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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
North Carolina Railroad Company Common Stock ($.50 par value)
(Title of class)
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
------- -------
The total number of pages contained in this document is 57
pages.
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the Registrant is $24,604,220 (based on last
average bid price of $23.25 per share of Registrant's Common
Stock on March 18, 1996).
The number of shares outstanding of each of the Registrant's
classes of Common Stock, as of March 18, 1996, is as follows:
Outstanding as of
Class March 18, 1996
Common Stock (par value $.50) 4,283,470
Documents Incorporated by Reference. None.
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TABLE OF CONTENTS
ITEM Page
Part 1 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . .4
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 14
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 15
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . 18
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . . . . . . 20
6. Selected Financial Data . . . . . . . . . . . . . . . . . 21
7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . 22
8. Financial Statements and Supplementary Data . . . . . . . 28
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . 29
Part III 10. Directors and Executive Officers of the
Registrant. . . . . . . . . . . . . . . . . . . . . . . 29
11. Executive Compensation. . . . . . . . . . . . . . . . . . 32
12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . 34
13. Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . . . . . . . 37
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 37
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
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PART I
Item 1. Business
General
The North Carolina Railroad Company (the "Registrant") was
incorporated in 1849 in the State of North Carolina. The
Registrant owns approximately 317 miles of continuous railroad
line running from Charlotte, North Carolina to Morehead City,
North Carolina. The Registrant has one office located at 234
Fayetteville Street Mall, Raleigh, North Carolina (27602) and
three full time employees.
Background of Railroad Leases
The Registrant conducted railroad operations beginning in
1856. In 1871, the Registrant leased substantially all of its
assets to the Richmond & Danville Railroad Company, a predecessor
of Southern Railway Company, for a term of thirty years. In
1895, the Registrant leased substantially all of its assets to
Southern Railway Company, now known as Norfolk Southern Railway
Company ("NSR"), for ninety-nine years (the "1895 Lease"). In
1989, the Registrant acquired the Atlantic and North Carolina
Railroad Company, the assets of which were subject to a lease
dating to 1939 with the Atlantic & East Carolina Railway Company
("AECR"), a wholly-owned subsidiary of Norfolk Southern Railway
Company (the "1939 Lease"). NSR and AECR are hereinafter
referred to as "Norfolk Southern." Information about the 1895
and 1939 Leases has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange
Commission ("Commission").
The terms of the 1895 Lease and 1939 Lease provided for
expiration on January 1, 1995 and December 31, 1994,
respectively, and did not require either the Registrant or
Norfolk Southern to renew the leases. However, Norfolk
Southern's operation of the Registrant's railroad line may not be
discontinued unless discontinuance is authorized by the Surface
Transportation Board of the United States Department of
Transportation ("STB"), the successor agency to the Interstate
Commerce Commission ("ICC"). Neither the Registrant nor Norfolk
Southern have sought regulatory authority for discontinuance of
service by Norfolk Southern (see "Regulatory Matters," below),
and Norfolk Southern is continuing to operate the Registrant's
railroad line under the circumstances described below.
During the fourth quarter of 1994, the Registrant and
Norfolk Southern reached tentative agreement on the primary terms
of a long term agreement to extend the 1895 and 1939 Leases.
However, a definitive agreement had not been reached as of the
expiration dates of the 1895 and 1939 Leases at the end of 1994,
and the Registrant and Norfolk Southern entered into a temporary
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arrangement to continue the rental and other terms of the 1895
and 1939 Leases beginning in 1995. During 1995, Norfolk Southern
continued to make rental payments under the terms of the 1895 and
1939 Leases.
Lease Extension Agreement
On August 10, 1995, the Board of Directors of the
Registrant approved a Lease Extension Agreement in the form
attached as an exhibit hereto (the "Lease Extension"). The Lease
Extension extends the terms of the 1895 Lease and the 1939 Lease,
and its effectiveness is retroactive to January 1, 1995. On
August 24, 1995, the Board of Directors of NSR and the Board of
Directors of AECR approved the Lease Extension.
Conditions to effectiveness of the Lease Extension were as
follows: (i) approval or exemption from approval from the ICC or
any successor entity, (ii) obtaining all required governmental
and corporate approvals and (iii) the expiration or termination
of any existing court-ordered injunctions. The Board of
Directors of the Registrant, pursuant to North Carolina law,
voted to condition approval of the Lease Extension upon a
majority of the votes cast at the meeting in person or by proxy
held by shareholders other than the State of North Carolina. In
a decision effective December 22, 1995, the ICC exempted the
Lease Extension from the prior approval requirements of the
Interstate Commerce Act. On December 22, 1995, the Governor and
Council of State of the State of North Carolina approved the
Lease Extension Agreement pursuant to North Carolina law. On
December 15, 1995, the shareholders of the Registrant voted to
approve the Lease Extension. However, a shareholder has
commenced a legal action challenging the validity of shareholder
approval. See Item 4, Submission of Matters to Vote of Security
Holders, regarding shareholder approval of the Lease Extension.
Other shareholder derivative litigation seeking to enjoin the
Lease Extension is also pending. See Item 3, Legal Proceedings,
for a description of the actions.
The Lease Extension, which has been executed by the
Registrant and Norfolk Southern, is being held in escrow by a
third party pursuant to an escrow agreement. The escrow
agreement provides for the Escrow Agent to retain the original
execution copies of the Lease Extension until the Escrow Agent
receives satisfactory evidence that either (i) all remaining
approvals of the Lease Extension have been received, or (ii) the
remaining approvals cannot be obtained. If neither of these
events occurs by March 31, 1997, the escrow agreement makes
provision for further disposition or destruction of the original
execution copies of the Lease Extension. As a result of the
shareholder action challenging the validity of shareholder
approval, neither the Registrant nor Norfolk Southern has made
demand to the Escrow Agent to release the Lease Extension
documents, and the Registrant has not indicated to Norfolk
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Southern that it considers the Lease Extension to be effective.
Notwithstanding Norfolk Southern's knowledge of the
shareholder derivative actions challenging approval of the Lease
Extension and the Registrant's failure to confirm the
effectiveness of the Lease Extension, on December 28, 1995
Norfolk Southern paid the Registrant approximately $7.8 million,
which, along with other amounts paid by Norfolk Southern in 1995,
is the amount that would have been owed to the Registrant under
the terms of the Lease Extension had the Lease Extension become
retroactively effective as of January 1, 1995. During 1996 to
date, Norfolk Southern has continued to make monthly payments to
the Registrant in amounts that would be due if the Lease
Extension is effective. The Registrant has not returned such
payments to Norfolk Southern, but has not indicated to Norfolk
Southern that the Lease Extension is effective. If the December
15, 1995 approval by the shareholders of the Registrant of the
Lease Extension is determined to be invalid, it is the intention
of the Registrant to retain any payments made by Norfolk Southern
to the Registrant as payment for use of the assets of the
Registrant since the beginning of 1995 or for other claims the
Registrant may have under the 1895 and 1939 Leases. The
Registrant may also seek payment of additional amounts for use of
the Registrant's assets by Norfolk Southern and other claims.
The Registrant does not know what position Norfolk Southern would
take with respect to payments made to the Registrant, but Norfolk
Southern's position could include a claim against the Registrant
seeking recovery of such payments from the Registrant. In such
event, the Registrant intends both to aggressively defend any
legal action Norfolk Southern may bring and to assert other
claims of the Registrant against Norfolk Southern. See
"Alternatives to Lease Extension" below regarding alternatives in
the event shareholder approval of the Lease Extension is
invalidated or if the Lease Extension is enjoined.
The Lease Extension provides for Norfolk Southern to make a
one-time settlement payment of $5 million, plus interest, to the
Registrant in exchange for the Registrant's release of Norfolk
Southern from certain contractual obligations relating to certain
personal property upon expiration of the 1895 Lease and 1939 Lease. The
Registrant and Norfolk Southern entered into an agreement dated August 10,
1995, whereby the settlement payment was made in early December
1995 in order to facilitate the Registrant seeking Real Estate
Investment Trust ("REIT") status at the earliest practicable
date. The Registrant is seeking a ruling from the Internal
Revenue Service as to the effect of the payment with respect to
the timing of the Registrant's REIT election, but the Registrant
has not yet received such ruling. The Lease Extension does not
waive or otherwise affect any claims of the Registrant to
railroad yards or other such property or facilities, but provides
that such claims are postponed until the termination of the Lease
Extension and any renewal pursuant to its terms.
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Set forth below is a summary of some of the material terms
of the Lease Extension, which summary should be read in
conjunction with the complete terms of the Lease Extension.
(1) The base annual rental under the Lease Extension is
eight million dollars ($8,000,000) for the period from
January 1, 1995 through December 31, 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 Registrant 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 Norfolk Southern, the
Registrant expects to recognize the renewal fee ratably over
the 20-year lease renewal term.
(4) 317 miles of railroad property (including the railroad
right of way and certain improvements to 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.
The Registrant has the right, however, to have certain
properties outside the right of way not used in
operating a railroad released from the 1895 and 1939
Leases. Norfolk Southern's rental payments will not be
reduced if the Registrant exercises this right. The
Registrant 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 Registrant estimates these properties
currently are producing less than $100,000 of annual
lease income. The Registrant will determine which
properties it will seek to have released after
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evaluating potential environmental liability and other
relevant factors.
(5) Norfolk Southern is required to pay to the Registrant
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.
(6) The Lease Extension contains extensive provisions
governing the rights and obligations of the parties for
various environmental liabilities and expenses.
(7) 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 Registrant from certain liability claims
by third parties.
Except as modified or supplemented by the Lease Extension,
the terms of the 1895 and 1939 Leases continue in full force and
effect.
Norfolk Southern beneficially owns 113,855 shares of the
common stock of the Registrant, which represents an ownership
interest of 2.7% of the Registrant.
Real Estate Investment Trust Election
On August 10, 1995, the Board of Directors of the Registrant
voted to cause the Registrant to elect REIT status for income tax
purposes, in connection with the Lease Extension. If the
Registrant 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 its shareholders. The REIT provisions of the
Internal Revenue Code ("I.R.C.") generally allow a REIT to deduct
distributions paid to its stockholders. The Registrant received
an opinion of counsel that the Registrant can qualify as a REIT
based upon the effectiveness and terms of the Lease Extension.
However, the Registrant is seeking a ruling from the Internal
Revenue Service ("I.R.S.") as to the effect of the $5 million
one-time settlement payment with respect to the timing of the
Registrant's REIT election, but the Registrant has not yet
received such ruling. In addition, certain shareholder
litigation could enjoin, delay, or otherwise affect the
effectiveness of the Lease Extension, the terms of the Lease
Extension, or the timing or amount of shareholder distributions.
In that event, the litigation may delay or even cause the
Registrant to be unable to qualify for REIT status, which would
substantially decrease the after-tax net income available for
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distribution to shareholders of the Registrant. See Item 3,
Legal Proceedings, for a description of the shareholder
litigation.
In order to be taxed as a REIT, the Registrant is required
to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (a) the sum of
(i) 95% of the Registrant's "REIT taxable income" (computed
without regard to the dividends-paid deduction and the
Registrant'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 Registrant 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 Registrant satisfies the foregoing distribution requirements,
to the extent that the Registrant 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 Registrant would be subject to a 4%
excise tax on the excess of such required distribution over the
amounts actually distributed. Under certain circumstances, the
Registrant may be able to rectify a failure to meet the
distribution requirements for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included
in the Registrant's deduction for dividends paid for the earlier
year. Thus, the Registrant may be able to avoid being taxed on
amounts distributed as deficiency dividends. The Registrant
will, however, be required to pay interest based upon the amount
of any deduction taken for deficiency dividends.
Due to the uncertainty over the effectiveness of the Lease
Extension caused by the shareholder derivative actions
challenging the validity of shareholder approval of the Lease
Extension, the Registrant has determined to delay a decision as
to whether to elect REIT status for its 1995 taxable year until
the earlier of the date the uncertainty has been resolved or the
latest date by which the Registrant may make an election to be
taxed as a REIT for 1995. The Registrant believes it may be able
to qualify for 1995. If the Lease Extension is invalidated, the
Registrant does not know whether its income, if any, for 1996 and
later years will qualify the Registrant for REIT status for
taxable years after 1995. The I.R.C. provides that if a
taxpayer's REIT election is terminated by its failure to satisfy
the qualification requirements, the taxpayer may not make a new
election to be taxed as a REIT prior to the fifth taxable year
after disqualification, unless the taxpayer fits within certain
narrow exceptions. Distributions to shareholders in any year in
which the Registrant fails to qualify as a REIT will not be
deductible by the Registrant nor will they be required to be
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made. Accordingly, the Registrant will evaluate the tax benefits
to be gained by electing REIT tax status for 1995 compared to the
possible detriment to the Registrant if the Registrant is
disqualified from REIT tax status for four subsequent taxable
years. The provisions of the I.R.C. and related regulations
governing the federal income tax treatment of REIT's are highly
technical and complex. There can be no assurance that the
Registrant can qualify for REIT status for 1995 or later years.
(See Note B to the financial statements regarding pro forma
information in the event the Registrant qualifies for REIT status
for 1995.)
To ensure that the decision about electing REIT tax status
for 1995 is made with the most reliable information available
under the circumstances, the Registrant has filed applications
for an extension of the time to file its tax returns for tax year
1995 until September 15, 1996. On or before that date, the
Registrant will evaluate all relevant factors in determining
whether to make a REIT election for its 1995 taxable year. Such
factors will include, for example, the status of the shareholder
derivative actions, any discussions with Norfolk Southern about
the Lease Extension, alternatives to the Lease Extension, advice
from the Registrant's professional advisers about the feasibility
of qualifying for REIT tax status if the Lease Extension does not
become effective, and the tax consequences of the Registrant
electing REIT status for 1995, but failing to qualify as a REIT
for 1996, 1997 or later years.
If the Registrant makes a REIT election for its 1995 taxable
year, by delaying certain distributions of 1995 income past
January 31, 1996, the Registrant would incur a Federal excise tax
liability of approximately $315,000 for 1995. If the Registrant
does not elect REIT tax status for 1995, the Registrant would
incur an additional 1995 income tax liability of approximately $3
million, in addition to income tax liability of approximately $2
million attributable primarily to taxes on the $5 million
property settlement payment. Under the original terms of the 1895
Lease, which pursuant to a temporary arrangement between the
Registrant and Norfolk Southern are applicable to Norfolk
Southern's continued operation after the end of 1994, all taxes,
including income taxes of the Registrant attributable to the
Lease, were the responsibility of Norfolk Southern as lessee. It
is unclear at this time, however, how such a temporary
arrangement would be interpreted by the courts with respect to
tax liability reimbursement.
Alternatives to the Lease Extension Agreement
In light of the uncertainty about the status of the Lease
Extension and the need to make an informed decision regarding
electing REIT tax status for 1995 and later years, the Registrant
is evaluating its strategic goals and the alternatives available
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to achieve such goals. Alternatives under consideration by the
Registrant include resubmitting the Lease Extension for approval
by the shareholders of the Registrant, seeking to negotiate with
Norfolk Southern terms more favorable to the Registrant than
those afforded by the Lease Extension submitted to the
shareholders in December 1995, litigation against Norfolk
Southern, leasing all or part of its properties to one or more
independent railroad operators, or operating all or part of its
properties as an independent railroad. Prior to approval of the
Lease Extension, the Registrant evaluated many of the foregoing
alternatives. For example, the Registrant and its financial
advisors attempted to interest alternative lessees/operators in
its railroad properties. Such efforts did not produce a
satisfactory alternative to the Lease Extension.
The Registrant has not determined whether to pursue any of
these alternatives, but depending upon future circumstances the
Registrant may decide to pursue one or more or a combination of
such alternatives. The Registrant also may solicit shareholders
opinions about these or other alternatives. Over the past
several years, certain shareholders have met with representatives
of the State of North Carolina ("State") to discuss a sale or
reorganization of the Registrant and the Registrant has been
advised by the State that a buy-out or reorganization is being
evaluated along with other options, but the Registrant is not
aware of the seriousness of such discussions or whether the State
will decide to pursue such a transaction. Although certain State
officials have 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. The Registrant 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 for such a transaction.
Under the Lease Extension discussed above, Norfolk Southern
would continue to assume maintenance, capital improvement, and
common carrier obligations with respect to the leased properties,
as is the case under the 1895 and 1939 Leases. The Registrant
has been advised by its ICC/STB counsel that it may have a
residual common carrier duty if Norfolk Southern were to
discontinue railroad service. If the Registrant were to operate
the railroad lines itself, the Registrant anticipates that it
would have to incur substantial capital expenditures. See Item
7, Registrant's Discussion and Analysis of Financial Condition
and Results of Operation, below.
If the Registrant operates its railroad lines, it would not
be eligible to seek qualification as a REIT for income tax
purposes, but instead would be treated as an operating railroad
for income tax purposes, in which event ordinary corporate income
tax treatment would apply to the Registrant. See "Real Estate
Investment Trust Election" above regarding a failure of the
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Registrant to qualify for REIT status for 1995 or later years.
It is possible that Norfolk Southern would seek to
discontinue its responsibility as a common carrier to operate all
or part of the Registrant's lines and/or to re-route certain
railroad traffic that does not either originate or terminate on
the Registrant's lines (known as "overhead traffic") to other
Norfolk Southern controlled lines. The Registrant does not have
complete or reliable information about the overhead traffic
because Norfolk Southern refused to disclose overhead traffic
data to the Registrant, but the Registrant believes that a
substantial majority of the traffic on its lines is overhead
traffic according to analyses of ICC carload waybill sample
information for 1994 and prior years. A portion of the property
leased by the Registrant, the segment between Greensboro, North
Carolina and Charlotte, North Carolina, forms part of a major
system route for Norfolk Southern.
The Registrant believes the volume and type of overhead
traffic diverted by Norfolk Southern would be the most
significant factor in determining the revenues of the Registrant
or any other operator of the Registrant's railroad lines. Many
of the factors affecting routing of overhead traffic would be
beyond the control of the Registrant. Other factors that would
likely affect the profitability of operating the railroad include
whether the operator would lose traffic to trucking companies or
other competitors, the percentage of revenues required for
operation (railway operating ratio), the revenues the operator
would receive for traffic moving to and from connecting
railroads, including Norfolk Southern, and revenues and expenses
associated with operations of National Rail Passenger Corporation
("Amtrak"), which operations are governed in part by federal law.
Other Leases
Under a lease dated December 31, 1968 (the "1968 Lease"),
the Registrant and Norfolk Southern renegotiated a portion of the
1895 Lease. Three parcels of land located in Charlotte, North
Carolina were released from the 1895 Lease and became subject to
the 1968 Lease. This lease expires on December 31, 2067, and
provides for an annual rental of $81,319 until 2018, when the
rent becomes six percent (6%) annually of the current value of
the leased land as determined by the parties.
In 1862, the Registrant entered into an agreement with the
Chatham Railroad Company ("Chatham"), a predecessor of CSX Transportation
Inc. ("CSXT"), for parallel construction and operation of a
railroad track by Chatham within the Registrant's right of way
between Raleigh and Cary, North Carolina, a distance of approximately
eight miles (hereinafter referred to as the "1862 agreement"). The 1862
agreement made no provision for rental to be paid to the
Registrant by Chatham. CSXT succeeded to the interests of
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Chatham and the railroad track and facilities subject to the
agreement are currently operated by CSXT as a part of its branch
line between Henderson and Hamlet, North Carolina. The
Registrant is currently negotiating with CSXT for renewal and
modification of the 1862 agreement.
In addition to the leases and agreements described above,
the Registrant leases several small parcels of property producing
approximately $700 of lease revenues monthly.
Regulatory Matters
Railroads and other transportation companies are subject to
state and federal regulations administered by agencies such as
the STB (successor agency to the ICC), United States Department
of Transportation ("DOT"), Federal Railroad Administration, state
departments of transportation and state utilities commissions.
During the past thirteen years, regulatory agencies have
exhibited a trend toward less regulation of transportation
industries. Effective January 1, 1996, under the ICC Termination
Act of 1995 ("ICCTA"), federal jurisdiction over the economic
regulation of railroads was modified and transferred by Congress
to the STB, a department within DOT. The ICCTA also gave the STB
exclusive jurisdiction over the economic regulation of railroads
and preempted remedies under state law. The Registrant is
evaluating the effect of the ICCTA upon the Registrant, including
the extent to which the prior law was retained, modified, or
repealed.
Railroads are affected not only by the regulation of the
railroad industry, but by regulation of other modes of
transportation, which can change the cost structures of
competitive modes of transportation. For example, proposals to
have regulations changed to increase the size and weight limits
of certain trucks are submitted to Congress from time to time.
If permitted, such increases could have a material adverse effect
upon railroads by decreasing the cost of shipping goods by truck.
The Registrant monitors the regulation of railroads and competing
modes of transportation on a regular basis, primarily through
railroad industry publications.
Other Matters - Environmental
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. 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
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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. The Lease
Extension contains extensive provisions governing the rights and
obligations of the parties for various environmental liabilities
and expenses. If the Lease Extension is invalidated or enjoined,
the Registrant may determine it is in its interest to initiate
substantial environmental assessments of its properties and
commence environmental litigation against Norfolk Southern and
its sublessees or other parties who may have created or who are
responsible for any actionable environmental conditions. If such
parties are not able to meet their responsibilities, under
certain statutes, regulations, and rules, the Registrant could
ultimately be held responsible. See Item 7, Legal Proceedings,
regarding the Peele site environmental matter.
Item 2. Properties
The principal asset of the Registrant is 317 miles of
railroad property, averaging less than 200 feet in width, between
Morehead City, North Carolina, and Charlotte, North Carolina.
Some of the property is owned in fee, and the majority of the
road extends over rights of way and perpetual easements purchased
or granted in the 19th century. The line extends from Morehead
City in an arc across North Carolina westward through New Bern,
Kinston, Goldsboro, Selma, Raleigh, Research Triangle Park
(unincorporated), Durham, Mebane, Burlington, Greensboro, High
Point, Lexington, Salisbury, Kannapolis, and Charlotte. The
route between Greensboro and Charlotte is a primary line of
Norfolk Southern's north-south freight route between Washington,
D.C. and Atlanta, Georgia. The Registrant's line intersects CSXT
railroad lines at Selma, Goldsboro, Raleigh, Durham, and
Charlotte, North Carolina.
The Registrant's tracks on the Greensboro to Charlotte
segment have been upgraded since original construction so that
today the track is laid with 132-lb. continuous welded rail with
alternating double and single track. Speeds of up to 79 miles
per hour may be maintained over substantial portions of the line,
and centralized traffic control exists for the entire stretch.
On the Greensboro to Goldsboro segment, the line is constructed
with both welded and jointed rail of varying weights. No signal
system is in use on this segment. Speeds of up to 50 miles per
hour (higher for passenger trains) may be maintained over
substantial portions of this segment. The road segment from
Goldsboro to Morehead City is unsignalled, single-trackage with
continuous welded and jointed rail of 85- to 132-lb. weight.
Several short segments of the line are operated jointly with
railroads other than the Registrant's lessees. The Registrant's
line between New Bern and Morehead City currently provides
Norfolk Southern's only access to the port at Morehead City. At
14
<PAGE>
the current time, Amtrak operates passenger trains on the
Registrant's railroad line between Selma and Charlotte, North
Carolina.
The Registrant also owns approximately 208 acres of land
divided into 24 parcels (non-operating property) that mostly
adjoin its rail corridor. Among these parcels are the three in
Mecklenburg County which are located in the downtown Charlotte
business district and subject to the 1968 Lease with Norfolk
Southern. Some of the properties have improvements, the
ownership of which depends on the terms of the arrangements with
the sublessees of the properties. Pursuant to the Lease
Extension, the Registrant has the right to have certain
properties outside the right of way not used in operating a
railroad released to the Registrant from the Lease Extension.
Norfolk Southern's rental payments will not be reduced if the
Registrant exercises this right. The Registrant 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 Registrant estimates these
properties currently are producing less than $100,000 of annual
lease income. The Registrant will determine which properties it
will seek to have released to it after evaluating potential
environmental liability and other relevant factors.
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 1996, the site ranked 122 out
of a total of 183 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
15
<PAGE>
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 could be materially
adversely affected.
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. Information about the actions
has been disclosed in prior quarterly and annual reports to the
Securities and Exchange Commission. On March 30, 1995, the court
consolidated the actions into one proceeding. The Registrant,
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 voted on the Lease Extension, and
granted a motion by the plaintiffs for leave to supplement their
pleadings. On February 26, 1996, the court again stayed the
proceeding until after the court rules on whether a quorum of
private shareholders was present at the December 15, 1995
shareholder meeting of the Registrant.
On December 21, 1995, a shareholder derivative legal action
was filed in Federal District Court in the Eastern District of
North Carolina, Rucker v. North Carolina Railroad Company, et
al., Case No. 5-95-CV-1054-BO(2). The action seeks to enjoin the
Lease Extension or invalidate the December 15, 1995 shareholders
meeting held to approve the Lease Extension on the basis of a
lack of a quorum of shareholders other than the State of North
Carolina, and makes other allegations against the defendants,
including alleged proxy rule violations. The court has not
enjoined the Lease Extension. The bylaws of the Registrant
provide that, in order to constitute a quorum for a shareholders'
meeting, a majority of the shares of stock of the Registrant held
by shareholders other than the State of North Carolina, must be
represented, in person or by proxy, at the meeting. The
plaintiff also sought a temporary restraining order seeking
permission to review the proxy records of the shareholder
meeting, which access was granted by the court. On February 26,
1996 the court granted a motion by the Registrant to accelerate
discovery on the issue whether a quorum of private shareholders
was present at the December 15, 1995 shareholder meeting, and
16
<PAGE>
stayed discovery with respect to all other issues. See Item 1,
Business, regarding the possible effects of the shareholder
litigation on the Registrant's ability to qualify for REIT
status, and Item 4, Submission of Matters to a Vote of Security
Holders regarding the shareholder meeting. The Registrant is
considering bringing a counterclaim or separate legal action
against certain shareholders of the Registrant for proxy rules
violations.
The Registrant is defending the aspects of the shareholder
suits relating to the shareholder meeting, the effectiveness of
the Lease Extension, and attempts to enjoin the Lease Extension.
The directors and officers named as defendants in the suits,
represented by separate counsel, are defending damage claims
brought against the directors and officers. The bylaws of the
Registrant provide that its directors and officers shall have the
right to be indemnified by the Registrant, to the fullest extent
permitted by law, against liabilities and expenses arising out of
their status as Directors. To the extent the directors' and
officers' 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 Registrant in connection with the shareholder
derivative actions described herein. 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 interests of
Registrant or its shareholders.
Under the NCBCA, a corporation is permitted to indemnify a
director or officer 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
or officer 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
or officer if the director or officer is adjudged liable to the
corporation. In addition, a corporation may not indemnify a
director or officer if the director or officer 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 or officer 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 or officer 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
17
<PAGE>
director or officer to repay such amounts unless it is ultimately
determined that he is entitled to be indemnified by the
corporation against such expenses. The directors and officers of
the Registrant who have executed such undertaking are receiving
advances for expenses incurred in defending the actions brought
against them in connection with the Lease Extension.
Additionally, the NCBCA provides that a corporation may purchase
and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against or incurred by
him in that capacity or arising from his status as a director or
officer. The Registrant has an insurance policy that covers the
Registrant against the indemnification liability of the
Registrant to its directors and officers. The policy has a
aggregate limit of $5 million and a $75,000 retention per
occurrence. The Registrant's liability exposure to its directors
and officers will, therefore, not be material, unless (i) the
directors or officers satisfy the requirements for being
indemnified as described above and (ii) the indemnified
liabilities and expenses exceed the Registrant's insurance
coverage. The Registrant is unable to determine this early in
the legal proceedings whether either of the foregoing conditions
will occur.
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
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 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
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. The Registrant is engaging
in negotiations to settle the litigation, but there can be no
assurance of any settlement or the terms of any such settlement.
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant's annual meeting of shareholders was held on
December 15, 1995. The bylaws of the Registrant provide that a
majority of the outstanding shares of the Registrant entitled to
vote, represented in person or by proxy, constitutes a quorum at
18
<PAGE>
a meeting of shareholders, provided, that a majority of the
shares held by shareholders other than the State of North
Carolina (the "private" shares) are represented at the meeting,
in person or by proxy. At the meeting, the Registrant submitted
the Lease Extension to the shareholders of the Registrant for
approval pursuant to North Carolina law. See Item 3, Legal
Proceedings, regarding shareholder litigation over whether a
quorum of shareholders was present at the shareholder meeting.
In connection with shareholder litigation challenging the quorum,
and the tabulation by the Registrant's stock transfer agent, the
Registrant retained a professional inspector of elections to
audit the tabulation of the number of shares present at the
meeting in person or by proxy and the votes cast at the meeting
by shareholders other than the State of North Carolina. The
tables below reflect the final quorum tabulation and voting
results.
Pursuant to the charter of the Registrant, the State of
North Carolina elects a total of ten directors and the remaining
shareholders elect a total of five directors. Directors are
elected to three-year staggered terms.
(a) Quorum ("private" shares)
Number of "Private" Shares required to be represented: 538,149
Number of "Private" Shares represented: 539,169
The quorum margin, according to the Registrant's audited
tabulation described above, is 1,020 shares. The plaintiff in
the quorum litigation has challenged proxy votes exceeding 30,000
shares. Until a final determination is made by the court, there
can be no assurance that the Registrant's tabulations are legally
valid. The Registrant cannot predict if or when a final
determination will be made by the court or when any appeals of
any court ruling may be exhausted.
(b) Votes Cast
Abstain/ Broker
For Against Withheld Non Votes
--------- --------- -------- ----------
1. Approval of the
Lease Extension
Agreement
By the "Private" 374,453 30,451 2,555* 131,460
Shareholders:
By the State of 3,207,173
North Carolina:
(*) an additional 250 shares were represented at the
meeting in person and not voted.
19
<PAGE>
2. Election of Directors
By the "Private" Shareholders:
P. C. Barwick, Jr. 516,947 -0- 21,972
By the State of North Carolina:
Marvin D. Gentry 3,207,173 -0- -0-
Robert W. Griffin 3,207,173 -0- -0-
William H. Kincheloe 3,207,173 -0- -0-
John S. Russell 3,207,173 -0- -0-
3. Appointment of Independent
Public Accountants
Ratification of the Selection
of Ernst & Young LLP 3,729,346 11,728 6,018
PART II
Item 5. Market for Registrant's Common Equity and Related Stock-
holder Matters
(a) Market Information
Common shares of the Registrant are currently traded in the
over-the-counter market. Quarterly high and low bids are as
follows for fiscal years 1994 and 1995:
1995 1994
Low High Low High
1st 1st
24 1/4 26 35 35
2nd 2nd
25 1/2 30 1/2 37 1/2 40 1/2
3rd 3rd
26 35 36 39
4th 4th
25 30 24 3/4 38
These over-the-counter market quotations reflect interdealer
prices, without retail markup, markdown or commission, and may
not necessarily represent market transactions.
(b) Holders
There were approximately 752 holders of common shares of the
Registrant of record as of March 4, 1996.
20
<PAGE>
(c) Dividends
In 1995, no dividends were declared. In 1994 and 1993, the
Registrant declared regular cash dividends of $.03 per share, or
$128,504. The amount and timing of future dividends will depend
upon the requirements for shareholder distributions if the
Registrant elects REIT status for income tax purposes, the
shareholder litigation, and the future profitability of the
Registrant. See Item 3, Legal Proceedings, regarding certain
shareholder litigation seeking to enjoin the Lease Extension.
The Registrant expects to continue to have substantial
uncertainty with respect to the shareholder litigation and the
effect of the litigation upon the Registrant's qualification for
REIT status for 1995 and future periods. See "Real Estate
Investment Trust Election" under Item 1, Business, above,
regarding the relationship between tax matters and dividend
policy, and Note C to the financial statements.
Item 6. Selected Financial Data
The following selected financial data are derived from the
financial statements of the Registrant. The data should be read
in conjunction with the financial statements, related notes and
other financial information included herein.
Selected Financial Data
At December 31 or For the Year Ended December 31
----------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Gross revenue.. $15,132,553 $ 851,074 $ 777,770 $ 773,400 $ 790,150
Lease revenue of
roadway and land 8,134,656(a) 674,277 642,817 631,048 601,352
Net income (loss) 8,864,922 107,145 (54,027)(b) 43,847 341,408
Net income (loss)
per share ..... 2.07 .03 (0.01) .01 .08
Deferred income
taxes.... 1,209,851 1,214,451 1,241,451 1,117,549 1,177,549
Total assets 24,480,264 10,084,797 9,639,966 9,803,679 9,906,346
Cash dividends
declared per
common share.... -0- .03 .03 .03 .03
(a) Includes payment of $7.8 million from Norfolk
Southern. See Item 7, Management's Discussion and
Analysis, below.
(b) Net income for 1993 before cumulative effect of
accounting change was $86,875. See Note D to the
financial statements.
21
<PAGE>
Item 7. The Registrant's Discussion and Analysis of Financial
Condition and Results of Operations
Overview and Background
A majority of the Registrant's assets were subject to two
railroad operating leases dating to 1895 and 1939, which by their
terms provided for expiration at the end of 1994. Information
about the leases has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange
Commission.
During the fourth quarter of 1994, the Registrant and
Norfolk Southern reached tentative agreement on the primary terms
of a long term agreement to extend the 1895 and 1939 Leases.
However, a definitive agreement had not been reached as of the
expiration dates of the 1895 and 1939 Leases at the end of 1994,
and the Registrant and Norfolk Southern entered into a temporary
arrangement to continue the rental and other terms of the 1895
and 1939 Leases beginning in 1995. During 1995, Norfolk Southern
continued to make rental payments under the terms of the 1895 and
1939 Leases.
On August 10, 1995, the Board of Directors of the Registrant
approved a Lease Extension with Norfolk Southern. The Lease
Extension would extend the terms of the 1895 Lease and the 1939 Lease,
and the effectiveness of the Lease Extension is retroactive to
January 1, 1995. On August 24, 1995, the Board of Directors of
NSR and the Board of Directors of AECR approved the Lease
Extension. For a discussion of the Lease Extension and
conditions to its effectiveness, see Item 1, Business.
Liquidity and Capital Resources
Pursuant to the Lease Extension, 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 Lease Extension is
deemed not to have been approved by the shareholders at the
December 15, 1995 shareholder meeting. See Item 3, Legal
Proceedings, regarding litigation seeking to enjoin the Lease
Extension and challenging the validity of shareholder approval.
If shareholder approval of the Lease Extension is deemed
invalid and the Lease Extension is not approved by the
shareholders at a future shareholder meeting, and 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
22
<PAGE>
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. Pursuant to a
separate agreement for the payment of $5.2 million (including
interest) by Norfolk Southern on December 1, 1995 in settlement
of certain personal property and equipment claims, the settlement
payment is not required to be returned to Norfolk Southern in the
event the Lease Extension is invalidated or enjoined. Pursuant
to the agreement, the payment is to be credited against any sums
or rentals ultimately determined to be due to the Registrant from
Norfolk Southern. Therefore, in such event, the Registrant's
claims for certain personal property and equipment or other
claims would be offset by the payment amount. See Item 1,
Business, for a discussion of risks of independent operation by
the Registrant.
Notwithstanding Norfolk Southern's knowledge of the
shareholder derivative actions challenging approval of the Lease
Extension and the Registrant's failure to confirm the
effectiveness of the Lease Extension, on December 28, 1995
Norfolk Southern paid the Registrant approximately $7.8 million,
which is the amount that would have been owed to the Registrant
under the terms of the Lease Extension had the Lease Extension
become retroactively effective as of January 1, 1995. During
1996 to date, Norfolk Southern has continued to make payments to
the Registrant in amounts that would be due if the Lease
Extension is effective, approximately $680,000 monthly. There
can be no assurance, however, that Norfolk Southern will continue
to make such payments. Nonetheless, the Registrant does not
foresee any need for funds during 1996 which cannot be met
primarily from available cash. However, see Item 1, Business,
for a discussion of the status of the Lease Extension and
payments by Norfolk Southern. In the event shareholder approval
of the Lease Extension is deemed invalid, if the Registrant and
Norfolk Southern litigate lease compensation or abandonment
issues before the STB, claims under the 1895 and 1939 Leases, or
other matters, the Registrant may be required to finance part of
the litigation expenses.
In order to qualify as a REIT for federal income tax
purposes, the Registrant is required to make distributions to its
stockholders of at least 95% of REIT taxable income, which will
limit the Registrant's ability to accumulate working capital.
The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of
operating expenses. The Company intends to invest amounts
23
<PAGE>
accumulated for distribution in short-term investments.
The Registrant's liquidity (cash and short-term investments)
improved from $1,615,284 at December 31, 1994 to $15,329,497 at
December 31, 1995. Short-term investments in high quality
commercial paper and U. S. Treasury Bills of $190,000 are
classified as held-to-maturity, and will mature within the first
six months of 1996. The Registrant's cash and cash equivalents
increased by $13,524,213 from December 31, 1994 to $15,139,497 at
December 31, 1995.
For the year ended December 31, 1995, $13,847,817 of net
cash was provided by operating activities and was primarily
related to net income of $8,864,922, an increase in accrued
expenses and accounts payable of $433,372, income taxes payable
of $5,230,277, and unearned rental income of $246,030, which were
partially offset by capitalized lease negotiation costs of
$1,037,044.
Investing activities resulted in a net use of cash of
$195,100 as $1,643,000 of short-term investments were purchased
and $1,453,000 matured during 1995. Property of $5,100 was also
purchased during the year.
Financing activities resulted in a net use of cash of
$128,504 representing dividends which were paid during 1995.
Results of Operations
Results of operations for the period covered hereby reflect
payments to the Registrant from Norfolk Southern. Payments
through December, 1995 were received pursuant to the terms of the
1895 Lease and 1939 Lease under a temporary arrangement between
the Registrant and the lessees which continued the rental and
other terms of the Leases. In December, 1995, Norfolk Southern
made payments in the amounts called for in the Lease Extension
for additional 1995 rental. See Item 1, Business, for a
description of the Lease Extension, and Item 3, Legal
Proceedings, regarding shareholder litigation to enjoin the Lease
Extension or invalidate shareholder approval of the Lease
Extension.
Total revenues increased to $15,132,553 for 1995 as compared
to $851,074 for 1994 and $777,770 for 1993. The increases were
attributable primarily to increases in rental revenue from leases
of roadway and land and the settlement payment of approximately
$5.2 million (including interest). Increases in rental revenue
from leases of roadway and land are attributable to payments
received from Norfolk Southern. Revenues generated by the
1895 and 1939 Leases from 1991 to 1994 and by additional
payments in 1995 are shown in the following chart:
24
<PAGE>
Revenue from Leases of Roadway and Land
----------------------------------------
Year % Change from
End Lease Income Total Prior Year
- ---- --------------------- ----------- --------------
1991 1895 Lease $ 286,000
1939 Lease 234,033
1968 Lease 81,319 $ 601,352 22.7%
1992 1895 Lease 286,000
1939 Lease 263,729
1968 Lease 81,319 631,048 4.9%
1993 1895 Lease 286,000
1939 Lease 275,498
1968 Lease 81,319 642,817 1.9%
1994 1895 Lease 286,000
1939 Lease 306,958
1968 Lease 81,319 674,277 4.9%
1995 Norfolk 8,000,000
Southern Payments
1968 Lease 81,319
Other* 53,337 8,134,656 1106.4%
* Additional rental under the 1939 Lease for the
period 1991-1994 as a result of an audit performed
during 1995 by the Registrant of rentals paid by AECR.
Interest income increased from $87,837 for 1993 to $94,361
for 1994 and $601,556 for 1995. The increase for 1994 was
attributable to increases in yields on invested cash. The
increase for 1995 was primarily attributable to increases in
average levels of invested cash and interest paid by Norfolk
Southern. Dividend income decreased from $25,000 for 1993 to
$12,500 for 1994 and $7,500 for 1995. For 1993, 1994, and 1995,
dividend income was attributable to special dividends received
from common stock of the State University Railroad Company. A
portion of the Registrant's holdings in the State University
Railroad Company was disposed of during the first quarter of 1995
in order to promote the Registrant's ability to qualify for REIT
status.
Rental income decreased from $9,720 for 1993 to $3,960 for
1994 and increased to $9,540 for 1995. The Registrant's rental
income is derived from miscellaneous leases of the Registrant's
properties.
Gains on sale of real estate increased from $12,396 for 1993
to $65,976 for 1994 and $688,055 for 1995. Gains on sale of real
estate and other income are derived primarily from sales and
condemnations of the Registrant's property. During 1995, the
Registrant sold approximately 16 acres of land in Johnston
County, North Carolina, recognizing a gain of $473,956,
recognized gains of approximately $180,027 from condemnations or
forced sales, and recognized a gain of $30,000 from the sale of
25
<PAGE>
stock of the State University Railroad Company.
Other lease income represents the settlement of a claim for
a lump sum tax benefit payment which was due upon the expiration
of the 1895 Lease from Norfolk Southern pursuant to a 1982 tax
benefit agreement between the Registrant and Norfolk Southern.
Under the terms of the settlement agreement, the Registrant
received a lump sum payment in the amount of $691,246. Norfolk
Southern has agreed to reimburse the Registrant for any income
taxes owed by the Registrant on the lump sum payment, and
accordingly the Registrant has not provided for income taxes
related to the receipt of the settlement.
On December 1, 1995, Norfolk Southern made a one-time
payment of $5 million, plus interest of approximately $200,000,
to the Registrant pursuant to the Lease Extension in exchange for
the Registrant's release of Norfolk Southern from its obligation
to return certain personal property upon expiration of the 1895
Lease and 1939 Lease. The Registrant and Norfolk Southern
entered into an agreement whereby the settlement payment was made
in early December 1995 in order to facilitate the Registrant
seeking REIT status at the earliest practicable date. In the
event the Lease Extension is deemed not to have been approved by
the shareholders, the Registrant is entitled to retain the
payment and interest for application against any future rental or
other amounts due from Norfolk Southern.
Salary and administrative expenses increased from $229,274
for 1993 to $268,029 for 1994 and $273,563 for 1995. The 17%
increase from 1993 to 1994 and the 2% increase from 1994 to 1995
are primarily attributable to the addition of administrative
staff and increases in employee benefits and compensation, which
were partially offset by decreases in directors' fees and
expenses.
For 1995, professional fees paid by the Registrant increased
to $414,740 as compared to $288,749 for 1994 and $160,221 for
1993. Professional fees relate to attorneys' and accountants'
fees paid for various filing and reporting requirements, certain
litigation and other general items. The increase for 1995, as
compared to 1993 and 1994, was attributable to higher
professional fees associated with the Registrant's preparation
for termination of its leases, negotiations with Norfolk
Southern, evaluation of REIT qualification, and litigation fees.
Insurance and taxes increased slightly to $59,100 for 1995
as compared to $57,766 for 1994 and $51,475 for 1993. The
Registrant expects to incur higher property tax expense in future
periods to the extent properties are excluded from the Lease
Extension for separate management by the Registrant.
The majority of investment banking fees and other fees
associated with the Lease Extension are currently being
capitalized for financial reporting and income tax purposes and
26
<PAGE>
will be amortized over the 30-year term of the Lease Extension.
Amortization expense of $46,743 related to capitalized lease
negotiations costs was recognized for 1995.
Consulting fees decreased from $146,197 in 1993 to $43,809
in 1994 and increased to $80,742 in 1995. The fluctuations in
consulting fees are attributable to the number and magnitude of
projects, primarily in connection with the Lease Extension
negotiations, in process during each year. Consulting fees over
the three-year period are related primarily to railroad valuation
and traffic studies.
The Registrant expects to continue to incur substantial
consultants' fees/expenses, investment banking fees, attorneys'
and accountants' fees and related expenses in future periods
until litigation and matters related to the Lease Extension are
resolved.
Other expenses include supplies, utilities, postage, office
rent, printing, and miscellaneous items and remained relatively
constant at $100,801 for 1993, $94,599 for 1994 and $106,579 for
1995.
Net income tax expense was $5,279,000 for 1995 as compared
to net income tax benefits of $17,000 for 1994 and $4,000 for
1993. The increase in income tax expense for 1995 is
attributable to the increase in income before income taxes of
$14,053,777. The income tax benefits for 1994 and 1993 are
attributable to capitalized lease negotiation costs and
reorganization costs for income tax purposes, most of which have
been expensed for financial reporting purposes. Under the 1895
Lease, all taxes, including income taxes attributable to the
lease, were the responsibility of Norfolk Southern as lessee.
Under the Lease Extension, all income taxes become the
responsibility of the Registrant as of January 1, 1995. The 1995
income tax provision does not take into account the Registrant's
possible REIT election for 1995 or Norfolk Southern's potential
liability for the Registrant's taxes should the Lease Extension
not be effective. (See Note B and Note D to the financial
statements.)
Inflation affects the Registrant primarily through increased
salary, administrative, property tax, and insurance expenses.
The Registrant's primary sources of revenue prior to 1995, rental
from the 1895 Lease and 1939 Lease, increased only to the extent
changes in the general inflation rate increase the excess rental
payments under the 1939 Lease. The Lease Extension contains an
inflation adjustment provision (See Item 1 above). The
Registrant expects to offset any negative effects of inflation
not offset by increased rental payments by controlling current
expenses.
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
27
<PAGE>
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. The Lease
Extension contains extensive provisions governing the rights and
obligations of the parties for various environmental liabilities
and expenses. If the Lease Extension is invalidated or enjoined,
the Registrant may determine that it is in its interest to
initiate substantial environmental assessments of its properties
and commence environmental litigation against Norfolk Southern
and its sublessees or other parties who may have created or who
are responsible for any actionable environmental conditions.
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
Lease Extension does not affect the responsibility of the
Registrant with respect to the Peele Site.
The status of the Peele 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.
Item 8. Financial Statements and Supplementary Data
The Registrant's financial statements are submitted as a
separate section of this report.
28
<PAGE>
Item 9. Changes in and Disagreements with Accountants in
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The persons listed below are directors of the Registrant.
Pursuant to Article III, Section 2 of the Bylaws of the
Registrant, each director shall hold office for a three-year term
until his death, resignation, retirement, removal, disqualifica-
tion or until his successor shall have been elected and
qualified. Except as described above, there are no arrangements
or understandings between any director and any other person
pursuant to which he was selected as a director. Pursuant to the
charter of the Registrant, the State of North Carolina elects ten
directors and the remaining shareholders elect five directors.
At the 1995 annual meeting, five directors were elected.
Period of Term
Name Age Offices Held Service Expires
*John McKnitt Alexander, Jr. 46 Director 7/93 to 1997
Present
Assist. 1985 to
Sec./Treas. 1990
Secretary 12/95 to
present
P. C. Barwick, Jr. (1) 58 Director 9/90 to 1998
Present
Secretary 9/89 to
12/95
J. Melville Broughton, Jr. 74 Director and 7/86 to 1996
Vice Pres. Present
Sidney R. French 68 Director 9/89 to 1997
Present
*Marvin D. Gentry (1) 61 Director 7/93 to 1998
Present
Alexander H. Graham, Jr. 77 Director 9/90 to 1997
Present
*Robert W. Griffin(1) 44 Director 12/95 to 1998
present
29
<PAGE>
*M. Rex Harris 61 Director 7/93 to 1997
Present
*William H. Kincheloe (1) 58 Director 7/87 to 1998
Present
Chauncey W. Lever 70 Director 9/87 to 1996
Present
Assist. 7/95 to
Sec./Treas. present
*Lynn T. McConnell 40 Director and 7/93 to 1996
Treasurer Present
*John F. McNair III 68 Director and 7/93 to 1996
President Present
*Jack A. Moody 68 Director 7/93 to 1996
Present
*John S. Russell (1) 41 Director 7/93 to 1998
Present
*David T. Woodard 47 Director 7/93 to 1997
Present
* Elected by the State of North Carolina
(1) Elected at the 1995 Annual Meeting
The persons listed below are officers of the Registrant.
Pursuant to Article II, Section 2 of the Bylaws of the
Registrant, each officer shall hold office until his death,
resignation, retirement, removal, disqualification, or his
successor is elected and qualified. Except as described above,
there are no arrangements between any officer and any other
person pursuant to which the officer was selected as an officer.
Officers are elected by the directors. Only directors elected by
shares held by shareholders other than the State of North
Carolina are entitled to vote for and elect a Vice President and
an Assistant Secretary-Treasurer.
Period of
Name Age Offices Held Service
John F. McNair III 68 President 7/93 to
Present
J. Melville Broughton, Jr. 74 Vice President 1988 to
Present
John McKnitt Alexander, Jr. 46 Secretary 12/95 to
Present
30
<PAGE>
Lynn T. McConnell 40 Treasurer 7/93 to
Present
Chauncey W. Lever 70 Assistant 7/95 to
Sec./Treas. Present
Scott M. Saylor 36 Exec. V.P./ 8/89 to
General Counsel Present
The business experience during the past five (5) years of
each member of the Board of Directors and each executive officer
of the Registrant is summarized below.
John McKnitt Alexander, Jr. - President & Chief Operating
Officer, Cardinal International Trucks, a heavy truck
dealership, 1968 to present. Secretary/Treasurer, Raleigh
Truck Rentals, 1976 to present. Vice-President, Alexander
Realty Company, 1980 to present. Director, First Citizens
BancShares, Inc., from 1990 to present.
P. C. Barwick, Jr. - Attorney at Law, Principal, Wallace,
Morris, Barwick & Rochelle, P.A. (law firm), Kinston, North
Carolina (1986-present). 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.
J. Melville Broughton, Jr. - Attorney at Law, Broughton,
Wilkins & Webb, P.A., Raleigh, North Carolina, 1974 to
1995. No outside directorships.
Sidney R. French - Self-employed farmer, Cove City, North
Carolina. No outside directorships.
Marvin D. Gentry - President, the New Fortis Corporation, a
residential building company, King, North Carolina, 1970 to
present. Director, Old North State Bank, King, North
Carolina.
Alexander H. Graham, Jr. - Attorney at Law, of Counsel, law
firm of Newsom, Graham, Hedrick, Kennon & Cheek, Durham,
North Carolina, joined the firm in 1946. Director of Rocky
Mount Mills, Rocky Mount, N.C. from 1965 to present.
Robert W. Griffin - Attorney at Law, Griffin & Griffin,
Kinston, North Carolina, from 1977 to present.
M. Rex Harris - Chief Executive Officer, International and
Domestic Development Corp., 1976 to present. Director,
United National Bank.
31
<PAGE>
William H. Kincheloe - President of Bulluck Furniture, Inc.
retailer of furniture, and President of Wildwood Lamps &
Accents, Inc., Rocky Mount, North Carolina, a manufacturer
of lamps. Director, Centura Banks, Inc., Rocky Mount, North
Carolina, from 1990 to present.
Chauncey W. Lever - President of Chauncey Lever &
Associates, Greensboro, North Carolina, management
consultants, 1987 to present. No outside directorships.
Lynn T. McConnell - Vice-President and Transaction Manager,
Nationsbanc Capital Markets, Inc., Charlotte, North
Carolina, 1989 to present. No outside directorships.
John F. McNair III - President and Chief Executive
Officer, Wachovia Bank of North Carolina, a commercial bank,
1985-1990. Director, Piedmont Natural Gas Co.
Jack A. Moody - Attorney at Law, 1955-1990. Director,
Centura Bank of North Carolina, Rocky Mount, North Carolina.
John S. Russell - Member, law firm of Moore & Van Allen,
PLLC, Raleigh, North Carolina; 1985-present. No outside
directorships.
Scott M. Saylor - Executive Vice-President and General
Counsel, North Carolina Railroad Company, 1989 to present.
No outside directorships.
David T. Woodard - General Agent, Union Central Life
Insurance Co., Raleigh, North Carolina, 1978 to present.
Chairman and Director, Hamlet Federal Credit Union, Hamlet,
North Carolina.
Section 16(a) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), requires that the Registrant's
directors and executive officers, and persons who own more than
ten percent (10%) of registered class of the Registrant'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 Registrant. Officers, directors and
greater than ten-percent beneficial owners are required by
Commission regulations to furnish the Registrant with copies of
all reports they file under Section 16(a). For the fiscal year
ended December 31, 1995, John S. Russell, director, filed a late
report for one acquisition transaction.
Item 11. Executive Compensation
The following table and narrative text discuss the
compensation paid during 1995 and the two prior fiscal years to
the Registrant's President and Chief Executive Officer. No
executive officer of the Registrant had an annual salary of and
bonuses in excess of $100,000 during 1995.
32
<PAGE>
Summary Compensation Table
Long Term
Annual Compensation Compensation
- -------------------------------------------------------------------------------
Name and Other Annual
Principal Position Year Salary Bonus Compensation
(1)
- -------------------------------------------------------------------------------
John F. McNair III 1995 $12,000 $-0- $-0- None.
President and
Chief Executive 1994 12,000 -0- -0-
Officer
1993 5,799* -0- -0-
*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.
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 1995 and none were either granted or
exercised during 1995. The Registrant has no stock option plans
or stock appreciation rights plans. The Registrant 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 Registrant 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.
Directors 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
Company, has no employment contract with the Registrant.
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 Company.
33
<PAGE>
The Committee consists of the following four members of the Board
of Directors of the Registrant: Lynn McConnell, Chauncey Lever,
Rex Harris, and John Russell.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
(a) Security Ownership of Certain Beneficial Owners
Of the 10,000,000 shares authorized to be issued, 4,283,470
shares are currently outstanding. The following table sets forth
as of March 18, 1996, the parties known to the Registrant to be
beneficial owners of more than five percent of the Registrant's
voting securities:
Title of Name & Address of Amount & Nature of Percent
Class Beneficial Owner Beneficial Ownership of class
Common State of North 3,207,173 shares, 74.82%
Shares Carolina c/o owned directly*
Governor James
B. Hunt,
The State Capitol, Raleigh, NC 27611
* 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 and has disclaimed beneficial
ownership of such shares. 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.
Chapter 1046 of the 1951 Session Laws of the General
Assembly of North Carolina states "no stock owned by the State of
North Carolina in the North Carolina Railroad Company shall be
sold except with the prior consent of the General Assembly."
During July, 1991, the North Carolina General Assembly enacted
legislation which created a Railroad Advisory Commission. On
June 30, 1995, statutory authorization of the Railroad Advisory
Commission terminated. Information about the Railroad Advisory
Commission has been disclosed in prior quarterly and annual
reports to the Securities and Exchange Commission.
Over the past several years, certain shareholders have met
with representatives of the State of North Carolina ("State") to
discuss a sale or reorganization of the Registrant and the
Registrant has been advised by the State that a buy-out or
reorganization is being evaluated along with other options, but
the Registrant is not aware of the seriousness of such
discussions or whether the State will decide to pursue such a
34
<PAGE>
transaction. Although certain State officials have 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. The Registrant 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 for
such a transaction.
(b) Security Ownership of Management
The following table sets forth as of March 18, 1996, the
shares beneficially owned by all officers and directors of the
Registrant.
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
Common Shares John McKnitt Alexander, Jr. 700 shares owned directly *
Director and Secretary 470 shares owned by
P.O. Box 26837 minor daughters
Raleigh, NC 27603 50 shares owned by spouse
P. C. Barwick, Jr. 600 shares owned directly *
Director
P. O. Box 3557
Kinston, NC 28502
J. Melville Broughton, Jr. 705 shares owned directly *
Director and Vice President
P.O. Box 2387
Raleigh, NC 27602
Sidney R. French 500 shares owned directly (1) *
Director
105 Wetherington Farm Road
Cove City, NC 28523
Marvin D. Gentry 500 shares owned directly *
Director
P.O. Box 485
King, NC 27021
Alexander H. Graham, Jr. 5,500 shares owned directly *
Director
P.O. Box 51579
Durham, NC 27717
Robert W. Griffin 526 shares owned directly (2) *
Director
P.O Box 3062
Kinston, NC 28502-3062
M. Rex Harris 500 shares owned directly *
Director
4511 Bragg Boulevard
Fayetteville, NC 28303
35
<PAGE>
William H. Kincheloe 500 shares owned directly *
Director
P.O. Box 671
Rocky Mount, NC 27802
Chauncey W. Lever 2,000 shares owned with wife *
Director and as joint tenants with right
Assist. Sec./Treas. of survivorship
P.O. Box 4108
Greensboro, NC 27404
Lynn T. McConnell 100 shares owned directly *
Director and Treasurer 400 shares owned directly (3)
138 Cherokee Road
Charlotte, NC 28207
John F. McNair III 500 shares owned directly *
Director and President
P.O. Box 3099
Winston Salem, NC 32251
Jack A. Moody 3,300 shares owned directly *
Director
P.O. Box 249
Siler City, NC 27344
John S. Russell 100 shares owned directly *
Director 500 shares owned directly (3)
One Hanover Square
Suite 1700
Raleigh, NC 27611
Scott M. Saylor 100 shares owned with wife *
Exec. V.P./General Counsel as joint tenants with right
P.O. Box 2248 of survivorship
Raleigh, NC 27602
David T. Woodard 100 shares owned directly *
Director 400 shares owned directly (3)
P.O. Box 17647
Raleigh, NC 27619-7647
* 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) Mr. Griffin's shares are held subject to a transfer
agreement with Thomas B. Griffin.
(3) 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 re-
acquire the stock.
All officers and directors as a group (16 persons)
beneficially own 18,051 common shares of the Registrant, or
approximately .42% of the total shares issued and outstanding.
36
<PAGE>
(c) Changes in Control
Pursuant to provisions of the charter and Article III,
Section 3 of the bylaws of the Registrant, the shares held by the
State of North Carolina are entitled to vote for and elect ten of
the Registrant's fifteen directors. The remaining shareholders
are entitled to vote for and elect the remaining five directors.
The bylaws provide that the directors elected by the shares held
by the State of North Carolina shall be named in the proxy given
by the Governor to his designee who shall attend the annual
meeting of shareholders. Inasmuch as the Governor of North
Carolina is an elected official, changes in control of the
Registrant can occur whenever a new governor is elected subject
to the timing of the expiration of the terms of directors elected
by the State of North Carolina. A general election electing a
new Governor in North Carolina will occur in November, 1996. See
also "Security Ownership of Certain Beneficial Owners" for
legislative control over the sale of shares owned by the State of
North Carolina.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) List of Documents Files as Part of This Report
1 and 2. Financial Statements and Schedules
The financial statements and supplemental schedules
listed in the accompanying index to financial statements
and schedules are filed as part of this report.
3. Exhibits
Exhibits to this report are listed in the
accompanying index to exhibits.
(b) Reports on Form 8-K
On August 18, 1995, the Registrant filed a Form 8-K
dated August 10, 1995 reporting Item 5, Other Events, with
regard to the Lease Extension Agreement with Norfolk
Southern.
On September 18, 1995, the Registrant filed a Form
8-K dated August 24, 1995 reporting Item 5, Other Events,
with regard to the Lease Extension Agreement with Norfolk
Southern.
37
<PAGE>
On January 5, 1996, the Registrant filed a Form 8-K
dated December 22, 1995 reporting Item 2, Acquisition or
Disposition of Assets and Item 5, Other Events, regarding
approvals of the Lease Extension Agreement and shareholder
litigation related thereto.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the North Carolina Railroad
Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTH CAROLINA RAILROAD COMPANY
Date: March 26, 1996 By: /s/ John F. McNair III
--------------------- -----------------------------
John F. McNair III, President
and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the North Carolina Railroad Company and in
the capacities and on the dates indicated.
/s/ John M. Alexander, Jr. Date: March 26, 1996
- ------------------------------ ---------------
John M. Alexander, Jr.,
Director
/s/ P. C. Barwick, Jr. Date: March 26, 1996
- ------------------------------ ---------------
P. C. Barwick, Jr.,
Director
/s/ J. Melville Broughton, Jr. Date: March 26, 1996
- ------------------------------ ---------------
J. Melville Broughton, Jr.,
Vice President and Director
/s/ Sidney R. French Date: March 26, 1996
- ------------------------------ ---------------
Sidney R. French,
Director
/s/ Marvin D. Gentry Date: March 26, 1996
- ------------------------------ ---------------
Marvin D. Gentry,
Director
/s/ Alexander H. Graham, Jr. Date: March 26, 1996
- ------------------------------ ---------------
Alexander H. Graham, Jr.,
Director
/s/ Robert W. Griffin Date: March 26, 1996
- ------------------------------ ---------------
Robert W. Griffin,
Director
/s/ M. Rex Harris Date: March 26, 1996
- ------------------------------ ---------------
M. Rex Harris,
Director
39
<PAGE>
/s/ William H. Kincheloe Date: March 26, 1996
- ------------------------------ ---------------
William H. Kincheloe,
Director
/s/ Chauncey W. Lever Date: March 26, 1996
- ------------------------------ ---------------
Chauncey W. Lever,
Assistant Secretary-Treasurer and Director
/s/ Lynn T. McConnell Date: March 26, 1996
- ------------------------------ ---------------
Lynn T. McConnell,
Treasurer, Director, and Principal Financial Officer
/s/ John F. McNair III Date: March 26, 1996
- ------------------------------ ---------------
John F. McNair III
President and Director
/s/ Jack A. Moody Date: March 26, 1996
- ------------------------------ ---------------
Jack A. Moody,
Director
/s/ John S. Russell Date: March 26, 1996
- ------------------------------ ---------------
John S. Russell,
Director
/s/ David T. Woodard Date: March 26, 1996
- ------------------------------ ---------------
David T. Woodard,
Director
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15 (d) of the Act by Registrant Which Have
Not Registered Securities Pursuant to Section 12 of the Act.
No annual report or proxy statement has been sent to the
shareholders of the Registrant; however, proxy statements and
annual reports will be sent prior to the annual meeting of
shareholders.
40
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
3.1 Charter of Registrant and Amendment
thereto, filed as Exhibit No. 1 to
Registrant's Form 10 filed with the
Securities and Exchange Commission on
April 27, 1987, which is incorporated by
reference into this Form 10-K.
3.2 Articles of Merger (with Agreement and Plan
of Merger) of the Atlantic and North
Carolina Railroad Company into the
Registrant dated September 29, 1989 filed
as Exhibit No. 2 to Registrant's Form 8-K
dated September 29, 1989 filed with the
Securities and Exchange Commission, which
is incorporated by reference into this Form
10-K.
3.3 Bylaws of Registrant filed as Exhibit No. 2
to Registrant's Form 10 filed with the
Securities and Exchange Commission on April
27, 1987, which is incorporated by
reference into this Form 10-K.
3.4 Amendment to Charter of Registrant filed as
Exhibit No. 3(c) to Registrant's Form 10-Q
filed with the Securities and Exchange
Commission on November 14, 1990, which is
incorporated by reference into this Form
10-K.
3.5 Amendment of Bylaws of Registrant filed as
Exhibit No. 3(d) to Registrant's Form 10-Q
filed with the Securities and Exchange
Commission on November 14, 1990, which is
incorporated by reference into this Form
10-K.
3.6 Bylaws of the Registrant, August 20, 1993,
as amended and restated, filed as Exhibit
No. 3(f) to Registrant's Form 10-Q filed
with the Securities and Exchange Commission
on November 12, 1993, which is incorporated
by reference into this Form 10-K.
41
<PAGE>
Exhibit No. Description of Exhibit
4.1 Specimen Common Stock ($.50 par value)
Certificate, filed as Exhibit No. 4(a) to
Registrant's Form 10-K filed with the
Securities and Exchange Commission on March
29, 1991, which is incorporated by reference
into this Form 10-K.
10.1 Lease dated August 16, 1895 between
Registrant and Southern Railway Company
filed as Exhibit No. 3(a) to Registrant's
Form 10 filed with the Securities and
Exchange Commission on April 27, 1987, which
is incorporated by reference into this Form
10-K.
10.2 Lease dated December 31, 1968 between
Registrant and Southern Railway Company
filed as Exhibit No. 3(b) to Registrant's
Form 10 filed with the Securities and
Exchange Commission on April 27, 1987, which
is incorporated by reference into this Form
10-K.
10.3 Lease dated August 30, 1939 between Atlantic
and North Carolina Railroad Company and
Atlantic East Carolina Railway Company filed
as Exhibit No. 28 (h) to Registrant's Form
S-4 filed with the Securities and Exchange
Commission on July 20, 1989, which is
incorporated by reference into this
Form 10-K.
10.4 Agreement dated November 25, 1862 between
the Registrant and the Chatham Railroad
Company, which is incorporated by reference
into this Form 10-K.
10.5 Lease Extension Agreement between the
Registrant, Norfolk Southern Railway Company
and Atlantic and East Carolina Railway
Company, filed as Appendix A to the
Registrant's Proxy Statement filed with the
Securities and Exchange Commission on
November 13, 1995, which is incorporated by
reference into this Form 10-K.
42
<PAGE>
Exhibit No. Description of Exhibit
10.6 Escrow Agreement between the Registrant,
Norfolk Southern Railway Company, Atlantic
and East Carolina Railway Company, and
Lawyers Title of North Carolina, Inc. dated
September 29, 1995, filed as Exhibit 10.5 to
Registrant's Form 10-Q filed with the
Securities and Exchange Commission on
November 14, 1995, which is incorporated by
reference into this Form 10-K.
99.1 Decision of the Interstate Commerce
Commission in Finance Docket No. 32820,
served December 22, 1995, filed as Exhibit
(c)(4) to Registrant's Form 8-K filed with
the Securities and Exchange Commission on
January 5, 1996, which is incorporated by
reference into this Form 10-K.
99.2 Letter dated December 30, 1994 from Petree
Stockton, L.L.P. to Norfolk Southern Railway
Company, which is incorporated by reference
into this Form 10-K.
43
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1995
NORTH CAROLINA RAILROAD COMPANY
RALEIGH, NORTH CAROLINA
<PAGE>
FORM 10-K - ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)
NORTH CAROLINA RAILROAD COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of North Carolina Railroad Company
are included in Item 8:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . 46
Balance Sheets, December 31, 1995 and 1994 . . . . . . . . . . . . . 47
Statements of Income for the Years
ended December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . 48
Statements of Shareholders' Equity for the Years
ended December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . 49
Statements of Cash Flows for the Years
ended December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . 50
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 51
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable,
and therefore have been omitted.
45
<PAGE>
Report of Independent Auditors
Board of Directors
North Carolina Railroad Company
We have audited the accompanying balance sheets of North Carolina
Railroad Company as of December 31, 1995 and 1994, and the related
statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. The
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amount
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of North
Carolina Railroad Company at December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note D, in 1993 the Company changed its method of
accounting for income taxes.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 4, 1996
46
<PAGE>
BALANCE SHEETS
NORTH CAROLINA RAILROAD COMPANY
</TABLE>
<TABLE>
<CAPTION>
December 31 December 31
1995 1994
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $15,139,497 $ 1,615,284
Short-term investments 190,000 -0-
Rent receivable -0- 246,030
Interest receivable and other assets 4,447 65,400
----------- ------------
TOTAL CURRENT ASSETS 15,333,944 1,926,714
PROPERTIES
Roadway and land--Note C 7,848,842 7,848,842
Buildings and equipment 241,469 236,369
Less accumulated depreciation (299,559) (292,395)
------------ ------------
7,790,752 7,792,816
------------ ------------
OTHER ASSETS
Lease negotiation costs, net of 1,355,568 365,267
amortization of $46,743 ------------ ------------
$24,480,264 $10,084,797
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payable $ 854,398 $ 421,026
Income taxes payable--Note D 5,230,277 -0-
Dividends payable -0- 128,504
----------- -----------
TOTAL CURRENT LIABILITIES 6,084,675 549,530
DEFERRED INCOME TAXES--Note D 1,209,851 1,214,451
COMMITMENTS AND CONTINGENCIES--Note E
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 11,455,548 2,590,626
------------ ------------
17,185,738 8,320,816
------------ ------------
$24,480,264 $10,084,797
============ ============
</TABLE>
See notes to financial statements.
47
<PAGE>
STATEMENTS OF INCOME
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Lease of roadway and
land-Note C $ 8,134,656 $ 674,277 $ 642,817
Interest income 601,556 94,361 87,837
Dividend income 7,500 12,500 25,000
Rental income 9,540 3,960 9,720
Gain on sale of real estate 688,055 65,976 12,396
and other income
Other lease income 691,246 -0- -0-
Settlement income--Note F 5,000,000 -0- -0-
----------- ----------- ----------
15,132,553 851,074 777,770
Expenses:
Salaries and administrative 273,563 268,029 229,274
Professional fees 414,740 288,749 160,221
Insurance and taxes 59,100 57,766 51,475
Amortization expense 46,743 -0- -0-
Depreciation 7,164 7,977 6,927
Consulting fees 80,742 43,809 146,197
Other 106,579 94,599 100,801
----------- ----------- ----------
988,631 760,929 694,895
----------- ----------- ----------
INCOME BEFORE INCOME
TAXES 14,143,922 90,145 82,875
Income taxes (benefits)--Note D:
Current 5,283,600 10,000 13,000
Deferred (4,600) (27,000) (17,000)
----------- ----------- ----------
5,279,000 (17,000) (4,000)
----------- ----------- ----------
NET INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 8,864,922 107,145 86,875
Cumulative effect as of January
1, 1993 of change in method
of accounting for income
taxes--Note D: -0- -0- (140,902)
----------- ---------- ----------
NET INCOME (LOSS) $ 8,864,922 $ 107,145 $ (54,027)
=========== ========== ==========
Earnings (loss) per share: $2.07 $0.03 $(0.01)
====== ====== ========
</TABLE>
See notes to financial statements.
48
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Earnings Shareholders'
Stock Capital Restricted Unrestricted Equity
---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at $2,141,735 $3,588,455 $ 493,241 $ 2,301,275 $8,524,706
December 31, 1992
Net income (loss) 16,537 (70,564) (54,027)
Cash dividends ($0.03) (128,504) (128,504)
---------- ----------- ---------- ------------ ------------
Balance at $2,141,735 $3,588,455 $ 509,778 $ 2,102,207 $8,342,175
December 31, 1993
Net income 15,850 91,295 107,145
Cash dividends ($0.03) (128,504) (128,504)
Release of restricted assets (525,628) 525,628
---------- ----------- ---------- ----------- ------------
Balance at $2,141,735 $3,588,455 $ -0- $ 2,590,626 $8,320,816
December 31, 1994
Net income -0- 8,864,922 8,864,922
----------- ----------- ---------- ----------- -----------
Balance at $2,141,735 $3,588,455 $ -0- $11,455,548 $17,185,738
December 31, 1995
========== ============ ========== =========== ===========
</TABLE>
See notes to financial statements.
49
<PAGE>
STATEMENTS OF CASH FLOWS
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 8,864,922 $ 107,145 $ (54,027)
Cumulative effect as of change
in method of accounting for
income taxes -0- -0- 140,902
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes (4,600) (27,000) (17,000)
Depreciation and amortization 53,907 7,977 6,927
Lease negotiation costs (1,037,044) (365,267) -0-
Change in operating assets and liabilities:
Rent receivable 246,030 111,901 (154,702)
Interest receivable and other assets 60,953 (22,915) 8,859
Income taxes recoverable -0- 17,811 39,089
Accrued expenses and accounts payable 433,372 364,686 (105,084)
Income taxes payable 5,230,277 -0- -0-
----------- --------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 13,847,817 194,338 (135,036)
INVESTING ACTIVITIES
Increase in restricted assets -0- (15,850) (16,537)
Release of restricted assets -0- 525,628 -0-
Purchase of properties (5,100) (1,487) (2,733)
Purchase of short-term investments (1,643,000) (200,000) (817,382)
Maturities of short-term investments 1,453,000 200,000 890,182
----------- -------- ----------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (195,100) 508,291 53,540
FINANCING ACTIVITIES
Dividends paid (128,504) -0- (128,504)
---------- -------- ----------
NET CASH USED IN FINANCING (128,504) -0- (128,504)
ACTIVITIES
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 13,524,213 702,629 (210,000)
Cash and cash equivalents at 1,615,284 912,655 1,122,655
beginning of period ----------- ----------- ----------
CASH AND CASH EQUIVALENTS $15,139,497 $1,615,284 $ 912,655
AT END OF PERIOD =========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes was $44,254, $36,656 and
$38,600 for the years ended December 31,
1995, 1994 and 1993, respectively.
Dividends of $128,504 were declared and accrued at
December 31, 1994.
</TABLE>
See notes to financial statements.
50
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NORTH CAROLINA RAILROAD COMPANY
December 31, 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The North Carolina Railroad Company (the
"Company"), owns approximately 317 miles of continuous railroad
line extending from Charlotte, North Carolina to Morehead City,
North Carolina. On August 10, 1995, the Board of Directors of
the Company approved a Lease Extension Agreement ("Lease
Extension") with Norfolk Southern to extend two prior leases of
substantially all of the Company's property. (See Note C.)
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. These properties are not depreciated
because they represent fully depreciated roadway or non-
depreciable land. However, a rehabilitation project of $200,000
was amortized over a five-year period during the 1940's.
REVENUE RECOGNITION: Revenue is reflected in the statements
of income when earned in accordance with the Company's lease
arrangements on the accrual method. (See Note C.)
INCOME TAXES: Prior to 1995, income tax expense was
disproportionate to income before income taxes because the lessee
of certain of the properties, pursuant to the terms of the 1895
Lease, was responsible for all income taxes attributable to the
lease arrangement. The Company considered the lessee's share of
the amortization of roadway costs to be a permanent difference
and no deferred taxes were provided thereon.
Under the Lease Extension, all income taxes become the
responsibility of the Company as of January 1, 1995. The 1995
income tax provision does not take into account the Company's
possible Real Estate Investment Trust ("REIT") election for 1995
or Norfolk Southern's potential liability for the Company's taxes
should the Lease Extension not be effective. (See Note B and
Note D.)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include
investments in commercial paper, U. S. Treasury Bills, and
51
<PAGE>
certificates of deposit with original maturities of three months
or less. Cash deposits are placed with high credit quality
financial institutions. At times, deposits exceed amounts
insured by the Federal Deposit Insurance Corporation.
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.
These investments are held-to-maturity and are carried at cost,
which approximates market.
LEASE/TRANSACTION COSTS: Certain lease negotiation costs have
been capitalized and will be amortized over the life of the lease
agreement.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
RESTRICTED ASSETS: 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 unrestricted property of the Company. (See Note C.)
FASB STATEMENT NO. 121: In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," which requires impairment losses
to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by these assets are less than the
assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement No. 121 in the first
quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.
NOTE B--REAL ESTATE INVESTMENT TRUST
On August 10, 1995, the Board of Directors of the Company
voted to cause the Company to elect REIT status for income tax
purposes, in connection with the Lease Extension. (See Note C.)
The REIT provisions of the Internal Revenue Code ("I.R.C.")
generally allow a REIT to deduct distributions paid to its
stockholders. The Company received an opinion of counsel that
the Company can qualify as a REIT based upon the effectiveness
and terms of the Lease Extension. However, certain shareholder
litigation could enjoin, delay, or otherwise affect the
effectiveness of the Lease Extension, the terms of the Lease
52
<PAGE>
Extension, or the timing or amount of shareholder distributions.
The Company is also seeking a ruling from the Internal Revenue
Service as to the effect of a one-time $5 million settlement
payment with respect to the timing of the Company's REIT
election, but the Company has not yet received such ruling. (See
Note F.) There can be no assurance that the Company can qualify
for REIT status for 1995 or later years.
If the Company qualifies for and elects to become a REIT for
the year ended December 31, 1995, lease revenue, income before
income taxes, income taxes, net income, and earnings per share on
a pro-forma basis would be as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
(Unaudited)
-------------------------------
<S> <C>
Lease of Roadway and Land $ 8,134,656
Income before Income Taxes 14,143,922
Income Taxes 2,675,400
Net Income 11,468,522
Earnings per Share 2.68
</TABLE>
The pro forma effect of REIT election for 1995 would be $.61
per share.
NOTE C--LEASES ON ROADWAY AND LAND
In 1895, the Company leased substantially all of its assets to
Southern Railway Company, now known as Norfolk Southern Railway Company
("NSR"), for ninety-nine years (the "1895 Lease"). In 1989, the
Company acquired the Atlantic and North Carolina Railroad
Company, the assets of which were subject to a lease dating to
1939 with the Atlantic & East Carolina Railway Company ("AECR"),
a wholly-owned subsidiary of Norfolk Southern Railway Company (the "1939
Lease"). NSR and AECR are hereinafter referred to as "Norfolk Southern".
The terms of the 1895 Lease and 1939 Lease provided for
expiration on January 1, 1995 and December 31, 1994,
respectively, and did not require either the Company or Norfolk
Southern to renew the leases.
On August 10, 1995, the Board of Directors of the Company
approved a Lease Extension Agreement to extend the terms of the
1895 Lease and the 1939 Lease, with its effectiveness retroactive
to January 1, 1995. However, a shareholder has commenced a legal
action challenging the validity of shareholder approval. Other
shareholder derivative litigation seeking to enjoin the Lease
Extension is also pending. The base annual rental under the
Lease Extension is eight million dollars ($8,000,000) for the
period from January 1, 1995 through December 31, 1995. 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
53
<PAGE>
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. The 1895 and 1939 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.
A third lease to Norfolk Southern (the "1968 Lease") expires
on December 31, 2067, and provides for an annual rental of
$81,319 through December 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 rental for
the remaining term of the 1968 Lease. Under the terms of the
1968 Lease, all taxes connected with the property, except income
taxes, are paid by the lessee. The 1968 Lease would not be
affected by the Lease Extension.
NOTE D--INCOME TAXES
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the
liability method required by FASB Statement No. 109, "Accounting
for Income Taxes." As permitted under the new rules, prior
years' financial statements were not restated. The cumulative
effect of adopting Statement No. 109 as of January 1, 1993 was a
reduction of income of $140,902.
Significant components of the provision for income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Current:
Federal $4,736,216 $ 6,000 $ 9,000
State 547,384 4,000 4,000
---------- --------- ---------
Total current 5,283,600 10,000 13,000
Deferred:
Federal (4,000) (24,000) (15,000)
State (600) ( 3,000) ( 2,000)
----------- -------- ---------
(4,600) (27,000) (17,000)
----------- -------- ---------
Total current $5,279,000 $(17,000) $( 4,000)
=========== ========= =========
</TABLE>
54
<PAGE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Significant components of the Company's deferred tax liability
as of December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book amortization $1,153,700 $1,138,550
Land condemnation 196,500 196,500
---------- ----------
Total deferred tax liability $1,350,200 $1,335,050
Deferred tax asset:
Reorganization costs 140,349 120,599
---------- ----------
Total deferred tax asset 140,349 120,599
---------- ----------
Valuation allowance -0- -0-
---------- ----------
Net deferred tax assets 140,349 120,599
---------- ----------
Net deferred tax liability $1,209,851 $1,214,451
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
---------------------------------
A reconciliation of the total tax expense to
the amount computed by applying the statutory
income tax rates before income taxes follows:
<S> <C> <C> <C>
Income taxes at the
statutory rate $ 4,564,359 $ 31,551 $ 28,178
State income taxes, net of
federal tax benefit 1,096,029 4,657 4,376
---------- -------- --------
5,660,388 36,208 32,554
Less:
Surtax exemption 100,000 20,505 6,714
Dividend received deduction 5,250 3,063 11,550
Federal and state income
taxes paid by lessee 276,578 25,131 8,594
Lessee deferred tax liability -0- 4,851 -0-
Other (440) (342) 9,696
---------- -------- --------
381,388 53,208 36,554
---------- -------- --------
$5,279,000 $(17,000) $ (4,000)
=========== ========= =========
</TABLE>
55
<PAGE>
The Company may be eligible for REIT status for 1995, which
would substantially reduce the Company's income tax expense for
1995 by approximately $2.6 million, or $.61 per share. (See Note
B).
NOTE E--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 could 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 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 as defendants. On December 21, 1995, a
shareholder derivative legal action was filed. The action seeks
to enjoin the Lease Extension or invalidate the December 15, 1995
shareholders meeting held to approve the Lease Extension on the
basis of a lack of a quorum of shareholders other than the State
of North Carolina, and makes other allegations against the
56
<PAGE>
defendants, including alleged proxy rule violations. The Company
is defending the aspects of the shareholder suits relating to the
shareholder meeting, the effectiveness of the Lease Extension,
and attempts to enjoin the Lease Extension. The directors and
officers named as defendants in the suits, represented by
separate counsel, are defending damage claims brought against the
directors and officers. 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 Company initiated a lawsuit in the
Mecklenburg County, North Carolina Superior Court regarding its
railroad corridor through downtown Charlotte. The Company
alleged that both the City of Charlotte and Norfolk Southern have
breached contract obligations and obligations based on real
property rights to the Company. The litigation has been
disclosed by the Company 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 Company's cross-appeal. Norfolk Southern
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 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. The
Company is engaging in negotiations to settle the litigation, but
there can be no assurance of any settlement or the terms of any
such settlement.
NOTE F--SETTLEMENT INCOME
On December 1, 1995, Norfolk Southern made a one-time
settlement payment of $5 million, plus interest, to the Company,
as provided in the Lease Extension, in exchange for the Company's
release of Norfolk Southern from certain contractual obligations
relating to certain personal property upon expiration of the 1895
Lease and 1939 Lease. The Company and Norfolk Southern entered
into an agreement dated August 10, 1995, whereby the settlement
payment was made in early December 1995 in order to facilitate the
Company seeking REIT status at the earliest practicable date.
The Company is seeking a ruling from the Internal Revenue Service
as to the effect of the payment with respect to the timing of the
Company's REIT election, but the Company has not yet received
such ruling. In the event the Lease Extension is invalidated,
the Company is entitled to retain the payment and interest for
application against any future rental or other amounts due from
Norfolk Southern.
57
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000813794
<NAME> N.C. RAILROAD COMPANY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 15,139,497
<SECURITIES> 190,000
<RECEIVABLES> 4,447
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,333,944
<PP&E> 8,090,311
<DEPRECIATION> (299,559)
<TOTAL-ASSETS> 24,480,264
<CURRENT-LIABILITIES> 6,084,675
<BONDS> 0
0
0
<COMMON> 2,141,735
<OTHER-SE> 15,044,003
<TOTAL-LIABILITY-AND-EQUITY> 24,480,264
<SALES> 0
<TOTAL-REVENUES> 15,132,553
<CGS> 0
<TOTAL-COSTS> 988,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,143,922
<INCOME-TAX> 5,279,000
<INCOME-CONTINUING> 8,864,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,864,922
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 0
</TABLE>
