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 June 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.)
234 Fayetteville Street Mall, Suite 600
P. O. Box 2248, Raleigh, North Carolina 27602
(Address of principal executive offices) (Zip Code)
(919) 829-7355
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date.
Common Stock, $.50 par Value--4,283,470 shares as of
June 30, 1996.
The total number of pages contained in this document is 36 pages.
<PAGE>
INDEX
NORTH CAROLINA RAILROAD COMPANY
PART I. FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited)
Balance Sheets - June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . 3
Statements of Income - Three months ended
June 30, 1996 and June 30, 1995 and six
months ended June 30, 1996 and
June 30, 1995 . . . . . . . . . . . . . .. . . . . . 4
Statements of Shareholders' Equity -
Six months ended June 30, 1996
and June 30, 1995 . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows -
Six months ended June 30, 1996 and
June 30, 1995 . . . . . . . . . . . . . . . . . . . 6
Notes to financial statements -
June 30, 1996 . . . . . . . . . . . . . . . . . . . 7
Item 2. The Registrant's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 12
PART II. OTHER INFORMATION
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 25
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
<PAGE>
BALANCE SHEETS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $16,461,959 $15,139,497
Short term investments -0- 190,000
Interest receivable 115,166 4,447
Prepaid expenses 49,593 -0-
----------- -----------
TOTAL CURRENT ASSETS 16,626,718 15,333,944
PROPERTIES
Roadway and land--Note C 7,848,842 7,848,842
Buildings and equipment 241,469 241,469
Less accumulated depreciation (303,989) (299,559)
----------- -----------
7,786,322 7,790,752
----------- -----------
OTHER ASSETS
Lease negotiation costs, net of 1,350,370 1,355,568
amortization of $70,115 ----------- -----------
and $46,743 $25,763,410 $24,480,264
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payable $ 732,886 $ 854,398
Income taxes payable 4,217,933 5,230,277
Unearned rental income 40,665 -0-
---------- ----------
TOTAL CURRENT LIABILITIES 4,991,484 6,084,675
DEFERRED INCOME TAXES 1,215,051 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 13,826,685 11,455,548
----------- -----------
19,556,875 17,185,738
----------- -----------
$25,763,410 $24,480,264
============ ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF INCOME (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
----------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Lease of roadway and land $ 2,062,429 $ 183,694 $4,124,858 $ 352,263
Interest income 201,000 20,429 416,849 51,933
Rental income 7,800 -0- 8,400 3,150
Gain on sale of real estate -0- 473,956 -0- 473,956
Other -0- 34,015 277 64,250
---------- ---------- ---------- --------
2,271,229 712,094 4,550,384 945,552
Expenses:
Salaries and administrative 72,164 56,394 135,189 117,500
Professional fees 85,161 53,390 177,170 169,618
Insurance and taxes 31,214 14,038 61,661 26,599
Amortization expense 11,685 -0- 23,371 -0-
Depreciation 2,215 1,791 4,430 3,583
Consulting fees 11,240 8,271 30,158 22,922
Other 25,971 33,260 43,912 63,725
---------- --------- ---------- --------
239,650 167,144 475,891 403,947
---------- --------- ---------- --------
INCOME BEFORE INCOME TAXES 2,031,579 544,950 4,074,493 541,605
Income taxes:
Current 849,078 202,000 1,698,156 202,000
Deferred 2,600 2,600 5,200 5,200
---------- --------- ---------- --------
851,678 204,600 1,703,356 207,200
---------- --------- ---------- --------
NET INCOME $1,179,901 $ 340,350 $2,371,137 $ 334,405
========== ========== ========== ========
Earnings per share: $0.27 $0.08 $0.55 $0.08
===== ===== ===== =====
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Shareholders'
Stock Capital Earnings Equity
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $2,141,735 $3,588,455 $2,590,626 $ 8,320,816
Net income 334,405 334,405
---------- ---------- ---------- -----------
Balance at June 30, 1995 $2,141,735 $3,588,455 $2,925,031 $ 8,655,221
========== ========== ========== ===========
Balance at January 1, 1996 $2,141,735 $3,588,455 $11,455,548 $17,185,738
Net income 2,371,137 2,371,137
---------- ---------- ----------- -----------
Balance at June 30, 1996 $2,141,735 $3,588,455 $13,826,685 $19,556,875
========== ========== =========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
STATEMENTS OF CASH FLOWS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Six Months Ended
June 30
1996 1995
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $2,371,137 $ 334,405
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Deferred income taxes 5,200 5,200
Depreciation and amortization 27,801 3,583
Lease negotiation costs (18,173) (131,935)
Change in operating assets and liabilities:
Rent receivable -0- 123,227
Interest receivable (110,719) 751
Other assets (49,593) (2,405)
Accrued expenses (121,512) (60,134)
Unearned rental income 40,665 40,661
Income taxes payable (1,012,344) 180,000
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,132,462 493,353
INVESTING ACTIVITIES
Purchase of short-term investments -0- (730,000)
Maturity of short-term investments 190,000 273,000
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 190,000 (457,000)
FINANCING ACTIVITIES
Dividends paid -0- (128,504)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES -0- (128,504)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,322,462 (92,151)
Cash and cash equivalents at beginning of period 15,139,497 1,615,284
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,461,959 $1,523,133
=========== ==========
</TABLE>
See notes to financial statements
6
<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 does not take into
account the Company's possible Real Estate Investment Trust
("REIT") election for 1995, the possibility of a claim by Norfolk
Southern for a refund of payments made since December, 1995, or
Norfolk Southern's potential liability for any income taxes on
such payments. (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 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 Agreement. (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 had received an opinion of counsel
that the Company could have qualified as a REIT based upon the
effectiveness and terms of the Lease Extension Agreement.
However, on July 29, 1996, a federal court enjoined the Company
from implementing the terms of the Lease Extension Agreement.
The Company will have to evaluate whether and when to elect REIT
status in light of the court order. The Company's decision about
electing REIT status will affect the timing and amount of
shareholder distributions, if any. 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
1995 and 1996, and recognizes the December 1995 payment of
additional rent ratably over all of 1995, lease revenue, income
before income taxes, income taxes, net income, and earnings per
share on a pro-forma basis would be as follows:
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
(Unaudited)
-----------------------------------------
Lease of Roadway and Land $ 4,124,858 $ 4,155,779
Income before Income Taxes 3,648,967 3,751,832
Income Taxes 83,200 1,158,250
Net Income 3,565,767 2,593,582
Earnings per Share .83 .61
The pro forma effect of REIT election and recognition of the
1995 lump sum rental payment ratably for the six month period
ended June 30, 1995 would be $.61 per share, and the effect of
REIT election for the six month period ended June 30, 1996 would
be $.83 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
8
<PAGE>
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. Other shareholder derivative
litigation seeking to enjoin the Lease Extension is also pending.
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. If this payment had been
recognized ratably over all of 1995, lease revenue, income before
income taxes, income taxes, net income, and earnings per share on
a pro forma basis would be as follows:
Six Months Ended
June 30, 1995
(Unaudited)
------------------
Lease of Roadway and Land $ 4,155,779
Income before Income Taxes 3,751,832
Income Taxes 2,615,139
Net Income 1,136,693
Earnings Per Share .27
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.
9
<PAGE>
NOTE D--COMMITMENTS AND CONTINGENCIES
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 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 included other
allegations against the defendants, including alleged proxy rule
violations. 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. As a result of the court order, on August
9, 1996 Norfolk Southern notified the Company that it does not
intend to continue making payments to the Company under 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.
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. 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.
10
<PAGE>
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.
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. 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.
11
<PAGE>
Item 2. 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. Until December, 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 Agreement ("Lease Extension") with
Norfolk Southern. The Lease Extension would have extended the
terms of the 1895 Lease and the 1939 Lease 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. On
December 15, 1995, the Registrant held a shareholder meeting to
approve the Lease Extension. On July 29, 1996, a federal court
in North Carolina enjoined the Registrant from implementing the
terms of the Lease Extension after determining that the
Registrant did not have a quorum at the shareholder meeting. See
Item 3, "Legal Proceedings" regarding the quorum litigation and
other shareholder litigation. The court order enjoining the
Lease Extension creates substantial uncertainty for the
Registrant. The Registrant is considering its alternatives in
light of the decision.
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, 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
12
<PAGE>
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.
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 of rental 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 the first seven months of 1996, Norfolk Southern continued
to make payments to the Registrant in amounts that would have
been due under the terms of the Lease Extension, or approximately
$680,000 per month. As a result of the court order enjoining
implementation of the Lease Extension, on August 9, 1996, Norfolk
Southern advised the Registrant that Norfolk Southern does not
intend to continue making such payments. Norfolk Southern may
assert claims against the Registrant for a refund of payments
made to the Registrant during the period from December, 1995 to
July, 1996, which total approximately $12.6 million. In such
event, the Registrant would oppose any such claims and would
assert counterclaims.
The Registrant has been advised by its railroad regulatory
counsel that the Registrant cannot require Norfolk Southern to
discontinue or abandon operations of the Registrant's railroad
line without approval or exemption from approval of the United
States Surface Transportation Board ("STB"), and that Norfolk
Southern cannot discontinue or abandon such operation without STB
approval or exemption from approval. The Registrant has also
been advised that it may have a residual common carrier duty to
provide railroad service if Norfolk Southern were to be permitted
to discontinue railroad service. If the Registrant operated its
railroad lines itself, it would not be eligible to seek
qualification as a Real Estate Investment Trust for income tax
purposes, but instead would be treated as an operating railroad
in which event ordinary corporate income tax treatment would
apply.
If the Registrant or Norfolk Southern litigate
discontinuance, abandonment, railroad operating rights, or lease
compensation issues before the STB, claims under the 1895 and
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<PAGE>
1939 leases, or other matters, the costs of such litigation are
not known, but the Registrant believes such costs could exceed $1
million per year. The Registrant may be required to finance part
of such litigation costs. If such costs could not be recovered
from Norfolk Southern, the financial position of the Registrant
would be materially adversely affected.
Pursuant to a separate agreement for the payment of $5
million (plus interest) by Norfolk Southern on December 1, 1995
in settlement of certain claims as called for the Lease Extension
(the "settlement payment"), the settlement payment is 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 agreement, the $5 million payment is to be
credited against any sums or rentals ultimately determined to be
due to the Registrant from Norfolk Southern. Therefore, any
recovery by the Registrant against Norfolk Southern for claims
would be offset by the payment amount.
The Registrant does not foresee any need for funds during
1996 which cannot be met primarily from available cash. However,
if the Registrant and Norfolk Southern fail to reach a lease
agreement approved by the Registrant's shareholders and litigate
lease compensation or abandonment issues before the United States
Surface Transportation Board, claims under the 1895 and 1939
Leases, or other matters, 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, equipment costs, or
capital expenditures associated with railroad operations in the
event Norfolk Southern discontinues or abandons operation of the
Registrant's railroad lines. See Item 3, "Legal Proceedings,"
regarding an administrative proceeding affecting railroad
operating rights over a key 2.4 mile segment of the Registrant's
railroad line which connects Norfolk Southern's main north-south
route through North Carolina with another Norfolk Southern owned
route and which might be used by Norfolk Southern to divert
traffic from the Registrant's railroad line.
If the Registrant elects REIT status 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.
See "Real Estate Investment Trust Election" below. If the
Registrant elects REIT status, the Registrant expects to use its
cash flow from operating activities for distributions to
shareholders and for payment of operating expenses.
The Registrant's liquidity (cash and short-term investments)
increased from $15,329,497 at December 31, 1995 to $16,461,959 at
June 30, 1996. Short-term investments in U. S. Treasury Bills of
$190,000 matured during the three month period ended June 30,
14
<PAGE>
1996. The Registrant's cash and cash equivalents increased by
$1,322,462 from December 31, 1995 to $16,461,959 at June 30,
1996.
For the six month period ended June 30, 1996, $1,132,462 of
net cash was provided by operating activities and was primarily
attributable to net income of $2,371,137, which was partially
offset by $1,012,344 of income taxes payable.
Investing activities provided net cash of $190,000 as short-
term investments matured during the quarter.
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, see
Item 3, "Legal Proceedings," regarding the July 29, 1996 court
order enjoining implementation of the Lease Extension. If the
$7.8 million payment described above were recognized ratably over
1995, revenue from lease of roadway and land, income before
income taxes, income taxes, net income, and earnings per share
would be substantially higher for the period ended June 30, 1995,
as noted below.
Total revenues increased from $712,094 for the three month
period ended June 30, 1995 to $2,271,229 for the same period
ended June 30, 1996, and increased from $945,552 for the six
month period ended June 30, 1995 to $4,550,384 for the same
period ended June 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 $20,429 for the three month
period ended June 30, 1995 to $201,000 for the same period ended
June 30, 1996, and increased from $51,933 for the six month
period ended June 30, 1995 to $416,849 for the same period ended
June 30, 1996. The increases were primarily attributable to
increases in average levels of invested cash.
15
<PAGE>
Rental income increased from $-0- for three month period
ended June 30, 1995 to $7,800 for the same period ended June 30,
1996, and increased from $3,150 for the six month period ended
June 30, 1995 to $8,400 for the same period ended June 30, 1996.
The Registrant's rental income is derived from miscellaneous
leases of the Registrant's properties.
Salary and administrative expenses increased from $56,394
for the three month period ended June 30, 1995 to $72,164 for the
same period ended June 30, 1996, and increased from $117,500 for
the six month period ended June 30, 1995 to $135,189 for the same
period ended June 30, 1996. The increases are primarily
attributable to increases in employee compensation and benefits
and administrative expenses.
For the three month period ended June 30, 1996, professional
fees paid by the Registrant increased to $85,161 as compared to
$53,390 for the same period ended June 30, 1995, and increased to
$177,170 as compared to $169,618 for the same period ended June
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.
Insurance and taxes increased to $31,214 for the three month
period ended June 30, 1996 as compared to $14,038 for the same
period ended June 30, 1995, and increased to $61,661 for the six
month period ended June 30, 1996 as compared to $26,599 for the
same period ended June 30, 1995. The increases are primarily
attributable to an increase in the Registrant's directors and
officers insurance premiums, which increases the Registrant
expects to continue to incur in future periods. The Registrant
also expects to incur higher property tax expense in future
periods to the extent property taxes do not continue to be the
responsibility of Norfolk Southern as lessee or become the
responsibility of other lessees.
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 June 30, 1996 and
$23,371 for the six month period ended June 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.
Consulting fees increased from $8,271 for the three month
16
<PAGE>
period ended June 30, 1995 to $11,240 for the same period ended
June 30, 1996, and increased from $22,922 for the six month
period ended June 30, 1995 to $30,158 for the same period ended
June 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 June 30, 1996, other expenses were $25,971 as
compared to $33,260 for the same period ended June 30, 1995, and
were $43,912 for the six month period ended June 30, 1996 as
compared to $63,725 for the same period ended June 30, 1995.
Net income tax expense increased to $1,179,901 for the three
month period ended June 30, 1996 as compared to $340,350 for the
same period ended June 30, 1995, and increased to $2,371,137 for
the six month period ended June 30, 1996 as compared to $334,405
for the same period ended June 30, 1995. The increases are
attributable to substantially higher net income from payments
under the Lease Extension, pursuant to which all income taxes
were to become the responsibility of the Registrant as of January
1, 1995. However, see Item 3, "Legal Proceedings" below
regarding the July 29, 1996 court order enjoining the
implementation of the terms of the Lease Extension. Under the
1895 Lease, all taxes, including income taxes attributable to the
lease, were the responsibility of Norfolk Southern as lessee.
The 1995 income tax provision does not take into account the
Registrant's possible REIT election for 1995 and 1996. See "Real
Estate Investment Trust Election" below and Note B and Note C to
the financial statements.
If the $7.8 million Norfolk Southern payment received in
December, 1995 were recognized ratably over all of 1995, results
of operations for the six month period ended June 30, 1995 as
compared to the same period ended June 30, 1996 would be as
follows:
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
(Unaudited)
---------------------------------------
Lease of Roadway and Land $4,124,858 $4,155,779
Income before Income Taxes 3,648,967 3,751,832
Income Taxes 1,703,356 2,615,139
Net Income 1,945,611 1,136,693
Earnings Per Share .45 .27
17
<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 Lease Extension contained an
annual inflation adjustment provision, which resulted in an
increase in base rental of $42,100, or 2.1%, for the three month
period ended June 30, 1996. However, see Item 3, "Legal
Proceedings" below regarding the July 29, 1996 court order
enjoining implementation of the Lease Extension. 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 Lease
Extension contained extensive provisions governing the rights and
obligations of the parties for various environmental liabilities
and expenses. As a result of the July 29, 1996 court order
enjoining the implementation of the Lease Extension, 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 status of the Peele environmental site is disclosed in
Item 3, "Legal Proceedings." According to a preliminary study
18
<PAGE>
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.
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. However, on
July 29, 1996, a federal court in North Carolina enjoined the
Registrant from implementing the terms of the Lease Extension.
See Item 3, "Legal Proceedings" below.
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
had received an opinion of counsel that the Registrant could have
qualified as a REIT based upon the effectiveness and terms of the
Lease Extension, but the timing of such election was uncertain.
The Registrant sought a ruling from the Internal Revenue Service
as to the effect of the $5 million one-time settlement payment
with respect to the timing of the Registrant's REIT election,
which ruling was favorable to the Registrant but was based on the
Lease Extension being effective. 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. 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
19
<PAGE>
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.
Due to the court order enjoining the Lease Extension and the
uncertainty over the Registrant's qualification for REIT status,
the Registrant has not yet determined whether to elect REIT
status for its 1995 taxable year. 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.
The Registrant's determination will be delayed until the earlier
of the date the uncertainty has been resolved or September 15,
1996, the latest date by which the Registrant may make an
election to be taxed as a REIT for 1995. The Registrant is
evaluating whether to make a REIT election for its 1995 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, any discussions with Norfolk
Southern about the Lease Extension or other agreements,
alternatives to the Lease Extension, including the likelihood of
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 1995
or later years and failing to qualify as a REIT in succeeding
years.
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 made.
Accordingly, in making a decision as to whether to elect REIT
status for 1995, the Registrant will evaluate the tax benefits to
be gained by electing REIT tax status compared to the possible
detriment to the Registrant if the Registrant is disqualified in
a later year from REIT tax status and is then unable to make a
REIT election for four subsequent taxable years following any
20
<PAGE>
such election. 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.)
By delaying certain distributions of 1995 income past
January 31, 1996, if the Registrant makes a REIT election for its
1995 taxable year the Registrant would incur an additional
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 a 1995 income tax liability of
approximately $5.2 million. 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
any tax liability reimbursement, or the effect on the
Registrant's tax liability of a claim by Norfolk Southern for
return of payments made to the Registrant in the amounts called
for in the Lease Extension during 1995 and 1996.
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 electing REIT status
and future agreements with or litigation against Norfolk
Southern, 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
economic performance, and (iv) statements of assumptions
underlying other statements and statements about the Registrant
or its business.
21
<PAGE>
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
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 whether or not the
Registrant and Norfolk Southern reach any agreement for the
continued lease or operation of the Registrant's railroad 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,
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.
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 ruling on whether a quorum of private
shareholders was present at the December 15, 1995 shareholder
meeting of the Registrant. On August 9, 1996, the Registrant and
22
<PAGE>
the defendant directors filed motions to dismiss the actions.
The court has not yet ruled on the motions.
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, and stayed discovery with respect to all other issues.
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 not determined whether it will 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 evaluating 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 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
23
<PAGE>
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. On or about May 15, 1996,
NSR filed a Notice of Exemption with the STB seeking exemption
from STB approval, without notice to or approval of the
Registrant, which was followed by a Notice of Exemption by the
STB published in the Federal Register on June 6, 1996. On June
28, 1996, NSR filed a purported amendment to its Notice of
Exemption including notice to the STB that such trackage rights
would be effective on or after July 8, 1996. Following the
Registrant's filing of the Petition to Revoke, on July 29, 1996,
NSR filed a reply to the Registrant's Petition to Revoke. 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.
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. The Registrant is
engaging in negotiations to settle the litigation, but there can
24
<PAGE>
be no assurance of any settlement or the terms of any such
settlement.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Index to Exhibits
Exhibit No. Description
----------- ----------------------------
27 Financial Data Schedule
99.3 Order dated July 29, 1996 and
Judgment dated July 31, 1996,
U. S. District Court for the
Eastern District of North
Carolina, Case No. 5:95-CV-1054-
BO(2).
There are no other changes to exhibits from the
Registrant's Form 10-K for the period ended June 30, 1996.
(b) Reports on Form 8-K
None.
25
<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: August 14, 1996 John M. Alexander, Jr.
---------------- -------------------------------
John M. Alexander, Jr.
Secretary and Director
DATE: August 14, 1996 Lynn T. McConnell
---------------- -------------------------------
Lynn T. McConnell, Treasurer and
Principal Financial Officer
26
<PAGE>
Exhibit 99.3
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
No. 5:95-CV-1054-BO(2)
WALKER F. RUCKER, Individually )
and on behalf of all others )
similarly situated, and )
derivatively on behalf of )
North Carolina Railroad )
Company, )
)
Plaintiff, )
)
v. ) O R D E R
)
JOHN F. McNAIR, III; JOHN )
McKNITT ALEXANDER, JR.; P. C. )
BARWICK, JR.; J. MELVILLE )
BROUGHTON, JR., SIDNEY R. )
FRENCH; MARVIN D. GENTRY; )
ALEXANDER H. GRAHAM, JR.; )
M. REX HARRIS; WILLIAM H. )
KINCHELOE; CHAUNCEY W. LEVER; )
LYNN T. McCONNELL; JACK A. )
MOODY; JOHN S. RUSSELL; SCOTT )
M. SAYLOR; VAN WYCK WEBB; )
and DAVID T. WOODARD, )
)
Defendants, )
)
and )
)
NORTH CAROLINA RAILROAD )
COMPANY, )
Nominal Defendant. )
This matter is before the undersigned on plaintiff's petition
for permanent injunction. On May 21, 1996, the court tried the
issue of whether a quorum of the private shareholders existed at
the December 15, 1995 stockholders meeting. Counsel for all
parties presented their arguments and introduced evidence.
Finding that a quorum did not exist, the court grants plaintiff's
petition and permanently enjoins defendants from implementing the terms of
the lease between the North Carolina Railroad (NCRR) and Norfolk
Southern Railway.
Facts
-----
This case arises out of a contract between NCRR and Norfolk
27
<PAGE>
Southern, whereby NCRR agreed to lease its facilities to Norfolk
Southern for an annual consideration of $8 million, adjusted for
inflation. The agreement was for a leasehold of 30 years, with
an option for an additional term of 20 years. Because the by-laws
of NCRR require approval of the lease by a majority of a quorum of
the private shareholders,1 a vote was scheduled for the annual
shareholders meeting on December 15, 1995. Believing the rent to
be substantially below market value, plaintiff implemented a
strategy to defeat the lease by encouraging private shareholders
to boycott the December 15, 1995 meeting, intending to prevent the
formation of the quorum required for putting the lease to a vote.
In anticipation of the vote, NCRR hired D.F. King Co. (King)
to serve as its proxy solicitor, First Citizens Bank (First
Citizens) to serve as the proxy tabulator, and James W. Peters of
First Citizens and Richard Haar of Ernst & Young to act as
inspectors of election. King assigned Thomas Long, Senior Vice
President, to the NCRR account. As proxy solicitor, King
contacted private NCRR shareholders, providing them with proxy statements
and proxy cards, and transmitted certain proxies and voting
instructions back to First Citizens.
At the December 15, 1995 meeting, Peters announced that
50.48% of the private shares were present in person or by proxy.2 On
three occasions subsequent to the meeting, Peters made changes to
the proxy count, resulting in a total of 540,596 on December 25,
1995. In its response to plaintiff's objections to the proxy
count, defendants again revised their count downward, arriving at
a final total of 539,169, or 1020 shares over the quorum
requirement.
Among the proxies in dispute is an attempted revocation of
4000 shares held in street name by Weiss, Peck & Greer (WPG) for
the benefit of Mrs. Doe.3 On November 16, 1995, Mrs. Doe voted
on all issues set forth in the proxy statement by returning her
- --------------------
1 Approximately 25% of the shares of NCRR are owned by private
citizens. The State of North Carolina owns the remaining
shares.
2 Putting aside the proper classification of the 1400 shares
transferred to several NCRR directors by the State, the
parties now agree that on the record date 1,076,297 shares
were privately held and that the presence of 538,149 shares
would have constituted a quorum.
3 The court will use a pseudonym in place of the
shareholder's true name pursuant to the confidentiality
order entered by this court on January 9, 1996.
28
<PAGE>
proxy card, which was received by First Citizens before the date of the
meeting. On November 28, 1995, Mrs. Doe's husband telephoned
NCRR and spoke to Tina Izzo, an administrative assistant. Mr. Doe
communicated to Izzo that his wife wanted to revoke her proxy.
Izzo contacted Peter's assistant, Fran Rose, who informed her
that Mrs. Doe would have to revoke her proxy through her broker
because the shares were held in street name. Izzo then called Scott
Saylor, NCRR's general counsel, who instructed her to call Thomas
Long at King. Long informed Izzo that Mrs. Doe could revoke her
proxy using a proxy card to be sent to shareholders in a new
mailing. Izzo then related Long's instructions to Mr. Doe, who
informed Izzo that WPG was the broker involved.
Later on November 28, 1995, Mr. Doe, at the direction of Mrs.
Doe, instructed WPG to revoke the proxy of November 16. In turn,
at 2:31 p.m. on December 1, 1995, WPG sent a fax to Automatic
Data Processing (ADP), directing it to execute the revocation. On
that same afternoon, ADP faxed a written revocation of Mrs. Doe's
proxy to First Citizens at 4:56 p.m. and to King at 5:00 p.m. A copy
of that revocation was found in King's files and produced during
discovery.
Discussion
----------
Resolution of the sole issue before the court, whether a
quorum of private shareholders existed at the December 15, 1995
meeting, turns on whether Mrs. Doe's attempted revocation of her
previously voted proxy of 4000 shares was effective. "An
appointment [or revocation] of a proxy is effective when it is
received by the secretary or other office or agent authorized to
tabulate votes." N.C. Gen. Stat. 55-7-22(c) (emphasis added).
As the official proxy tabulator, First Citizens was authorized to
receive proxies and revocations. Therefore, Mrs. Doe's
revocation was effective if received by First Citizens before the
stockholders' meeting on December 15, 1995. Alternatively, if
King acted as an agent of NCRR with respect to tabulation or
transmission and receipt of proxies, then Mrs. Doe's revocation
was effective because King received the revocation on December 1,
1995.4
First Citizens' Receipt
The preponderance of the evidence introduced at trial
demonstrates that First Citizens received the revocation on
December 1, 1995. Several pieces of evidence verify that ADP
transmitted the revocation via fax to both First Citizens and
King. First, on the "ADP Client Proxy" constituting the revocation is
- --------------------
4 Defendants do not contest the validity of the revocation
document itself or the appropriateness of the method of
transmission.
29
<PAGE>
the following handwritten notation:
1st Citizens
919-755-2025
DF King
212-809-8838
(Pl.'s Ex. 37.) Charles Pasfield, Director of Issuer Services in
the Investor Communications Services Division at ADP Proxy
Services, explained that the notation indicated "where th[e] vote
was going to be sent." (Pasfield Depo. at 28.) Second, attached
to the revocation in ADP's files were two "Transaction
Report[s]," indicating a successful transmission of one page to First
Citizens at 4:56 on December 1, 1995, and a successful transmission of one
page to King at 5:00. (Pasfield Depo. at 34-37; Pl.'s Ex. 5.)
Third, a phone system computer search revealed that ADP had
placed a call to First Citizens' fax line at approximately 4:56 p.m.5 on
December 1, 1995, and a call to King's fax line at approximately
5:00 p.m.6 on December 1, 1995. (Pasfield Depo. at 37-46; Pl.'s
Exs. 7, 9.) Finally, a copy of the revocation, bearing a fax
stamp of "Dec-01-95 Fri 04:59 ADP Proxy Edge," was found by King in its
file of proxies received from ADP, indicating that the revocation
had been properly transmitted four minutes after the disputed
transmission to First Citizens. (Long Depo. at 57-58, 95; Pl.'s
Ex. 37.)
Defendants' rebuttal of this evidence consists only of
Peters' testimony that he did not receive the faxed revocation. When
questioned about First Citizens' procedures for the handling of
incoming faxes, Peters responded that no specific individual was
responsible for handling faxes and that faxes were laid out on a
counter by various individuals where they would be picked up by
the addressee. (Peters Depo. at 62.) In addition, individuals
sometimes delivered faxes to the addressee, but no formal
delivery system or log existed. (Id. at 62-63.) In reference to faxed
proxies and revocations, Peters explained that he picked them up
directly from the fax machine or counter, but that it was
possible that some proxies and revocations were delivered directly to
Susan Moorefield, who was responsible for data entry. (Id. at 64-65.)
- --------------------
5 The report indicates a time of 16:57 or 4:57 p.m.
6 The report indicates that calls were placed to King's fax
line at 10:52 a.m., 12:47 p.m., 16:47 or 4:47 p.m., 16:53
or 4:53 p.m., and 17:01 or 5:01 p.m.
7 Peters testified that Moorefield "left her employment in
January, [1996,] I believe, to pursue other interests."
(Peters Depo. at 65.)
30
<PAGE>
Moorefield, whose whereabouts since January, 1996, are unknown to
Peters,7 posted proxy data, including revocations, to the
computer system. (Id.) After entering a revocation, Moorefield was
supposed to file the revocation document in a folder titled
"Revocations." (Id. at 65.)
The testimony of Richard Haar, the co-inspector of election,
provides further support for plaintiff's contention that First
Citizens received the faxed revocation before the stockholders'
meeting. On December 27, 1995, Haar met with Peters to review
the adjustments Peters had made to the proxy count. One of the
adjustments was a reduction of 4000 shares from the vote total of
privately held shares. At his deposition, Haar had difficulty
remembering whether the deduction was for a revocation or a
double-count of the shares, but he drew some conclusions based on his
notes. Referring to a page of his notes entitled "Scratch re
total Reconciliation[,] NCRR," Haar interpreted the minus sign before
the 4000 as indicating a revocation. (Haar Depo. at 27; Pl.'s Ex.
115.) Although he could not definitively state that he had seen
the WPG revocation, Haar testified that he believed that the
reduction of 4000 shares on December 27 was for a revocation,
notwithstanding the fact that Peters had "worded it as a double
count." (Haar Depo. at 36.) Nevertheless, Haar, without
examining any documentation of a double-count, "just accepted [Peters']
word and made a note that there [had been] a double-count." (Haar
Depo. at 39; Pl.'s Ex. 117.)
Peters' testimony concerning his meeting with Haar on
December 27 fails to clarify why he reduced the proxy count by 4000.
Peters could not recall the details of their discussion. (Peters Depo.
at 80.) Specifically, Peters did not remember telling Haar that the
4000 shares had been double-counted. (Peters Depo. at 80.) In
fact, Peters could not even remember whether the 4000 deduction
represented a single or multi-shareholder correction. (Peters
Depo. at 54.) More significantly, because Peters failed to keep
records of the changes he made on December 20, 22, and 25, 1995,8
he was unable to reconstruct his calculations and the reasons for
them. (Peters Depo. at 53, 55, 58, 60, 81, 83.) The best Peters
could do was to offer his recollection that the corrections were
made to rectify "posting errors" or "double-counting." (Peters
Depo. at 55, 57-58.) In fact, the 4000 shares must have been
double counted because the final count included a 4000 share vote
by WPG.
- --------------------
8 The evidence further suggests that Peters violated this
court's order of December 20, 1995, restraining all persons
from altering or destroying any proxies, revocations, or
documents referring to such materials, by making changes to
the computer record of the proxy count without preserving a
copy of the record before each set of changes. (See Peters
Depo. at 86-88.)
31
<PAGE>
While plaintiff has put forward credible evidence that the
WPG revocation was received by First Citizens, defendants offer only
the testimony of Peters who had trouble remembering why changes
were made subsequent to the stockholders' meeting. Moreover,
Peters could not produce documentation of the mistakes or
computer records detailing the proxy count's metamorphosis through three
sets of adjustments on December 20, 22, and 25, 1995. The only
reasonable inference to be drawn from this evidence is that First
Citizens received the faxed revocation. Although the holes in
Peters' story and his destruction of the computer records
preclude a further finding on the path travelled by the revocation at
First Citizens, the evidence indicates that First Citizens erroneously
posted the revocation as an additional proxy vote, subsequently
discovered the double-count of the WPG shares, and then deducted
the double-count, but failed to give effect to the revocation
which had been mysteriously lost. Thus, in light of the evidence
presented, the court finds, as a matter of fact, that First
Citizens received the WPG revocation on December 1, 1995, and
therefore concludes, as a matter of law, that the revocation was
effective.
King's Agency
In addition to First Citizens' receipt, it is undisputed that
King, NCRR' proxy solicitor, received the revocation on December
1, 1995.9 Nevertheless, defendants argue that receipt of the
revocation by King is insufficient because King was not the
authorized tabulator. Finding that King was an agent of NCRR
authorized to receive and transmit proxies, the court concludes
that Mrs. Doe's revocation was effective.
"An agent is one who, by the authority of another, undertakes
to transact some business or manage some affairs on account of
such other, and to render an account of it. He is a substitute, or
deputy, appointed by his principal primarily to bring about
business relations between the latter and third persons."
Greensboro Housing Authority v. Kirkpatrick & Associates, Inc.,
56 N.C. App. 400, 402 (1982). Although King did not serve as the
official tabulator, overwhelming evidence indicates that King
acted as NCRR's agent with respect to the flow of proxy materials
between shareholders and NCRR and its tabulator, First Citizens.
The contract between NCRR and King provides that NCRR
"retains King for proxy solicitation services . . . in connection with the
Meeting and authorizes King to contact and to provide information
to the Company's stockholders." (Long Depo. at 9; Pl.'s Ex. 19.)
In a pre-contract letter of September 5, 1995 to Scott Saylor,
Long represented that King's proxy solicitation services would include
"consultation with and coordination with the tabulator to assure
- --------------------
9 A copy of the revocation, with a fax stamp of December 1,
1995, was found in King's files. For a discussion of the
facts surrounding transmission, see supra at 5-6.
32
<PAGE>
reliable recording and timely reporting of voting results,
including daily or on-line reports customized to your
specification." (Pl.'s Ex. 139 at 3 (emphasis added).)
King distributed proxy materials to brokers for distribution
to beneficial owners. (Izzo Depo. at 15-16, 24-26.) In fact,
after consulting King in response to Mr. Doe's November 28, 1995,
NCRR specifically instructed Mr. Doe that King would be sending
out a second mailing of proxy cards which could be used to effectuate
the desired revocation. (Izzo Depo. at 12.) Furthermore, in its
proxy mailings King enclosed return envelopes addressed to
itself. (Izzo Depo. at 15-16, 24-26.) NCRR also instructed at least some
of its shareholders to submit proxies through King. (See Pl.'s
Ex. 152.)
As part of its services, King also carefully tracked the
proxy voting. King kept a running total of all proxies it received
from banks, brokers, and nominees. (Long Depo. at 27-28; Pl.'s Ex.
24.) Upon receipt of a revocation from a bank or broker, King's
procedure was to record it. (Long Depo. at 49.) Nevertheless,
the March 26, 1996 version of King's "Detail Proxy Input Listing"
shows the WPG shares as having been voted, (Long Depo. at 64; Pl.'s Ex.
24), indicating that King failed to properly record the
revocation it received.
Although there is considerable confusion on the part of King
as to what materials it transmitted to the tabulator, the
evidence demonstrates that King transmitted proxy cards and ADP voting
instructions to First Citizens. Long testified that King
transmitted non-ADP banks and brokers' votes to First Citizens,
may have transmitted proxy cards that it received from registered
holders, and "may or may not have turned over some ADP proxies."
(Long Depo. at 29, 118.) Long stated that he could not remember
what materials were specifically transmitted to First Citizens
and that no documents existed which could provide that information.
(Long Depo. at 118-20.) Long admitted to turning over proxies to
First Citizens that he obtained on December 14 and 15, 1995, but
he could not remember which ones. (Long Depo. at 146.) Long also
made several calls to ADP from Raleigh on the morning of the
vote. (Long Depo. at 157-58; Pl.'s Ex. 150.) Finally, NCRR produced
several ADP proxies addressed to itself care of King, further
demonstrating that King transmitted proxies and ADP voting
instructions to NCRR and its tabulator. (Pl.'s Exs. 154, 155.)
In light of the overwhelming evidence that King was hired by
NCRR to disseminate and receive proxy materials and did, in fact,
forward proxies, including those received from ADP, to the
tabulator, the court must conclude that King served as NCRR's
agent, and was therefore bound to transmit Mrs. Doe's revocation
to First Citizens. Furthermore, King's failure is not a shield for
NCRR. "[A] principal is chargeable with, and bound by, the
knowledge of or notice to his agent received while the agent is
acting within the scope of his authority and in reference to a
33
<PAGE>
matter over which his authority extends, although the agent does
not in fact inform his principal thereof." Norburn v. Mackie,
262 N.C. 16, 24 (1964). Thus, the court concludes, as a matter of
law, that the revocation was effective.
Conclusion
----------
Having found that Mrs. Doe's revocation was received by the
tabulator, First Citizens, and King, NCRR's agent, the court
concludes that a quorum of private shareholders did not exist at
the December 15, 1995 shareholder meeting.10 Accordingly, the
court permanently enjoins defendants from implementing the terms
of the lease between NCRR and Norfolk Southern Railway.
This 29th day of July, 1996.
/s/Terrence W. Boyle
----------------------------
TERRENCE W. BOYLE
UNITED STATES DISTRICT JUDGE
- --------------------
10 Reducing the private shareholders' proxy count of 540,596
by the 4000 share revocation leaves a total of 536,596 private
shares represented at the meeting, well below the 538,149
shares needed for a quorum.
34
<PAGE>
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
No. 5:95-CV-1054-BO(2)
WALKER F. RUCKER, Individually )
and on behalf of all others )
similarly situated, and )
derivatively on behalf of )
North Carolina Railroad )
Company, )
Plaintiff, )
)
v. )
) JUDGEMENT IN A CIVIL CASE
JOHN F. McNAIR, III; JOHN )
McKNITT ALEXANDER, JR.; P. C. )
BARWICK, JR.; J. MELVILLE )
BROUGHTON, JR., SIDNEY R. )
FRENCH; MARVIN D. GENTRY; )
ALEXANDER H. GRAHAM, JR.; )
M. REX HARRIS; WILLIAM H. )
KINCHELOE; CHAUNCEY W. LEVER; )
LYNN T. McCONNELL; JACK A. )
MOODY; JOHN S. RUSSELL; SCOTT )
M. SAYLOR; VAN WYCK WEBB; )
and DAVID T. WOODARD, )
Defendants, )
)
and )
)
NORTH CAROLINA RAILROAD )
COMPANY, )
Nominal Defendant.)
This action came to hearing before the Court. The issues
having been heard and a decision has been rendered,
IT IS ORDERED AND ADJUDGED that the defendants John F. McNair,
III, John McKnitt Alexander, Jr., P. C. Barwick, Jr., J. Melville
Broughton, Jr., Sidney R. French, Marvin D. Gentry, Alexander H.
Graham, Jr., M. Rex Harris, William H. Kincheloe, Chauncey W.
Lever, Lynn T. McConnell, Jack A. Moody, John S. Russell, Scott
M. Saylor, Van Wyck Webb and David T. Woodard and North Carolina
Railroad Company are hereby permanently enjoined from
implementing the terms of the lease agreement between NCRR and Norfolk
Southern Railway.
THIS JUDGMENT FILED AND ENTERED THIS 31st DAY OF JULY, 1996, AND
COPIES MAILED TO THE FOLLOWING:
35
<PAGE>
David M. Clark, Esq.
P. O. Box 1349
Greensboro, NC 27402
J. Anthony Penry, Esq.
Wyrick Robbins Yates & Ponton
4101 Lake Boone Trail
Suite 300
Raleigh, NC 27607
John L. Sarratt, Esq.
Petree Stockton
4101 Lake Boon Trail
Suite 400
Raleigh, NC 27607-6519
July 31, 1996 DAVID W. DANIEL, CLERK
By: /s/Rebecca Bowen
------------------
Deputy Clerk
36
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,461,959
<SECURITIES> 0
<RECEIVABLES> 115,166
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,626,718
<PP&E> 8,090,311
<DEPRECIATION> (303,989)
<TOTAL-ASSETS> 25,763,410
<CURRENT-LIABILITIES> 4,991,484
<BONDS> 0
0
0
<COMMON> 2,141,735
<OTHER-SE> 17,415,140
<TOTAL-LIABILITY-AND-EQUITY> 25,763,410
<SALES> 0
<TOTAL-REVENUES> 4,550,384
<CGS> 0
<TOTAL-COSTS> 475,891
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,074,493
<INCOME-TAX> 1,703,356
<INCOME-CONTINUING> 2,371,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,371,137
<EPS-PRIMARY> .55
<EPS-DILUTED> 0
</TABLE>
