SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
( X ) Filed by the Registrant
( ) Filed by a Party other than the Registrant
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-b(e)(2))
( X ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to (section mark)240.14a-11(c) or
(section mark)240.14a-12
NORTH CAROLINA RAILROAD COMPANY
(Name of Registrant as Specified In Its Charter)
NORTH CAROLINA RAILROAD COMPANY
(Name of Person(s) Filing Proxy Statement If Other Than Registrant)
PAYMENT OF FILING FEE (Check the appropriate box):
( ) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
( ) $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: *
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
(Set forth the amount on which the filing fee is calculated and state how
it was determined)
( X ) Fee previously paid with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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NORTH CAROLINA RAILROAD COMPANY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 13, 1995
Notice is hereby given that the Annual Meeting of
Shareholders of North Carolina Railroad Company ("NCRR") will be
held at the Crabtree Marriott Hotel, 4500 Marriott Drive, Raleigh,
North Carolina, 27612 on Friday, December 15, 1995, at 10:00 A.M.,
for the following purposes:
(1) To consider approval of a Lease Extension Agreement;
(2) To elect five members of the Board of Directors to
terms of three years of which four Directors will be
elected by the State of North Carolina and one
Director will be elected by the other shareholders;
(3) To consider ratification of the selection of Ernst &
Young as independent public accountants for the year
ending December 31, 1995; and
(4) To transact such other business as may properly come
before the meeting or any adjournment or adjournments
thereof.
Pursuant to the Bylaws of the NCRR the Board of Directors
fixed the close of business on November 5, 1995 as the record date
for the determination of stockholders entitled to notice of and to
vote at the meeting. A complete list of the stockholders entitled
to vote at the meeting will be available at the office of the NCRR
at 234 Fayetteville Street Mall, Suite 600, Raleigh, North
Carolina at least ten days prior to the meeting.
All shareholders are cordially invited to attend the meeting
in person. Even if you plan to attend the meeting, YOU ARE
REQUESTED TO SIGN, DATE AND RETURN THE ACCOMPANYING PROXY AS SOON
AS POSSIBLE.
P. C. BARWICK, JR.
SECRETARY
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NORTH CAROLINA RAILROAD COMPANY
234 Fayetteville Street Mall, Suite 600
P. O. Box 2248
Raleigh, North Carolina 27602
PROXY STATEMENT
NOVEMBER 13, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
<S> <C>
Summary............................................................................................................. 3
General............................................................................................................. 6
Approval of Lease Extension Agreement............................................................................... 7
Summary of Certain Lease Extension Agreement Provisions............................................................. 7
Revenue Sources..................................................................................................... 9
Summary of Negotiations............................................................................................. 9
Reasons for Board Approval of Lease Extension Agreement............................................................. 10
Comparison of Terms to Other Railroad Leases........................................................................ 12
Alternatives to Lease Extension Agreement........................................................................... 15
Appraisals and Valuations........................................................................................... 20
Financial Advisors and Fairness Opinion............................................................................. 23
Real Estate Investment Trust (REIT) and Other Tax Matters........................................................... 25
Shareholder Vote and Quorum Requirements............................................................................ 32
Certain Conflicts of Interest and Shareholder Derivative Actions.................................................... 33
Dissenters' Rights.................................................................................................. 37
Election of Directors............................................................................................... 37
Current Directors and Executive Officers............................................................................ 38
Security Ownership of Certain Beneficial Owners and Management...................................................... 39
Executive Compensation.............................................................................................. 41
Appointment of Independent Public Accountants....................................................................... 43
Available Information............................................................................................... 43
Incorporation of Certain Information by Reference................................................................... 43
Other Business...................................................................................................... 43
Appendix A -- Form of Lease Extension Agreement..................................................................... A-1
Appendix B -- Form of Fairness Opinion of Morgan Stanley & Co. Incorporated......................................... B-1
Appendix C -- Form of Opinion of Petree Stockton, L.L.P............................................................. C-1
</TABLE>
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SUMMARY
LEASE EXTENSION AGREEMENT
The shareholders of the North Carolina Railroad Company ("NCRR") are being
asked to approve a Lease Extension Agreement with Norfolk Southern at the Annual
Meeting. The Lease Extension Agreement provides for annual base rental payments
of $8 million, inflation adjustments pursuant to a negotiated formula, an
initial term of 30 years, an option by Norfolk Southern for an additional
20-year term and a $5 million payment by Norfolk Southern in settlement of the
NCRR's claims to certain personal property. The Lease Extension Agreement is a
net lease that requires Norfolk Southern to pay all real estate taxes,
maintenance and other operating expenses for the properties subject to the Lease
Extension Agreement.
For the reasons stated herein, the Board of Directors has unanimously
approved the Lease Extension Agreement, and has determined that it is fair to,
and in the best interests of, the NCRR and its shareholders. AFTER CAREFUL
CONSIDERATION, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL OF THE LEASE EXTENSION AGREEMENT.
REASONS FOR APPROVAL
The Board of Directors of the NCRR unanimously approved the Lease Extension
Agreement because the Board of Directors determined that the Lease Extension
Agreement is in the best interest of all the shareholders of the NCRR. The Board
of Directors determined the best interests of the NCRR's shareholders would be
served by meeting the following primary strategic objective:
MAXIMIZE SHAREHOLDER VALUE BY MAXIMIZING DISTRIBUTABLE AFTER-TAX
INCOME TO THE SHAREHOLDERS CONSISTENT WITH MINIMIZING THE RISKS (I)
THAT INCOME WILL BE DISRUPTED AND (II) THAT THE VALUE OF THE ASSETS OF
THE NCRR WILL BE IMPAIRED.
The Board of Directors has determined that this Lease Extension Agreement
promotes the foregoing objective better than any of the other alternatives
realistically available to the NCRR, for the reasons discussed in detail in this
Proxy Statement. This determination by the Board was based on both the positive
features of the Lease Extension Agreement, and the uncertainty and risks
associated with the alternatives considered by the Board.
THE POSITIVE FEATURES OF THE LEASE EXTENSION AGREEMENT INCLUDE THE
FOLLOWING:
(Bullet) ATTRACTIVE REVENUES/TRAFFIC DENSITY RATIO. Revenues per
million ton miles from the Lease Extension Agreement compares
favorably to comparable railroad lease agreements. See
"COMPARISON OF TERMS TO OTHER RAILROAD LEASES."
(Bullet) INFLATION ADJUSTMENT. The Lease Extension Agreement contains
a provision adjusting the annual rent payment for inflation
that compares favorably to comparable railroad lease
agreements. See "COMPARISON OF TERMS TO OTHER RAILROAD
LEASES."
(Bullet) POSITIVE EFFECTS OF REIT STATUS. The Lease Extension
Agreement will allow the NCRR to satisfy all conditions to
electing Real Estate Investment Trust ("REIT") tax status,
which will allow the NCRR to avoid paying federal corporate
income taxes on that portion of its ordinary income or
capital gain that is currently distributed to shareholders.
Other alternatives to the Lease Extension Agreement, such as
the NCRR operating its own line without a lessee, would not
allow the NCRR to qualify for REIT status. See "ALTERNATIVES
TO LEASE EXTENSION AGREEMENT -- Operation
Without Any Lessee" and "REIT AND OTHER TAX MATTERS."
(Bullet) LESSEE CREDIT RATING. Norfolk Southern is a lessee with a
strong credit rating, which the Board believes ensures
revenue stability better than any alternative.
THE UNCERTAINTY AND RISKS ASSOCIATED WITH THE ALTERNATIVES CONSIDERED
BY THE BOARD INCLUDE THE FOLLOWING:
(Bullet) NO COMPETING BIDDERS FOR LINE. No class 1 railroad or short
line operator bid against Norfolk Southern despite efforts by
the NCRR and Morgan Stanley to solicit such bids. See
"ALTERNATIVES TO LEASE EXTENSION AGREEMENT --
Other Lessees for All or Part of the Line."
(Bullet) ICC LITIGATION UNCERTAINTY. Special ICC legal counsel advised
the Board that the NCRR could petition the ICC to set the
compensation that Norfolk Southern would pay for continued
use of the NCRR's line, but that (i) the outcome of such a
petition would be in doubt because the ICC has never decided
a case exactly like the NCRR's; the ICC could order higher or
lower rental payments than the $8 million provided for in the
Lease Extension
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Agreement; (ii) the ICC proceeding and related court action
would cost several million dollars, without taking appeals
into account, could take years to resolve and Norfolk
Southern could seek to have the compensation issue reopened
even after losing all appeals; and (iii) legislation has been
introduced to abolish the ICC and transfer some but not all
of its functions to other agencies; it is uncertain whether
the ICC or any other government agency will have the power to
establish rent payments. See "ALTERNATIVES TO LEASE
EXTENSION AGREEMENT -- Litigation Against Norfolk
Southern."
(Bullet) POSSIBLE LOSS OF OVERHEAD TRAFFIC. Most of the traffic over
the NCRR's line is overhead traffic (traffic that originates
and terminates off the NCRR's line), which is controlled by
Norfolk Southern. If Norfolk Southern ceases to lease the
NCRR's line, it cannot be determined whether Norfolk Southern
would divert a substantial amount of overhead traffic to
other routes. Diversion of substantial amounts of overhead
traffic would decrease attractiveness of the line to a short
line operator and reduce profitability of the line if the
NCRR operates its own line without a lessee. See
"ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Operation
Without Any Lessee."
(Bullet) RISKS OF INDEPENDENT OPERATION. Operating its own line
without a lessee would subject the NCRR to a number of risks,
including diversion of overhead traffic by Norfolk Southern,
loss of freight to competitors, including trucking companies,
unpredictable maintenance and labor expenses, capital
improvement costs, and a lack of experienced management.
Operating its own line without a lessee would mean that the
NCRR could not qualify for REIT tax status. See
"ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Other Lessees
for All or Part of the Line."
POTENTIAL ADVANTAGES OF CERTAIN ALTERNATIVES TO THE LEASE EXTENSION AGREEMENT
The alternatives to the Lease Extension Agreement reviewed and rejected by
the Board of Directors offer some potential, despite the risks described above,
to afford the NCRR greater revenues, and in some cases greater after-tax net
profits, than is afforded by the Lease Extension Agreement. For example, the
NCRR's railroad management consultants have estimated that, if the NCRR operates
its own line without a lessee and Norfolk Southern does not divert any overhead
traffic, the NCRR could generate $66 million of revenues, pre-tax net income of
$18.3 million and after-tax net income of $11.35 million. The consultants also
estimated that if Norfolk Southern diverted all overhead traffic, the NCRR's
revenues from independent operation would be approximately $18.4 million with
pre-tax net income of $3.8 million and after-tax net income of only $2.35
million. See "ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Operation by the NCRR
without any Lessee." Based on the advice of special ICC counsel as to the
valuation methods that might be utilized by the ICC, the property to which the
ICC might apply the valuation method, and the interest rates that might be
utilized by the ICC in setting compensation, NCRR's railroad management
consultants estimated that the ICC could order Norfolk Southern to pay the NCRR
as much as $74.7 million and as little as $4.6 million annually. Although the
Board believed litigation would have been an expensive and drawn out process, it
is also possible that Norfolk Southern may have settled the litigation by
offering the NCRR a lease with better economic terms. See "ALTERNATIVES TO LEASE
EXTENSION AGREEMENT -- Potential Litigation Against Norfolk Southern." It is
also possible that, if the NCRR takes the risks associated with independent
operation and/or ICC litigation to achieve the potential rewards described
above, the State of North Carolina would seek to purchase the interests of the
other shareholders and that such purchase would be at a valuation based on the
NCRR's potential to achieve high revenues and profits as described above. There
can be no assurance, however, that the State will purchase the stock of the
other shareholders or of the valuation if such a purchase occurs. The Board
deems it to be in the best interests of the shareholders not to speculate about
the Board's strategy in negotiating any future buy-out offer from the State as
such speculation may be used against the NCRR in possible future negotiations.
See "CERTAIN CONFLICTS OF INTERESTS AND SHAREHOLDER DERIVATIVE ACTIONS." For the
reasons described herein, the Board of Directors of the NCRR determined that the
risks associated with alternatives to the Lease Extension Agreement made it
unwise to gamble (i) that the potential high revenues and profits would in fact
be achieved if the NCRR pursued such alternatives or (ii) that Norfolk Southern
would settle any litigation on terms favorable to the NCRR.
FINANCIAL ADVISOR AND FAIRNESS OPINION
Morgan Stanley & Co. Incorporated ("Morgan Stanley"), financial advisor to
the Board of Directors of the NCRR in connection with this transaction, has
delivered to the Board its opinion dated as of September 15, 1995, that subject
to the assumptions, matters considered, and limitations set forth in the
opinion, the consideration to be received by the NCRR pursuant to Lease
Extension Agreement is fair, from a financial point of view, to the NCRR. The
NCRR's shareholders are urged to read the opinion carefully and in its
entirety. See "FINANCIAL ADVISORS AND FAIRNESS OPINION" and APPENDIX B --
"FAIRNESS OPINION OF MORGAN STANLEY & CO. INCORPORATED."
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SHAREHOLDER VOTE AND QUORUM REQUIREMENTS
Under North Carolina law, the Lease Extension Agreement can be approved by
the shareholders only if the holders of a majority of the outstanding shares of
Common Stock of the NCRR affirmatively vote to approve the Lease Extension
Agreement at a meeting duly called and at which a quorum is present. In
addition, in order to give the shareholders other than the State of North
Carolina (which owns approximately 75% of the NCRR's outstanding shares of
Common Stock) a role in the approval process, the Board of Directors has
determined that approval of the Lease Extension Agreement will require approval
of a majority of the votes cast by shareholders other than the State of North
Carolina.
A quorum is normally present under corporate statutes if the holders of a
majority of the outstanding shares are represented at the meeting, either in
person or by proxy. However, the Bylaws of the NCRR also require that the
holders of a majority of the shares held by shareholders other than the State of
North Carolina must be represented, in person or by proxy, in order to
constitute a quorum at a meeting of shareholders. Unless this Bylaw is
challenged and invalidated, the holders of a majority of the shares of the NCRR
held by persons other than the State of North Carolina could prevent approval of
the Lease Extension Agreement by not attending the meeting in person and not
executing and returning a proxy.
Shareholders who oppose the Lease Extension Agreement may choose whether
their opposition is best effectuated by not voting or by voting against the
Lease Extension Agreement. Failure to execute and return a proxy will have the
practical effect of voting against the Lease Extension Agreement if the holders
of a majority of the NCRR's outstanding shares other than the State of North
Carolina do not attend the meeting in person or by proxy. However, if the
holders of a majority of the NCRR's outstanding shares other than the State of
North Carolina attend the meeting in person or by proxy, opposition to the Lease
Extension Agreement will be effective only if the number of votes cast against
approval of the Lease Extension Agreement equals or exceeds the number of votes
cast for approval by shareholders other than the State of North Carolina. See
"SHAREHOLDER VOTE AND QUORUM REQUIREMENTS."
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GENERAL
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of the North Carolina Railroad Company (the "NCRR") of
proxies in the accompanying form to be used at the Annual Meeting of
Shareholders to be held Friday, December 15, 1995, 10:00 A.M., at the Crabtree
Marriott Hotel, 4500 Marriott Drive, Raleigh, North Carolina, 27612 and at any
subsequent time as may be made necessary by its adjournment. The Proxy Statement
and form of proxy were first sent to shareholders on or about November 13, 1995.
The shares represented by any proxy given as a result of this request will
be voted as specified in the proxy. As to any matter for which no choice has
been specified in an executed proxy, the shares represented thereby will be
voted by the persons named in the proxy:
(1) For approval of the Lease Extension Agreement;
(2) For the election as a director of the nominee listed herein;
(3) For the approval of the selection of Ernst & Young as independent
public accountants for the year ended December 31, 1995; and
(4) In their discretion with respect to any other business as may
properly come before the meeting or any adjournment or
adjournments thereof.
THE NCRR'S ANNUAL REPORT TO SHAREHOLDERS, INCLUDING FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1994, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES, WAS SENT
TO SHAREHOLDERS IN JULY 1995. ANOTHER COPY OF THE FORM 10-K AND ANY EXHIBIT TO
FORM 10-K IS AVAILABLE UPON REQUEST, WITHOUT CHARGE, TO THE PERSONS WHOSE
PROXIES ARE SOLICITED. WRITTEN REQUESTS SHOULD BE MADE TO P. C. BARWICK, JR.,
SECRETARY, P. O. BOX 2248, RALEIGH, NORTH CAROLINA 27602.
PROXY SOLICITATION
The entire cost of solicitation of proxies will be borne by the NCRR. In
addition to mailing proxy material, the NCRR expects to solicit proxies by
telephone, facsimile, telegraph or personally by directors, officers and
employees of the NCRR. Officers and directors will not receive additional
compensation for their efforts. The NCRR expects to pay an independent proxy
solicitor up to $25,000 as compensation for the solicitation of proxies. In
addition, the NCRR may reimburse brokers and other custodians, nominees and
fiduciaries for their expenses for sending proxy material to beneficial owners
in accordance with the rules and regulations of the Securities and Exchange
Commission.
PROXY REVOCATION
Any shareholder who has executed a proxy and attends the meeting may elect
to vote in person rather than by proxy. A shareholder may revoke his proxy at
any time before it is voted by filing written notice of revocation or by filing
a later valid proxy with the Secretary of the NCRR. Revocations will be
effective if delivered to the principal office of the NCRR at any time prior to
the day of the shareholders' meeting, or if delivered to the Secretary of the
NCRR at the meeting any time prior to the time the Chairman of the meeting
closes voting on the matter for which the proxy is sought to be revoked.
VOTING AND QUORUM REQUIREMENTS
Pursuant to the Bylaws of the NCRR the Board of Directors fixed November 5,
1995 as the record date for shareholders entitled to vote at the Annual Meeting
and only shareholders of record at the close of business on that date will be
entitled to vote. There are outstanding 4,283,470 shares of the Common Stock of
the NCRR of which 3,207,173 shares are owned by the State of North Carolina with
the remaining 1,076,297 shares owned by shareholders other than the State of
North Carolina (the "privately-owned" shares). (The State of North Carolina also
holds shares in escheat subject to the claim of unknown owners. The State of
North Carolina has advised that it does not currently vote shares held in
escheat.)
As a group, as of October 31, 1995, directors and officers of the NCRR
beneficially owned 26,700 shares of Common Stock of the NCRR, or approximately
0.62% of the total issued and outstanding shares. As a group, directors elected
by the "privately-owned" shares beneficially owned 15,080 shares of Common Stock
of the NCRR, or approximately 0.35% of the total issued and outstanding shares,
and approximately 1.4% of the total "privately-owned" shares.
Pursuant to agreements with some of the directors elected by the State of
North Carolina, the State is entitled to dividends from, and retains the right
to repurchase, an additional 1,400 shares. Shares owned of record by Directors
that are subject to repurchase by the State of North Carolina are deemed owned
by the Director personally and if present at the
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meeting will be counted toward the quorum requirements, and if voted will be
counted toward the voting requirements, that pertain solely to shareholders
other than the State of North Carolina. See "SHAREHOLDER VOTE AND QUORUM
REQUIREMENTS."
VOTING
Each share of Common Stock is entitled to one vote on all matters presented
at the meeting. There is no cumulative voting for election of directors.
The Lease Extension Agreement must be approved by both (i) as required by
statute, the vote of a majority of the outstanding shares of capital stock of
the NCRR at a meeting at which a quorum is present and (ii) as required by the
Board of Directors, a majority of the votes cast by shareholders other than the
State of North Carolina. A plurality of the votes cast at the meeting is
required to elect a Director. The vote of the majority of the shares present and
voting at a meeting is required with respect to all other matters expected to
come before the meeting. In the election of a Director, any action other than a
vote for a nominee will have the practical effect of voting against the nominee.
See "SHAREHOLDER VOTE AND QUORUM REQUIREMENTS."
QUORUM
Under North Carolina law, a matter can not be voted on at a meeting of the
shareholders unless a quorum is present at the meeting in person or by proxy.
The Bylaws of the NCRR provide that a majority of the outstanding shares of the
NCRR entitled to vote, represented in person or by proxy, constitutes a quorum
at a meeting of shareholders, provided, that a majority of the shares held by
shareholders other than the State of North Carolina are represented at the
meeting, in person or by proxy. Attendance at the meeting for any purpose
constitutes attendance at the meeting for all purposes of the meeting. Not
attending the meeting, either in person or by proxy, may have the effect of
causing a quorum not to be present at the meeting, in which case it would not be
possible to vote on the Lease Extension Agreement or any other matter. See
"SHAREHOLDER VOTE AND QUORUM REQUIREMENTS."
Abstentions and "broker non-votes" are counted for purposes of determining
whether a quorum is present, but do not represent votes cast with respect to any
proposal. "Broker non-votes" are shares held by a broker or nominee for which an
executed proxy is received by the NCRR, but are not voted as to one or more
proposals because instructions have not been received from the beneficial owners
or persons entitled to vote and the broker or nominee does not have
discretionary voting power.
APPROVAL OF LEASE EXTENSION AGREEMENT
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF THE
NCRR VOTE TO APPROVE THE LEASE EXTENSION AGREEMENT BY VOTING FOR THE FOLLOWING
RESOLUTION:
RESOLVED that the Lease Extension Agreement in the form attached
as Appendix A to the Proxy Statement sent to shareholders in
connection with this Annual Meeting of Shareholders be, and it hereby
is, adopted, ratified and approved.
FOR THE REASONS STATED HEREIN, THE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE LEASE EXTENSION AGREEMENT AND HAS DETERMINED THAT IT IS FAIR TO,
AND IN THE BEST INTERESTS OF, THE NCRR AND ITS SHAREHOLDERS. AFTER CAREFUL
CONSIDERATION, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL OF THE LEASE EXTENSION AGREEMENT.
See "REASONS FOR APPROVAL OF LEASE EXTENSION AGREEMENT," "CERTAIN CONFLICTS
OF INTERESTS AND SHAREHOLDER DERIVATIVE ACTIONS" and "SHAREHOLDER VOTE AND
QUORUM REQUIREMENTS."
SUMMARY OF CERTAIN LEASE EXTENSION AGREEMENT PROVISIONS
The Lease Extension Agreement extends the terms of (i) the Lease dated
August 16, 1895, as amended and supplemented thereafter, between the NCRR and
Norfolk Southern Railway Company, formerly known as Southern Railway Company
("NSR") (the 1895 "Lease") and (ii) the Lease dated August 30, 1939, as amended
and supplemented thereafter, between Atlantic and North Carolina Railroad
Company (merged into the NCRR in 1989) and Atlantic and East Carolina Railway
Company, a wholly-owned subsidiary of NSR ("AECR") (the "1939 Lease"). The 1895
Lease and the 1939 Lease
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are hereinafter collectively referred to as the "Leases." NSR and AECR are
hereinafter collectively referred to as "Norfolk Southern."
Set forth below is a summary of some of the material terms of the Lease
Extension Agreement, which summary should be read in conjunction with the
complete terms of the Lease Extension Agreement, a copy of which is included as
Appendix A hereto and is incorporated herein in its entirety.
(1) The base annual rental under the Lease Extension Agreement is eight
million dollars ($8,000,000) for the period from January 1, 1995
through December 31, 1995. Following effectiveness of the Lease
Extension Agreement, Norfolk Southern will pay the NCRR the amount by
which (i) annual accrued rental payments ($8 million during 1995), plus
interest at the 90-day U. S. Treasury bill rate for the period
commencing the date payment would have been due under the Lease
Extension Agreement and ending on the date Norfolk Southern pays,
exceeds (ii) the aggregate amount of rental payments made to the NCRR
by Norfolk Southern for use of the NCRR's property under the 1895 Lease
and the 1939 Lease for the period between December 31, 1994 and the
effective date of the Lease Extension Agreement. As of September 30,
1995, Norfolk Southern has paid the NCRR approximately $188,000 in
rental for 1995.
(2) Annual base rent for 1996 and each year thereafter will be adjusted
each year to account for inflation during the preceding calendar year
according to the implicit price deflator for the gross domestic product
(IPD-GDP). In no event, however, will the base annual rental for any
calendar year be less than eight million dollars ($8,000,000). The base
rent adjustment in any year cannot exceed the sum of: (i) four (4%)
percent of the base rent for the preceding year, plus (ii) seventy-five
(75%) percent of the IPD-GDP in excess of four (4%) percent. There is a
one-year delay in application of the IPD-GDP. For example, adjustment
of 1995 rental payments to determine 1996 rental payments is based upon
the IPD-GDP for 1994.
(3) The Leases are extended for an initial term of thirty (30) years,
through December 31, 2024 and are extendable for an additional twenty
(20) years at the option of Norfolk Southern. Exercise of the
twenty-year extension option requires that Norfolk Southern pay to the
NCRR an option fee equal to the lesser of (i) twenty-five (25%) percent
of the base rent in effect during the year prior to Norfolk Southern
giving notice to exercise its extension option or (ii) $5 million. If
the extension option is exercised by the lessee, the NCRR expects to
recognize the renewal fee ratably over the 20-year lease renewal term.
(4) Norfolk Southern will make a one-time payment to the NCRR of five
million dollars ($5,000,000). In exchange for the NCRR's release of
Norfolk Southern from its obligation to return to the NCRR certain
personal property upon expiration of the Leases, the NCRR and Norfolk
Southern have entered into an agreement whereby the $5,000,000 payment
will be made in December of 1995 in order to facilitate the NCRR
seeking REIT status at the earliest practicable date. The carrying
value of the personal property released is fully depreciated and
therefore has no book value, therefore, the NCRR will recognize a gain
on the full amount of the payment. The Lease Extension Agreement does
not waive or otherwise affect any claims of the NCRR to Spencer
(Linwood) Yard or other such property or facilities, but provides that
such claims are postponed until the termination of the Lease Extension
Agreement and any renewal pursuant to its terms.
(5) 317 miles of railroad property (including the railroad right of way and
certain improvements yard areas and other structures situated adjacent
to, under or along the lines) located between Morehead City and
Charlotte, North Carolina, are covered by the Lease Extension
Agreement. The NCRR has the right, however, to have certain properties
outside the right of way not used in operating a railroad released from
the Leases. Norfolk Southern's rental payments will not be reduced if
the NCRR exercises this right. The NCRR intends to exercise its right
to have released from the Leases those properties it determines have
income-generating potential in excess of projected expenses. The NCRR
estimates these properties currently are producing less than $100,000
of annual lease income. The NCRR will determine which properties it
will seek to have released to it after evaluating environmental
liability and other relevant factors.
(6) Norfolk Southern is required to pay to the NCRR seventy-five (75%) of
any revenues (in excess of de minimis amounts) obtained by Norfolk
Southern for longitudinal leases and licenses granted by Norfolk
Southern to third parties for certain fiber optic and other uses.
(7) The Lease Extension Agreement contains extensive provisions governing
the rights and obligations of the parties for various environmental
liabilities and expenses.
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(8) Norfolk Southern is required to pay the expenses to maintain and
operate the leased railroad lines and facilities, to fulfill all
railroad common carrier duties pertaining to the leased railroad
lines and to indemnify the NCRR from certain liability claims by
third parties.
Except as modified or supplemented by the Lease Extension Agreement, the
terms of the Leases continue in full force and effect. The Lease Extension
Agreement does not affect the lease dated December 31, 1968 (the "1968 Charlotte
Lease") between the NCRR and Norfolk Southern, which will continue without
change until its December 31, 2067 expiration date. The 1968 Charlotte Lease
covers three parcels of land in Charlotte, North Carolina, for which the NCRR
currently receives $81,319 in rental payments annually under the 1968 Charlotte
Lease.
REVENUE SOURCES
Upon effectiveness of the Lease Extension Agreement and exercise by the
NCRR of its right to the return of nonoperating properties, the NCRR is expected
to have the following sources of revenues.
(1) $8 million annually from Norfolk Southern pursuant to the Lease
Extension Agreement;
(2) $81,319 annually from Norfolk Southern pursuant to the 1968 Charlotte
Lease;
(3) approximately $100,000 annually from leases of nonrailroad operating
property;
(4) Possible revenues from fiber optic leases and licenses along its
railroad line; and
(5) Miscellaneous sales or condemnations of operating and nonoperating
properties.
SUMMARY OF NEGOTIATIONS
On January 20, 1992 the NCRR and Norfolk Southern executed a
confidentiality agreement to cover the exchange of information required to
facilitate the negotiating process. The NCRR and Norfolk Southern commenced
negotiations to extend or renew the existing 1895 Lease and the 1939 Lease at a
meeting on June 26, 1992. On January 27, 1994 the NCRR's Board voted to retain
Morgan Stanley & Co. Incorporated ("Morgan Stanley") to advise the NCRR's Board
about negotiations and alternatives to entering into a lease with Norfolk
Southern. The NCRR also retained other consultants from time to time to assist
in matters relating to negotiations and evaluating alternatives to an agreement
with Norfolk Southern. Dozens of negotiating meetings were held prior to
execution of the Lease Extension Agreement.
On November 22, 1994, the NCRR announced tentative agreement with Norfolk
Southern regarding annual lease payments, inflation adjustment provisions, the
length of the initial term and renewal options and settlement of claims by the
NCRR for the return of certain personal property to the NCRR. This tentative
agreement was approved by a vote of NCRR's Board with eleven Directors voting in
favor, two voting against, and one absention. On December 30, 1994 the NCRR and
Norfolk Southern entered into a temporary nonholdover agreement to cover
continued railroad operations over the NCRR's property following December 31,
1994. On December 31, 1994 and January 1, 1995 the Leases expired by their
terms. During December 1994 and January 1995, four shareholder derivative legal
actions were filed seeking to enjoin the Lease Extension Agreement. See "CERTAIN
CONFLICT OF INTEREST ISSUES AND SHAREHOLDER DERIVATIVE ACTIONS."
On August 10, 1995, the Board of Directors of the NCRR unanimously approved
a Lease Extension Agreement in the form attached as Appendix A hereto (the
"Lease Extension Agreement"). On August 24, 1995, Norfolk Southern approved the
Lease Extension Agreement.
The Lease Extension Agreement will not be effective until certain
conditions occur, but upon the occurrence of such conditions effectiveness will
be retroactive to January 1, 1995. Conditions to effectiveness include (i)
obtaining from the Interstate Commerce Commission, or any successor entity, any
required approval or exemption from the requirement to obtain approval of the
Lease Extension Agreement, under the provisions of the Interstate Commerce Act
or any successor statute, (ii) obtaining all required governmental and corporate
approvals and (iii) the expiration or termination of any then existing
court-ordered injunctions (of which currently there are none). The interim
agreement whereby Norfolk Southern is continuing to operate over the properties
of the NCRR since the expiration date of the Leases on December 31, 1994 is
expected to continue until the earlier of (i) the Lease Extension Agreement
becoming effective or (ii) determination that the conditions to effectiveness
will not occur.
The NCRR is required by North Carolina statutes to obtain approval of (i)
the shareholders of the NCRR and (ii) the Governor and the Council of State of
the State of North Carolina, before the Lease Extension Agreement can be
effective.
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The NCRR intends to seek such approvals of the Lease Extension Agreement by the
Governor and the Council of State of the State of North Carolina as soon as
practicable.
REASONS FOR BOARD APPROVAL OF LEASE EXTENSION AGREEMENT
The Board of Directors of the NCRR unanimously approved the Lease Extension
Agreement because the Board of Directors determined that the Lease Extension
Agreement is in the best interest of all the shareholders of the NCRR.
The Board of Directors gave substantial weight to (i) the fact that no
other potential lessee for all or part of the NCRR's line made any bid or
expressed any interest in bidding for a lease, (ii) the fact that the Lease
Extension Agreement will allow the NCRR to satisfy conditions to electing Real
Estate Investment Trust ("REIT") tax status, which will enable the NCRR to avoid
paying federal corporate taxes on that portion of its ordinary income and
capital gains that is currently distributed to shareholders, (iii) other
comparable leases having lower lease payments per million ton miles than the
Lease Extension Agreement, (iv) the fact that most of the traffic on the NCRR's
line is overhead traffic that is outside the control of the NCRR and (v) the
risks associated with alternatives to the Lease Extension Agreement. The Board
of Directors determined the best interests of the NCRR's shareholders would be
served by meeting the following primary strategic objective:
MAXIMIZE SHAREHOLDER VALUE BY MAXIMIZING DISTRIBUTABLE AFTER-TAX
INCOME TO THE SHAREHOLDERS CONSISTENT WITH MINIMIZING THE RISKS (I)
THAT INCOME WILL BE DISRUPTED AND (II) THAT THE VALUE OF THE ASSETS OF
THE NCRR WILL BE IMPAIRED.
The Board of Directors has determined that this Lease Extension Agreement
promotes the foregoing objective better than any of the other alternatives
realistically available to the NCRR, for the reasons discussed in detail in this
Proxy Statement. This determination by the Board was based on both the positive
features of the Lease Extension Agreement, and the uncertainty and risks
associated with the alternatives considered by the Board.
THE POSITIVE FEATURES OF THE LEASE EXTENSION AGREEMENT INCLUDE THE
FOLLOWING:
(Bullet) ATTRACTIVE REVENUES/TRAFFIC DENSITY RATIO. Revenues per million
ton miles from the Lease Extension Agreement compared favorably to
comparable railroad lease agreements. See "COMPARISON OF TERMS TO
OTHER RAILROAD LEASES."
(Bullet) INFLATION ADJUSTMENT. The Lease Extension Agreement contains a
provision adjusting the annual rent payment for inflation that
compares favorably to comparable railroad lease agreements. See
"COMPARISON OF TERMS TO OTHER RAILROAD LEASES."
(Bullet) POSITIVE EFFECTS OF REIT STATUS. The Lease Extension Agreement
will allow the NCRR to satisfy all conditions to electing Real
Estate Investment Trust ("REIT") tax status, which will allow the
NCRR to avoid paying federal corporate income taxes on that
portion of its ordinary income or capital gain that is currently
distributed to shareholders. Other alternatives to the Lease
Extension Agreement, such as the NCRR operating its own line
without a lessee, would not allow the NCRR to qualify for REIT
status. See "ALTERNATIVES TO LEASE EXTENSION AGREEMENT --
Operation Without Any Lessee" and "REIT AND OTHER TAX MATTERS."
(Bullet) LESSEE CREDIT RATING. Norfolk Southern is a lessee with a strong
credit rating, which the Board believes ensures revenue stability
better than any alternative.
THE UNCERTAINTY AND RISKS ASSOCIATED WITH ALTERNATIVES TO THE LEASE
EXTENSION AGREEMENT CONSIDERED BY THE BOARD INCLUDE THE FOLLOWING:
(Bullet) NO COMPETING BIDDERS FOR LINE. No class I railroad or short line
operator bid against Norfolk Southern despite efforts by the NCRR
and Morgan Stanley to solicit such bids. See "ALTERNATIVES TO
LEASE EXTENSION AGREEMENT -- Other Lessees for All or Part of the
Line."
(Bullet) ICC LITIGATION UNCERTAINTY. Special ICC legal counsel advised the
Board that the NCRR could petition the ICC to set the compensation
that Norfolk Southern would pay for continued use of the NCRR's
line, but that (i) the outcome of such a petition would be in
doubt because the ICC has never decided a case exactly like the
NCRR's; the ICC could order higher or lower rental payments than
the $8 million provided for in the Lease Extension Agreement; (ii)
the ICC proceeding and related court action would cost several
million dollars, without taking appeals into account, could take
years to resolve and Norfolk Southern could seek to have the
compensation issue reopened even after losing all appeals; and
(iii) legislation has been introduced to abolish the ICC and
transfer some but not all of its
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functions to other agencies; it is uncertain whether the ICC or
any other government agency will have the power to establish rent
payments. See "ALTERNATIVES TO LEASE EXTENSION
AGREEMENT -- Litigation Against Norfolk Southern."
(Bullet) POSSIBLE LOSS OF OVERHEAD TRAFFIC. Most of the traffic over the
NCRR's line is overhead traffic (traffic that originates or
terminates off the NCRR's line), which is controlled by Norfolk
Southern. If Norfolk Southern ceases to lease the NCRR's line, it
cannot be determined whether Norfolk Southern would divert a
substantial amount of overhead traffic to other routes. Diversion
of substantial amounts of overhead traffic would decrease
attractiveness of the line to a short line operator and reduce
profitability of the line if the NCRR operates its own line
without a lessee. See "ALTERNATIVES TO LEASE EXTENSION
AGREEMENT -- Operation Without Any Lessee."
(Bullet) RISKS OF INDEPENDENT OPERATION. Operating its own line without a
lessee would subject the NCRR to a number of risks, including
diversion of overhead traffic by Norfolk Southern, loss of freight
to competitors, including trucking companies, unpredictable
maintenance and labor expenses, capital improvement costs, and a
lack of experienced management. Operating its own line without a
lessee would mean that the NCRR could not qualify for REIT tax
status. See "ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Other
Lessees for All or Part of the Line."
Alternatives to the Lease Extension Agreement evaluated by the Board of
Directors include leasing all or part of its line to one or more other
railroads, operating its own independent railroad business without a lessee over
all or part of its line and bringing actions at the Interstate Commerce
Commission (the "ICC") and the courts to have the ICC and the courts define the
rights and obligations of NCRR and Norfolk Southern to one another.
POTENTIAL ADVANTAGES OF CERTAIN ALTERNATIVES TO LEASE EXTENSION AGREEMENT
The alternatives to the Lease Extension Agreement reviewed and rejected by
the Board of Directors offer some potential, despite the risks described above,
to afford the NCRR greater revenues, and in some cases greater after-tax net
profits, than is afforded by the Lease Extension Agreement. For example, the
NCRR's railroad management consultants have estimated that, if the NCRR operates
its own line without a lessee and Norfolk Southern does not divert any overhead
traffic, the NCRR could generate $66 million of revenues, pre-tax net income of
$18.3 million and after-tax net income of $11.35 million. The consultants also
estimated that if Norfolk Southern diverted all overhead traffic, the NCRR's
revenues from independent operation would be approximately $18.4 million with
pre-tax net income of $3.8 million and after-tax net income of only $2.35
million. See "ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Operation by the NCRR
without any Lessee." Based on the advice of special ICC counsel as to the
valuation methods that might be utilized by the ICC, the property to which the
ICC might apply the valuation method, and the interest rates that might be
utilized by the ICC in setting compensation, NCRR's railroad management
consultants estimated that the ICC could order Norfolk Southern to pay the NCRR
as much as $74.7 million and as little as $4.6 million annually. Although the
Board believed litigation would have been an expensive and drawn out process, it
is also possible that Norfolk Southern may have settled the litigation by
offering the NCRR a lease with better economic terms. See "ALTERNATIVES TO LEASE
EXTENSION AGREEMENT -- Potential Litigation Against Norfolk Southern." It is
also possible that, if the NCRR takes the risks associated with independent
operation and/or ICC litigation to achieve the potential rewards described
above, the State of North Carolina would seek to purchase the interests of the
other shareholders and that such purchase would be at a valuation based on the
NCRR's potential to achieve high revenues and profits as described above. There
can be no assurance, however, that the State will purchase the stock of the
other shareholders or of the valuation if such a purchase occurs. The Board
deems it to be in the best interests of the shareholders not to speculate about
the Board's strategy in negotiating any future buy-out offer from the State as
such speculation may be used against the NCRR in possible future negotiations.
See "CERTAIN CONFLICTS OF INTERESTS AND SHAREHOLDER DERIVATIVE ACTIONS." For the
reasons described herein, the Board of Directors of the NCRR determined that the
risks associated with alternatives to the Lease Extension Agreement made it
unwise to gamble (i) that the potential high revenues and profits would in fact
be achieved if the NCRR pursued such alternatives or (ii) that Norfolk Southern
would settle any litigation on terms favorable to the NCRR.
After evaluating the alternatives, the Board of Directors concluded that
lease(s) on acceptable terms would best satisfy the above-stated strategic
objective of the NCRR. Obtaining the highest possible rental and other
acceptable lease terms with one or more experienced and credit-worthy lessees
became the primary focus of the NCRR's efforts.
As Norfolk Southern was the current lessee, controls the overhead traffic,
which constitutes a majority of the traffic on the NCRR's line, and has a strong
credit rating and asset position, negotiations were commenced with Norfolk
Southern to determine its level of interest in renewing the Leases. From the
start of discussions Norfolk Southern conducted negotiations as if it was the
only potential lessee for the NCRR's line.
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Despite the NCRR's efforts to find another potential lessee for all or part
of its line, the failure of any other alternative lessee operator to come
forward to negotiate or bid for a lease gave the NCRR very little bargaining
leverage with Norfolk Southern. A primary factor in the Board's decision to
approve the Lease Extension Agreement was its conclusion that reaching an
agreement with a competing bidder for all or part of the NCRR's line was not a
realistic possibility, which conclusion was reinforced by the fact that no
competing bidder emerged after the NCRR publicly announced in November 1994 the
proposed annual rent and other primary economic terms. The NCRR's line is
located so that the primary potential source of overhead traffic is likely to be
from Norfolk Southern, which puts Norfolk Southern in a position to have a
substantial impact on traffic densities over the NCRR's line. Any operator of
the line would be required to negotiate agreements with Norfolk Southern for
traffic moving over connection points to and from the Norfolk Southern system
and to negotiate usage agreements for railroad cars. As Norfolk Southern's
overhead traffic constitutes a majority of traffic over the NCRR's line, other
operators of the line would be reluctant to enter into a long-term lease with a
guaranteed rental payment that attributes significant value to traffic that
Norfolk Southern could divert to other routes. Also, due to consolidations of
Class I railroads, fewer large railroads compete with one another for access to
smaller railroad lines, such as the NCRR's line. Consequently, no competing bids
were made for the line.
The negotiating process resulted in significant improvement over Norfolk
Southern's initial offer, but Norfolk Southern's position changed little after
mid-1994. By November, 1994, it appeared that Norfolk Southern had made its best
offer and the Board concluded it would be prudent to agree with Norfolk Southern
upon basic economic terms and commence negotiating a definitive agreement.
Consequently, in November 1994 the Board decided to accept an $8 million annual
rental payment, which was at the low end of the price range the Board considered
acceptable, provided other lease terms could be negotiated that would reduce
risks to the NCRR. For example, the NCRR insisted on an inflation adjustment
factor that offered protection against inflation by adjusting the annual rent
based upon inflation reflected in the IPD-GDP. After announcement of the
tentative agreement on annual rent and other primary terms, the Board focused on
reducing risk to the distributable net income and the value of NCRR's assets by
including in the agreement provisions relating to environmental liabilities.
The NCRR sought to have Norfolk Southern pay rent at an $8 million annual
rent until the Lease Extension Agreement is negotiated, executed and becomes
effective, but Norfolk Southern refused. Instead, the NCRR will receive 1995
rental payments retroactively upon effectiveness of the Lease Extension
Agreement.
COMPARISON OF TERMS TO OTHER RAILROAD LEASES
The Board believes that the annual rental payment, inflation adjustment
provision and the environmental protection provisions of the Lease Extension
Agreement are more favorable to the NCRR as lessor than are the provisions of
certain comparable railroad leases.
ANNUAL RENT PAYMENT
Railroad revenues are in large part tied to traffic densities over a line.
Consequently, the Board believes the most significant measure of the rental
terms of a railroad lease is the amount of compensation the lessee receives
compared to the density of traffic over the line. As indicated in the table set
forth below, the Lease Extension Agreement provides the NCRR with greater rent
for its line's traffic density than the lessors received under the leases to
which the NCRR compared the Lease Extension Agreement. Consequently, the Board
concluded that the $8 million annual rental payment to be received by the NCRR
under the Lease Extension Agreement is more favorable to the NCRR than the
rental provisions of comparable leases are to the lessors under such leases.
This conclusion by the Board was a significant factor in the Board deciding to
approve the Lease Extension Agreement.
Set forth below is a table that compares two leases that the Board, with
the advice of its financial advisor, compared to the Lease Extension Agreement;
the Cincinnati Lease with Norfolk Southern and the Georgia Lease with CSX
Transportation, Inc. ("CSX") (both as defined below). The table compares rental
payments, miles of leased line and traffic tonnage density, which information is
based upon the best information available to the NCRR:
<TABLE>
<CAPTION>
MGTM (1)
PER PAYMENT
TRACK ANNUAL TRACK PER
MILES PAYMENT MGTM (1) MILE MGTM (1)
<S> <C> <C> <C> <C> <C>
Cincinnati (2).......................... 336 $14.0 million 16,625 49.5 $ 842
Georgia (3)............................. 134 $ 5.3 million 5,987 44.7 $ 878
NCRR.................................... 317 $ 8.0 million 4,464(4) 14.1 $1,792
</TABLE>
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(1) "MGTM" means Million Gross Ton Miles. MGTM is the product derived by
multiplying (i) the number of tons of cargo shipped over a line by the
number of miles the cargo travels. MGTM is a common, but not the exclusive,
means of determining traffic density over a line of track. MGTM is often a
basis for comparing railroad volumes and profitability. However, although
MGTM is correlated with revenues generated over a line of track, MGTM cannot
be used to establish profitability with a reasonable degree of certainty.
(2) 1994 Lease Payment and 1993 Norfolk Southern traffic data.
(3) 1995 Lease Payment, 1993 CSX traffic data.
(4) 1993 ALK Associates traffic estimates using ICC carload waybill samples.
BACKGROUND OF COMPARABLE LEASES
To evaluate the fairness to the NCRR of the terms of the Lease Extension
Agreement, the Board of Directors, with the assistance of its financial advisor,
Morgan Stanley, compared the provisions of the Lease Extension Agreement to two
other comparable railroad leases (described below) in which the lessor is NOT an
operating railroad, and to the extent possible, other commercial lease
provisions. Leases in which the lessor did NOT operate a railroad were deemed to
be more comparable to the situation under which the NCRR was negotiating the
Lease Extension Agreement, as an entity that operates a railroad is in a
different bargaining position than an entity that conducts no active railroad
operations.
The first comparable transaction is the supplementary agreement between the
Trustees of the Cincinnati Southern Railway, as lessor, and the Cincinnati New
Orleans and Texas Pacific Railway Company, as lessee, dated January 1, 1987, and
covering a 335 mile long railroad line extending from Cincinnati to Chattanooga
(the "Cincinnati Lease"). The owner of the lessor is the City of Cincinnati. The
lessee under the Cincinnati Lease is an affiliate of Norfolk Southern. The
Cincinnati Lease was a renegotiation of an existing lease whose term had not yet
expired. The extension was part of a settlement of litigation in which the
lessor had charged Norfolk Southern with breach of its lease obligations and
other claims.
The second comparable transaction is a lease between the State of Georgia,
as lessor, and Louisville and Nashville Railroad Company, as lessee, dated March
4, 1968, covering a railroad line running from Atlanta to Chattanooga (the "W&A
Lease"). CSX is the lessee (through a merger) under this lease. In this lease,
CSX and Norfolk Southern bid against one another. The NCRR's Board has been
advised by railroad industry consultants that there is a perception in the
railroad industry that CSX and Norfolk Southern have concluded it is not in
their respective interests to bid against one another for leased lines that have
historically been operated as a part of the system of the other company. The
Seaboard System Railroad, Inc. became the lessee under the W&A Lease by
corporate merger. It entered into an amendment of lease for the W&A Line in
1986. This lease amendment and the W&A Lease are similar in most respects, and
are hereinafter referred to as the "Georgia Lease."
In a third, less comparable transaction, a small line was leased by the
Pittsburgh and West Virginia Railroad ("PWVR") to an affiliate of Norfolk
Southern in 1964. PWVR is a public company with REIT tax status whose shares
trade on the American Stock Exchange. The PWVR rail line is only 132 miles long,
the traffic densities on the line are substantially lower than traffic densities
for the NCRR's line and the lease contains no inflation adjustment provision.
For these reasons, the NCRR and its financial advisor did not deem this lease to
be suitable for comparison to the Lease Extension Agreement.
OTHER LEASE PROVISIONS
The Board believes that in a transaction as complicated as the lease of a
railroad line neither the rent payment nor any other single factor is by itself
determinative of fairness. Many provisions of the Lease Extension Agreement were
negotiated to reduce the risks that income would be disrupted or that the
long-term value of the NCRR's assets would be impaired. Set forth below is a
comparison of other provisions of the Lease Extension Agreement, the Cincinnati
Lease and the Georgia Lease which the Board of the Directors considered in
approving the Lease Extension Agreement.
INFLATION ADJUSTMENT. The Board considered obtaining protection against
inflation to be a substantial priority. In periods of high inflation, the Lease
Extension Agreement provisions regarding inflation provide substantially greater
protection to the NCRR than that afforded the lessors under either the
Cincinnati Lease or the Georgia Lease.
The Lease Extension Agreement provides that annual base rent will be
adjusted each year to account for inflation during the preceding calendar year
according to the implicit price deflator for the gross domestic product
(IPD-GDP) published by the U.S. Department of Commerce, Bureau of Economic
Analysis. In no event, however, will the base annual rental for any
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calendar year be less than eight million dollars ($8,000,000). The base rent
adjustment in any year cannot exceed the sum of: (i) four (4%) percent of the
base rent for the preceding year, plus (ii) seventy-five (75%) percent of the
inflation factor in excess of four (4%) percent. There is a one-year delay in
application of the IDP-GDP. For example, adjustment of 1995 rental payments to
determine 1996 rental payments will be based upon the IDP-GDP for 1994.
The Cincinnati Lease provides for annual adjustments of base rent by the
IPD-GDP, but places a four (4%) percent annual cap on both downward and upward
adjustments. Since 1987, the Cincinnati Lease Inflation adjustment reached its
4% cap in two years. Inflation in excess of four (4%) percent in any year does
not result in any additional adjustment of the base rent under the Cincinnati
Lease, whereas the Lease Extension Agreement provides the NCRR with 75% coverage
against inflation in excess of 4%. The Georgia Lease provides for a fixed 2.5%
annual inflation adjustment factor.
ENVIRONMENTAL. In general, the environmental language in the Lease
Extension Agreement obligates Norfolk Southern to investigate, to remediate, and
to indemnify the NCRR from most types of environmental problems. It also
prohibits Norfolk Southern from permanently disposing of any type of waste on
the lease properties and requires that Norfolk Southern notify the NCRR and
appropriate government officials about specified types of environmental
problems. As is more fully provided in the Lease Extension Agreement, Norfolk
Southern must indemnify the NCRR from damages arising as a result of: (i)
violations of environmental laws during the term of the Lease Extension
Agreement by Norfolk Southern or its tenants; (ii) pollution that occurs on the
leased properties during the term of the Lease Extension Agreement; (iii)
Norfolk Southern's failure to fulfill the legal obligations, including the
notification obligations, of the owner and/or operator of the leased properties;
and (iv) property damage to neighboring properties and personal injury to
persons on neighboring properties as a result of a release of contaminants on
the leased properties during the term of the Lease Extension Agreement.
Time related defenses to environmental claims (such as the statute of
limitations) are tolled for the term of the Lease Extension Agreement plus seven
years. Although the Lease Extension Agreement does not obligate Norfolk Southern
to actively search for and clean up environmental contamination, the NCRR may
conduct its own environmental investigations. The rights that the NCRR has under
the environmental provisions in the Lease Extension Agreement are in addition to
its rights under the 1895 Lease and the 1939 Lease, which contain no specific
environmental language.
The environmental provisions in the Lease Extension agreement are much more
specific than the provisions of the Cincinnati Lease or the Georgia Lease.
Because the environmental provisions of the Cincinnati Lease and the Georgia
Lease are minimal or non-existent, the scope and extent of the lessee's
environmental obligations under the Cincinnati Lease and Georgia Lease are
unclear. The Cincinnati Lease and the Georgia Lease contain general obligations
to maintain the leased property in reasonable condition. The Cincinnati Lease
contains a provision indemnifying the lessor, during the term of the lease, from
all liabilities arising from lessee's "possession, control, management and
operation of the . . . leased premises." The Cincinnati Lease limits the
indemnity obligation to the term of the lease, but the indemnity obligations of
the Lease Extension Agreement continue for at least seven years after the end of
the lease term. The Georgia Lease includes a provision requiring the lessee to
indemnify the lessor from liability incurred by the lessor and "arising out of
Lessee's use or maintenance of the railroad properties," with certain specified
exceptions. A court would have to determine the extent to which these provisions
of the Georgia Lease and the Cincinnati Lease obligate the lessee to cleanup
contamination. It is possible that a court could interpret the broad indemnity
provisions in the Cincinnati Lease or the Georgia Lease to cover environmental
liabilities not covered by the Lease Extension Agreement because the Cincinnati
Lease and the lease amendment to the Georgia Lease were entered into before
environmental provisions became common, but a court is likely to expect more
specificity in a lease drafted in 1995. In recent leases where Norfolk Southern
leased track to another railroad (the North Carolina & Virginia Railroad Lease
and the Chesapeake & Albemarle Railroad Lease), Norfolk Southern, as lessor,
obtained from the lessee environmental provisions that are stricter on the
lessee in some areas than the provisions contained in the Lease Extension
Agreement.
EMINENT DOMAIN. The Lease Extension Agreement provides that in the event of
a taking by eminent domain or a sale under threat of eminent domain, Norfolk
Southern will be entitled to the portion of the proceeds or award which is equal
to that amount needed to cover the costs of replacing, restoring and relocating
its operating facilities so as to continue to the same extent the railroad
operations conducted prior to such sale or taking. The NCRR receives the balance
of such proceeds.
The Cincinnati Lease provides that any condemnation award or payment is
held by the lessee in an interest bearing account and used, with the interest,
only to replace the property or improvements taken, or to acquire additional
real property to be titled in the name of the lessor and to make improvements
thereon for the operation of the railway. The lessee is to make an annual
accounting of the use of such funds to the lessor. Any balance in such account
at the termination of the lease then becomes the property of lessor. The
language on the Lease Extension Agreement may be more favorable to the lessor
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than the provision of the Cincinnati Lease because the NCRR does not have to
wait until the end of the lease to receive payments, as is the case in the
Cincinnati Lease.
The Georgia Lease has no provisions regarding eminent domain, presumably
because the lessor is the State of Georgia.
ALTERNATIVES TO LEASE EXTENSION AGREEMENT
OTHER LESSEES FOR ALL OR PART OF LINE
The NCRR, with the assistance of its financial advisor, Morgan Stanley,
sought to solicit bids from other railroads or short line operators for lease of
all or part of the NCRR's line. If such leases were properly structured, the
NCRR could qualify as a REIT. However, no bids were received, nor did any entity
seek to enter into serious discussions with the NCRR, concerning lease of all or
part of its line. The Board believes that Norfolk Southern's control of the
overhead traffic, which constitutes a majority of the traffic over the NCRR's
line, was a significant factor in other potential lessees not bidding against
Norfolk Southern. Consequently, the Board believes a lessee other than Norfolk
Southern could not guarantee the NCRR a fixed lease payment that values the
overhead traffic, because, if Norfolk Southern were to divert overhead traffic,
the lessee would risk having substantially decreased revenues from operating the
NCRR's line. Consequently, even if another lessee were willing to pay more than
Norfolk Southern had offered the NCRR, the provisions necessary to protect the
lessee against the loss of overhead traffic probably would have made the offer
less attractive to the NCRR.
The NCRR's railroad management consultants have advised the Board that it
is common practice in the railroad industry for short line operators to exclude
overhead traffic from revenue calculations in determining the rental payments
they will agree to make to lessors due to the unpredictability of continued
overhead traffic. Lack of interest by other parties may also reflect hesitation
by other companies to interfere with Norfolk Southern's historical relationship
with the NCRR. As a dominating factor in the railroad industry in the Eastern
U.S., other railroads and short line operators are likely to have other business
dealings with Norfolk Southern, which they would be hesitant to jeopardize.
OPERATION BY THE NCRR WITHOUT ANY LESSEE
The NCRR investigated whether it should operate all or part of its line
without any lessee. As the NCRR's primary potential source of business as an
independent operator would be overhead traffic controlled by Norfolk Southern,
the Board deemed overhead traffic to be the primary variable in its
determination of whether independent operation of its line was an attractive
alternative to leasing the line. The Board's investigation of this alternative
was hampered by the fact that information about overhead traffic (defined as
traffic that neither originates nor terminates on the NCRR's line) was either
incomplete, unreliable or not available as Norfolk Southern declined to provide
detailed overhead traffic data requested by the NCRR. The NCRR did, however,
carefully evaluate with the assistance of railroad management consultants the
information available to it.
A great number of variables would affect revenues, expenses and profits if
the NCRR were to operate its own line without a lessee. Consequently, no
estimate of operating results could be a guarantee of actual operating results.
Nevertheless, the Board asked its railroad consultants to provide the Board with
estimates operating results should the NCRR decide to operate its line without a
lessee. The Board took the speculative nature of such estimates into account in
deciding what weight to give to the estimates of operating results provided by
the NCRR's consultants.
The Board asked its management consultants to provide two estimates of
operating results, one of which assumed that Norfolk Southern would not divert
any of the overhead traffic it currently runs over the NCRR's line and the
second of which assumed that Norfolk Southern would divert all the overhead
traffic it currently runs over the NCRR's line.
ESTIMATE INCLUDING OVERHEAD TRAFFIC. The railroad management consultants
retained by the NCRR concluded (based on 1993 ICC railroad traffic information
available to them) that the gross revenues of Norfolk Southern from operation of
the NCRR's line, including revenues from overhead traffic, was approximately $66
million and that this produced pre-tax net income of approximately $17.7 million
for Norfolk Southern. In addition, the NCRR believes Norfolk Southern receives
an annual subsidy from Amtrak of approximately $600,000. Accordingly, the
consultants advised the Board that one possible result of the NCRR operating its
line without Norfolk Southern or any lessee would be a pre-tax net income from
rail operations of approximately $18.3 million. Legal counsel has advised the
NCRR that operating its own line without a lessee would mean that the NCRR would
not qualify for REIT status. Consequently, on an after-tax basis (assuming a 38%
tax rate) operation of the line without a lessee could equal approximately
$11.35 million compared to the $8 million annual rental contained in the Lease
Extension Agreement.
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<PAGE>
ESTIMATE WITHOUT OVERHEAD TRAFFIC. The NCRR's management consultants
advised the Board of Directors that the traffic originating or terminating on
the NCRR's line or captive feeder lines (nonoverhead traffic) could produce
revenues of approximately $18.4 million and net income of approximately $3.8
million ($2.35 million after taxes), which was substantially lower than the $8
million annual rental contained in the Lease Extension Agreement.
VARIABLES AND RISKS. In addition to overhead traffic, the Board determined
there were other variables and risks associated with the NCRR operating its line
without a lessee, including the following. Estimates by consultants of before
and after-tax net income were based on the operating margins of Norfolk
Southern. There could be no assurance that the operating margins of an
inexperienced and much smaller railroad, such as the NCRR, would be as high as
Norfolk Southern's operating margins. Labor, maintenance and other expenses
could be higher or lower than estimated by the NCRR's consultants. Operating its
own line would require the NCRR to raise capital to fund operations, purchase
equipment and to maintain and improve its line. This would add capital cost and
could dilute the interests of the NCRR's shareholders. In addition, the lack of
experienced management to operate this new business is also a substantial risk.
A lease provides the NCRR with certain protections against expenses by
requiring the lessee to maintain the line and indemnify the NCRR against
environmental liabilities. Operating independently of a lessee would subject the
NCRR to substantially greater risk in these areas. Finally, revenue assumptions
for both overhead and nonoverhead traffic assume that market conditions will be
such that the Norfolk Southern and the NCRR will be successful in maintaining
their levels of overhead and nonoverhead traffic. The NCRR would be subject to
the risk that other transportation competitors, such as the trucking industry,
would be better able to compete with the NCRR for nonoverhead traffic than with
an experienced operator such as Norfolk Southern.
OVERHEAD TRAFFIC. During negotiations, Norfolk Southern advised the NCRR
that it has the ability to divert overhead traffic from the NCRR's line. The
NCRR's management consultants, however, advised the Board that Norfolk Southern
would probably have to make substantial capital expenditures (in the hundreds of
millions of dollars), the actual amount of which would depend on the routing
selected by Norfolk Southern, to create the additional capacity on its other
rail lines to achieve total diversion of overhead traffic, due in part to high
traffic volumes over the lines Norfolk Southern would use for such diversion.
The management consultants, however, advised the NCRR that such capital
expenditures estimates were based on incomplete information and that it was
impossible to determine the amount and timing of actual required capital
expenditures.
The Board of Directors weighed the potential to generate an estimated
$11.35 million of after-tax profits against the risk that after-tax profits
would be substantially lower ($2.35 million) due to diversion of overhead
traffic by Norfolk Southern. The Board of Directors determined that the risk of
substantial diversion of overhead traffic was a real and substantial risk, but
that the likelihood of diversion or the volume and timing of diversions could
not be ascertained to a reasonable degree of certainty, due to the lack
information available to NCRR.
If Norfolk Southern decided not to divert all overhead traffic, the amount
of the NCRR's revenues for overhead traffic would depend upon the division of
rates that would be negotiated between the NCRR (or other lessee/operator) and
Norfolk Southern or prescribed by the ICC if either party requested such
prescription. As the primary source of overhead traffic, with the ability to
determine the level of profitability of the NCRR, Norfolk Southern would have
substantial leverage in negotiating the division of revenues between the NCRR
and Norfolk Southern. Consequently, charging Norfolk Southern for trackage
rights or other access fees would not necessarily result in a better economic
deal for the NCRR than a lease of the entire line. If Norfolk Southern's
systemwide traffic volumes decreased, Norfolk Southern may have the capacity to
divert traffic without substantial costs. The NCRR could find itself acting as
Norfolk Southern's overflow resource to be used in high traffic years and
ignored in low traffic years. In addition, if Norfolk Southern invested
substantial amounts in capital improvements to alternate routes, Norfolk
Southern's additional capacity could result in permanent diversion of overhead
traffic.
In light of the foregoing variables and risks, the Board of Directors
determined that it would be in the best interest of the shareholders to accept a
stable annual rental payment from Norfolk Southern that was in the range between
the high and low estimates of after-tax net income from independent operation,
than to subject the NCRR's profits and asset value to the risks associated with
operating its rail line without a lessee. The Board of Directors also determined
that, as the NCRR has been in the business of leasing its rail line for more
than 100 years, it was not reasonable to subject its shareholders to the risks
of being in a new business, unless it was clear that the new business would
result in greater after-tax distributable income than the current business of
leasing its line to an experienced operator, such as Norfolk Southern. The Board
was advised by legal counsel that it would not be likely that the NCRR could
qualify as a REIT if the NCRR operates its own line without a lessee.
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The Board determined that it was not clear whether the new business of operating
its own line would produce more or less after-tax distributable net income than
the Lease Extension Agreement.
FOR THE FOREGOING REASONS THE BOARD OF DIRECTORS OF THE NCRR DETERMINED
THAT THE LEASE EXTENSION AGREEMENT WITH NORFOLK SOUTHERN IS A BETTER ALTERNATIVE
THAN OPERATING ALL OR PART ITS LINE WITHOUT A LESSEE.
POTENTIAL LITIGATION AGAINST NORFOLK SOUTHERN
In December 1992 the NCRR retained the law firm of Steptoe & Johnson,
Washington, D.C., as special counsel to advise the NCRR with respect to matters
related to the Interstate Commerce Commission (the "ICC"). The scope of the ICC
issues related to the expiration of the Leases included advice as to whether the
NCRR should petition the ICC to establish "reasonable compensation" for Norfolk
Southern's continued use of the NCRR's rail line beyond the expiration date of
the Leases and whether Norfolk Southern could terminate its current common
carrier duty to serve customers over the NCRR's line by obtaining an ICC order
permitting Norfolk Southern to abandon or discontinue service on all or part of
the NCRR's line.
When the negotiations with Norfolk Southern ceased to make progress in the
spring of 1994, the Board of Directors of the NCRR considered petitioning the
ICC to set compensation. The NCRR's special ICC legal counsel advised the Board
that the ICC had the power to establish compensation, but that it would be
unpredictable as to the amount of compensation the ICC would set or the length
of time an ICC proceeding might take. ICC counsel also advised that Norfolk
Southern would be free to seek to abandon or discontinue its operations over all
or part of the NCRR's line, which if granted would eliminate the requirement to
pay compensation for that portion of the line. In addition, special ICC counsel
advised that, if the ICC established compensation, Norfolk Southern could at a
future time petition the ICC to reduce the compensation it originally ordered.
Consequently, an ICC order would not guarantee a long-term stream of regular
payments if Norfolk Southern desired to challenge the order. In addition, there
was uncertainty as to whether litigation in the ICC or the courts would enable
the NCRR to operate in a way that would enable the NCRR to qualify for and
maintain REIT status.
The Board of Directors determined, based on advice from special ICC legal
counsel, that the risks associated with bringing an ICC action to establish
reasonable compensation were substantial. The NCRR's Board of Directors also
took the probable length of the litigation (in excess of two years, plus
appeals) and the cost of litigation into account in its decision not to
litigate. Legal counsel estimated that legal fees for an ICC action and an
accompanying court action were likely to exceed $2 million and that substantial
additional fees would be required for any appeal by Norfolk Southern or the NCRR
of a decision by the ICC or a court. The Board of Directors determined
expenditure of such legal fees would be warranted if there was a strong
probability that the ICC would award compensation substantially in excess of the
lease payment that could be negotiated with Norfolk Southern and that the risk
was low that Norfolk Southern would be able to reduce its payments after several
years or to abandon or seek to discontinue its operations over all or a
substantial part of the NCRR's line. As is discussed below, such abandonment or
discontinuance could have a material adverse effect on the amount of rental
payments the ICC would award. Special ICC legal counsel was unable to provide
the Board of Directors with sufficient certainty on any of these issues.
PETITION TO FIX REASONABLE COMPENSATION. Special ICC legal counsel advised
the Board that the Interstate Commerce Act (the "ICA") does not prescribe a
particular formula or methodology for the determination of the compensation to
be paid by one railroad for operating over the line of another railroad. The
selection of methodology is thus left to the discretion of the ICC. Special ICC
counsel advised the Board of Directors it is most likely that the Reproduction
Cost New Less Depreciation ("RCNLD") methodology would be used in valuing NCRR's
line to prescribe compensation should the NCRR petition the ICC. However,
special ICC legal counsel indicated other methodologies were employed by the ICC
in earlier cases, and in a recent case the ICC has emphasized that its selection
of methodology is made on a case-by-case basis. Consequently, ICC counsel could
not assure the Board of Directors that RCNLD would be the methodology ultimately
applied by the ICC.
RCNLD fixes compensation by determining the cost of replacing the property
required for the lessee's operations in its present condition, and then applying
an interest component designed to yield the lessor a reasonable return for the
use of its assets. The formula itself is simple, but special ICC counsel advised
that there is substantial uncertainty as to the application of that methodology
to the facts of each case. Special ICC counsel advised the Board of Directors
that there have been no prior cases in which the ICC has applied the RCNLD
formula to leases similar to the NCRR's Leases or in circumstances in which the
lessee has been obligated to pay for all maintenance to the line, as is required
under the Leases.
Special ICC counsel also advised that Norfolk Southern would be likely to
argue that among the factors the ICC should take into account in determining
whether and how to apply the RCNLD formula is Norfolk Southern's profitability
from
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operating over the NCRR's line or that Norfolk Southern could request the ICC to
apply an income-based valuation methodology. Accordingly, the Board concluded
that one possible outcome is that the ICC would set compensation in a way that
awarded the NCRR a reasonable share of Norfolk Southern's profits from operating
the NCRR's line, which the NCRR's railroad management consultants estimated to
be approximately $18.3 million on a pre-tax basis.
Set forth below is a table prepared for the NCRR by its railroad
consultants, which reflects the range of possible RCNLD calculations using the
variables of what property the ICC would include in the valuation and whether
the ICC would reduce the rate of return normally employed by it (the nominal
pre-tax cost of capital of the railroad industry, which in 1993 was 16.6%) to
reflect that the NCRR would be a REIT that is not subject to federal corporate
taxes on that portion of its ordinary income or capital gain that is currently
distributed to its shareholders.
NORTH CAROLINA RAILROAD COMPANY
ICC VALUATION METHODOLOGIES
REPRODUCTION COST LESS DEPRECIATION ANALYSIS
<TABLE>
<CAPTION>
GROSS
POTENTIAL ANNUAL
RCNLD RENTAL
POTENTIAL PROPERTY DEFINITIONS (1) VALUATION (2) @16.6% (3)
<S> <C> <C> <C>
(IN MILLIONS)
1) Land Only -- 50' ROW (Right of Way)............................................... $ 40 $ 6.6
2) Land with Grading and Bridges -- 50' ROW.......................................... 180 29.9
3) Scenario #2 without Bridges....................................................... 161 26.7
4) Land only -- 200' ROW............................................................. 115 19.1
5) Land with grading and bridges -- 200' ROW......................................... 260 43.2
6) Scenario 5 without bridges........................................................ 241 40.0
7) Land with grading, bridges, track and signals -- 200' ROW......................... 400 66.4
8) Land with grading, bridges, track and signals -- 200' ROW plus yards and shops
excluding Spencer (Linwood) Yard.................................................. 412 68.4
9) Land with grading, bridges, track and signals -- 200' ROW plus yards and shops
including Spencer (Linwood) Yard.................................................. 450 74.7
<CAPTION>
GROSS
ANNUAL
RENTAL
POTENTIA @11.4% (4)
<S> <<C>
1) $ 4.6
2) 20.5
3) 18.4
4) 13.1
5) 29.6
6) 27.5
7) 45.6
8)
47.0
9)
51.3
</TABLE>
(1) Examines various definitions of property varying from narrow to broad.
(2) Based upon Mercer Management Consulting analysis.
(3) ICC rail industry composite pre-tax cost of capital for 1993.
(4) ICC rail industry composite after-tax cost of capital for 1993.
The foregoing RCNLD table indicates the possibility that annual rentals
ordered by the ICC could range from a low of $4.6 million to a high of $74.7
million if the ICC uses the RCNLD formula.
As the RCNLD formula values all segments of the line by replacement cost,
without regard to the income produced by the property, special ICC counsel
advised the Board that Norfolk Southern might seek to discontinue its operations
over substantial portions of the line that produce little income in an effort to
substantially reduce the total value of the assets it is using or seek to remove
assets from the formula after diverting traffic. Norfolk Southern could use its
discontinuance or reduced use of the NCRR's line as a basis for adjusting
downward the compensation payable to the NCRR under the RCNLD formula.
Under the RCNLD formula, the NCRR would be entitled to compensation only
for assets owned by the NCRR and used by Norfolk Southern. One of the matters
that would be in dispute should litigation occur is the determination of what
property is owned by the NCRR. For example, the NCRR has asserted claims to
assets, such as Spencer (Linwood) Yard. Norfolk Southern, however, asserts that
Linwood Yard is owned by Norfolk Southern. The ownership of property and matters
relating to interpretation of the Leases are a matter of state law, which the
ICC would not adjudicate. Consequently, these matters would be decided in a
separate court action. If the ICC were to delay a final decision as to
compensation until completion of such court action, including all appeals, the
time required to obtain an ICC decision could be substantially delayed.
The timing of an ICC decision was of concern to the Board as annual
litigation expenses in the ICC and the courts would exceed the annual lease
payments Norfolk Southern was paying the NCRR under the 1895 Lease and the 1939
Lease.
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Special ICC legal counsel advised that the NCRR could petition the ICC to
establish interim compensation at a higher rate after the 1895 Lease and the
1939 Lease expired, but special ICC counsel could not estimate the likelihood
that the ICC would grant such interim relief. Accordingly, the Board determined
that litigation expenses for several years might have to be financed by
borrowing.
The Board's concern that the ICC might not apply the RCNLD formula was
heightened by a recent compensation case decided by the ICC in which the ICC
applied a formula based on the net liquidation value (NLV) of the line. The
NCRR's railroad consultants advised the NCRR that valuation factors producing
higher RCNLD values tend to decrease NLV values and the consultants produced the
following possible compensation alternatives if the NLV method were applied to
the NCRR:
NET LIQUIDATION VALUE METHODOLOGY
<TABLE>
<CAPTION>
GROSS GROSS
POTENTIAL ANNUAL ANNUAL
NLV RENTAL RENTAL
POTENTIAL PROPERTY DEFINITIONS VALUATION 16.6% (1) 11.4% (2)
<S> <C> <C> <C>
(IN MILLIONS)
Property including Spencer (Linwood) Yard................................................... $43.9 $ 7.3 $ 5.0
Property excluding Spencer (Linwood) Yard................................................... $42.2 $ 7.0 $ 4.8
</TABLE>
(1) ICC rail industry composite pre-tax cost of capital for 1993.
(2) ICC rail industry composite after-tax cost of capital for 1993.
The Board was also concerned with the advice of ICC counsel that the ICC
would set compensation, but the ICC probably would not set other terms that were
important to minimize risks, such as requiring Norfolk Southern to maintain the
line or to indemnify the NCRR against environmental liabilities. Accordingly,
the Board concluded that an ICC award for compensation would have to be
substantially higher than $8 million to offset expected and unexpected expenses
and liabilities associated with operating without a lessee.
ABANDONMENT OF NORFOLK SOUTHERN'S OPERATIONS OVER NCRR'S LINES
Under (section mark)10903 of the ICA, a railroad is not permitted to
abandon or discontinue its operations over any line (including a line leased
from another party) without the prior approval of the ICC. Before a railroad can
file an abandonment application, the line must have been listed in its System
Diagram Map on file with the ICC as one potentially subject to abandonment for
at least four months.
Section 10903 of the ICA provides that the ICC may authorize an abandonment
of, or discontinuance of operations over, all or part of a line only if it finds
that the present or future public convenience and necessity requires or permits
the abandonment or discontinuance. In applying these criteria, the ICC balances
the harm to the shipping public that would result from the abandonment or
discontinuance against the burden imposed on the carrier and on interstate
commerce by continued operations. The railroad has the burden of proof to
demonstrate that abandonment or discontinuance is justified. Generally, the ICC
will not approve an abandonment or discontinuance unless the railroad can
demonstrate that the revenues received from its operations over a line fail to
cover its costs (as defined by the ICC) and yield it a reasonable return.
If the ICC were to approve Norfolk Southern's abandonment or discontinuance
of all or part of Norfolk Southern's operations over the NCRR line, then
shippers on the NCRR's line could argue that the NCRR would have the residual
common carrier obligation to provide railroad service. The NCRR could satisfy
this obligation either by conducting the operations itself or by retaining a
carrier (such as a short line railroad) to conduct the operations on the NCRR's
behalf. The NCRR would be required to continue such operations (which could
require the NCRR to acquire the necessary equipment and facilities) until such
time as the NCRR itself obtained abandonment or discontinuance authority from
the ICC, pursuant to the criteria described above.
If the ICC were to deny Norfolk Southern's application for abandonment or
discontinuance, Norfolk Southern could appeal that decision to a United States
Court of Appeals. In addition, Norfolk Southern would be free to file a new
abandonment or discontinuance application at a future time, contending that
changes in the traffic flow, revenues or costs justify abandonment or
discontinuance. As many of these factors are within the power of Norfolk
Southern to control, the Board believed the risk of abandonment or
discontinuance was real. Consequently, the Board concluded that ICC litigation
could be an open ended expense lasting for years even if the NCRR initially
received a favorable determination from the ICC.
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PROPOSED CHANGES TO THE ICA AND THE ICC
Several proposals have been made to the U.S. Congress that, if adopted,
would result in significant changes in the ICC and/or its functions. At the
present time, the various proposals include complete repeal of the ICA and
abolition of the ICC; repeal of some, but not all, provisions of the ICA and
retention of the ICC in its present form; repeal of some, but not all,
provisions of the ICA and transfer of the remaining ICC functions to a new
independent agency within the Department of Transportation ("DOT"); and repeal
of some, but not all, provisions of the ICA and transfer of the remaining ICC
functions to various executive agencies, such as DOT, the Department of Justice,
and the Department of Labor. Bills have been introduced in Congress that would,
if enacted, eliminate the ICC and transfer some, but not all, of its functions
to DOT; consideration and revision of those bills by Congressional subcommittees
and committees is currently ongoing. Other bills providing for the elimination
of the ICC and the transfer of some or all of its functions to other agencies
may also be introduced before the current session of Congress ends. Whether, or
to what extent, provisions of the ICA may be repealed or modified, or the
functions of the ICC transferred to another agency, cannot be predicted at this
time.
If Congress were to repeal the provisions of the ICA under which the
government is authorized to set the compensation for one railroad's operations
over the lines of another, and/or the provisions requiring government
authorization for abandonment or discontinuance of service, it is possible that
any order previously issued by the ICC with respect to such matters might become
a nullity or that Norfolk Southern would be able to abandon service on a portion
or all of NCRR's line, and cease to pay compensation with respect to the portion
of line abandoned, without having to satisfy the requirements described above.
Moreover, even if such ICA provisions were not repealed, the transfer of
functions to a different agency could result in a change in the policies and
standards applied. The Board considered these risks in deciding that the Lease
Extension Agreement was a better alternative than litigating against Norfolk
Southern.
FOR THE FOREGOING REASONS, THE BOARD OF DIRECTORS OF THE NCRR DETERMINED
THAT THE LEASE EXTENSION AGREEMENT WITH NORFOLK SOUTHERN IS A BETTER ALTERNATIVE
THAN BRINGING AN ICC AND/OR COURT ACTION AGAINST NORFOLK SOUTHERN.
SALE OF THE NCRR
The NCRR and Norfolk Southern discussed sale of the NCRR to Norfolk
Southern early in their negotiations. Norfolk Southern, however, did not show
substantial interest in purchasing the NCRR and no serious negotiations about
sale of the NCRR occurred. In soliciting bids from potential lessees other than
Norfolk Southern, the NCRR also left the door open to sale discussions, but
neither a lessee nor a buyer made any bid or entered into serious negotiations.
See also "CERTAIN CONFLICTS OF INTEREST AND SHAREHOLDER DERIVATIVE
ACTIONS -- Buyout by State of North Carolina."
APPRAISALS AND VALUATIONS
The Board of Directors has reviewed numerous appraisals and valuations of
the NCRR during the past several years. The Board of Directors does not believe
any single valuation is, by itself, depositive of the value of the NCRR or of
what would constitute a fair annual return on the assets of the NCRR.
RECENT VALUATIONS
The valuation on which the Board focused most closely is the Reproduction
Cost New Less Depreciation (RCNLD) evaluation prepared for the Board by its
consultants in connection with the Board considering whether to bring an action
in the ICC to request the ICC to establish reasonable compensation for Norfolk
Southern's continued use of the NCRR's line. The RCNLD formula values all
segments of the line by replacement cost, without regard to the income produced
by the property. The value of the NCRR's properties for RCNLD purposes ranged
from a low of $40 million to a high of $450 million depending on which assets
are included in the valuation. Different combinations of assets were valued by
the NCRR's consultants because the NCRR's special ICC legal counsel indicated it
could not be certain which assets the ICC would include in the valuation
formula. See "ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Litigation Against
Norfolk Southern."
Also in connection with consideration of bringing an ICC action, the NCRR's
consultants advised the Board that if the ICC used a net liquidation formula to
determine compensation, the net liquidation value of the NCRR's assets other
than Spencer Yard would be in the range of $42.2 million to $43.9 million. See
"ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Litigation Against Norfolk
Southern."
The Board of Directors also considered going concern valuations based upon
estimates of income earned by Norfolk Southern from its use of the NCRR's line.
A valuation study conducted by Mercer Management Consulting, based upon 1990,
1991 and 1992 information, indicated a value of $150 million, taking all
overhead traffic into account.
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<PAGE>
MERGER VALUATIONS
For the purpose of establishing an exchange ratio in connection with the
merger of the Atlantic and North Carolina Railroad Company (the "ANCRR") into
the NCRR in 1989, appraisals of the assets of the ANCRR and the NCRR were
performed in 1986 and up-dated in 1988. The Board believed that such merger
appraisals, which may have been useful in comparing the two railroad lines to
establish the comparative value of one line to the other to negotiate an
exchange ratio, were less useful to the Board of Directors in determining a fair
lease price.
Certain assumptions which were key to these 1986-1988 valuations, while
appropriate at the time, now have questionable applicability in light of
information developed during the lease negotiations with Norfolk Southern. For
example, in determining the value of the NCRR as part of Norfolk Southern, it
was assumed that Norfolk Southern would be willing to pay a premium of 40% above
the market price of the NCRR's stock in order to gain the benefits of total
control of the NCRR. This premium over market price added approximately $35
million to the NCRR's valuation. Given the absence of lessors or buyers willing
to compete with Norfolk Southern for control of the NCRR's properties, Norfolk
Southern demonstrated an unwillingness in negotiations to pay the assumed
premium.
Similarly, the valuation of the NCRR as an independent enterprise assumed
(i) that no overhead traffic would be diverted by Norfolk Southern from an
independent NCRR to other north-south lines and, further, that (ii) Norfolk
Southern would agree to pay the NCRR a trackage rights fee for the overhead
traffic that at least equaled the estimated cost to Norfolk Southern of
upgrading the adjacent Winston-Salem line and replacing Spencer Yard. This
amount accounted for $175 million of the estimated value of the NCRR as an
independent enterprise. However, subsequent analysis conducted during the
negotiations with Norfolk Southern, as discussed herein, revealed that estimates
concerning the risk of Norfolk Southern's diversion of overhead traffic from the
NCRR are difficult to make, and that Norfolk Southern has options other than the
Winston-
Salem line for routing such traffic around the NCRR. Thus the assumption that
Norfolk Southern would necessarily pay the NCRR in trackage rights fees an
amount at least equal to the estimated cost of upgrading specific alternative
facilities is now questionable.
With regard to NCRR, American Appraisal Associates Inc. ("AAA") appraised
the fair market value of its transportation properties as of July 1, 1986, using
two bases of value, and subsequently updated the appraisal to July 1, 1987, and
July 1, 1988. With regard to ANCRR, AAA appraised the fair market value of its
transportation properties of the railroad as of July 1, 1987, using two bases of
value, and subsequently updated the appraisal to July 1, 1988. In the case of
both companies, AAA first estimated the value of each to Norfolk Southern; and,
second, AAA evaluated the value of each as an independent enterprise. The NCRR
appraisal performed by AAA in 1986 and updated in 1987 included estimates of
value based upon replacement cost. The ANCRR appraisal performed by AAA in 1987
also included estimates of value based upon replacement cost. However, these
values were not subsequently updated in 1988 because they were not among the
values that AAA ultimately advised the representative boards to consider in
arriving at the Exchange Ratio in the 1989 merger of the ANCRR into the NCRR.
The determination of the value of each company to Norfolk Southern was
based on an analysis of what Norfolk Southern would be willing to pay for each
company as an operating entity within the Norfolk Southern system, and did not
consider the amount others might be willing to pay should the companies have
been offered for sale as going concerns. AAA determined the value to Norfolk
Southern of ANCRR and NCRR by the following valuation method: (i) AAA considered
the railroad operating revenues derived from the lessee's operations of the
lines leased from ANCRR and NCRR and created pro forma income statements for
both NCRR and ANCRR for the five years prior to the respective appraisals,
modifying the lessee's income statements by excluding interest expense and
interest income, applying Norfolk Southern's systemwide five-year average tax
rate, excluding income not derived from railroad operations, and excluding lease
payments for the railroad lines; (ii) AAA compared the pro forma financial and
operating characteristics of ANCRR and NCRR with a group of publicly held
railroad companies on a number of comparative criteria and the price earnings
ratios of their common shares; (iii) AAA applied the median price earnings
ratios to the pro forma earnings of ANCRR and NCRR; and (iv) AAA applied a 25%
premium for the sale of a 100% interest in ANCRR and a 40% premium for the sale
of a 100% interest in NCRR. In arriving at the valuations of each company as an
independent enterprise, AAA did not consider the amounts third parties might be
willing to pay upon the sale of the respective companies.
The value of ANCRR to Norfolk Southern was appraised to be approximately
$9.5 million as of July 1, 1988; the value of ANCRR as an independent enterprise
was appraised to be approximately $12.8 million as of that date. Prior to the
1988 study, the same categories in 1987 were reported as follows: approximately
$10 million in value to Norfolk Southern; and approximately $13.6 million as an
independent enterprise. The 1987 study also took into account replacement costs
for the line, which were appraised at approximately $149 million.
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In 1988, AAA applied two of the same categories of measure to NCRR. The
appraised value of NCRR to Norfolk Southern was approximately $122 million; its
appraised value as an independent enterprise was approximately $224 million.
Prior to the 1988 study, AAA reported the same categories in 1987 as follows:
$141 million in value to Norfolk Southern; and approximately $228 million as an
independent going concern. For 1986, the categories were reported as follows:
approximately $125 million in value to Norfolk Southern; approximately $225
million as a going concern; and approximately $512 million for replacement cost.
The appraisals discussed above are concerned with the values of NCRR and
ANCRR as railroad properties as of the dates of the appraisals; they do not
concern themselves with the nonoperating assets of either. In 1982, ANCRR's
nonoperating assets were valued by a third party at approximately $1.7 million
and the nonoperating assets of NCRR were valued by a third party at
approximately $7.9 million. In 1987, the ANCRR nonoperating assets were valued
by a third party at approximately $2.9 million. NCRR's nonoperating assets have
not been valued since 1982. The nonoperating assets of ANCRR consisted primarily
of approximately 33 acres of land divided into 18 parcels, some with
improvements, that mostly adjoin its right-of-way.
The nonoperating properties of NCRR presently consist of approximately 208
acres of land divided into 24 parcels, some with improvements, mostly adjoining
its right-of-way, including 3 in the downtown Charlotte, North Carolina business
district that are subject to the 1968 Charlotte Lease with Norfolk Southern.
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FINANCIAL ADVISOR AND FAIRNESS OPINION
FINANCIAL ADVISOR
In January 1994 the Board of Directors of the NCRR retained Morgan Stanley
& Co. Incorporated ("Morgan Stanley") to act as its financial advisor in
connection with negotiations with Norfolk Southern and evaluation of other
alternatives. Morgan Stanley was selected to act as the Board's financial
advisor based on Morgan Stanley's qualifications, expertise and reputation,
including its prior experience in the railroad industry.
Morgan Stanley's assistance to the Board of Directors throughout its
engagement has included negotiating advice, advice about evaluating alternatives
and seeking other potential lessees for the NCRR's assets. In addition, Morgan
Stanley has rendered to the NCRR Board its written opinion dated September 15,
1995 ("Morgan Stanley Opinion") that, as of such date, based upon the various
considerations set forth in its opinion, the consideration to be received by the
NCRR pursuant to Lease Extension Agreement is fair from a financial point of
view to NCRR.
THE FULL TEXT OF THE MORGAN STANLEY OPINION, WHICH SETS FORTH ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED
AS APPENDIX B TO THIS PROXY STATEMENT. NCRR SHAREHOLDERS ARE URGED TO READ THE
OPINION CAREFULLY AND IN ITS ENTIRETY. THE MORGAN STANLEY OPINION IS DIRECTED
ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY THE NCRR FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER OF NCRR AS TO HOW SUCH SHAREHOLDER SHOULD VOTE ON THE PROPOSAL TO
APPROVE THE LEASE EXTENSION AGREEMENT. THE FOLLOWING SUMMARY OF THE MORGAN
STANLEY OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, Morgan Stanley, among other things: (i) analyzed
certain publicly available financial statements and other information of the
NCRR; (ii) discussed the past and current operations and financial condition and
the prospects of the NCRR with certain members of the Board of Directors and
management of the NCRR; (iii) reviewed the financial terms of certain comparable
lease transactions, based upon information provided by Norfolk Southern and its
financial advisor and other information publicly available; (iv) reviewed the
financial terms, to the extent publicly available, of certain acquisition
transactions; (v) participated in discussions and negotiations among
representatives of the NCRR, Norfolk Southern, and certain other parties, and
the NCRR's financial and legal advisors; (vi) reviewed the existing Leases and
the proposed Lease Extension Agreement and certain other related documents;
(vii) discussed and reviewed with certain members of the Board of Directors and
management of the NCRR various alternatives to the proposed lease renewal
transaction, including, without limitation, the independent management of an
operating railroad business by the NCRR, the sale or other divestiture of the
NCRR, or lease of the NCRR's assets to a party other than Norfolk Southern;
(viii) reviewed certain railroad traffic data and certain other related
information concerning the NCRR and Norfolk Southern prepared by consultants to
the NCRR; (ix) reviewed certain reports prepared by experts concerning the value
of and potential return on the NCRR's assets based upon certain ICC
methodologies including the reproduction cost new less depreciation methodology;
(x) participated in discussions with the management of the NCRR and the NCRR's
legal counsel regarding certain alternatives involving state or federal court
litigation and ICC proceedings; (xi) reviewed the prices and trading activity
for the Common Stock of the NCRR; (xii) compared the financial performance of
the NCRR and the prices and trading activity of the Common Stock of the NCRR
with that of certain other comparable publicly-traded companies and their
securities; (xiii) analyzed the pro forma impact of the Lease Extension
Agreement on the NCRR's earnings per share and dividend yield on the NCRR's
Common Stock; and (xiv) performed such other analyses as Morgan Stanley deemed
appropriate.
Morgan Stanley assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by it for the purposes of
this opinion. Morgan Stanley did not make any independent valuation or appraisal
of the assets or liabilities of the NCRR; however, Morgan Stanley reviewed the
reports referred to in clauses (viii) and (ix) above and relied without
independent verification upon such reports for purposes of its opinion. The
Morgan Stanley Opinion states that it is based on economic, market and other
conditions as in effect on, and the information made available to Morgan Stanley
as of, the date of the opinion.
In arriving at its opinion, Morgan Stanley, together with the assistance of
the NCRR, solicited the potential interest of certain likely prospective
purchasers engaged in the railroad business with respect to a transaction
involving the sale or lease of the assets of the NCRR. None of the potential
purchasers contacted, however, expressed an interest in pursuing such
transactions.
In preparing its opinion, Morgan Stanley relied upon and took into account
the principal strategic objective of the NCRR, to maximize shareholder value by
maximizing distributable after-tax net income to the shareholders consistent
with minimizing the risks (i) that income will be disrupted and (ii) that the
value of the assets of the NCRR will be impaired. In
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determining how to best achieve that strategic objective, the Board of Directors
of the NCRR decided not to commence litigation in the courts or the ICC and not
to independently manage an operating railroad business, which decisions were
based principally upon the determination of the Board of Directors of the NCRR
that such alternatives to the Lease Extension Agreement presented unacceptable
risks to achieving the objectives of the NCRR. Factors considered by the NCRR in
making the determination that the risks associated with such alternatives were
unacceptable included (i) the uncertainty of the outcome and estimated expenses
of litigation in the courts or the ICC and (ii) the uncertainty regarding the
volume of overhead traffic and associated revenues that could be realized by,
and other risks and expenses associated with, initiating and maintaining an
operating railroad business, including the fact that the NCRR historically has
not independently managed an operating railroad business. See "ALTERNATIVES TO
LEASE EXTENSION AGREEMENT." Consequently, Morgan Stanley did not consider such
alternatives in arriving at its opinion. Morgan Stanley also relied upon the
stated intention of the NCRR to make a Real Estate Investment Trust ("REIT")
election for federal income tax purposes for either 1995 or 1996 and upon the
advice and the opinion of tax counsel to the NCRR regarding the ability of the
NCRR to qualify as a REIT for federal income tax purposes.
The following is a brief summary of certain financial analyses performed by
Morgan Stanley and reviewed with the NCRR Board in connection with the Morgan
Stanley Opinion:
PRESENT VALUE ANALYSIS
For purposes of comparison to other potential valuation methodologies,
Morgan Stanley performed a discounted cash flow analysis of the annual payments
expected under the Lease Extension Agreement. In this analysis, Morgan Stanley
assumed the $8.0 million initial annual rental payment would be reduced by
$500,000 of annual overhead expenses (net of other revenues), providing an
annual net payment stream of $7.5 million to the shareholders (assuming the NCRR
elects REIT tax status). Morgan Stanley reviewed and analyzed the nominal yield
available from certain other comparable securities or indices in order to derive
a range of possible discount rates which reflected, among other things, the
inflation adjustment included in the Lease Extension Agreement, the nature of
the lessee obligation, Norfolk Southern's general credit risk, and general
inflation expectations. As a result of this analysis, Morgan Stanley derived a
range of real discount rates of 5.15% to 6.08%, which it used to evaluate the
cash flows expected to be generated by the Lease Extension Agreement. This
analysis suggested that the perpetuity value of annual payments expected to be
generated by the Lease Extension Agreement, including the after-tax value of the
$5.0 million initial payment, was in a range of $127 million to $148 million
assuming the NCRR qualified for REIT election in 1995.
LEASE TERM VALUATION ANALYSIS
Morgan Stanley also performed a lease term valuation analysis comparing the
present value of aggregate lease payments for different lease terms, ranging
from a term of five years to a term of 45 years. Specifically, Morgan Stanley
compared a 15-year term to a 30-year term because the tentative agreement
publicly announced in November 1994 called for a base lease term of 15 years,
but the Lease Extension Agreement had a base lease term of 30 years (in both
cases without considering renewal options). The present value of lease payments
within the initial 15-year term was approximately 59% of the total perpetuity
value produced by Morgan Stanley's analysis, as described above utilizing a 6%
discount rate. The present value of lease payments within the initial 30-year
term was approximately 83% of the perpetuity value produced by Morgan Stanley's
analysis, as described above utilizing a 6% discount rate. Morgan Stanley noted
that by increasing the guaranteed initial term from 15 years (as announced in
November 1994) to 30 years, the NCRR has achieved greater certainty with respect
to the ongoing income streams to its shareholders.
ANALYSIS OF SELECTED PRECEDENT LEASE TRANSACTIONS
Morgan Stanley reviewed certain financial and operating data for three
precedent lease transactions. As with the NCRR, each transaction involved a
lease of rail assets in which the lessor was not an operating railroad. Morgan
Stanley noted that one of these transactions, the Pittsburgh and West Virginia
lease, was comparable to the Lease Extension Agreement with respect to its REIT
status, but was very small in size and did not contain any provision for
inflation adjustments. Morgan Stanley noted that two other transactions, the
Cincinnati Lease and the Georgia Lease (as described earlier), were the most
comparable since both lessors' revenues were composed entirely of lease payments
from a Class I railroad, and since both lessees had limited alternatives to
entering into these transactions. However, Morgan Stanley also noted that these
lease transactions differed from the Lease Extension Agreement with respect to,
among other things, inflation adjustment provisions, the level of available
re-routing alternatives for the lessee and the inclusion of operating rights or
property in the lease
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agreements. Morgan Stanley reviewed, among other things, estimated current
annual lease payments for these lease transactions, mileage of track covered
under these agreements, and certain measures of traffic density on these lines.
Morgan Stanley compared, among other things, the annual rental payment per MGTM
(a measure of traffic volume over the lines, as described earlier) for these two
transactions and for the NCRR Lease Extension Agreement, and noted that the
annual rental payment per MGTM for the NCRR ($1,792 per MGTM, based on estimated
1993 NCRR traffic data from ALK Associates as described above) was higher than
for either of the other two transactions ($842 per MGTM and $878 per MGTM for
the Cincinnati Lease and the Georgia Lease, respectively).
ANALYSIS OF SELECTED PRECEDENT PURCHASE AND SALE TRANSACTIONS
Morgan Stanley reviewed thirteen purchase and sale transactions in the
railroad industry during the period 1985 to 1995 which, it observed, were not
directly comparable to the Lease Extension Agreement. These transactions had a
median and mean aggregate value per mile of $247,000/mile and $279,000/mile,
respectively, as compared to $416,000/mile for the NCRR Lease Extension
Agreement as suggested by perpetuity value analysis and assuming REIT election
in 1995 and a 6% real discount rate as described above. These transactions had a
median and mean aggregate value per MGTM of $22,900/MGTM and $34,500/MGTM,
respectively, as compared to $29,500/MGTM for the NCRR Lease Extension Agreement
as suggested by perpetuity value analysis and assuming REIT election in 1995, a
6% real discount rate, and estimated 1993 NCRR traffic data from ALK Associates
as described above. These transactions had a median and mean ratio of aggregate
value to revenues of 1.41x and 1.68x, respectively, as compared to 1.56x for the
NCRR Lease Extension Agreement as suggested by perpetuity value analysis and
assuming REIT election in 1995, a 6% real discount rate and retention by the
NCRR of all traffic and revenues (including overhead traffic) as estimated by
ALK Associates based on 1993 traffic data, as described above.
In connection with its review of the Lease Extension Agreement, Morgan
Stanley performed a variety of financial and comparative analyses for purposes
of its opinion. The summary of the Morgan Stanley analyses set forth above does
not purport to be a complete description of the presentation by Morgan Stanley
to the NCRR Board. Morgan Stanley believes that its analyses and the summary set
forth above must be considered as a whole and that selecting portions of its
analyses, or of the above summary, could create an incomplete view of the
process underlying the analyses performed by Morgan Stanley in connection with
the preparation of its opinion letter. In performing its analyses, Morgan
Stanley made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of the NCRR. The analyses performed by Morgan Stanley are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to value of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
The NCRR retained Morgan Stanley based upon its experience and expertise.
Morgan Stanley is an internationally recognized investment banking and advisory
firm. Morgan Stanley, as part of its investment banking business, is regularly
engaged in the valuation of business and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Morgan Stanley may continue to
provide investment banking services to NCRR in the future. In the course of its
trading activities, Morgan Stanley, may, from time to time, have a long or short
position in, and buy and sell, securities of the NCRR or Norfolk Southern.
Pursuant to a letter agreement dated as of January 25, 1994 between the
NCRR and Morgan Stanley, if the Lease Extension Agreement becomes effective, the
NCRR will pay Morgan Stanley a transaction fee of approximately $1.1 million.
The NCRR has also agreed to reimburse Morgan Stanley for its out-of-pocket
expenses and to indemnify Morgan Stanley and its affiliates, their respective
directors, officers, agents and employees and each person, if any, controlling
Morgan Stanley, or any of its affiliates against certain liabilities and
expenses, including liabilities under federal securities laws incurred in
connection with its services.
REAL ESTATE INVESTMENT TRUST (REIT) AND OTHER TAX MATTERS
The following is a general summary of the material federal income tax
considerations associated with evaluation of the Lease Extension Agreement.
Petree Stockton, L.L.P., which has acted as tax counsel to NCRR, has reviewed
the following discussion and is of the opinion that it fairly summarizes the
Federal income tax considerations that are likely to be material to evaluation
of the Lease Extension Agreement. The NCRR has also received advice regarding
REIT qualification and tax planning from Ernst & Young, the NCRR's independent
public accountants.
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The following discussion is not exhaustive of all possible tax
considerations and is not tax advice. Moreover, this summary does not deal with
all tax aspects that might be relevant to a particular stockholder in light of
his or her personal circumstances nor does it deal with particular types of
stockholders that are subject to special treatment under the Internal Revenue
Code (the "Code"), such as insurance companies, financial institutions and
broker-dealers. The Code provisions governing the Federal income tax treatment
of REITs are highly technical and complex, and this summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof. The
following discussion and the opinions of Petree Stockton, L.L.P. are based on
current law.
EACH SHAREHOLDER IS URGED TO CONSULT HIS OWN TAX ADVISOR WITH RESPECT TO
SUCH SHAREHOLDER'S SPECIFIC FEDERAL STATE, LOCAL, FOREIGN AND OTHER TAX MATTERS.
FEDERAL INCOME TAXATION OF THE NCRR
The NCRR intends to operate so as to meet the requirements under the Code
for qualification as a REIT. The NCRR intends to elect to be taxed as a REIT in
the first tax year in which it meets all of the applicable requirements. As
discussed below, the timing of the REIT election will be affected by the timing
of the receipt and the treatment of the $5 million payment from Norfolk Southern
for the settlement of the personal property issues. Based on various assumptions
and factual representations made by the NCRR, in the opinion of Petree Stockton,
L.L.P., the NCRR will qualify to be taxed as a REIT under the Code. Such
qualification depends upon the NCRR complying with certain preliminary steps
which will enable the NCRR to meet the various requirements imposed under the
Code, including, those relating to qualification and operating results, as
discussed below. NCRR anticipates that it will complete all steps necessary to
comply with such requirements. Petree Stockton, L.L.P. will not review
compliance with these requirements, and no assurance can be given that the NCRR
will meet these requirements. The opinion of Petree Stockton, L.L.P. is not
binding on the Internal Revenue Service (the "IRS"). The opinion of Petree
Stockton, L.L.P. is also based upon existing law, IRS regulations, currently
published administrative positions of the IRS and judicial decisions, which are
subject to change either prospectively or retroactively.
If the NCRR qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary income
or capital gain that is currently distributed to stockholders. The REIT
provisions of the Code generally allow a REIT to deduct distributions paid to
its shareholders. This deduction for distributions paid to stockholders
substantially eliminates the federal "double taxation" on earnings (once at the
corporate level when earned and once again at the stockholder level when
distributed) that usually results from investments in a corporation.
Nevertheless, the NCRR will be subject to Federal income tax, including as
follows: First, the NCRR will be taxed at regular corporate rates on its
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the NCRR may be subject to the "alternative
minimum tax" as a consequence of its items of tax preference. Third, if the NCRR
has net income from the sale or other disposition of "foreclosure property" that
is held primarily for sale to customers in the ordinary course of business or
other non-qualifying income from foreclosure property, it will be subject to tax
at the highest corporate rate on such income. Fourth, if the NCRR has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property other than foreclosure property held primarily for sale
to customers in the ordinary course of business), such income will be subject to
a 100% tax. Fifth, if the NCRR should fail to satisfy either the 75% or 95%
gross income test (discussed below) but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the NCRR fails either the 75% or 95% test, multiplied by a
fraction intended to reflect the NCRR's profitability. Sixth, if the NCRR fails
to distribute during each year at least the sum of (i) 85% of its ordinary
income for such year, (ii) 95% of its capital gain net income for such year and
(iii) any undistributed taxable income from prior periods, the NCRR will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if during the ten-year period (the
"Recognition Period") beginning with the date of the NCRR's REIT election the
NCRR disposes of any of its existing assets in a transaction in which gain is
recognized by the NCRR, then, to the extent of the excess of (a) the fair market
value of the assets as of the beginning of the applicable Recognition Period
over (b) the NCRR's adjusted basis in such asset as of the beginning of such
Recognition Period (the "Built-In Gain"), such gain will be subject to tax at
the highest regular corporate rate, pursuant to guidelines issued by the IRS
(the "Built-In Gain Rules"). If the NCRR transfers its assets in a transaction
in which the NCRR recognizes no gain on the transfer, the acquiror would be
subject to the Built-In Gain Rules with respect to its transfer of the acquired
assets. Likewise, if the NCRR should acquire any asset from a C corporation
(i.e., a corporation generally subject to full corporate-level tax) in a
carryover-basis transaction and NCRR subsequently recognizes gain on the
disposition of such asset during the ten-year period beginning on the date on
which the asset was acquired by the NCRR, then, the Built-In Gain Rules would
apply.
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REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the NCRR must elect to be so treated and must meet
the requirements, discussed below, relating to the NCRR's organization, sources
of income, nature of assets and distributions of income to shareholders.
ORGANIZATIONAL REQUIREMENTS. The Code defines a REIT as a corporation,
trust or association: (i) that is managed by one or more trustees or directors,
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest, (iii) that would be taxable as
a domestic corporation but for the REIT requirements, (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code, (v) the beneficial ownership of which is held by 100 or more persons,
and (vi) during the last half of each taxable year not more than 50% in value of
the outstanding stock of which is owned, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities). In addition, certain other
tests, described below, regarding the nature of its income and assets also must
be satisfied. The Code provides that conditions (i) through (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) (the "100 stockholder" and "five or fewer" requirements) will not apply
until after the first taxable year for which an election is made to be taxed as
a REIT. For purposes of conditions (v) and (vi), pension funds and certain other
tax-exempt entities are treated as individuals or persons, subject to a
"look-through" exception in the case of condition (vi). In addition, a
corporation may not elect to become a REIT unless its taxable year is the
calendar year. The NCRR's taxable year will be the calendar year.
INCOME TESTS. To maintain qualification as a REIT, three gross income
requirements must be satisfied annually.
(Bullet) First, at least 75% of the NCRR's gross income, for each taxable
year, excluding gross income from certain dispositions of property
held primarily for sale to customers in the ordinary course of a
trade or business ("prohibited transactions"), must be derived
directly or indirectly from investments relating to real property
or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain
types of temporary investments.
(Bullet) Second, at least 95% of the NCRR's gross income (excluding gross
income from prohibited transactions) for each taxable year must be
derived from such real property investments and from
distributions, interest and gain from the sale or disposition of
stock or securities or from any combination of the foregoing.
(Bullet) Third, short-term gain from the sale or other disposition of stock
or securities, gain from prohibited transactions and gain from the
sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure
property) must represent less than 30% of the NCRR's gross income
(including gross income from prohibited transactions) for each
taxable year.
Rents received or deemed to be received by the NCRR will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT
described above only if several conditions are met.
(Bullet) First, the amount of rent generally must not be based in whole or
in part on the income or profits of any person.
(Bullet) Second, the Code provides that rents received from a tenant will
not qualify as "rents from real property" in satisfying the gross
income tests, if the REIT or an owner of 10% or more of the REIT,
directly or constructively, owns 10% or more of such tenant (a
"Related Party Tenant").
(Bullet) Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of
the total rent received under the lease, then the portion of rent
attributable to the personal property will not qualify as "rents
from real property."
(Bullet) Finally, for rents to qualify as "rents from real property" the
REIT must not operate or manage the property or furnish or render
services to tenants, other than through an independent contractor
who is adequately compensated and from whom the REIT does not
derive any income: provided, however, that a REIT may provide
services with respect to its properties and the income will
qualify as "rents from real property" if the services are "usually
or customarily rendered" in connection with the rental space for
occupancy only and are not otherwise considered "rendered to the
occupant."
The NCRR does not anticipate: (i) charging rent that is based in whole or
in part on the income or profits of any person; (ii) deriving rent attributable
to personal property leased in connection with real property that exceeds 15% of
the total rents; (iii) providing any services to Norfolk Southern under the
Lease Extension Agreement; or (iv) receiving rent from Related Party Tenants.
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Under the terms of the Lease Extension Agreement, Norfolk Southern will pay
to the NCRR $5 million in settlement of any obligation by Norfolk Southern
relating to the use, depreciation, maintenance, repair, renewal, replacement or
return to the NCRR of locomotives, railroad cars, and those other items of
personal property which are not customarily located or used on the NCRR's leased
real property. There may be some small amounts of personal property which would
not be covered by the settlement, but the value of any such personal property
should be insubstantial compared to the value of the NCRR's real property and
improvements and other assets.
The payment of the $5 million settlement amount will be made after certain
conditions have been satisfied. It is possible that these conditions may not be
satisfied until after December 31, 1995. Under the terms of a separate agreement
with Norfolk Southern (the "Settlement Payment Agreement"), in the event that
these conditions are not satisfied by December 1, 1995, Norfolk Southern will
make the $5 million settlement payment to the NCRR so that it will be received
in 1995. In the event the conditions are never satisfied, the $5 million payment
will be applied to other amounts owed or that may be owed by Norfolk Southern to
the NCRR.
The timing of the REIT election by the NCRR will be affected by the timing
of the receipt of the settlement payment from Norfolk Southern and the treatment
of such payment. To the extent that the receipt of the settlement payment is
attributable to the settlement of personal property issues, it may be treated as
gain from the sale of personal property and may prevent the NCRR from meeting
the income tests for the year of receipt. The NCRR will apply for a ruling from
the IRS that the receipt of the $5 million settlement payment should be excluded
from the determination of whether the NCRR has satisfied the income tests as a
REIT. If the IRS grants the requested ruling, then the NCRR may elect REIT
status as of January 1, 1995. If, on the other hand, the ruling is not granted,
then NCRR will not be able to qualify as a REIT at lease until January 1, 1996.
In this connection, as discussed above, under the Settlement Payment Agreement
with Norfolk Southern, the $5 million payment will in any event be paid to the
NCRR in 1995, and it is the NCRR's intention to include the payment in income in
1995, thereby enabling the NCRR to satisfy the income tests in 1996 and future
years.
If the NCRR fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for that year
if it is eligible for relief under certain provisions of the Code. These relief
provisions will be generally available if: (i) the NCRR's failure to meet these
tests was due to reasonable cause and not due to willful neglect; (ii) the NCRR
attaches a schedule of the sources of its income to its Federal income tax
return; and (iii) any incorrect information on the schedule is not due to fraud
with intent to evade tax. It is not possible, however, to state whether, in all
circumstances, the NCRR would be entitled to the benefit of these relief
provisions. For example, if the NCRR fails to satisfy the gross income tests
because nonqualifying income that the NCRR intentionally incurs exceeds the
limits on such income, the IRS could conclude that the NCRR's failure to satisfy
the tests was not due to reasonable cause. As discussed above in "Federal Income
Tax Considerations -- Federal Income Taxation of the NCRR," even if these
relief provisions apply, a tax would be imposed with respect to the excess net
income. No similar mitigation provision provides relief if the NCRR fails the
30% income test, and in such case, the NCRR will cease to qualify as a REIT.
ASSET TESTS. At the close of each quarter of its taxable year the NCRR also
must satisfy three tests relating to the nature and diversification of its
assets.
(Bullet) First, at least 75% of the value of the NCRR's total assets must
be represented by real estate assets, cash, cash items and
government securities.
(Bullet) Second, no more than 25% of the NCRR's total assets may be
represented by securities other than those in the 75% asset class.
(Bullet) Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the NCRR may not
exceed 5% of the value of the NCRR's total assets, and the NCRR
may not own more than 10% of any one issuer's outstanding voting
securities.
Under the terms of the Lease Extension Agreement, the equipment and
personal property issues will be resolved by means of a cash payment and will
not involve a return of the equipment and personal property. Remaining assets
which will be leased to Norfolk Southern will include parcels of land and the
railroad corridor, including the improvements or other inherently permanent
structures situated under, along, or adjacent to the lines of the railroad such
as trackage, roadbed, buildings, bridges and tunnels. Under the terms of the
Lease Extension Agreement, the seventy-five percent and twenty-five percent
asset tests will be met.
After initially meeting the asset tests at the close of any quarter, the
NCRR will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the
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asset tests results from an acquisition of securities or other property during a
quarter, the failure can be cured by disposition of sufficient nonqualifying
assets within 30 days after the close of that quarter. The NCRR intends to
maintain adequate records of the value of its assets to ensure compliance with
the asset tests and to take such other actions within 30 days after the close of
any quarter as may be required to cure any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to be taxed as a REIT, the NCRR
is required to distribute dividends (other than capital gain dividends) to its
stockholders in an amount as least equal to (a) the sum of (i) 95% of the NCRR's
"REIT taxable income" (computed without regard to the dividends-paid deduction
and the NCRR's capital gain) and (ii) 95% of the net income, if any, from
foreclosure property in excess of the special tax on income from foreclosure
property, minus (b) the sum of certain items of non-cash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the NCRR timely files its Federal
income tax return for such year and if paid on or before the first regular
dividend payment after such declaration. Even if the NCRR satisfies the
foregoing distribution requirements, to the extent that the NCRR should fail to
distribute during each calendar year at least the sum of (a) 85% of its ordinary
income for that year, (b) 95% of its capital gain net income for that year and
(c) any undistributed taxable income from prior periods. The NCRR would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. In addition, during its Recognition Period, if the
NCRR disposes of any assets subject to the Built-In Gain Rules, the NCRR will be
required pursuant to guidance issued by the IRS to distribute at least 95% of
the Built-In Gain (after tax), if any, recognized on the disposition of the
asset. The NCRR intends to make timely distributions sufficient to satisfy the
annual distribution requirements.
The NCRR's REIT taxable income may be less than its cash flow due to the
allowance of depreciation and other non-cash charges in computing REIT taxable
income. Accordingly, the NCRR anticipates that it will generally have sufficient
cash or liquid assets to enable it to satisfy the 95% distribution requirement.
It is possible, however, that the NCRR, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
or to distribute such greater amount as may be necessary to avoid income and
excise taxation, due to timing differences between (i) the actual receipt of
income and the actual payment of deductible expenses and (ii) the inclusion of
such income and the deduction of such expenses in arriving at taxable income of
the NCRR, or as a result of nondeductible cash expenditures as principal
amortization or capital expenditures in excess of noncash deductions. In the
event that such timing differences occur, the NCRR may find it necessary to
arrange for borrowing or, if possible, pay taxable stock dividends in order to
meet the distribution requirement.
Under certain circumstances, the NCRR may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year, which may be included in the NCRR's deduction for
dividends paid for the earlier year. Thus, the NCRR may be able to avoid being
taxed on amounts distributed as deficiency dividends. The NCRR will, however, be
required to pay interest based upon the amount of any deduction taken for
deficiency dividends.
EARNINGS AND PROFITS. The Code provides that a REIT must distribute before
the close of its first taxable year any earnings and profits earned by it during
years in which it did not qualify as a REIT. Ernst & Young has conducted a study
to determine the amount of the NCRR's accumulated earnings and profits. The NCRR
anticipates that it will distribute its earnings and profits, if any, by the end
of the first year for which the NCRR's REIT election is in effect. Treasury
regulations issued in 1993 also provide that REITs may use the special
deficiency dividend procedures under Section 852(e) of the Code in satisfying
the earnings and profits distributions requirements. This provision protects the
REIT from disqualification, in the event that the distribution was not properly
made, by allowing the REIT to make the distribution within ninety days of the
IRS's determination that a distribution was required. However, the REIT will be
subject to an interest penalty due to the delay in distribution. How these
deficiency dividend procedures will be applied to REITs is not clear from the
regulations, and there can be no assurance that the deficiency dividend
procedure will be available in a particular case.
FAILURE TO QUALIFY
If the NCRR fails to qualify for taxation as a REIT in any taxable year and
the relief provisions do not apply, the NCRR will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to shareholders in any year in which the NCRR
fails to qualify will not be deductible by the NCRR nor will they be required to
be made. In such event, to the extent of current or accumulated earnings and
profits, all distributions to stockholders, will be dividends, taxable as
ordinary income, except that, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless the NCRR is entitled to relief under specific statutory provisions, the
NCRR also will be disqualified from taxation as a REIT for the four taxable
years following the year
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during which qualification was lost. It is not possible to state whether in all
circumstances the NCRR would be entitled to such statutory relief. For example,
if the NCRR fails to satisfy the gross income tests because nonqualifying income
that the NCRR intentionally incurs exceeds the limit on such income, the IRS
could conclude that the NCRR's failure to satisfy the tests was not due to
reasonable cause.
TAXATION OF U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of Common Stock
that for United States income tax purposes (a) is a citizen or resident of the
United States, (b) is a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof or (c) is an estate or trust, the income of which is subject
to United States Federal income taxation regardless of its source. For any
taxable year for which the NCRR qualifies for taxation as a REIT, amounts
distributed to taxable U.S. Stockholders will be taxed as follows.
DISTRIBUTIONS GENERALLY. Distributions to U.S. Stockholders other than
capital gain dividends discussed below, will constitute dividends up to the
amount of the NCRR's current or accumulated earnings and profits and to that
extent, will be taxable to the stockholders as ordinary income. These
distributions are not eligible for the dividends received deduction for
corporations. To the extent that the NCRR makes a distribution in excess of its
current or accumulated earnings and profits, the distribution will be treated
first as a tax-free return of capital, reducing the tax basis in the U.S.
Stockholder's Common Stock, and the distribution in excess of such basis will be
taxable as gain realized from the sale of its Common Stock. Dividends declared
by the NCRR in October, November or December of any year payable to a
shareholder of record on a specified date in any such month shall be treated as
both paid by the NCRR and received by the stockholder on December 31 of the
year, provided that the dividends is actually paid by the NCRR during January of
the following calendar year. Stockholders may not include on their own Federal
income tax returns any tax losses of the NCRR.
The NCRR will be treated as having sufficient earnings and profits to treat
as a dividend any distribution by the NCRR up to the amount required to be
distributed in order to avoid imposition of the 4% excise tax discussed in
"Federal Income Tax Considerations -Federal Income Taxation of the NCRR" above.
Moreover, any "deficiency dividend" will be treated as an ordinary or capital
gain dividend, as the case may be, regardless of the NCRR's earnings and
profits. As a result, stockholders may be required to treat certain
distributions that would otherwise result in a tax-free return of capital as
taxable dividends.
CAPITAL GAIN DISTRIBUTIONS. Distributions to U.S. Stockholders that are
properly designated by the NCRR as capital gain distributions will be treated as
long-term capital gains to the extent they do not exceed the NCRR's actual net
capital gains for the taxable year without regard to the period for which the
stockholder has held his stock. However, corporate stockholders may be required
to treat up to 20% of certain capital gain dividends as ordinary income. Capital
gain dividends are not eligible for the dividends-received deduction for
corporations.
PASSIVE ACTIVITY LOSS AND INVESTMENT LIMITATIONS. Distributions from the
NCRR and gain from the disposition of Common Stock will not be treated as
passive activity income, and therefore shareholders will not be able to apply
any "passive losses" against such income. Dividends from the NCRR (to the extent
they do not constitute a return of capital) will generally be treated as
investment income for purposes of the investment interest limitation; net
capital gain from the disposition of Common Stock or capital gain dividends
generally will be excluded from investment income.
CERTAIN DISPOSITIONS OF SHARES. Losses incurred on the sale or exchange of
Common Stock held for less than six months (after applying certain holding
period rules) will be deemed long-term capital loss to the extent of any capital
gain dividends received by the selling stockholder from those shares.
TREATMENT OF TAX-EXEMPT STOCKHOLDERS. Distributions from the NCRR to a
tax-exempt employee pension trust or other domestic tax-exempt shareholders
generally will not constitute "unrelated business taxable income" ("UBTI")
unless the stockholder has borrowed to acquire or carry its Common Stock. For
taxable years beginning after December 31, 1993, however, qualified trusts that
hold more than 10% (by value) of the shares of certain REIT, may be required to
treat a certain percentage of such a REIT's distributions as UBTI. This
requirement will apply only if the REIT would not qualify as such for Federal
income tax purposes, not for the application of a "look-through" exception to
the five or fewer requirement applicable to shares held by qualified trusts and
to the REIT is "predominantly held" by qualified trusts. A REIT is predominantly
held if either (i) a single qualified trust holds more than 25% by value of the
REIT interests or (ii) one or more qualified trusts, each owning more than 10%
by value of the REIT interests, hold in the aggregate more than 50% of the REIT
interests. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (b) the total gross
income (less
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certain associated expenses) of the REIT. A de minimis exception applies where
the ratio set forth in the preceding sentence is less than 5% for any year. For
these purposes, a qualified trust is any trust described in section 401 (a) of
the Code and exempt from tax under section 501(a) of the Code. The provisions
requiring qualified trusts to treat a portion of REIT distributions as UBTI will
not apply if the REIT is able to satisfy the five or fewer requirements without
relying upon the "look-through" exception.
SPECIAL TAX CONSIDERATIONS FOR NON-U.S. STOCKHOLDERS
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships and foreign trusts and
estates (collectively, "Non-U.S. Stockholders") are complex, and the following
discussion is intended only as a summary of certain of these rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of Federal, state and local income tax laws on an investment in the
NCRR, including any reporting requirements.
In general, Non-U.S. Stockholders will be subject to regular United States
Federal income tax with respect to their investment in the NCRR if the
investment is "effectively connected" with the Non-U.S. Stockholder's conduct of
a trade or business in the United States. A corporate Non-U.S. Stockholder that
receives income that is (or is treated as) effectively connected with a U.S.
trade or business may also be subject to the branch profits tax under section
884 of the Code, which is payable in addition to regular United States Federal
corporate income tax. The following discussion will apply to Non-U.S.
Stockholders whose investment in the NCRR is not so effectively connected.
A distribution by the NCRR that is not attributable to gain from the sale
or exchange by the NCRR of a United States real property interest and that is
not designated by the NCRR as a capital gain distribution will be treated as an
ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. Generally, any ordinary income dividend will
be subject to a United States Federal income tax equal to 30% of the gross
amount of the dividend unless this tax is reduced by an applicable tax treaty.
Such a distribution in excess of NCRR's earnings and profits will be treated
first as a return of capital that will reduce a Non-U.S. Stockholder's basis in
its Common Stock (but not below zero) and then as gain from the disposition of
such shares, the tax treatment of which is described under the rules discussed
below with respect to dispositions of Common Stock.
Distributions by the NCRR that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Stockholder
as if the distributions were gains "effectively connected" with a United States
trade or business. Accordingly, a Non-U.S. Stockholder will be taxed at the
normal capital gain rates applicable to a U.S. Stockholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of non-resident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax when made to a foreign corporate
stockholder that is not entitled to either a reduced rate or an exemption under
a treaty.
Although tax treaties may reduce the NCRR's withholding obligations, the
NCRR generally will be required to withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS (i) 35% of designated capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (ii) 30% of the ordinary dividends paid out of
earnings and profits. In addition, if NCRR designates prior distributions as
capital gain dividends, subsequent distributions up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding. A distribution in excess of the NCRR's earnings and profits will be
subject to 30% dividend withholding. If the amount of tax withheld by the NCRR
with respect to a distribution to a Non-U.S. Stockholder exceeds the
stockholder's United States tax liability with respect to such distribution, the
Non-U.S. Stockholder may file for a refund of such excess from the IRS.
Unless the Common Stock constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of Common Stock by a Non-U.S.
Stockholder generally will not be subject to United States Federal income
taxation. The Common Stock will not constitute a United States real property
interest if the NCRR is a "domestically controlled REIT." A domestically
controlled REIT is a REIT in which at all times during a specified testing
period less than 50% in value of its shares is held directly or indirectly by
Non-U.S. Stockholders. It is currently anticipated that the NCRR will be a
domestically controlled REIT and therefore that the sale of Common Stock will
not be subject to taxation under FIRPTA. However, because the Common Stock will
be publicly traded, no assurance can be given that NCRR will continue to be a
domestically controlled REIT. Notwithstanding the foregoing, capital gains not
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S.
Stockholder is a non-resident alien individual who is present in the United
States for 183 days or more
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during the taxable year and certain other conditions apply, in which case the
non-resident alien individual will be subject to a 30% tax on his or her U.S.
source capital gains. If the NCRR were not a domestically controlled REIT,
whether a Non-U.S. Stockholder's sale of Common Stock would be subject to tax
under FIRPTA as a sale of a United States real property interest would depend on
whether the Common Stock were "regularly traded" on an established securities
market (such as the New York Stock Exchange) on which the Common Stock will be
listed and on the size of the selling stockholder's interest in the NCRR. If the
gain on the sale of Common Stock were subject to taxation under FIRPTA, the
Non-U.S. Stockholder would be subject to the same treatment as a U.S.
Stockholder with respect to the gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in he case of non-resident alien
individuals). In addition, distributions that are treated as gain from the
disposition of Common Stock and that are subject to tax under FIRPTA also may be
subject to a 30% branch profit tax when made to a foreign corporate stockholder
that is not entitled to either a reduced rate or an exemption under a treaty. In
any event, a purchaser of Common Stock from a Non-U.S. Stockholder will not be
required to withhold under FIRPTA on the purchase price if the purchased Common
Stock are "regularly traded" on an established securities market or if the NCRR
is a domestically controlled REIT. Otherwise, under FIRPTA the purchaser of
Common Stock may be required to withhold 10% of the purchase price and remit
this amount to the IRS.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under certain circumstances, U.S. Stockholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Common Stock. Backup withholding will apply only if
the holder (i) fails to furnish his or her taxpayer identification number
("TIN") (which, for an individual, would be his or her Social Security Number),
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed to report properly payments of interest and dividends or is otherwise
subject to backup withholding or (iv) under certain circumstances, fails to
certify, under penalties of perjury, that he or she has furnished a correct TIN
and (a) that he or she has not been notified by the IRS that he or she is
subject to backup withholding for failure to report interest and dividend
payments or (b) that he or she has been notified by the IRS that he or she is
not longer subject to backup withholding. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against the U.S. Stockholder's United
States Federal income tax liability and may entitle the U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding for Non-U.S. Stockholders. Non-U.S. Stockholders should consult
their tax advisors with regard to U.S. information reporting and backup
withholding.
STATE AND LOCAL TAX
The NCRR and its stockholders may be subject to state and local tax in
various states and localities, including those in which it or they transact
business, own property, or reside. The tax treatment of the NCRR and the
shareholders in such jurisdictions may differ from the Federal income tax
treatment described above. Consequently, prospective stockholders should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the Common Stock of the NCRR.
SHAREHOLDER VOTE AND QUORUM REQUIREMENTS
QUORUM REQUIREMENTS
Section 15-12-02 of the General Statutes of the State of North Carolina
require all leases of substantially all the assets of a corporation incorporated
under the laws of the State of North Carolina to be approved by the vote of a
majority of the outstanding capital stock of the corporation at a meeting at
which a quorum is present. Section 7 of Article II of the Bylaws of the NCRR
provides as follows with respect to quorums:
A MAJORITY OF THE OUTSTANDING SHARES OF THE CORPORATION ENTITLED TO
VOTE, REPRESENTED IN PERSON OR BY PROXY, SHALL CONSTITUTE A QUORUM AT
A MEETING OF SHAREHOLDERS, PROVIDED, HOWEVER, THAT A MAJORITY OF THE
SHARES HELD BY SHAREHOLDERS OTHER THAN THE STATE OF NORTH CAROLINA
MUST BE REPRESENTED, IN PERSON OR BY PROXY, IN ORDER TO CONSTITUTE A
QUORUM AT A MEETING OF SHAREHOLDERS.
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The NCRR has obtained an opinion of its legal counsel, which advises the
NCRR that it believes this Bylaw is valid under the corporate laws of the State
of North Carolina, as such laws existed at the time of adoption of this Bylaw,
at the date hereof and at all intervening dates. Such legal opinion, however,
notes that a similar Bylaw of the NCRR was declared invalid under the corporate
law in effect until 1957, and there can be no assurance that this Bylaw
provision would ultimately be upheld as valid if it is challenged by any person.
In the case in which the Bylaw was held to be invalid, shareholders other than
the State of North Carolina boycotted a shareholders' meeting. The legal opinion
obtained by the NCRR with respect to the validity of this Bylaw provision is
based on an analysis of the current North Carolina corporate statute. There can
be no assurance that the state legislature would not seek to alter the corporate
statute as it applies to the NCRR if a quorum is not present at the Annual
Meeting of the NCRR.
Until advised otherwise by a court of competent jurisdiction, the NCRR will
consider this Bylaw valid and a quorum will not be deemed to be in existence at
this Annual Meeting of Shareholders, unless both (i) a majority of the
outstanding shares of the NCRR are represented at the meeting, in person or by
proxy, and (ii) a majority of the shares of the NCRR held by shareholders other
than the State of North Carolina are represented at the meeting, in person or by
proxy.
The effect of attending the meeting in person or signing and returning a
form of Proxy, whether or not a shareholder votes or abstains on any matter, is
to have your shares counted toward a quorum being present. If a quorum is
present whether the Lease Extension Agreement is approved will be determined by
the vote described below.
VOTE REQUIREMENTS
Under North Carolina law, the Lease Extension Agreement can be approved by
the shareholders only if the holders of a majority of the outstanding shares of
Common Stock of the NCRR affirmatively vote to approve the Lease Extension
Agreement at a meeting duly called and at which a quorum is present. In
addition, in order to give the shareholders other than the State of North
Carolina a role in the approval process, the Board of Directors has determined
that approval of the Lease Extension Agreement will also require approval of a
majority of the votes cast by shareholders other than the State of North
Carolina.
Shareholders who oppose the Lease Extension Agreement can choose whether
their opposition is best effectuated by not voting or by voting against the
Lease Extension Agreement. Failure to execute and return a proxy will have the
practical effect of voting against the Lease Extension Agreement if the holders
of a majority of the NCRR's outstanding shares other than the State of North
Carolina do not attend the meeting in person or by proxy. However, if the
holders of a majority of the NCRR's outstanding shares other than the State of
North Carolina attend the meeting in person or by proxy, opposition to the Lease
Extension Agreement will be effective only if the number of votes cast against
the Lease Extension Agreement equals or exceeds the number of votes cast for
approval by shareholders other than the State of North Carolina.
CERTAIN CONFLICTS OF INTEREST AND SHAREHOLDER DERIVATIVE ACTIONS
NORFOLK SOUTHERN
Norfolk Southern beneficially owns 113,855 shares of the Common Stock of
the NCRR, which represents an ownership interest of 2.7% of the NCRR, or
approximately 10.6% of the shares held by shareholders other than the State of
North Carolina. Further, the NCRR owns approximately 9.6% of the outstanding
common stock of the State University Railroad Company, the majority of which is
owned by Norfolk Southern. The Board of Directors believes that the Lease
Extension Agreement contains terms not more favorable to Norfolk Southern than
would have been agreed to in an arms length transaction by parties having no
other relationship with one another.
STATE OF NORTH CAROLINA
The State of North Carolina is not a party to the Lease Extension
Agreement. Accordingly, the Board of Directors of the NCRR has not considered
the State of North Carolina to be an interested party.
The long history of the NCRR and the State's ownership of its stock do show
that the State of North Carolina believes the NCRR is useful in the economic
development of the State. Consequently, in certain instances state law treats
the NCRR somewhat differently than other corporations. For example, Section
124-5 of the General Statutes of the State of North Carolina requires the
approval of the Governor and the Council of State prior to the NCRR being able
to sell or lease its assets.
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The charter and Bylaws of the NCRR contain unique provisions designed to
balance the interests of the State and the other shareholders. One example of
these balancing provisions is the special quorum bylaw discussed in detail
above. See "SHAREHOLDER VOTE AND QUORUM REQUIREMENTS." Another example is that
the NCRR's charter provides that ten members of the Board of Directors of the
NCRR are elected by the State and five members of the Board of Directors are
elected by shareholders other than the State which is disproportionate to their
share ownership. This difference in voting power is mandated despite the fact
that this is a single class of stock. If the State purchases additional shares
or sells shares, there is no provision for reducing or increasing the number of
members of the Board of Directors that the State has a right to elect. This
method of electing members of the Board of Directors of the NCRR differs from
the method prescribed by statutes for other North Carolina corporations.
The Board of Directors determined that whatever economic development
interests the State of North Carolina may have, those interests are
substantially consistent with the interests of the other shareholders of the
NCRR to the extent the growth of revenue traffic along the line is promoted. The
Board of Directors of the NCRR unanimously approved the Lease Extension
Agreement because the Board of Directors determined that the Lease Extension
Agreement is in the best interest of all the shareholders of the NCRR. The Board
of Directors determined the best interests of the NCRR's shareholders would be
served by achieving following primary strategic objective:
MAXIMIZE SHAREHOLDER VALUE BY MAXIMIZING DISTRIBUTABLE AFTER-TAX
INCOME TO THE SHAREHOLDERS CONSISTENT WITH MINIMIZING THE RISKS (I)
THAT INCOME WILL BE DISRUPTED AND (II) THAT THE VALUE OF THE ASSETS OF
THE NCRR WILL BE IMPAIRED.
The Board of Directors has determined that the Lease Extension Agreement
promotes the foregoing objective better than any of the other alternatives
realistically available to the NCRR. See "REASONS FOR APPROVAL OF LEASE
EXTENSION AGREEMENT" and "ALTERNATIVES TO LEASE EXTENSION AGREEMENT." The Board
believes the primary strategic objective formulated by the Board as described
above represents a good guideline for balancing the interests of all the
shareholders and that the decisions made by the Board to determine which
alternatives best promote the primary strategic objective have been fair to all
shareholders, made without regard to promoting the interests of one shareholder
over another and were reasonable in light of all the circumstances.
In certain litigation discussed below, it is alleged that the State's
interest in economic development is inimical to the interests of the other
shareholders of the NCRR because the State desires to promote industrial growth
in areas of North Carolina through which the NCRR's line passes. The Board
believes this amounts to saying that the State's desire to increase the number
of shippers near the NCRR's lines is in conflict with the interests of the other
shareholders of the NCRR.
The Board of Directors has determined that it is in the interests of all
the shareholders that the volume of revenue traffic over its line increase.
Valuation formulas discussed in other sections of these proxy materials indicate
that one measure of the value of a rail line is the volume of shipments over the
line. The NCRR's railroad consultants have also indicated that the volume of
shipments that either originates or terminates on a railroad's line plays a
substantial role in increasing the ability of the owner of the line to increase
revenues derived from the line, whether by the owner operating the line itself,
leasing to a short-line operator or negotiating a lease with a company, such as
Norfolk Southern. Captive traffic is not subject to the risk that it will be
diverted when a lease expires, except to the extent that losses may occur to
competitors, such as trucking companies. See "COMPARISON OF TERMS OF OTHER RAIL
LEASES" and " ALTERNATIVES TO LEASE EXTENSION AGREEMENT -- Operation Without Any
Lessee." Consequently, the Board of Directors sees no inimical conflict of
interest between the economic development interests of the State and the
interests of other shareholders. The interests of all shareholders is promoted
by increasing the value of the NCRR's line.
The Board of Directors believes that allegations of conflict of interest
between the State of North Carolina and other shareholders oversimplify the
conflict of interest issues. There are many conflicts of interest among the
shareholders. Long-term investors and short-term investors have different
interests on some issues. Shareholders who are willing to incur high risks in
the hopes of earning high returns have interests that sometimes conflict with
those shareholders who do not desire to incur high risks.
While some shareholders may focus their attention on fluctuations in the
market price of the Common Stock of the NCRR, the Board notes that the trading
market for shares of the NCRR's Common Stock is very thin. Sales of large blocks
of shares in a short period are sometimes not possible or have the effect of
causing substantial decreases in market price. Accordingly, the Board concluded
that many shareholders would be best served by establishing predictability in
income, profits and distributions to avoid minimizing the risk that shareholders
would have to liquidate their holdings quickly in response to radical swings in
the financial performance of the NCRR. The Board believes the Lease Extension
Agreement
34
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<PAGE>
affords the NCRR a revenue stream that promotes such predictability.
Alternatives to the Lease Extension Agreement were much more likely to produce
wide swings in revenue, profit and distributions.
The legal actions described below, which allege conflict of interest, were
filed after a decrease in the market price of the stock following announcement
of the tentative terms of the Lease Extension Agreement in November 1994. Prior
to announcing its decision the Board recognized that stock prices could be
adversely affected by any of the alternatives considered by the Board and the
Board concluded that swings in stock price were not the best way to judge the
fairness or reasonableness of the an agreement with Norfolk Southern.
It should also be noted that some of the alternatives to the Lease
Extension Agreement provide greater potential for conflicts of interest than
does the Lease Extension Agreement. For example, if the NCRR were to operate its
line without a lessee, the NCRR would make numerous decisions each year about
service and train schedules, rates to be charged shippers, whether to have
stations and other facilities in certain towns and other matters. The Board
believes that it is easier for the Board to avoid potential conflicts of
interest between the State as a political body and other shareholders in the
context of a single lease transaction with a third party commercial operator
than would be the case in hundreds of smaller decisions, each of which could
affect the revenues, expenses, and profitability of the NCRR.
The Lease Extension Agreement does not contain any provision that is
designed to promote the economic development interests of the State of North
Carolina to any degree that is greater than is reasonably required to promote
maintaining or increasing the value of the NCRR's assets or income potential.
Examples of provisions of the Lease Extension Agreement that are reasonably
designed to maintain or increase the value of the NCRR's line include:
(1) Norfolk Southern must maintain the quality of the line to specified
track standards that allow trains to travel at high speeds, which is a
more valuable asset than track that is certified for lower speeds.
(2) The Lease Extension Agreement does not require Norfolk Southern to
indefinitely continue service on the eastern portion of the NCRR's
line. If increases in volumes of shipments originating on the line
between Raleigh and Morehead City are not achieved, Norfolk Southern is
given the opportunity to renegotiate to seek to discontinue service
over segments of the line between Raleigh and Morehead City beginning
in the year 2003. The NCRR is agreeing to assist Norfolk Southern to
delegate its common carrier duty with respect to such segment. However,
to protect the value of such segment, the segment must connect to
another rail line so that another operator can use the abandoned track.
Such discontinuance of service would not cause rental payments to
decrease.
(3) Norfolk Southern agrees to use its best efforts to develop and locate
rail-served industries along the NCRR's lines. Norfolk Southern
controls other rail lines in North Carolina and owns or operates over
14,000 miles of track nationwide. The NCRR desires to ensure that
Norfolk Southern does not influence companies to locate near the lines
Norfolk Southern owns to the detriment of the line the NCRR leases to
Norfolk Southern.
COMMUNICATIONS WITH STATE OF NORTH CAROLINA
From commencement of discussions with Norfolk Southern about extension of
the Leases until 1993, the NCRR did not provide the State with any information
about the substance of the lease negotiations. Since August of 1993, the
President of the NCRR has briefed the Governor of the State of North Carolina
several times about the progress of negotiations with Norfolk Southern. The
Governor and the Governor's legal counsel executed a confidentiality agreement,
which strictly limits their right to disseminate information, including to other
State officials. Briefings of the Governor were commenced for the purposes of
dissuading the Governor from contacting individual directors on matters
concerning the lease negotiations, to preclude Norfolk Southern from giving the
Governor a distorted view of negotiations and to enable the Governor to respond
on an informed basis to the concerns of shippers and negative publicity
generated by Norfolk Southern. The Board of Directors believes its strategy of
keeping the Governor informed successfully insulated the negotiating process
from outside influences. As discussed above, the Lease Extension Agreement
contains no special provisions that promote the State's interests to the
detriment of the interests of other shareholders.
BUYOUT BY STATE OF NORTH CAROLINA
During the course of negotiations with Norfolk Southern and the evaluation
of alternatives, it has been suggested to the NCRR by certain shareholders that
it would be in the best interests of the shareholders to either sell all or
substantially all the stock or assets of the NCRR to the State of North Carolina
or to reorganize the ownership of the NCRR so that the State of North Carolina
owns 100% of the segments of the NCRR's line with lower traffic densities on the
eastern portion of the
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<PAGE>
NCRR's line and in return other shareholders would own a greater percentage of a
separate corporation that owns the assets in the western part of the State.
The NCRR's Board of Directors determined that it would not pursue serious
consideration of such proposals, unless it were determined that the State of
North Carolina had serious interest in pursuing such a buy-out or
reorganization. As the State of North Carolina would have to agree to any such
buy-out or reorganization, the Board of Directors determined that it would be a
waste of corporate resources to pursue such a sale or reorganization prior to
receiving any sign of serious State interest. The Board of Directors determined
that the interests of the shareholders were best served by devoting all the
NCRR's limited management and financial resources to considering the other
alternatives described above and negotiating the Lease Extension Agreement with
Norfolk Southern.
Accordingly, the NCRR has indicated to shareholders who have proposed such
a sale or reorganization that they discuss the matter with the State of North
Carolina. The Board of Directors of the NCRR is aware that certain shareholders
have met with representatives of the State of North Carolina to discuss such a
sale or reorganization and the NCRR has been advised by the State that a buy-out
or reorganization is being evaluated along with other options, but the NCRR is
not aware of the extent or seriousness of such discussions, or whether the State
will decide to enter into or approve such a transaction.
Some shareholders have expressed the view that the economic terms of the
Lease Extension Agreement will be the basis of the valuation of the stock of the
NCRR if the State makes a buy-out offer. The Board of Directors deems it to be
in the best interests of the shareholders not to speculate about the Board's
strategy in negotiating any future buy-out offer from the State as such
speculation may be used against the NCRR in possible future negotiations. If the
State desires to formulate a buy-out offer, the Board of Directors will evaluate
and respond to that offer as it deems appropriate consistent with its duties to
all shareholders. Consequently, it would be inappropriate at this time to
comment on how the Lease Extension Agreement terms would affect a buy-out by the
State. The Board of Directors notes that although certain officials of the State
of North Carolina have in recent years discussed in public a buy-out of the
other shareholders as being in the interest of the State, other officials have
also indicated that it may be in the State's interest to sell all or part of its
stock. Like other matters of State business, different officials have taken
different positions at different times. The Board of Directors is not aware of
any decision by the State to buy-out the other shareholders and is not aware of
what legislative or other government approvals would be required to accomplish a
buy-out by the State.
SHAREHOLDER DERIVATIVE LEGAL ACTIONS
Four shareholder derivative actions were filed in the United States
District Court for the Eastern District of North Carolina during December 1994
and January and February 1995 by shareholders of the NCRR. The complaints name
the directors of the NCRR as defendants and the NCRR as "nominal defendant". Two
of the actions, KAHN V. NORTH CAROLINA RAILROAD CO., ET AL. ("Kahn"), Civil
Action No. 5:94-CV-936-F(2) and NORBERG V. NORTH CAROLINA RAILROAD CO., ET AL.
("Norberg"), Civil Action No. 5-95-CV-96-Br(2) seek to enjoin a purported lease
between the NCRR and Norfolk Southern and to recover for the NCRR unspecified
damages and other relief from the directors. Two other actions, WERNER, ET AL.
V. NORTH CAROLINA RAILROAD CO., ET AL. ("Werner"), Civil Action No.
5:94-CV-943-Bo(1) and TARAN V. NORTH CAROLINA RAILROAD CO., ET AL. ("Taran"),
Civil Action No. 5:95-CV-17-Bo(1), seek similar relief and also name the State
of North Carolina, the Governor of North Carolina, and Norfolk Southern as
defendants.
The Kahn and Norberg actions allege misconduct by the directors of the
NCRR, including breach of fiduciary duty, mismanagement, and waste of corporate
assets. The Werner and Taran actions assert similar claims, allege collusion
between the State of North Carolina and Norfolk Southern producing a
below-market lease rental rate, and assert that the State of North Carolina has
condemned the NCRR's properties for public uses for the benefit of the State.
The NCRR, along with the co-defendants, filed motions to dismiss or stay
the actions. On October 18, 1995, the court denied the motions to dismiss,
granted the motions to stay the proceeding until such time as the shareholders
have voted on the Lease Extension Agreement, and granted a motion by the
plantiffs for leave to supplement their pleadings. The NCRR is opposing the
actions brought by the plaintiffs to the extent the actions seek to enjoin any
lease arrangement or seek recovery against the NCRR or seek any remedy against
the best interests of the NCRR or its shareholders.
The Bylaws of the NCRR provide that its Directors shall have the right to
be indemnified by the NCRR, to the fullest extent permitted by law, against
liabilities and expenses arising out of their status as Directors. To the extent
the Directors' conduct meets the standard of conduct for indemnification set
forth by the North Carolina Business Corporation Act ("NCBCA"), as described
below, they will be so indemnified by the NCRR in connection with the
shareholder derivative actions described herein.
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Under the NCBCA, a corporation is permitted to indemnify a director who
conducted himself in good faith and reasonably believed: (i) in the case of
conduct in his official capacity with the corporation, that his conduct was in
the best interest of the corporation and (ii) in all other cases, that his
conduct was at least not opposed to the corporation's best interest. In the case
of any criminal proceeding, the director must not have had any reasonable cause
to believe his conduct was unlawful. In any proceeding by or in the right of a
corporation (such as the four shareholder derivative actions described herein),
a corporation may not voluntarily indemnify a director if the director is
adjudged liable to the corporation. In addition, a corporation may not indemnify
a director if the director is adjudged liable on the basis that personal benefit
was improperly received by him. Where a proceeding is by or in the right of a
corporation, indemnification of a director is limited to reasonable expenses if
the proceeding is concluded without a final adjudication on the issue of
liability.
The NCBCA permits an advance for expenses incurred by a director in
defending a proceeding. The expenses may be paid by a corporation in advance of
the final disposition of the legal action, upon receipt of an undertaking by or
on behalf of the director to repay such amount, unless it is ultimately
determined that he is entitled to be indemnified by the corporation against such
expenses. The Directors of the NCRR who have executed such undertakings are
receiving advances for expenses incurred in defending the actions brought
against them in connection with the Lease Extension Agreement.
Additionally, the NCBCA provides that a corporation may purchase and
maintain insurance on behalf of a director of the corporation against any
liability asserted against or incurred by him in that capacity or arising from
his status as a director. The NCRR has an insurance policy that covers the NCRR
against the indemnification liability of the NCRR to its directors. The policy
has an aggregate limit of $5 million and a $75,000 retention per occurrence. The
NCRR's liability exposure to its Directors will, therefore, not be material,
unless (i) the Directors satisfy the requirements for being indemnified as
described above and (ii) the indemnified liabilities and expenses exceed the
NCRR's insurance coverage. The NCRR is unable to determine this early in the
legal proceedings whether either of the foregoing conditions will occur.
DISSENTERS' RIGHTS
Section 55-13-02 of the General Statutes of the State of North Carolina
specifies those situations in which shareholders have the right to dissent and
have their shares appraised and purchased a corporation. Section 55-13-02 does
not cover votes on leases of assets. Consequently, no appraisal rights are
available to shareholders who oppose the Lease Extension Agreement.
ELECTION OF DIRECTORS
In the election of directors, the shares owned by the State of North
Carolina are entitled to vote on and elect ten of the fifteen directors and the
"privately-owned" shares are entitled to vote on and elect the remaining five
directors, for staggered three-year terms according to the charter and bylaws of
the NCRR. At the 1995 Annual Meeting of shareholders, the State of North
Carolina is expected to elect four (4) directors and the "privately-owned"
shares will elect one (1) director. Proxies are not solicited by the Board of
Directors of the NCRR for directors elected by the State of North Carolina.
Proxies voted by the "privately-owned" shares cannot be voted for more than one
(1) person at the 1995 Annual Meeting.
The Nominating Committee has recommended to the Board of Directors that the
person named below be nominated at the Annual Meeting of Shareholders for
election by the "privately-owned" shares to serve as a director for a term
expiring at the 1998 annual meeting of shareholders and until his successor is
duly elected and qualified.
Unless contrary instructions are set forth in the proxies, it is intended
that the persons named in the proxy will vote all shares represented by such
proxy for the election as directors of the nominee named below. Should the
nominee become unable or unwilling to accept nomination or election, it is
intended that the persons acting under the proxy will vote for the election, in
the nominee's stead, of such other person as the Board of Directors may
recommend. Management has no reason to believe that the nominee will be unable
or unwilling to serve if elected.
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NOMINEES
Set forth below is certain information concerning the nominee for election
as director at the 1995 Annual Meeting:
<TABLE>
<CAPTION>
PRESENT POSITION DIRECTOR
NAME AGE WITH THE NCRR SINCE
<S> <C> <C> <C>
P.C. Barwick, Jr.* 58 Director and Secretary 1990
</TABLE>
* Mr. Barwick was elected to the Board of Directors by the State of North
Carolina, but is to be nominated at the 1995 Annual Meeting for election by
shareholders other than the State of North Carolina.
The business experience during the past five (5) years of the nominee is
summarized below.
Attorney at Law, Principal, Wallace, Morris, Barwick & Rochelle, P.A. (law
firm), Kinston, North Carolina since 1986. Mr. Barwick served as Secretary and
Treasurer of ANCRR from 1985 to 1989. Director, State University Railroad
Company from 1993 to present. The Registrant owns a minority position in State
University Railroad Company, a majority whose stock is owned by Norfolk
Southern.
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and the
executive officers of the NCRR:
<TABLE>
<CAPTION>
YEAR ELECTED TERM YEAR ELECTED
NAME AGE AS DIRECTOR EXPIRES AS OFFICER POSITION WITH NCRR
<S> <C> <C> <C> <C> <C>
John F. McNair, III* (1) 68 1993 1996 1993 President and Director
J. Melville Broughton, Jr. 73 1986 1996 1988 Vice President and
Director
P.C. Barwick, Jr.* (2) 58 1990 1995 1989 Secretary and Director
Lynn T. McConnell* 40 1993 1996 1993 Treasurer and Director
Chauncey W. Lever 70 1987 1996 1995 Assistant Secretary-
Treasurer & Director
Scott M. Saylor 36 -- -- 1989 Exec. Vice President
and General Counsel
John M. Alexander, Jr.* (3) 46 1993 1997 -- Director
Sidney R. French 68 1989 1997 -- Director
Marvin D. Gentry* (4) 60 1993 1995 -- Director
Alexander H. Graham, Jr. 77 1989 1997 -- Director
M. Rex Harris* 61 1993 1997 -- Director
William H. Kincheloe* (5) 58 1987 1995 -- Director
Jack A. Moody* (6) 68 1993 1996 -- Director
Van Wyck Webb 80 1985 1995 -- Director
John S. Russell* 41 1993 1995 -- Director
David T. Woodard* 47 1993 1997 -- Director
</TABLE>
* Director elected by the State of North Carolina
(1) Mr. McNair serves as a director of Piedmont Natural Gas Company.
(2) Mr. Barwick serves as a director of State University Railroad NCRR. NCRR
owns a minority position in State University Railroad Company, a majority of
whose stock is owned by Norfolk Southern.
(3) Mr. Alexander serves as a director of First Citizens Bancshares, Inc.
(4) Mr. Gentry serves as a director of Old North State Bank, King, N.C.
(5) Mr. Kincheloe serves as a director of Centura Banks, Inc.
(6) Mr. Moody serves as a director of Centura Bank, a subsidiary of Centura
Banks, Inc.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors held 12 meetings during the year ended December 31,
1994.
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<PAGE>
The Board of Directors has an Executive Committee comprised of Ms.
McConnell, and Messrs. McNair, Broughton, Barwick, and Saylor (ad hoc member),
and is responsible for general management of routine business affairs of the
NCRR. Under the bylaws of the NCRR, the Executive Committee has all the powers
and authority of the Board of Directors, except that the Executive Committee may
not, without prior Board approval, (a) amend the bylaws, (b) remove any director
or officer, (c) fill any director or officer vacancy, (d) sell, lease, or
dispose of any corporate asset, (e) incur any obligation or authorize any
expenditure in excess of $10,000, or (f) change the compensation of any officer
of the NCRR. The Executive Committee was organized in September of 1989, and met
seven times during 1994.
The Board of Directors has an Audit Committee comprised of Messrs. Lever,
Gentry, Graham and Woodard. The Audit Committee is responsible for making
recommendations to the Board of Directors regarding selection and appointment of
the independent certified public accounts, reviewing their fees, ensuring that
financial information is disseminated properly, and meeting with the independent
pubic accounts periodically. The Audit Committee met twice during 1994.
The Board of Directors has a Budget and Compensation Committee responsible
for the compensation of officers, directors and employees. At 1994 year end, the
Committee was comprised of Ms. McConnell and Messrs. Lever, Russell and Harris.
The Committee met twice during 1994.
The Board of Directors has a Nominating Committee responsible for
recommending nominations for directors to be nominated and elected by the
"privately-owned" shares. For 1995, the Nominating Committee was comprised of
Messrs. Barwick, Lever, and Broughton. The Nominating Committee met once during
1994. The Nominating Committee will consider nominees recommended by security
holders. Security holders should submit names and qualifications of recommended
nominees within a reasonable time prior to preparation for annual meetings of
shareholders.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's directors and executive officers,
and persons who own more than ten percent (10%) of a registered class of the
Company's equity securities, file with the Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than ten-percent
beneficial owners are required by Commission regulations to furnish the Company
with copies of all reports they file under Section 16(a).
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with
during the fiscal year ended December 31, 1994.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Of the 10,000,000 shares authorized to be issued, 4,283,470 shares are
currently outstanding. The following table sets forth as of October 31, 1995,
the parties known to the NCRR to be beneficial owners of more than five percent
of the NCRR's voting securities:
<TABLE>
<CAPTION>
AMOUNT & NOTICE OF PERCENT
NAME & ADDRESS OF BENEFICIAL OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
<S> <C> <C> <C>
Common Shares State of North Carolina 3,207,173 shares, 74.82 %
c/o Governor James B. Hunt, owned directly *
The State Capitol,
Raleigh, NC 27611
</TABLE>
* The State of North Carolina also holds shares in escheat subject to the claims
of unknown owners. The State of North Carolina has advised that it does not
customarily vote shares held in escheat. Pursuant to agreements with some of
the directors elected by the State of North Carolina, the State is entitled to
dividends and retains a right of repurchase for an additional 1,400 shares.
39
<PAGE>
<PAGE>
The following table sets forth as of October 31, 1995, the shares
beneficially owned by all directors and nominees and all directors and officers
as a group:
<TABLE>
<CAPTION>
AMOUNT & NOTICE OF PERCENT
NAME & ADDRESS OF BENEFICIAL OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
<S> <C> <C> <C>
Common John McKnitt Alexander, Jr. 700 shares owned *
Shares........ Director directly, 470 shares
1526 S. Blount St. owned by minor
Raleigh, NC 27603 daughters, 50 shares
owned by spouse
P.C. Barwick, Jr. 600 shares owned *
Secretary and Director directly
P.O. Box 3557
Kinston, NC 28502
J. Melville Broughton, Jr., 880 shares owned *
Vice-President and Director directly
P.O. Box 2387
Raleigh, NC 27602
Sidney R. French 500 shares owned *
Director directly (1)
105 Wetherington Farm
Cove City, NC 28523
Marvin D. Gentry 500 shares owned *
Director directly
P.O. Box 485
King, NC 27021
Alexander H. Graham Jr., 5,500 shares owned *
Director directly
P.O. Box 51579
Durham, NC 27717
M. Rex Harris 3,300 shares owned *
Director directly
4511 Bragg Boulevard
Fayetteville, NC 28303
William H. Kincheloe 500 shares owned *
Director directly
P.O. Box 671
Rocky Mount, NC 27802
Chauncey W. Lever 2,000 shares owned *
Director with wife as joint
P.O. Box 4108 tenants with right of
Greensboro, NC 27404 survivorship
Lynn T. McConnell 100 shares owned *
Director and Treasurer directly; 500 shares
138 Cherokee Road owned directly (2)
Unit 11
Charlotte, NC 28207
John F. McNair, III 500 shares owned *
Director and President directly
P.O. Box 3099
Winston-Salem, NC 27510
</TABLE>
40
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<PAGE>
<TABLE>
<CAPTION>
AMOUNT & NOTICE OF PERCENT
NAME & ADDRESS OF BENEFICIAL OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
<S> <C> <C> <C>
Common Shares Jack A. Moody 3,300 shares owned *
Director directly
P.O. Box 249
Siler City, NC 27344
John S. Russell 500 shares owned *
Director directly (2)
One Hannover Square
Suite 1700
Raleigh, NC 27611
Scott M. Saylor 100 shares owned with *
Exec. V.P./Gen. Counsel wife as joint tenants
P.O. Box 2248 with right of
Raleigh, NC 27602 survivorship
Van Wyck Webb 5,200 shares owned *
Director directly; 1,000
P.O. Box 670 shares owned by wife
Raleigh, NC 27602
David T. Woodard 100 shares owned *
Director directly; 400 shares
P.O. Box 27647 owned directly (2)
Raleigh, NC 27619-7647
</TABLE>
* Less than 1% of the class.
(1) Mr. French's shares are held subject to a transfer agreement with A.J.
Ballard Tire & Oil Pension and Profit Sharing Plan.
(2) Shares acquired without cash consideration from the State of North Carolina
pursuant to an agreement which entitles the State to receive all dividends
and to reacquire the stock.
All officers and directors as a group (16 persons) beneficially own 26,700
common shares of the NCRR, or approximately 0.62% of the total shares issued and
outstanding.
EXECUTIVE COMPENSATION
The following table and narrative text discuss the compensation paid during
1993 and 1994 to the NCRR's President and Chief Executive Officer, who was
elected to that position in July of 1993. No executive officer of the NCRR had
an annual salary of and bonuses in excess of $100,000 during 1994.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
RESTRICTED PAYOUTS
ANNUAL COMPENSATION OTHER ANNUAL STOCK OPTIONS/ LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDS (2) AWARDS (1)(2) PAYOUTS
<S> <C> <C> <C> <C> <C> <C> <C>
John F. McNair, III 1994 12,000 $ 0 0 0 0 $ 0
President and Chief 1993 5,799* $ 0 0 0 0 $ 0
Executive Officer
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION (3)
<S> <C>
John F. McNair, III $0
President and Chief $0
Executive Officer
</TABLE>
* partial year's compensation.
(1) Other Annual Compensation for executive officers is not reported as it is
less than the required reporting threshold of the Securities and Exchange
Commission.
(2) The NCRR did not grant any Stock Options or Stock Appreciation Rights during
the years covered by the table.
(3) Under Securities and Exchange Commission rules on executive compensation
disclosure, no disclosure regarding Other Compensation is required for
fiscal years prior to 1993.
41
<PAGE>
<PAGE>
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLANS, LONG-TERM INCENTIVE PLANS
AND PENSION PLANS.
No stock options or stock appreciation rights were outstanding at the end
of 1994 and none were either granted or exercised during 1994. The NCRR has no
stock option plans or stock appreciation rights plans. The NCRR does not
contribute to any "long-term" incentive plan or pension plan for its executive
officers as those terms are defined in the rules of the Securities and Exchange
Commission. The NCRR and its employees participate in the retirement/benefit
program under the Railroad Retirement Act, administered by the U.S. Railroad
Retirement Board.
COMPENSATION OF DIRECTORS.
Directors are compensated $400 per day, plus travel expenses, for each day
of attendance at directors' meetings. Director's are compensated $400 per day or
$200 per half day, plus travel expenses, for attending meetings of committees
held other than in conjunction with meetings of the Board of Directors.
EMPLOYMENT CONTRACTS.
Mr. McNair, the President and Chief Executive Officer of the NCRR, has no
employment contract with the NCRR.
COMPENSATION COMMITTEE AND DECISION MAKING.
The Budget and Compensation Committee of the Board of Directors is
responsible for decisions concerning the compensation of officers, directors and
employees of the NCRR. The Committee consists of the following four members of
the Board of Directors of the NCRR: Lynn McConnell, Chauncey Lever, Rex Harris,
and John Russell.
PERFORMANCE GRAPH
The graph shown below is a line presentation comparing the NCRR's
cumulative five-year shareholder returns on an indexed basis with the Standard &
Poor's Index and Railroad NCRR Index compiled for the NCRR by Standard & Poors
Compustat for the five-year period commencing on December 31, 1989 and ending on
December 31, 1994. The total return assumes that dividends were reinvested
quarterly and is based on a $100 investment on December 31, 1989. The NCRR notes
that the Railroad Company Index was used to comply with rules of the Securities
and Exchange Commission. However, as the railroads in such index are all much
larger than the NCRR's and conduct active railroad business, rather than leasing
substantially all their assets as the NCRR does, the NCRR does not represent
that the railroads comprising this index or any other industry group represent
meaningful comparisons for investors.
42
<PAGE>
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APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The NCRR's Board of Directors has approved and selected Ernst & Young as
independent certified public accountants to make an examination of the NCRR's
accounts for the year ending December 31, 1995. The firm has examined the NCRR's
accounts since 1932. The Board of Directors asks that the selection of
independent public accountants be approved by an affirmative vote of a majority
of the shares represented and voted at the meeting. If such affirmative vote is
not obtained, management will reconsider the matter.
THE BOARD OF DIRECTORS RECOMMENDS THE SHAREHOLDERS VOTE FOR APPROVAL OF THE
SELECTION OF ERNST & YOUNG AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR THE
YEAR ENDING DECEMBER 31, 1995.
A representative of Ernst & Young will attend the 1995 Annual Meeting with
the opportunity to make a statement if he desires to do so and to respond to
appropriate questions.
AVAILABLE INFORMATION
The NCRR is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the NCRR can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its Regional Offices located at 75 Park Place, New
York, New York 10007, and the John C. Kluezynski Federal Building, 230 South
Dearborn Street, Chicago, Illinois 60604. Copies of such material can be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 upon request and payment of the
prescribed fees.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, as amended from time to time, each of which was
previously filed by the NCRR with the Commission pursuant to Section 13 of the
Exchange Act, are incorporated herein by reference:
(a) Annual Report on Form 10-K and 10-K/A for the year ended December 31,
1994.
(b) Quarterly Report on Form 10-Q and 10-Q/A for the quarter ended March
31, 1995.
(c) Quarterly Report on Form 10-Q and 10-Q/A for the quarter ended June 30,
1995.
(d) Report on Form 8-K dated August 10, 1995.
(e) Report on Form 8-K dated August 24, 1995.
All documents filed by the NCRR pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the Annual Meeting of Shareholders to which this Proxy Statement
relates shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of the filing of such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in any accompanying Proxy Statement Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
The NCRR will provide without charge to each person to whom a Proxy
Statement is delivered upon written or oral request of each person, a copy of
any documents incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the documents that this Proxy Statement). Requests for such copies should be
directed to the NCRR's Secretary, 234 Fayetteville Street Mall, P. O. Box 2248,
Raleigh North Carolina 27602, (919) 829-7355.
OTHER BUSINESS
Management does not intend to bring any business before the meeting other
than the matters referred to in the accompanying notice and at this date has not
been informed of any matters that may be presented to the meeting by others. If,
however, any other matters properly come before the meeting, it is intended that
the persons named in the accompanying proxy will vote, pursuant to the proxy, in
accordance with their best judgment on such matters.
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PROPOSALS OF SHAREHOLDERS FOR 1996 ANNUAL MEETING
Any proposals of shareholders intended to be presented at the 1996 annual
meeting must be received by the NCRR for inclusion in the issuer's proxy
statement no later than January 1, 1996. Shareholders should sent their
proposals for the NCRR's 1996 Annual Meeting to the attention of the NCRR's
secretary at its principal office, 234 Fayetteville Street Mall, Post Office Box
2248, Raleigh, NC 27602.
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APPENDIX A
LEASE EXTENSION AGREEMENT
THIS LEASE EXTENSION AGREEMENT (hereinafter "Extension"), dated the 1st day
of January, 1995, by and among NORTH CAROLINA RAILROAD COMPANY (hereinafter
"Lessor"), a North Carolina corporation, NORFOLK SOUTHERN RAILWAY COMPANY
(hereinafter "NSR"), a Virginia corporation, and ATLANTIC AND EAST CAROLINA
RAILWAY COMPANY (hereinafter "A&EC"), a North Carolina corporation (NSR and A&EC
being sometimes referred to collectively hereinafter as "Lessees").
WHEREAS, Lessor and Southern Railway Company (hereinafter "Southern")
entered into that lease dated August 16, 1895, a true copy of which is attached
hereto as Exhibit A and incorporated by reference herein;
WHEREAS, Lessor and Southern entered into certain supplements or amendments
to the aforesaid 1895 lease agreement (the aforesaid 1895 lease agreement, as
heretofore supplemented or amended, is referred to hereinafter as "1895 Lease");
WHEREAS, Atlantic and North Carolina Railroad Company (hereinafter "ANC"),
as lessor, a North Carolina corporation, and A&EC, a wholly owned subsidiary of
NSR, as lessee, entered into that Lease and Indenture dated August 30, 1939, a
true copy of which is attached hereto as Exhibit B and incorporated by reference
herein;
WHEREAS, ANC and A&EC entered into certain supplements or amendments to the
aforesaid 1939 Lease and Indenture, the last of which supplements provided A&EC
the option to continue the aforesaid 1939 Lease and Indenture through the end of
1994, and that option was properly exercised by registered mail notice, dated
July 5, 1963, received August 1, 1963 (the aforesaid 1939 Lease and Indenture,
as heretofore supplemented or amended, is referred to hereinafter as "1939
Lease");
WHEREAS, effective September 29, 1989, ANC was merged into Lessor;
WHEREAS, effective December 31, 1990, Southern changed its name to Norfolk
Southern Railway Company; and
WHEREAS, the Lessor, NSR and A&EC wish to provide herein for the extension
of the 1895 Lease and the extension of the 1939 Lease, upon and subject to the
terms, conditions and provisions hereinafter recited;
NOW THEREFORE, in consideration of the commitments and undertakings recited
below, the parties hereto do hereby covenant and agree as follows:
FIRST: TERM (LENGTH) OF EXTENSION AND RENEWAL. The aforesaid 1895 Lease, as
herein supplemented, and the aforesaid 1939 Lease, as herein supplemented, are
each hereby extended for a further term of thirty (30) years, through December
31, 2024. NSR and A&EC may extend for an additional twenty (20) years the term
of the 1895 Lease, as herein supplemented, and the term of the 1939 Lease, as
herein supplemented, through December 31, 2044, by paying Lessor the lesser of
(a) one fourth of the Base Rental (as hereinafter defined) for the calendar year
preceding the notice, and (b) FIVE MILLION DOLLARS ($5,000,000) as additional
rent and serving written notice of such renewal upon Lessor, said payment and
written notice to be delivered to Lessor at least twenty-four (24) months prior
to January 1, 2025.
NSR and A&EC may exercise the above-stated options to renew only if both
NSR and A&EC exercise their respective options to renew.
As used in this Extension, "Leased Properties" shall mean the properties
which are: (i) included within the leaseholds as of December 31, 1994, under the
1895 Lease or under the 1939 Lease; or (ii) which then or thereafter are or
become additions to the properties leased under the 1895 Lease, as herein
supplemented, or under the 1939 Lease, as herein supplemented; or (iii) which
during any period of continued use by NSR or A&EC of the premises leased from
Lessor to the Lessees following termination of the Extension and any renewal are
the properties or become additions to the properties which were leased under the
1895 Lease, as herein supplemented, or are the properties or become additions to
the properties which were leased under the 1939 Lease, as herein supplemented.
SECOND: BASE RENTAL. The total amount of the base annual rental payable to
Lessor under both of the leases herein extended (hereinafter "Base Rental") for
the period January 1, 1995 through December 31, 1995, shall be EIGHT MILLION
DOLLARS ($8,000,000). For each calendar year thereafter, the Base Rental shall
be adjusted as described in the following formula, except that in no event shall
the Base Rental be less than EIGHT MILLION DOLLARS ($8,000,000), and in no event
will any increase or decrease in the Base Rental for any year exceed the sum of
(i) an amount equal to four percent (4%) of the Base Rental applicable for the
immediately preceding year as determined under the following formula, and
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(ii) seventy-five percent (75%) of that amount of any increase or decrease in
Base Rental determined under said formula which is in excess of the
aforesaid four percent (4%) amount described in (i) above:
Subject to the restrictions on increases in and decreases of Base Rental
set forth above in this Article SECOND, for 1996 and subsequent calendar
years the Base Rental shall be an amount calculated by multiplying the
prior year's Base Rental by the "Factor", obtained by dividing the Implicit
Price Deflator for Gross Domestic Product ("IPD-GDP") for the calendar year
preceding the prior calendar year by the IPD-GDP for the calendar year
preceding that calendar year. For any given calendar year, the denominator
of the fraction used to calculate the Factor will be the same as the
numerator of the fraction used to calculate the immediately prior year's
Factor. The calculations of the Factor to be applied to the immediately
prior year's Base Rental shall be carried out to five places to the right
of the decimal with the sixth place to the right of the decimal rounded up
if five or a higher number and rounded down if four or a lower number.
Presently, IPD-GDP is developed by the United States Department of
Commerce, Bureau of Economic Analysis and is reported in the publication
ECONOMIC INDICATORS prepared for the Joint Economic Committee by the
Council of Economic Advisors. The denominator of the initial Factor will
utilize the IPD-GDP for 1993, as published in the July 1994 issue of
ECONOMIC INDICATORS, and the numerator of the initial Factor will be the
IPD-GDP for 1994, as published in the July 1995 issue of ECONOMIC
INDICATORS.
If during the term of this Extension, including any renewal period, the IPD-GDP
is no longer published, the Lessor, NSR and A&EC will attempt in good faith to
agree upon a replacement index. If Lessor, NSR and A&EC are unable to agree upon
such replacement index, either party may apply to any North Carolina Superior
Court for the designation of a replacement index.
Base Rental will be paid by NSR and/or A&EC to Lessor, without set-off or
reduction, in monthly installments not later than the 15th day of each month. In
the event of any late payment of a monthly installment of Base Rental, NSR
and/or A&EC will pay an additional rental equal to an amount determined by: (i)
multiplying the monthly rental installment by 10%; (ii) dividing the result of
that multiplication by 365; and (iii) multiplying the result obtained in (ii) by
the number of days such monthly installment of Base Rental is overdue. Further,
if in any calendar year the Lessees (a) have failed to pay timely a single
monthly installment of Base Rental for that calendar year within twenty (20)
days of receipt of written notice from Lessor that payment thereof is overdue;
or (b) have failed for a second time to pay timely a monthly installment of Base
Rental for that calendar year and that overdue monthly installment is not paid
within ten (10) days of receipt of written notice from Lessor that payment
thereof is overdue; or (c) have failed for a third time or more times to pay
timely a monthly installment of Base Rental for that calendar year, then, they
will pay to Lessor, as additional rent, three (3) percent of the amount of that
overdue monthly installment of Base Rental. Notwithstanding the preceding terms
and provisions of this Article SECOND, payment of any installment payment(s) of
Base Rental hereunder will be deferred until five (5) business days after: (i)
all requisite governmental and corporate approvals for this Extension have
become effective or have been satisfied; (ii) this Extension has been fully
executed and delivered; and (iii) any court orders enjoining the implementation
of this Extension have expired or are no longer in effect. Base Rental payable
from the period beginning January 1, 1995 shall be due five (5) business days
after all corporate and governmental approvals necessary for this Extension have
become effective or have been satisfied, and shall include, as additional rent,
interest on each monthly installment of Base Rental from the date it would have
been due had the obligation to commence payment of monthly installments of Base
Rental commenced January 1, 1995, to the date payment thereof is made, with the
interest rate for such initial payment of Base Rental being the same as the
interest rate set forth in Article THIRD hereof. Nothing in this Article SECOND
pertaining to or calling for the payment of interest or additional rent for an
overdue monthly payment of Base Rental shall be construed to be a waiver or an
acceptance by Lessor for such payment to be overdue, and Lessor retains all
rights it has for nonpayment or late payment of rent.
THIRD: $5,000,000.00 PAYMENT. NSR, on its behalf and on behalf of A&EC and
for the consideration set forth hereinafter in this Article THIRD, hereby
promises to pay Lessor the sum of FIVE MILLION DOLLARS ($5,000,000), plus
interest at the ninety (90) day U.S. Treasury bill rate as of January 1, 1995.
Said interest shall accrue from January 1, 1995 until the said FIVE MILLION
DOLLARS ($5,000,000.00) is paid. Said FIVE MILLION DOLLARS ($5,000,000.00) and
the aforesaid interest thereon shall be due within five (5) business days from
the date: (i) all requisite corporate and governmental approvals for this
Extension have become effective or have been satisfied; (ii) this Extension has
been fully executed and delivered; and (iii) any court orders enjoining the
implementation of this Extension have expired or are no longer in effect. In
consideration of said payment Lessor hereby agrees that each and every
obligation NSR or A&EC may have under the 1895 Lease or the 1939 Lease with
respect to or in any manner connected with the use, depreciation, maintenance,
repair, renewal, replacement or return to Lessor of locomotives, railroad cars,
and those other items of personal property which are not customarily located or
used on the Leased Properties during any part of at least ten months of any
consecutive twelve month
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period during the ten years preceding termination of this Extension and any
renewal is hereby deleted from the 1895 Lease and from the 1939 Lease and will
be of no further force or effect.
FOURTH: CONFIDENTIALITY AGREEMENT. Except as may be otherwise agreed
between Lessor and Lessees, all documents and records (the "information") shared
between the parties pursuant to this Extension shall not be disclosed to third
parties without first obtaining the written consent of the party providing the
information to another party hereto. However, Lessor or Lessees may disclose the
information to third parties if the information is publicly available or if
disclosure is recommended or required under applicable laws, rules, or
regulations, including, without limitation, securities laws.
FIFTH: LESSOR NON-OPERATING PROPERTIES. Lessor, NSR and A&EC hereby agree
that the term "Current NCRR Non-Operating Properties" as used herein means those
properties owned by Lessor and described on Exhibit C attached hereto and
incorporated herein by reference. The Current NCRR Non-Operating Properties may,
at Lessor's option (to be exercised by written notice to the Lessees within 24
months of the date: (i) all requisite corporate and governmental approvals
necessary for this Extension have become effective or have been satisfied; (ii)
this Extension has been fully executed and delivered; and (iii) any court orders
enjoining the implementation of this Extension have expired or are no longer in
effect), be deleted from the leaseholds described in the 1895 Lease, as herein
supplemented, and from the 1939 Lease, as herein supplemented, and to the extent
that option is exercised, such Current NCRR Non-Operating Properties at such
time shall be released or returned by the lessee to Lessor free and clear of the
encumbrance of these leases and any other interest of NSR, A&EC or any of their
affiliates, along with all rents received by NSR or A&EC for such properties
from January 1, 1995, after subtracting any property taxes and normal
maintenance paid or to be paid by NSR and/or A&EC applicable to any period from
and after January 1, 1995. Said Current NCRR Non-Operating Properties shall be
returned and/or released to Lessor free of any railroad common carrier
obligations. If after this Extension is executed any additional non-operating
outparcels (parcels not within the railroad right-of-way or existing railroad
yards) are identified which are not used by the lessee thereof and said lessee
of such outparcels does not reasonably anticipate future use thereof for
railroad purposes by it or by a rail-served customer, then, upon written request
of Lessor, the lessee thereof will release such outparcels to Lessor in
accordance with the terms of this Article FIFTH. Also excluded from the 1895
Lease, as herein supplemented, is that property subject to an agreement between
NCRR and the Chatham Rail Road Company dated November 25, 1862 consisting of up
to 100 feet in width of Lessor's right of way between Boylan and Fetner, North
Carolina.
If CSX Transportation, Inc., or any of its affiliates, assignees, or
successors (referred to collectively herein as "CSX"), is permitted use of
tracks or railroad right-of-way between Boylan and Fetner, North Carolina
included in the Leased Properties, whether by sublease, trackage rights, or
other agreement or arrangement during the term of this Extension and any
renewal, NSR shall pay Lessor, as additional annual rental (in addition to the
Base Rental to be paid Lessor under Article SECOND hereof) at the rate per annum
of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00) if such use occurs in 1995,
and an amount adjusted in accordance with the provisions in Article SECOND
hereof for any such use by CSX during any subsequent year, using TWO HUNDRED
FIFTY THOUSAND DOLLARS ($250,000.00) as the base for such adjustment. Such
additional annual rental shall be payable by NSR, pro rata, 30 days prior to any
such use by CSX, if such use begins on a date other than on January 1 of any
year, and such annual rental shall be paid by NSR to Lessor in monthly
installments, in addition to and together with the installments of Base Rental
to be paid under Article SECOND hereof.
SIXTH: RIGHT TO POSSESSION. Subject to Lessor's rights of inspection set
forth in I(l) of Article FIFTEENTH hereof and incorporated in II(g) of Article
FIFTEENTH hereof and the inspection provisions of Article EIGHTEENTH hereof,
during the extensions provided for hereinabove and any renewals thereof, NSR and
A&EC shall each have complete possession of and control over railroad operations
over the properties and lines of railroad leased to it by Lessor to the extent
of Lessor's interest therein, except as explicitly limited herein. During the
term of the Extension and any renewal thereof, NSR and A&EC shall promptly and
completely fulfill all railroad common carrier duties pertaining to the leased
lines, including any railroad common carrier duties Lessor may have with respect
to the leased lines.
SEVENTH: SUBLEASE AND DISCONTINUANCE. Subject to obtaining any requisite
governmental approvals or authorizations, from and after January 1, 2003, NSR
and A&EC may from time to time sublease (but may not assign) to another railroad
all or any part or parts of the leased railroad lines lying easterly of the
westerly corporate limits of Raleigh, North Carolina, subject to the following
restrictions:
1. Before effecting any such sublease, the holder of the leasehold under
the pertinent lease (NSR or A&EC) will provide Lessor with at least 18
months' advance written notice of its intent to effect a sublease;
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2. Every such sublease will be made expressly subject to all lease
obligations of the lessee under the pertinent lease which cover the
segment so subleased;
3. NSR and A&EC shall remain primarily liable to Lessor and shall not in
any respect be released from any obligation by such sublease; and
4. The terms of any such sublease must not adversely affect the Lessor's
status as a real estate investment trust under Sections 856 to 859 of
the Internal Revenue Code of 1986, as amended (or the corresponding
provision of any future United States Internal Revenue law), and related
Treasury Regulations and Rulings or similar provisions regarding real
estate investment trusts under state law (all of such provisions being
hereinafter referred to as the "REIT Provisions").
After January 1, 2003, the rights of NSR and/or A&EC to effect a discontinuance
of service over any segments of the Raleigh-Morehead City portion of the leased
lines of railroad (between Mile Post 80.9 at Boylan and Mile Post EC 94.25 at
Morehead City) are subject to good-faith negotiations among the parties hereto
in the event material development of rail-served industry fails to occur on the
line segment or segments over which service is proposed to be discontinued. It
is understood and agreed that any proposal for discontinuance of service and/or
any discontinuance of service by NSR or A&EC which will result in a break in the
continuity of the leased lines of railroad or in the reversion to Lessor of any
railroad common carrier obligation may be unilaterally rejected by Lessor. Such
segment proposed to be discontinued must begin at the easterly terminus of the
leased lines of railroad, and the westerly terminus thereof must be at New Bern,
Goldsboro, Selma, Raleigh, or such other interchange point that connects with
another railroad. However, Lessor agrees to cooperate (at no cost to Lessor)
with NSR and/or A&EC by also seeking a discontinuance of Lessor's common carrier
obligations to provide railroad service over any line segment over which NSR
and/or A&EC wish to discontinue common carrier railroad service, unless Lessor
wishes to provide or contract for the provision of common carrier railroad
services over that line segment. For the purposes of applying this provision,
the phrase "material development" shall mean the location of rail-served
industries along said Raleigh-Morehead City line affording NSR and A&EC a total
of not less than a net increase of 5,000 originating or terminating rail
carloads per year above the total number of originating or terminating carloads
on such line for calendar year 1993 on said line. In the event of any
discontinuance of service, it is understood and agreed that there shall not be
any abatement of rent and that upon request of Lessor, any such segment shall be
released, delivered, conveyed and/or returned by Lessee to Lessor free from the
terms of this Extension, the 1895 Lease, as herein supplemented, and the 1939
Lease, as herein supplemented, and of any other interests therein of NSR, A&EC
or any of their affiliates.
EIGHTH: LESSEE NON-OPERATING PROPERTIES. NSR shall have the right to
acquire, own and dispose of any non-operating properties, or any rights or
interests therein, which are located adjacent to or nearby any of the properties
included in the 1895 Lease, as herein supplemented, free and clear of any claims
or rights of Lessor, or of any parties claiming under Lessor, under the 1895
Lease, as herein supplemented. Likewise, A&EC shall have the right to acquire,
own and dispose of any non-operating properties, or any rights or interests
therein, located adjacent to or nearby any of the properties included in the
1939 Lease, as herein supplemented, free and clear of any claims or rights of
the Lessor, or of any parties claiming under Lessor, under the 1939 Lease, as
herein supplemented.
NINTH: CHARLOTTE SEGMENT. That portion of the "R" Line in Charlotte, North
Carolina which lies between the point of connection between said "R" Line and
CSX Transportation, Inc. near 12th Street and the easterly line of Second Street
(included as part of the leasehold of the 1895 Lease, as herein supplemented)
will be leased to NSR only until such time as Lessor notifies NSR in writing
that this leased line segment is to be returned to Lessor; whereupon, NSR and
Lessor will seek discontinuance of any common carrier obligations imposed by
federal and state laws regulating the operation of a railroad (including,
without limitation, any Lessor residual common carrier obligation), and NSR will
thereupon execute and deliver to Lessor a release of its leasehold interest in
said leased line segment.
TENTH: OPERATING AND TRACKAGE RIGHTS AGREEMENTS. To the best knowledge of
NSR and A&EC after a diligent examination of their joint facility records, all
operating and trackage rights agreements with other railroads affecting any of
the leasehold properties included in either of the leases hereby extended are
listed in NSR's Schedule of Operating and Trackage Rights, dated January 1,
1995, a copy of which has been furnished to Lessor and is hereby made a part
hereof by reference. Upon request by Lessor, such agreements shall be made
available to Lessor at NSR's Archives in Atlanta, Georgia for review and
copying. Also, any leasehold or other interests in the leased lines granted by
NSR or A&EC based upon the leaseholds hereby extended are subordinate to the
rights of Lessor under the 1895 Lease as herein supplemented, and the 1939
Lease, as herein supplemented, except to the extent agreed to in writing by
Lessor. NSR and A&EC shall promptly notify Lessor of any future operating and
trackage rights agreements with other railroads which have or are expected to
have a duration of one (1) year or more affecting any of the leasehold
properties and upon request of Lessor such agreement(s)
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shall be made available to Lessor at NSR's Archives in Atlanta, Georgia for
review and copying. Upon termination of this Extension and any renewal, NSR and
A&EC will deliver to NCRR a copy of all of their revenue division arrangements
with other railroad common carriers pertaining to traffic originating or
terminating on the leased lines.
ELEVENTH: REIT COOPERATION. NSR and A&EC will cooperate fully with Lessor
in any application or effort of Lessor (1) to secure from any lender or lenders
a financing secured by the leases herein extended, (2) to qualify Lessor as a
real estate investment trust, or (3) to qualify the leaseholds hereby extended
as qualified real estate assets or the income therefrom as qualifying rents for
a real estate investment trust as defined under the REIT provisions, provided,
however, neither NSR nor A&EC will be required to (1) subordinate any of its
leasehold rights to the rights of any such lender or lenders or to any such real
estate investment trust, or (2) agree to any modification of any of the
provisions of this Extension which in the reasonable opinion of the Lessee
affects a significant right or obligation of Lessee. NSR and/or A&EC will upon
request of Lessor execute an estoppel certificate certifying, if true, that the
Extension is in full force, that no default by Lessor exists and the date
through which rent has been paid.
TWELFTH: MAINTENANCE STANDARDS. NSR and A&EC each agrees to maintain,
repair and renew the railroad lines and railroad facilities within their
respective leaseholds under the 1895 Lease, as herein supplemented, and under
the 1939 Lease, as herein supplemented, in accordance with the following
standards:
1. Any lines over which regularly scheduled Amtrak passenger trains are
operating shall be maintained, repaired and renewed so that said lines
conform with any applicable federal requirements and any governing
contractual provisions.
2. The balance of the lines within the scope of that leasehold shall be
maintained, repaired and renewed consistent with Lessee's maintenance
standards for similar lines, but not less than current standards for:
(a) Class 4 track standards of the Federal Railroad Administration
(hereinafter "FRA") for the tracks between Mile Post 375.31 at
Charlotte, North Carolina (at the beginning of the freight main tracks
approximately ten (10) feet easterly of East 30th Street) and Mile Post
H-80.9 at Boylan Avenue in Raleigh, North Carolina; (b) Class 3 track
standards of the FRA for tracks between Mile Post H-80.9 at Boylan
Avenue in Raleigh, North Carolina and Mile Post H-130.0 at Goldsboro,
North Carolina; and (c) Class 2 track standards of the FRA for tracks
between Mile Post EC-0.86 (Mile Post EC-0.86 = Mile Post H-130.0) at
Goldsboro, North Carolina and Mile Post EC-94.25 at Morehead City, North
Carolina.
All other railroad facilities within their respective leaseholds shall be
maintained in a manner at least consistent with the current maintenance
standards for comparable facilities of NSR throughout its system of railroad
properties.
THIRTEENTH: RIGHT TO USE AND LICENSE OTHERS. NSR and A&EC may each use the
properties included in their respective leaseholds herein extended for any
lawful purpose, and subject to the provisions of Article SEVENTH, each of them
may also lease or license the same for any lawful purpose for a term not to
extend beyond the period the property to be leased or licensed remains leased
under this Extension and any renewal thereof. NSR or A&EC, as the case may be,
may retain all income derived from any such leases or licenses, subject to the
following exceptions:
From annual or prepaid (lump sum) rentals paid to NSR or A&EC (or any
affiliate) under those longitudinal fiber optic leases or licenses for a
distance of five hundred (500) feet or longer or which provide for an
annual rental of FIVE THOUSAND DOLLARS ($5,000) or more (or its equivalent
one time consideration), the holder of the affected leasehold (NSR or A&EC)
will be entitled to twenty-five percent (25%) of such rentals received by
the lessee, and the Lessor will be entitled to seventy-five percent (75%)
of such rentals received by the lessee. All rentals paid to NSR or A&EC for
all other longitudinal leases or licenses having an annual rental of FIVE
THOUSAND DOLLARS ($5,000) or more (or its equivalent one time
consideration) will also be shared in the same proportions set forth in
this subparagraph. Prepaid (lump sum) rentals in any such longitudinal
leases or licenses providing for a rental of FIVE THOUSAND DOLLARS ($5,000)
or more per annum (or its equivalent one time consideration) covering any
of the last three years prior to January 1, 1995 shall also be apportioned
on the same basis, pro rata, and paid as additional rent on or before the
due date of the initial Base Rental payment as set forth in Article SECOND.
However, in applying the terms and provisions of the foregoing exceptions
during any renewal of the Extension, the FIVE THOUSAND DOLLARS ($5,000)
amounts will, in each instance, be increased at the beginning of such
renewal period by the same percentage Base Rental for the first year of
such renewal period exceeds the amount of Base Rental for 1995.
The terms of any such sublease must not adversely affect the Lessor's
status as a real estate investment trust under Sections 856 to 859 of the
Internal Revenue Code of 1986, as amended (or the corresponding provision of any
future United States Internal Revenue law), and related Treasury Regulations and
Rulings or similar provisions regarding real estate investment trusts under
state law.
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NSR and A&EC will provide Lessor with a copy of all agreements which become
effective at any time from and after January 1, 1995, which affect any of the
Leased Properties and provide for: (i) State or local government highway
construction; (ii) leases and licenses having a rental in excess of $5,000 per
annum, except that said $5,000 amount will be increased at the beginning of the
20 year renewal period hereunder by the same percentage Base Rental for the
first year of the renewal period exceeds the amount of Base Rental for the first
year of the renewal period exceeds the amount of Base Rental applicable for
1995; (iii) industry siding construction agreements for railroad construction
costing in excess of $100,000; and (iv) leases and licenses providing for
rentals or charges which the lessee is to share with Lessor as provided
hereinabove in this Article THIRTEENTH (regardless of effective date).
NSR and A&EC shall submit to Lessor by February 28, 1996 and by February 28
of each year thereafter during the term and continuance of the leases hereby
extended, including any renewal thereof, a written statement showing the amount
and computation of all receipts from those longitudinal leases or licenses
generating rentals in which the Lessor is to participate as provided in this
Article THIRTEENTH. Such written statement shall be transmitted by letter
certifying that such statement is correct and includes all such receipts in
which the Lessor is to share as aforesaid. Accompanying such statement will be
payment to Lessor, as additional rent, of its entire share of all such receipts
reported in that statement.
Anything in this Extension to the contrary notwithstanding, it is agreed
that Lessor shall in no event be deemed to be a partner or engaged in a joint
venture with, or an associate of NSR or A&EC, or of any party associated with
NSR or A&EC in the conduct of its business or otherwise; nor shall Lessor be
liable for any debts incurred by NSR or A&EC in the conduct of its business. The
relationship of Lessor to NSR and of Lessor to A&EC, as established and ratified
by this Extension, is that of lessor and lessee only.
FOURTEENTH: AIR RIGHTS. Those air rights which were not released from the
1895 Lease by Lease Agreement of December 31, 1968, between Lessor and Southern,
or which are not needed for railroad operations or railroad structures and
subsurface mineral rights are expressly reserved to the Lessor, subject to the
requirements of the holders of these leaseholds for horizontal and vertical
clearances needed for railroad operations, for support for railroad facilities,
and for avoidance of any interference with railroad operations.
Lessor agrees that any use, lease, license, disposition or development of
such air rights or mineral interests will be in conformity with and shall not
interfere with the railroad operations conducted upon the premises included
within the leaseholds hereby extended. Also, Lessor will not enter into any use,
lease, license, disposition or development of any such air rights or mineral
interests without first obtaining the written consent of the holder of the
affected leasehold (NSR or A&EC) which said consent shall not be unreasonably
withheld.
FIFTEENTH: MODIFICATIONS TO EXISTING LEASES. I. Effective January 1, 1995,
the following modifications are hereby made in the aforesaid lease agreement of
August 16, 1895:
(a) Lines six through seventeen and "1995" on line eighteen on page 4
are superseded by Article SECOND of this Extension.
(b) All provisions pertaining to the obligations to pay taxes of any
nature or type whatsoever are superseded by the terms and provisions of
Article TWENTY-FIRST hereof.
(c) As to the provisions of the last two lines on page 4, all lines
except the last three lines on page 5, and the words "shall become due and
payable:" on the thirty-second line on page 5, the requirements that the
party of the second part keep moneys, bonds or securities on deposit are
deleted. Further, notices given by the Lessor to Lessee shall be given
according to the provisions of Article TWENTY-FIFTH of this Extension.
(d) The word "Semi-annual" on the last two lines of page 5 are hereby
deleted.
(e) The last seven lines on page 5 1/2 and the words "And for" in the
twenty-seventh line on page 5 1/2 are hereby deleted.
(f) The words "engines, cars" are hereby deleted from: (i) the tenth
line on page 2-3, (ii) the first and second lines on page 4, and (iii) the
seventh, fourteenth and fifteenth lines on page 5 1/2.
(g) After the word "lease" on the thirteenth line of page 5 1/2 insert
the words "as extended."
(h) The words "; such notice to be given to the station agent of the
party of the second part at either of the following named places, to wit:
Raleigh, Greensboro or Charlotte or Burlington, all in the State of North
Carolina" are hereby
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deleted from the eighth, ninth, tenth and eleventh lines of page 6. Such
notice is to be given pursuant to Article TWENTY-FIFTH of this Extension.
(i) All the words set forth in the twelfth through eighteenth lines on
page 6, all the words in the first and second lines on page 7, and the
words "date last above named" in the third line on page 7 are hereby
deleted.
(j) The word "semi-annually" on line twenty-six of page 7 is hereby
deleted.
(k) The words "or if they" on line thirty-one, all of lines thirty-two
and thirty-three and the words "North Carolina Railroad Company to do" on
line thirty-four of page 7 are hereby deleted.
(l) Lines one through eleven and the words "to be chosen as aforesaid;
and " on line twelve of the first full paragraph on page 9 are hereby
deleted and the following language is hereby substituted therefor:
It is agreed by and between said parties that they will jointly conduct an
annual inspection of the properties leased hereunder beginning in June of each
year. An inventory of the Leased Properties (as used in this paragraph are the
properties defined as Leased Properties in the Lease Extension Agreement, dated
as of January 1, 1995, excepting those properties released and/or returned to
the Lessor pursuant to the terms of Article FIFTH thereof and less those
properties and interests in properties which are exempted from the obligation to
release and/or convey properties and interests in properties to the Lessor under
the terms of Article TWENTY-SIXTH thereof) shall be made and taken twenty-four
(24) months prior to the termination of this lease and any renewal thereof.
Also, by April 30 of each year, NSR and AEC will furnish to Lessor the following
records or documents; (i) a set of valuation or similar maps showing the
properties currently leased hereunder and operating properties acquired by the
lessee, including intersection points with other lines; (ii) a list of buildings
and facilities used for rail operations on the Leased Properties; (iii) a
current list of railroad bridges on the Leased Properties; (iv) rail program
maintenance improvements made on the Leased Properties since the last report
including, without limitation, the number of new ties installed, miles surfaced,
and length of new or used rail installed, by line segment (Charlotte-Greensboro,
Greensboro-Raleigh, Raleigh-Morehead City); (v) condensed track profiles; (vi)
railroad traffic data or records as furnished to the Interstate Commerce
Commission or its successor (annual one percent carload waybill sample), or its
equivalent; (vii) scheduled program maintenance for the then current calendar
year; (viii) operating and trackage rights agreements as they relate to the
Leased Properties with other railroads entered into since the last report; (ix)
copies of the latest available annual reports filed with the North Carolina
Utilities Commission and the Interstate Commerce Commission ("ICC") or its
successor (currently designated as Form R-1 for the ICC); and (x) account
balances for ICC (if required to be filed with the ICC or its successor)
reporting purposes relating to the Leased Properties. At times other than in
connection with an annual inspection as set forth above, Lessor shall have the
right to enter upon the Leased Properties to make reasonable inspections
provided (i) Lessor gives the lessee ten (10) days prior written notice of such
entry, (ii) no entry shall occur in an area closer than fifteen (15) feet from
any railroad track unless Lessor is accompanied by the lessee's representative,
and (iii) Lessor complies with all safeguards and instructions of the lessee's
representative in order to avoid harm to Lessor's personnel and hazard to the
lessee's rail operations.
II. Effective January 1, 1995, the following modifications are hereby made
in the aforesaid Lease and Indenture of August 30, 1939:
(a) The words ", engines, cars and railroad equipment" are hereby
deleted from the last line on page 2.
(b) The provisions of Paragraph 5 that relate to the amount of minimum
annual rental, additional rent, and interest on past due rent, are
superseded by the terms of this Extension.
(c) All provisions pertaining to the obligations to pay taxes of any
nature or type whatsoever are superseded by the terms and provisions of
Article TWENTY-FIRST hereof.
(d) Articles 7 and 9 and the second paragraph of article 8 are hereby
deleted.
(e) The words "engines, cars" are hereby deleted from the third line
of article 10.
(f) The first sentence of article 11 is hereby deleted.
(g) Article 14 is amended by adding the inspection, inventory and
records submission provisions of I(l) of Article FIFTEENTH hereof.
(h) The words "its rolling stock" are hereby deleted from the second
line of article 15.
(i) Article 18 on pages 11 and 12 is hereby deleted.
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(j) The words "or any part of the said properties" in the third and
fourth lines of article 19 are hereby deleted.
(k) Article 21 on page 13 is hereby deleted.
III. Effective January 1, 1995, the following modifications are hereby made
in certain supplements constituting a part of the 1939 Lease:
(a) Lines one through thirty-two and the word "lease" in line
thirty-three and lines thirty-nine through forty-three of article 1 of the
supplement dated July 1, 1943 are deleted.
(b) Articles 2, 3, 5, and 6 of the supplement dated July 1, 1943 are
deleted.
(c) The words "engines, cars" are hereby deleted from the eighth and
ninth lines of article 8 of the supplement dated July 1, 1943.
(d) The provisions of the supplement dated January 1, 1951 relating to
rent are superseded and replaced by Article SECOND of this Extension.
(e) The words "engines, cars," are hereby deleted from the eleventh
line of article (1) of the supplement dated August 19, 1954.
(f) Article (2) of the supplement dated August 19, 1954 is hereby
deleted.
SIXTEENTH: CONFLICTING TERMS. If any of the express terms, conditions and
provisions of this Extension conflict with any of the terms, conditions and
provisions of either the 1895 Lease or the 1939 Lease, the express terms,
conditions and provisions of this Extension will be controlling.
SEVENTEENTH: DUTY TO DEVELOP RAIL BUSINESS. NSR and A&EC covenant to use
their best efforts to develop and locate rail-served industries along the
railroad lines included in the leaseholds hereby extended.
EIGHTEENTH: ENVIRONMENTAL PROVISIONS. In addition to whatever rights Lessor
has under the 1895 Lease or the 1939 Lease, the Lessees hereby agree to
indemnify, defend, and hold harmless Lessor, and its respective officers,
directors, beneficiaries, shareholders, partners, agents, and employees from all
fines, suits, procedures, claims, liabilities, damages and actions of every
kind, and all reasonable costs and expenses associated therewith (including
attorneys' and consultants' fees if Lessor is a named or charged party) arising
from: (i) any violation of applicable federal, state or local environmental
laws, regulations, administrative orders or judicial decrees, as they apply to
any part of the Leased Properties, that occurred or occurs during the term of
its lease thereof or during the use thereof by either of the Lessees or any of
their tenants; (ii) any noise, vibration or the deposit, spill, discharge, or
other release of a Contaminating Substance (defined as oil, petroleum or any
substance declared to be hazardous or toxic or treated as a pollutant or
contaminant under any law or regulation now or hereafter enacted or promulgated
by any governmental authority) that occurred or occurs on any part of the Leased
Properties at any time during the term of its lease thereof or during the use
thereof by either of the Lessees or any of its tenants; (iii) any failure of
either of the Lessees to provide information, make all appropriate submissions,
and fulfill all legal obligations of the owner and/or operator of the Leased
Properties during the term of its lease thereof or during the use thereof by
either of the Lessees or any of its tenants (including but not limited to
remediation of a deposit, spill, discharge or other release of a Contaminating
Substance); or (iv) any damages (including, but not limited to, diminution in
value) to any of the properties adjoining or nearby any of the Leased Properties
or any injury to any individuals while they are upon any of those adjoining or
nearby properties because of any deposit, spill, discharge or other release of a
Contaminating Substance on any part of the Leased Properties at any time during
the term of its lease thereof or during the use thereof by either of the Lessees
or by any of its tenants. In addition to the language of this Article
EIGHTEENTH, Lessor shall retain all rights and causes of action it has under the
1895 Lease and the 1939 Lease, and Lessor shall retain all statutory and common
law rights and causes of action against Lessees, including but not limited to
any right to recover losses and diminution in property value.
Lessees shall be primarily responsible for responding to notices, claims,
lawsuits, orders pertaining to environmental issues, and complying with and
performing all environmental obligations of the owner or operator of the Leased
Properties during the term of its lease thereof or during the use of the Leased
Properties by either of the Lessees or by any of its tenants. Lessor shall be
responsible for notifying Lessees of all notices, claims, lawsuits, orders and
environmental obligations of which Lessor is notified by any third party
pertaining to the Leased Properties. Lessees shall not dispose of any wastes of
any kind, whether hazardous or not, on the Leased Properties. For purposes of
the preceding sentence only, the agreement of the
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Lessees not to dispose of any wastes on the Leased Properties shall not apply to
the temporary storage of wastes in accordance with all applicable environmental
laws and regulations. Lessees shall conduct and bear the expense of any
environmental investigation or remedial action which may be required under
applicable environmental laws, rules, regulations, ordinances or judgments.
Should Lessees inadequately perform any action required under the applicable
environmental laws, rules, regulations, ordinances or judgments, Lessor or its
representative will have the right to enter the Leased Properties and to take
whatever corrective action Lessor deems necessary to eliminate the violation, at
the sole expense of Lessees.
To the extent permitted by applicable laws and regulations, the following
will be provided to Lessor within 30 days of the receipt or submission thereof
by either of the Lessees:
<TABLE>
<C> <S>
Any administrative or judicial investigation, complaint or demand filed, served on or delivered to either of the
Lessees by any governmental agency because of or arising from the deposit, spill, discharge or other release of a
Contaminating Substance occurring on any part of the Leased Properties at any time during the term of its lease
(i) thereof or during the use of the Leased Properties by either of the Lessees or by any of its tenants;
Notice of the filing of any claims or action against the Lessor or either of the Lessees for injunctive relief or
recovery of losses sustained because of or arising from the deposit, spill, discharge or other release of a
Contaminating Substance occurring on any part of the Leased Properties at any time during the term of its lease
(ii) thereof or during the use of the Leased Properties by either of the Lessees or by any of its tenants;
A copy of any analytical results, correspondence or report pertaining to underground storage tanks, above-ground
storage tanks, wetlands or any environmental investigation of any part of the Leased Properties, which is submitted
to either of the Lessees by any third party (excluding Lessee's contractors and consultants, but including
governmental agencies) or submitted by either of the Lessees to any governmental agency at any time during the term
(iii) of its lease thereof or during the use of the Leased Properties by either of the Lessees or by any of its tenants;
A copy of the results of environmental tests performed by or on behalf of a governmental agency because of or
related to any deposit, spill, discharge or other release of a Contaminating Substance occurring on any part of the
Leased Properties at any time during the term of its lease thereof or during the use of the Leased Properties by
(iv) either of the Lessees or by any of its tenants; and
A copy of all environmental reports, notices and correspondence required to be submitted by either of its Lessees
to any governmental agency after the effective date of this Extension pursuant to any applicable federal, state, or
local law, ordinance or regulation pertaining to any part of the Leased Properties at any time during the term of
(v) its lease thereof or during the use of the Leased Properties by Lessees or their tenants.
</TABLE>
If there is a noise, vibration, or a deposit, spill, discharge or other
release of a Contaminating Substance occurring on any part of the Leased
Properties which the Lessor has a reasonable good faith belief may constitute a
risk of liability, expense or criminal exposure to Lessor, Lessor shall be given
full access to and opportunity to copy any relevant environmental reports,
studies or data pertaining to such noise, vibration, deposit, spill, discharge
or other release in the possession of Lessees (excepting privileged
communications with counsel for NSR or A&EC), upon 30 days prior written notice
to Lessees. In addition, in any sublease of the Leased Properties by either of
the Lessees, the sublease should contain language requiring that the sublessee
provide Lessor with a copy of all such documents and written notifications
provided to either of the Lessees. In the event that any such sublease does not
contain the language described in the preceding sentence, the Lessees shall
provide Lessor with a copy of all such documents and written notifications
provided to either of the Lessees by such sublessee or its agents.
During the term of this Extension, any renewal and any holdover period,
whichever is later, and for a period of seven (7) years thereafter, Lessees
agree to waive and agree not to assert as a defense to their indemnification
commitments in this Article EIGHTEENTH any statute of limitations, statute of
repose, laches, or other time related defense. The provisions of this Article
EIGHTEENTH, including but not limited to the indemnification provisions, shall
survive the termination of this Extension and any renewal.
Lessor shall have the right to enter upon the Leased Properties to make
reasonable inspections for any purpose, including but not limited to
environmental inspections, provided that (i) Lessor gives the Lessee ten (10)
tens day prior written notice of such entry, (ii) no entry shall occur in an
area closer than fifteen (15) feet from any railroad track unless Lessor is
accompanied by the Lessees' representative, and (iii) Lessor complies with all
reasonable safeguards and safety instructions of the Lessees' representative in
order to avoid harm to Lessors' personnel and hazard to the Lessees' rail
operations. However, the provisos of the preceding sentence shall not be
applicable to the extent it is not practical to comply with such
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provisos and access onto the property is required to respond to or comply with a
notice, order or other legal requirements or there is an emergency situation or
imminent hazard so long as Lessor provides reasonable prior notice of its
activities under the circumstances and Lessor works cooperatively with Lessees.
During Lessor's inspections of the property, its representatives shall have the
right to conduct sampling and testing, including but not limited to soil borings
and groundwater testing, provided all such testing is conducted in accordance
with NSR's standard procedures for such testing (the specifications for such
procedures will be reasonable and will be furnished from time to time by NSR to
Lessor) and provided Lessor will not unreasonably interfere with Lessee's use of
the Leased Properties. Nothing in this paragraph shall preclude Lessor or its
representatives from performing visual inspections of the Leased Properties at
any time from portions of the Leased Properties that are accessible to the
general public.
NINETEENTH: ENVIRONMENTAL INFORMATION FOR NON-OPERATING PROPERTIES. With
respect to the non-operating properties to be returned to Lessor free of lease
under Article FIFTH hereof, NSR and A&EC will each identify any contamination of
which it has knowledge and provide to Lessor all information and reports
pertaining thereto, and Lessor will have the right to inspect such non-operating
properties before their return to Lessor. Such right of inspection shall include
the right to perform an environmental site assessment.
TWENTIETH: OPERATING AND OTHER COSTS. NSR and A&EC will be responsible for
expenditures relating to the operation of the Leased Properties, including
without limitation, maintenance, liability, any hazard insurance (to the extent
the Lessees are not self insured) and taxes (other than Excluded Taxes as
defined in Article TWENTY-FIRST hereof) imposed on Lessor as a result of NSR and
A&EC's use, lease, possession or operation of the Leased Properties, and except
as specifically amended by this Extension all provisions of the 1895 Lease and
1939 Lease relating to such obligations will continue in full force and effect.
TWENTY-FIRST: TAX PROVISIONS. (a) During the period of the lease extensions
provided for herein and any renewal thereof, NSR and A&EC shall pay when due, as
additional rent, all taxes, assessments, fees, and penalties other than Excluded
Taxes (as hereinafter defined), however denominated, together with any interest,
penalties, additions to tax or additional amounts that may become payable in
respect thereof, imposed by any federal, state, local or other taxing authority
on Lessor, based upon the Leased Properties or arising out of the use, lease,
possession or operation of the Leased Properties during that period, under the
leases being extended herein, which taxes shall, by way of illustration, include
ad valorem taxes, real and personal property taxes, assessments, fees, and
penalties and other obligations of the same or of a similar nature imposed on
the ownership, possession or use of the Leased Properties. For purposes of this
paragraph (a), Excluded Taxes shall mean: (i) all taxes based, in whole or in
part, on net income or gross income (including, without limitation, any minimum
tax) of the Lessor or which are in substitution for, or relieve Lessor from, any
tax based upon or measured by Lessor's net income or gross income, together with
any interest, penalties, additions to tax or additional amounts that may become
payable in respect thereof; (ii) business and occupation taxes, and gross
receipts taxes of the Lessor and taxes based upon Lessor's capital stock imposed
by the United States or any state or political subdivision; (iii) interest,
fines and penalties to the extent due to the acts or omissions of Lessor; and
(iv) ad valorem taxes and any other taxes assessed upon the air rights or
mineral rights hereinbefore reserved unto Lessor or resulting from the
development, use, or occupation thereof or the location of structures under any
such rights. Neither NSR nor A&EC shall be required to pay any tax it is
obligated to pay under the provisions of this Article TWENTY-FIRST during the
time it shall reasonably and in good faith and by appropriate legal or
administrative proceedings contest the validity or amount thereof.
(b) Lessor shall have the right and obligation, at its own expense, to
prepare and file all tax returns required to be filed by Lessor under applicable
laws and regulations. Prior to Lessor's filing of any tax returns for taxes
required to be paid by either of the Lessees under paragraph (a) of this Article
TWENTY-FIRST, Lessor shall provide such returns to the Lessees for their review
and approval, which said approval will not be unreasonably withheld.
(c) NSR, A&EC and their respective assignees and designees shall have the
right to control at their expense any audit or examination by any taxing
authority, or any judicial proceeding, relating to any taxes required to be paid
by either of them under paragraph (a) of this Article TWENTY-FIRST.
(d) During the period of the lease extensions provided for herein and any
renewal thereof, NSR, A&EC and any of their respective designees, are entitled
to claim federal, state and local tax benefits (including, without limitation,
deductions and credits) arising out of the Lessee's expenditures in the use,
lease, possession or operation of the Leased Properties by NSR, A&EC, or any of
their respective assignees or designees, and the improvements thereto, that NSR,
A&EC or any of their respective designees is entitled to claim under federal,
state and local laws and regulations. These tax benefits include but are not
limited to: (i) deductions for depreciation or amortization attributable to
property (both tangible and intangible) owned by NSR, A&EC or any of their
respective assignees or designees, including improvements made to any of the
Leased Properties
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by any of them, as well as expenditures made by any of them that are required to
be capitalized under sections 263 or 263A or some other section of the United
States Internal Revenue Code (hereinafter "Code"); (ii) deductions for
expenditures made by NSR, A&EC or any of their respective assignees or
designees, deductible as ordinary and necessary business expenses under section
162 of the Code; (iii) deductions for the value of its share of any charitable
contributions of any of the Leased Properties made by NSR, A&EC or any of their
respective assignees or designees, deductible under section 170 of the Code;
(iv) deductions for losses attributable to property (both tangible and
intangible) owned by NSR, A&EC or any of their respective assignees or
designees, deductible under section 165 of the Code; and (v) any federal, state
or local tax credits applicable to the use, lease, possession or operation of
the Leased Properties by NSR, A&EC or any of their respective assignees or
designees, and improvements thereto. Lessor is entitled to deductions for taxes
of Lessor paid by Lessee under paragraph (a) of this Article TWENTY-FIRST and
treated as rent paid by the lessees under the leases herein extended and taxable
income received by Lessor under section 1.162-11(a) of the Income Tax
Regulations.
TWENTY-SECOND: EMINENT DOMAIN. In the event of any sale under threat of
eminent domain or any eminent domain taking of any of the properties subject to
either of the leases extended hereunder, the proceeds received in connection
with such sale or taking will be apportioned between the Lessor and the lessee
of the property so sold or taken as follows: first, the lessee of that property
will be entitled to that portion of such sales proceeds or such award which is
equal to that amount which is needed to cover the costs of replacing, restoring
and relocating its operating facilities so as to continue to the same extent the
railroad operations conducted prior to such sale or taking, as nearly as
feasible, and the Lessor will be entitled to receive and retain the balance of
such proceeds. The lessee of the property so sold or taken and the Lessor will
cooperate fully with each other in contesting or settling any such taking or
threat of taking.
TWENTY-THIRD: RESERVATION OF CLAIMS. Notwithstanding any of the terms,
provisions and conditions of this Extension, except with respect to claims
released under Article THIRD hereof or under the terms of the next following
paragraph, none of the Lessor's claims under the 1895 Lease or the 1939 Lease
which existed and could have been addressed at the expiration thereof had they
not been extended by this Extension are waived or affected by virtue of the
execution and delivery of this Extension. The aforesaid claims so reserved to
Lessor are maintained and continued until the termination of this Extension and
any renewal, whether by expiration or otherwise, and such claims shall be
addressed at such termination as fully as the same would have been addressed in
connection with the expiration of the 1895 Lease and the 1939 Lease had this
Extension not been executed.
As part of the consideration for the commitments of NSR and A&EC set forth
in this Extension, Lessor hereby agrees not to assert the remedy of forfeiture
due to any noncompliance by NSR or A&EC prior to January 1, 1995, with any one
or more of its obligations under the 1895 Lease or the 1939 Lease.
For purposes of clarification, the parties distinctly agree that, except as
expressly superseded by this Extension, the respective lease terms of the 1895
Lease and the 1939 Lease do not expire at the end of 1994, and the same are
extended by this Extension until the termination of this Extension and any
renewal thereof, and that no claim or demand contemplated by the 1895 Lease
and/or the 1939 Lease otherwise to be determined at the expiration or
termination thereof may be made until, and therefore each of them is postponed
to the termination of this Extension and any renewal. As changed and modified by
this Extension, the terms, provisions and conditions of the 1895 Lease and the
1939 Lease shall continue in full force and effect.
Lessor, NSR and A&EC agree that nothing in this section shall abridge,
estop, compromise, release or waive the claims reserved to the Lessor under this
Article TWENTY-THIRD, and that no defense of waiver, latches, acquiescence,
release, estoppel, or the like arising on or after December 31, 1994 with
respect to such claims existing on that date may be asserted by reason of
Lessor's agreement not to assert or prosecute such claims at this time. It is
the intention of the parties hereto that these property issues not impede the
resolution of other issues in dispute, not impede the extension of the leases,
and that neither party should be prejudiced by the deferral of such issues.
Further, the Lessor, NSR and A&EC understand and agree that the Lessor's
reserved claims under the terms of the 1895 Lease and/or the 1939 Lease will
include not only such reserved claims existing as of the end of 1994, but that
this Extension contemplates the accrual of further claims under the terms of the
1895 Lease and the 1939 Lease during the term of this Extension and any renewal
thereof.
The terms of the 1895 Lease and the 1939 Lease create claims or potential
claims that NSR and/or A&EC would owe and be obligated to deliver to Lessor
additional properties and/or rights (hereinafter "Claims for Additions"). The
parties acknowledge that to the extent Claims for Additions exist, the
circumstance that such additional properties and/or rights may have been
acquired or now be held in the name of a company affiliated with NSR or A&EC
will not, of itself, prejudice the
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Claims for Additions of Lessor. In consideration of the Lessor not requiring
that any such additional properties and/or rights be acquired in the name of
Lessor, NSR and A&EC agree that they shall not raise as a defense to Claims for
Additions the fact that any such additional properties and/or rights have been
acquired in the name of an affiliate of either of the Lessees, and such fact
will not impair NSR and A&EC's contractual obligation to deliver such additional
properties to Lessor.
TWENTY-FOURTH: REGULATORY APPROVAL AND EFFECTIVE DATE. This Extension and
any renewal are subject to approval or exemption from approval by the Interstate
Commerce Commission (hereinafter "ICC") or any successor agency of the
undertakings of NSR and A&EC herein, as may be required or appropriate under 49
U.S.C. (section mark)11301, et seq., and (section mark)11343, et seq., or any
successor federal legislation and such approval or exemption action becoming
final.
After (i) all requisite governmental and corporate approvals for this
Extension have become effective or have been satisfied (ii) this Extension has
been fully executed and delivered and (iii) any court orders enjoining the
implementation of this Extension have expired or are no longer in effect, this
Extension shall be effective as of January 1, 1995.
TWENTY-FIFTH: NOTICES. Any notices given hereunder shall be effective if
sent by registered or certified mail (United States Mails) and addressed as
follows:
If to NSR or A&EC:
Vice President-Transportation
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510
If to Lessor:
President
North Carolina Railroad Company
P.O. Box 2248
Raleigh, North Carolina 27602
or to such other official and/or address as any of the parties hereto may
specify in a written notice to the other parties hereto, sent as stated above.
TWENTY-SIXTH: RETURN OF PROPERTY AT TERMINATION. Upon termination of the
leaseholds extended hereunder, NSR, A&EC and their affiliates will release
and/or convey to Lessor: (1) all properties and interests in properties
originally leased to NSR and A&EC, less only properties released under Article
THIRD hereof and such of those properties and interests in properties that have
been released from the 1895 Lease or the 1939 Lease, and such of those
properties and interests in properties which have been acquired by others by
operation of law, eminent domain proceedings, transfers or conveyances in which
the Lessor has participated, and otherwise through no fault of either of the
Lessees, (2) all additions, betterments and improvements thereof other than
properties included in the release of claims set forth in Article THIRD hereof,
and (3) excepting properties released under Article THIRD hereof, any and all
other properties, franchises, rights, privileges, or interests to which Lessor
is entitled pursuant to the 1895 Lease, the 1939 Lease and this Extension.
TWENTY-SEVENTH: GUARANTY OF PERFORMANCE. The parties are Lessor and Lessee
under two leases (the 1895 Lease and the 1939 Lease) due to circumstances of
history. Lessor is unwilling to extend either Lease unless both are extended.
Therefore in consideration of, and as a condition to Lessor executing this
Extension, the Lessees do hereby guarantee the performance and money payments by
the other lessee and of any sublessee, immediate or remote, including all duties
and obligations of such other lessee under its respective lease and this
Extension.
TWENTY-EIGHTH: BINDING EFFECT. This Lease Extension Agreement shall be
binding upon the parties hereto, their heirs, successors, licensees, sublessees,
assigns, or any other party claiming under said parties, both immediate and
remote.
TWENTY-NINTH: MISCELLANEOUS.
(a) Except to the extent controlled by federal laws and regulations,
this Extension shall in all respects be governed by the laws of the State
of North Carolina.
(b) This Extension, together with its exhibits, contain all the
agreements of the parties hereto and supersede any previous negotiations.
There have been no representations made by or on behalf of the Lessor or
either of the Lessees or understandings made between or among the parties
hereto other than those set forth in this Extension. This Extension may not
be modified except by a written instrument signed by the parties hereto.
A-12
<PAGE>
(c) All obligations of the parties hereunder not fully performed as of
the expiration or earlier termination of the term of this Extension and any
renewal shall survive such expiration or earlier termination of the term
hereof and any renewal.
(d) If any clause, phrase, provision or portion of this Extension or
the application thereof to any party or circumstance shall be invalid or
unenforceable under applicable law, such event shall not affect, impair or
render invalid or unenforceable the remainder of this Extension or any
other clause, phrase, provision or portion hereof, nor shall it affect the
application of any other clause, phrase, provision or portion hereof to
other parties or circumstances.
(e) The Article headings herein are for convenience of reference and
shall in no way define, increase, limit, or describe the scope or intent of
any provision of this Extension.
IN WITNESS WHEREOF, the parties hereto have executed this Extension as of
the day and year first above written.
<TABLE>
<S> <C>
[CORPORATE SEAL] NORTH CAROLINA RAILROAD COMPANY
Attest:
By P.C. BARWICK, JR. By JOHN F. MCNAIR III
P.C. BARWICK, JR., SECRETARY JOHN F. MCNAIR III, PRESIDENT
[CORPORATE SEAL] NORFOLK SOUTHERN RAILWAY COMPANY
Attest:
By SANDRA T. PIERCE By JOHN R. TURBYFILL
SANDRA T. PIERCE, CORPORATE SECRETARY JOHN R. TURBYFILL, VICE PRESIDENT
[CORPORATE SEAL] ATLANTIC AND EAST CAROLINA RAILWAY COMPANY
Attest:
By SANDRA T. PIERCE By JOHN R. TURBYFILL
SANDRA T. PIERCE, CORPORATE SECRETARY JOHN R. TURBYFILL, VICE PRESIDENT
</TABLE>
A-13
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF FORSYTH
This 26th day of September, 1995, personally came before me, M. Marie
Harper, Notary Public for said County and State, John F. McNair, III, who, being
by me duly sworn, says that he is President of NORTH CAROLINA RAILROAD COMPANY,
a corporation, and that the seal affixed to the foregoing instrument in writing
is the corporate seal of said corporation, and that said writing was signed and
sealed by him in behalf of said corporation by its authority duly given. And the
said President acknowledged the said writing to be the act and deed of said
corporation.
WITNESS my hand and official seal, this the 26th day of September, 1995.
M. MARIE HARPER
NOTARY PUBLIC
My term of office expires 2-19-99.
<TABLE>
<S> <C> <C>
STATE OF VIRGINIA
(bat wing goes here) to-wit:
CITY OF NORFOLK
</TABLE>
I, Jeanie B. Davis, a notary public in and for the City and State
aforesaid, do certify that John R. Turbyfill, whose name as Vice President of
Norfolk Southern Railway Company is signed to the writing above, bearing date as
of the 1st day of January 1995, acknowledged the same to be the act and deed of
said corporation before me in my City and State aforesaid.
Given under my hand and official seal this 15th day of September, 1995.
JEANIE B. DAVIS
NOTARY PUBLIC
My term of office expires July 31, 1999.
<TABLE>
<S> <C> <C>
STATE OF VIRGINIA
(bat wing goes here) to-wit:
CITY OF NORFOLK
</TABLE>
I, Jeanie B. Davis, a notary public in and for the City and State
aforesaid, do certify that John R. Turbyfill, whose name as Vice President of
Atlantic and East Carolina Railway Company is signed to the writing above
bearing date as of the 1st day of January, 1995, acknowledged the same to be the
act and deed of said corporation before me in my City and State aforesaid.
Given under my hand and official seal this 15th day of September, 1995.
JEANIE B. DAVIS
NOTARY PUBLIC
My term of office expires July 31, 1999.
A-14
<PAGE>WE
Exhibit A to Lease Extension Agreement
NORTH CAROLINA RAILROAD COMPANY
TO THE
SOUTHERN RAILWAY COMPANY
LEASE
THIS DEED, made this 16th day of August, 1895, by and between the
NORTH CAROLINA RAILROAD COMPANY, a corporation incorporated by the
State of North Carolina, of the one part, and the SOUTHERN RAILWAY
COMPANY, a corporation incorporated by the State of Virginia, of
the other part, witnesseth:
THAT WHEREAS, it is provided by the nineteenth section of the
charter of the North Carolina Railroad Company, "that the said com-
pany may, when they see fit, farm out their right of transportation
over said road, subject to the rules above mentioned; and the said
Company, and every person who may have received from them the right of
transportation of goods, wares and produce, shall be deemed and ta-
ken to be a common carrier, as respects all goods, wares, produce
and merchandise entrusted to them for transportation:"
AND WHEREAS, by an Act of the General Assembly of Virginia,
approved February 20, 1894, the Southern Railway Company is empow-
ered from time to time to lease, use, operate, consolidate with, purchase
or otherwise acquire, or be leased, used or operated by, or consol-
idated with any railroad or transportation company now or hereafter
incorporated by the laws of the United States, or any of the States
thereof;
AND WHEREAS, it now seems to the North Carolina Railroad
Company to be fit and judicious and to the advantage of the said
Company, to "farm out" their entire railroad, with all their fran-
chises, rights of transportation, works and property thereunto be-
longing and used, and connected therewith, as hereinafter describ-
ed, to the Southern Railway Company aforesaid for a term of years:"
NOW THIS DEED FURTHER WITNESSETH, that in consideration of the
several sums of money, rents, covenants and agreements hereinafter
specified and agreed to be paid, kept and performed by the South-
ern Railway Company, the said party of the first part, namely the
North Carolina Railroad Company has demised, let, hired, "farmed
E-A-1
<PAGE>
Exhibit A to Lease Extension Agreement
out," and delivered, and by these presents doth demise, let, hire,
"farm out" and deliver, to the said party of the second part, name-
ly the Southern Railway Company, the entire railroad of the said
party of the first part, with all its franchises, rights of trans-
portation, works and property, including, among other things, its
superstructure, road-bed and right of way incident thereto, situate
in the State of North Carolina, and leading from the City of Golds-
boro, in the County of Wayne, to the City of Charlotte, in the
County of Mecklenburg, in said State; and, also, the depot houses,
shops, buildings, fixtures, engines, cars, and all franchises,
rights and privileges, and other things, if any, of whatsoever kind
or nature, to the said North Carolina Railroad Company belonging,
and necessary, incident and appurtenant to the free, easy and con-
venient operation of the railroad leased hereby, and now or hereto-
fore used in that behalf, the same being the property and effects
of the party of the first part, which the party of the second part,
as purchaser of the interest of the Richmond and Danville Railroad
Company, Lessee, now has in its Possession as such purchaser, ex-
cepting specially, from the operation of this lease, the building at
Burlington in which is the office now occupied by the Secretary and
Treasurer of the party of the first part, together with a rectangu-
lar lot on which said building stands, the respective sides of
which shall not be less than fifty (50) feet distant from said build-
ing at any point, for the full term of ninety-nine (99) years from
and after the 1st day of January, 1896, fully to be completed and
ended commencing on first day of January 1896, And the North Car-
olina Railroad Company aforesaid, for itself, its successors and
assigns, doth covenant and agree with the Southern Railway Company
aforesaid, its successors and assigns, that the latter Company, its
successors and assigns, shall, during the entire term aforesaid,
have and enjoy quiet, peaceable and uninterrupted possession of all
of the property, rights, privileges, franchises and estates herein-
above "farmed out" and leased by the North Carolina Railroad Company
aforesaid to the Southern Railway Company aforesaid. And for and
in consideration of such demising, letting, hiring, "farming out"
and delivering of said railroad, works and property, including road
bed, superstructure, right of way and of
E-A-2
<PAGE>
Exhibit A to Lease Extension Agreement
transportation, depots, houses, buildings, shops, fixtures, engines,
cars, franchises and privileges, and other things incident and appur-
tenant thereto, the Southern Railway Company, on its part, doth
covenant with and oblige itself to the North Carolina Railroad Com-
pany to pay to it rent as follows:
From January 1, 1896, to December 31, 1901, two hundred and
sixty-six thousand ($266,000) dollars per annum, payable as follows:
one hundred and thirty-three thousand ($133,000) dollars on the
first day of July, 1896, and one hundred and thirty-three ($133,000)
dollars semi-annually thereafter, on the first days of January and
July, in each year, up to and including January 1st, 1902; from
January lst, 1902, till the expiration of this lease, two hundred
and eighty-six thousand ($286,000) dollars, per annum, payable as
follows: one hundred and forty-three thousand ($143,000) dollars
on the first day of July, 1902, and one hundred and forty-three
($143,000) dollars semi-annually thereafter, on the first days of
January and July, in each year, up to and including January first,
1995; And, in addition to the rental reserved as aforesaid, and as
a part of the rent to be paid by the party of the second part for
the leased property, herein described, the party of the second part
agrees to pay for and on account of the party of the first part all
taxes and assessments lawfully imposed upon the said leased proper-
ty, or upon the franchise of the party of the first part, or its
income, whether by the State of North Carolina, or any County,
City, Town or Township thereof, or by the United States. All of such
taxes and assessments shall be paid by the party of the second part,
so as to entirely relieve the party of the first part from the pay-
ment of taxes of any nature whatever, during the continuance of
this lease, upon the property leased or the franchise of the party
of the first part, or its income from the leased property.
To secure the prompt and faithful payment of the said rent as
above stipulated to be paid, and all taxes
E-A-3
<PAGE>
Exhibit A to Lease Extension Agreement
payable on the leased railroad and property as herein provided, the
said party of the second part doth covenant with and oblige itself
unto the said party of the first part, to deposit and keep on de-
posit in the First National Bank, of Charlotte, North Carolina, or
such other bank or banks as may be approved by the Directors of
the North Carolina Railroad Company from year to year, and all the
time pending said term, the sum of one hundred and seventy-five
thousand ($175,000) dollars in cash or its equivalent, at all times
in United States bonds, or other marketable securities, acceptable
to the Directors of said Lessor Company, and having a market value
of not less than said sum; which said sum of money, or its such
equivalent, may be applied by the said party of the first part to
the satisfaction and discharge of any such sum of money so semi-
annually due and remaining unpaid, or of any such taxes due and
remaining unpaid, or any judgment or judgments recovered in any
Court of the State, or of the United States, when finally
adjudicated for any tort, wrong, injury, negligence,
default or contract, done, made or permitted by the party of the
second part, its successors, assigns, employees, agents or ser-
vants, for which the party of the first part shall be adjudged
liable, whether the party of the first part is sued jointly with
or separately from said party of the second part, provided that the
said North Carolina Railroad Company shall give to the Southern Rail-
way Company the notice of suit herein provided for; such notice shall
be given to the Company's station agent at either of the following
places, to-wit: Raleigh, Greensboro or Charlotte, or Burlington; and in case of
either application of such deposit, then to renew the same from time
to time as often as such application of any such deposit may become
necessary; but, any bonds so deposited shall be deposited and held
in such manner as to enable the said Southern Railway Company to
draw the interest accruing thereon, from time to time, as the same
shall become due and payable: PROVIDED, the said Southern Railway
Company shall faithfully perform its covenants to pay the semi-
annual rent aforesaid, as it may become due as herein provided, and
E-A-4
<PAGE>
Exhibit A to Lease Extension Agreement
also, all of such taxes or assessments, or judgments, as the party
of the second part may be lawfully liable to pay for the party of
the first part, by the terms of this lease. And for the consid-
eration aforesaid, the said party of the second part doth covenant
with and oblige itself unto the said party of the first to keep the
said Railroad, roadbed, superstructure, depots, buildings, houses,
shops, engines, cars, fixtures, and other property of every kind
and every part thereof, so hired, let, "farmed out" and delivered in
equally as good condition and repair as the property is at the date
of this lease, or to keep, in the place of the same, like things of
equally good condition and repair; and to return, at the end of
the said term of ninety-nine (99) years, or at the termination of
said lease, to the said party of the first part the said railroad,
roadbed, superstructure, depots, houses, buildings, shops, engines,
cars, fixtures and other property, and all and every part thereof,
in like good condition and repair; or other property, when any part
of said property shall be worn out, destroyed or abandoned, as good
in quality and substance, and in like good order and repair. But
there shall be no claim or liability during the continuance of
this lease, or at its termination, by the party of the second
part, its successors or assigns, upon the party of the first
part, its successors or assigns, for any improvement of said
property conveyed by this lease, over the condition of the said
property at the date of this lease, but all such improvements
shall be and remain the property of the party of the first
part, its successors or assigns, subject to the provisions
of the lease, as hereinafter set forth. And for
the faithful keeping and performance of the covenant obligation
last aforesaid, the said party of the second part doth covenant
with and oblige itself unto the party of the first part to execute
to the said party of the first part a bond, good and sufficient at
all times in the ability of its makers to pay, in the sum of one
hundred and thirty thousand ($130,000) dollars, conditioned for the
faithful keeping and performance of said last named covenant.
E-A-5
<PAGE>
Exhibit A to Lease Extension Agreement
The party of the first part covenants and agrees with the
party of the second part, that whenever suit or action shall be
instituted against it, the said party of the first part, for any
cause of action, for which the said party of the second part would
be liable to the said party of the first part, under the terms of
this lease, the said party of the first part will immediately give
notice and tender defense of such suit or action to the said party
of the second part; such notice to be given to the station agent
of the party of the second part at either of the following named
places, to-wit: Raleigh, Greensboro or Charlotte, or Burlington all in the State
of North Carolina.
And for the considerations aforesaid, the said party of the
second part does covenant with and oblige itself, unto the said
party of the first part, that the said party of the second part,
will not at any time during said term fix or establish the rates
of freight, called "local freight", at a higher average price or
rate from station to station than the average rate for "local
freight" tariff as fixed, established and printed by the said party
E-A-6
<PAGE>
Exhibit A to Lease Extension Agreement
of the second part on this date, and the local passenger fare
shall not exceed the local rate as fixed and established on the
date last above named. And for the consideration aforesaid,
the said party of the second part, for itself, its successors and
assigns, doth covenant with and oblige itself, unto the said party
of the first part, to indemnify and save harmless the said party of
the first part against and from any and all damages which may be
recovered from or against it, according to law, by reason of any
failure of the said party of the second part, its agents or em-
ployees, or successor or assigns, to perform, in all things, their
duties and obligations, whereby the said party of the first part
may become liable to any party injured, or sustaining injury, in
his or her person or property. And the said party of the first
part, for the consideration aforesaid, for itself, its successors
and assigns, doth covenant with and oblige itself unto the said
party of the second part, its successors and assigns, that its
stockholders and directors will not do any thing or take any action,
as such stockholders and directors, that may or can interfere in
any way whatsoever with the free use and operation and convenience
of said railroad and other property so hired, let, "farmed out"
and delivered to the said party of the second part, according to the
terms and intents of these presents.
IT IS FURTHER AGREED between the said parties, that, if
the Southern Railway Company shall make default in the payment of
the sums of money they have agreed to pay on the first day of
July, 1896, and semi-annually thereafter, for thirty days or
more after the same shall become due and payable, or if they make
such default in the payment of any part thereof, or shall fail to
pay all taxes and assessments lawfully made against the party of
the first part, which, by the terms of this lease, it has agreed
to pay for and on account of the party of the first part; or if they
fail to keep on deposit such sum of money, or its equivalent, in
bonds, as they have covenanted with and obliged themselves to the
North Carolina Railroad Company to do, then the said North Carolina
E-A-7
<PAGE>
Exhibit A to Lease Extension Agreement
Railroad Company shall, upon giving to the Southern Railway Company
at least thirty days' notice, have the right, should the Southern
Railway Company still remain in default, to dispose of and apply
the deposit to any unpaid rent or unpaid taxes, assessments or judgments
lawfully made against the party of the first part, which, by
the terms of this lease, it has agreed to pay for and on account of
the party of the first part, and to enter upon and resume possession
of said railroad and all said other property, rights, franchises,
etc., of every kind and description; provided, nevertheless, this
stipulation shall not be so construed as to abridge or discharge
any of the said covenants which require and provide for the payment
of such semi-annual rent, and for every part thereof, and for the
return of the said railroad and other property, according to the
terms of such covenants, at any termination of said term, and pro-
vided, further, that the same shall be so construed that the said
party of the first part shall be entitled to all the rent due at
any termination of said lease, and to have the said road and other
property of every kind returned, as aforesaid, to the said party
of the first part, and for damages for any failure to so return the same.
E-A-8
<PAGE>
Exhibit A to Lease Extension Agreement
IT IS FURTHER AGREED by and between the said parties, that a
fair valuation and inventory of said railroad, and all and every
part and parcel of said other property, shall be made and taken on
January 1st, 1896, by two competent experts, one to be selected by
the party of the first part, and the other by the party of the
second part, who shall, in case of disagreement, select an umpire;
and the valuation and inventory so made and taken shall be final
and shall be kept, recognized and acted upon at all times; and an-
nually in the first week in October in each year, if the party of
the first part shall so require, a like valuation and inventory
shall be made and taken by like competent experts and their umpire
to be chosen as aforesaid; and in case said railroad and said prop-
erty are not in like good condition and repair, as provided in the
several covenants, as aforesaid, then the said party of the second
part may have until the first of January next, after such default,
so to make good said railroad and said other property; and the said
party of the first part shall not have the right to enter and take
possession of said railroad and other property for such default and
breach of such covenants until the said first day of January next
after such default; and not then on such account, if such default
in the meantime shall be repaired to the satisfaction of said ex-
perts or their said umpire.
IT IS FURTHER AGREED by and between said parties, that at any
termination of said lease and term, whether by its own limitation
or otherwise, the said railroad and all the said other property of
every kind whatsoever, shall be valued, and an inventory thereof
taken by like competent experts and their umpire, to be selected as
aforesaid.
And the said party of the second part doth hereby covenant with
and oblige itself to the said party of the first part, its success-
ors or assigns, to do and perform all acts and things affecting
the said railroad or its operation, running or conduct that shall
be required or enjoined during the continuance of this lease by
the laws of this State.
IT IS FURTHER AGREED by and between said parties, that if the
said lease shall be determined otherwise than by its own limitation,
the said party of the first part shall only be entitled to have the
rent due at such termination thereof, and to have said railroad
and all and every part and parcel of said property so returned to
it; or damages for failure to do so, and indemnity for any loss it
E-A-9
<PAGE>
Exhibit A to Lease Extension Agreement
may have sustained by reason of any default or neglect of the said
party of the second part as herein imposed.
IT IS FURTHER AGREED by and between the parties, that the said
party of the second part shall have leave to change any shops,
tracks, houses and other things in such way as to promote the con-
venience of shipment of freights, travel, and the safety of the
road and property, without charge to the party of the first part;
and also shall have leave, without charge to the party of the
first part as aforesaid, to change the gauge of the said railroad
track; but should the Southern Railway Company change the gauge of
siad railroad track they do hereby covenant and agree with the
North Carolina Railroad Company to change the gauge of said road
to what it now is, at the termination of said lease, if required to
so do by the North Carolina Railroad Company.
It is hereby distinctly understood and agreed by the parties
hereto that the lease made under date of September 11, 1871, by
and between the Richmond and Danville Railroad Company and the
North Carolina Railroad Company shall terminate as of December 31st,
1895 at mid-night, and the Southern Railway Company, for itself,
and as the purchaser of the interest of said Richmond and Danville
Railroad Company, in respect to said lease and in consideration of
the making of this lease for a period long beyond said former
lease, consents to such termination on behalf of said Richmond and
Danville Railroad Company, and the North Carolina Railroad Company
for a like consideration of the fact that this lease is more favor-
able to it than the former one in the matter of taxes from January
1st, 1896, to December 31st, 1901, likewise consents to such
termination.
E-A-10
<PAGE>
Exhibit A to Lease Extension Agreement
The party of the second part hereby expressly agreeing that
the exemption from taxation for its property, claimed by the party
of the first part, may be surrendered by it, but such surrender
shall not take effect before mid-night of December 31st, 1895, and
that, thereafter, the said property shall be taxable as other
property of like kind in the State of North Carolina.
IN WITNESS WHEREOF, the said North Carolina Railroad Company,
by S. B. Alexander, its President, acting for and on its behalf,
and the said Southern Railway Company, by Samuel Spencer, its Pres-
ident, acting for and on its behalf, have caused the corporate
seals of their respective corporations to be affixed hereto, and
the same to be signed by their respective Presidents aforesaid.
THE NORTH CAROLINA RAILROAD COMPANY,
By: /s/ S. B. Alexander, President
(L. S.)
Official Seal of
Prest.N.C.R.R.Co.:
/s/ P. B. Ruffin
Secretary
SOUTHERN RAILWAY COMPANY,
By: /s/ Samuel Spencer
President
Attest:
/s/ Geo. R. Anderson
Secy. Pro-tem
Witness:
E-A-11
<PAGE>
Exhibit A to Lease Extension Agreement
State of North Carolina :
: ss.
County of Alamance :
I, J.C. Staley, a Notary Public for the
County and State aforesaid, do hereby certify that Sydenham B.
Alexander and Peter Brown Ruffin, whose names are signed to the
foregoing agreement as President and Secretary respectively of
the North Carolina Railroad Company, personally appeared before me
this day and acknowledged the due execution of said agreement as
their free act and deed, and as the free act and deed of the said
North Carolina Railroad Company.
The said Sydenham B. Alexander and Peter Brown Ruffin
further state that they are the President and Secretary respectively
of the said North Carolina Railroad Company, that they know the
corporate seal of the said Company; the seal affixed the fore-
going instrument is the seal of the said Company and was thereto
affixed by authority of the Board of Directors of said Company, and
that they signed their names thereto as President and Secretary
respectively by like authority.
\s\ J.C. Staley
Given under my
hand and seal, this sixteenth
day of August, 1895
(seal affixed here)
E-A-12
<PAGE>
Exhibit A to Lease Extension Agreement
State of North Carolina :
: ss.
County of Alamance :
I, J.C. Staley, a Notary Public for the County and
State aforesaid, do hereby certify that Samuel Spencer and GeO. R.
Anderson, whose names are signed to the agreement above, as Pres-
ident and Secretary pro tem. respectively of the Southern Railway
Company, personally appeared before me this day and acknowledged the
due execution of the foregoing agreement as their free act and deed,
and as the free act and deed of the Southern Railway Company.
And the said Samuel Spencer and GeO. R. Anderson did further
state that they are President and Secretary pro tem. of the South-
ern Railway Company, that they know the corporate seal of said
Company; that the seal affixed to the foregoing agreement is the
corporate seal of said Company, and was thereto affixed by authority
of the Board of Directors of said Company, and that they signed
their names thereto as President and Secretary pro tem. respectively
by like authority.
\s\ J. C. Staley
Given under my hand
and seal this sixteenth day
of August, 1895.
(seal affixed here)
E-A-13
<PAGE>
Exhibit B to Lease Extension Agreement
THIS LEASE AND INDENTURE, made and executed in
duplicate originals this the 30th day of Aug, 1939,
by and between the ATLANTIC AND NORTH CAROLINA RAILROAD
COMPANY, a corporation existing under and by virtue of
the laws of the State of North Carolina, party of the
first part, hereinafter called the lessor, and the
ATLANTIC AND EAST CAROLINA RAILWAY COMPANY, a corpo-
ration existing under and by virtue of the laws of the
State of North Carolina, party of the second part, and
hereinafter call the lessee,
W I T N E S S E T H:
THAT WHEREAS, the charter of the lessor was duly
granted and is contained in Chapter 136 of the Public
Laws of North Carolina, Session of 1852-1853, and was
amended by Chapter 232 of the Private Laws of North
Carolina, Session of 1854-1855, and the same is a corpo-
ration duly created, organized and existing under said
laws; and
WHEREAS, the lessor is duly empowered to farm
out and lease its property and franchises; and
WHEREAS, an offer in writing having been submit-
ted by H. P. Edwards for and on behalf of the lessee to
lease the franchises and property of the Atlantic and
North Carolina Railroad Company and such proposition
having been accepted by actions and resolutions of the
directors and stockholders of the Atlantic and North
Carolina Railroad Company duly and regularly adopted at
meetings held in the City of Raleigh, State of North
Carolina, on April 20, 1939.
E-B-1
<PAGE>
Exhibit B to Lease Extension Agreement
1. NOW, THEREFORE, for and in consideration of
the several sums of money, rents, covenants, agreements
and stipulations hereinafter specified and to be performed
by the lessee, the payment and performance of which are
conditions precedent to the continuance hereof, subject
to the Joint User Contract between the lessor and the
Receivers of the Norfolk Southern Railroad Company relating
to the use and maintenance of certain tracks and sidings in
and about the City of New Bern, the lessor has demised, let,
hired, farmed out and delivered and by these presents does
demise, let, hire, farm out and deliver to the lessee
for the full term of twenty-five (25) years, said term to
begin on the first day of the month following the approval
of this lease by the Interstate Commerce Commission and
upon its issuance to the lessee of a certificate of con-
venience and necessity to operate said railroad and upon
approval by the Utilities Commissioner of North Carolina
and surrender of possession of said property to the lessee
and to end twenty-five (25) years thereafter, the entire
railroad of the lessor with all its franchises, privi-
leges, rights of transportation, works and properties
including, among other things, its superstructure, road
bed, right of way incident thereto, situated in the State
of North Carolina and extending from Morehead City in the
County of Carteret into the City of Goldsboro, in the
County of Wayne; and also all depots, houses, shops, piers,
wharves, waterfronts, water privileges, buildings, fixtures,
engines, cars and railroad equipment, and all franchises,
E-B-2
<PAGE>
Exhibit B to Lease Extension Agreement
rights and privileges and other things of whatsoever kind
or nature belonging to said lessor and necessary, incident
and appurtenant to the free, easy and convenient operation
of the said railroad leased hereby and now used in that be-
half, and also all lands and interest in lands EXCEPTING
AND WITH THE EXCEPTION of the property situated near More-
head City and known as the Camp Glenn property consisting
of about fifty-seven (57) acres of land and described in
a deed from the Receivers of the Norfolk and Southern
Railroad Company to the Atlantic and North Carolina Railroad
Company, which deed is duly recorded in the office of the
Register of Deeds of Carteret County, and EXCEPTING all of
the land in Morehead City known as the Atlantic Hotel prop-
erty, other than that situated east of Fourth Street and
south of the railroad track in said City, and EXCEPTING
FURTHER all cash on hand, all choses in action, bills and
accounts receivable and securities owned by or due and
payable to lessor, and EXCEPTING also all materials and
supplies on hand, an inventory of which will be made and
signed by the parties hereto on the effective day of this
lease.
2. The said lessor for itself, its successors and
assigns does covenant and agree to and with the lessee,
its successors and assigns, that at the time of the sealing
and delivery of these presents it is seized and possessed
and entitled to the premises, property, rights, franchises,
and privileges above described for the term demised except
as hereinafter stated, and has good right, full power and
lawful authority to lease, farm out and deliver the same in
the form and manner aforesaid, and that the same are free
and clear from all liens and encumbrances of any kind and
nature whatsoever save and except a deed of trust from the
E-B-3
<PAGE>
Exhibit B to Lease Extension Agreement
Atlantic and North Carolina Railroad Company to American
Trust Company, securing the outstanding bonds of the lessor,
and certain taxes due the State and political subdivisions
thereof; that the said lessee, its successors and assigns,
notwithstanding said deed of trust and taxes, shall during
the entire term aforesaid have and enjoy the quiet, peace-
ful and uninterrupted possession of all the property
rights, privileges, franchises and estate hereinbefore
leased and farmed out; and that the said lessor, its stock-
holders and directors will not do anything or take any
action as such stockholders and directors to interfere in
any way with the free use and operation of said railroad
by the lessee according to the terms and intent of these
presents.
3. Prior to the termination of the period of its
corporate existence as limited in its charter, the lessor
covenants and agrees that it will duly take all necessary
and proper steps to cause its corporate existence to be
extended beyond the term of this lease.
4. It is expressly stipulated and agreed by the
lessor that the lessee shall not be liable for any rents
until it shall have been put into actual possession of
the property hereby demised.
5. The lessee hereby covenants and agrees that as
rent for said property it will pay to the lessor a minimum
annual rental of $60,500.00, that during the first year of
this lease said sum shall be paid in four equal quarterly
installments, same to be paid within fifteen days after
the end of each quarter; that thereafter said minimum
annual rental shall be paid in equal monthly installments
within fifteen days after the end of each month. The
E-B-4
<PAGE>
lessee further covenants and agrees that if, during any
calendar year of this lease, its railway operating revenues
as shown in its annual report of railway operating revenues
filed with the Interstate Commerce Commission under its
accounting system shall exceed the sum of $475,000.00, it
will pay to the lessor additional rent according to the
following schedule:
$475,001.00 to $499,999.00 1-1/2% of railway operating revenues
$500,000.00 to $550,000.00 2% of railway operating revenues
$550,001.00 to $600,000.00 3% of railway operating revenues
$600,001.00 to $700,000.00 4% of railway operating revenues
and 4% on all railway operating revenues above $700,001.00
Said additional rent shall be paid on or before the
first day of April for the preceding year for each year
of this lease. The lessee shall forfeit this lease if it
fails for thirty days to make any of the quarterly or month-
ly payments on the annual minimum rent covenanted to be
paid by it hereunder, or if it is in default in the payment
of said additional rent for a period of thirty days. Past
due rent shall also bear interest at six per cent.
6. The lessee further covenants that it shall pay
all operating taxes lawfully imposed by the State or Federal
Government upon the lessee on account of the operation of
the railroad, including North Carolina franchise taxes for
1939 and thereafter during continuance of this lease,
social security, unemployment insurance, railroad retire-
ment and all other operating taxes assessed against the
lessee. The lessor shall pay all ad valorem property taxes,
income taxes assessed against it, street assessments,
social security taxes on account of its employees, and fran-
chise taxes levied against it other than franchise taxes
levied against it as an operating railroad company, except
1939 franchise taxes. It is understood and agreed that
if the possession of the properties herein demised is not
E-B-5
<PAGE>
Exhibit B to Lease Extension Agreement
given before July 1, 1939, than and in such event the 1939
North Carolina franchise taxes are to be prorated between
lessor and lessee.
7. The lessee further covenants that during the
continuance of this lease it will keep the warehouses,
depots, shops and all other building now or hereafter to
be erected and used in the operation of the said railroad
insured in some safe and reliable insurance company or
companies, lawfully doing business within the State of
North Carolina, to their full insurable value according to
schedule which will be fixed and agreed to by the parties
hereto. All policies of insurance shall contain a clause
making the loss payable as interest may appear to the
Atlantic and North Carolina Railroad Company. It is agreed
that the proceeds from all such insurance policies shall be
used, however, for the purpose of rebuilding or restoring
properties on account of damage or loss for which the
claims are paid.
8. The lessee further covenants that it will place
in the tracks of the railroad as rapidly as possible and
within twelve months from the effective day of this lease
fifty thousand (50,000) cross ties of good and substantial
quality, and that it will place in such tracks forty
thousand (40,000) cross ties of like quality annually
thereafter until the tracks are in good condition, and
maintain the same in such condition thereafter.
The lessee further covenants and agrees that at the
expiration of every six months during the period of this
lease it will make and file with the lessor a sworn written
statement of the number and location of all cross ties
installed by it during the preceding six months.
E-B-6
<PAGE>
Exhibit B to Lease Extension Agreement
9. The lessee further covenants and agrees that
it will set up a depreciation and reserve fund and deposit
in cash with the Branch Banking and Trust Company, Kinston,
North Carolina, in the name of the lessor and lessee,
as Trustees, an amount equal to the depreciation that
accrues on all rolling stock included within the terms of
this lease; provided, that no cash deposit upon this de-
preciation and reserve fund shall be made by or required
of the lessee for a period of three years from the date
upon which this lease becomes effective. The amount and
rate of depreciation shall be determined by and according
to the depreciation rate established by the Interstate
Commerce Commission for such rolling stock. The depreci-
ation fund shall be used only to replace worn out rolling
stock, the lessee to determine the rolling stock which
shall be purchased for this purpose. Funds shall be sub-
ject to withdrawal for purchase of rolling stock upon
the request of the lessee and upon signatures of a desig-
nated official of the lessee and the President of the
lessor company. The only obligation of the lessor in
connection with withdrawal of monies from this fund shall
be to see that proper application of the monies so with-
drawn is made by the lessee. At the termination of the
lease any remaining balance of this fund shall pass to
and be the property of the lessor. Payments into the
fund shall be made monthly. The lessee may, in lieu
of making payments into the said depreciation and reserve
fund and as provided in Section 11 of this lease, make
replacements of rolling stock by providing similar or
like rolling stock to take the place of worn out rolling
E-B-7
<PAGE>
Exhibit B to Lease Extension Agreement
stock and the amounts actually paid by the lessee for the
purchase thereof shall be credited against any amounts due
to be paid by him to the said reserve or depreciation fund,
upon the transfer of the title and ownership of such pur-
chased replacements to the lessor free from liens and
encumbrances thereon, less depreciation thereon calculated
as aforesaid to the time of said transfer. In the event
the lessee shall elect to purchase additional rolling
stock and there is not sufficient money in the depreciation
fund to make such purchase or purchases, the lessee shall
have the right to advance the money and make such purchase
or purchases, and upon transfer of the legal or equitable
title to said stock to the lessor the lessee shall receive
credit for such monies so advanced and for the deferred
installments as and when paid by the lessee, less the de-
preciation on the property purchased calculated as afore-
said to the time of said transfer. If said purchases
are made on a partial payment basis and the title to or
equity in the property purchased has been transferred to the
lessor, the lessee shall be credited for such payments as
are made thereon at the time such payments are made, less
depreciation on said property calculated as aforesaid to
the date of payments.
10. The lessee covenants and agrees that it will
keep and maintain said railroad, road bed, superstructure,
depots, buildings, shops, engines, cars fixtures and
other property covered by this lease in equally as good
condition and repair as the property is at the date of
this lease, less ordinary depreciation of the demised
property, and to return the same at the termination of
this lease in like good condition and repair.
E-B-8
<PAGE>
Exhibit B to Lease Extension Agreement
11. It is understood and agreed that the lessee
shall have the right to replace any of the rolling stock
or equipment by sale or exchange of the old rolling stock
or equipment and the purchase of additional or new rolling
stock or equipment for that so sold or exchanged, but the
terms, conditions and price for which said property is
sold or exchanged must be first approved by the President
of the lessor corporation, and in such event the title to
the properties acquired by purchase or exchange shall
vest in and the same shall be the property of the lessor
and subject to the provisions of this lease in the same
manner as the properties herein and hereby demised. During
such time as the lessee shall not be in default under para-
graphs 9, 10 and 11 of this lease, as they relate to roll-
ing stock, the lessee shall at all times be privileged to
acquire and hold in its own right or lease additional
rolling stock and use the same at will in the operation of
said railroad.
12. The lessee further covenants and agrees to
indemnify and save harmless the said lessor, its successors
and assigns, against and from any and all damages which may
be recovered from or against the lessor according to law
by reason of any failure of the lessee, its agents or
employees to perform all duties and obligations, whether
imposed by this lease or by reason of law, whereby the
lessor may become liable to any person killed or person,
firm or corporation injured in his, her or its person,
reputation or property, and that the lessee will indemnify
and will save harmless the lessor against any judgment or
judgments recovered in any State or Federal court of the
United States or any foreign country for any tort, wrong,
injury, negligence or default done, made or permitted by
the lessee, its employees, agents or servants for which
E-B-9
<PAGE>
Exhibit B to Lease Extension Agreement
the lessor shall be adjudged liable, whether the lessor is sued
jointly with or separately from the lessee.
13. The lessee covenants further that whenever any
suit or action shall be instituted against the lessor, or against
the lessor and lessee jointly for any cause of action for which
the lessee would be liable to indemnify the lessor under the terms
of this agreement, it will defend said action diligently and at its
own cost and expense, provided that whenever any suit shall be
instituted against the lessor separately by reason of which the
lessee might become liable to indemnify the lessor under the terms
of this agreement, the lessor will give due notice thereof to the
lessee by registered letter directed to the lessee at New Bern,
North Carolina. And in all cases where the lessor is sued for any
cause of action for which the lessee would be bound to indemnify
the lessor hereunder, whether or not the lessor is sued separately
or with one or more other defendants, the lessor will, with reason-
able promptness, mail to lessee at New Bern, North Carolina, a copy
of the summons and complaint served upon it in all such suits, but
if it should fail to do so, such failure shall not relieve
the lessee of any of its duties or liabilities to the lessor hereunder,
and the rights of the lessor shall in no way be affected thereby.
14. It is mutually agreed by and between the parties
that a fair valuation and inventory of all engines, cars, tools,
machinery and equipment of the railroad hereby transferred and leas-
ed, together with all material and supplies on hand and belonging
to the lessor, shall be made at the time of or as soon as practicable
after the effective date of this lease by two competent persons, one
to be selected by the lessor and the other to be selected by the
lessee who shall in case of disagreement select an umpire, and the
valuation and inventory so made and taken shall be finally estab-
lished and recognized and acted upon at all times.
15. It is further agreed that the lessor shall have
the right at all times to inspect the railroad, its rolling stock
and other property. The lessor is to employ an inspector, who is
E-B-10
<PAGE>
Exhibit B to Lease Extension Agreement
to make inspection of the railroad and railroad properties semi-
annually, or more often if the lessor so desires, and report to
the lessor as to improvements and the general condition of the
railroad and property and in case the said railroad and prop-
erties are not found to be in the condition required by this
lease and as provided in the covenants, the lessee shall be given
written notice of any under-maintenance and allowed such reasonable
time as may be fixed by the inspector within which to make such re-
pairs and improvements as will fully comply with the provisions
hereof. The lessee shall make available all reasonable transpor-
tation or other facilities required by the inspector in the per-
formance of his duties without cost to the lessor.
16. It is understood and agreed that the lessee shall
have the right to purchase any or all operating material and
supplies at the inventoried price and to pay for the same at the
end of the month, and furnish to the lessor at the end of each
month a statement of all supplies purchased and used.
17. It is understood and agreed that the lessee hereby
assumes all duties, obligations and responsibilities of the lessor
in connection with the maintenance under the Joint User Contract
between the Receivers of the Norfolk Southern Railroad Company
and the lessor referred to herein in paragraph one; that the
lessee shall have custody and possession of all of the operating
records of the lessor, but shall make the same available for the
use and inspection of the lessor at any time upon its demand.
18. The lessee shall not be liable for any loss or
destruction of property of the lessor caused by war, riots,
acts of God or strikes not caused by the wrongful or unreason-
able conduct to the lessee. If any of the properties hereby
demised shall be destroyed by war, riots, acts of God, or
strikes not caused by the wrongful or unreasonable conduct of
the lessee, the same shall be replaced by the lessor, but in
the event such damage is so great that lessor is unable to
replace the same, then and in such event this lease shall
E-B-11
<PAGE>
Exhibit B to Lease Extension Agreement
be terminated, but the lessee, at its option, may replace
the same and, if so replaced, no termination of this lease
shall be caused thereby. The lessee shall be allowed a
reasonable credit on rents for loss of use of the railroad
during such time as service thereon is interrupted by
destruction of said property from said causes, and this
provision shall apply whether the destruction be total or
partial and whether the replacement be by the lessor or
lessee. Provided, however, that nothing herein contained
shall relieve the lessee of its duty to insure the demised
properties other than rolling stock and equipment against
fire or windstorm.
19. That the lessee covenants and agrees not to
assign, transfer, mortgage or pledge this lease or to sub-
let the franchise or properties, or any part of the said
properties hereby demised without the prior written con-
sent of the lessor.
20. The lessee covenants and agrees that if the
quarterly or monthly rent or any part thereof shall be
unpaid at the expiration of any grace period herein pro-
vided for, or if the lessee shall fail to perform any of the
covenants, conditions, provisions and agreements herein
contained to be done or performed by it, or if a permanent
receiver or permanent trustee in bankruptcy shall be
appointed in any suit or proceeding brought by or against
lessee, or if the lessee shall make an assignment for the
benefit of creditors, then and in each and every such case
the term hereby granted shall immediately cease, terminate,
and come to an end. The lessee, his receiver, trustee or
assignee, and the surety on the bond hereinafter mentioned
shall be and continue liable for all damages caused to the
lessor.
E-B-12
<PAGE>
Exhibit B to Lease Extension Agreement
21. To insure the prompt and faithful payment of
the rents and sums herein stipulated to be paid, and the
performance of each and every covenant on the part of the
lessee to be performed, as herein set forth, the lessee
covenants to and with the lessor, its successors and
assigns, that it will deposit and keep on deposit with
the lessor a surety bond in the sum of $50,000.00 duly
executed by a company approved by the lessor and duly
licensed by the Insurance Commissioner of the State of
North Carolina.
IN TESTIMONY WHEREOF, the Atlantic and North Caro-
lina Railroad Company has caused these presents to be
signed in its name by its President, attested by its
Secretary and its corporate seal to be hereto affixed,
all by the order of its stockholders and its directors
in meetings duly called and held. And the
ATLANTIC AND EAST CAROLINA RAILWAY COMPANY
has caused its name to be hereto signed by its President,
attested by its Secretary and its corporate seal to be
hereto affixed, all by order of its stockholders and
directors in meetings duly assembled, on this day
and year first above written.
ATLANTIC AND NORTH CAROLINA RAILROAD COMPANY
BY: \s\ H. P. Crowell
President
Attest:
\s\ H. M. Jacobs
Secretary
ATLANTIC AND EAST CAROLINA RAILWAY COMPANY
BY: \s\ H. P. Edwards
President
Attest:
\s\ Patty C. Buchan
Secretary
E-B-13
<PAGE>
Exhibit B to Lease Extension Agreement
THIS INDENTURE, made this 1st day of July, 1943,
by and between the Atlantic and North Carolina Railroad Com-
pany, a corporation existing under and by virtue of the laws
of North Carolina, of the first part, hereinafter called the
lessor, and the Atlantic and East Carolina Railway Company, a
corporation existing under and by virtue of the laws of North
Carolina, of the second part, and hereinafter called the
lessee,
W I T N E S S E T H:
THAT, WHEREAS, under date of the thirtieth day of
August, 1939, the parties hereto executed a lease for the op-
eration of the Atlantic and North Carolina Railroad Company
facilities between Goldsboro, North Carolina, and Morehead
City, North Carolina, which lease appears of record in the
office of the Register of Deeds of Craven County in Book 351
at page 98, and also appears of record in other counties; and
WHEREAS, since the execution of the said lease and
the operation of said railroad facilities by the lessee there-
under, certain improvements have been made under the provisions
thereof, but, because of the circumstances growing out of the
state of war now existing and the unexpected and unusual de-
mands made upon the railroad facilities, it has been found
advisable and necessary for additional improvements to be made
to said railroad roadway, track and structures; and
WHEREAS, the United States Navy Department has agreed
to advance for such purposes, under certain provisions agreed
upon between it and the parties hereto, the sum of four hundred
thousand dollars ($400,000.00), and the lessor has agreed to
make available for such purposes the sum of two hundred thou-
sand dollars ($200,000.00), all to be expended in accordance
with the Navy Department's requirements:
E-B-14
<PAGE>
Exhibit B to Lease Extension Agreement
NOW, THEREFORE, it is agreed by and between the
parties hereto as follows:
1. That Section five (5) of the aforesaid lease
heretofore entered into between the parties hereto is hereby
altered, changed and modified, as of January 1, 1943, to read
as follows:
The lessee hereby covenants and agrees that as rent
for said property it will pay to the lessor a minimum annual
rental of sixty thousand five hundred dollars ($60,500.00),
said minimum annual rental shall be paid in equal monthly in-
stallments within fifteen days after the end of each month.
The lessee further covenants and agrees that if, during any
calendar year of this lease, its railway operating revenues
as shown in its annual report of railway operating revenues
filed with the Interstate Commerce Commission under its ac-
counting system shall exceed the sum of four hundred and
seventy-five thousand dollars ($475,000.00), it will pay to
the lessor additional rent calculated on the excess above four
hundred and seventy-five thousand dollars ($475,000.00), accord-
ing to the following schedule:
$475,000.00 to $500,000.00 1 1/2% of such excess
railway operating revenues, that is, 1 1/2%
of the amount between $475,000.00 and
$500,000.00;
$500,000.00 to $550,000.00 2% of such excess
railway operating revenues, that is, 2% of
the amount between $500,000.00 and $550,000.00;
$550,000.00 to $600,000.00 3% of such excess
railway operating revenues, that is, 3% of
the amount between $550,000.00 and $600,000.00;
and 4% of all railway operating revenues above
$600,000.00.
Said additional rent shall be paid on or before the
first day of April for the preceding year for each year of this
lease. The lessee shall forfeit this lease if it fails for
thirty days to make any of the monthly payments on the annual
minimum rent covenanted to be paid by it hereunder, or if it
is in default in the payment of said additional rent for a
E-B-15
<PAGE>
Exhibit B to Lease Extension Agreement
period of thirty days. Past-due rent shall also bear inter-
est at six per cent.
The lessee having protested the payment of part of
the excess rents claimed by the lessor for the years 1941 and
1942, the said protest is hereby withdrawn and it is agreed
that said payments shall be treated as payments of rent in ac-
cordance with the provisions of the lease hereby amended.
2. In addition to the excess rent to be paid under
Section one (1) above, the lessee agrees to also pay rent
equal to six per cent on all railway operating revenues as
shown in its annual report of railway operating revenues filed
with the Interstate Commerce Commission under its accounting
system over and above four hundred and seventy-five thousand
dollars ($475,000.00) in any calendar year. Rents payable
under this section shall continue until, but not after, the
lessee has paid in rents under this section a sum equal to
two hundred thousand dollars ($200,000.00), plus such sum of
additional rent as will equal two per cent per annum on the
said two hundred thousand dollars ($200,000.00), or on bal-
ances thereof after credits of such additional rental payments
as shall be made under this section. Such rent shall be pay-
able at the same time and under the same provisions as are
provided for the payment of the excess rent in Section one
(1). Provided, that the total rents to be paid under this
section shall be reduced or increased by the amount of net
savings or costs in Federal income and excess profits taxes
realized by the lessor by reason of the rehabilitation pro-
gram and the amortization of improvements made thereunder.
Such net savings or costs shall be calculated annually and
shall remain subject to adjustment until such time as both
the above rental provision fixed in this section and the agree-
ment reducing United States Navy Department freight rates and
E-B-16
<PAGE>
Exhibit B to Lease Extension Agreement
other Navy Department charges shall have expired. The payment
of excess rent under this section shall be calculated from
that date upon which the lessor company begins amortizing the
cost of the rehabilitation program.
For the purpose of calculating net savings or cost
in Federal income and excess profits taxes realized by the
lessor, as contemplated by this section, no deductions shall
be taken by the lessor on account of total salaries paid to
officers and employees of the said corporation in excess of
seven thousand five hundred dollars ($7,500.00) per year, and
no deductions shall be taken on account of interest paid by
the lessor company to the State of North Carolina in excess of
three per cent per annum. Any compensation paid on account
of engineering service in connection with the rehabilitation
program may be included in deductions from net income although
the total amount of salaries and wages including such payments
may exceed seven thousand five hundred dollars ($7,500.00).
In calculating the above rent for the period begin-
ning with the date on which the lessor company begins amortiz-
ing the rehabilitation facilities and ending the follow-
ing December 31, if less than one year, the railway operating
revenues for the period shall be converted to an annual basis,
and the amount of rent to be paid shall be in the same propor-
tion as the period from the effective date of this section to
the following December 31 bears to twelve months.
3. In calculating excess rent to become due under
Sections one (1) and two (2) of this agreement, there shall be
excluded from the annual railway operating revenue of the
lessee such amount of freight and other charges as shall be
rebated to the United States Navy Department in accordance with
the terms of the agreement between the lessee and the said Navy
Department providing for such rehabilitation program.
E-B-17
<PAGE>
Exhibit B to Lease Extension Agreement
4. The lessee agrees to keep that portion of the
mainline roadbed, track and structures which may be rehabili-
tated under the program proposed, which portion at this time
is expected to be that between Kinston and Morehead City, in
equally as good condition and repair as such mainline roadbed,
track and structures will be at the date of completion of the
rehabilitation program, less ordinary depreciation, and to re-
turn the same at the termination of this lease in like good
condition and repair. Except as modified hereby, Section ten
(10) of the original lease shall continue in effect.
5. It is agreed and stipulated that if there is
default in the payment of rent hereunder, the salary of any
officer or employee shall not exceed the rate of five thousand
dollars ($5,000.00) per year until such default is completely
removed.
6. It is further agreed that while default, if any,
in the payment of rents due the lessor continues, no additional
officers of the corporation shall be created by the Board of
Directors, nor shall the salaries now being paid the present
officers of the corporation be increased, without the unani-
mous consent of the Board of Directors, and, during such per-
iod of default, if any occurs, it is also agreed that all per-
sons generally designated as clerks or stenographers shall not
be paid in excess of ten per cent over salaries or wages pre-
vailing for like services rendered to other railroads by per-
sons under similar conditions without the unanimous consent of
the Board of Directors.
7. It is agreed and stipulated that there shall be
added three members to the present Board of Directors of the
Atlantic and East Carolina Railway Company, and that the new
members shall be nominated by the Governor and elected by the
stockholders of the lessee company. The three persons so
elected to the directorate shall be thereafter annually
E-B-18
<PAGE>
Exhibit B to Lease Extension Agreement
re-elected by the stockholders so long as the lessee company
shall be either indebted to the lessor company or so long as
there may be rental payments accruing under Section two (2)
hereof. Rents accruing under Section One (1) hereof which
are not in default shall have no application to the foregoing
provision. In case of death or disqualification of either of
the three persons so elected to the directorate under this
section, the Governor shall nominate three persons from whom
one shall be elected to such vacancy.
8. The term of the lease referred to in the pre-
amble hereof may be extended for an additional period of
twenty years from its expiration at the option of the lessee,
upon notice in writing being given to the lessor at least one
year prior to the expiration of the term provided in said
lease. In the event of the exercise of this option, the lessee
covenants an agrees that it will keep and maintain said rail-
road, roadbed, superstructure, depots, buildings, shops, en-
gines, cars fixtures and other property covered by this lease
in equally as good condition and repair as the property will
be at the date of renewal of this lease, less ordinary depre-
ciation of the demised property, and to return the same at the
termination of this lease in like good condition and repair.
9. That the lessee shall secure in writing the con-
sent of the surety on the bond given to guarantee the faithful
performance of the lease referred to in the preamble hereof
before any of the changes contemplated by this contract shall
become effective.
IN WITNESS WHEREOF, the Atlantic and North Carolina
Railroad Company has caused these presents to be signed in
its name by the President, attested by its Secretary, and its
corporate seal to be hereto affixed, all by the order of its
Directors in meetings duly called and held. And the Atlantic
E-B-19
<PAGE>
Exhibit B to Lease Extension Agreement
and East Carolina Railway Company has caused its name to be
hereto signed by its President, attested by its Secretary,
and its corporate seal to be hereto affixed, all by order of
its Directors in meetings duly assembled, on this the day
and year first above written.
ATLANTIC AND NORTH CAROLINA
RAILROAD COMPANY
By (signed) Judson H. Blount
President
ATTEST:
(signed) F.E. Wallace
Secretary
ATLANTIC AND EAST CAROLINA
RAILWAY COMPANY
By (signed) H.P. Edwards
President
ATTEST:
(signed) Patty C. Buchan
Secretary
E-B-20
<PAGE>
Exhibit B to Lease Extension Agreement
THIS INDENTURE, made as of the 1st day of January, 1951, by and
between The Atlantic and North Carolina Railroad Company, a corporation
existing under and by virtue of the laws of North Carolina, of the first
part, hereinafter called the Lessor, and the Atlantic and East Carolina
Railway Company, a corporation existing under and by virtue of the laws of
North Carolina, of the second part, and hereinafter called the Lessee.
WITNESSETH:
THAT, WHEREAS, under date of the thirtieth day of August, 1939,
the parties hereto executed a Lease for the operation of The Atlantic and
North Carolina Railroad Company facilities between Goldsboro, North Carolina,
and Morehead City, North Carolina, which Lease appears of record in the office
of the Register of Deeds of Craven County, North Carolina in Book 351, at
Page 98, and also appears of record in other counties. The original lease
under which applicant now operates between The Atlantic and North Carolina
Railroad Company and the Atlantic and East Carolina Railway Company was approved
by the Interstate Commerce Commission August 1, 1939. See 233 I.C.C. 644,
Finance Docket 12456; and,
WHEREAS, since the execution of said original lease, and on the
______ day of July, 1943, an amendment thereto was entered into and executed
between the parties after an approval by the Interstate Commerce Commission
and to be effective as of July, 1943. The amendment or modification of lease
agreement appears in Finance Docket No. 12456; and,
WHEREAS, a recent survey of the present condition of the railroad
tracks and equipment indicates that it is desirable and necessary to replace
20 miles of 60-lb. rail with 85-lb. rail, to replace the foundations under
the drawbridge at Trent River, New Bern, N. C., and to acquire one or two
Diesel electric locomotives in order that the applicant may adequately handle
the heavy volume and character of traffic which will necessarily be carried
thereon incident to the Marine Air Base at Cherry Point, N. C. as well as
serving other naval and military purposes along said railroad; and,
E-B-21
<PAGE>
Exhibit B to Lease Extension Agreement
WHEREAS, said improvements and the acquisition of said locomotives
has been found by the Governor and Council of State to be necessary and
expedient in the public interest; and,
WHEREAS, the costs of said improvements and the acquisition of said
Diesel locomotives will approximate Five Hundred Thousand Dollars ($500,000.00);
and,
WHEREAS, the State of North Carolina is authorized by Chapter 896
of the Public Laws of 1951 to make a loan to the Atlantic and North Carolina
Railroad Company of a sum not exceeding Five Hundred Thousand Dollars
($500,000.00) to be used in said rehabilitation and the acquisition of the two
Diesel locomotives, the said loan to the Atlantic and North Carolina Railroad
Company to be repaid with three per cent (3%) interest thereon to the State of
North Carolina from rentals to be paid the Atlantic and North Carolina Railroad
Company by the Atlantic and East Carolina Railway Company; and,
WHEREAS, the Atlantic and East Carolina Railway Company, in considera-
tion of the improvements to be made and equipment to be acquired, has agreed to
increase its rental payments, and thereby necessitating a further amendment to
the lease agreements between the parties hereto.
NOW, THEREFORE, it is agreed by and between the parties hereto as
follows:
1. That, in addition to the rents payable under the lease agreements
heretofore entered into between the parties, the Lessee agrees to pay a rent
equal to three per cent (3%) of the unpaid balance of any advances made by the
State of North Carolina to the Lessor or ten per cent (10%) of the Lessee's
gross operating revenues, defined by the ICC Accounting Bureau as "Account No.
501-Railway Operating Revenue", in excess of Eight Hundred Thousand Dollars
($800,000.00) per year, whichever is the greater, said increased rentals under
this agreement to be payable on or before the first day of April for the preced-
ing year of each year this agreement is in effect.
E-B-22
<PAGE>
Exhibit B to Lease Extension Agreement
The total rent to be paid under this supplemental lease agreement
shall equal the amount of advances made by the Lessor for the rehabilitation
of the road and the acquisition of motor power or other equipment plus three
per cent (3%) interest thereon. When this amount has been paid no further
rents shall be payable under this supplemental lease agreement, and rents
accruing thereafter shall revert to the amounts as calculated under the original
lease and the supplement thereto dated July, 1943.
2. In calculating the gross revenues under this supplemental lease
agreement there shall be deducted from gross revenues all amounts accruing to
the United States Navy Department under Contract NOy-6554 either as rebates of
switching and other charges or as profit rebates.
3. Rents to be paid under this supplemental lease agreement shall
include any depreciation funds that would under the previous agreements be paid
on equipment purchased by the Lessor and leased to the Lessee, and the Lessee
shall not be required to deposit any funds to cover depreciation on the
equipment and improvements hereinbefore referred to as provided in Section
Nine (9) of the original lease agreement dated August 30, 1939.
4. This lease shall not become effective until approved by the
Interstate Commerce Commission.
IN WITNESS WHEREOF, the Atlantic and North Carolina Railroad Company
has caused these presents to be signed in its name by its President, attested
by its Secretary, and its corporate seal to be hereto affixed, all by order of
its Board of Directors in meetings duly called and held. And the Atlantic and
East Carolina Railway Company has caused its name to be hereto signed by its
President, attested by its Secretary, and its corporate seal to be hereto
affixed, all by order of its Directors in meetings duly called and held.
ATLANTIC AND NORTH CAROLINA RAILROAD COMPANY
By /s/ M. G. Mann
President
ATTEST:
/s/W. Guy Hargett
Secretary
E-B-23
<PAGE>
Exhibit B to Lease Extension Agreement
ATLANTIC AND EAST CAROLINA RAILWAY COMPANY
By /s/ E. R. Buchan
President
ATTEST:
/s/ Patty C. Buchan
Secretary
NORTH CAROLINA
LENOIR COUNTY
THIS 19th day of November , 1951, personally came
before me, Olive P. Mallison , a Notary Public in and for
the State and County aforesaid, W. Guy Hargett , who
being by me duly sworn, says that he knows the common seal of the Atlantic
and North Carolina Railroad Company, a North Carolina corporation, and is
acquainted with M. G. Mann , who is the President of
said corporation, and that he, the said deponent, is the Secretary of the said
corporation and saw the said President sign the foregoing and annexed instru-
ment and saw the said common seal of the said corporation affixed to said
instrument by said President, and that he, the said deponent, signed his name
in attestation of the execution of said instrument in the presence of said
President of said corporation.
Witness my hand and notarial seal, this 19th day of November ,
1951.
\s\ Olive P. Mallison
Notary Public
My commission expires:
July 28, 1952
E-B-24
<PAGE>
NORTH CAROLINA
LENOIR COUNTY
THIS 19th day of November , 1951, personally came before
me, Olive P. Mallison , a Notary Public in and for the
State and County aforesaid, Patty C. Buchan , who being by me
duly sworn says that she knows the common seal of the Atlantic and East Carolina
Railroad Company, a North Carolina corporation, and is acquainted with
E. R. Buchan , who is the President of said corporation, and
that she, the said deponent, is the Secretary of the said corporation and saw
the said President sign the foregoing and annexed instrument and saw the said
common seal of the said corporation affixed to said instrument by said
President, and that she, the said deponent, signed her name in attestation of
the execution of said instrument in the presence of said President of said
corporation.
Witness my hand and notarial seal, this 19th day of November , 1951.
\s\ Olive P. Mallison
Notary Public
My commission expires:
July 28, 1952
E-B-25
<PAGE>
Exhibit B to Lease Extension Agreement
THIS AMENDED LEASE, Made and entered into this 19th
day of August , 1954, by and between the Atlantic
and North Carolina Railroad Company, a corporation duly created
and existing under and by virtue of the laws of the State of
North Carolina, hereinafter designated as the lessor, and the
Atlantic and East Carolina Railway Company, a corporation duly
created and existing under and by virtue of the laws of the
State of North Carolina, hereinafter designated as the lessee,
W I T N E S S E T H:
The lessor, for and in consideration of the covenants
and agreements of the lessee hereinafter contained, under and
by virtue of authority of a resolution duly adopted by the
Board of Directors of the lessor at a meeting duly called and
held in Raleigh, North Carolina, on the 15th day of January,
1954, and a resolution of the stockholders of the lessor duly
adopted at a meeting duly called and held on said date in
Raleigh, North Carolina, and by virtue of the approval and
execution of this amended lease by the Governor and Council
of State of North Carolina at a meeting duly called and held
in Raleigh, North Carolina, on the 20th day of January, 1954,
and the approval of this amended lease by the order of the
Interstate Commerce Commission dated the 27thday of May,
1954, and the approval of this amended lease by the Utilities
Commission of North Carolina by order dated the 4th day of
August, 1954;
IT IS HEREBY AGREED that the lease dated the 30th
day of August, 1939, from the Atlantic and North Carolina Railroad
Company to the Atlantic and East Carolina Railway Company, as
amended by agreement entered into on the 1st day of July, 1943,
by the Atlantic and North Carolina Railroad Company and the
E-B-26
<PAGE>
Exhibit B to Lease Extension Agreement
Atlantic and East Carolina Railway Company, be further amended
so as to provide in part as follows:
(1) The term of the lease referred to in the pre-
amble to the amended lease, dated the 1st day of July, 1943,
and the amended lease, dated July 1, 1943, is hereby amended
by providing that the term of this lease may be extended at
the option of the lessee, upon notice in writing being given
to the lessor at least one year prior to the expiration of the
term provided for in the amended lease, for a term of years
to end on the 31st day of December, 1994. In the event of the
exercise of this option, the lessee covenants and agrees that
it will keep and maintain the said railroad, roadbed, super-
structure, depots, buildings, shops, engines, cars, fixtures,
and other property covered by this lease, in equally as good
condition and repair as the property will be at the time of
such renewal of this lease, less ordinary depreciation of the
demised property, and to return the same at the termination
of this lease in like condition and repair.
(2) The Atlantic and East Carolina Railway Company
further covenants and agrees with the Atlantic and North
Carolina Railroad Company, that, during the remaining term
of the original lease and any extensions or renewals thereof,
the present and existing divisions (except such divisions as
may not be subject to control of the Atlantic and East Carolina
Railway Company or its majority stockholder) of freight revenues
(or, in the case of increases or decreases in present and
existing rates, the present and existing ratio of total freight
revenues) accruing to the Atlantic and East Carolina Railway
Company from connecting carriers shall not be reduced but
shall remain in full force and effect, unless required by the
E-B-27
<PAGE>
Exhibit B to Lease Extension Agreement
Interstate Commerce Commission or other regulatory bodies
having jurisdiction, or unless, at the request of the
Atlantic and East Carolina Railway Company, a reduction in
said basis or percentage of divisions shall be proposed to
and approved by the Atlantic and North Carolina Railroad
Company, and, provided further, that, in the event the
Atlantic and North Carolina Railroad Company and the Atlantic
and East Carolina Railway Company are unable to agree on such
proposed reductions in basis or percentage of divisions of
such revenue, the same may be determined by the Utilities
Commission of the State of North Carolina, and shall there-
after be binding upon both of said railroads. It is further
agreed that the Atlantic and North Carolina Railroad Company
shall be duly notified of any contemplated changes in said
divisions of freight revenue and from time to time shall be
given opportunity to audit the records of the Atlantic and
East Carolina Railway Company with regard to said division
of freight revenue.
The Atlantic and East Carolina Railway Company,
under and by virtue of authority of a resolution adopted by
its Board of Directors, at a meeting duly called and held on
the 6th day of April, 1954, does hereby agree
to the amendments to the said lease and amended lease as
hereinbefore set forth and provided.
IN WITNESS WHEREOF, the Atlantic and North Carolina
Railroad Company, the lessor, has caused this agreement to be
signed in its name by its President, attested by its Secretary,
and its corporate seal hereto affixed, and the Atlantic and
East Carolina Railway Company, the lessee, has caused this
E-B-28
<PAGE>
Exhibit B to Lease Extension Agreement
agreement to be signed in its name by its President, attested
by its Secretary, and its corporate seal hereto affixed,
in duplicate.
ATLANTIC AND NORTH CAROLINA RAILROAD
COMPANY
By: \s\ M. G. Mann
President
Attest:
\s\ G. Paul LaRouqe
Secretary
ATLANTIC AND EAST CAROLINA RAILWAY
COMPANY
By: \s\ E. R. Buchan
President
Attest:
\s\ Patty C. Buchan
Secretary
E-B-29
<PAGE>
ATLANTIC AND EAST CAROLINA RAILWAY COMPANY
REGISTERED MAIL
RETURN RECEIPT REQUESTED
To Atlantic and North Carolina Railroad Company,
Raleigh, North Carolina.
You will please take notice that Atlantic and East Carolina Railway
Company elects to, and hereby does, extend the term of the lease between
Atlantic and North Carolina Railroad Company and Atlantic and East Carolina
Railway Company dated August 30, 1939, as amended by supplements dated July 1,
1943, January 1, 1951, and August 19, 1954, concerning lease of the railroad and
property of Atlantic and North Carolina Railroad Company, for a term of years to
begin upon the expiration of the term provided for in said lease, as amended,
and to end on the 31st day of December, 1994.
DATED at Washington, D.C., this 5th day of July, 1963.
ATLANTIC AND EAST CAROLINA RAILWAY
COMPANY,
By \s\ J. Rust
Vice President
The foregoing notice was received
and accepted on the 1st day of
August, 1963, by
ATLANTIC AND NORTH CAROLINA RAIL-
ROAD COMPANY,
By \s\ A. Moore, Jr.
President
STATE OF NORTH CAROLINA
County of WAKE
This 1st day of August, A.D., 1963, personally came before
me Clyde T. Hall, a Notary Public in and for the State and Coun-
ty aforesaid A. Moore, Jr., who, being by me duly sworn, says he
is President of the Atlantic and North Carolina Railroad Company, and that the
foregoing notice was received and accepted by him, as President of said corpora-
tion, on the date aforementioned.
WITNESS my hand and notarial seal this 1st day of August, 1963.
\s\ Clyde T. Hall
Notary Public
My commission expires
April 11, 1964
E-B-30
<PAGE>
EXHIBIT C
CURRENT NCRR NON-OPERATING PROPERTIES
All those pieces, parcels and strips of land shown in single hatch on Norfolk
Southern Drawing RA-94-0058 (45 sheets), dated August 17, 1994; Norfolk Southern
Drawing RA-95-0067, dated July 14, 1995; and Norfolk Southern Drawing RB-0076,
dated July 14, 1995; prints of said drawings having been furnished to North
Carolina Railroad Company and as may be corrected from time to time.
E-C-1
<PAGE>
APPENDIX B
FAIRNESS OPINION
OF
MORGAN STANLEY & CO. INCORPORATED
September 15, 1995
Board of Directors
North Carolina Railroad Company
234 Fayetteville Street Mall, Suite 600
Post Office Box 2248
Raleigh, North Carolina 27602
Gentlemen:
We understand that North Carolina Railroad Company ("NCRR" or the
"Company") and Norfolk Southern Railway Company or its affiliates ("NS") propose
to enter into a Lease Extension Agreement (the "Lease Agreement") which
provides, among other things, for (i) the lease of certain assets of the Company
for a period of 30 years in exchange for an annual payment over the term of the
lease of $8.0 million to the Company, subject to certain annual inflation
adjustments, (ii) a one-time cash payment of $5.0 million as settlement of
certain obligations of NS under the prior lease agreements for return of
property, (iii) the grant of an option to NS to extend the term of the Lease for
one additional 20 year term, at an exercise price based on an inflation
adjustment but subject to a maximum of $5.0 million. The terms and conditions of
the Lease are more fully set forth in the Lease Agreement.
You have asked for our opinion as to whether the consideration to be
received by the Company pursuant to the Lease Agreement is fair from a financial
point of view to the Company.
For purposes of the opinion set forth herein, we have:
<TABLE>
<C> <S>
(i) analyzed certain publicly available financial statements and other information of the Company;
(ii) discussed the past and current operations and financial condition and the prospects of the Company with certain
members of the Board of Directors and management of the Company;
(iii) reviewed the financial terms of certain comparable lease transactions, based upon information provided by NS and
its financial advisor and other information publicly available;
(iv) reviewed the financial terms, to the extent publicly available, of certain acquisition transactions;
(v) participated in discussions and negotiations among representatives of the Company, NS, and certain other parties,
and the Company's financial and legal advisors;
(vi) reviewed the existing lease agreements and the proposed Lease Agreement and certain other related documents;
(vii) discussed and reviewed with certain members of the Board of Directors and management of the Company various
alternatives to the proposed lease renewal transaction, including, without limitation, the independent management
of an operating railroad business by the Company, the sale or other divestiture of the Company, or lease of the
Company's assets to a party other than NS;
(viii) reviewed certain railroad traffic data and certain other related information concerning the Company and NS prepared
by consultants to the Company;
(ix) reviewed certain reports prepared by experts concerning the value of and potential return on the Company's assets
based upon certain Interstate Commerce Commission ("ICC") methodologies including the reproduction cost new less
depreciation methodology;
(x) participated in discussions with the management of the Company and the Company's legal counsel regarding certain
alternatives involving state or federal court litigation and ICC proceedings;
(xi) reviewed the prices and trading activity for the common stock of the Company;
(xii) compared the financial performance of the Company and the prices and trading activity of the common stock of the
Company with that of certain other comparable publicly-traded companies and their securities;
</TABLE>
B-1
<PAGE>
<PAGE>
<TABLE>
<C> <S>
(xiii) analyzed the pro forma impact of the Lease Agreement on the Company's earnings per share and dividend yield on the
Company's common stock; and
(xiv) performed such other analyses as we have deemed appropriate.
</TABLE>
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. We have not made any independent valuation or appraisal of the
assets or liabilities of the Company; however, we have reviewed the reports
referred to in paragraphs (viii) and (ix) above and have relied without
independent verification upon such reports for purposes of this opinion. Our
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
In arriving at our opinion, we, together with the assistance of the
Company, solicited the potential interest of certain likely prospective
purchasers engaged in the railroad business with respect to a transaction
involving the sale or lease of the assets of the Company. None of the potential
purchasers contacted, however, expressed an interest in pursuing such
transactions.
In preparing our opinion, we have relied upon and taken into account the
principal strategic objective of the Company, to maximize shareholder value by
maximizing distributable post-tax net income to the shareholders consistent with
minimizing the risks (i) that income will be disrupted and (ii) that the value
of the assets may be impaired. It is our understanding that the Company's
decision not to commence litigation in the courts or the ICC and not to
independently manage an operating railroad business was based principally upon
its determination that such alternatives to the Lease Agreement presented
unacceptable risks to achieving the objectives of the Company. Factors
considered by the Company in making the determination that the risks associated
with such alternatives were unacceptable included (i) the uncertainty of the
outcome and estimated expenses of litigation in the courts or the ICC and (ii)
the uncertainty regarding the volume of overhead traffic and associated revenues
that could be realized by, and other risks and expenses associated with,
initiating and maintaining an operating railroad business, including the fact
that the Company historically has not independently managed an operating
railroad business. Consequently, we have not considered such alternatives in
arriving at our opinion. We have also relied upon the stated intention of the
Company to make a Real Estate Investment Trust ("REIT") election for federal
income tax purposes for the year ending 1995 or 1996 and upon the advice and the
opinion of tax counsel to the Company regarding the ability of the Company to
qualify for such REIT election for federal income tax purposes.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services.
It is understood that this letter is for the information of the Company
only and may not be used for any other purpose without our prior written
consent. We hereby consent to reproduction of this opinion in full in any
filings to be made by the Company with the Securities and Exchange Commission
(the "SEC"), including in connection with the proxy statement to be filed with
the SEC and mailed to the shareholders of the Company.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the Company pursuant to the
Lease Agreement is fair from a financial point of view to the Company.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Nelson S. Walsh
NELSON S. WALSH
VICE PRESIDENT
B-2
<PAGE>
<PAGE>
APPENDIX C
OPINION OF PETREE STOCKTON, L.L.P.
November 13, 1995
Board of Directors
North Carolina Railroad Company
234 Fayetteville Street Mall, Suite 600
Post Office Box 2248
Raleigh, NC 27602
Re: Status as a Real Estate
Investment Trust ("REIT")
Gentlemen:
We have acted as tax counsel to the North Carolina Railroad Company
("NCRR") in connection with the proposed transactions described in the Proxy
Statement dated November 13, 1995, filed with the Securities and Exchange
Commission (the "Proxy Statement"). In connection therewith, you have requested
our opinion with respect to the qualification of the NCRR as a Real Estate
Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code") and the accuracy of the discussion included in the Proxy Statement
under the heading "REIT and Other Tax Matters." Unless otherwise specifically
defined in this letter, all capitalized terms have the meanings assigned to such
terms in the Proxy Statement.
We understand that our opinion will be filed as an Exhibit to the Proxy
Statement and will be referred to under the caption "REIT and Other Tax Matters"
in the Proxy Statement, which Proxy Statement will be delivered to the
shareholders of the NCRR, and we hereby consent to such use of our opinion. In
formulating our opinions, we reviewed the Charter of the NCRR and all amendments
thereto, the Bylaws of the NCRR, the Lease Extension Agreement, the Proxy
Statement and such other documents and information provided by you as was
relevant to the proposed transactions contemplated in the Proxy Statement.
In addition, you provided us with a certificate (the "Officer's
Certificate") executed by a duly appointed officer of the NCRR setting forth
certain representations that the NCRR will be operated in such a manner that it
will satisfy the requirements for qualification as a REIT under the Code.
For purposes of our opinions, we made no independent investigation of the
facts set forth in such documents, the Officer's Certificate, or the Proxy
Statement. Consequently, we relied on your representations that the information
presented in such documents, or otherwise furnished to us, accurately and
completely describes all material facts relevant to our opinions. No facts have
come to our attention, however, that would cause us to question the accuracy and
completeness of such facts, documents, or opinions in a material way.
In rendering these opinions, we assumed that transactions contemplated by
the foregoing documents will be consummated in accordance with the operative
documents, and that such documents accurately reflect the material facts of such
transactions. In addition, we assumed that the NCRR will be operated in the
manner described in the Proxy Statement and that the statements and descriptions
of the NCRR's businesses, properties, and intended activities as described in
the Proxy Statement are accurate. The opinions set forth herein are based upon
the relevant provisions of the Code, Treasury Regulations thereunder (including
Proposed and Temporary Regulations), and interpretations of the foregoing as
expressed in court decisions, administrative determinations, and legislative
history as of the date hereof. These provisions and interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. Of
course, a material change made after the date hereof in any of foregoing bases
of our opinions could affect our conclusions.
Based upon and subject to the foregoing, we are of the following opinions:
1. Commencing with the NCRR's taxable year ending December 31, 1995, or
1996, depending upon the resolution of the treatment of the $5 million
settlement payment as described in the Proxy Statement under the heading "REIT
and Other Tax Matters -- Requirements for Qualification -- Income Tests," and
assuming that the actions contemplated in the Proxy
C-1
<PAGE>
<PAGE>
Statement are completed in a timely fashion, the NCRR will be organized in
conformity with the requirements for qualification as a REIT under the Code, and
the NCRR's proposed methods of operation will permit it to so qualify for its
current and subsequent taxable years.
2. The discussion in the Proxy Statement under the heading "REIT and Other
Tax Matters" fairly summarizes the federal income tax considerations that are
likely to be material to a holder of Common Stock.
This opinion is given as of the date hereof. Any variation or difference in
the facts from those set forth in the Proxy Statement may affect the conclusions
stated herein. Further, the NCRR's qualification and taxation as a REIT depend
upon the NCRR's ability to meet -- through actual annual operating
results -- requirements under the Code regarding income, distributions and
diversity of stock ownership. Because the NCRR's satisfaction of these
requirements will depend upon future events, no assurance can be given that the
actual results of the NCRR's operation for any one taxable year will satisfy the
tests necessary to qualify as or be taxed as a REIT under the Code.
Other than as expressly stated above, we express no opinion on any issue
relating to the NCRR or to any investment therein.
Respectfully submitted,
PETREE STOCKTON, L.L.P.
C-2
<PAGE>
******************************************************************************
APPENDIX
<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
NORTH CAROLINA RAILROAD COMPANY
The undersigned shareholder of the North Carolina Railroad Company hereby
acknowledges receipt of the Notice of Annual Meeting of Shareholders and the
accompanying Proxy Statement and hereby constitutes and appoints John F. McNair
III; J. Melville Broughton, Jr.; and Chauncey W. Lever and each of them,
attorneys and proxies with full power of substitution, to act and vote the
shares of the undersigned at the Annual Meeting of Shareholders of the said
corporation to be held Friday, December 15, 1995, at 10:00 a.m. and at any
adjournment or adjournments thereof. The undersigned hereby directs this proxy
to be voted as follows:
1. Approving the Lease Extension Agreement described in the Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Electing P. C. Barwick, Jr. as a Director to serve for a three-year term;
<TABLE>
<S> <C>
[ ] FOR nominee listed above [ ] WITHHOLD AUTHORITY to vote for nominee listed above.
</TABLE>
3. Ratifying the selection of Ernst & Young as independent public accountants
for the year ended December 31, 1995.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion to vote upon any other business as may properly come
before the meeting or any adjournment or adjournments thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE>
[ ] Please check box if you intend to attend the Annual Meeting in person.
PLEASE COMPLETE, SIGN AND RETURN PROXY WHETHER OR NOT YOU INTEND TO ATTEND THE
MEETING.
Any proxy heretofore given by the undersigned is hereby revoked.
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. IN THE ABSENCE OF ANY DIRECTION
TO THE CONTRARY, THE
PROXYHOLDERS WILL VOTE THIS PROXY FOR THE ELECTION OF THE NOMINEE LISTED ABOVE
AS DIRECTOR, FOR APPROVAL OF THE OTHER MATTERS LISTED ABOVE, AND IN THEIR
DISCRETION WITH RESPECT TO ANY OTHER MATTERS WHICH PROPERLY COME BEFORE THE
MEETING. IF, AT OR BEFORE THE TIME OF THE MEETING, THE NOMINEE LISTED ABOVE HAS
BECOME
UNAVAILABLE FOR ANY REASON, THE PROXYHOLDERS HAVE THE DISCRETION TO VOTE FOR A
SUBSTITUTE NOMINEE.
Number of Shares
Date
Signature of Shareholder
IMPORTANT: Please sign your
name exactly as it appears
on your certificate. Please
add your full title to your
signature. Executors,
administrators, trustees,
and other fiduciaries should
so indicate when signing and
furnish proof of such
fiduciary capacity. All
persons signing on behalf of
corporations and/or
partnerships should so
indicate when signing.
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<C> <S>
NOTE: If you receive more than one
proxy, please date and sign each one
and return all proxies in the same
PLEASE RETURN THIS PROXY IN THE ENCLOSED ENVELOPE. envelope.
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