C:\10-Q.WPD
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 March 31, 1997
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 Avenue, Suite 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
March 31, 1997.
The total number of pages contained in this document is 24 pages.
<PAGE>
INDEX
NORTH CAROLINA RAILROAD COMPANY
PART I. FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited)
Balance Sheets - March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . 3
Statements of Operations - Three months ended
March 31, 1997 and March 31, 1996 . . . . . . . . . 4
Statements of Shareholders' Equity -
Three months ended March 31, 1997
and March 31, 1996 . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows -
Three months ended March 31, 1997 and
March 31, 1996 . . . . . . . . . . . . . . . . . . . 6
Notes to financial statements -
March 31, 1997. . . . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . . 18
Item 5. Other Information . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 21
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
<PAGE>
BALANCE SHEETS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
--------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,707,880 $ 5,318,933
Prepaid expenses 66,000 -0-
------------ ------------
TOTAL CURRENT ASSETS 4,773,880 5,318,933
PROPERTIES
Roadway and land--Note C 7,848,842 7,848,842
Buildings and equipment 303,424 285,635
Less accumulated depreciation (310,634) (308,419)
------------ ------------
7,841,632 7,826,058
------------ ------------
$12,615,512 $13,144,991
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payable $ 402,615 $ 262,698
Accrued environmental remediation costs 200,000 200,000
Unearned rental income 60,989 -0-
------------ ------------
TOTAL CURRENT LIABILITIES 663,604 462,698
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 6,221,718 6,952,103
------------ ------------
11,951,908 12,682,293
------------ ------------
$12,615,512 $13,144,991
============ ============
</TABLE>
See notes to financial statements.
3
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STATEMENTS OF OPERATIONS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
Three Months Ended
March 31
1997 1996
--------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Revenues:
Lease of roadway and land $ 20,330 $2,062,429
Interest income 62,371 215,848
Rental income 7,400 600
Other 1,879 277
---------- ---------
91,980 2,279,154
Expenses:
Salaries and administrative 93,685 63,024
Professional fees 282,312 92,008
Insurance and taxes 196,983 30,447
Amortization expense -0- 11,685
Depreciation 2,215 2,215
Consulting fees 210,196 18,918
Other 25,974 17,936
---------- ----------
811,365 236,233
(LOSS) INCOME BEFORE INCOME TAXES (719,385) 2,042,921
Income taxes:
Current 11,000 849,078
Deferred -0- 2,600
---------- ----------
11,000 851,678
---------- -----------
NET (LOSS)INCOME $ (730,385) $1,191,243
========== ===========
NET (LOSS) INCOME per share: ($0.17) $0.28
===== =====
</TABLE>
See notes to financial statements.
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STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
Additional
Common Paid-In Retained Shareholders'
Shares Capital Earnings Equity
--------- --------- --------- ----------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $2,141,735 $3,588,455 $11,455,548 $17,185,738
Net income 1,191,243 1,191,243
---------- ---------- ----------- -----------
Balance at March 31, 1996 $2,141,735 $3,588,455 $12,646,791 $18,376,981
========== ========== =========== ===========
Balance at January 1, 1997 $2,141,735 $3,588,455 $ 6,952,103 $12,682,293
Net loss (730,385) (730,385)
---------- ---------- ----------- -----------
Balance at March 31, 1997 $2,141,735 $3,588,455 $ 6,221,718 $11,951,908
========== ========== =========== ===========
</TABLE>
See notes to financial statements.
5
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STATEMENTS OF CASH FLOWS
NORTH CAROLINA RAILROAD COMPANY
Three Months Ended
March 31
1997 1996
--------- ---------
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net (loss) income $ (730,385) $1,191,243
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Deferred income taxes -0- 2,600
Depreciation and amortization 2,215 13,900
Lease negotiation costs -0- (18,268)
Change in operating assets and liabilities:
Interest receivable -0- (71,363)
Other assets (66,000) (74,398)
Accrued expenses 139,917 (85,453)
Unearned rental income 60,989 61,000
Income taxes payable -0- (1,783,422)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (593,264) (764,161)
INVESTING ACTIVITIES
Purchase of equipment (17,789) -0-
Maturity of short-term investments -0- 190,000
---------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17,789) 190,000
----------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (611,053) (574,161)
Cash and cash equivalents at beginning of period 5,318,933 15,139,497
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,707,880 $14,565,336
========== ===========
</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 the year ended December 31, 1996.
PROPERTIES: Buildings and equipment are reported at cost.
Depreciation is computed on the straight-line method over the
estimated useful lives of the assets. Buildings are depreciated
over thirty years and equipment is depreciated over three to five
years. Properties in the roadway and land account are carried at
an amount which approximates the 1916 valuation by the Interstate
Commerce Commission. These properties are not depreciated
because they represent fully depreciated roadway or non-depreciable land.
However a rehabilitation project of $200,000
was amortized over a five-year period in the 1940's.
INCOME TAXES: The Company is a real estate investment trust
("REIT") for federal income tax purposes. A corporate REIT is a
legal entity that holds real estate interests, and through
distributions to shareholders, is permitted to reduce or avoid
the payment of federal income taxes at the corporate level. To
maintain qualification as a REIT, the Company must distribute to
shareholders at least 95% of REIT taxable income. No provision
has been made for income taxes related to REIT taxable income to
be distributed to shareholders if the Company continues to
qualify for REIT status for 1996 and 1997. A provision has been
made, however, related to a portion of REIT taxable income that
will not be distributed to shareholders in such event. (See Note
B.)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents
include investments in commercial paper, U. S. Treasury Bills,
and certificates of deposit with original maturities of three
months or less. Cash deposits are placed with high credit
quality financial institutions. At times, deposits exceed
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amounts insured by the Federal Deposit Insurance Corporation.
LEASE/TRANSACTION COSTS: Certain lease negotiation costs
were capitalized and were being amortized over thirty years. As
a result of the discontinuance of rental payments by Norfolk
Southern during 1996 and the uncertainty of any future lease
arrangements, the capitalized lease negotiation costs were
written off in December 1996. (See Note D.)
NOTE B--REAL ESTATE INVESTMENT TRUST
On September 16, 1996, the Company elected REIT status for
1995. The REIT provisions of the Internal Revenue Code generally
allow a REIT to deduct distributions paid to its shareholders.
If the Company makes shareholder distributions of 95% of 1996
REIT taxable income, the Company believes it will continue to
qualify as a REIT for 1996 and later years. The Company has
requested extensions to file its 1996 income tax returns, and
there can be no assurance that the Company can continue to
qualify for REIT status for 1996, 1997, or later years.
Prior to the election of REIT status, the Company calculated
its provisions 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. The pro forma effect of REIT election
for the first quarter of 1996 was as follows:
Period Ended March 31, 1996
(Unaudited)
Lease of Roadway and Land $2,062,429
Income before Income Taxes 2,042,921
Income Taxes 43,900
Net Income 1,999,021
Earnings Per Share 0.46
For the year ended December 31, 1996 and the period ended
March 31, 1997, the Company has calculated its provision for
income taxes based upon its recent REIT election. As a result of
the Registrant's failure to make certain shareholder
distributions prior to January 31, 1997, the Registrant incurred
an excise tax of approximately $170,000 for tax year 1996.
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
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Lease"). In 1989, the Company acquired the Atlantic and North
Carolina Railroad Company, the assets of which were subject to a
lease dating to 1939 with the Atlantic & East Carolina Railway
Company ("AECR"), a wholly-owned subsidiary of Norfolk Southern
Railway Company (the "1939 Lease"). NSR and AECR are hereinafter
referred to as "Norfolk Southern". The terms of the 1895 Lease
and 1939 Lease provided for expiration on January 1, 1995 and
December 31, 1994, respectively, and did not require either the
Company or Norfolk Southern to renew the leases.
On August 10, 1995, the Board of Directors of the Company
approved a Lease Extension Agreement to extend the terms of the
1895 Lease and the 1939 Lease, with its effectiveness retroactive
to January 1, 1995. However, 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 base annual 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, Norfolk Southern made a payment
of approximately $7.8 million called for in the Lease Extension
for additional 1995 rental, and from January through July, 1996,
made monthly payments of base rental in the amount called for in
the Lease Extension for 1996 rental totaling approximately $4.8
million. 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. As a result, no
rental revenue has been recognized for the period from August,
1996 through March 31, 1997.
A lease of certain properties in Charlotte, North Carolina
to Norfolk Southern (the "1968 Lease") expires on December 31,
2067, and provides for an annual rental of $81,319 through
December 2017. 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.
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 (which action was removed to
federal court) 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
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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 an interim basis in
an amount not to exceed 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 relating to the Lease
Extension 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." 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. The Company and the other defendants 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 of the Registrant's Board of Directors and
asserts other claims.
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 makes 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, determining
that a proxy which had been counted toward the quorum was
effectively revoked, thus reducing the proxy count below the
number of shares needed for a quorum under the Company's bylaws.
The Company is opposing a claim in excess of $1 million by the
plaintiff for legal fees in the action.
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 from certain claims and liabilities alleged in the
actions, including the defense costs and expenses. The Company
notified its directors and officers insurance carriers of claims
as a result of the actions. Except with respect to the action
filed on September 24, 1996, claims have been accepted by the
relevant insurance carrier on behalf of the directors and
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officers. With regard to the September 24, 1996 action, the
insurance carrier has asserted that coverage is not available
under the policy in effect at that time. The Company is
evaluating the insurance carrier's assertion. The directors and
officers insurance policy has an aggregate limit of $5,000,000
and a $75,000 retention per occurrence.
In January, 1994, 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 pesticide disposal site (the "site"). The Company is
one of several defendants that have been held jointly and
severally liable for response costs and remediation of the site.
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. On February 26, 1997, the Company and
other parties entered into an agreement among themselves and an
agreement with DEHNR to remediate the site and share in
assessment and clean-up costs and as a result, the Company
accrued $200,000 in 1996 as an estimate of its share of
remediation costs. However, the Company does not know the total
amount of financial exposure or the timing of the resolution of
the matter. If such costs are not paid by other parties, the
financial position of the Company could be materially adversely
affected. The Company does not have insurance to minimize its
potential exposure.
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Item 2. The Registrant's Discussion and Analysis of Financial
Condition and Results of Operations
A majority of the Registrant's assets were subject to two
railroad operating leases dating to 1895 and 1939. Information
about the leases has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange
Commission. See Item 3, Legal proceedings regarding litigation
against Norfolk Southern Railway Company, Atlantic & East
Carolina Railway Company and other related entities with respect
to compensation, property, and other issues associated with the
expiration of the Registrant's leases.
If the Registrant is unable to negotiate other leases or
obtain orders by the STB upon acceptable terms, 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. However, the Registrant may be required to incur
substantial capital expenditures and other expenses for the
operation of the railroad line if equipment, facilities and other
railroad operating property are not returned by the lessees in
operating condition or if the quantities or type of the returned
equipment is insufficient to operate the railroad line.
The Registrant's cash and cash equivalents were
approximately $4.5 million as of May 1, 1997. If the Registrant
continues to qualify for REIT status for 1996, a distribution of
approximately $3.2 million would be required to be made to
shareholders. The Registrant does not foresee any need for funds
during 1997 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 is opposing a claim in excess of $1
million for legal fees in a shareholder action overturning the
December 15, 1995 shareholder vote on the Lease Extension.
In addition, in connection with the possible buy out of the
Registrant by the State of North Carolina, the Registrant may be
required to pay investment banking fees of approximately $500,000
at the time the Registrant requests a fairness opinion, which may
have to be paid even if the buy out does not occur. The
combination of the REIT distribution for 1996, investment banking
fees and the shareholder claim for approximately $1 million of
attorneys fees exceed the current cash and cash equivalents of
the Registrant's assets. The Registrant may be required to
finance (i) litigation expenses, (ii) expenses associated with
seeking alternative operators or lessees of the Registrant's
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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 or ceases to
maintain the Registrant's property at a level acceptable to the
Registrant or at levels acceptable to regulatory agencies such as
the U. S. Federal Railroad Administration. There can be no
assurance such financing will be available or if available, that
it can be obtained on terms favorable to the Registrant. Failure
to obtain financing would have a material adverse effect upon the
Registrant.
The Registrant's liquidity (cash) decreased from $5,318,933
at December 31, 1996 to $4,707,880 at March 31, 1997. Prepaid
expenses increased from -0- to $66,000 over the same period
reflecting premiums paid for directors and officers insurance.
For the three month period ended March 31, 1997, $593,264
of net cash was used in operating activities and was primarily
attributable to a net loss of $730,385, which was offset in part
by $139,917 of accrued expenses.
Results of Operations
On August 9, 1996, Norfolk Southern notified the Registrant
that payments of approximately $680,000 monthly would be
discontinued. As a result, no railroad rental revenue has been
recognized for the period ended March 31, 1997. See Item 3,
"Legal Proceedings," regarding certain Norfolk Southern
litigation. The Registrant expects its revenues in future
periods will remain at current low levels until alternate sources
of revenue are secured. Results of operations for 1996 reflect
payments to the Registrant from Norfolk Southern from January
through July, 1996.
Total revenues decreased from $2,279,154 for the three month
period ended March 31, 1996 as compared to $91,980 for the same
period ended March 31, 1997. The decrease was attributable
primarily to a decrease in rental revenue from leases of roadway
and land and a decrease in interest income.
Interest income decreased from $215,848 for the three month
period ended March 31, 1996 to $62,371 for the same period ended
March 31, 1997. The decrease was primarily attributable to a
decrease in average levels of invested cash.
Rental income increased from $600 for three month period
ended March 31, 1996 to $7,400 for the same period ended March
31, 1997. The Registrant's rental income is derived from
miscellaneous leases of the Registrant's properties. On January
1, 1997 the Registrant commenced a lease of certain property in
Morehead City, North Carolina expected to generate approximately
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$2,000 of revenues monthly.
Salary and administrative expenses increased from $63,024
for the three month period ended March 31, 1996 to $93,685 for
the same period ended March 31, 1997. The increase was
attributable to increases in meeting expenses, employee benefits,
and salaries.
For the three month period ended March 31, 1997,
professional fees paid by the Registrant increased to $282,312 as
compared to $92,008 for the same period ended March 31, 1996.
The increase in professional fees relates to attorneys' and
accountants' fees paid for various filing and reporting
requirements, litigation fees, REIT qualification evaluation and
other general items, and the Registrant expects to continue to
incur substantial professional fees in future periods until
litigation and related matters are resolved.
Insurance and taxes increased to $196,983 for the three
month period ended March 31, 1997 as compared to $30,447 for the
same period ended March 31, 1996. The increase was attributable
to excise taxes paid by the Registrant for tax year 1996 of
approximately $170,000 in connection with the Registrant's
failure to make certain shareholder distributions as a REIT prior
to January 31, 1997.
Amortization expense decreased from $11,685 for the three
month period ended March 31, 1996 to -0- for the same period
ended March 31, 1997. The decrease is attributable to the write-off
of certain lease negotiations costs in 1996.
Consulting fees increased from $18,918 for the three month
period ended March 31, 1996 to $210,196 for the same period ended
March 31, 1997. Consulting fees vary according to the number and
magnitude of projects, primarily in connection with ongoing
litigation, the Special Committee of the Registrant's Board of
Directors, and other matters. The increase was primarily
attributable to increases in investment banking, public
relations, and railroad consulting fees. The Registrant expects
to continue to incur substantial consulting fees, investment
banking fees and related expenses in future periods until
litigation matters, matters related to the lease or operation of
the Registrant's properties, and issues addressed by the Special
Committee are resolved. See Item 5, Other Information, regarding
a Letter of Intent between the Registrant, the State of North
Carolina, and the Beaufort & Morehead Railroad Company with
respect to the possible acquisition by the State of North
Carolina of all of the shares of the Registrant not held by the
State.
Other expenses include supplies, utilities, postage, office
rent, printing, and miscellaneous items. For the three month
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period ended March 31, 1997, other expenses were $25,974 as
compared to $17,936 for the same period ended March 31, 1996.
The increase was primarily attributable to increases in office
rent, office equipment and supplies.
Current income tax expense was $11,000 for the period ended
March 31, 1997 as compared to $849,078 for the same period ended
March 31, 1996. The decrease for 1997 is attributable to the
September 1996 REIT election. Prior to the REIT election, the
Registrant was taxed as a "C" corporation. There can be no
assurance that the Registrant will continue to qualify as a REIT.
See Note B to the financial statements and "Real Estate
Investment Trust" below.
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 the 1939 Lease, increased only to the
extent changes in the general inflation rate increased the excess
rental payments under the 1939 Lease. The Registrant intends to
offset the effects of inflation by seeking inflation adjustments
in any compensation order by the STB, or securing leases or other
agreements for the lease or operation of the Registrant's
properties with inflation adjustment provisions. However, if the
uncertainties regarding the litigation against Norfolk Southern's
failure to pay rental to the Registrant are not resolved,
inflation will tend to increase any expenses required to be
financed by the Registrant in future periods.
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 Norfolk Southern or its sublessees
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
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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 clean up of the property it owns. See Item 3, "Legal
Proceedings," regarding the status of the Peele environmental
site.
Real Estate Investment Trust
On September 16, 1996, the Registrant elected tax status as
a Real Estate Investment Trust ("REIT") for the tax year ended
December 31, 1995. A REIT is generally not 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
shareholders. However, the Norfolk Southern litigation and
certain shareholder litigation could delay or affect the
Registrant's ability to receive rental income or the timing or
amount of shareholder distributions. Acquisition of the
Registrant by the State of North Carolina could reduce the number
of shareholders of the Registrant below the requirements for REIT
status under the I.R.C. Failure to meet either of these
requirements could cause the Registrant to be unable to continue
to qualify for REIT status. Failure to continue to qualify as a
REIT would substantially decrease the after-tax net income
available for distribution to shareholders of the Registrant.
The Registrant believes that if it makes the required
shareholder distributions, or it will continue to qualify as a
REIT. In order to continue to qualify as a REIT, the Registrant
must declare a dividend of at least 95% of REIT taxable income
prior to the due date of its 1996 tax return, as extended. 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.
The Registrant will evaluate all relevant factors in
determining whether to maintain its qualification for REIT status
for its 1996 taxable year and later years. Such factors will
include, for example, the status of the rental and other
litigation against Norfolk Southern before the STB and the
courts, alternatives to litigation, the Registrant's cash flow,
advice from the Registrant's professional advisers about the
16
<PAGE>
feasibility of continued qualification for REIT status, the
possible acquisition of shares by the State of North Carolina or
reorganization, the status of the shareholder derivative actions,
and the tax consequences of the Registrant failing to qualify as
a REIT for 1997 or subsequent years. Due to the uncertainty, the
Registrant has determined to delay a determination as to whether
it will qualify as a REIT for its 1996 taxable year until the
earlier of the date the uncertainty has been resolved or the
latest date by which the Registrant may file its 1996 federal
income tax return. The provisions of the I.R.C. and related
regulations governing the federal income tax treatment of REIT's
are highly technical and complex. At present, the Registrant
intends to continue its qualification for REIT status, however,
there can be no assurance that the Registrant will maintain its
qualification for REIT status for 1996 or later years due to
possible cash flow requirements and other uncertainties discussed
above.
By delaying certain distributions of 1996 income past
January 31, 1997, the registrant incurred an additional federal
excise tax liability of approximately $170,000 for 1996. If the
Registrant does not qualify as a REIT for 1996, the Registrant
would incur an additional 1996 income tax liability of
approximately $1.4 million.
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, the possibility of a buy-out by the State of North
Carolina, and other alternatives the Registrant is considering
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.
This document and any document incorporated by reference
17
<PAGE>
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 the shareholder legal actions, 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 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 operations of the Registrant.
Norfolk Southern Litigation (Federal Court)
On September 20, 1996, the Registrant filed an action
against Norfolk Southern Corporation, NSR, AECR, and certain
subsidiaries or affiliates thereof (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
asserts other claims, including breach of contract and
environmental claims. Information about the litigation has been
disclosed by the Registrant in prior quarterly and annual reports
to the Securities and Exchange Commission. There have been no
changes in the litigation since the last report that are material
to the Registrant.
Norfolk Southern Litigation (U. S. Surface Transportation Board)
On September 23, 1996 the Registrant filed (i) a petition
18
<PAGE>
for interim relief and (ii) a petition to set trackage
compensation before the 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 federal court action against Norfolk Southern
and the Registrant's petition to the STB to set trackage
compensation. In response, Norfolk Southern petitioned the STB
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. Information about the
litigation has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange
Commission. There have been no changes in the litigation since
the last report that are material 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, which actions were consolidated
into one case by the court. Information about the actions has
been disclosed in prior quarterly and annual reports to the
Commission. There have been no changes in the litigation since
the last report that are material to the Registrant.
On December 21, 1995, a shareholder derivative legal action
was filed in Federal District Court in the Eastern District of
North Carolina, Rucker v. North Carolina Railroad Company, et
al., Case No. 5-95-CV-1054-BO(2). The action 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 Commission. There have been no changes in the
litigation since the last report that are material to the
Registrant.
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 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 NSR's main north-south
19
<PAGE>
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 owned railroad lines. Information
about the proceeding has been disclosed in prior quarterly
reports to the 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 pesticide disposal site (the "site"). Information
about the site and the litigation has been disclosed by the
Registrant in prior annual and quarterly reports to the
Commission. On February 26, 1997, the Registrant and other
parties entered into an agreement among themselves and an
agreement with DEHNR to remediate the site and share in
assessment and clean-up costs. As a result, the Registrant has
accrued $200,000 in 1996 as an estimate of its share of
remediation costs under the agreements. However, the Registrant
does not know the total amount of financial exposure or the
timing of the resolution of the matter. If such costs are not
paid by other parties, the financial position of the Registrant
could be materially adversely affected. The Registrant does not
have insurance to minimize its potential exposure.
Charlotte Convention Center Litigation
During 1991, the Registrant initiated lawsuits in the
Mecklenburg County, North Carolina, Superior Court regarding its
railroad corridor through downtown Charlotte. The Registrant
alleged that both the City of Charlotte ("City") 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. During the first
quarter, the Registrant and the City reached an agreement to
for a sale by the Registrant of certain inactive railroad
property less than one mile in length to the City, subject to
certain conditions of closing, whereby the City will pay the
Registrant $4,000,000 in exchange for the property and
dismissal of the lawsuits.
20
<PAGE>
Item 5. Other Information
On April 7, 1997, the Registrant, the State of North
Carolina and the Beaufort & Morehead Railroad Company (a North
Carolina corporation whose stock is wholly owned by the State of
North Carolina)("State") executed a Letter of Intent to reach a
definitive agreement for a plan of merger, whereby the State
would acquire the shares held by shareholders other than the
State at a cash price of $66.00 per share. The Letter of Intent
between the State and the Registrant was recommended for approval
by the Special Committee of the Registrant's Board of Directors
and was approved by the Registrant's Board of Directors at a
meeting on April 7, 1997. No definitive agreement has been
reached with the State. Under the terms of the Letter of Intent,
any definitive agreement will be subject to all other corporate
and governmental approvals, including approval by the
shareholders of the Registrant, to the State securing necessary
financing, and to other conditions. The Letter of Intent also
provides that either the State or the Registrant may terminate
any definitive agreement if closing does not occur on or before
May 5, 1998.
There can be no assurance that a definitive agreement can be
reached, and if reached, that it will include a share price or
any other terms that are attractive to the shareholders of the
Registrant. In addition, there can be no assurance that the
State will obtain the necessary financing or that any approvals
required within the State government or the Registrant could be
obtained to authorize closing on any agreement that may be
reached. The Registrant does not know what effect, if any, an
acquisition of the shares by the State, if consummated, will have
on the Registrant's relationship with Norfolk Southern, pending
litigation between Norfolk Southern and the Registrant, or the
Registrant's ability to continue to qualify as a Real Estate
Investment Trust.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits to this report are listed in the accompanying Index
to Exhibits.
There are no other changes to exhibits from the Registrant's
Form 10-K for the period ended March 31, 1997.
(b) Reports on Form 8-K
On April 8, 1997, the Registrant filed a Form 8-K dated
April 7, 1997, reporting Item 5, Other Events, with regard to a
Letter of Intent between the Registrant, the State of North
21
<PAGE>
Carolina, and the Beaufort & Morehead Railroad Company (wholly
owned by the State) to reach an agreement for a plan of merger
whereby the State may acquire the shares of the Registrant not
owned by the State.
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: May 14, 1997 /s/ R. Samuel Hunt, III
------------ -----------------------
R. Samuel Hunt, III
President
DATE: May 14, 1997 /s/ Lynn T. McConnell
------------ ---------------------
Lynn T. McConnell, Treasurer and
Principal Financial Officer
23
<PAGE>
Index to Exhibits
Exhibit No. Item
------------ -----
27 Financial Data Schedule (This
Exhibit is required to be submitted
electronically pursuant to the
rules and regulations of the
Securities and Exchange Commission
and shall not be deemed filed for
purposes of Section 11 of the Securities
Act of 1933 or Section 18 of the
Securities Exchange Act of 1934.)
99.1 Letter of Intent between the
Beaufort & Morehead Railroad
Company, the State of North
Carolina, and the Registrant
dated April 7, 1997, filed as
Exhibit 99.1 to the Registrant's
Form 8-K filed with the Securities
and Exchange Commission on April
8, 1997, incorporated by reference
into this Form 10-Q.
99.2 Joint News Release by the
Registrant and the State of North
Carolina dated April 7, 1997,
filed as Exhibit 99.2 to the
Registrant's Form 8-K filed
with the Securities and Exchange
Commission on April 8, 1997,
incorporated by reference into
this Form 10-Q.
24
<PAGE>
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<ARTICLE> 5
<CIK> 0000813794
<NAME> N.C. RAILROAD COMPANY
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,707,880
<SECURITIES> 0
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<CURRENT-ASSETS> 4,773,880
<PP&E> 8,152,266
<DEPRECIATION> (301,634)
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<CURRENT-LIABILITIES> 663,604
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0
0
<COMMON> 2,141,735
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<TOTAL-LIABILITY-AND-EQUITY> 12,615,512
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<TOTAL-REVENUES> 91,980
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<INCOME-PRETAX> 719,385
<INCOME-TAX> 11,000
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