a fraction the numerator of which is "1" and the denominator of which is the number of monthly payments remaining to be paid in the 10-year period as of January 1 of the calendar year. The number of credits in such account shall be reduced effective January 1 of each year during the 10-year period by the credit equivalent of the payments made during the previous year. However, in the event the calculation of the credit allocated to the deferred savings account of a participant is changed from a credit based on the price of Norfolk Southern Corporation Common Stock to a cash credit based on Interest, then the monthly payment shall be an amount sufficient to amortize the participant's deferred savings account together with Interest over the 10- year period. If the deferred savings account on January 1 of the year following termination contains a value as calculated above of less than $10,000, the entire amount will be paid in full within 45 days in lieu of payment over a 10-year period as outlined in the preceding paragraph. Section XII. DISTRIBUTION IN CASE OF TERMINATION The Board of Directors, in its sole discretion, may authorize and direct Norfolk Southern Corporation to make payments after termination of employment of a participant to such participant or his or her beneficiary in a lump sum or over a period other than that provided for in Article XI, and to charge such payments against the participant's deferred PAGE 102 EXHIBIT 10(b) Page 7 of 7 savings 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 Article XI could create a conflict of interest for the participant or beneficiary; provided, that all amounts due to the participant or beneficiary under this Plan shall in all events be paid to the participant or beneficiary by the end of the 10-year period referred to in Article XI. No participant or beneficiary who is also a member of the Board of Directors shall participate in any decision of the Board to make accelerated payments under this Article XII. Section XIII. NO GUARANTEE OF CONTINUANCE OF EMPLOYMENT Nothing contained in this Plan or in any designation of a participant hereunder shall constitute or be deemed to constitute any evidence of an agreement or obligation on the part of Norfolk Southern Corporation or its affiliates to continue to employ any such participant for any period whatsoever. Section XIV. AMENDMENT TO AND TERMINATION OF PLAN Norfolk Southern 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 beneficiary of any rights hereunder theretofore legally accrued, and no such termination shall be effective for the year in which such resolution is adopted. Section XV. RECALCULATION EVENTS Norfolk Southern Corporation's commitment to accrue and pay Interest as provided in Article VII is facilitated by the purchase of corporate- owned life insurance. If the Compensation and Nominating Committee, 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 Norfolk Southern Corporation to recover the cost of providing the benefits otherwise payable under the Plan, then if the Compensation and Nominating Committee 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 Compensation and Nominating Committee, but which shall be not less than seven and one-half percent (7-1/2). EX-10.C 4 NSC EXECUTIVE MANAGEMENT INCENTIVE PLAN A/O 1/1/96 PAGE 103 EXHIBIT 10(c) Page 1 of 4 NORFOLK SOUTHERN CORPORATION EXECUTIVE MANAGEMENT INCENTIVE PLAN EFFECTIVE JANUARY 1, 1996 Section I. PURPOSE OF THE PLAN It is the purpose of the Norfolk Southern Corporation Executive Management Incentive Plan (Plan) to enhance increased profitability for Norfolk Southern Corporation by rewarding certain officers elected by the Board of Directors of Norfolk Southern Corporation and its affiliates with a bonus for collectively striving to attain and surpass profit objectives. Section II. ADMINISTRATION OF THE PLAN The Compensation and Nominating Committee of the Board of Directors of Norfolk Southern Corporation shall administer and interpret this Plan and, from time to time, adopt such rules and regulations and make such recommendations to the Board of Directors concerning Plan changes as are deemed necessary to insure effective implementation of this Plan. No executive may simultaneously participate in more than one Norfolk Southern Corporation Incentive Group. Section III. RECOMMENDATION TO THE BOARD OF DIRECTORS The Compensation and Nominating Committee shall recommend to the Board of Directors: A. The Incentive Groups for the incentive year, which Groups shall consist of Board-elected officers at the level of Vice President and above, and B. The maximum bonus level for each Incentive Group for the incentive year. Section IV. TYPE OF INCENTIVE BONUS By December 22 of the year prior to the incentive year, each participant must elect to receive any incentive bonus which may be awarded to him or her for the incentive year either 100% cash or deferred in whole or in part. A participant shall be permitted to defer only 25%, 50%, 75% or 100% of the bonus for any incentive year. If the participant elects to receive 100% cash, the entire amount of the bonus for the incentive year shall be distributed to the participant, or his or her beneficiary, as hereinafter defined on or before March 1 of the year following the incentive year. If deferred in whole or in part, the amount deferred shall be allocated to the Norfolk Southern Corporation PAGE 104 EXHIBIT 10(c) Page 2 of 4 Officers' Deferred Compensation Plan (and such deferrals will be governed by the provisions of that plan) on or before March 1 of the year following the incentive year and the remainder, if any, shall be distributed in cash to the participant or his or her beneficiary on or before March 2 of the year following the incentive year. Failure on the part of the participant to elect a deferral by December 22 of the year prior to the incentive year, either in whole or in part for the incentive year, shall be deemed to constitute an election by such participant to receive the entire incentive bonus for the incentive year as a cash bonus. The Board of Directors shall have the right to reject all deferral elections if, in its sole discretion, it shall determine prior to the close of an incentive year that deferral has become inadvisable, and, if such right shall be exercised, all incentive bonuses earned under the Plan for such year shall be payable in cash, as provided for in the third sentence of this Article IV. Section V. INCENTIVE BONUS FUND A single bonus fund representing a combined fund for both this Plan and the Management Incentive Plan shall be determined and made available annually for each incentive year equal to 0.75% of Pre-tax Net Income (Norfolk Southern's income before state and federal income taxes as reported in the annual consolidated financial statements for the incentive year plus interest expense on debt due after one year) when the return on Average Invested Capital (the average of Norfolk Southern stockholders' equity plus debt due after one year at the beginning and end of the incentive year) equals 10%, and 1.5% of Pre-Tax Net Income when the return on Average Invested Capital equals or exceeds 20%. At any intermediate level of return on Average Invested Capital between 10% and 20%, the bonus fund shall be calculated at an interpolated percentage of Pre-tax Net Income between the 0.75% minimum and 1.5% maximum levels. In computing Pre-tax Net Income, special charges and restructuring charges, and unusual or infrequent accounting adjustments which are significant, and restatements or reclassifications, all as determined in accordance with Generally Accepted Accounting Principles, which would have the effect of reducing Pre-tax Net Income, shall be excluded, but such Pre-tax Net Income shall be adjusted for any expenses attributable to bonuses paid or accrued under this Plan and the Management Incentive Plan. The Compensation and Nominating Committee of the Board of Directors shall have the right to reduce the bonus fund for all or any portion of such excluded accounting adjustments, restatements or reclassifications, or by any other amount the Compensation and Nominating Committee deems appropriate. PAGE 105 EXHIBIT 10(c) Page 3 of 4 The portion of the total bonus fund available to be awarded under this Plan for the incentive year shall be determined by multiplying the total bonus fund by a fraction whose numerator is the sum of the maximum bonus payable to all Plan participants eligible to receive a bonus award and whose denominator is the sum of the maximum bonus payable to all employees eligible to receive a bonus award under this Plan or the Management Incentive Plan. Section VI. BONUS AWARDS The portion of the total bonus fund available to be awarded under this Plan for the incentive year pursuant to the formula set forth in Article V shall be divided among each Incentive Group under this Plan in proportion to the maximum bonus payable for that Incentive Group, and the percentage bonus allocable to each Incentive Group participant in this Plan shall be determined by multiplying the bonus fund allocated to that Incentive Group by the ratio of the participant's total salary paid during the incentive year to the total salaries paid to all participants in that Incentive Group. However, no participant may be awarded a bonus which exceeds 50% of the bonus fund. The Compensation and Nominating Committee of the Board may review the performance of the Plan participants and may, at its discretion, reduce the bonus award of any such participant between 0% and 100%, based on the individual's performance. If the employment of a participant who is employed by Norfolk Southern Corporation or its affiliates during the incentive year terminates prior to the end of such year by reason of (1) death, or (2) normal retirement, early retirement or total disability under applicable Norfolk Southern Corporation plans and policies, then the phrase "total salary paid during the incentive year" means base salary paid to the participant during that portion of such year of employment prior to his or her termination and through the end of the calendar month in which employment terminates but excludes any cash paid with respect to such participant's unused vacation. No incentive bonus for any incentive year shall be awarded or paid to any participant whose employment with Norfolk Southern Corporation and all its affiliates terminates before the end of such incentive year for a reason other than one of those specifically stated in the preceding sentence. If a participant becomes eligible for the Plan during the year or becomes eligible for a different Incentive Group, then the amount of the award shall be adjusted proportionally to reflect such changes. Section VII. 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, including absence by revocation of any previous designation, a legal representative of the participant, duly appointed in the case of PAGE 106 EXHIBIT 10(c) Page 4 of 4 incompetency or death of the participant. A participant may designate both primary and contingent named 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 Norfolk Southern Corporation signed by the participant and filed with the Office of the Vice President- Personnel, Norfolk Southern Corporation, prior to the death of such participant. Any such designation, change or revocation shall be ineffective to invalidate any cash payment made or other action taken by Norfolk Southern Corporation pursuant to this Plan prior to the receipt of same by Norfolk Southern Corporation. The determination by Norfolk Southern Corporation of a beneficiary or beneficiaries, or the identity thereof, or the rights of same, based on proof by affidavit or other written evidence satisfactory to Norfolk Southern Corporation shall be conclusive as to the liability of Norfolk Southern Corporation and any payment made in accordance therewith shall discharge Norfolk Southern Corporation of its obligation under this Plan for such payment. Section VIII. NO GUARANTEE OF CONTINUANCE OF EMPLOYMENT Nothing contained in this Plan or in any designation of a participant hereunder shall constitute or be deemed to constitute any evidence of an agreement or obligation on the part of Norfolk Southern Corporation or its affiliates to continue to employ any such participant for any period whatsoever. Section IX. AMENDMENT TO AND TERMINATION OF PLAN Norfolk Southern 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 beneficiary of any rights hereunder theretofore legally accrued, and no such termination shall be effective for the year in which such resolution is adopted. EX-10.D 5 NSC LONG-TERM INCENTIVE PLAN A/O 1/24/95 PAGE 107 EXHIBIT 10(d) Page 1 of 16 NORFOLK SOUTHERN CORPORATION LONG-TERM INCENTIVE PLAN AS AMENDED EFFECTIVE JANUARY 24, 1995 (subject to stockholder approval) 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 and a new designation substituted therefor by the Participant at any time before his death without the consent of the previously designated Beneficiary. PAGE 108 EXHIBIT 10(d) Page 2 of 16 Board of The Board of Directors of the Corporation. Directors 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 With respect to a Stock Appreciation Right, all of the Gain shares of Common Stock received upon exercise of the Shares 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 The value of Common Stock on a particular date as measured Value 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 An Option that complies with the terms and conditions set Stock forth in Section 422(b) of the Code and is designated by Option the Committee as an Incentive Stock Option. Non-qualified An Option granted under the Plan other than an Incentive Stock Option 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. PAGE 109 EXHIBIT 10(d) Page 3 of 16 Participant Any officer or key employee of the Corporation or a Subsidiary Company selected by the Committee to participate in the Plan. Performance The period of time, designated by the Committee, over Cycle which Performance Shares may be earned. Performance Shares of Common Stock granted pursuant to Section 10 of Shares the Plan, which may be made subject to the restrictions and other terms and conditions prescribed in Section 11 of the Plan. Performance Contingent rights to receive Performance Shares pursuant Share Units to Section 10 of the Plan. Restricted Shares of Common Stock granted pursuant to Section 9 of Shares the Plan and subject to the restrictions and other terms and conditions set forth therein. Restriction A period of time not less than twenty-four (24) nor more Period 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 retirement plan of a Subsidiary Company (whichever is applicable), as amended from time to time. Share An agreement entered into pursuant to Section 11 of Retention the Plan. Agreement Stock The right, granted pursuant to the provisions of Section 8 Appreciation of the Plan, to receive a payment equal to the excess of Right the Fair Market Value of Common Stock over the Option price of such Common Stock, as specified in Section 8 of the Plan. Subsidiary A corporation of which at least eighty percent (80%) of Company the total combined voting power of all classes of stock entitled to vote is owned, directly or indirectly, by the Corporation. PAGE 110 EXHIBIT 10(d) Page 4 of 16 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 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. PAGE 111 EXHIBIT 10(d) Page 5 of 16 Section 5. SHARES AVAILABLE Subject to the provisions of Section 13 of the Plan, no more than an aggregate of 17,675,000 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 250,000 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. 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 112 EXHIBIT 10(d) Page 6 of 16 (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) 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 (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. PAGE 113 EXHIBIT 10(d) Page 7 of 16 (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 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. PAGE 114 EXHIBIT 10(d) Page 8 of 16 (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; (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. PAGE 115 EXHIBIT 10(d) Page 9 of 16 (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. (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. (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. PAGE 116 EXHIBIT 10(d) Page 10 of 16 (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 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 PAGE 117 EXHIBIT 10(d) Page 11 of 16 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. (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 PAGE 118 EXHIBIT 10(d) Page 12 of 16 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. (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 Participant as a result of the PAGE 119 EXHIBIT 10(d) Page 13 of 16 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 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 automatic 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 automatic 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 automatic 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. 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 PAGE 120 EXHIBIT 10(d) Page 14 of 16 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. 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, PAGE 121 EXHIBIT 10(d) Page 15 of 16 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 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 PAGE 122 EXHIBIT 10(d) Page 16 of 16 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. (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. EX-10.J 6 NSC EXCESS LONG-TERM DISABILITY PLAN A/O 10/1/95 PAGE 123 EXHIBIT 10(j) Page 1 of 3 EXCESS LONG-TERM DISABILITY PLAN OF NORFOLK SOUTHERN CORPORATION AND PARTICIPATING SUBSIDIARY COMPANIES (effective October 1, 1995) ARTICLE I. INTRODUCTION Norfolk Southern Corporation has established this Excess Long-Term Disability Plan ("Plan") effective October 1, 1995 ("Effective Date"), to provide long-term disability benefits to eligible employees in excess of those provided for by the Long-Term Disability Plan of Norfolk Southern Corporation and participating subsidiary companies. ARTICLE II. DEFINITIONS NSC Norfolk Southern Corporation, a Virginia corporation. Long-Term Disability Plan The Long-Term Disability Plan of Norfolk Southern Corporation and Participating Subsidiary Companies. Participating Subsidiary Each subsidiary or affiliated company of NSC which is Disability a Participating Subsidiary in the Long-Term Plan shall automatically participate in the Plan. Participant An employee of NSC or a Participating Subsidiary who Disability is eligible to participate in the Long-Term Plan. Board of Managers A group composed of the same individuals that compose the Board of Managers of the Long-Term Disability Plan. ARTICLE III. ELIGIBILITY 1. Any Participant whose benefit computed under Article III of the Long-Term Disability Plan without regard to the limit on salary exceeds the benefit payable under such Article III. ARTICLE IV. EXCESS BENEFIT 1. A Participant shall, upon commencement of benefits under the Long-Term Disability Plan, be entitled to receive a monthly benefit equal to the excess of: (a) the monthly benefit under Article III of the Long-Term Disability Plan if such benefit had been computed without regard to the limitation on salary provided therein; over (b) the monthly benefit actually payable under the Long-Term Disability Plan. PAGE 124 EXHIBIT 10(j) Page 2 of 3 2. The payment of excess benefits under the Plan shall be made in a manner consistent with the provisions of the Long-Term Disability Plan, and shall continue for the same period of time. ARTICLE V. FUNDING The benefits under the Plan shall be paid in cash from the general funds of NSC or its Participating Subsidiary, and no special or separate fund shall be established or other segregation of assets made to assure such payments. Nothing contained in the plan shall create or be construed to create a trust of any kind. To the extent that any person acquires a right to receive payments under the terms of the Plan, such right shall be no greater than the right of an unsecured creditor of NSC or its Participating Subsidiary. ARTICLE VI. ADMINISTRATION 1. The Plan shall be administered by the Board of Managers ("Board"). All determinations of the Board with respect to any matter hereunder shall be conclusive and binding on all persons. ARTICLE VII. RIGHTS AND RESTRICTIONS 1. Participants in the Plan shall have only those rights in respect to the Plan specifically set forth herein. 2. This Plan shall not be deemed to constitute a contract between NSC or any Participating Subsidiary and any Participant, nor shall it be construed to be consideration for or an inducement or condition of the employment of any Participant. Nothing contained herein shall be deemed to give any Participant the right to continued employment. 3. Benefits payable hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to accomplish any of these mentioned acts shall be void. Benefits shall not be subjected to attachment or other legal process of debts of the Participant. PAGE 125 EXHIBIT 10(j) Page 3 of 3 ARTICLE VIII. AMENDMENTS AND TERMINATIONS This Plan may be amended at any time, and retroactively if deemed necessary or appropriate, by any proper officer of NSC to effect changes which are, in his or her sole judgment and discretion, ministerial, substantively administrative, or necessary to comply with statutory or other legally mandated requirements, and the implementation of which do not result in a material cost to NSC or to the Plan. IN WITNESS WHEREOF, the Corporation has caused this Plan to be adopted on the 26th day of September 1995, effective October 1, 1995. NORFOLK SOUTHERN CORPORATION and PARTICIPATING SUBSIDIARY COMPANIES By ------------------------- EX-11 7 NSC COMPUTATION OF EARNINGS PER SHARE PAGE 126 EXHIBIT 11 PAGE 1 of 4 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In millions except per share amounts)
1995 1994 1993 ---- ---- ---- Computation for Statements of Income - ------------------------------------ Income before cumulative effects of changes in accounting principles $ 712.7 $ 667.8 $ 548.7 -------- -------- -------- Cumulative effects of changes in accounting principles -- -- 223.3 -------- -------- -------- Weighted average number of shares outstanding 131.0 136.3 139.4 -------- -------- -------- Primary earnings per share: Income before accounting changes $ 5.44 $ 4.90 $ 3.94 Cumulative effects of accounting changes -- -- 1.60 -------- -------- -------- Net income $ 5.44 $ 4.90 $ 5.54 ======== ======== ======== Additional Primary Computation - ------------------------------ Income before cumulative effects of changes in accounting principles $ 712.7 $ 667.8 $ 548.7 -------- -------- -------- Cumulative effects of changes in accounting principles -- -- 223.3 Adjustment to weighted average number of shares outstanding: Weighted average number of shares outstanding per primary computation above 131.0 136.3 139.4 Dilutive effect of outstanding options, stock appreciation rights (SARs) and performance share units (PSUs) (as determined by the application of the treasury stock method) (1) 1.3 1.1 1.2 -------- -------- -------- Weighted average number of shares outstanding, as adjusted 132.3 137.4 140.6 ======== ======== ========
PAGE 127 EXHIBIT 11 PAGE 2 of 4 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In millions except per share amounts)
1995 1994 1993 ---- ---- ---- Primary earnings per share, as adjusted (2): Income before accounting changes $ 5.39 $ 4.86 $ 3.90 Cumulative effects of accounting changes -- -- 1.59 -------- -------- -------- Net income $ 5.39 $ 4.86 $ 5.49 ======== ======== ======== (1) See Note 12 of Notes to Consolidated Financial Statements on page 70 for a description of the Long-Term Incentive Plan. (2) These calculations are submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because they result in dilution of less than 3 percent.
PAGE 128 EXHIBIT 11 PAGE 3 of 4 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In millions except per share amounts)
1995 1994 1993 ---- ---- ---- Fully Diluted Computation - ------------------------- Income before cumulative effects of changes in accounting principles, per primary computation $ 712.7 $ 667.8 $ 548.7 Adjustment to increase earnings to requisite level to earn maximum PSUs, net of tax effect 55.3 93.0 162.1 -------- -------- -------- Income before cumulative effects, as adjusted 768.0 760.8 710.8 Cumulative effects of changes in accounting principles -- -- 223.3 -------- -------- -------- Net income, as adjusted $ 768.0 $ 760.8 $ 934.1 ======== ======== ======== Adjustment to weighted average number of shares outstanding, as adjusted for additional primary calculation: Weighted average number of shares outstanding, as adjusted per additional primary computation on page 1 132.3 137.4 140.6 Additional dilutive effect of outstanding options and SARs (as determined by the application of the treasury stock method using period end market price) 0.3 -- 0.2 Additional shares issuable at maximum level for PSUs 0.1 0.1 0.2 -------- -------- -------- Weighted average number of shares, as adjusted 132.7 137.5 141.0 -------- -------- --------
PAGE 129 EXHIBIT 11 PAGE 4 of 4 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (In millions except per share amounts)
1995 1994 1993 ---- ---- ---- Fully diluted earnings per share (3): Income before accounting changes $ 5.79 $ 5.53 $ 5.04 Cumulative effects of accounting changes -- -- 1.58 -------- -------- -------- Net income $ 5.79 $ 5.53 $ 6.62 ======== ======== ======== (3) These calculations are submitted in accordance with Regulation S-K item 601(b)(11) although they are contrary to paragraph 40 of APB Opinion No. 15 because they produce an anti-dilutive result.
EX-12 8 NSC RATIO EARNINGS TO FIXED CHARGES PAGE 130 EXHIBIT 12 PAGE 1 of 1 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Millions of Dollars)
Year ended December 31 ------------------------------------------------ 1995 1994 1993 1992 1991 (1) ---- ---- ---- ---- ---- EARNINGS Income before income taxes as reported $1,114.7 $1,049.0 $ 898.6 $ 875.3 $ 143.6 Add: Total interest expenses (as detailed below) 174.9 159.9 160.7 161.6 151.4 Income (loss) of partially owned entities (2) 0.1 0.6 (2.6) 2.0 1.3 Subsidiaries' preferred dividend requirement 2.6 2.7 2.7 2.7 3.3 -------- -------- -------- -------- -------- Income before income taxes, as adjusted $1,292.3 $1,212.2 $1,059.4 $1,041.6 $ 299.6 ======== ======== ======== ======== ======== FIXED CHARGES Interest expense on debt $ 113.4 $ 101.6 $ 98.6 $ 109.0 $ 99.7 Other interest expense 31.5 31.8 38.7 33.0 34.8 Calculated interest portion of rent expense 30.0 26.5 23.4 19.6 16.9 -------- -------- -------- -------- -------- Total interest expenses 174.9 159.9 160.7 161.6 151.4 Capitalized interest 14.0 17.8 21.7 17.9 19.3 Subsidiaries' preferred dividend requirement on a pretax basis 4.1 4.2 4.3 4.2 4.9 -------- -------- -------- -------- -------- Total fixed charges $ 193.0 $ 181.9 $ 186.7 $ 183.7 $ 175.6 ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 6.70 6.66 5.67 5.67 1.71(1) (1) Included in 1991 results is a special charge that increased transportation operating expenses by $680 million. (2) Includes the distributed income of 20%-49% owned entities, net of equity recorded in undistributed income and the minority income of consolidated entities which have fixed charges. The computations do not include $0.3 million of interest expense related to $7.8 million of debt guaranteed for a less than 50% owned entity.
EX-21 9 NAME AND STATE OF INC. OF SUBS OF NSC PAGE 131 EXHIBIT 21 PAGE 1 of 3 NAME AND STATE OF INCORPORATION OF SUBSIDIARIES OF NORFOLK SOUTHERN CORPORATION AS OF MARCH 1, 1996 Agency Media Services, Inc., Indiana Atlantic Investment Company, Delaware Norfolk Southern Properties, Inc., Virginia Norfolk Southern Railway Company, Virginia North American Van Lines, Inc., Delaware NS Crown Services, Inc., Virginia NS Fiber Optics, Inc., Virginia NS Transportation Brokerage Corporation, Virginia Pocahontas Development Corporation, Kentucky Pocahontas Land Corporation, Virginia TCS Leasing, Inc., Oklahoma Norfolk Southern Railway Company subsidiaries: Airforce Pipeline, Inc., North Carolina Alabama Great Southern Railroad Company, The; Alabama Atlanta and Charlotte Air Line Railway Company, The; Georgia, North Carolina, South Carolina 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 Elberton Southern Railway Company, Georgia Georgia Midland Railway Company, The; Georgia Georgia Southern and Florida Railway Company, Georgia High Point, Randleman, Asheboro and Southern Railroad Company, North Carolina Interstate Railroad Company, Virginia Lamberts Point Barge Company, Inc., Virginia Memphis and Charleston Railway Company, Mississippi Mobile and Birmingham Railroad Company, Alabama Norfolk and Portsmouth Belt Line Railroad Company, Virginia Norfolk and Western Railway Company, Virginia North Carolina Midland Railroad Company, The; North Carolina Rail Investment Company, Delaware Shenandoah-Virginia Corporation, Virginia South Western Rail Road Company, The; Georgia Southern Rail Terminals, Inc., Georgia Southern Rail Terminals of North Carolina, Inc., North Carolina Southern Railway-Carolina Division, South 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 PAGE 132 EXHIBIT 21 PAGE 2 of 3 Tennessee, Alabama & Georgia Railway Company, Delaware Tennessee Railway Company, Tennessee Toledo Belt Railway Company, The; Ohio Virginia and Southwestern Railway Company, Virginia Yadkin Railroad Company, North Carolina Norfolk Southern Properties, Inc. subsidiaries: Alexandria-Southern Properties, Inc., Virginia Arrowood-Southern Company, North Carolina Arrowood Southern Executive Park, Inc., North Carolina Carlyle CA Corporation, Virginia Carlyle Development Corporation, Virginia Charlotte-Southern Corporation, North Carolina Charlotte-Southern Hotel Corporation, North Carolina Lambert's Point Docks, Incorporated, Virginia NS-Charlotte Tower Corporation, North Carolina Nickel Plate Improvement Company, Inc., The; Indiana Norfolk Southern Industrial Development Corp., Virginia NS Gas Properties, Inc., Virginia Sandusky Dock Corporation, Virginia Southern Region Industrial Realty, Inc., Georgia Virginia Holding Corporation, Virginia North American Van Lines, Inc. domestic subsidiaries: A Five Star Forwarding, Inc., Delaware A Three Rivers Forwarding, Inc., Indiana Alaska USA Van Lines, Inc., Indiana Americas Quality Van Lines, Inc., Indiana City Storage & Transfer, Inc., Colorado Fleet Insurance Management, Inc., Indiana FrontRunner Worldwide, Inc., Delaware Great Falls North American, Inc., Montana NACAL, Inc., California NALOG, Inc., Delaware NAVTRANS Container Lines, Inc., Florida NAVTRANS International Freight Forwarding, Inc., Indiana NorAm Forwarding, Inc., Indiana North American Distribution Systems, Inc., Indiana North American Forwarding, Inc., Indiana North American Logistics, Ltd., Indiana North American Moving & Storage, Inc., Indiana North American Transport Insurance Company, Indiana North American Van Lines of Texas, Inc., Texas Relocation Management Systems, Inc., Delaware PAGE 133 EXHIBIT 21 PAGE 3 of 3 North American Van Lines, Inc. foreign subsidiaries: Cavalier Moving & Storage Co. Ltd., Canada Cold Lake Moving & Storage Ltd., Alberta Curry Moving & Storage Ltd., Ontario Midi-Data Speditions GmbH, Germany NAVPAN, S.A., Panama NAVTRANS International Speditions GmbH, Germany North American Van Lines Ltd., United Kingdom North American Van Lines Canada Ltd., Canada North American Van Lines (Alberta) Ltd., Alberta North American Van Lines (Atlantic) Ltd., Nova Scotia Star Storage Ltd., Manitoba Tru-Flite Transportation Systems Inc., Canada Westlake Moving & Storage, Ltd., Ontario Westmount Moving & Storage, Inc. (Demanagement Et Entreposage Westmount), Quebec 153843 Canada Inc., Canada NOTE: Of the above subsidiaries, only Norfolk Southern Railway Company and Norfolk and Western Railway Company meet the Commission's "significant subsidiary" test. EX-23 10 1995 10-K405 CONSENT OF IND. AUDITORS PAGE 134 EXHIBIT 23 PAGE 1 of 1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Norfolk Southern Corporation: We consent to incorporation by reference in Registration Statements Nos. 33-44188, 33-30157, 33-556, 33-25713, 33-52031, and 33-57417 on Form S-8 and Registration Statement No. 33-38595 on Form S-3 of Norfolk Southern Corporation of our report dated January 23, 1996, relating to the consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in the December 31, 1995 annual report on Form 10-K405 of Norfolk Southern Corporation. Our report refers to changes in accounting methods related to income taxes, postretirement benefits and postemployment benefits. /s/ KPMG Peat Marwick LLP Norfolk, Virginia March 26, 1996 EX-27 11 YEAR END 1995 EX-27 NSC FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1995 DEC-31-1995 68 261 723 19 62 1,343 13,585 4,326 10,905 1,206 1,553 136 0 0 4,693 10,905 0 4,668 0 3,582 (142) 0 113 1,115 402 713 0 0 0 713 5.44 0
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