UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the transition period from to
Commission file number 0-15768
NORTH CAROLINA RAILROAD COMPANY
(Exact name of Registrant as specified in its charter)
NORTH CAROLINA 56-6003280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
North Carolina Railroad Company Common Stock ($.50 par value)
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The total number of pages contained in this document is 54
pages.
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $40,168,508 (based on last average bid price of $38.00 per
share of Registrant's Common Stock on March 20, 1997).
The number of shares outstanding of each of the Registrant's
classes of Common Stock, as of March 20, 1997, is as follows:
Outstanding as of
Class March 20, 1997
Common Stock (par value $.50) 4,283,470
Documents Incorporated by Reference. None.
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TABLE OF CONTENTS
ITEM Page
Part 1 1. Business. . . . . . . . . . . . . . . . . . . . .4
2. Properties. . . . . . . . . . . . . . . . . . . 10
3. Legal Proceedings . . . . . . . . . . . . . . . 12
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . 15
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . 16
6. Selected Financial Data . . . . . . . . . . . . 17
7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . 18
8. Financial Statements and Supplementary Data . . 25
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . 25
Part III 10. Directors and Executive Officers of the
Registrant. . . . . . . . . . . . . . . . . . 25
11. Executive Compensation. . . . . . . . . . . . . 29
12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . 31
13. Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . . 34
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . 34
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . 37
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PART I
Item 1. Business
General
The North Carolina Railroad Company (the "Registrant") was
incorporated in 1849 in the State of North Carolina. The
Registrant owns approximately 317 miles of continuous railroad
line running from Charlotte, North Carolina to Morehead City,
North Carolina. The Registrant has one office located at 3200
Atlantic Avenue, Suite 110, Raleigh, North Carolina (27604) and
four full time employees.
Background of Railroad Leases
The Registrant conducted railroad operations beginning in
1856. In 1871, the Registrant leased substantially all of its
assets to the Richmond & Danville Railroad Company, a predecessor
of Southern Railway Company, for a term of thirty years. In
1895, the Registrant leased substantially all of its assets to
Southern Railway Company, now known as Norfolk Southern Railway
Company ("NSR"), for ninety-nine years (the "1895 Lease"). In
1989, the Registrant acquired the Atlantic and North Carolina
Railroad Company, the assets of which were subject to a lease
dating to 1939 with the Atlantic & East Carolina Railway Company
("AECR"), a wholly-owned subsidiary of Norfolk Southern Railway
Company (the "1939 Lease"). NSR and AECR are hereinafter
referred to as "Norfolk Southern." Information about the 1895
and 1939 Leases has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange
Commission ("Commission").
The terms of the 1895 Lease and 1939 Lease provided for
expiration on January 1, 1995 and December 31, 1994,
respectively, and did not require either the Registrant or
Norfolk Southern to renew the leases. However, Norfolk
Southern's operation of the Registrant's railroad line may not be
discontinued unless discontinuance is authorized by the Surface
Transportation Board of the United States Department of
Transportation ("STB"), the successor agency to the Interstate
Commerce Commission ("ICC"). Neither the Registrant nor Norfolk
Southern have sought regulatory authority for discontinuance of
service by Norfolk Southern (see "Regulatory Matters," below),
and Norfolk Southern is continuing to operate the Registrant's
railroad line under the circumstances described below.
On August 10, 1995, the Board of Directors of the
Registrant approved a Lease Extension Agreement ("Lease
Extension") with Norfolk Southern to extend the 1895 and 1939
Leases. Information about the Lease Extension has been disclosed
by the Registrant in prior quarterly and annual reports to the
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Commission. On December 15, 1995, the shareholders of the
Registrant voted on approval of the Lease Extension. Following
the shareholder meeting, a shareholder commenced a legal action
challenging the validity of shareholder approval, and on July 29,
1996, the United States District Court for the Eastern District
of North Carolina entered an order enjoining the Registrant from
implementing the terms of the Lease Extension due to the lack of
a quorum at the 1995 shareholder meeting. Other shareholder
derivative litigation which sought to enjoin the Lease Extension
is also pending. See Item 3, Legal Proceedings, for a
description of the actions. Notwithstanding Norfolk Southern's
knowledge of the shareholder derivative actions challenging
approval of the Lease Extension and the Registrant's failure to
confirm the effectiveness of the Lease Extension, on December 28,
1995 Norfolk Southern paid the Registrant approximately $7.8
million, which, along with other amounts paid by Norfolk Southern
in 1995, is the amount that would have been owed to the
Registrant under the terms of the Lease Extension had the Lease
Extension become retroactively effective as of January 1, 1995.
Norfolk Southern also made monthly payments to the Registrant in
amounts that would have been due if the Lease Extension was
effective until August 1996, when it notified the Registrant that
payments would be discontinued. On September 13, 1996, the
Registrant entered into an interim agreement with Norfolk
Southern regarding the Registrant's ability to retain certain
payments by Norfolk Southern. On September 20, 1996, the
Registrant commenced a legal action against Norfolk Southern
asserting rental, property ownership, environmental, and other
claims and on September 23, 1996 commenced proceedings before the
STB to prescribe both interim and long term compensation for
Norfolk Southern's use of the Registrant's assets. See Item 3,
Legal Proceedings.
Real Estate Investment Trust Election
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, which 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
for 1996. In order to continue to qualify as a REIT, the
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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. 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 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 $143,000 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.
Strategic Goals and Alternatives
The Registrant is evaluating its strategic goals and the
alternatives available to achieve such goals. Alternatives which
the Registrant is either pursuing or considering include seeking
an order from the STB requiring Norfolk Southern to operate the
Registrant's properties under terms more favorable to the
Registrant than otherwise available, negotiating a new lease or
other agreement with Norfolk Southern, leasing all or part of its properties
to one or more independent railroad operators, a sale
or reorganization of the Registrant, or operating all or part of
its properties as an independent railroad. The Registrant
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previously evaluated many of the foregoing alternatives. For
example, prior to 1996 the Registrant and its financial advisors
attempted to interest alternative lessees/operators in its
railroad properties. These efforts did not produce a
satisfactory alternative to leasing its property to Norfolk
Southern, but such efforts are being renewed by the Registrant.
Depending upon future circumstances, the Registrant may decide to
pursue one or more or a combination of such alternatives.
The Registrant has been advised by its STB counsel that it
may have a residual common carrier duty to provide railroad
service if Norfolk Southern were to discontinue railroad service,
in the absence of any abandonment of all or any part of the
Registrant's railroad lines. If the Registrant were to operate
the railroad lines itself, the Registrant anticipates that it
would have to incur substantial capital expenditures. See Item
7, Registrant's Discussion and Analysis of Financial Condition
and Results of Operations. If the Registrant operates its
railroad lines, it would not qualify as a REIT for income tax
purposes, but instead would be treated as an operating railroad
for income tax purposes, in which event ordinary corporate income
tax treatment would apply to the Registrant. See "Real Estate
Investment Trust Election" above regarding a failure of the
Registrant to qualify for REIT status for 1996 or later years.
It is possible that Norfolk Southern would seek to
discontinue its responsibility as a common carrier to operate all
or part of the Registrant's lines and/or to re-route certain
railroad traffic that does not either originate or terminate on
the Registrant's lines (known as "overhead traffic") to other
Norfolk Southern controlled lines. The Registrant does not have
complete or reliable information about the overhead traffic
because Norfolk Southern refused to disclose overhead traffic
data to the Registrant, but the Registrant believes that a
substantial majority of the traffic on its lines is overhead
traffic according to analyses of ICC carload waybill sample
information. A portion of the property leased by the Registrant,
the segment between Greensboro, North Carolina and Charlotte,
North Carolina, forms part of a major system route for Norfolk
Southern.
The Registrant believes the volume and type of overhead
traffic diverted by Norfolk Southern would be the most
significant factor in determining the revenues of the Registrant
or any other operator of the Registrant's railroad lines. Many
of the factors affecting routing of overhead traffic would be
beyond the control of the Registrant. For example, it is unclear
how the acquisition of control by Norfolk Southern and CSX
Transportation ("CSXT") of all or part of Consolidated Rail
Corporation ("Conrail"), a major Class I railroad company in the
northeastern United States, will change railroad traffic, volume
and movements between the northeastern and southeastern United
States. It is possible that such acquisition could materially
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affect the volume and type of overhead traffic over the
Registrant's railroad lines, particularly with respect to the
segment between Greensboro and Charlotte, North Carolina. Other
factors that would likely affect the profitability of operating
the railroad include whether the operator would lose traffic to
trucking companies or other competitors, the percentage of
revenues required for operation (railway operating ratio), the
revenues the operator would receive for traffic moving to and
from connecting railroads, including Norfolk Southern, and
revenues and expenses associated with operations of National Rail
Passenger Corporation ("Amtrak"), which operations are governed
in part by federal law.
A significant portion of railroad traffic on the eastern
segment of the Registrant's railroad line is derived from
shipments of aviation fuel to military installations. The U. S.
Department of Defense has undertaken a comprehensive review of
alternative aviation fuel delivery methods, including tanker
truck, pipeline, and barge. Diversion of aviation fuel from rail
to other modes of transportation in eastern North Carolina, which
the Registrant has been advised could occur during 1997, would
have a material adverse effect upon the revenues derived from the
operation of the eastern segment of the Registrant's railroad
line. These operations are currently conducted by Norfolk
Southern. See "Background of Railroad Leases" above.
Buyout by the State of North Carolina
During August, 1996, the State notified the Registrant that
the State retained NationsBank as a financial advisor to evaluate
the acquisition of the Registrant's shares not already owned by
the State. On August 22, 1996, the Board of Directors of the
Registrant appointed a Special Committee of five "private"
directors (directors elected by shareholders other than the
State) responsible for negotiating with the State ("Special
Committee"). The Special Committee has authority to make
recommendations to the entire Board regarding any offer made by
the State, to formulate offers or counter offers, and to consider
alternatives to a transaction with the State. In September,
1996, Alexander H. Graham, Jr., resigned from the Special
Committee due to health considerations. On November 22, 1996
following the shareholder meeting, Porter B. Thompson succeeded
Chauncey W. Lever, who retired, as a director and member of the
Special Committee. On March 5, 1997 Alexander H. Graham, Jr.,
resigned as a director of the Registrant. On March 19, 1997,
John W. Graham was elected a director and on March 20, 1997 was
appointed to the Special Committee. The Special Committee is
currently comprised of J. Melville Broughton, Jr., P.C. Barwick,
Jr., Sidney R. French, Porter B. Thompson, and John W. Graham.
The Special Committee has retained a financial advisor,
Credit Suisse First Boston, and legal counsel. Although certain
state officials have discussed in public a buy-out of the other
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shareholders as being in the interest of the State, other
officials have also indicated that it may be in the State's
interest to sell all or part of its stock in the Registrant.
There can be no assurance either that the State will make an
offer or that an offer, if made, will be at a price or on other
terms that are acceptable to the Special Committee or the
shareholders other than the State. In addition, there can be no
assurance that the State can obtain the necessary financing, or
that any approvals required within State government or by the
Registrant could be obtained to consummate any agreement that may
be reached.
CSXT Agreement
In 1862, the Registrant entered into an agreement with the
Chatham Railroad Company ("Chatham"), a predecessor of CSXT, for
parallel construction and operation of a railroad track by
Chatham within the Registrant's right of way between Raleigh and
Cary, North Carolina, a distance of approximately eight miles
(hereinafter referred to as the "1862 agreement"). The 1862
agreement made no provision for rental to be paid to the
Registrant by Chatham. CSXT succeeded to the interests of Chatham and
the railroad track and facilities subject to the
agreement are currently owned and operated by CSXT as a part of
its branch line between Henderson and Hamlet, North Carolina.
The Registrant and CSXT have been negotiating for renewal and
modification of the 1862 agreement, but a final agreement has not
been reached.
Other Leases
Under a lease dated December 31, 1968 (the "1968 Lease"),
the Registrant and Norfolk Southern renegotiated a portion of the
1895 Lease. Three parcels of land located in Charlotte, North
Carolina were released from the 1895 Lease and became subject to
the 1968 Lease. This lease expires on December 31, 2067, and
provides for an annual rental of $81,319 until 2018, when the
rent becomes six percent (6%) annually of the current value of
the leased land as determined by the parties.
In addition to the leases and agreements described above,
the Registrant leases several small parcels of property producing
approximately $2,500 of lease revenues monthly.
Regulatory Matters
Railroads and other transportation companies are subject to
state and federal regulations administered by agencies such as
the STB (successor agency to the ICC), United States Department
of Transportation, Federal Railroad Administration, state
departments of transportation and state utilities commissions.
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During the past two decades, regulatory agencies have exhibited a
trend toward less regulation of transportation industries.
Railroads are affected not only by the regulation of the railroad
industry, but by regulation of other modes of transportation,
which can change the cost structures of competitive modes of
transportation. For example, proposals to have regulations
changed to increase the size and weight limits of certain trucks
are submitted to Congress from time to time. If permitted, such
increases could have a material adverse effect upon railroads by
decreasing the cost of shipping goods by truck. The Registrant
monitors the regulation of railroads and competing modes of
transportation on a regular basis, primarily through railroad
industry publications.
Other Matters - Environmental
The Registrant and its lessees are responsible for
compliance with state, federal, local or other provisions
relating to discharge of materials or the protection of the
environment. State and federal environmental provisions may
impose joint and several liability upon the Registrant and its
lessees and sublessees for environmental damage or clean up (or
associated costs) of any real properties owned by the Registrant
and adjoining properties if the source of any problem is the
property of the Registrant. The Registrant believes that damage
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's
litigation against Norfolk Southern includes claims for
environmental liability. See Item 3, Legal Proceedings. The
Registrant may also determine it is in its interest to initiate
substantial environmental assessments of its properties and
commence environmental litigation against Norfolk Southern's
sublessees or other parties who may have created or who are
responsible for any actionable environmental conditions. If such
parties are not able to meet their responsibilities, under
certain statutes, regulations, and rules, the Registrant could
ultimately be held responsible. See Item 3, Legal Proceedings,
regarding the Peele site environmental matter.
Item 2. Properties
The principal asset of the Registrant is 317 miles of
railroad property, averaging less than 200 feet in width, between
Morehead City, North Carolina, and Charlotte, North Carolina.
Some of the property is owned in fee, and the majority of the
road extends over rights of way and perpetual easements purchased
or granted in the 19th century. The line extends from Morehead
City in an arc across North Carolina westward through New Bern,
Kinston, Goldsboro, Selma, Raleigh, Research Triangle Park
(unincorporated), Durham, Burlington, Greensboro, High Point,
Lexington, Salisbury, Kannapolis, and Charlotte. The route
between Greensboro and Charlotte is a primary line of Norfolk
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Southern's north-south freight route between Washington, D.C. and
Atlanta, Georgia. The Registrant's line intersects CSXT railroad
lines at Selma, Goldsboro, Raleigh, Cary, Durham, and Charlotte,
North Carolina.
The Registrant's tracks on the Greensboro to Charlotte
segment have been upgraded since original construction so that
today the track is laid with 132-lb. continuous welded rail with
alternating double and single track. Speeds of up to 79 miles
per hour may be maintained over substantial portions of the line,
and centralized traffic control exists for the entire stretch.
On the Greensboro to Goldsboro segment, the line is constructed
with both welded and jointed rail of varying weights. No signal
system is in use on this segment. Speeds of up to 50 miles per
hour (higher for passenger trains) may be maintained over
substantial portions of this segment. The road segment from
Goldsboro to Morehead City is unsignalled, single-trackage with
continuous welded and jointed rail of 85- to 132-lb. weight.
Several short segments of the line are operated jointly with
railroads other than the Registrant's lessees. The Registrant's
line between New Bern and Morehead City currently provides
Norfolk Southern's only access to the port at Morehead City. At
the current time, Amtrak operates passenger trains on the
Registrant's railroad line between Selma and Charlotte, North
Carolina.
The Registrant also owns approximately 208 acres of land
divided into 24 parcels that mostly adjoin its rail corridor.
Among these parcels are the three in Mecklenburg County which are
located in the downtown Charlotte business district and subject
to the 1968 Lease with Norfolk Southern. Some of the properties
have improvements, the ownership of which depends on the terms of
the arrangements with the sublessees of the properties. The
Registrant is evaluating whether properties which are not
necessary for current railroad operations have income-generating
potential in excess of projected expenses. According to
information provided by Norfolk Southern, these properties
currently are producing approximately $330,000 of annual gross
lease revenue. Norfolk Southern has advised the Registrant that
Norfolk Southern believes it is entitled to continue management
responsibility for and to collect the lease income from such
properties notwithstanding the absence of a lease or other
written agreement with the Registrant. Norfolk Southern has
asserted that a majority of the Registrant's properties are
subject to the jurisdiction of the STB. The Registrant is
evaluating Norfolk Southern's assertion regarding any such
jurisdiction and has demanded that Norfolk Southern pay the
income from such properties to the Registrant. See Item 3, Legal
Proceedings, regarding the Registrant's litigation against
Norfolk Southern.
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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. Effective October 24, 1996, the action was
removed to the United States District Court for the Eastern
District of North Carolina. Also in October, 1996, Norfolk
Southern filed counterclaims against the Registrant asserting
unjust enrichment claims of approximately $12 million for rental
payments, conversion, environmental contribution, and other
claims. In November 1996, defendants NSR and AECR filed a motion
to stay the action and the remaining subsidiary or affiliate
defendants filed a motion to dismiss all claims against them.
Both motions were denied. Defendants other than NSR and AECR
filed environmental counterclaims against the Registrant. The
Registrant is vigorously pursuing its claims against Norfolk
Southern and defending the counterclaims.
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
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. Several shareholders of the
Registrant have filed petitions to intervene in the STB
proceeding. The STB has not yet ruled on the Registrant's
petitions or other petitions or motions in the proceeding.
The foregoing is only a summary of the claims made by the
Registrant and the reader should refer to the complaint and
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petitions filed by the Registrant. The Registrant believes that
litigation against Norfolk Southern will be both protracted and
difficult. Legal fees and expenses associated with the
litigation could exceed several million dollars. In addition,
Norfolk Southern may respond to the Registrant's legal action by
seeking permission from the STB to abandon all or part of the
Registrant's lines or Norfolk Southern may seek to divert
railroad traffic from the Registrant's railroad lines. There can
be no assurance as to the amount or timing of rental payments if
compensation is set by the STB, or that the outcome of the
litigation before the courts or the STB will be favorable to the
Registrant.
Shareholder Litigation
Four shareholder derivative actions were filed in the United
States District Court for the Eastern District of North Carolina
during December 1994 and January and February 1995 by
shareholders of the Registrant, 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. On August 9, 1996, the Registrant and the defendant
directors filed motions to dismiss the actions. The court has
not yet ruled on the motions. On September 24, 1996, a lawsuit
filed as a purported class action by the same plaintiffs as the
consolidated case was filed in the Superior Court of Wake County,
North Carolina. The action alleged that the Board of Directors
of the Registrant breached their fiduciary duty to shareholders
in the formation of the Special Committee and asserts other
claims. The Registrant is not a party to the suit. The
directors have filed a motion to dismiss this suit. With regard
to the September 24, 1996 action, the Registrant's directors and
officers insurance carrier has asserted that coverage is not
available under the policy in effect at that time. The
Registrant is evaluating the insurance carrier's assertion.
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. On July 29, 1996 the court entered an
order enjoining the Registrant from implementing the terms of the
Lease Extension and on July 31, 1996 entered a judgment
incorporating the order, and the Registrant did not appeal the
order or judgment. On December 15, 1996, the plaintiff filed an
application for allowance of attorney's fees, expenses, and other
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sums totaling approximately $1 million, and supplemented the
application by requesting approximately $89,000 in additional
fees. The Registrant has moved to strike the supplemental
application. The Registrant and the defendant directors and
officers are vigorously opposing the applications. The court has
not yet ruled on the application. If the plaintiff's application
were granted and the plaintiff's requested fee award were upheld
after any appeals, the Registrant's financial position would be
materially adversely affected. See "Real Estate Investment Trust
Election" above regarding the possible effects of the shareholder
litigation on the Registrant's ability to qualify for REIT
status.
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.
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. The Registrant 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 Registrant, the estimated costs of remediation
range between $500,000 to in excess of $2,000,000. 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.
14
<PAGE>
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.
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant's annual meeting of shareholders was held on
November 12, 1996. The tables below reflect the final voting
results. Pursuant to the charter of the Registrant, the State of
North Carolina elects a total of ten directors and the remaining
shareholders elect a total of five directors. Directors are
elected to three-year staggered terms. Three directors were
elected at the Annual Meeting by the shareholders other than the
State of North Carolina, instead of two directors which would
otherwise have been the case. In July 1996, a court determined
that a quorum was not present at the 1995 Annual Meeting. The
State of North Carolina ("State") elected seven Directors at the
Annual Meeting, instead of three, for the same reasons.
Abstain/ Broker
For Against Withheld Non Votes
_____ _______ ________ _______
1. Election of Directors
By the "Private" Shareholders:
P. C. Barwick, Jr.
733,360 -0- 37,665 -0-
J. Melville Broughton, Jr.
735,899 -0- 35,126 -0-
Porter B. Thompson
732,510 -0- 38,515 -0-
By the State of North Carolina:
Robert W. Griffin
3,206,173 -0- -0- -0-
R. Samuel Hunt, III
3,206,173 -0- -0- -0-
William H. Kincheloe
3,206,173 -0- -0- -0-
15
<PAGE>
Lynn T. McConnell
3,206,173 -0- -0- -0-
Jack A. Moody
3,206,173 -0- -0- -0-
John S. Russell
3,206,173 -0- -0- -0-
J. Bradley Wilson
3,206,173 -0- -0- -0-
2. Appointment of Independent
Public Accountants
Ratification of the Selection
of Ernst & Young LLP
3,972,851 2,417 2,930 -0-
PART II
Item 5. Market for Registrant's Common Equity and Related Stock-
holder Matters
(a) Market Information
Common shares of the Registrant are currently traded in the
over-the-counter market (symbol "NORA"). Quarterly high and low
bids are as follows for fiscal years 1995 and 1996:
1996 1995
Low High Low High
1st 1st
22 1/4 27 1/2 24 1/4 26
2nd 2nd
23 1/4 24 5/8 25 1/2 30 1/2
3rd 3rd
23 40 26 35
4th 4th
37 1/4 38 1/4 25 30
These over-the-counter market quotations reflect interdealer
prices, without retail markup, markdown or commission, and may
not necessarily represent market transactions.
(b) Holders
There were approximately 722 holders of common shares of the
Registrant of record as of February 28, 1997.
(c) Dividends
During 1996, a dividend was declared in the amount of $3.06
per share, or $13,107,418, relating to the Registrant's REIT
election for tax year 1995. During 1995, no dividends were
16
<PAGE>
declared and in 1994, the Registrant declared regular cash
dividends of $.03 per share, or $128,504. The amount and timing
of future dividends will depend upon any ruling(s) by the STB to
set interim or other compensation for the use of the Registrant's
properties, the Registrant's REIT status, the Norfolk Southern
litigation, the shareholder litigation, and the future
profitability of the Registrant. The Registrant expects to
continue to have substantial uncertainty with respect to each of
these matters. See Item 3, Legal Proceedings, regarding the
Norfolk Southern litigation and certain shareholder litigation.
See "Real Estate Investment Trust Election" under Item 1,
Business, above, regarding the relationship between tax matters
and dividend policy, and Note C to the financial statements.
Item 6. Selected Financial Data
The following selected financial data are derived from the
financial statements of the Registrant. The data should be read
in conjunction with the financial statements, related notes and
other financial information included herein.
Selected Financial Data
At December 31 or For the Year Ended December 31
----------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- ----------- --------- --------- --------
Gross revenue.. $5,620,469 $15,132,553 $851,074 $777,770 $773,400
Lease revenue of
roadway and land.. 4,846,216 8,134,656(a) 674,277 642,817 631,048
Net income (loss).. 8,603,973 8,864,922 107,145 (54,027)(b) 43,847
Net income (loss)
per share .. 2.01 2.07 .03 (0.01) .01
Deferred income
taxes.... -0- 1,209,851 1,214,451 1,241,451 1,117,549
Total assets 13,144,991 24,480,264 10,084,797 9,639,966 9,803,679
Cash dividends
declared per
common share.. 3.06(c) -0- .03 .03 .03
</TABLE>
(a) Includes payment of $7.8 million from Norfolk
Southern. See Item 7, Management's Discussion and
Analysis, below.
(b) Net income for 1993 before cumulative effect of
accounting change was $86,875.
(c) Dividend declared in connection with REIT election
for 1995 tax year.
17
<PAGE>
Item 7. The Registrant's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Pursuant to the terms of the Lease Extension, the
Registrant's lessees were obligated to continue paying for
maintenance and property taxes relating to the Registrant's
property subject to the Lease Extension. If the Registrant is
unable to negotiate other leases 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. Under the terms of the 1895 Lease,
the lessee is required to return the leased properties, or
equivalent replacements of leased properties, including
equipment, in as good a condition and repair as the property was
at the inception of the lease, less ordinary depreciation.
However, the Registrant may be required to incur substantial
capital expenditures and other expenses for the operation of the
railroad line if the equipment is not returned in operating
condition upon termination of the leases or if the quantities or
type of the returned equipment is insufficient to operate the
railroad line. See Item 1, Business, for a discussion of risks
of independent operation by the Registrant.
The Registrant's cash and cash equivalents were
approximately $4.7 million as of March 21, 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. 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.
18
<PAGE>
Pursuant to an agreement for the payment of $5 million (plus
interest) by Norfolk Southern on December 1, 1995 and an Interim
Agreement with Norfolk Southern dated September 13, 1996,
approximately $17 million of payments by Norfolk Southern in 1995
and 1996, (described in "Results of Operation" below) were not
required to be returned to Norfolk Southern notwithstanding the
court order enjoining the effectiveness of the Lease Extension.
Pursuant to the agreements, the payments are to be credited
against any sums or rentals ultimately determined to be due to
the Registrant from Norfolk Southern. However, notwithstanding
the agreements, Norfolk Southern has asserted counterclaims
against the Registrant for unjust enrichment and conversion with
respect to the payments.
The Registrant's liquidity (cash and short-term investments)
decreased from $15,329,497 at December 31, 1995 to $5,318,933 at
December 31, 1996. Short-term investments decreased from
$190,000 to $-0- during the year ended December 31, 1996. On
September 16, 1996, the Registrant elected tax status as a REIT
for the tax year ended December 31, 1995. Pursuant to that
election, the Registrant declared a special cash dividend in the
amount of $3.06 per share, or $13,107,418, which was paid during
the fourth quarter of 1996. The special dividend is not
indicative of future dividends or continued REIT qualification.
To the extent the Registrant receives qualifying rental
income, qualifies for and elects REIT status for federal income
tax purposes for 1996 and future years, the Registrant is
required to make distributions to its stockholders of at least
95% of REIT taxable income, which will limit the Registrant's
ability to accumulate working capital necessary to fund
litigation or other expenses. If the Registrant continues to
elect REIT status, the Registrant expects to use its cash flow
from operating activities for distributions to shareholders and
for payment of operating expenses. Other information about the
REIT status of the Registrant has been disclosed in prior
quarterly and annual reports to the Commission.
For the year ended December 31, 1996, $3,141,020 of net cash
was provided by operating activities and was primarily
attributable to net income of $8,603,973, which was partially
offset by changes in current income taxes recoverable and payable
amounts and deferred tax amounts.
Investing activities provided net cash of $145,834 primarily
due to short-term investments that matured during 1996.
Results of Operations
Results of operations for the periods covered hereby reflect
payments to the Registrant from Norfolk Southern. Payments
received until December, 1995 were received pursuant to the terms
19
<PAGE>
of the 1895 Lease and 1939 Lease under a temporary arrangement
between the Registrant and the lessees which continued the rental
and other terms of the Leases. In December, 1995, Norfolk
Southern made a payment of approximately $7.8 million called for
in the Lease Extension for additional 1995 rental, and from
January through July, 1996, made monthly payments in the amount
called for in the Lease Extension for 1996 rental 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 through December, 1996. See Item 3, "Legal
Proceedings", regarding the Norfolk Southern litigation, the July
29, 1996, court order, and certain shareholder litigation.
Consequently, the Registrant expects its revenues in future
periods will be substantially lower until alternate sources of
revenue are secured.
Total revenues were $5,620,469 for 1996 as compared to
$15,132,553 for 1995 and $851,074 for 1994. The increase for 1995
as compared to 1994 was attributable primarily to increases in
rental revenue from leases of roadway and land and the settlement
payment of approximately $5.2 million (including interest). The
decrease in rental revenue from leases of roadway and land for
1996 as compared to 1995 is attributable to the reduction in
payments received from Norfolk Southern. Revenues generated by
the 1895 and 1939 Leases from 1992 to 1995 and by payments by
Norfolk Southern in 1995 and 1996 are shown in the following
chart:
Revenue from Leases of Roadway and Land
Year % Change from
End Lease Income Total Prior Year
1992 1895 Lease 286,000
1939 Lease 263,729
1968 Lease 81,319 631,048 4.9%
1993 1895 Lease 286,000
1939 Lease 275,498
1968 Lease 81,319 642,817 1.9%
1994 1895 Lease 286,000
1939 Lease 306,958
1968 Lease 81,319 674,277 4.9%
1995 Norfolk 8,000,000
Southern Payments
1968 Lease 81,319
Other* 53,337 8,134,656 1106.4%
20
<PAGE>
1996 Norfolk 4,764,900
Southern Payments
1968 Lease 81,319 4,846,219 (40.4)%
* Additional rental under the 1939 Lease for the period 1991-1994 as a
result of an audit performed during 1995 by the Registrant of rentals
paid by AECR.
Interest income increased from $94,361 for 1994 to $601,556
for 1995 and $747,576 for 1996. The increases were primarily
attributable to increases in average levels of invested cash and
interest paid by Norfolk Southern. Dividend income was $15,000
for 1996 as compared to $7,500 for 1995 and $12,500 for 1994.
For 1994, 1995, and 1996, dividend income was attributable to
special dividends received from the common stock of State
University Railroad Company.
Rental income increased from $3,960 for 1994 to $9,540 for
1995 and $11,400 for 1996. The Registrant's rental income is
derived from miscellaneous leases of the Registrant's properties.
Gains on sale of real estate increased from $65,976 for 1994
to $688,055 for 1995 and decreased to $-0- for 1996. Gains on
sale of real estate and other income are derived primarily from
sales and condemnations of the Registrant's property. During
1995, the Registrant sold approximately 16 acres of land in
Johnston County, North Carolina, recognizing a gain of $473,956,
and recognized other gains of approximately $210,000 from
condemnations, forced sales, and sales of stock.
Other lease income for 1995 represents the settlement of a
claim for a lump sum tax benefit payment which was due upon the
expiration of the 1895 Lease from Norfolk Southern pursuant to a
1982 tax benefit agreement between the Registrant and Norfolk
Southern. Under the terms of the settlement agreement, the
Registrant received a lump sum payment in the amount of $691,246.
On December 1, 1995, Norfolk Southern made a payment of $5
million, plus interest of approximately $200,000, to the
Registrant pursuant to the Lease Extension with respect to a
release of Norfolk Southern from its obligation to return certain
personal property upon expiration of the 1895 Lease and 1939
Lease. The Registrant and Norfolk Southern entered into an
agreement whereby the settlement payment made in early December
1995 in order to facilitate the Registrant seeking REIT status at
the earliest practicable date. As the implementation of the
Lease Extension was enjoined by a court, pursuant to agreements
with Norfolk Southern the Registrant believes it is entitled to
retain the payment and interest for application against other
amounts due from Norfolk Southern. However, See Item 3, Legal
Proceedings, regarding claims by Norfolk Southern against the
Registrant with respect to certain payments by Norfolk Southern.
21
<PAGE>
Salary and administrative expenses increased from $268,029
for 1994 to $273,563 for 1995 and $366,869 for 1996. The
increases are primarily attributable to increases in employee
compensation and benefits, office rental, telephone expenses,
and meeting expenses.
For 1996, professional fees increased to $616,340 as
compared to $414,740 for 1995 and $288,749 for 1994.
Professional fees relate to attorneys' and accountants' fees paid
for various filing and reporting requirements, certain
litigation, and other general items. The increases are primarily
attributable to higher professional fees associated with the
Norfolk Southern litigation, issues relating to the Lease
Extension, legal fees of the Special Committee, evaluation of
REIT qualification, and shareholder litigation fees and expenses.
The Registrant expects professional fees to continue to increase
due to ongoing Norfolk Southern and shareholder litigation,
activities of the Special Committee and its advisors, and other
matters.
Insurance and taxes increased to $126,146 for 1996 as
compared to $59,100 for 1995 and $57,766 for 1994. The increases
are primarily attributable to increases in the Registrant's
directors and officers insurance premiums. In future periods, if
Norfolk Southern refuses to pay property taxes the Registrant
expects to incur higher property tax expense. The Registrant is
also evaluating insurance relating to risks associated with
railroad operations by Norfolk Southern in the absence of any
indemnification or other contractual obligations of Norfolk
Southern to the Registrant. The Registrant expects to incur
substantially higher insurance expense in future periods if any
such insurance is purchased by the Registrant.
Amortization expense of $35,057 for 1996 and $46,743 for
1995 related to capitalized lease negotiations costs. In
December 1996, investment banking fees and other fees of $732,685
associated with the Lease Extension were written-off. During the
fourth quarter of 1996, the Special Committee retained legal
counsel and a financial advisor. Additional legal fees and
investment banking fees are expected to be incurred in future
periods.
Consulting fees increased from $43,809 for 1994 to $80,742
for 1995 and $137,559 for 1996. Consulting fees vary according
to the number and magnitude of projects, primarily in connection
with ongoing litigation, the Special Committee, and other
matters. The increase for 1996 as compared to 1995 and 1994 was
primarily attributable to increases in public relations and
railroad consulting fees. The Registrant expects to continue to
incur substantial consulting fees, investment banking fees,
attorneys' and accountants' fees and related expenses in future
periods until litigation matters, matters related to the lease or
22
<PAGE>
operation of the Registrant's properties, and issues addressed by
the Special Committee are resolved.
The provision for environmental remediation costs of
$200,000 for 1996 is attributable to agreements between the
Registrant and other parties to remediate the Peele pesticide
disposal site and share in certain assessment and clean-up costs.
See Item 3, Legal Proceedings.
Other expenses include supplies, utilities, postage, office
rent, printing, and miscellaneous items. For 1996, other
expenses were $133,451 as compared to $106,579 for 1995 and
$94,599 for 1994. The increases were primarily attributable to
increases in office rent, printing expenses, office equipment,
and supplies.
Current income tax expense was $96,000 for 1996 as compared
to $5,283,600 for 1995 and $10,000 for 1994. The decrease for
1996 is attributable to the September 1996 REIT election. Prior
to the REIT election, the Registrant was taxed as a "C"
corporation. In 1995, the corporate income tax provision
represented an effective tax rate of 37%. With the REIT
election, the income tax provision was reduced and reflected as a
benefit in change of corporate entity during 1996. See Note C to
the financial statements.
During 1996, the Registrant's 1994 federal income tax return
was examined by the Internal Revenue Service ("I.R.S."). The
I.R.S. determined that additional taxes and interest in the
amount of approximately $56,000 was due; however, the Registrant
has filed a protest of the assessment amount. The final outcome
of the audit and protest is not expected to have a material
effect upon the Registrant's financial condition.
Inflation affects the Registrant primarily through increased
salary, administrative, property tax, and insurance expenses.
The Registrant's primary sources of revenue prior to 1995, rental
from the 1895 Lease and 1939 Lease, increased only to the extent
changes in the general inflation rate 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
23
<PAGE>
environment. The risk of incurring environmental liability is
inherent in conducting railroad operations. Some of the
commodities which are transported over the Registrant's railroad
lines are classified as hazardous materials. The 1895 and 1939
Leases did not make provision for the lessees to disclose
environmental problems affecting the Registrant's properties.
Environmental problems may exist on properties owned by the
Registrant which are known to 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
could ultimately be held responsible for any remediation,
removal, or cleanup of the property it owns. See Item 3, "Legal
Proceedings," regarding the status of the Peele environmental
site.
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
24
<PAGE>
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
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 effect of the
July 29, 1996 court order upon the Registrant's ability to reach
any future agreement with Norfolk Southern for rental or other
terms for the continued operation of the Registrant's railroad
lines, the willingness of the State to make an acceptable buy-out
offer and its ability to finance any offer, and other matters
which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private
Litigation Securities Reform Act of 1995 above and elsewhere by
the Registrant should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the
Registrant prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Registrant to
control and in many cases the Registrant cannot predict what
factors would cause actual results to differ materially from
those indicated by the forward looking statements.
Item 8. Financial Statements and Supplementary Data
The Registrant's financial statements are submitted as a
separate section of this report.
Item 9. Changes in and Disagreements with Accountants in
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The persons listed below are directors of the Registrant.
Pursuant to Article III, Section 2 of the Bylaws of the
Registrant, each director shall hold office for a three-year term
until his death, resignation, retirement, removal, disqualification or until
his successor shall have been elected and qualified. Except as described
above, there are no arrangements or understandings between any director
25
<PAGE>
and any other person pursuant to which he was selected as a director. Pursuant
to the charter of the Registrant, the State of North Carolina elects ten
directors and the remaining shareholders elect five directors.
At the 1996 annual meeting, ten directors were elected.
Period of Term
Name Age Offices Held Service Expires
*John McKnitt Alexander, Jr. 47 Director 7/93 to 1997
Present
Secretary 12/95 to
11/96
Assistant
Secretary/Treasurer
1985 to
1990
P. C. Barwick, Jr. (1) 58 Director 9/90 to 1999
Present
Assistant
Secretary/Treasurer
11/96 to
Present
Secretary 9/89 to
12/95
J. Melville Broughton, Jr. (1) 74 Director and 7/86 to 1998
Vice Pres. Present
Sidney R. French 69 Director 9/89 to 1997
Present
John W. Graham (2) 73 Director 3/97 to 1997
Present
*Robert W. Griffin (1) 44 Director 12/95 to 1998
present
*M. Rex Harris 62 Director 7/93 to 1997
Present
*R. Samuel Hunt, III (1) 55 President 11/96 to 1999
Present
*William H. Kincheloe (1) 59 Director 7/87 to 1998
Present
26
<PAGE>
*Lynn T. McConnell (1) 41 Director and 7/93 to 1999
Treasurer Present
*Jack A. Moody (1) 69 Director 7/93 to 1999
Present
*John S. Russell (1) 42 Director 7/93 to 1998
Present
Porter B. Thompson (1) 62 Director 11/96 to 1999
Present
*J. Bradley Wilson (1) 44 Director and 11/96 to 1998
Secretary Present
*David T. Woodard 48 Director 7/93 to 1997
Present
* Elected by the State of North Carolina
(1) Elected at the 1996 Annual Meeting
(2) On March 5, 1997 Alexander H. Graham, Jr. resigned as a
director. Pursuant to the bylaws of the Registrant, on
March 19, 1997, John W. Graham was elected by the "private"
directors to serve until the next annual meeting of
shareholders or until his successor is duly elected and
qualified. John W. Graham is the brother of Alexander H.
Graham, Jr.
The persons listed below are officers of the Registrant.
Pursuant to Article II, Section 2 of the Bylaws of the
Registrant, each officer shall hold office until his death,
resignation, retirement, removal, disqualification, or his
successor is elected and qualified. Except as described above,
there are no arrangements between any officer and any other
person pursuant to which the officer was selected as an officer.
Officers are elected by the directors. Only directors elected by
shares held by shareholders other than the State of North
Carolina are entitled to vote for and elect a Vice President and
an Assistant Secretary-Treasurer.
Period of
Name Age Offices Held Service
R. Samuel Hunt, III 55 President 11/96 to
Present
Scott M. Saylor 37 Exec. V.P./ 8/89 to
General Counsel Present
27
<PAGE>
J. Melville Broughton, Jr. 74 Vice President 1988 to
Present
J. Bradley Wilson 44 Secretary 11/96 to
Present
Lynn T. McConnell 41 Treasurer 7/93 to
Present
P. C. Barwick, Jr. 58 Assistant 11/96 to
Sec./Treas. Present
The business experience during the past five (5) years of each member
of the Board of Directors and each executive officer of the Registrant is
summarized below.
John McKnitt Alexander, Jr. - President & Chief Operating
Officer, Cardinal International Trucks, a heavy truck
dealership, 1968 to present. Secretary/Treasurer, Raleigh
Truck Rentals, 1976 to present. Vice-President, Alexander
Realty Company, 1980 to present. Director, First Citizens
BancShares, Inc., from 1990 to present.
P. C. Barwick, Jr. - Attorney at Law, Principal, Wallace,
Morris & Barwick, P.A., Kinston, North Carolina (1986-present).
Director, State University Railroad Company from 1993 to present.
The Registrant owns a minority position in State University Railroad
Company, a majority whose stock is owned by Norfolk Southern.
J. Melville Broughton, Jr. - Attorney at Law, Broughton,
Wilkins & Webb, P.A., Raleigh, North Carolina, 1974 to 1995.
No outside directorships.
Sidney R. French - Self-employed farmer, Cove City, North
Carolina. No outside directorships.
John W. Graham - President and owner of Graham Realty, Inc.,
a commercial and industrial real estate brokerage, Raleigh,
North Carolina. Director of Rocky Mount Mills, Inc.
Robert W. Griffin - Attorney at Law, Griffin & Griffin,
Kinston, North Carolina, from 1977 to 1996.
M. Rex Harris - Chief Executive Officer, International and
Domestic Development Corp., 1976 to present. Director,
United National Bank.
R. Samuel Hunt, III - President, Hunt Electric Supply
Company, 1971 to present. President, Atlas Electric Corp.,
1992 to present. Secretary, North Carolina Department of
Transportation, 1993 to 1995.
28
<PAGE>
William H. Kincheloe - President of Bulluck Furniture, Inc.
retailer of furniture, and President of Wildwood Lamps &
Accents, Inc., Rocky Mount, North Carolina, a manufacturer
of lamps. Director, Centura Banks, Inc., Rocky Mount, North
Carolina, from 1990 to present.
Lynn T. McConnell - Senior Vice-President and Transaction
Manager, Nationsbanc Capital Markets, Inc., Charlotte, North
Carolina, 1989 to present. No outside directorships.
Jack A. Moody - Attorney at Law, 1955 to 1990. Director,
Centura Bank of North Carolina, Rocky Mount, North Carolina.
John S. Russell - Member, law firm of Moore & Van Allen,
PLLC, Raleigh, North Carolina; 1985 to present. No outside
directorships.
Scott M. Saylor - Executive Vice-President and General
Counsel, North Carolina Railroad Company, 1989 to present.
No outside directorships.
Porter B. Thompson - President and owner of LEADS
Corporation, a management consulting firm, 1989 to present.
Certified Public Accountant since 1964. Retired officer and
director of Blue Bell, Inc.
J. Bradley Wilson - Senior Vice President & General Counsel,
Blue Cross Blue Shield of North Carolina, Inc., 1995 to
present. General Counsel, Office of the Governor or North
Carolina, 1993 to 1995. Partner, Carpenter, Wilson, Cannon
& Blair, P.A., Attorneys at Law, 1978 to 1992.
David T. Woodard - General Agent, Union Central Life
Insurance Co., Raleigh, North Carolina, 1978 to present.
Chairman and Director, Hamlet Federal Credit Union, Hamlet,
North Carolina.
Item 11. Executive Compensation
The following table and narrative text discuss the
compensation paid during 1996 and the two prior fiscal years to
the Registrant's President and Chief Executive Officer. No
executive officer of the Registrant had an annual salary of and
bonuses in excess of $100,000 during 1996.
29
<PAGE>
Summary Compensation Table
Long Term
Annual Compensation Compensation
- --------------------------------------------------------------------------------
Name and Other Annual
Principal Position Year Salary Bonus Compensation
(1)
- --------------------------------------------------------------------------------
R. Samuel Hunt, III 1996 *$ 1,643 $-0- $-0- None.
President and
Chief Executive
Officer
John F. McNair III 1996 *$ 6,000 $-0- $-0- None.
President and 1995 12,000 -0- -0-
Chief Executive 1994 12,000 -0- -0-
Officer
*partial year's compensation.
(1) Other Annual Compensation for executive officers is not reported as it is
less than the required reporting threshold of the Securities and Exchange
Commission.
Stock Option and Stock Appreciation Rights Plans, Long-term
Incentive Plans and Pension Plans
No stock options or stock appreciation rights were
outstanding at the end of 1996 and none were either granted or
exercised during 1996. The Registrant has no stock option plans
or stock appreciation rights plans. The Registrant does not
contribute to any "long-term" incentive plan or pension plan for
its executive officers as those terms are defined in the rules of
the Securities and Exchange Commission. The Registrant and its
employees participate in the retirement/benefit program under the
Railroad Retirement Act, administered by the U.S. Railroad
Retirement Board. The Registrant also contributes to a SEP-IRA
for its employees. For 1996, the Registrant contributed a total
of $15,200 to the fund.
Compensation of Directors
Directors are compensated $600 per day, plus travel
expenses, for each day of attendance at directors' meetings.
Directors are compensated $600 per diem, plus travel expenses,
for attending meetings of committees and other business on behalf
of the Registrant conducted other than in conjunction with
meetings of the Board of Directors.
Employment Contracts
Mr. Hunt, the President and Chief Executive Officer,
30
<PAGE>
has no employment contract with the Registrant. Mr. McNair had
no employment contract with the Registrant.
Compensation Committee and Decision Making
The Budget and Compensation Committee of the Board of
Directors is responsible for decisions concerning the
compensation of officers, directors and employees of the
Registrant. The Committee consists of the following four members
of the Board of Directors of the Registrant: Lynn McConnell,
Porter Thompson, Rex Harris, and John Russell.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
(a) Security Ownership of Certain Beneficial Owners
Of the 10,000,000 shares authorized to be issued, 4,283,470
shares are currently outstanding. The following table sets forth
as of March 20, 1997, the parties known to the Registrant to be
beneficial owners of more than five percent of the Registrant's
voting securities:
Title of Name & Address of Amount & Nature of Percent
Class Beneficial Owner Beneficial Ownership of class
Common State of North 3,206,173 shares, 74.85%
Shares Carolina c/o owned directly*
Governor James
B. Hunt,
The State Capitol, Raleigh, NC 27611
* The State of North Carolina also holds shares in escheat
subject to the claims of unknown owners. The State of North
Carolina has advised that it does not customarily vote
shares held in escheat and has disclaimed beneficial
ownership of such shares. Pursuant to agreements with some
of the directors elected by the State of North Carolina, the
State is entitled to dividends and retains a right of
repurchase for an additional 2,400 shares.
Chapter 1046 of the 1951 Session Laws of the General
Assembly of North Carolina states "no stock owned by the State of
North Carolina in the North Carolina Railroad Company shall be
sold except with the prior consent of the General Assembly."
See Item 1, Business, regarding the possible acquisition of
shares held by shareholders other than the State.
(b) Security Ownership of Management
The following table sets forth as of March 20, 1997, the
shares beneficially owned by all officers and directors of the Registrant.
31
<PAGE>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
Common Shares John McKnitt Alexander, Jr. 700 shares owned directly *
Director 550 shares owned by
P.O. Box 26837 minor daughters
Raleigh, NC 27603 50 shares owned by spouse
P. C. Barwick, Jr. 600 shares owned directly *
Director and Assistant
Secretary/Treasurer
P. O. Box 3557
Kinston, NC 28502
J. Melville Broughton, Jr. 705 shares owned directly *
Director and Vice President
P.O. Box 2387
Raleigh, NC 27602
Sidney R. French 500 shares owned directly (1) *
Director
105 Wetherington Farm Road
Cove City, NC 28523
John W. Graham 5,500 shares owned directly *
Director
403 E. Six Forks Road
Raleigh, NC 27609
Robert W. Griffin 526 shares owned directly (2) *
Director
P.O Box 3062
Kinston, NC 28502-3062
M. Rex Harris 500 shares owned directly *
Director
4511 Bragg Boulevard
Fayetteville, NC 28303
R. Samuel Hunt, III 500 shares owned directly (3) *
Director and President
P.O. Box 2440
Burlington, NC 27216
William H. Kincheloe 500 shares owned directly *
Director
P.O. Box 671
Rocky Mount, NC 27802
Lynn T. McConnell 100 shares owned directly *
Director and Treasurer 500 shares owned directly (3)
138 Cherokee Road
Charlotte, NC 28207
Jack A. Moody 3,300 shares owned directly *
Director
P.O. Box 249
Siler City, NC 27344
32
<PAGE>
John S. Russell 100 shares owned directly *
Director 500 shares owned directly (3)
One Hanover Square
Suite 1700
Raleigh, NC 27611
Scott M. Saylor 100 shares owned with spouse *
Exec. V.P./General Counsel as joint tenants with right
P.O. Box 2248 of survivorship
Raleigh, NC 27602
Porter B. Thompson 4,000 shares, owned with spouse *
Director as joint tenants with right of
230 North Elm Street survivorship
Suite 1650
Greensboro, NC 27401
J. Bradley Wilson 500 shares owned directly (3) *
Director and Secretary
P.O. Box 2291
Durham, NC 27702
David T. Woodard 100 shares owned directly *
Director 400 shares owned directly (3)
P.O. Box 17647
Raleigh, NC 27619-7647
* Less than 1% of the class
(1) Mr. French's shares are held subject to a transfer
agreement with A.J. Ballard Tire & Oil Pension and Profit
Sharing Plan.
(2) Mr. Griffin's shares are held subject to a transfer
agreement with Thomas B. Griffin.
(3) Shares acquired without cash consideration from the
State of North Carolina pursuant to an agreement which
entitles the State to receive all dividends and to
re-acquire the stock.
All officers and directors as a group (16 persons)
beneficially own 20,231 common shares of the Registrant, or
approximately .47% of the total shares issued and outstanding.
(c) Changes in Control
Pursuant to provisions of the charter and Article III,
Section 3 of the bylaws of the Registrant, the shares held by the
State are entitled to vote for and elect ten of the Registrant's
fifteen directors. The remaining shareholders are entitled to
vote for and elect the remaining five directors. The bylaws
provide that the directors elected by the shares held by the
State shall be named in the proxy given by the Governor to his
designee who shall attend the annual meeting of shareholders.
Inasmuch as the Governor of North Carolina is an elected
official, changes in control of the Registrant can occur whenever
a new governor is elected subject to the timing of the expiration
of the terms of directors elected by the State. A general
33
<PAGE>
election electing a new Governor in North Carolina will occur in
November, 2000. See also "Security Ownership of Certain
Beneficial Owners" for legislative control over the sale of
shares owned by the State and Item 1, Business, regarding
possible acquisition of shares by the State.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) List of Documents Files as Part of This Report
1 and 2. Financial Statements and Schedules
The financial statements and supplemental schedules
listed in the accompanying index to financial statements
and schedules are filed as part of this report.
3. Exhibits
Exhibits to this report are listed in the
accompanying index to exhibits.
(b) Reports on Form 8-K
None.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the North Carolina Railroad
Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTH CAROLINA RAILROAD COMPANY
Date: March 28, 1997 By: /s/ R. Samuel Hunt, III
------------------------------
R. Samuel Hunt, III, President
and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the North Carolina Railroad Company and in
the capacities and on the dates indicated.
/s/ John M. Alexander, Jr. Date: March 28, 1997
- --------------------------
John M. Alexander, Jr.,
Director
/s/ P. C. Barwick, Jr. Date: March 28, 1997
- --------------------------
P. C. Barwick, Jr.,
Assistant Secretary/Treasurer and Director
/s/ Sidney R. French Date: March 28, 1997
- --------------------------
Sidney R. French,
Director
/s/ John W. Graham Date: March 28, 1997
- --------------------------
John W. Graham
Director
/s/ Robert W. Griffin Date: March 28, 1997
- --------------------------
Robert W. Griffin,
Director
/s/ M. Rex Harris Date: March 28, 1997
- --------------------------
M. Rex Harris,
Director
/s/ R. Samuel Hunt, III Date: March 28, 1997
- --------------------------
R. Samuel Hunt, III,
President and Director
/s/ William H. Kincheloe Date: March 28, 1997
- --------------------------
William H. Kincheloe,
Director
35
<PAGE>
/s/ Lynn T. McConnell Date: March 28, 1997
- --------------------------
Lynn T. McConnell,
Treasurer, Director, and Principal Financial Officer
/s/ Jack A. Moody Date: March 28, 1997
- --------------------------
Jack A. Moody,
Director
/s/ John S. Russell Date: March 28, 1997
- --------------------------
John S. Russell,
Director
/s/ Porter B. Thompson Date: March 28, 1997
- --------------------------
Porter B. Thompson,
Director
/s/ J. Bradley Wilson Date: March 28, 1997
- --------------------------
J. Bradley Wilson,
Secretary and Director
/s/ David T. Woodard Date: March 28, 1997
- --------------------------
David T. Woodard,
Director
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15 (d) of the Act by Registrant Which Have
Not Registered Securities Pursuant to Section 12 of the Act.
No annual report or proxy statement has been sent to the
shareholders of the Registrant; however, proxy statements and
annual reports will be sent prior to the annual meeting of
shareholders.
36
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
3.1 Charter of Registrant and Amendment
thereto, filed as Exhibit No. 1 to
Registrant's Form 10 filed with the
Securities and Exchange Commission on
April 27, 1987, which is incorporated by
reference into this Form 10-K.
3.2 Articles of Merger (with Agreement and Plan
of Merger) of the Atlantic and North
Carolina Railroad Company into the Registrant dated
September 29, 1989 filed as Exhibit No. 2
to Registrant's Form 8-K dated September 29, 1989
filed with the Securities and Exchange Commission,
which is incorporated by reference into this Form 10-K.
3.3 Bylaws of Registrant filed as Exhibit No. 2
to Registrant's Form 10 filed with the
Securities and Exchange Commission on April
27, 1987, which is incorporated by
reference into this Form 10-K.
3.4 Amendment to Charter of Registrant filed as
Exhibit No. 3(c) to Registrant's Form 10-Q
filed with the Securities and Exchange
Commission on November 14, 1990, which is
incorporated by reference into this Form 10-K.
3.5 Amendment of Bylaws of Registrant filed as
Exhibit No. 3(d) to Registrant's Form 10-Q
filed with the Securities and Exchange
Commission on November 14, 1990, which is incorporated
by reference into this Form 10-K.
3.6 Bylaws of the Registrant, August 20, 1993, as
amended and restated, filed as Exhibit No. 3(f)
to Registrant's Form 10-Q filed with the Securities and
Exchange Commission on November 12, 1993, which is
incorporated by reference into this Form 10-K.
37
<PAGE>
Exhibit No. Description of Exhibit
4.1 Specimen Common Stock ($.50 par value) Certificate,
filed as Exhibit No. 4(a) to Registrant's Form 10-K
filed with the Securities and Exchange Commission on
March 29, 1991, which is incorporated by reference
into this Form 10-K.
10.1 Lease dated August 16, 1895 between Registrant and
Southern Railway Company filed as Exhibit No. 3(a) to
Registrant's Form 10 filed with the Securities and
Exchange Commission on April 27, 1987, which
is incorporated by reference into this Form 10-K.
10.2 Lease dated December 31, 1968 between Registrant
and Southern Railway Company filed as Exhibit No. 3(b)
to Registrant's Form 10 filed with the Securities and
Exchange Commission on April 27, 1987, which is
incorporated by reference into this Form 10-K.
10.3 Lease dated August 30, 1939 between Atlantic
and North Carolina Railroad Company and
Atlantic East Carolina Railway Company filed
as Exhibit No. 28 (h) to Registrant's Form
S-4 filed with the Securities and Exchange
Commission on July 20, 1989, which is incorporated
by reference into this Form 10-K.
10.4 Agreement dated November 25, 1862 between
the Registrant and the Chatham Railroad
Company, which is incorporated by reference
into this Form 10-K.
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.)
38
<PAGE>
Exhibit No. Description of Exhibit
99.1 Complaint, Civil Action No. 5:96-CV-900-BO,
U.S. District Court for the Eastern District
of North Carolina, filed on September 20,
1996, in the Superior Court of Wake County,
North Carolina, filed as Exhibit 99.1 to the
Registrant's Form 8-K filed with the
Securities Exchange Commission on October 3,
1996, which is incorporated by reference
into this Form 10-K.
99.2 Petition to set Trackage Compensation and
Petition for Interim Relief, filed on September 23, 1996,
before the United States Surface Transportation Board,
Finance Docket No. 33134, filed as Exhibit 99.2 to the
Registrant's Form 8-K filed with the Securities Exchange
Commission on October 3, 1996, which is incorporated by
reference into this Form 10-K.
99.3 Lease Extension Agreement between the
Registrant, Norfolk Southern Railway Company
and Atlantic and East Carolina Railway
Company, filed as Appendix A to the
Registrant's Proxy Statement filed with the
Securities and Exchange Commission on
November 13, 1995, which is incorporated by
reference into this Form 10-K.
99.4 Escrow Agreement between the Registrant,
Norfolk Southern Railway Company, Atlantic
and East Carolina Railway Company, and
Lawyers Title of North Carolina, Inc. dated
September 29, 1995, filed as Exhibit 10.5 to
Registrant's Form 10-Q filed with the
Securities and Exchange Commission on
November 14, 1995, which is incorporated by
reference into this Form 10-K.
99.5 Interim Agreement between the Registrant and
Norfolk Southern dated September 13, 1996,
which is incorporated by reference into this
Form 10-K.
99.6 News release by the Registrant dated August 26, 1996,
filed as Exhibit (c) (6) to the Registrant's Form 8-K
filed with the Securities Exchange Commission on
September 11, 1996, which is incorporated by reference
into this Form 10-K.
39
<PAGE>
EXHIBIT 99.5
Interim Agreement
THIS INTERIM AGREEMENT is made and entered into this 13th day
of September 1996, by and among North Carolina Railroad Company
("NCRR"), on the one hand, and Norfolk Southern Railway Company
("NSR") and Atlantic and East Carolina Railway Company ("A&EC"), on
the other hand.
WITNESSETH:
WHEREAS, NCRR is the owner of certain property in North
Carolina which was the subject of a proposed Lease Extension
Agreement among NCRR, NSR and A&EC, which would have been effective
as of January 1, 1995 (the "Lease Extension Agreement");
WHEREAS, on December 15, 1995, a meeting of the shareholders
of NCRR was held for the purpose of voting on the approval by the
shareholders of the Lease Extension Agreement,
WHEREAS, the United States District Court for the Eastern
District of North Carolina has issued an order dated July 29, 1996,
finding that a quorum of the private shareholders of NCRR did not
exist at the December 15, 1995 shareholders' meeting, and has
barred implementation of the Lease Extension Agreement;
WHEREAS, Article Third of the Lease extension Agreement
provided for the payment by NSR and A&EC to NCRR of $5 million in
consideration of a release of NSR and A&EC by NCRR from certain
alleged obligations under the 1895 Lease and the 1939 Lease plus
interest as set forth in Article Third from and after January 1,
1995 (hereinafter the "Release Payment"), and by letter agreement
dated August 10, 1995, a copy of which is attached as Exhibit A
(the "August 10, 1995, Letter Agreement"), NCRR, NSR, and A&EC
agreed that such Release Payment would be paid within five business
days of December 1, 1995, and in the event that certain Conditions
of Payment defined therein were not satisfied, which Conditions of
Payment included all requisite corporate approvals and any court
orders enjoining implementation of the Lease Extension Agreement no
longer being in effect, the Release Payment would be applied
against any sums or rentals ultimately determined to be due NCRR
from NSR and A&EC for the period from and after January 1, 1995,
and the release Payment was paid;
WHEREAS, NSR and A&EC made payments to NCRR during 1995 which
were intended as advance payment of rentals (the "Rental Advances")
covering the period from January 1, 1995, through July 31, 1996,
under Article Second of the Lease Extension Agreement, on the
assumption that the Lease Extension Agreement eventually would
become effective; and
WHEREAS, it has been the intention of the parties that NCRR be
able to qualify as a real estate investment trust ("REIT") under
40
<PAGE>
the Internal Revenue Code of 1986, as amended, and that the Rental
Advances be treated as qualifying rents for a REIT under the
applicable federal REIT provisions.
NOW, THEREFORE, the parties agree as follows:
1. Payments of Rental Advances made under Article Second of
the Lease Extension Agreement shall be applied as a credit against
amounts ultimately determined to be owed by NSR and A&EC for the
rental from NCRR of its land and its railroad corridor, including
improvements or other inherently permanent structures situated
under, along or adjacent to the lines of railroad such as trackage,
roadbeds, buildings, bridges, and tunnels, as provided in Revenue
Ruling 69-94, 1969-1 C.B. 189, and the parties will characterize
such payments in such manner in the preparation of their federal
and state income tax returns. If the payments of Rental Advances
are not fully credited against amounts described in the previous
sentence, the amount not so credited shall be credited against any
other obligation determined to be owed by NSR or A&EC to NCRR if
crediting the Rental Advance against such obligation will not
prevent NCRR from qualifying or continuing to qualify as a REIT.
2. The Release Payment shall be characterized by the parties
in the preparation of their federal and state income tax returns in
the manner prescribed by Article Third of the Lease Extension
Agreement and as reflected in the Internal Revenue Service ruling
dated June 6, 1996, a copy of which is attached as Exhibit B, until
such time as either of NCRR or NSR and A&EC shall determine that
the Conditions of Payment as defined in the August 10, 1995 Letter
Agreement will not be met. In such case, the Release Payment shall
be applied as a credit against any similar obligation resulting
from any settlement or judicial determination of the issues
addressed by such Article Third of the Lease Extension Agreement.
If any such settlement or judicial determination is not obtained,
the Release Payment shall be applied as a credit against amounts
ultimately determined to be owed for the rental of assets described
in Paragraph 1 above, or against any other obligation determined to
be owed by NSR or A&EC to NCRR if crediting the Release Payment
against such obligation will not prevent NCRR from qualifying or
continuing to qualify as a REIT.
3. NCRR will pay and bear the entire cost of any and all
income taxes imposed or resulting from the payment to NCRR of the
Rental Advances and the Release Payment, and NSR and A&EC will have
no obligation whatever to NCRR with respect to any such income
taxes.
4. Any amendments to this Agreement must be in writing and
signed by the authorized representatives of the parties hereto.
5. Neither party, by executing this Agreement, is making any
admission regarding any matter to the other or to any third party.
41
<PAGE>
Nothing herein shall restrict the right of any party to bring any
legal or administrative action to enforce its rights or other
claims.
6. This Agreement shall be binding upon the parties hereto,
their heirs, successors, licensees, subleasees, assigns, or any
other party claiming under said parties, both immediate and remote.
7. Except to the extent controlled by federal laws and
regulations, this Agreement shall in all respects be governed by
the laws of the State of North Carolina.
8. If any clause, phrase, provision or portion of this
Agreement or the application thereof to any party or circumstance
shall be invalid or unenforceable under applicable law, such event
shall not affect, impair or render invalid or unenforceable the
remainder of this Agreement or any other clause, phrase, provision
or portion hereof, nor shall it affect the application of any other
clause, phrase, provision or portion hereof to other parties or
circumstances.
9. This Agreement may be executed in two or more
counterparts, each of which is an original and all of which
together shall deemed to be one and the same instrument. This
Agreement shall become binding when one or more counterparts taken
together shall have been executed and delivered by all of the
parties.
In WITNESS WHEREOF, this Agreement is executed as of the date
first set forth above.
North Carolina Railroad Company
By: /s/ J. Melville Broughton, Jr.
-------------------------------
Name: J. Melville Broughton, Jr.
Title: Vice President
Norfolk Southern Railway Company
By: /s/ William J. Romig
---------------------
Name: William J. Romig
Title: Vice President
Atlantic and East Carolina Railway Company
By: /s/ William J. Romig
---------------------
Name: William J. Romig
Title: Vice President
42
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
NORTH CAROLINA RAILROAD COMPANY
RALEIGH, NORTH CAROLINA
43
<PAGE>
FORM 10-K - ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)
NORTH CAROLINA RAILROAD COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of North Carolina Railroad Company
are included in Item 8:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . 45
Balance Sheets, December 31, 1996 and 1995 . . . . . . . . . . . . 46
Statements of Income for the Years
ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . 47
Statements of Shareholders' Equity for the Years
ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . 48
Statements of Cash Flows for the Years
ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . 49
Notes to Financial Statements . . . . . . . . . . . . . . . . . . 50
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable,
and therefore have been omitted.
44
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
North Carolina Railroad Company
We have audited the accompanying balance sheets of North Carolina
Railroad Company as of December 31, 1996 and 1995, and the related
statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of North
Carolina Railroad Company at December 31, 1996 and 1995, and the
results of its operations and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 7, 1997
45
<PAGE>
BALANCE SHEETS
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,318,933 $15,139,497
Short-term investments -0- 190,000
Interest receivable and other assets -0- 4,447
----------- ------------
TOTAL CURRENT ASSETS 5,318,933 15,333,944
PROPERTIES
Roadway and land--Note D 7,848,842 7,848,842
Buildings and equipment 285,635 241,469
Less accumulated depreciation (308,419) (299,559)
------------ ------------
7,826,058 7,790,752
------------ ------------
OTHER ASSETS
Lease negotiation costs, net of -0- 1,355,568
amortization of $46,743 in 1995 ------------ ------------
$13,144,991 $24,480,264
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and other payables $ 262,698 $ 854,398
Accrued environmental remediation costs 200,000 -0-
Income taxes payable -0- 5,230,277
----------- -----------
TOTAL CURRENT LIABILITIES 462,698 6,084,675
DEFERRED INCOME TAXES -0- 1,209,851
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 6,952,103 11,455,548
------------ ------------
12,682,293 17,185,738
------------ ------------
COMMITMENTS AND CONTINGENCIES--Note E
$13,144,991 $24,480,264
============ ============
</TABLE>
See notes to financial statements.
46
<PAGE>
STATEMENTS OF INCOME
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Revenues:
Lease of roadway and land- $ 4,846,216 $ 8,134,656 $ 674,277
Note D
Interest income 747,576 601,556 94,361
Dividend income 15,000 7,500 12,500
Rental income 11,400 9,540 3,960
Gain on sale of real estate -0- 688,055 65,976
Other lease income -0- 691,246 -0-
Settlement income -0- 5,000,000 -0-
Other income 277 -0- -0-
----------- ----------- ----------
5,620,469 15,132,553 851,074
Expenses:
Salaries and administrative 366,869 273,563 268,029
Professional fees 616,340 414,740 288,749
Insurance and taxes 126,146 59,100 57,766
Amortization expense 35,057 46,743 -0-
Write-off of lease
negotiation costs 732,685 -0- -0-
Depreciation 8,860 7,164 7,977
Consulting fees 137,559 80,742 43,809
Provision for environmental
remediation costs 200,000 -0- -0-
Other 133,451 106,579 94,599
----------- ---------- --------
2,356,967 988,631 760,929
----------- ----------- --------
INCOME BEFORE INCOME
TAXES 3,263,502 14,143,922 90,145
Income taxes
Current 96,000 5,283,600 10,000
Deferred -0- (4,600) (27,000)
Benefit from change in
corporate entity from
corporation to REIT (5,436,471) -0- -0-
------------ --------- --------
(5,340,471) 5,279,000 (17,000)
------------ --------- --------
NET INCOME $ 8,603,973 $ 8,864,922 $ 107,145
=========== ========== ========
Earnings per share: $2.01 $2.07 $ 0.03
===== ===== =====
</TABLE>
See notes to financial statements.
47
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Earnings Shareholders'
Stock Capital Restricted Unrestricted Equity
---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at $2,141,735 $3,588,455 $ 509,778 $2,102,207 $8,342,175
December 31, 1993
Net income -0- -0- 15,850 91,295 107,145
Cash dividends -0- -0- -0- (128,504) (128,504)
($0.03 per share)
Release of -0- -0- (525,628) 525,628 -0-
restricted assets
----------- ---------- ---------- --------- --------
Balance at 2,141,735 3,588,455 -0- 2,590,626 8,320,816
December 31, 1994
Net income -0- -0- -0- 8,864,922 8,864,922
----------- ---------- ------- --------- ----------
Balance at 2,141,735 3,588,455 -0- 11,455,548 17,185,738
December 31, 1995
Net income -0- -0- -0- 8,603,973 8,603,973
Cash dividends -0- -0- -0- (13,107,418) (13,107,418)
($3.06 per share)
---------- ---------- ------- ---------- ---------
Balance at $2,141,735 $3,588,455 $ -0- $ 6,952,103 $12,682,293
December 31, 1996 ========== ========== ========= ========== ==========
</TABLE>
See notes to financial statements.
48
<PAGE>
STATEMENTS OF CASH FLOWS
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,603,973 $8,864,922 $ 107,145
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes (1,209,851) (4,600) (27,000)
Depreciation and amortization 43,917 53,907 7,977
Capitalized lease negotiation costs -0- (1,037,044) (365,267)
Write-off of lease negotiation costs 732,685 -0- -0-
Change in operating assets and liabilities:
Rent receivable -0- 246,030 111,901
Interest receivable 4,447 60,953 (22,915)
Income taxes recoverable -0- -0- 17,811
Accrued expenses and other payables (3,874) 433,372 364,686
Accrued environmental
remediation costs 200,000 -0- -0-
Income taxes payable (5,230,277) 5,230,277 -0-
---------- ---------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,141,020 13,847,817 194,338
INVESTING ACTIVITIES
Increase in restricted assets -0- -0- (15,850)
Release of restricted assets -0- -0- 525,628
Purchase of properties (45,666) (5,100) (1,487)
Proceeds from sale of property
& equipment 1,500 -0- -0-
Purchase of short-term investments -0- (1,643,000) (200,000)
Maturities of short-term investments 190,000 1,453,000 200,000
----------- ----------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 145,834 (195,100) 508,291
FINANCING ACTIVITIES
Dividends paid (13,107,418) (128,504) -0-
------------ ------------ ---------
CASH USED IN FINANCING ACTIVITIES (13,107,418) (128,504) -0-
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (9,820,564) 13,524,213 702,629
Cash and cash equivalents at
beginning of period 15,139,497 1,615,284 912,655
----------- ------------ ---------
CASH AND CASH EQUIVALENTS $5,318,933 $15,139,497 $1,615,284
AT END OF PERIOD ========== =========== =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes was $-0-, $44,254 and
$36,656 for the years ended December 31,
1996, 1995 and 1994, respectively.
Dividends of $128,504 were declared and accrued at
December 31, 1994.
See notes to financial statements.
49
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NORTH CAROLINA RAILROAD COMPANY
December 31, 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The North Carolina Railroad Company (the
"Company"), owns approximately 317 miles of continuous railroad line
extending from Charlotte, North Carolina to Morehead City, North
Carolina. Substantially all of the Company's property is operated
by Norfolk Southern. (See Note D.)
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.
REVENUE RECOGNITION: Revenue is reflected in the statements of
income when earned in accordance with the Company's lease
arrangements on the accrual method. (See Note D.)
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 stockholders, 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 stockholders
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. 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 C.)
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 insured by the
Federal Deposit Insurance Corporation.
SHORT-TERM INVESTMENTS: Short-term investments in 1995 included
investments in high quality commercial paper and U. S. Treasury
Bills with maturities within one year of the balance sheet date.
LEASE/TRANSACTION COSTS: Certain lease negotiation costs were
capitalized in 1995 and 1994 and were being amortized over thirty
50
<PAGE>
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.)
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
FASB STATEMENT NO. 121: In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by these assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company adopted Statement
No. 121 in the first quarter of 1996 and, the effect of adoption was
not material.
NOTE B--LEASES
The Company leases its office space under an operating lease.
Aggregate future minimum lease payments under operating leases
having remaining terms in excess of one year are as follows:
1997 $ 43,316
1998 43,316
1999 43,316
2000 43,316
2001 28,877
--------
$202,141
========
Rent expense totaled approximately $28,285, $20,345, and $17,637 for
the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE C--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 stockholders. 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. However, there can be no assurance that the Company can
continue to qualify for REIT status for 1996 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
51
<PAGE>
quarter of 1996 financial statements were prepared and presented on
this basis. For the year ended December 31, 1996, the Company has
calculated its provision for income taxes based upon its recent REIT
election. The effect of changing from a "C" corporation to a REIT
is reflected as a component of income tax expense (benefit) in the
Company's statements of income. The Company's current and deferred
income tax liability amounts presented on the December 31, 1996
balance sheet have been adjusted to reflect the REIT election.
NOTE D--LEASES ON ROADWAY AND LAND
In 1895, the Company leased substantially all of its assets to
Southern Railway Company, now known as Norfolk Southern Railway
Company ("NSR"), for ninety-nine years (the "1895 Lease"). In 1989,
the Company acquired the Atlantic and North Carolina Railroad
Company, the assets of which were subject to a lease dating to 1939
with the Atlantic & East Carolina Railway Company ("AECR"), a
wholly-owned subsidiary of Norfolk Southern Railway Company (the
"1939 Lease"). NSR and AECR are hereinafter referred to as "Norfolk
Southern". The terms of the 1895 Lease and 1939 Lease provided for
expiration on January 1, 1995 and December 31, 1994, respectively,
and did not require either the Company or Norfolk Southern to renew
the leases.
On August 10, 1995, the Board of Directors of the Company
approved a Lease Extension Agreement to extend the terms of the 1895
Lease and the 1939 Lease, with its effectiveness retroactive to
January 1, 1995. However, 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 through December 1996.
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.
52
<PAGE>
NOTE E--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 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." Two of the actions seek to enjoin a purported
lease between the Company and Norfolk Southern and seek to recover
for the Company unspecified damages and other relief from the
directors. Two other actions seek similar relief and also name the
State of North Carolina, the Governor of North Carolina, and Norfolk
Southern as defendants. The Company filed motions to dismiss the
actions, and the court has not yet ruled on the motions. On
September 24, 1996, a lawsuit filed as a purported class action by
the same plaintiffs as the December 1994 and February 1995 federal
court actions was filed in the Superior Court of Wake County, North
Carolina. The action alleged that the Board of Directors of the
Registrant breached their fiduciary duty to shareholders in the
formation of the Special Committee and asserts other claims.
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. The court determined that a single
proxy for 4,000 shares which had been counted toward the quorum was
effectively revoked, thus reducing the proxy count below the number
of shares needed for a quorum of shareholders other than the State
of North Carolina under the Company's bylaws. The Registrant 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
53
<PAGE>
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 Registrant
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.
54
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000813794
<NAME> N.C. RAILROAD COMPANY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,318,933
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,318,933
<PP&E> 8,134,477
<DEPRECIATION> (308,419)
<TOTAL-ASSETS> 13,144,991
<CURRENT-LIABILITIES> 462,698
<BONDS> 0
0
0
<COMMON> 2,141,735
<OTHER-SE> 10,540,558
<TOTAL-LIABILITY-AND-EQUITY> 13,144,991
<SALES> 0
<TOTAL-REVENUES> 5,620,469
<CGS> 0
<TOTAL-COSTS> 1,624,282
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,263,502
<INCOME-TAX> (5,340,471)
<INCOME-CONTINUING> 8,603,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,603,973
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 0
</TABLE>
