UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934
For the transition period from __________ to __________
Commission file number 0-15768
NORTH CAROLINA RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-6003280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Atlantic Ave., Ste. 110, Raleigh, North Carolina 27604
(Address of principal executive offices) (Zip Code)
(919) 954-7601
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $.50 par Value--4,283,470 shares as of September 30,
1996.
The total number of pages contained in this document is 23 pages.
<PAGE>
INDEX
NORTH CAROLINA RAILROAD COMPANY
PART I. FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited)
Balance Sheets - September 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . 3
Statements of Income - Three months ended
September 30, 1996 and September 30, 1995
and nine months ended September 30, 1996 and
September 30, 1995. . . . ...........................4
Statements of Shareholders' Equity -
Nine months ended September 30, 1996
and September 30, 1995 . . . . . . . . . . . . . . . 5
Statements of Cash Flows -
Nine months ended September 30, 1996 and
September 30, 1995. . . . . . . . . . . . . . . . . 6
Notes to financial statements -
September 30, 1996. . . . . . . . . . . . . . . . . 7
Item 2. The Registrant's Discussion and Analysis of
Financial Condition and Results of Operations. . . 11
PART II. OTHER INFORMATION
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 21
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . 23
2
<PAGE>
BALANCE SHEETS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ ------------
<S> <C>
ASSETS
Cash and cash equivalents $17,074,680 $15,139,497
Short term investments -0- 190,000
Interest receivable 49,787 4,447
Income taxes recoverable 1,780,000 -0-
Prepaid expenses 24,798 -0-
- ------------ ---------
TOTAL CURRENT ASSETS 18,929,265 15,333,944
PROPERTIES
Roadway and land--Note C 7,848,842 7,848,842
Buildings and equipment 244,538 241,469
Less accumulated depreciation (306,204) (299,559)
------------ ---------
7,787,176 7,790,752
------------ ---------
OTHER ASSETS
Lease negotiation costs, net of 1,338,684 1,355,568
amortization of $81,800 ------------ ------------
and $46,743 $28,055,125 $24,480,264
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payable $ 844,198 $ 854,398
Income taxes payable -0- 5,230,277
Dividends payable 13,107,418 -0-
Unearned rental income 20,336 -0-
----------- -----------
TOTAL CURRENT LIABILITIES 13,971,952 6,084,675
DEFERRED INCOME TAXES -0- 1,209,851
COMMITMENTS AND CONTINGENCIES--Note D
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 8,352,983 11,455,548
------------ ------------
14,083,173 17,185,738
------------ ------------
$28,055,125 $24,480,264
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
STATEMENTS OF INCOME (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
------------------------ -----------------------
<S> <C>
Revenues:
Lease of roadway and land $701,029 $ 221,483 $ 4,825,887 $ 573,746
Interest income 225,079 29,143 641,928 81,077
Rental income 1,200 3,870 9,600 7,020
Gain on sale of real estate -0- -0- -0- 473,956
Dividend income 15,000 7,500 15,000 7,500
Other lease income -0- 691,246 -0- 691,246
Other -0- 13,520 277 77,769
---------- ---------- --------- ---------
942,308 966,762 5,492,692 1,912,314
Expenses:
Salaries and administrative 111,138 81,155 246,328 198,656
Professional fees 127,302 104,488 304,472 274,107
Insurance and taxes 29,781 12,676 91,443 39,274
Amortization expense 11,685 -0- 35,057 -0-
Depreciation 2,215 1,791 6,645 5,373
Consulting fees 61,096 12,149 91,254 36,510
Other 29,298 28,005 73,206 90,222
---------- ---------- ---------- ---------
372,515 240,264 848,405 644,142
---------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES
(BENEFIT) 569,793 726,498 4,644,287 1,268,172
Income taxes (benefit):
Current 32,000 48,000 96,000 250,000
Deferred -0- 2,600 -0- 7,800
Benefit from change from
"C" corporation to REIT (7,095,929) -0- (5,456,569) -0-
------------ ---------- ------------ ---------
(7,063,929) 50,600 (5,360,569) 257,800
------------ ---------- ------------ ---------
NET INCOME $7,633,722 $ 675,898 $10,004,856 $1,010,372
============ ========== ============ =========
Earnings per share: $1.78 $0.16 $2.33 $0.24
===== ===== ===== =====
</TABLE>
See notes to financial statements.
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Shareholders'
Stock Capital Earnings Equity
--------- ----------- --------- -----------
<S> <C>
Balance at January 1, 1995 $2,141,735 $3,588,455 $ 2,590,626 $ 8,320,816
Net income 1,010,372 1,010,372
---------- ---------- ----------- -----------
Balance at September 30, 1995 $2,141,735 $3,588,455 $ 3,600,998 $ 9,331,188
========== ========== =========== ===========
Balance at January 1, 1996 $2,141,735 $3,588,455 $11,455,548 $17,185,738
Dividends payable (13,107,418) (13,107,418)
Net income 10,004,856 10,004,856
---------- ---------- ----------- -----------
Balance at September 30, 1996 $2,141,735 $3,588,455 $ 8,352,983 $14,083,173
========== ========== =========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
STATEMENTS OF CASH FLOWS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1996 1995
------------------------------------
<S> <C>
OPERATING ACTIVITIES
Net income $10,004,856 $1,010,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (1,209,851) 7,800
Depreciation and amortization 41,702 5,373
Lease negotiation costs (18,176) (430,449)
Change in operating assets and liabilities:
Rent receivable -0- (9,889)
Interest receivable (45,340) (6,919)
Prepaid expenses (24,798) 18,661
Income tax recoverable (1,780,000) -0-
Accrued expenses (10,200) 191,099
Unearned rental income 20,336 20,332
Income taxes payable (5,230,277) 204,477
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,748,252 1,010,857
INVESTING ACTIVITIES
Purchase of short-term investments -0- (1,453,000)
Maturity of short-term investments 190,000 980,000
Purchase of buildings and equipment (3,069) (3,512)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 186,931 (476,512)
FINANCING ACTIVITIES
Dividends paid -0- (128,504)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES -0- (128,504)
INCREASE IN CASH AND CASH EQUIVALENTS 1,935,183 405,841
Cash and cash equivalents at beginning of period 15,139,497 1,615,284
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,074,680 $2,021,125
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NORTH CAROLINA RAILROAD COMPANY
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position and results of operations of North
Carolina Railroad Company (the "Company" or "NCRR") as of and for each of the
periods presented. These financial statements should be read in conjunction with
the financial statements and notes included in the Company's audited financial
statements for 1995.
PROPERTIES: 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.
INCOME TAXES: The income tax provision reflects the Company's Real Estate
Investment Trust ("REIT") election for 1995. (See Note B and Note C.)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include investments
in commercial paper, U. S. Treasury Bills, or certificates of deposit with
original maturities of three months or less. Cash deposits are placed with high
credit quality financial institutions. Deposits exceed amounts insured by the
Federal Deposit Insurance Corporation.
SHORT-TERM INVESTMENTS: Short-term investments include investments in high
quality commercial paper or 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 were being
capitalized and amortized over the life of the Lease Extension Agreement. The
Company is evaluating the extent to which such costs may be expensed currently
for financial reporting and income tax purposes. (See Note C.)
7
<PAGE>
NOTE B--REAL ESTATE INVESTMENT TRUST
On September 16, 1996, the Company elected REIT status for 1995 and
expects to qualify for REIT status for 1996. The REIT provisions of the
Internal Revenue Code ("I.R.C.") generally allow a REIT to deduct distributions
paid to its stockholders, but there can be no assurance that the Company can
qualify for REIT status for 1996 or later years. Prior to the election of REIT
status, the Company calculated its provision for income taxes and reported the
results of its operations and financial condition assuming that it would be
taxed as a "C" corporation. The Company's 1995 and first and second quarter of
1996 financial statements were prepared and presented on this basis. For the
nine months and three months ended September 30, 1996, the Company has
calculated its provision for income taxes based on its recent REIT election.
The effect of changing from a "C" corporation to a REIT is reflected as a
component of income tax expense (benefit) in the Company's statement of
income. The Company's current and deferred income tax liability amounts
presented on the September 30, 1996 balance sheet have been adjusted to
reflect the REIT election.
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 ("Lease Extension") to extend the terms of the 1895
Lease and the 1939 Lease, with its effectiveness retroactive to January 1, 1995.
However, on July 29, 1996 a federal court in North Carolina enjoined the Company
from implementing the terms of the Lease Extension in a shareholder legal action
challenging the shareholder meeting held to approve the Lease Extension. The
Lease Extension provided for rental of eight million dollars ($8,000,000) for
the period from January 1, 1995 through December 31, 1995 with certain annual
inflation adjustments thereafter. In December, 1995 following the shareholder
meeting, Norfolk Southern paid approximately $7.8 million to the Company for
1995 as called for in the Lease Extension and continued to pay rental on this
basis until August, 1996.
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 have been affected by the Lease Extension.
NOTE D--COMMITMENTS AND CONTINGENCIES
On August 9, 1996, Norfolk Southern notified the Company that it did
not intend to continue making rental payments to the Company. On September 20
and September 23, 1996, the Company filed actions against Norfolk Southern and
its affiliates in state court in North Carolina and before the United States
Surface Transportation Board ("STB") asserting rental, property ownership,
environmental and other claims as a result of Norfolk Southern's discontinuance
of rental payments and the expiration of the 1895 and 1939 leases. In October,
1996, Norfolk Southern filed counterclaims against the Company asserting unjust
enrichment, conversion, environmental contribution, and other claims, and is
seeking to establish rental on a interim basis in an amount not greater than the
rental called for in the 1895 and 1939 leases, or approximately $600,000
annually. The Company is vigorously pursuing its claims against Norfolk Southern
and defending the counterclaims.
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 relating to the
Lease Extension. The Company filed motions to dismiss the actions, and the court
has not yet ruled on the motions. On September 24, 1996, a lawsuit filed as a
purported class action by the same plaintiffs as the December 1994 and February,
1995 federal court actions was filed in the Superior Court of Wake County, North
Carolina. The action alleged that the Board of Directors of the Registrant
breached their fiduciary duty to shareholders in the formation of the Special
Committee and asserts other claims.
9
<PAGE>
On December 21, 1995, a shareholder derivative legal action was
filed seeking 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 asserted
other claims. On July 29, 1996, the court enjoined the Company from implementing
the terms of the Lease Extension. The court determined that a single proxy for
4,000 shares which had been counted toward the quorum was effectively revoked,
thus reducing the proxy count below the number of shares needed for a quorum of
shareholders other than the State of North Carolina under the Registrant's
bylaws.
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.
In January, 1994, the North Carolina Department of Environment,
Health, and Natural Resources ("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 Peele environmental site. The Registrant is one of
several defendants that have been held jointly and severally liable for response
costs and remediation of 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 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.
10
<PAGE>
Item 2. The Registrant's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Pursuant to the terms of the Lease Extension, the Registrant's
lessees were obligated to continue paying for maintenance and property taxes
relating to the Registrant's property subject to the Lease Extension. If the
Registrant is unable to negotiate other leases upon acceptable terms approved by
the Registrant's shareholders or if Norfolk Southern were to discontinue
railroad operations over the Registrant's line, operating its own line without a
lessee would subject the Registrant to a number of risks that would materially
affect the Registrant's liquidity and capital resources. The Registrant
anticipates that it would have to incur substantial operating expenses over
time, but that it would initially not likely incur substantial capital
expenditures with respect to fixed plant. Under the terms of the 1895 Lease, the
lessee is required to return the leased properties, or equivalent replacements
of leased properties, including equipment, in as good a condition and repair as
the property was at the inception of the lease, less ordinary depreciation.
However, the Registrant may be required to incur substantial capital
expenditures and other expenses for the operation of the railroad line if the
equipment is not returned in operating condition upon termination of the leases
or if the quantities or type of the returned equipment is insufficient to
operate the railroad line.
11
<PAGE>
Pursuant to a separate agreement for the payment of $5 million (plus
interest) by Norfolk Southern on December 1, 1995 in settlement of certain
personal property claims called for in the Lease Extension (the "settlement
payment") and Interim Agreement with Norfolk Southern dated September 13, 1996,
the settlement payment and rental payments totalling approximately $12 million,
as described in "Results of Operations" below, were not required to be returned
to Norfolk Southern as a result of the court
order enjoining the effectiveness of the Lease Extension. Pursuant to the
agreements, the payments are to be credited against any sums or rentals
ultimately determined to be due to the Registrant from Norfolk Southern.
Notwithstanding the agreements, Norfolk Southern has asserted counterclaims
against the Registrant for unjust enrichment and conversion with respect to the
payments.
The Registrant does not foresee any need for funds during 1996 which
cannot be met primarily from available cash. However, the Registrant's
litigation described in this report is expected to be protracted and costly
and may exceed $1 million per year. The Registrant may be required to finance
(i) litigation expenses, (ii) expenses associated with seeking alternative
operators or lessees of the Registrant's railroad property, (iii) operating
expenses, maintenance, equipment costs, or capital expenditures associated with
railroad operations in the event Norfolk Southern discontinues or abandons
operation of the Registrant's railroad lines.
The Registrant's liquidity (cash and short-term investments)
increased from $15,329,497 at December 31, 1995 to $17,074,680 at September 30,
1996. However, approximately $13 million was paid out in dividends after
September 30, 1996, as discussed below. There was no change in short-term
investments during the three month period ended September 30, 1996.
On September 16, 1996, the Registrant elected tax status as a Real
Estate Investment Trust for the tax year ended December 31, 1995. Pursuant to
that election, the Registrant declared a special cash dividend in the amount of
$3.06 per share or $13,107,418, payable on or about October 15, 1996, to
holders of record of common stock at the close of business on September 27,
1996. The Registrant will address the issues regarding REIT qualification in
future years at a later date, and the special dividend is not indicative of
future dividends.
12
<PAGE>
If the Registrant elects REIT status for federal income tax purposes
for 1996 and future years, 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 necessary to fund litigation
or other expenses. If the Registrant continues to elect REIT status, the
Registrant expects to use its cash flow from operating activities for
distributions to shareholders and for payment of operating expenses. Other
information about the REIT status of the Registrant has been disclosed in prior
quarterly and annual reports to the Securities and Exchange Commission. The
Registrant is evaluating whether to make a REIT election for its 1996 taxable
year and the effect of such election on future years. The factors the Registrant
is considering include, for example, the status of the shareholder derivative
actions and the effect of the July 29, 1996 court order, the litigation with
Norfolk Southern, advice from the Registrant's professional advisers about the
feasibility of qualifying for REIT tax status in the absence of the Lease
Extension, and the tax consequences of the Registrant electing REIT status for
1996 or later years and failing to qualify as a REIT in succeeding years.
For the nine month period ended September 30, 1996, $1,748,252 of
net cash was provided by operating activities and was primarily attributable to
net income of $10,004,856, which was partially offset by changes in current
income taxes recoverable and payable amounts and deferred tax amounts.
Investing activities provided net cash of $190,000 as short-term
investments matured during the period.
Results of Operations
Results of operations for the periods covered hereby reflect
payments to the Registrant from Norfolk Southern. Payments received until
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 a payment of approximately $7.8 million as called for in the Lease
Extension for additional 1995 rental, and from January through July, 1996, made
monthly payments in the amount called for in the Lease Extension for 1996
rental. However, Norfolk Southern is seeking to establish rental on a interim
basis in an amount not greater than the rental called for in the 1895 and 1939
13
<PAGE>
leases, approximately $600,000 annually. See Item 3, "Legal Proceedings,"
regarding the Norfolk Southern litigation.
Total revenues decreased from $966,762 for the three month period
ended September 30, 1995 to $942,308 for the same period ended September 30,
1996, and increased from $1,912,314 for the nine month period ended September
30, 1995 to $5,492,692 for the same period ended September 30, 1996. On August
9, 1996, Norfolk Southern notified the Registrant that payments of approximately
$680,000 monthly would be discontinued as a result of the July 29, 1996 court
order enjoining implementation of the Lease Extension. See Item 3, "Legal
Proceedings" below regarding the court order and certain shareholder litigation.
Consequently, the Registrant expects its revenues in future quarters will be
substantially lower until alternate sources of revenue are secured.
Interest income increased from $29,143 for the three month period
ended September 30, 1995 to $225,079 for the same period ended September 30,
1996, and increased from $81,077 for the nine month period ended September 30,
1995 to $641,928 for the same period ended September 30, 1996. The increases
were primarily attributable to increases in average levels of invested cash.
Rental income decreased from $3,870 for three month period ended
September 30, 1995 to $1,200 for the same period ended September 30, 1996, and
increased from $7,020 for the nine month period ended September 30, 1995 to
$9,600 for the same period ended September 30, 1996. The Registrant's rental
income is derived from miscellaneous leases of the Registrant's properties.
Salary and administrative expenses increased from $81,155 for the
three month period ended September 30, 1995 to $111,138 for the same period
ended September 30, 1996, and increased from $198,656 for the nine month period
ended September 30, 1995 to $246,328 for the same period ended September 30,
1996. The increases are primarily attributable to increases in employee
compensation and benefits and administrative expenses.
For the three month period ended September 30, 1996, professional
fees paid by the Registrant increased to $127,302 as compared to $104,488 for
the same period ended September 30, 1995, and increased to $304,472 for the nine
month period ended September 30, 1996 as compared to $274,107 for the same
period ended September 30, 1995. Professional fees relate to attorneys' and
accountants' fees paid for various filing and reporting requirements, certain
litigation, and other general items. The increase was primarily attributable to
higher professional fees associated with issues relating to the Lease Extension,
evaluation of REIT qualification, and litigation fees and expenses. The
Registrant expects professional fees to continue to increase due to ongoing
litigation and other matters.
14
<PAGE>
Insurance and taxes increased to $29,781 for the three month period
ended September 30, 1996 as compared to $12,676 for the same period ended
September 30, 1995, and increased to $91,443 for the nine month period ended
September 30, 1996 as compared to $39,274 for the same period ended September
30, 1995. The increases are primarily attributable to an increase in the
Registrant's directors and officers insurance premiums. In future periods, if
Norfolk Southern refuses to pay property taxes the Registrant expects to incur
higher property tax expense.
The majority of investment banking fees and other fees associated
with the Lease Extension were being capitalized for financial reporting and
income tax purposes and amortized over the 30-year term of the Lease Extension.
Amortization expense of $11,685 for the three month period ended September 30,
1996 and $35,057 for the nine month period ended September 30, 1996 related to
capitalized lease negotiations costs. The Registrant is evaluating the extent to
which expenses associated with the Lease Extension may be expensed currently for
financial reporting and income tax purposes. On November 12, 1996, the Special
Committee of the Board of Directors retained CS First Boston as its
financial advisor. Accordingly additional investment banking fees will be
incurred in future periods.
Consulting fees increased from $12,149 for the three month period
ended September 30, 1995 to $61,096 for the same period ended September 30,
1996, and increased from $36,510 for the nine month period ended September 30,
1995 to $91,254 for the same period ended September 30, 1996. Consulting fees
vary according to the number and magnitude of projects, primarily in connection
with the Lease Extension, and environmental assessment fees. The Registrant
expects to continue to incur substantial consulting fees, investment banking
fees, attorneys' and accountants' fees and related expenses in future periods
until litigation and matters related to the lease or operation of the
Registrant's properties are resolved.
Other expenses include supplies, utilities, postage, office rent,
printing, and miscellaneous items. For the three month period ended September
30, 1996, other expenses were $29,298 as compared to $28,005 for the same period
ended September 30, 1995, and were $73,206 for the nine month period ended
September 30, 1996 as compared to $90,222 for the same period ended September
30, 1995.
Current income tax expense decreased to $32,000 for the three month
period ended September 30, 1996 as compared to $48,000 for the same period
ended September 30, 1995, and decreased to $96,000 for the nine month period
ended September 30, 1996 as compared to $250,000 for the same period ended
September 30, 1995. The decreases are attributable to the September, 1996
REIT election. See Note B to the financial statements.
15
<PAGE>
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 Registrant intends to offset
the effects of inflation by securing leases or other agreements for the lease or
operation of the Registrant's properties with inflation adjustment provisions.
The Registrant and its lessees are responsible for compliance with
state, federal, local or other provisions relating to discharge of materials or
the protection of the environment. The risk of incurring environmental liability
is inherent in conducting railroad operations. Some of the commodities which are
transported over the Registrant's railroad lines are classified as hazardous
materials. The 1895 and 1939 Leases did not make provision for the lessees to
disclose environmental problems affecting the Registrant's properties.
Environmental problems may exist on properties owned by the Registrant which are
known to the lessees but have not been disclosed to the Registrant or which are
unknown to the lessee or the Registrant. State and federal environmental
provisions may impose joint and several liability upon the Registrant and its
lessees and sublessees for environmental damage or clean up (or associated
costs) of any real properties owned by the Registrant and adjoining properties
if the source of any problem is the property of the Registrant. The Registrant
believes that damage or clean up (or the associated costs) would be the
responsibility of the lessees and any sublessees or other parties who may have
created any actionable environmental condition. The Registrant may determine
that it is in its interest to initiate substantial environmental assessments of
its properties in connection with the litigation against Norfolk Southern. If
Norfolk Southern, its sublessees, or other parties who are responsible for any
actionable environmental conditions fail to pay for damage or
remediation, under certain statutes, regulations, and rules, the Registrant
could ultimately be held responsible for any remediation, removal, or cleanup of
the property it owns.
The status of the Peele environmental 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
16
<PAGE>
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.
Cautionary Statement Identifying Important Factors That Could Cause the
Registrant's Actual Results to Differ From Those Projected in Forward Looking
Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document, and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements,
which include statements about litigation, REIT status, and a possible buy-out
by the State of North Carolina are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those indicated by
the forward looking statements. Examples of forward looking statements include,
but are not limited to (i) projections of revenues, income or loss, earnings or
loss per share, capital expenditures, dividends, capital structure and other
financial items, (ii) statements of the plans and objectives of the Registrant
or its management or Board of Directors, including estimates or predictions of
actions by other parties or regulatory authorities, (iii) statements of future
17
<PAGE>
economic performance, and (iv) statements of assumptions underlying other
statements and statements about the Registrant or its business.
This document and any document incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include the Registrant's litigation against Norfolk Southern, the
court's disposition of various legal actions challenging the Lease Extension,
Norfolk Southern's ability or willingness to divert traffic from the
Registrant's line, the Registrant's ability to qualify for tax treatment as a
REIT or the timing of any such REIT election, the effect of the July 29, 1996
court order upon the Registrant's ability to reach any future agreement with
Norfolk Southern for rental or other terms for the continued operation of the
Registrant's railroad lines, the willingness of the State to make an acceptable
buy-out offer and its ability to finance any offer, and other matters which are
described herein and/or in documents incorporated by reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Registrant should not
be construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Registrant prior to the effective date of such Act.
Forward looking statements are beyond the ability of the Registrant to control
and in many cases the Registrant cannot predict what factors would cause actual
results to differ materially from those indicated by the forward looking
statements.
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.
Norfolk Southern Litigation
On September 20, 1996, the Registrant filed an action against
Norfolk Southern Corporation, including certain subsidiaries or affiliates
(hereafter referred to collectively as "Norfolk Southern") in the Superior Court
of Wake County of the State of North Carolina. The action seeks a declaratory
judgment of the Registrant's property ownership and other rights and obligations
of the parties arising out of the expiration of the Registrant's leases with
Norfolk Southern, and seeks other claims and remedies. On October 24, 1996,
Norfolk Southern filed a notice of removal of the action to the United States
District Court for the Eastern District of North Carolina.
On September 23, 1996 the Registrant filed (i) a petition for
interim relief and (ii) a petition to set trackage compensation before the
18
<PAGE>
United States Transportation Board ("STB") for the use of the Registrant's
property by Norfolk Southern, STB Finance Docket No. 33134. The petition for
interim relief seeks an order requiring Norfolk Southern to pay rental on a
temporary basis in the amount of $680,700 monthly pending a final adjudication
or other resolution of the Registrant's state court claims and the Registrant's
petition to the STB to set trackage compensation. Information about negotiations
with Norfolk Southern has been disclosed by the Registrant in prior reports to
the Securities and Exchange Commission.
In October, 1996, Norfolk Southern filed counterclaims against the
Registrant asserting unjust enrichment claims of approximately $12 million
for rental payments, conversion, environmental contribution,
and other claims, and is seeking to establish rental on a interim basis in an
amount not greater than the rental called for in the 1895 and 1939 leases, or
approximately $600,000 annually. The Registrant is vigorously pursuing its
claims against Norfolk Southern and defending the counterclaims. The foregoing
is only a summary of the claims made by the Registrant and the reader should
refer to the complaint and petitions filed by the Registrant, which are hereby
incorporated herein in their entirety. The Registrant believes that litigation
against Norfolk Southern will be both protracted and difficult. Legal fees and
expenses associated with the litigation could exceed several million dollars. In
addition, Norfolk Southern may respond to the Registrant's legal action by
seeking permission from the STB to abandon all or part of the Registrant's line
or Norfolk Southern may seek to divert railroad traffic from the Registrant's
railroad line. There can be no assurance as to the amount or timing of rental
payments if compensation is set by the STB, or that the outcome of the
litigation before the courts or the STB will be favorable to the Registrant.
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 August 9, 1996, the Registrant and
the defendant directors filed motions to dismiss the actions. The court has not
yet ruled on the motions. On September 24, 1996, a lawsuit filed as a purported
class action by the same plaintiffs as the December 1994 and February, 1995
federal court actions was filed in the Superior Court of Wake County, North
Carolina. The action alleged that the Board of Directors of the Registrant
breached their fiduciary duty to shareholders in the formation of the Special
Committee and asserts other claims. The Registrant has notified its directors
and officers insurance carrier of the action.
19
<PAGE>
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 sought 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
included other allegations against the defendants, including alleged proxy rule
violations. Information about the action has been disclosed in prior quarterly
and annual reports to the Securities and Exchange Commission. 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. On July 29, 1996 the court entered an order enjoining
the Registrant from implementing the terms of the Lease Extension and on July
31, 1996 entered a judgment incorporating the order.
The Registrant has determined not to appeal the ruling. On August 9,
1996, the Registrant and the defendant directors filed a motion to alter or
amend the July 31, 1996 judgment in order to seek a clarification from the court
as to whether the Registrant is precluded from pursuing alternatives to the
Lease Extension, including any interim payment or other agreements with Norfolk
Southern. See "Real Estate Investment Trust Election" above regarding the
possible effects of the shareholder litigation on the Registrant's ability to
qualify for REIT status. The Registrant is defending the aspects of the
shareholder suits relating to the shareholder meeting and the Lease Extension.
Information about indemnification of directors, directors and officers
insurance, and related matters has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange Commission.
Greensboro Segment Trackage Rights
On July 8, 1996, the Registrant filed a petition before the STB to
revoke (the "Petition to Revoke") a Notice of Exemption filed by Norfolk
Southern Railway Company ("NSR") of a grant of certain trackage rights by NSR to
Norfolk & Western Railway Company ("N&W"), an affiliate of Norfolk Southern,
over a 2.4 mile segment of the Registrant's railroad line in Greensboro, North
Carolina, STB Finance Docket No. 32961. The trackage rights affect the segment
of the Registrant's railroad line which connects Norfolk Southern's main
north-south route through North Carolina on the Registrant's railroad line with
a Norfolk Southern owned route to Winston-Salem, North Carolina which segment
the Registrant believes might be utilized by Norfolk Southern to divert traffic
away from the Registrant's lines to Norfolk Southern railroad owned lines.
20
<PAGE>
Information about the proceeding has been disclosed in prior quarterly reports
to the Securities and Exchange Commission. The Registrant is challenging the
Notice of Exemption and the amendment by NSR on the basis that NSR failed to
recognize the Registrant's ownership of the 2.4 mile segment affected by the
purported trackage rights and NSR's inability to grant trackage rights in the
absence of the Lease Extension. The STB has not ruled on the matter.
Peele Site
In January, 1994, North Carolina Department of Environment, Health,
and Natural Resources ("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 Peele environmental site. Information about the
litigation has been disclosed by the Registrant in prior annual and quarterly
reports to the Securities and Exchange Commission. The Registrant is one of
several defendants that have been held jointly and severally liable for response
costs and remediation of 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 Registrant, the estimated costs of remediation range
between $500,000 to in excess of $2,000,000. 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Index to Exhibits
Exhibit No. Description
----------- ----------------------------
27 Financial Data Schedule
There are no other changes to exhibits from the
Registrant's Form 10-K for the period ended September 30, 1996.
(b) Reports on Form 8-K
On September 11, 1996, the Registrant filed a Form 8-K
dated August 26, 1996 reporting Item 5, Other Events, with
regard to the Registrant's appointment of the Special
Committee in response to the State of North Carolina's
evaluation of a possible buyout.
21
<PAGE>
On October 3, 1996, the Registrant filed a
Form 8-K dated September 16, 1996 reporting Item 5, Other
Events, regarding (i) the Registrant's election of Real Estate
Investment Trust for the tax year ended December 31, 1995 and
(ii) the Registrant's legal actions against Norfolk Southern.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH CAROLINA RAILROAD COMPANY
DATE: November 14, 1996 Lynn T. McConnell
----------------------------------
Lynn T. McConnell, Treasurer and
Principal Financial Officer
Scott M. Saylor
----------------------------------
Scott M. Saylor
Executive Vice President
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