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, 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
June 30, 1997.
The total number of pages contained in this document is 25 pages.
<PAGE>
INDEX
NORTH CAROLINA RAILROAD COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . 3
Statements of Operations - Three months ended
June 30, 1997 and June 30, 1996 and six months
ended June 30, 1997 and June 30, 1996 . . . .. . . . 4
Statements of Shareholders' Equity -
Six months ended June 30, 1997
and June 30, 1996 . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows -
Six months ended June 30, 1997 and
June 30, 1996 . . . . . . . . . . . . . . . . . . . . 6
Notes to financial statements -
June 30, 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. . . . . . . . . . . . . . . . . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 23
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
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BALANCE SHEETS
NORTH CAROLINA RAILROAD COMPANY
June 30 December 31
1997 1996
(Unaudited)
------------ ------------
ASSETS
Cash and cash equivalents $ 4,479,749 $ 5,318,933
Prepaid expenses 86,243 -0-
------------ ------------
TOTAL CURRENT ASSETS 4,565,992 5,318,933
PROPERTIES
Roadway and land--Note C 7,848,742 7,848,842
Buildings and equipment 308,753 285,635
Accumulated depreciation (312,849) (308,419)
------------ ------------
7,844,646 7,826,058
------------ ------------
$12,410,638 $13,144,991
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payable $ 562,993 $ 262,698
Accrued environmental remediation costs 172,355 200,000
Unearned rental income 40,660 -0-
----------- -----------
TOTAL CURRENT LIABILITIES 776,008 462,698
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 5,904,440 6,952,103
------------ ------------
11,634,630 12,682,293
------------ ------------
$12,410,638 $13,144,991
============ ============
See notes to financial statements.
3
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STATEMENTS OF OPERATIONS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
---------------------- --------------------
<S> <C> <C> <C> <C>
Revenues:
Lease of roadway and land $ 20,330 $2,062,429 $ 40,659 $4,124,858
Interest income 63,005 201,000 125,376 416,849
Rental income 8,609 7,800 16,008 8,400
Gain on sale of real estate 56,900 -0- 56,900 -0-
Other 1,945 -0- 3,825 277
---------- ---------- --------- ---------
150,789 2,271,229 242,768 4,550,384
Expenses:
Salaries and administrative 72,952 72,164 166,637 135,189
Professional fees 187,296 85,161 469,607 177,170
Insurance and taxes 43,714 31,214 240,698 61,661
Amortization expense -0- 11,685 -0- 23,371
Depreciation 2,215 2,215 4,430 4,430
Consulting fees 131,997 11,240 342,193 30,158
Other 29,893 25,971 55,866 43,912
---------- ---------- --------- ---------
468,067 239,650 1,279,431 475,891
---------- ---------- ---------- ---------
(LOSS) INCOME BEFORE (317,278) 2,031,579 (1,036,663) 4,074,493
INCOME TAXES
Income taxes:
Current -0- 849,078 11,000 1,698,156
Deferred -0- 2,600 -0- 5,200
---------- ---------- ---------- ---------
-0- 851,678 11,000 1,703,356
---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (317,278) $1,179,901 $(1,047,663) $2,371,137
(Loss) earnings per share: $(0.07) $0.27 $(0.24) $0.55
===== ===== ===== =====
</TABLE>
See notes to financial statements.
4
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STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<S> <C> <C> <C> <C>
Additional
Common Paid-In Retained Shareholders'
Stock Capital Earnings Equity
--------- -------- --------- -------------
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
========== ======== =========== ===========
Balance at January 1, 1997 $2,141,735 $3,588,455 $6,952,103 $12,682,293
Net loss (1,047,663) (1,047,663)
---------- --------- ----------- ------------
Balance at June 30, 1997 $2,141,735 $3,588,455 $ 5,904,440 $11,634,630
========== ========== =========== ============
</TABLE>
See notes to financial statements.
5
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STATEMENTS OF CASH FLOWS (Unaudited)
NORTH CAROLINA RAILROAD COMPANY
Six Months Ended
June 30
1997 1996
-------------------------
OPERATING ACTIVITIES
Net (loss) income $(1,047,663) $ 2,371,137
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Deferred income taxes -0- 5,200
Depreciation and amortization 4,430 27,801
Gain on sale of land (56,900) -0-
Lease negotiation costs -0- (18,173)
Change in operating assets and liabilities:
Interest receivable -0- (110,719)
Other assets (86,243) (49,593)
Accrued expenses and accounts payable 300,295 (121,512)
Accrued environmental remediation costs (27,645) -0-
Unearned rental income 40,660 40,665
Income taxes payable -0- (1,012,344)
---------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (873,066) 1,132,462
INVESTING ACTIVITIES
Purchase of equipment (23,118) -0-
Proceeds from sale of land 57,000 -0-
Maturity of short-term investments -0- 190,000
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 33,882 190,000
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (839,184) 1,322,462
Cash and cash equivalents at beginning of period 5,318,933 15,139,497
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,479,749 $16,461,959
=========== ===========
See notes to financial statements.
6
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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 amounts
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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 second quarter of 1996 was as follows:
Period Ended June 30, 1996
(Unaudited)
Lease of Roadway and Land $2,062,429
Income before Income Taxes 2,031,579
Income Taxes 43,678
Net Income 1,987,901
Earnings Per Share 0.46
For the year ended December 31, 1996 and the period ended
June 30, 1997, the Company has calculated its provision for
income taxes based upon its recent REIT election. As a result of
the Company'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
Company 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 June 30, 1997. However, on July 9, 1997, Norfolk
Southern made a payment of $1,345,343 to the Company for the
period from August, 1996 to May, 1997 and on August 7, 1997, made
a payment of $321,085 for periods through June 30, 1997 pursuant to a
decision and order of the U.S. Surface Transportation Board ("STB").
See Note D.
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 STB aaserting rental, property
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ownership, environmental and other claims as a result of Norfolk
Southern's discontinuance of rental payments and the expiration
of the 1895 and 1939 leases. In October, 1996, Norfolk Southern
filed counterclaims against the Company asserting unjust
enrichment, conversion, environmental contribution, and other
claims, and sought 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 STB issued a
decision and order dated May 29, 1997 with respect to the Company's
petition for interim relief to the STB, STB Finance Docket No. 33134
(the "STB decision"). The Company's petition for interim relief
sought an order requiring Norfolk Southern to pay rental on a temporary
basis in the amount of $680,700 per month.
The STB decision denied the rental amount requested by the
Company and provides (i) that the Company's petition for interim
compensation is granted at the level of out-of-pocket expenses
incurred by the Company due to Norfolk Southern's continued
operation of the line, (ii) that the petition of the State of
North Carolina ("State") to hold the proceeding in abeyance
pending a negotiated buy-out of minority shareholders and
subsequent reopening of lease negotiations is granted subject to
the requirement that the State and the Company report monthly to
the STB on the progress of negotiations, and (iii) other
procedural and related findings.
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 Company breached
their fiduciary duty to shareholders in the formation of the
Special Committee of the Company's Board of Directors and
asserts other claims. On June 19, 1997, the court granted the
Company's motion to dismiss the action. On July 7, 1997, the
plaintiffs appealed the ruling to the North Carolina Court of
Appeals.
On December 21, 1995, a shareholder derivative legal action
was filed seeking to enjoin the Lease Extension or invalidate the
10
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December 15, 1995, shareholders meeting. On July 29, 1996, the
court enjoined the Company from implementing the terms of the
Lease Extension. 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
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. 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.
11
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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 $5.9 million as of August 7, 1997, which includes
payments of approximately $1.6 million made by Norfolk Southern pursuant
to a decision and order of the STB. See "Results of Operations"
below, and Item 3, Legal Proceedings. If the Registrant
continues to qualify for REIT status for 1996, a distribution of
approximately $3.7 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. If Norfolk
Southern does not pay sufficient rental to the Registrant under
the May 29, 1997 STB decision and order, the combination of the
REIT distribution for 1996, investment banking fees and the
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shareholder claim for approximately $1 million of attorneys fees
could 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 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 $4,479,749 at June 30, 1997. Prepaid
expenses increased from -0- to $86,243 over the same period
reflecting premiums paid for insurance.
For the six month period ended June 30, 1997, $873,066
of net cash was used in operating activities and was primarily
attributable to a net loss of $1,047,663, which was offset in
part by $300,295 of accrued expenses and accounts payable.
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 June 30, 1997. The STB issued a
a decision and order dated May 29, 1997 with respect to the Registrant's
petition for interim relief to the STB, STB Finance Docket No. 33134
(the "STB decision"). The Registrant's petition for interim relief
sought an order requiring Norfolk Southern to pay rental on a temporary
basis in the amount of $680,700 per month.
The STB decision denied the rental amount requested by the
Registrant and provides (i) that the Registrant's petition for
interim compensation is granted at the level of out-of-pocket
expenses incurred by the Registrant due to Norfolk Southern's
continued operation of the line, (ii) that the petition of the
State of North Carolina ("State") to hold the proceeding in
abeyance pending a negotiated buy-out of minority shareholders
and subsequent reopening of lease negotiations is granted subject
to the requirement that the State and the Registrant report
monthly to the STB on the progress of negotiations, and (iii)
other procedural and related findings.
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On July 9, 1997, Norfolk Southern made a payment of
$1,345,343 to the Registrant for the period from August, 1996 to
May, 1997 and on August 7, 1997 made a payment of $321,085 for periods
through June 30, 1997 pursuant to the STB decision. There can be no
assurance that any such payment will continue to be made or the
amounts of any such payments. If Norfolk Southern continues to make
payments pursuant to the STB order, the amounts of any such
payments are not expected to exceed the operating expenses of the
Registrant. 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 $2,271,229 for the three month
period ended June 30, 1996 as compared to $150,789 for the same
period ended June 30, 1997, and decreased from $4,550,384 for the
six month period ended June 30, 1996 to $242,768 for the same
period ended June 30, 1997. The decreases were attributable
primarily to a decrease in rental revenue from leases of roadway
and land and a decrease in interest income.
Interest income decreased from $201,000 for the three month
period ended June 30, 1996 to $63,005 for the same period ended
June 30, 1997, and decreased from $416,849 for the six month
period ended June 30, 1996 to $125,376 for the same period ended
June 30, 1997. The decreases were primarily attributable to a
decrease in average levels of invested cash.
Rental income increased from $7,800 for three month period
ended June 30, 1996 to $8,609 for the same period ended June 30,
1997, and increased from $8,400 for the six month period ended
June 30, 1996 to $16,008 for the same period ended June 30, 1997.
The Registrant's rental income is derived from miscellaneous
leases of the Registrant's properties.
Salary and administrative expenses increased slightly from
$72,164 for the three month period ended June 30, 1996 to $72,952
for the same period ended June 30, 1997, and increased from
$135,189 for the six month period ended June 30, 1996 to $166,637
for the same period ended June 30, 1997. The increase was
attributable to increases in meeting expenses, employee benefits,
and salaries.
For the three month period ended June 30, 1997, professional
fees paid by the Registrant increased to $187,296 as compared to
$85,161 for the same period ended June 30, 1996 and increased to
$469,607 for the six month period ended June 30, 1997 as compared
to $177,170 for the same period ended June 30, 1996. The
increases in professional fees relate to attorneys' and
accountants' fees paid for various filing and reporting
requirements, fees associated with negotiating a buy out
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agreement, litigation fees, REIT qualification evaluation and
other general items. The Registrant expects to continue to incur
substantial professional fees in future periods until the buy
out, litigation, and related matters are resolved.
Insurance and taxes increased to $43,714 for the three month
period ended June 30, 1997 as compared to $31,214 for the same
period ended June 30, 1996, and increased to $240,698 for the six
month period ended June 30, 1997 as compared to $61,661 for the
same period ended June 30, 1996. The increases were primarily
attributable to excise taxes paid by the Registrant for tax year
1996 of approximately $170,000.
Amortization expense decreased from $11,685 for the three
month period ended June 30, 1996 to -0- for the same period ended
June 30, 1997, and decreased from $23,371 for the six month
period ended June 30, 1996 to -0- for the same period ended June
30, 1997. The decrease is attributable to the write-off of
certain lease negotiations costs in 1996.
Consulting fees increased from $11,240 for the three month
period ended June 30, 1996 to $131,997 for the same period ended
June 30, 1997, and increased from $30,158 for the six month
period ended June 30, 1996 to $342,193 for the same period ended
June 30, 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 increases were 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
period ended June 30, 1997 other expenses were $29,893 as
compared to $25,971 for the same period ended June 30, 1996 and
were $55,866 for the six month period ended June 30, 1997 as
compared to $43,912 for the same period ended June 30, 1996. The
increases were primarily attributable to increases in office
rent, office equipment and supplies.
Current income tax expense was -0- for the three month
period ended June 30, 1997 as compared to $849,078 for the same
15
<PAGE>
period ended June 30, 1996, and was $11,000 for the six month
period ended June 30, 1997 as compared to $1,698,156 for the same
period ended June 30, 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
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
16
<PAGE>
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, 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
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 1996 or subsequent years. Due to the uncertainty, the
17
<PAGE>
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, payments
from Norfolk Southern, 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
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
18
<PAGE>
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, North Carolina, which action was removed to the United
States District Court for the Eastern District 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
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
19
<PAGE>
petition for interim relief sought 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.
The STB issued a decision and order dated May 29, 1997 with
respect to the Registrant's petition for interim relief. The STB
decision denied the rental amount requested by the Registrant and
provides (i) that the Registrant's petition for interim compensation
is granted at the level of out-of-pocket expenses incurred by the
Registrant due to Norfolk Southern's continued operation of the
line, (ii) that the petition of the State of North Carolina
("State") to hold the proceeding in abeyance pending a negotiated
buy-out of minority shareholders and subsequent reopening of
lease negotiations is granted subject to the requirement that the
State and the Registrant report monthly to the STB on the
progress of negotiations, and (iii) other procedural and related
findings. On July 9, 1997, Norfolk Southern made a payment of
$1,345,343 to the Registrant for the period from August, 1996 to
May, 1997 and on August 7, 1997 made a payment of $321,085 for periods
through June 30, 1997 pursuant to the STB decision. The payments represent
certain out-of-pocket expenses of the Registrant for such periods, but
exclude expenses of the Norfolk Southern federal court
litigation and other miscellaneous expenses of the Registrant.
There can be no assurance that any such payments will continue to
be made or the basis of any such payments. On July 7, 1997, the STB
granted a petition by the Registrant for an extension of time for
the Registrant to petition to reopen the STB decision until 90
days after consummation of any acquisition of the Registrant by
the State of North Carolina or the failure of acquisition
negotiations. On June 27, 1997 and July 28, 1997, motions were
filed by Walker F. Rucker Intervenrs to reopen the STB decision.
The STB has not yet ruled on the motions.
The Registrant is negotiating with Norfolk Southern
regarding the interpretation of the STB decision and future payments
to be made 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
20
<PAGE>
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
September 24, 1996, a lawsuit field 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
June 19, 1997, the court granted the Registrant's motion to
dismiss the action. On July 7, 1997, the Plaintiffs appealed the
dismissal to the North Carolina Court of Appeals.
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
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.
21
<PAGE>
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. There have
been no changes in the litigation since the last report that are
material to the Registrant.
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
22
<PAGE>
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.
During the second quarter, legislation was introduced in the
General Assembly of North Carolina to provide for funding of an
acquisition of the Registrant by the State. The legislation has
not been approved and there can be no assurance that it will be
approved. There can be no assurance that a definitive merger
agreement can be reached with the State, 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 REIT.
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 June 30, 1997.
(b) Reports on Form 8-K
On June 3, 1997, the Registrant filed a Form 8-K dated May
29, 1997, reporting Item 5, Other Events, with regard to the
decision and order of the STB with respect to the Registrant's
petition for interim relief.
23
<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 4, 1997 /s/ R. Samuel Hunt, III
-------------- --------------------------
R. Samuel Hunt, III
President
DATE: August 8, 1997 /s/ Lynn T. McConnell
-------------- -------------------------------
Lynn T. McConnell, Treasurer and
Principal Financial Officer
24
<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 Decision of the Surface
Transportation Board, served May 29, 1997,
Finance Docket No. 33134,
North Carolina Railroad Company --
Petition To Set Trackage
Compensation And Other Terms
And Conditions -- Norfolk Southern
Railway Company, Norfolk & Western
Railway Company, And Atlantic
And East Carolina Railway Company,
filed as Exhibit 99.1 to the
Registrant's Form 8-K filed
with the Securities and Exchange
Commission on June 3, 1997, incorporated
by reference into this Form 10-Q.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000813794
<NAME> N.C. RAILROAD COMPANY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,479,749
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,565,992
<PP&E> 8,157,495
<DEPRECIATION> (312,849)
<TOTAL-ASSETS> 12,410,638
<CURRENT-LIABILITIES> 776,008
<BONDS> 0
0
0
<COMMON> 2,141,735
<OTHER-SE> 9,492,895
<TOTAL-LIABILITY-AND-EQUITY> 12,410,638
<SALES> 0
<TOTAL-REVENUES> 242,768
<CGS> 0
<TOTAL-COSTS> 1,279,431
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,036,663)
<INCOME-TAX> 11,000
<INCOME-CONTINUING> (1,047,663)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,047,663)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> 0
</TABLE>
