UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1995
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Act of 1934
For the transition period from __________ to __________
Commission file number 0-15768
NORTH CAROLINA RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-6003280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Fayetteville Street Mall, Suite 600
P. O. Box 2248, Raleigh, North Carolina 27602
(Address of principal executive offices) (Zip Code)
(919) 829-7355
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $.50 par Value--4,283,470 shares as of March 31, 1995.
The total number of pages contained in this document is 16 pages.
1
<PAGE>
INDEX
NORTH CAROLINA RAILROAD COMPANY
PART I. FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited)
Balance Sheets - June 30, 1995 and
December 31, 1994 . . . . . . . . . . . . . . . . . 3
Statements of Income - Three months ended June 30,
1995 and June 30, 1994 and six months ended
June 30, 1995 and June 30, 1994 . . . . . . . . . . 4
Statements of Shareholders' Equity -
Six months ended June 30, 1995
and June 30, 1994 . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows -
Six months ended June 30, 1995 and
June 30, 1994 . . . . . . . . . . . . . . . . . . . 6
Notes to financial statements -
June 30, 1995 . . . . . . . . . . . . . . . . . . . 7
Item 2. The Registrant's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 9
PART II. OTHER INFORMATION
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 12
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
BALANCE SHEETS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,523,133 $ 1,615,284
Short-term investments 457,000 -0-
Rent receivable 122,803 246,030
Interest receivable and other assets 67,054 65,400
------------ ------------
TOTAL CURRENT ASSETS 2,169,990 1,926,714
PROPERTIES
Roadway and land--Note B 7,848,842 7,848,842
Buildings and equipment 236,369 236,369
Less accumulated depreciation (295,977) (292,395)
------------ ------------
7,789,234 7,792,816
------------ ------------
OTHER ASSETS
Lease negotiation costs 497,202 365,267
------------ ------------
$ 10,456,426 $ 10,084,797
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payable $ 360,893 $ 421,026
Income taxes payable 180,000 -0-
Dividends payable -0- 128,504
Unearned rental income 40,661 -0-
------------ ------------
TOTAL CURRENT LIABILITIES 581,554 549,530
DEFERRED INCOME TAXES 1,219,651 1,214,451
SHAREHOLDERS' EQUITY
Common stock, par value $0.50 per share--
10,000,000 shares authorized, 4,283,470
shares issued and outstanding 2,141,735 2,141,735
Additional paid-in capital 3,588,455 3,588,455
Retained earnings 2,925,031 2,590,626
------------ ------------
8,655,221 8,320,816
------------ ------------
COMMITMENTS AND CONTINGENCIES--Note C
$ 10,456,426 $ 10,084,797
============ ============
</TABLE>
See notes to financial statements.
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STATEMENTS OF INCOME (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Lease of roadway and land $183,694 $160,794 $352,263 $321,497
Interest income 20,429 20,484 51,933 39,059
Rental income -0- 1,080 3,150 2,160
Gain on sale of real estate 473,956 -0- 473,956 -0-
Other 34,015 31,088 64,250 41,875
-------- -------- -------- --------
712,094 213,446 945,552 404,591
Expenses:
Salaries and administrative 56,394 68,789 117,500 130,268
Professional fees 53,390 44,213 169,618 133,288
Insurance and taxes 14,038 13,006 26,599 24,770
Depreciation 1,791 2,061 3,583 3,855
Consulting fees 8,271 2,369 22,922 4,530
Other 33,260 26,664 63,725 45,270
-------- -------- -------- --------
167,144 157,102 403,947 341,981
-------- -------- -------- --------
INCOME BEFORE INCOME 544,950 56,344 541,605 62,610
TAXES
Income taxes:
Current 202,000 5,830 202,000 5,830
Deferred 2,600 2,600 5,200 5,200
-------- -------- -------- --------
204,600 8,430 207,200 11,030
-------- -------- -------- --------
NET INCOME $340,350 $ 47,914 $334,405 $ 51,580
======== ======== ======== ========
Earnings per share: $ 0.08 $ 0.01 $ 0.08 $ 0.01
======== ======== ======== ========
See notes to financial statements.
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STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
</TABLE>
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Earnings Shareholders'
Stock Capital Restricted Unrestricted Equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $2,141,735 $3,588,455 $ 509,778 $2,102,207 $8,342,175
Net income 5,800 45,780 51,580
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1994 $2,141,735 $3,588,455 $ 515,578 $2,147,987 $8,393,755
========== ========== ========== ========== ==========
Balance at January 1, 1995 $2,141,735 $3,588,455 $ -0- $2,590,626 $8,320,816
Net income -0- 334,405 334,405
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1995 $2,141,735 $3,588,455 $ -0- $2,925,031 $8,655,221
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
5
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STATEMENTS OF CASH FLOWS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Six Months Ended
June 30
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 334,405 $ 51,580
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 5,200 5,200
Depreciation 3,583 3,855
Lease negotiations costs (131,935) -0-
Change in operating assets and liabilities:
Rent receivable 123,227 250,771
Interest receivable and other assets (1,654) 30,371
Accrued expenses and accounts payable (60,134) 14,944
Income taxes payable 180,000 -0-
Unearned rental income 40,661 40,671
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 493,353 397,392
INVESTING ACTIVITIES
Increase in restricted assets -0- (5,800)
Purchase of equipment -0- (1,487)
Purchase of short term investments (730,000) -0-
Maturities of short term investments 273,000 -0-
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (457,000) (7,287)
FINANCING ACTIVITIES
Dividends paid (128,504) -0-
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (128,504) -0-
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (92,151) 390,105
Cash and cash equivalents at beginning of period 1,615,284 912,655
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,523,133 $ 1,302,760
=========== ===========
</TABLE>
See notes to financial statements.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
June 30, 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position and results of operations of North
Carolina Railroad Company (the "Company" or "NCRR") as of and for each of the
periods presented. These financial statements should be read in conjunction with
the financial statements and notes included in the Company's audited financial
statements for 1994.
PROPERTIES: Buildings and equipment are reported at cost. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets. Buildings are depreciated over thirty years and equipment is depreciated
over three to five years.
Properties in the roadway and land account are carried at an amount which
approximates the 1916 valuation by the Interstate Commerce Commission. Virtually
all the property in the roadway and land account is leased either to the Norfolk
Southern Railway Company ("Norfolk Southern Railway") or the Atlantic and East
Carolina Railway Company ("AECR") (See Note B). Norfolk Southern Railway is a
subsidiary of Norfolk Southern Corporation. AECR is a subsidiary of Norfolk
Southern Railway. These properties are not depreciated because they represent
fully depreciated roadway or non-depreciable land.
REVENUE RECOGNITION: Revenue is reflected in the statements of income when
earned in accordance with the Company's lease arrangements on the accrual
method. Excess lease revenue related to the 1939 lease with AECR is estimated
and recognized based upon the previous quarter's billed traffic.
INCOME TAXES: Income tax expense is disproportionate to income before
income taxes because the lessee of certain of the properties, pursuant to the
terms of the 1895 Lease, pays all income taxes attributable to the lease
arrangement. The Company considers the lessee's share of the amortization of
roadway costs to be a permanent difference and no deferred taxes are provided
thereon.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include investments
due to mature within 90 days of the balance sheet date.
SHORT TERM INVESTMENTS: Short term investments include investments in high
quality commercial paper and U.S. Treasury bills with maturities within one year
of the balance sheet date.
LEASE/TRANSACTION COSTS: Certain lease negotiation costs have been
capitalized and will be amortized over the life of any lease extension
agreements, if consummated.
RESTRICTED RETAINED EARNINGS: Under terms of its lease agreement with AECR,
the Company had maintained a restricted cash account. All restrictions expired
on December 31, 1994, and the assets became the property of the Company.
Accordingly, these assets are no longer classified as restricted.
NOTE B--LEASES ON ROADWAY AND LAND
The Company leases its roadway and land under two leases to Norfolk
Southern Railway and one lease to AECR.
The first lease to Norfolk Southern Railway (the "1895 Lease") expired on
January 1, 1995, and provided for an annual lease rental of $286,000. Under the
terms of the lease, all income, property and franchise taxes are paid by the
lessee.
The Company leased additional roadway and land to AECR (the "1939 Lease")
under the terms of an original lease dated August 30, 1939 between Atlantic and
North Carolina Railroad
7
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NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
NORTH CAROLINA RAILROAD COMPANY
NOTE B--LEASES ON ROADWAY AND LAND (continued)
Company and AECR. The original lease was amended on August 29, 1954, and
provided for an expiration date of December 31, 1994. The lessee is responsible
for all state and federal taxes imposed upon the lessee on account of the
operation of the railroad. The lessor is responsible for certain ad valorem
property taxes, income taxes assessed against it, and payroll taxes on account
of its employees. Under the terms of this lease, AECR pays an annual fixed lease
rental of $60,500 plus annual excess lease rentals based upon operating revenues
in excess of $475,000. The Company and Norfolk Southern Railway have conducted
intensive negotiations over the terms of a definitive agreement to extend the
1895 and 1939 Leases. Thus far, the negotiations have not successfully produced
a definitive agreement satisfactory to the Company and Norfolk Southern Railway,
but negotiations are continuing.
The second lease to Norfolk Southern Railway expires on December 31, 2067,
and provides for an annual lease rental of $81,319 through December 31, 2017 for
certain properties in Charlotte, North Carolina. Beginning on January 1, 2018,
6% of the appraised value of the property will be the annual lease rental for
the remainder of the lease. Under the terms of the lease, all taxes connected
with the property, except income taxes, are paid by the lessee.
NOTE C--COMMITMENTS AND CONTINGENCIES
During the fourth quarter of 1989, the Company was notified by the North
Carolina Department of Environment, Health, and Natural Resources ("DEHNR") of a
possible abandoned pesticide disposal site on property owned by the Company in
Johnston County, North Carolina. It is believed that the site was used by a
predecessor owner to burn and/or bury surplus pesticides from the predecessor's
business, which was not located at the site. In January, 1994, DEHNR initiated a
lawsuit against the Company and other parties seeking reimbursement of $84,354
in response costs incurred by DEHNR and remediation of the site. On February 1,
1995, the Court granted partial summary judgment holding all of the defendants,
including the Company, jointly and severally liable for the site. The Court has
not yet ruled on apportionment of liability or cost sharing among the
defendants. According to a preliminary study conducted by the Company, the
estimated costs of remediation range between $500,000 to in excess of
$2,000,000. The Company will vigorously defend the action brought by DEHNR and
will aggressively pursue any other parties who may be liable for any
remediation, removal, or clean-up. The ultimate costs of any remediation,
removal, or clean-up are not known. However, if such costs are not paid by other
parties, the financial position of the Company would be materially adversely
affected.
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 Company. The complaints
name the directors of the Company as defendants and the Company as "nominal
defendant." Two of the actions seek to enjoin a purported lease between the
Company and Norfolk Southern Railway and seek to recover for the Company
unspecified damages and other relief from the directors. Two other actions seek
similar relief and also name the State of North Carolina, the Governor of North
Carolina, and Norfolk Southern Railway as defendants. The Company's officers and
directors are indemnified in the bylaws of the Company for certain claims and
liabilities alleged in the actions, including the defense costs and expenses.
The Company notified its directors and officers insurance carrier of claims as a
result of the actions, which claims have been acknowledged by the insurance
carrier. The directors and officers insurance policy has an aggregate limit of
$5,000,000 and a $75,000 retention per occurrence.
On December 10, 1991, the Registrant initiated a lawsuit in the Mecklenburg
County, North Carolina, Superior Court regarding its railroad corridor through
downtown Charlotte. The Registrant alleged that both the City of Charlotte and
Norfolk Southern Railway have breached contract obligations and obligations
based on real property rights to the Registrant. The litigation has been
disclosed by the Registrant in prior quarterly and annual reports to the
Securities and Exchange Commission. On December 7, 1993, the North Carolina
Court of Appeals ruled against the defendants' appeal and against the
Registrant's cross-appeal. Norfolk Southern Railway then petitioned the Supreme
Court of North Carolina to review the decision of the North Carolina Court of
Appeals, which petition was denied. Norfolk Southern Railway then petitioned the
United States Supreme Court for review. On June 12, 1995, the United States
Supreme Court denied the petition, and the lawsuit will continue in Superior
Court, Mecklenburg County, North Carolina.
8
<PAGE>
Item 2. The Registrant's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
A majority of the Registrant's assets are subject to two railroad operating
leases dating to 1895 and 1939. Information about the leases has been disclosed
by the Registrant in prior quarterly and annual reports to the Securities and
Exchange Commission. There was little change in liquidity, capital resources, or
asset position from the end of the fiscal year 1994 to June 30, 1995. The
Registrant's lessees pay for maintenance and all operating railroad equipment.
Therefore, the Registrant does not anticipate any need for substantial capital
expenditures unless the 1895 and 1939 Leases are not extended. The Registrant is
negotiating for extension of the leases. (See Note B to the financial
statements.) If the leases are not extended or if the Registrant is unable to
negotiate other leases upon acceptable terms, operating its own line without a
lessee would subject the Registrant to a number of risks that would materially
affect the Registrant's liquidity and capital resources. The Registrant
anticipates that it would have to incur substantial operating expenses over
time, but that it would initially not likely incur substantial capital
expenditures with respect to fixed plant. Under the terms of the 1895 Lease, the
lessee is required to return the leased properties, or equivalent replacements
of leased properties, including equipment, in as good a condition and repair as
the property was at the inception of the lease, less ordinary depreciation.
However, the Registrant may be required to incur substantial capital
expenditures and other expenses for the operation of the railroad line if the
equipment is not returned in operating condition upon termination of the leases
or if the quantities or type of the returned equipment is insufficient to
operate the railroad line. Risks of independent operation that would affect
operating income and expenses would include the potential for diversion of
overhead traffic by Norfolk Southern, loss of traffic to competitors, and
unpredictable maintenance and labor expenses.
The Registrant does not foresee any need for funds during 1995 which cannot
be met primarily from its income from leases or in part from available cash in
the regular course of business, except that (1) in the event the Registrant and
Norfolk Southern litigate issues before the Interstate Commerce Commission
("ICC"), claims under the 1895 and 1939 Leases, or other matters, the Registrant
may be required to finance part of the litigation expenses, and (2) if the
Registrant seeks qualification as a Real Estate Investment Trust ("REIT") for
income tax purposes, the Registrant may be required to finance a portion of
accumulated earnings and profits required to be distributed to the Registrant's
shareholders in the first year of REIT status.
For the first six months of 1995, $493,353 of net cash was provided by
operating activities and was printing related to net income of $334,405, a
decrease of rent receivable of $123,227, an increase in
9
<PAGE>
income taxes payable of $180,000 and an increase in unearned rental income of
$40,661, which were partially offset by capitalized lease negotiation costs of
$131,935 and decreased accrued expenses and accounts payable of $60,134.
Investing activities resulted in a net use of cash of $457,000 as $730,000
of short-term investments were purchased and $273,000 matured during the period.
Financing activities resulted in a net use of cash of $128,504 as dividends
were paid during the period.
Results of Operations
Results of operations for the period covered hereby reflect rental payments
to the Registrant pursuant to the terms of the 1895 Lease and 1939 Lease under a
temporary arrangement between the Registrant and the lessees which continues the
rental and other terms of the Leases. The Registrant is negotiating for an
extension of the Leases, the terms of which will take into account the
difference between the rental under the Leases and any increased rental.
Total revenues increased from $213,446 for the second quarter of 1994 as
compared to $712,094 for the second quarter of 1995, and increased from $404,591
for the six month period ended June 30, 1994 to $945,552 for the same period
ended June 30, 1995.
Revenues from leases of roadway and land increased from $160,794 for the
three month period ended June 30, 1994 to $183,694 for the same period ended
June 30, 1995 and increased from $321,497 for the six month period ended June
30, 1994 to $352,263 for the same period ended June 30, 1995. The slight
increases in revenues from leases of roadway and land were attributable to
estimated increases in excess rental revenues from the 1939 Lease. The 1939
Lease rental estimate is based upon AECR previous quarter's billed traffic, plus
or minus adjustment to actual revenues as the amounts are determined during the
year. AECR revenue estimates are furnished by Norfolk Southern Corporation. See
Note B to the financial statements.
Interest income decreased slightly from $20,484 for the three month period
ended June 30, 1994 to $20,429 for the same period ended June 30, 1995, and
increased from $39,059 for the six month period ended June 30, 1994 to $51,933
for the same period ended June 30, 1995. The increase in interest income is
attributable to an increase in levels of invested cash.
Gain on sale of real estate increased from $-0- for the three month period
ended June 30, 1994 to $473,956 for the same period ended June 30, 1995, and
increased by the same amount for the six month period ended June 30, 1994 as
compared to the same period ended June 30, 1995. The increase is attributable to
the sale of approximately 16 acres of land located in Johnston County, North
Carolina.
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Other income increased from $31,088 for the three month period ended June
30, 1994 to $34,015 for the same period ended June 30, 1995, and increased from
$41,875 for the six month period ended June 30, 1994 to $64,250 for the same
period ended June 30, 1995. The Registrant's other income is derived primarily
from proceeds of condemnations of the Registrant's properties.
Salary and administrative expenses decreased from $68,789 for the second
quarter of 1994 as compared to $56,394 for the second quarter of 1995, and
decreased from $130,268 for the six month period ended June 30, 1994 to $117,500
for the same period ended June 30, 1995. The decreases are attributable
primarily to reduced meeting fees and expenses.
Professional fees increased from $44,213 for the second quarter of 1994 to
$53,390 for the second quarter of 1995, and increased from $133,288 for the six
month period ended June 30, 1994 to $169,618 for the same period ended June 30,
1995. The increases in professional fees are attributable to increases in fees
and expenses associated with the Registrant's renegotiation of its leases with
Norfolk Southern Railway, attorneys' fees in litigation matters, and evaluation
of REIT qualification. The Registrant expects to continue to incur substantially
greater professional and investment banking fees and expenses in future periods
until resolution of matters related to current and future leases or other
transactions. The majority of such fees are currently being capitalized for
income tax purposes.
Insurance and taxes remained relatively constant at $13,006 for the second
quarter of 1994 as compared to $14,038 for the second quarter of 1995, and
$24,770 for the six month period ended June 30, 1994 as compared to $26,599 for
the same period ended June 30, 1995 . The Registrant expects to incur higher
property tax expense in future periods if any properties are excluded from a
lease extension agreement and separately managed by the Registrant.
Consulting fees increased from $2,369 for the second quarter of 1994 to
$8,271 for the second quarter of 1995, and increased from $4,530 for the six
month period ended June 30, 1994 to $22,922 for the same period ended June 30,
1995. The increases are attributable to increases in outside consultants' fees
associated with the termination of the 1895 and 1939 Leases and negotiations
with Norfolk Southern Railway. The Registrant expects to continue to incur
substantial consultants' fees and other expenses in future periods at least
until the resolution of all matters related to current and future leases or
other transactions.
Other expenses increased from $26,664 for the second quarter of 1994 to
$33,260 for the second quarter of 1995, and increased from $45,270 for the six
month period ended June 30, 1994 to $63,725 for the same period ended June 30,
1995. The increases in other expenses are attributable to increased office
furniture and supplies expense.
11
<PAGE>
Current income taxes increased from $5,830 for the second quarter of 1994
to $202,000 the second quarter of 1995, and increased by the same amounts for
the six month period ended June 30, 1994 as compared to the same period ended
June 30, 1995. The increases are attributable to gains on the sale of real
estate during the second quarter. Deferred income taxes also remained constant
at $2,600 for the second quarter of 1994 as compared to the second quarter of
1995 and remained constant at $5,200 for the six month period ended June 30,
1994 as compared to the same period ended June 30, 1995. Under the 1895 Lease,
all taxes attributable to the 1895 Lease, including income taxes, are paid by
Norfolk Southern Railway as lessee.
The Registrant and its lessees are responsible for compliance with state,
federal, local or other provisions relating to discharge of materials or the
protection of the environment. The risk of incurring environmental liability is
inherent in conducting railroad operations. Some of the commodities which are
transported over the Registrant's railroad lines are classified as hazardous
materials. The 1895 and 1939 Leases did not make provision for the lessees to
disclose environmental problems affecting the Registrant's properties.
Environmental problems may exist on properties owned by the Registrant which are
known to the lessees but have not been disclosed to the Registrant or which are
unknown to the lessee or the Registrant. State and federal environmental
provisions may impose joint and several liability upon the Registrant and its
lessees and sublessees for environmental damage or clean up (or associated
costs) of any real properties owned by the Registrant and adjoining properties
if the source of any problem is the property of the Registrant. The Registrant
believes that damage or clean up (or the associated costs) would be the
responsibility of the lessees and any sublessees or other parties who may have
created any actionable environmental condition. However, if such parties are not
able to meet their responsibilities, under certain statutes, regulations, and
rules, the Registrant could ultimately be held responsible for any remediation,
removal, or cleanup of the property it owns.
The status of one such site is disclosed in Item 3 "Legal Proceedings."
According to a preliminary study conducted by the Registrant, the estimated
costs of remediation range between $500,000 to in excess of $2,000,000. At this
time, the Registrant does not know the total amount of its financial exposure,
the timing of the resolution of the matter, or the extent to which the
Registrant's potential exposure may be reduced by contribution or
indemnification from other parties. The Registrant does not have insurance to
minimize its potential exposure. Legal expenses and the costs of remediation,
removal, or cleanup represent a possible substantial future drain on the
financial resources of the Registrant which cannot be quantified at this time.
Any future remediation, removal, or cleanup at the site should have no effect
upon railroad operations.
Inflation affects the Registrant primarily through increased
salary, administrative, property tax, and insurance expenses. The
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Registrant's primary sources of revenue, rental from the 1895 Lease and 1939
Lease, increase only to the extent changes in the general inflation rate
increase the excess rental payments under the 1939 Lease, which are based on a
percentage of the lessee's operating revenues. Revenues from the 1895 Lease do
not increase or decrease with changes in the inflation rate. The Registrant
expects to offset any negative effects of inflation not offset by increased
excess rental payments by controlling current expenses. The Registrant is also
seeking inflation protection provisions in connection with its negotiations for
a lease extension agreement.
PART II. OTHER INFORMATION
Item 3. Legal Proceedings
Except as described below, there are no legal proceedings pending to which
the Registrant is a party that are material to the operation of the Registrant.
Peele Site
During the fourth quarter of 1989, the Registrant was notified by the North
Carolina Department of Environment, Health, and Natural Resources ("DEHNR") that
DEHNR had been notified of a possible abandoned pesticide disposal site on
property owned by the Registrant in Johnston County, North Carolina. Information
about the site has been disclosed by the Registrant in prior quarterly and
annual reports to the Securities and Exchange Commission. Since 1991, the site
had been included in the DEHNR Inactive Hazardous Waste Sites Priority List. The
sites on the Priority List are ranked in decreasing order of danger to the
public health and environment based on a ranking system administered by DEHNR.
In February 1995, the site ranked 98 out of a total of 158 sites on the Priority
List.
In January, 1994, DEHNR initiated a lawsuit against the Registrant and
other parties seeking reimbursement of $84,354 in response costs incurred by
DEHNR and remediation of the site. On February 1, 1995, the Court granted
partial summary judgement holding all of the defendants, including the
Registrant, jointly and severally liable. The Court has not yet ruled on
apportionment of liability or cost sharing among the defendants. According to a
preliminary study conducted by the Registrant, the estimated costs of
remediation range between $500,000 to in excess of $2,000,000. The Registrant
will vigorously defend the action by DEHNR, and will aggressively pursue any
other parties who may be liable for any remediation, removal, or clean-up. The
ultimate costs of any remediation, removal, or clean-up are not known. However,
if such costs are not paid by other parties, the financial position of the
Registrant would be materially adversely affected.
13
<PAGE>
Charlotte Convention Center Litigation
On December 10, 1991, the Registrant initiated a lawsuit in the Mecklenburg
County, North Carolina, Superior Court regarding its railroad corridor through
downtown Charlotte. The Registrant alleged that both the City of Charlotte and
Norfolk Southern Railway have breached contract obligations and obligations
based on real property rights to the Registrant. The litigation has been
disclosed by the Registrant in prior quarterly and annual reports to the
Securities and Exchange Commission.
On December 7, 1993, the North Carolina Court of Appeals ruled against the
defendants' appeal and against the Registrant's crossappeal. Norfolk Southern
Railway then petitioned the Supreme Court of North Carolina to review the
decision of the North Carolina Court of Appeals, which petition was denied.
Norfolk Southern Railway then petitioned the United States Supreme Court for
review. On June 12, 1995, the United States Supreme Court denied the petition,
and the lawsuit will continue in Superior Court, Mecklenburg County, North
Carolina.
Shareholder Litigation
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 Registrant. The complaints
name the directors of the Registrant as defendants and the Registrant 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-F(2) seek to
enjoin a purported lease between the Registrant and Norfolk Southern Railway and
to recover for the Registrant 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-F(1) and Taran v. North Carolina
Railroad Co., et al. ("Taran"), Civil Action No. 5:95-CV-17-F(1), seek similar
relief and also name the State of North Carolina, the Governor of North
Carolina, and Norfolk Southern Railway as defendants. On March 30, 1995, the
court consolidated the actions into one proceeding. The Registrant, along with
the co-defendants, have filed motions to dismiss the actions. The court has not
yet ruled on the motions.
The Kahn and Norberg actions allege misconduct by the directors of the
Registrant, 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 Railway
producing a below-market lease rental rate, and assert that the State of North
Carolina has condemned the Registrant's properties for public uses for the
benefit of the State. The Registrant will oppose the actions brought by the
plaintiffs to the extent the actions seek to enjoin any lease arrangement or
seek recovery against the Registrant or seek any remedy against the best
14
<PAGE>
interests of Registrant 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.
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 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 amounts unless it is ultimately
determined that he is entitled to be indemnified by the corporation against such
expenses. The Directors of the NCRR have executed such undertaking and 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 a 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 of the
foregoing conditions will occur.
The Registrant also notified its general liability insurance carrier of
claims as a result of the shareholder actions, which claims were denied.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH CAROLINA RAILROAD COMPANY
DATE: November 9, 1995 /s/ John F. McNair III
---------------------- -------------------------------
John F. McNair III
President
DATE: November 9, 1995 /s/ Lynn T. McConnell
---------------------- -------------------------------
Lynn T. McConnell, Treasurer and
Principal Financial Officer
16
<PAGE>
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