- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
NORTH CAROLINA RAILROAD COMPANY
(Name of the Issuer)
NORTH CAROLINA RAILROAD COMPANY
THE NORTH CAROLINA DEPARTMENT OF TRANSPORTATION
BEAUFORT AND MOREHEAD RAILROAD COMPANY
(Name of Persons Filing Statement)
North Carolina Railroad Company 658238100
Common Stock, $.50 par value per share CUSIP Number of Class of
(Title of Class of Securities) Securities)
<TABLE>
<CAPTION>
<S> <C> <C>
Scott M. Saylor David D. King Garland B. Garrett, Jr.
Executive Vice President Deputy Secretary, Transit, Rail and Aviation President
and General Counsel North Carolina Department of Transportation Beaufort and Morehead
North Carolina Railroad Company One South Wilmington Street Railroad Company
3200 Atlantic Avenue, Suite 110 Raleigh, North Carolina 27611 One South Wilmington Street
Raleigh, North Carolina 27604 (T) (919) 733-2520 Raleigh, North Carolina 27611
(T) (919) 954-7601 (F) (919) 733-9150 (T) (919) 733-2520
(F) (919) 954-7099 (F) (919) 733-9150
</TABLE>
(Name, Address, Telephone Number and Facsimile Number of Person Authorized to
Receive Notices and Communications on Behalf of Persons Filing Statement)
With a copy to:
<TABLE>
<CAPTION>
<S> <C> <C>
James F. Verdonik Larry J. Dagenhart, Esq. Grayson G. Kelley, Esq.
Kilpatrick Stockton LLP Smith Helms Mulliss & Moore, L.L.P. Special Deputy Attorney General
Suite 400, 4101 Lake Boone Trail 214 N. Church Street North Carolina Department of Justice
Raleigh, North Carolina 27607 Charlotte, North Carolina 28202 One South Wilmington Street
(T) (919) 420-1700 (T) (704) 343-2000 Raleigh, North Carolina 27611
(F) (919) 420-1800 (F) (704) 334-8467 (T) (919) 733-3316
(F) (919) 733-9329
</TABLE>
<PAGE>
(CONTINUATION OF COVER PAGE OF SCHEDULE 13E-3)
This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an
information statement subject to Regulation 14A,
Regulation 14C, or Rule 13e-3(c) under the Securities
Exchange of 1934.
b. / / The filing of a registration statement under the
Securities Act of 1933.
c. / / A tender offer.
d. / / None of the above
Check the following box if the solicitation materials or information
statement referred to in checking box (a) are preliminary copies: /X/
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation (1) Amount of Filing Fee (2)
70,769,262 $14,154
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(1) Estimated solely for purposes of calculating the filing fee
and pursuant to Rule 0-11 under the Securities Exchange Act of
1934 (the "Act"), based upon an estimate of the proposed
maximum amount of merger consideration that could be paid in
the Merger ($66.00 per share in cash with respect to 1,072,262
shares).
(2) The amount of the filing fee, calculated in accordance with
Rule 0-11 of the Act, equals 1/50th of one percent of the
Transaction Value.
/X/ Check if any part of the fee is offset as provided by
Rule 0-11(a)(2) and identify the filing with which
the offsetting fee was previously paid. Identify the
previous filing by registration statement number, or
the form or schedule and date of its filing.
Amount Previously Paid: $14,154 Filing Party: North Carolina Railroad Company
Form of Registration No.: SCHEDULE 14A Date Filed: November 25, 1997
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Exhibit Index appears on page 10
(ii)
<PAGE>
SCHEDULE 13E-3
INTRODUCTION
This Rule 13e-3 Transaction Statement (the "Statement") is being filed
in connection with the proposed merger (the "Merger") of Beaufort and Morehead
Railroad Company, a North Carolina corporation ("B&M") which is wholly owned by
the State of North Carolina (the "State") through the North Carolina Department
of Transportation ("DOT"), with and into North Carolina Railroad Company, a
North Carolina corporation (the "Company"), pursuant to the terms and conditions
of the Agreement and Plan of Merger dated as of October 3, 1997, among B&M, DOT
and the Company (the "Merger Agreement"), a copy of which is attached hereto as
Exhibit (c)(1). Upon consummation of the Merger, the separate corporate
existence of B&M will cease, and the Company will continue as the surviving
corporation, wholly owned by the State through the DOT. Upon completion of the
Merger, each share of Common Stock, par value $.50 per share (the "Shares"), of
the Company (other than Shares held by the State or its affiliates, and Shares
held by shareholders exercising appraisal rights pursuant to Section 55-13-01,
et seq. of the North Carolina Business Corporation Act) will be converted into
the right to receive in cash $66.00 per Share, without interest, upon the terms
and conditions set forth in the Merger Agreement.
The Cross Reference Sheet is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Company's
preliminary proxy statement (the "Proxy Statement") concurrently being filed
with the Securities and Exchange Commission (the "SEC") in connection with the
proposed Merger, which contains information required to be included in response
to items of this Statement. A copy of the Proxy Statement is attached hereto as
Exhibit (d)(1). The information in the Proxy Statement, including all exhibits
thereto, is hereby expressly incorporated herein by reference and the responses
to each item are qualified in their entirety by the provisions of the Proxy
Statement. All information in, or incorporated by reference in, the Proxy
Statement or this Statement concerning the Company or its advisors, or actions
or events with respect to any of them, was provided by the Company, and all
information in, or incorporated by reference in, the Proxy Statement or this
Statement concerning the DOT or B&M or their affiliates, or actions or events
with respect to them, was provided by the DOT. The Proxy Statement incorporated
by reference in this filing is in preliminary form and is subject to completion
or amendment. In addition, the information in the Proxy Statement is intended to
be solely for the information and use of the SEC, and should not be relied upon
by any other person for any purpose. Capitalized terms used but not defined in
this Statement shall have the respective meanings given them in the Proxy
Statement.
As of October 31, 1997, the State owned 3,211,208 shares of Common
Stock of the Company, representing approximately 74.97% of the total outstanding
Common Stock of the Company. This Statement is being filed jointly by the
Company, the DOT and B&M. By filing this Schedule 13E-3, none of the joint
signatories concedes that Rule 13e-3 under the
<PAGE>
Securities Exchange Act of 1934, as amended, is applicable to the Merger or the
other transactions contemplated by the Merger Agreement.
Where substantially identical information required by Schedule 13E-3 is
included in more than one caption, reference may be made to only one caption of
the Proxy Statement.
2
<PAGE>
CROSS REFERENCE SHEET
(PURSUANT TO GENERAL INSTRUCTION F TO SCHEDULE 13E-3)
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
<S> <C> <C>
1. ISSUER AND CLASS OF
SECURITY SUBJECT TO THE
TRANSACTION.
(a).............................................. Front Cover Page and "SUMMARY--Parties
to the Merger Agreement" sections of the
Proxy Statement are incorporated herein by
this reference.
(b).............................................. "SUMMARY--Parties to the Merger
Agreement" and "CERTAIN
INFORMATION ABOUT NCRR--
Shareholders; Changes in Control" sections
of the Proxy Statement are incorporated
herein by this reference.
(c),(d)......................................... "CERTAIN INFORMATION ABOUT NCRR--Market Price
of and Dividends on NCRR Common Stock"
section of the Proxy Statement is
incorporated herein by this reference.
(e).............................................. Not Applicable.
(f).............................................. Not Applicable.
2. IDENTITY AND BACKGROUND.
This Statement is being jointly filed by the North Carolina Railroad Company, the
North Carolina Department of Transportation ("DOT") and the Beaufort and
Morehead Railroad Company, a North Carolina corporation which is wholly owned
by the DOT.
(a)-(d),(g)..................................... "SUMMARY--Parties to the Merger Agreement"
section of the Proxy Statement is
incorporated herein by this reference.
3
<PAGE>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
(e),(f)......................................... To the best of the undersigneds' knowledge,
none of the persons with respect to whom
information is provided in response to this
Item was during the last five years (i)
convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors)
or (ii) a party to a civil proceeding of a
judicial or administrative body of competent
jurisdiction and as a result of such
proceeding was or is subject to a judgment,
decree or final order enjoining further
violations of, or prohibiting activities
subject to, federal or state securities laws
or finding any violation of such laws.
3. PAST CONTACTS,
TRANSACTIONS OR
NEGOTIATIONS.
(a)(1),(a)(2),(b).............................. "THE MERGER" and "CERTAIN CONFLICTS OF
INTEREST AND SHAREHOLDER DERIVATIVE ACTIONS"
sections of the Proxy Statement are
incorporated herein by this reference.
4. TERMS OF THE
TRANSACTION.
(a).............................................. "THE MERGER"; "SUMMARY OF SPECIAL COMMITTEE
PROCEEDINGS AND NEGOTIATIONS"; "REASONS FOR
APPROVAL OF THE MERGER AGREEMENT" and "ANNEX
A-- Agreement and Plan of Merger" sections of
the Proxy Statement are incorporated herein
by this reference.
(b).............................................. "THE MERGER" and "DISSENTING SHAREHOLDERS'
RIGHTS OF APPRAISAL" sections of the Proxy
Statement are incorporated herein by this
reference.
4
<PAGE>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
5. PLANS OR PROPOSALS OF THE
ISSUER OR AFFILIATE.
(a).............................................. "THE MERGER" section of the Proxy
Statement is incorporated herein by this
reference.
(b).............................................. None.
(c),(d),(e).................................... "VALUE TO STATE OF NORTH CAROLINA; PLANS OR
PROPOSALS OF THE STATE" and "THE CHARTER
AMENDMENTS AND THE BYLAW AMENDMENTS" sections
of the Proxy Statement are incorporated
herein by this reference.
(f),(g)......................................... "THE MERGER--Dequotation and Deregistration
of NCRR Common Stock" section of the Proxy
Statement is incorporated herein by this
reference.
6. SOURCE AND AMOUNT OF
FUNDS OR OTHER
CONSIDERATION.
(a),(c)......................................... "SUMMARY--Source of Merger Consideration" and
"ANNEX E-Legislation Authorizing" North
Carolina Railroad Acquisition" sections of
the Proxy Statement are incorporated herein
by this reference.
(b).............................................. "THE MERGER--Costs and Expenses of the
Merger" section of the Proxy Statement is
incorporated herein by this reference.
(d).............................................. Not applicable.
7. PURPOSE(S), ALTERNATIVES,
REASONS AND EFFECTS.
5
<PAGE>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
(a)-(c).......................................... "SUMMARY--Background of the Merger"; "THE
MERGER-Background of the Merger" and "REASONS
FOR APPROVAL OF THE MERGER AGREEMENT- Summary
of Reasons Alternatives to the Merger are
Less Attractive for Shareholders" sections of
the Proxy Statement are incorporated herein
by this reference.
(d).............................................. "THE MERGER--Certain Federal Income Tax
Considerations" and "THE MERGER-- The Merger
Consideration and Recommendations and
Reasons" sections of the Proxy Statement are
incorporated herein by this reference.
8. FAIRNESS OF THE
TRANSACTION.
(a),(b)......................................... "THE MERGER--The Merger Consideration and
Recommendations and Reasons"; "SUMMARY OF
SPECIAL COMMITTEE PROCEEDINGS AND
NEGOTIATIONS" and "REASONS FOR APPROVAL OF
THE MERGER AGREEMENT" sections of the Proxy
Statement are incorporated herein by this
reference.
(c).............................................. "SHAREHOLDER VOTE AND QUORUM REQUIREMENTS"
section of the Proxy Statement is
incorporated herein by this reference.
(d),(e)......................................... "SUMMARY--Special Committee of the Board of
Directors" and "SUMMARY OF SPECIAL COMMITTEE
PROCEEDINGS AND NEGOTIATIONS" sections of the
Proxy Statement are incorporated herein by
this reference.
(f).............................................. Not applicable.
9. REPORTS, OPINIONS,
APPRAISALS AND CERTAIN
NEGOTIATIONS.
6
<PAGE>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
(a)-(c).......................................... "OPINION OF THE SPECIAL COMMITTEE'S FINANCIAL
ADVISOR" and "SUMMARY OF SPECIAL COMMITTEE'S
PROCEEDINGS AND NEGOTIATIONS--The Special
Committee Proceedings" sections of the Proxy
Statement are incorporated herein by this
reference.
10. INTEREST IN SECURITIES OF
THE ISSUER.
(a).............................................. "SUMMARY--Vote Required for Approval; Quorum
Requirements"; "CERTAIN INFORMATION ABOUT
NCRR-- Shareholders; Changes in Control" and
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" sections of the Proxy
Statement are incorporated herein by this
reference.
(b).............................................. Not applicable.
11. CONTRACTS, ARRANGEMENTS
OR UNDERSTANDINGS WITH
RESPECT TO THE ISSUER'S
SECURITIES.............................. The Merger Consideration NCRR-- Shareholders;
Changes in Control" and ANNEX B-The Charter
Amendments and the Bylaw Amendments" sections
of the Proxy Statement are incorporated
herein by this reference.
12. PRESENT INTENTION AND
RECOMMENDATION OF
CERTAIN PERSONS WITH
REGARD TO THE
TRANSACTION.
7
<PAGE>
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
(a),(b)......................................... "THE MERGER--The Merger Consideration and
Recommendations and Reasons"; "REASONS FOR
APPROVAL OF THE MERGER AGREEMENT" and
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" sections of the Proxy
Statement are incorporated herein by this
reference.
13. OTHER PROVISIONS OF THE
TRANSACTION.
(a).............................................. "DISSENTING SHAREHOLDERS' RIGHTS OF
APPRAISAL" section of the Proxy Statement is
incorporated herein by this reference.
(b).............................................. Not applicable.
(c).............................................. Not applicable.
14. FINANCIAL INFORMATION.
(a).............................................. "CERTAIN INFORMATION ABOUT NCRR--Selected
Financial Data" section of the Proxy
Statement is incorporated herein by this
reference.
(b).............................................. Not applicable.
15. PERSONS AND ASSETS
EMPLOYED, RETAINED OR
UTILIZED.
(a),(b)......................................... "GENERAL--Proxy Solicitation" and "THE
MERGER--Costs and Expenses of the Merger"
sections of the Proxy Statement are
incorporated herein by this reference.
16. ADDITIONAL INFORMATION. See text of the Proxy Statement.
17. MATERIAL TO BE FILED AS
EXHIBIT.
8
<PAGE>
(a).............................................. Exhibit (a)(1) Legislation Authorizing North
Carolina Railroad Acquisition (incorporated
by reference to ANNEX E to the Proxy
Statement attached hereto as Exhibit (d)(1)).
(b).............................................. Exhibit (b)(1) Opinion of Financial Advisor
(incorporated by reference to ANNEX C to the
Proxy Statement attached hereto as Exhibit
(d)(1)).
Exhibit (b)(2) Special Committee Presentation
of Credit Suisse First Boston Corporation
dated October 3, 1997.
(c).............................................. Exhibit (c)(1) Agreement and Plan of Merger
dated October 3, 1997, among North Carolina
Railroad Company, Beaufort and Morehead
Railroad Company and the North Carolina
Department of Transportation (incorporated by
reference to ANNEX A to the Proxy Statement
attached hereto as Exhibit (d)(1)).
(d).............................................. Exhibit (d)(1) Preliminary copy of Letter to
Stockholders, Notice of Special Meeting of
Stockholders, Proxy Statement and form of
Proxy for the Special Meeting of Stockholders
of North Carolina Railroad Company to be held
on _____________, 19__.
(e).............................................. Exhibit (e)(1) Article 13 of the North
Carolina Business Corporation Act
(incorporated by reference to ANNEX D to the
Proxy Statement attached hereto as Exhibit
(d)(1)).
(f).............................................. Not applicable.
</TABLE>
9
<PAGE>
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
November 25, 1997 NORTH CAROLINA RAILROAD COMPANY
By: /s/ J. Bradley Wilson
____________________________
Name: J. Bradley Wilson
Title: Secretary
November 25, 1997 NORTH CAROLINA DEPARTMENT OF
TRANSPORTATION
By: /s/ Garland B. Garrett, Jr.
____________________________
Name: Garland B. Garrett, Jr.
Title: Secretary of Transportation
November 25, 1997 BEAUFORT AND MOREHEAD RAILROAD
COMPANY
By: /s/ Garland B. Garrett, Jr.
____________________________
Name: Garland B. Garrett, Jr.
Title: President
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- --------
<S> <C> <C>
(a).............................................. Exhibit (a)(1) Legislation Authorizing North
Carolina Railroad Acquisition (incorporated
by reference to ANNEX E to the Proxy
Statement attached hereto as Exhibit (d)(1)).
(b).............................................. Exhibit (b)(1) Opinion of Financial Advisor
(incorporated by reference to ANNEX C to the
Proxy Statement attached hereto as Exhibit
(d)(1)).
Exhibit (b)(2) Special Committee Presentation
of Credit Suisse First Boston Corporation
dated October 3, 1997.
(c).............................................. Exhibit (c)(1) Agreement and Plan of Merger
dated October 3, 1997, among North Carolina
Railroad Company, Beaufort and Morehead
Railroad Company and the North Carolina
Department of Transportation (incorporated by
reference to ANNEX A to the Proxy Statement
attached hereto as Exhibit (d)(1)).
(d).............................................. Exhibit (d)(1) Preliminary copy of Letter to
Stockholders, Notice of Special Meeting of
Stockholders, Proxy Statement and form of
Proxy for the Special Meeting of Stockholders
of North Carolina Railroad Company to be held
on _____________, 19__.
(e).............................................. Exhibit (e)(1) Article 13 of the North
Carolina Business Corporation Act
(incorporated by reference to ANNEX D to the
Proxy Statement attached hereto as Exhibit
(d)(1)).
(f).............................................. Not applicable.
</TABLE>
10
Exhibit (b)(2)
October 3, 1997 CONFIDENTIAL
MATERIALS PREPARED FOR THE BOARD OF DIRECTORS OF
NORTH CAROLINA RAILROAD COMPANY
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
TABLE OF CONTENTS
1. OVERVIEW
2. VALUATION METHODOLOGIES
3. DISCOUNT RATE ANALYSIS
4. NCRR STOCK PRICE PERFORMANCE
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
1.
OVERVIEW
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
2.
VALUATION METHODOLOGIES
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
3.
DISCOUNT RATE ANALYSIS
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
4.
NCRR STOCK PRICE PERFORMANCE
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 1
OVERVIEW
THE STATE OF NORTH CAROLINA (THE STATE) IS PROPOSING TO ACQUIRE THE SHARES OF
THE NORTH CAROLINA RAILROAD COMPANY (NCRR) THAT IT DOES NOT ALREADY OWN (THE
"SHARES") FOR $66.00 PER SHARE IN CASH.
BACKGROUND
The major value of the NCRR is as owner of 317 miles of railroad right of way
and track in North Carolina. Most of the NCRR's property had been leased
primarily to Norfolk Southern (NS) and its predecessors in leases that expired
at the end of 1994.
The NCRR negotiated a lease extension agreement (the Agreement) with Norfolk
Southern that was unanimously approved by the NCRR Board of Directors on August
10, 1995. On July 29, 1996, a federal judge invalidated the lease agreement, on
the basis that a majority of NCRR's minority shareholders had not been
represented at the annual meeting and therefore there was no quorum.
Subsequent to the invalidation of the Agreement, the NCRR filed a motion with
the Surface Transportation Board (STB) to set an interim and permanent rate for
Norfolk Southern to pay to use the NCRR line.
On August 26, 1996, the State announced that it was considering a buyout of the
NCRR and that it had retained Nationsbanc as its financial advisor. On November
13, 1996, the Special Committee of the Board of Directors of the NCRR retained
Credit Suisse First Boston as its financial advisor.
On April 7, 1997, NCRR entered into a letter of intent for the purchase by the
State of the Shares for $66.00 per share in cash, or a total transaction value
of approximately $71 million. On August 27, 1997, the North Carolina General
Assembly approved legislation which enables the State to fund the purchase of
the Shares.
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 2
VALUATION METHODOLOGIES
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE VALUES)
- ------------------------------------------------------------------------------------------------------------------------------------
METHODOLOGY VALUATION RANGE PER SHARE VALUE COMMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ESTIMATED LEASE VALUE
Replacement Cost New Less $82-$549 $19-$128 Surface Transportation Board (STB) methodology
Depreciation (RCNLD)
ESTIMATED VALUE TO NORFOLK SOUTHERN
Income $195-$234 $46-$55 NCRR share of NS North Carolina operating cash flow
Railroad Purchases $280-$300 $65-$70 Comparable railroad transactions
Discounted Cash Flow $150-$200 $35-$47 Discounted cash flow of NS's NCRR free cash flows
ESTIMATED VALUE TO STATE
Corridor Purchases* $315-$450 $74-$105 Florida and California corridor purchases. Florida
purchase price based on RCNLD
Land Value NC DOT Estimates $225-$250 $53-$58 Cost of a 200 ft., 317 mile ROW between Morehead
City and Charlotte
REFERENCE RANGE $195-$300 $45-$70
- ------------------------------------------------------------------------------------------------------------------------------------
* Low end of the range represents the mid-point of the RCNLD methodology valuation - the methodology used to value the State of
Florida's purchase of CSX track. The high end of the range is based on the per mile price paid by the State of California for
track in the Los Angeles region. Please note these valuations may be based on, among other things, demographics and necessity for
passenger service and the ability to create earnings from trackage rights and other sources. In due diligence discussions with
the State, the State indicated that, while it may utilize the NCRR for public use in the long term, it did not have any near term
plans to utilize such property for public use other than current freight railroad service.
</TABLE>
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 3
ESTIMATE OF STB DETERMINED RENTAL
In the absence of an agreement between the NCRR and Norfolk Southern for a lease
of the NCRR's property, as the result of an NCRR petition, the STB has the
authority to rule on the NCRR's request to set permanent lease rates for
Norfolk Southern's use of the NCRR. On May 28, 1997, the STB granted the State's
request to hold the case in abeyance pending the outcome of the State's proposed
buyout of the NCRR and ruled that interim compensation should be limited to
out-of-pocket expenses incurred by NCRR for Norfolk Southern's continued
operation of the line.
CHOICE OF METHODOLOGIES
There is no prescribed methodology for the STB to follow in setting rates for
track usage, however, Replacement Cost New Less Depreciation (RCNLD) is the
methodology with the most precedent. Net Liquidation Value (NLV) has been used
in one case. If the STB rules on the compensation to be paid to the NCRR there
is no guarantee that the STB will use either of these methodologies to calculate
the rate to be paid, or it may make adjustments in the way it applies them.
LACK OF PRECEDENT
It must be noted that prior to the NCRR situation, the STB has not presided over
a case in which a non-operating entity has leased its tracks to an operating
railroad. The fact that the NCRR is a REIT adds to the complexity of the
situation and makes the outcome of the STB hearings more unpredictable.
CREDIT FIRST
SUSSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 4
STB LEASE RATE SETTING - RCNLD
REPRODUCTION COST NEW LESS DEPRECIATION ANALYSIS
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
POTENTIAL GROSS RENTAL LESS
RCNLD ANNUAL RENTAL(3) UPKEEP(4)
POTENTIAL PROPERTY DEFINITIONS(1) VALUATION(2) @11.9% @11.9%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Land only - 50' ROW (Right of Way) $ 40 $ 4.8
2. Land with Grading and Bridges - 50' ROW 180 21.4
2a. Scenario 2 without Bridges 161 19.2
3. Land only - 200' ROW 115 13.7
4. Land with grading and bridges-200' ROW 260 30.9
4a. Scenario 4 without bridges 241 28.7
5. Land with grading, bridges, track and signals-200' ROW 400 47.6 $22.9
6. Land with grading, bridges, track and signals-200' ROW
plus yards and shops excluding Spencer (Linwood) Yard 412 49.0 24.3
7. Land with grading, bridges, track and signals-200' ROW
plus yards and shops including Spencer (Linwood) Yard 450 53.6 28.9
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Examines various definitions of property varying from narrow to broad.
(2) Based upon Mercer Management Consulting analysis.
(3) STB rail industry composite after-tax cost of capital for 1996.
(4) Assumes maintenance of $10.2mm and capital expenditures of $14.5mm, based on Mercer Management Consulting analysis.
POSSIBLE STB OPTIONS:
(I) USE A RESTRICTED ASSET DEFINITION (SCENARIOS 1 TO 4A) AND LEAVE NS THE UPKEEP; OR
(II) USE A FULL ASSET DEFINITION (SCENARIO 5, 6 OR 7) AND CHARGE THE NCRR FOR UPKEEP.
</TABLE>
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 5
RCNLD LEASE VALUES
PERPETUITY VALUE OF RCNLD LEASES
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE VALUES)
- ------------------------------------------------------------------------------------------------------------------------------------
PERPETUITY OF GROSS RENTAL LESS
RENTAL @ 5.25%(6) UPKEEP @5.25% (5,6)
-----------------------------------------------
POTENTIAL 11.9% PER 11.9% PER
POTENTIAL PROPERTY DEFINITIONS(1) RCNLD VALUATION(2) RENTAL(3) SHARES(4) RENTAL(3) SHARE(4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Land only - 50' ROW (Right of Way) $ 40 $ 81.5 $ 19.03
2. Land with Grading and Bridges - 50' ROW 180 407.1 95.03
2a. Scenario 2 without Bridges 161 362.9 84.72
3. Land only - 200' ROW 115 255.9 59.75
4. Land with grading and bridges-200' ROW 260 593.1 138.46
4a. Scenario 4 without bridges 241 548.9 128.15
5. Land with grading, bridges, track and signals-200' ROW 400 918.7 214.47 $436.0 $101.79
6. Land with grading, bridges, track and signals-200' ROW
plus yards and shops excluding Spencer (Linwood) Yard 412 946.6 220.98 463.9 108.30
7. Land with grading, bridges, track and signals-200' ROW
plus yards and shops including Spencer (Linwood) Yard 450 1,034.9 241.61 552.3 128.93
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Examines various definitions of property varying from narrow to broad.
(2) Based upon Mercer Management Consulting analysis.
(3) STB rail industry composite after-tax cost of capital for 1996.
(4) 4,283,470 shares outstanding 6/30/97 10-Q.
(5) Assumes maintenance and capital expenditure of $24.7mm.
(6) Includes a one-time charge for NCRR general and administrative expenses of $11.5mm and uses mid-year discounting of the lease
payments.
</TABLE>
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 6
NCRR OPERATING CASH FLOW TO NORFOLK SOUTHERN
MERCER MANAGEMENT CONSULTING PREPARED ESTIMATES OF NS' NCRR DERIVED 1995
OPERATING CASH FLOW USING THREE DIFFERENT METHODS. THE YEARLY FIGURES ARE:
REGRESSION MODEL (ARROW) $33.4 MILLION
NORTH CAROLINA STATE REPORTING (ARROW) $34.4 MILLION
NS SYSTEM TOTAL REPORTING (ARROW) $28.7 MILLION
RANGE $28.7-$34.4 MILLION
NS LTM OPERATING CASH FLOW MULTIPLE(1) 6.8x
IMPLIED ENTERPRISE VALUE $195-$234 MILLION
IMPLIED PER SHARE VALUE $46-$55
NOTE: Revenues were estimated and allocated based on gross-ton mileage
information derived from NS' traffic density map.
Cost estimates were developed for three segments of the NCRR line:
Charlotte-Greensboro; Greensboro-Raleigh; Raleigh-Morehead City.
(1) LTM EBITDA as of 3/31/97. AMV as of 6/30/97. Pro forma to reflect
impact of Conrail acquisition. Merger synergies estimates from NatWest
Securities as of 8/1/97 and Morgan Stanley Dean Witter as of 6/2/97.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 7
SELECTED COMPARABLE RAILROAD TRANSACTIONS
THE COMPARABLE ACQUISITIONS ANALYSIS CONSIDERS A NUMBER OF RAILROAD
TRANSACTIONS. PLEASE NOTE THAT WHILE THIS ANALYSIS REPRESENTS THE POTENTIAL
VALUE OF NS OF CONTROLLING THE NCRR, REALIZATION OF THIS VALUE BY NCRR AND ITS
SHAREHOLDERS MAY BE LIMITED. CREDIT SUISSE FIRST BOSTON, AND MORGAN STANLEY
BEFORE IT, SOLICITED INDICATIONS OF INTEREST IN ACQUIRING NCRR FROM POTENTIAL
STRATEGIC AND FINANCIAL INVESTORS. THIS PROCESS DID NOT LEAD TO THE SUBMISSION
BY ANY PARTIES CONTACTED OF INDICATIONS OF INTEREST/FIRM PROPOSALS.
<TABLE>
<CAPTION>
U.S. CLASS 1 RAILROAD
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
ADJUSTED VALUE AS A MULTIPLE OF
ADJ. PRICE/ -------------------------------
DATE ANN./ TARGET COMPANY/ ADJUSTED ADJ. PRICE/ TRACK MILE OPERATING OPERATING
DATE COMP. ACQUIRING COMPANY EQUITY PRICE PRICE MGTM(1) ($000'S) SALES CASH FLOW INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/96 Conrail, Inc./ $10,284.2 $12,345.2 N.A. $696.9 3.3x 12.5x 17.5x
6/3/97 CSX Corp./Norfolk Southern
1/17/96 CCP Holdings, Inc./ $139.0 $157.0 $34.9 $184.7 2.1x 4.4x 4.6x
6/13/96 Illinois Central Corporation
11/10/95 Mexrail Inc./ $46.9 $46.9 N.A. $299.0 2.6x N.A. N.A.
12/12/95 Kansas City Southern Industries
8/3/95 Southern Pacific Rail Corp./ $4,012.9 $5,476.0 N.A. $377.7 1.7x 12.5x 18.7x
9/11/96 Union Pacific Corp.
3/23/95 Chicago & North Western/ $1,573.6 $2,667.7 N.A. $477.1 2.4x 8.9x 11.8x
6/23/95 Union Pacific Corp.
1/18/95 Santa Fe Pacific Corp./ $3,635.8 $4,770.4 N.A. $611.6 1.8x 7.6x 11.1x
Withdrawn Union Pacific Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Mercer Management Consulting estimates.
</TABLE>
(CONTINUED ON NEXT PAGE)
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 8
SELECTED COMPARABLE RAILROAD TRANSACTIONS
<TABLE>
<CAPTION>
U.S. CLASS 1 RAILROAD
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
ADJUSTED VALUE AS A MULTIPLE OF
ADJ. PRICE/ -------------------------------
DATE ANN./ TARGET COMPANY/ ADJUSTED ADJ. PRICE/ TRACK MILE OPERATING OPERATING
DATE COMP. ACQUIRING COMPANY EQUITY PRICE PRICE MGTM(1) ($000'S) SALES CASH FLOW INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/23/94(2) Santa Fe Pacific Corp./ $4,077.8 $5,212.4 N.A. $668.2 1.9x 8.3x 12.2x
9/22/95 Burlington Northern Inc.
7/19/94 Kansas City Southern Industries, Inc. $638.7 $1,573.7 $59.4 $551.2 3.1x 8.2x 11.7x
Withdrawn (Railway Division)/
Illinois Central Corporation
9/12/92 MidSouth Corporation/ $213.5 $350.0 $58.6 $318.2 3.2x 8.2x 11.1x
6/10/93 Kansas City Southern Industries, Inc.
1/8/92 Green Bay & Western Railroad Co./ $7.7 $10.2 N.A. $40.0 0.5x N.M. N.M.
8/27/93 Wisconsin Central Transportation
Corp. (Itel Corp.)
1/8/92 Fox River Valley Railroad Co./ $54.4 $79.3 $72.1 $375.8 2.8x 9.6x 13.3x
8/27/93 Wisconsin Central Transporation
Corp. (Itel Corp.)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Mercer Management Consulting estimates.
(2) Multiples have been calculated using year-end 1994 numbers and acquiror's stock price as of February 9, 1995.
</TABLE>
(CONTINUED ON NEXT PAGE)
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 9
SELECTED COMPARABLE RAILROAD TRANSACTIONS
<TABLE>
<CAPTION>
U.S. CLASS 1 RAILROAD
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
ADJUSTED VALUE AS A MULTIPLE OF
ADJ. PRICE/ -------------------------------
DATE ANN./ TARGET COMPANY/ ADJUSTED ADJ. PRICE/ TRACK MILE OPERATING OPERATING
DATE COMP. ACQUIRING COMPANY EQUITY PRICE PRICE MGTM(1) ($000'S) SALES CASH FLOW INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
05/16/90 Delaware & Hudson Railway/ $25.0 $25.0 N.A. $28.9 N.A. N.A. N.A.
1/18/91 Canadian Pacific Ltd.
2/20/90 RF&P Corp. (Railway Operations)/ $135.0 $135.0 N.A $1,194.7 2.7x 6.5x 8.4x
10/10/91 CSX Corp.
High $72.1 $1,194.7 3.3x 12.5x 18.7x
Average: 56.3 448.0 2.3x 8.7x 12.0x
Median: 59.0 377.7 2.5x 8.3x 11.8x
Low: 34.9 28.9 0.5x 4.4x 4.6x
NCRR VALUES 5.2 MGTM 317 mile $81.4 $34.4 $26.5
Implied Enterprise Value of NCRR
NCRR-Average $292.5 $142.0 $190.6 298.2 $319.1
NCRR-Median 306.8 119.7 203.5 283.8 311.4
Implied Per Share Value of NCRR
NCRR-Average $68.29 $33.15 $44.50 69.63 74.49
NCRR-Median 71.62 27.95 47.51 66.25 72.69
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Mercer Management Consulting estimates.
</TABLE>
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 10
DISCOUNTED CASH FLOW OF NS'S NCRR EARNINGS
Enterprise value range $150.0 - $200.0 million, equal to $35 - $47 per share
NS'S ESTIMATED NCRR CASH FLOWS
- --------------------------------------------------------------------------------
($MM)
- --------------------------------------------------------------------------------
NS 1995 NCRR Operating Income $26.5
Taxes(1) 6.7
-----
Net Income 19.8
Depreciation(+) 7.9
Capital Expenditure (-) 14.5
-----
NET CASH FLOW $13.2
- --------------------------------------------------------------------------------
(1) Assumes a cash tax rate of 25.4%.
SOURCE: Mercer Management Consulting analysis
PERPETUITY OF NS'S ESTIMATED NCRR CASH FLOWS (1)
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
REVENUE GROWTH RATE
DISCOUNT ---------------------------------------------------------------
RATE (2) 3.0% 4.0% 5.0%
- --------------------------------------------------------------------------------
11.0% $171.1 $194.6 $226.0
11.5% 161.4 182.1 209.1
12.0% 152.8 171.1 194.6
12.5% 145.1 161.4 182.1
13.0% 138.1 152.8 171.1
- --------------------------------------------------------------------------------
(1) Uses mid-year discounting.
(2) Weighted average cost of capital for US Class 1 railroads.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 11
ESTIMATED VALUE TO THE STATE
THE NCRR REPRESENTS A RAILROAD OPERATION AND RIGHT OF WAY (ROW) THAT IS EXPECTED
TO BE OF INCREASING VALUE TO THE STATE AS TIME PASSES AND THE COST OF
REPRODUCING THE ROW INCREASES.
The use of railroad for economic development and transit purposes has potential
value to the State in a number of ways, including:
o Taxation revenue o Right of way usage
o Reduced highway spending o Employment
o Environmental Priorities
Valuation of the benefits of full ownership of the NCRR by the State is
difficult to quantify, especially considering that passenger rail services,
while often desired by a government, are usually cash flow negative. Two recent
railway corridor purchases by the States of Florida and California show that
replacement cost can be a proxy for value in instances in which a State is
purchasing a rail corridor for public use.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 12
STATE USES FOR THE NCRR
PROPOSED USES OF THE NCRR
Triangle Transit Authority Chartered with providing public
transport within the Triangle area - is
proposing to run passenger commuter
service over NCRR lines in the Triangle.
High Speed Rail Corridor (1) The NCRR line between Charlotte and
Raleigh has been designated as part of a
high speed rail corridor by the U.S.
Department of Transport, linking
Charlotte to Washington, D.C.
Global Transpark (1) Rail service along the NCRR's route is
seen a major supporting element for the
establishment of the Global Transpark in
eastern North Carolina.
Promoting Economic Development (1) Encourage industry to locate close to
the NCRR through the use of concessional
freight rates and favorable leases on
NCRR property. The NCRR is seen as an
important element for the further
development of the Morehead City port.
Corridor Uses (1) ROW use for oil, gas, water or sewer
lines; communications lines and power
transmission.
- --------------------------
(1) Report of the Governor's Special North Carolina Railroad Study Group
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 13
STATE RAIL CORRIDOR PURCHASES
Valuation of the benefits of full ownership of NCRR by the State is difficult to
quantify, especially considering that passenger rail services, while often
desired by a government, are usually cash flow negative. One recent railway
corridor purchase by the State of Florida shows that replacement cost can be a
proxy for value in instances in which a State is purchasing a rail corridor for
public use. The basis of value in the Florida/CSX transaction was RCNLD.
STATE RAIL CORRIDOR PURCHASES
(DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE VALUES)
- -------------------------------------------------------------------------------
IMPLIED
PRICE NCRR(1)
PER PRICE
ACQUIROR/SELLER DATE DESCRIPTION PRICE MILE PER SHARE
- ---------------- ---- ------------------- ------ ------- ---------
State of Florida/ 1988 81 miles of track from $263 $3.25 $240(2)
CSX Corp West Palm Beach to Miami.
CSX retained freight rights
State of 1992/ 340 miles of track sold $482 $1.42 $105
California/ 1993 to 8 transportation agencies
Santa Fe in the Los Angeles area
- ------------------------------
(1) Based on price per mile by 317 miles and 4,283,470 shares outstanding from
6/30/97 10-Q.
(2) RCNLD valuation implied NCRR per share of $19-$128.
Enterprise value range $315-$450 million, equal to $74-$105 per share.(3)
- ------------------
(3) Low end of the range represents the mid point of the RCNLD methodology
valuation - the methodology used to value the State of Florida's purchase of
CSX track. The high end of the range is based on the per mile price paid by
the State of California for track in the Los Angeles region. Please note
these valuations may be based on, among other things, demographics and
necessity for passenger service and the ability to create earnings from
trackage rights and other sources. In due diligence discussions with the
State, the State indicated that, while it may utilize the NCRR for public
use in the long term, it did not have any near term plans to utilize such
property for public use other than current freight railroad service.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 14
NCRR RIGHT OF WAY LAND VALUE - NC DOT ESTIMATE
IN DECEMBER 1996, THE RIGHT-OF-WAY (HIGHWAY) SECTION OF THE NORTH CAROLINA
DEPARTMENT OF TRANSPORTATION ESTIMATED THE COST OF ACQUIRING LAND TO DUPLICATE
THE NCRR RIGHT OF WAY. THE COST ESTIMATE WAS $225MM-$250MM.
LAND VALUE ESTIMATES
- ------------------------------------------------------------------------------
LOCATION DOLLARS PER ACRE
- ------------------------------------------------ -----------------------
Morehead City, Havelock, New Bern Kinston $50,000 - $200,000
Outlying Morehead City and Selma 2,000 - 10,000
Raleigh, Durham and Research Triangle 30,000 - 200,000
Rural areas of Durham, Orange and Alamance counties 5,000 - 10,000
Burlington 40,000 - 80,000
Rural Alamance and Eastern Guilford 5,000 - 25,000
Greensboro/High Point 50,000 - 100,000
Rural Davidson County 4,000 - 4,000
Salisbury 40,000 - 80,000
Kannapolis, Concord and Charlotte 40,000 - 60,000
- ------------------------------------------------- -----------------------
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 15
STB LEASE RATE SETTING - NET LIQUIDATION VALUE
NLV has been used on one occasion by the STB. It may be used if the STB were to
allocate maintenance to Norfolk Southern.
NLV METHODOLOGY
(DOLLARS IN MILLIONS)
- -------------------------------------------------------------------------------
POTENTIAL NLV GROSS ANNUAL
POTENTIAL PROPERTY DEFINITIONS VALUATION RENTAL 11.9% (1)
- ------------------------------------------- ------------- ---------------
Property including Spencer (Linwood) Yard $43.9 $5.2
Property excluding Spencer (Linwood) Yard 42.2 5.0
- -------------------------------
(1) STB rail industry composite after-tax cost of capital for 1996.
Source: Merger Management Consulting analysis.
PERPETUITY VALUE OF NLV BASED RENTAL AT 5.25% (2)
- -------------------------------------------------------------------------------
POTENTIAL PERPETUITY PER SHARE
NLV OF VALUE OF
POTENTIAL PROPERTY DEFINITIONS VALUATION RENTAL RENTAL (3)
- ------------------------------------------ --------- --------- ----------
Property including Spencer (Linwood) Yard $43.9 $90.6 $21.15
Property excluding Spencer (Linwood) Yard 42.2 86.6 20.22
- ------------------------------
(2) Includes a one-time charge for NCRR general and administrative expenses of
$11.5mm.
(3) 4,283,470 shares outstanding. 6/30/97 10-Q.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 16
LEASE EXTENSION VALUATION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE VALUES)
- -------------------------------------------------------------------------------
DISCOUNT RATE
------------------------------------
VALUE 4.5% 5.0% 5.5% 6.0%
- ------------------------------------- ------------------------------------
Perpetuity of Lease Payments (1,7) $207.0 $186.7 $170.1 $156.3
Perpetuity of NCRR Expenses (1,2,7) (13.3) (12.0) (11.0) (10.1)
Value of Renewal Payment (3) 0.7 0.7 0.7 0.7
Less Value of Indexing Cap (4) (6.2) (5.6) (5.1) (4.7)
------ ------ ------ ------
Equity Value $168.1 $169.8 $154.7 $142.2
Equity Value Per Share (5) $ 43.93 $ 39.65 $ 36.15 $ 33.23
Non-Railroad NCRR Assets (6) $ 2.35 $ 2.35 $ 2.35 $ 2.35
Adjusted Equity Value $190.4 $172.1 $157.1 $144.6
ADJUSTED EQUITY VALUE PER SHARE (5) $ 44.46 $ 40.18 $ 36.67 $ 33.76
- -------------------------------
Assumes transaction closes 12/31/97.
(1) Assumes Mid-Year Discounting.
(2) $550,000 in 1995 dollars, indexed by the IPD-GDP.
(3) Assumes a $5.0mm payment received 12/31/2023, discounted at 8.0%.
(4) Assumes the Indexing cap has a (3.0)% impact on revenue value.
(5) 4,283,470 shares outstanding 6/30/97 10-Q.
(6) Non-railroad real property not producing income.
(7) IPD-GDP deflator values used were 2.24% for 1994, 2.57% for 1995 and
1.73% for 1996.
PLEASE NOTE THAT THIS VALUATION IS OF A LEASE WHICH IS NOT EFFECTIVE AND, IN
FACT, WAS NOT APPROVED BY NCRR'S MINORITY SHAREHOLDERS PRIMARILY DUE TO ISSUES
AS TO VALUE.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 17
LEASE EXTENSION VALUATION
NCRR REVENUE SOURCES
- -------------------------------------------------------------------------------
REVENUE SOURCES PER YEAR (1) ISSUES
- ----------------------------- --------------- ----------------------------
TIER 1 REVENUE- CERTAIN UNDER LEASE
- ---------------
Lease Extension $8,000,000 Indexed by the GDP deflator
1968 Lease 81,319 Fixed
Non-operating Properties 100,000 NCRR Estimate
Dividend 4,500 30 shares of the University
-------- Railroad with a $150
dividend
TIER 1 REVENUE $8,185,819
TIER 2 REVENUE - UNRESOLVED ISSUES
- --------------
CSX/1862 Chatham Railroad Lease $ 115,000 Under negotiation:
-$80,000 track usage fee,
indexed
-$35,000 Non-operating
lease pass-throughs
Lease Extension CSX Usage Payment 250,000
TIER 2 REVENUE $ 365,000
----------
TIER 1 AND TIER 2 REVENUE $8,550,819
- ---------------------------------------
(1) 1995 dollars.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 18
LEASE EXTENSION VALUATION
NCRR CASH COSTS
- -------------------------------------------------------------------------------
NORMALIZED NCRR OPERATING COSTS - 1995 DOLLARS (1)
- -------------------------------------------------------------------------------
$275,000 Salaries & Administrative
45,000 Professional Fees
- Consulting
100,000 Insurance & Taxes
30,000 Capital Expenditure
100,000 Other
-------
$550,000
---------
- ----------------------------
(1) Cash costs grow at the rate of the implicit price deflator of the gross
domestic product (IPD-GDP).
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 19
DIVERSION ANALYSIS - ROANOKE/BRISTOL/KNOXVILLE LINE
COST AND VALUE IMPACT ON NS
(DOLLARS IN MILLIONS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Annual Operating Cash Flow Impact on NS in 1995 $ 69.0
NS LTM Operating Cash Flow Multiple (1) 6.8x
IMPLIED LOSS OF VALUE TO NS DUE TO LOST OPERATING 469
CASH FLOW
Replacement Capital Requirement $271
TOTAL ESTIMATED VALUATION IMPACT $740
- --------------------------------
(1) LTM EBITDA as of 3/31/97. AMV as of 6/30/97. Pro forma to reflect impact
of Conrail acquisition. Merger synergies estimates from NatWest
Securities as of 8/1/97 and Morgan Stanley Dean Wittier as of 6/2/97.
Source: Mercer Management Consulting Analysis
PLEASE NOTE THAT THE COST TO NS OF DIVERTING TRAFFIC IS NOT AN INDICATION
OF VALUE TO THE EXTENT THAT IT EXCEEDS EITHER: (1) THE INTRINSIC VALUE OF
THE OPERATIONS AND ITS CASH FLOWS TO NS; OR (2) THE PAYMENTS NS WOULD BE
REQUIRED TO MAKE TO NCRR PURSUANT TO AN STB MANDATED SETTLEMENT. AS A RESULT,
NS MAY DECIDE TO
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 20
EITHER TERMINATE THE OPERATIONS/BUSINESS OR PETITION THE STB TO RULE ON
COMPENSATION TO THE NCRR BEFORE PAYING THE DIVERSION COST.
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NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 21
DIVERSION ANALYSIS - ROANOKE/BRISTOL/KNOXVILLE LINE
IMPACT OF ADDITIONAL CAR MILEAGE AND TRAFFIC
MERCER MANAGEMENT CONSULTING ESTIMATES THAT THE ANNUAL OPERATING CASH FLOW
IMPACT TO NS TO DIVERT TRAFFIC FROM THE NCRR IS APPROXIMATELY ($69)MM.
Key assumptions:
o NS would retain all divertible traffic and upgrade the Roanoke/
Bristol/Knoxville line
o NS would lose all local and non-divertible overhead traffic on the
NCRR
o NS would retain traffic forwarded to and received from the NCRR,
but would experience a diminished length of haul and diminished
revenue and operating costs
o Changes in NS operating costs are based on analysis using the
Uniform Rail Costing System
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NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 22
DIVERSION ANALYSIS - ROANOKE/BRISTOL/KNOXVILLE LINE
NS REPLACEMENT COST FOR THE NCRR
MERCER'S ESTIMATE FOR THE CAPITAL COST TO REPLACE THE NCRR IS $271MM BASED UPON:
o Upgrading the Roanoke/Bristol/Knoxville route to carry all non-captive
overhead traffic from the NCRR
o 304,000 carloads to be diverted
o Estimates provided by NCRR and adjusted for recent events
LINE SEGMENT ITEM/QUANTITY TOTAL COST ($MM)
- ------------------------ ------------------------ ----------------
Roanoke - Bristol Passing Track/10.5 miles $16
Bristol - Knoxville CTC/90 miles 14
Passing Track/14 miles 21
Knoxville - Ooltewah CTC/86 miles 14
Passing Track/12 miles 18
Bull's Gap - Atlanta 2nd Main Track/135 miles 189
------------
271
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 23
IPD - GDP ESTIMATE
The Lease Extension Agreement between NCRR and Norfolk Southern contains a
provision for the payments by Norfolk Southern to be indexed, on a lagged
basis, by the Implicit Price Deflator of Gross Domestic Product (IPD-GDP).
An estimate of an average rate 1.0%-3.0% for the IPD-GDP for the next 50 years
will be used.
There are few published long-term estimates for the US IPD-GDP available from
reliable sources. As a result, a Credit Suisse First Boston economist was
consulted. His view is:
o There has been, and continues to be, a shift from the fiscal policies
of Governments globally towards fiscal restraint and balanced budgets;
o This will lead to the IPD-GDP averaging between 1.0%-3.0% over the
next 30-50 years, compared to a compounded annual rate of 4.4% from
1960 to the third quarter of 1996; (1)
o This estimate does not take into account the impact a major war or
oil shock could have on inflation as the timing and impact (if any)
of these events difficult to estimate.
- ---------------------------
(1) Data inconsistencies make a comparison of IPD-GDP values prior to 1960 to
those after 1960 inconsistent, however including the 1950's in the equation
would lower the average compound IPD-GDP rate. For the Consumer Price Index
(CPI) including the 1950's lowers the average by 0.55% and for the Producer
Price Index (PPI) by 0.42%.
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NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 24
MEASURES OF INFLATION
CONSUMER PRICE INDEX, PRODUCER PRICE INDEX AND IPD - GDP
QUARTERLY YEAR-ON-YEAR PERCENT CHANGES
1950-1997 Q2
[PLOT POINTS TO BE PROVIDED]
Source: PPI and CPI, Bureau of Labor Statistics, IDP-GDP, Bureau of Economic
Analysis
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NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 25
DISCOUNT RATE ANALYSIS
- ------------------------------------------------------------------------------
NOMINAL BENEFITS OF DOWNSIDES OF
SECURITY/INDEX YIELD USING AS PROXY USING AS PROXY
- ---------------- --------- ------------------------- ---------------------
P&WV Common (1) 7.17% o All revenues derived o Under the terms of
from long-term operating the lease, annual
lease with NS payments do not grow
with inflation
o REIT structure
o Relatively small
market
capitalization
o P&WV lease goes
through 2067
(less renewal risk)
NS Preferred (2) 6.05% o Reflects subordinated, o Fixed rate coupon
unsecured long-term NS
obligation o Does not grow with
inflation
o Preferred has
DRD eligibility
S&P Utility 4.98% o Dividends grow roughly o Reflects common
Index (3) with inflation stock and utility-
specific risk
o Distributes majority of
earnings as dividends
NS Long Term 7.45% o Actual long term NS o No inflation
Index (3) debt, reflecting adjustment
(2021) unsecured position in
long term NS obligation o Low renewal risks
U.S. Government 3.61% o Reflects inflation o Controversy over
CPI Indexed Bond (4) premium the exact CPI
definition and
novelty may
depress yield.
- ----------------------------------------
(1) NS railroad lease that qualifies for REIT tax status. Assumes quarterly
dividend of $.13 per share; $7.25 per share closing price 9/26/97. Market
equity value of $11.0 million.
(2) Based on $2.60 annual dividends; $42.75 closing price 9/26/97.
(3) As of 9/26/97.
(4) As of 9/26/97. First auction of 10 year U.S. Government CPI indexed bonds
occurred on 1/29/97, with an acceptance yield of 3.45%.
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<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 26
DISCOUNT RATE ANALYSIS
POTENTIAL ESTIMATES OF DISCOUNT RATE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
P&WV NS NS S&P UTILITY U.S. GOV'T REFERENCE
SOURCE COMMON PREFERRED DEBT INDEX INDEXED BOND RANGE
- --------------- ------ -------- ----- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Current Nominal Yield 7.17%-7.17% 6.05%-6.05%(3) 7.45%-7.45% 4.98% 3.61%
Long-Term Inflation 3.00%-1.00% 3.00%-1.00% 3.00%-1.00% - -
Expectation ---- ---- ---- ---- ---- ----
4.17%-6.17% 3.05%-5.05% 4.45%-6.45% 4.98% 3.61% 4.5-6.0%
- --------------------------------------------------------------
</TABLE>
IMPACT OF INFLATION RATE ESCALATION CAP
ANNUAL COMPOUND RATE
---------------------------------------
1960-1965 1950-1995
- -------------------------------------------------------------------------------
IPD - GDP 4.39% NA
Consumer Price Index 4.71% 4.16%
Producer Price Index 3.87% 3.45%
IPD-GDP Under Index Cap 4.11% (1)
Impact on Value (3.81)% (2)
- ----------------------------------------
(1) Lease Extension Agreement indexing cap of 4% adjustment plus 75% of
IPD-GDP movement in excess of 4.0%.
(2) Discounted at 8.0% and includes IPD-GDP adjustment cap.
(3) Does not include a yield adjustment for a 70% dividend received deduction.
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 27
RECENT STOCK PRICE PERFORMANCE
DAILY CLOSING PRICES (1)
SEPTEMBER 26, 1995 TO SEPTEMBER 26, 1997
[PLOT POINTS TO BE PROVIDED]
- -----------------------------------------------
Source: FactSet.
(1) Mid-point between the bid and the ask price at closing.
CREDIT FIRST
SUISSE BOSTON
<PAGE>
NORTH CAROLINA RAILROAD COMPANY CONFIDENTIAL 28
no copy
CREDIT FIRST
SUISSE BOSTON
<PAGE>
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
--------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
--------------------------
_________________, 1997
Notice is hereby given that a Special Meeting of Shareholders of North
Carolina Railroad Company ("NCRR") will be held at
_______________________________________, Raleigh, North Carolina, ______ on
______________, ______________, 199__, at ___________ A.M., for the following
purpose:
To consider and vote upon a proposal to approve and
adopt an Agreement and Plan of Merger dated October
3, 1997 among NCRR, Beaufort and Morehead Railroad
Company ("B&M") and the North Carolina Department of
Transportation providing for the merger (the "Merger")
of B&M with and into NCRR (a copy of which is
attached as Annex A to the accompanying Proxy
Statement) and related Charter amendments and Bylaw
amendments (the form of which is attached as Annex B
to the accompanying Proxy Statement) effective only if
and when the Merger is consummated.
.
Pursuant to the Bylaws of NCRR, the Board of Directors fixed the close
of business __________, 1997 as the record date for the determination of
shareholders entitled to notice of and to vote at the meeting. A complete list
of the shareholders entitled to vote at the meeting will be available at the
office of NCRR at 3200 Atlantic Avenue, Suite 110, Raleigh, North Carolina at
least ten (10) days prior to the meeting.
All shareholders are cordially invited to attend the meeting in person.
Even if you plan to attend the meeting, YOU ARE REQUESTED TO SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY AS SOON AS POSSIBLE.
Sincerely,
-----------------------------------
Secretary
1
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TABLE OF CONTENTS
DESCRIPTION PAGE NO.
Introduction............................................................2
Summary.................................................................3
General.................................................................7
Shareholder Vote and Quorum Requirements................................8
The Merger..............................................................9
The Charter Amendments and the Bylaw Amendments........................14
Dissenting Shareholder's Rights of Appraisal...........................16
Summary of Special Committee Proceedings and Negotiations.............18
Reasons for Approval of the Merger Agreement...........................21
Opinion of the Special Committee's Financial Advisor...................24
Alternatives to Merger Agreement.......................................27
Alternative Lease Extension Agreement.........................27
Abandonment of Norfolk Southern's Operations over
NCRR's Lines................................................29
Operation Without Any Lessee..................................30
Litigation Against Norfolk Southern...........................31
Other Purchasers and Lessees For All or Part of the Line......35
Appraisals and Valuations..............................................35
Value to State of North Carolina; Plans or Proposals of the State......37
Certain Conflicts of Interest and Litigation...........................38
Certain Information About NCRR.........................................40
Current Directors and Executive Officers...............................43
Security Ownership of Certain Beneficial Owners and Management.........44
Available Information..................................................47
Incorporation of Certain Information by Reference......................47
Accountants............................................................48
Other Business.........................................................48
Annex A - Agreement and Plan of Merger...................................
Annex B - Form of Charter Amendments and Bylaw Amendments................
Annex C - Opinion of Credit Suisse First Boston Corporation..............
Annex D - Article 13 of the North Carolina Business Corporation Act......
Annex E - Legislation Authorizing North Carolina Railroad Acquisition....
Annex F - Consent of Independent Auditors................................
2
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NORTH CAROLINA RAILROAD COMPANY
3200 ATLANTIC AVENUE
SUITE 110
RALEIGH, NORTH CAROLINA 27604
(919) 954-7601
PROXY STATEMENT
_________________, 1997
INTRODUCTION
This Proxy Statement serves as the proxy statement of the North
Carolina Railroad Company ("NCRR"), in connection with the solicitation of
proxies to be voted at a special meeting of shareholders of NCRR to approve and
adopt the Agreement and Plan of Merger dated October 3, 1997 (the "Merger
Agreement") among NCRR, Beaufort and Morehead Railroad Company ("B&M"), a North
Carolina corporation and wholly owned subsidiary of the North Carolina
Department of Transportation (the "DOT"), and the DOT, providing for the Merger
of B&M with and into NCRR (the "Merger") in accordance with the terms and
conditions of the Merger Agreement, a copy of which is attached as Annex A to
this Proxy Statement and related amendments to the NCRR Charter (the "Charter
Amendments") and amendments to the NCRR Bylaws (the "Bylaw Amendments"), copies
of which are attached as Annex B to the accompanying Proxy Statement, effective
only if and when the Merger is consummated. On the day the Merger is consummated
(the "Effective Date"), each share of NCRR's outstanding shares of Common Stock,
par value $ .50 per share (the "NCRR Common Stock"), other than (i) any shares
held by B&M or the State of North Carolina (the "State") (including shares held
by the State as a result of the escheat laws of the State) and (ii) shares as to
which dissenters' rights have been perfected in accordance with North Carolina
law, (the "Canceled Shares") will be canceled and converted into the right to
receive Sixty-six Dollars ($66.00) in cash (the "Merger Consideration") payable
to the holder of the NCRR Common Stock, without interest, upon surrender of the
stock certificate(s) evidencing such NCRR Common Stock.
Consummation of the Merger is subject to the satisfaction of several
conditions, including, among others, approval by the shareholders of NCRR at a
special meeting of shareholders called for the purpose of voting on the proposed
Merger Agreement. See "GENERAL -- Conditions to the Merger." The transaction is
subject also to the jurisdiction of the Surface Transportation Board of the
United States Department of Transportation (the "STB"). See "THE MERGER --
Regulatory Approval."
HOLDERS OF NCRR COMMON STOCK SHOULD NOT SEND
STOCK CERTIFICATES WITH THEIR PROXY CARDS
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
3
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SUMMARY
The following is a summary of certain information contained in this
Proxy Statement relating to the Merger, the Charter Amendments and the Bylaw
Amendments. The summary is not complete and is qualified in its entirety by the
more detailed information appearing elsewhere in the Proxy Statement including
the Merger Agreement attached as Annex A hereto and the form of the Charter
Amendments and the Bylaw Amendments attached as Annex B hereto and the
accompanying annexes and the documents incorporated herein by reference.
PARTIES TO THE MERGER AGREEMENT. NCRR is a corporation primarily
engaged in the lease of railroad properties. Its principal asset is
approximately 317 miles of railroad right-of-way and track running from Morehead
City, North Carolina, northwest through Raleigh and Greensboro, North Carolina,
and then southwest to Charlotte, North Carolina, which is the terminus of the
line. NCRR also owns certain real estate parcels, most of which are adjacent to
the railroad right-of-way. NCRR was chartered by an act of the North Carolina
General Assembly in 1849. The book value of its net assets as of September 30,
1997 was $9,449,947. Its capital stock consists of one class of common stock,
$.50 par value, of which 4,283,470 shares were issued and outstanding as of
October 31, 1997.
The DOT is the agency of the State with principal responsibility for
planning and administering to the transportation needs of the State of North
Carolina and its people. The DOT's principal office is located at One South
Wilmington Street, Raleigh, North Carolina 27611.
B&M is a North Carolina corporation which is wholly owned by the State
through the DOT. The principal asset of the B&M is a railroad trestle across the
Newport River in Carteret County, North Carolina and adjoining right of way. The
principal office of the B&M is located at One South Wilmington Street, Raleigh,
North Carolina 27611.
PROPOSED MERGER. Under the terms of the proposed merger, B&M will be
merged with and into NCRR. As promptly as practicable after the approval of the
Merger Agreement by the holders of the NCRR Common Stock and compliance with (or
waiver of) certain other conditions, articles of merger will be filed with the
North Carolina Secretary of State pursuant to which B&M will be merged with and
into NCRR. NCRR will be the surviving corporation, which will continue operating
under NCRR's then existing charter and Bylaws.
MERGER CONSIDERATION. Under provisions of the Merger Agreement, each of
the Canceled Shares will be converted into the right to receive the Merger
Consideration payable to the holders of the NCRR Common Stock, without interest,
upon surrender of the stock certificate(s) evidencing such NCRR Common Stock.
Each share of B&M Preferred Stock outstanding immediately prior to the Effective
Date of the Merger shall, by virtue of the Merger and without any action on the
part of the holders thereof, be converted into a right to receive following the
effectiveness of the Merger one share of NCRR Preferred Stock.
SOURCE OF MERGER CONSIDERATION. The total Merger Consideration is
estimated to be approximately $71 million. Approximately $10 million of the
Merger Consideration will be paid from dividends previously paid by NCRR to the
State and the remaining $61 million will be borrowed by B&M from the State
pursuant to legislation adopted by the State legislature, the full text of which
is attached hereto as Annex E.
SPECIAL MEETING. A meeting of shareholders of NCRR will be held on
_________________________ at _________ A.M., in
__________________________________, Raleigh, North Carolina _________ (the
"Special Meeting"). The purpose of the Special Meeting is to vote on the
approval of the Merger Agreement.
4
<PAGE>
CERTAIN CONFLICTS OF INTEREST. The State of North Carolina owns all of
the issued and outstanding shares of B&M (except that, it is anticipated that
certain B&M Preferred Stock will be issued prior to the Merger, see "VALUE TO
STATE OF NORTH CAROLINA; PLANS OR PROPOSALS OF THE STATE"). The executive
officers and directors of NCRR own shares of NCRR Common Stock, which would be
exchanged for the Merger Consideration in connection with the Merger. After the
effectiveness of the Charter Amendments, the NCRR Charter will provide for the
indemnification of directors and officers of NCRR under certain circumstances
and eliminate the personal liability of directors under certain circumstances.
SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS. Following communications
by the State to NCRR that the State was considering entering into negotiations
to acquire all the outstanding shares of NCRR Common Stock not already owned by
the State, the NCRR Board of Directors (the "NCRR Board") organized a special
committee (the "Special Committee") of the NCRR Board consisting of the five
Directors of NCRR (the "Minority Directors") elected by the holders of the
outstanding shares of NCRR Common Stock other than the State and its affiliates
(the "Minority Shareholders"), to negotiate with the State and consider
alternatives to the State's offer. Following the death of J. Melville Broughton,
Jr., a member of the Special Committee, in April 1997, the Special Committee
consisted of the four remaining members of the Special Committee. Prior to the
NCRR Board acting with respect to the Merger, the Special Committee recommended
to the NCRR Board that the NCRR Board approve the Merger Agreement. See "SUMMARY
OF SPECIAL COMMITTEE PROCEEDINGS AND NEGOTIATIONS." The Special Committee
retained independent legal and financial advisors to assist the Special
Committee.
BOARD RECOMMENDATION. The NCRR Board has determined that the Merger,
upon the terms and conditions set forth in the Merger Agreement, is fair to,
and in the best interests of, NCRR and its shareholders. Accordingly, the NCRR
Board has unanimously adopted the Merger Agreement and approved the Merger and
unanimously recommends that the shareholders vote in favor of approval of the
Merger Agreement at the Special Meeting. See "THE MERGER -- Certain Conflicts
of Interest."
OPINION OF THE SPECIAL COMMITTEE'S FINANCIAL ADVISOR. Credit Suisse
First Boston Corporation ("CSFB"), financial advisor to the Special Committee,
has rendered to the Special Committee a written opinion dated October 3, 1997 to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Merger Consideration was fair to the Minority
Shareholders from a financial point of view (the "CSFB Opinion"). A copy of the
CSFB Opinion is attached hereto as Annex C and should be read carefully in its
entirety with respect to the procedures followed, assumptions made, matters
considered and limitations on the review undertaken in connection with the CSFB
Opinion. The CSFB Opinion is directed to the Special Committee and relates only
to the fairness of the Merger Consideration from a financial point of view, does
not address any other aspect of the proposed Merger or any related transaction
and does not constitute a recommendation to any shareholder as to how such
shareholder should vote at the Special Meeting. See "REASONS FOR APPROVAL OF THE
MERGER AGREEMENT - Opinion of the Special Committee's Financial Advisor."
BACKGROUND OF THE MERGER. Since its inception, NCRR has been majority
owned by the State with the remaining shares of NCRR Common Stock fairly widely
dispersed among the public. However, the Charter and Bylaws of NCRR provide the
Minority Shareholders certain rights independent from the State. See
"SHAREHOLDER VOTE AND QUORUM REQUIREMENTS." During its corporate history, this
ownership and voting arrangement has from time to time posed difficulties to
NCRR. Most recently, when certain long-term leases expired in 1994, NCRR was
faced with a number of alternatives, including extending these leases,
most of which would require shareholder approval. See "ALTERNATIVES TO
MERGER AGREEMENT."
VOTE REQUIRED FOR APPROVAL; QUORUM REQUIREMENTS. The NCRR Board has
recommended that the proposed Merger Agreement be approved and has directed that
the approval of the Merger Agreement be submitted to a vote for approval by the
NCRR shareholders. Under North Carolina law,
5
<PAGE>
approval of the Merger Agreement requires the affirmative vote of the holders of
at least a majority of the outstanding shares of NCRR Common Stock. In addition,
because the State is interested in this transaction, and owns approximately 75%
of the NCRR Common Stock, the NCRR Board has required as an additional condition
to approval of the Merger Agreement, that the holders of a majority of the
shares of NCRR Common Stock held by the Minority Shareholders must approve the
Merger Agreement. A quorum will not be deemed to be in existence at the Special
Meeting, unless both (i) a majority of the outstanding shares of NCRR Common
Stock are represented at the Special Meeting, in person or by proxy, and (ii) a
majority of the shares of NCRR Common Stock held by the Minority Shareholders
are represented at the Special Meeting, in person or by proxy. The effect of
attending the Special Meeting in person or signing and returning a form of
Proxy, whether or not a shareholder votes or abstains on any matter, is to have
the shareholder's shares counted toward a quorum being present. If a quorum is
present, whether the Merger Agreement is approved will be determined by the vote
described above. See "SHAREHOLDER VOTE AND QUORUM REQUIREMENTS."
The Charter Amendments and the Bylaw Amendments will be approved if the
Merger Agreement is approved, but will be effective only upon consummation of
the Merger.
As of __________________, the record date for the Special Meeting, the
State owned 3,211,208 shares, or approximately 74.97% of the outstanding NCRR
Common Stock (including shares held in escheat and shares as to which the State
may exercise voting rights), and NCRR's directors and executive officers owned
19,546 shares or approximately .46% of the outstanding NCRR Common Stock.
CONDITIONS TO THE MERGER. The obligations of NCRR and B&M to consummate
the Merger are subject to various conditions, including obtaining the approval
of holders of the requisite number of shares of NCRR Common Stock and the
approval by the Minority Shareholders of the Merger Agreement. In addition, the
obligations of the parties to the Merger Agreement are subject to the condition
that all approvals or exemptions that may be required shall have been obtained
and become effective and the condition that no governmental authority, agency or
commission will have enacted, issued, promulgated, enforced or entered into any
statute, rule, regulation, order, decree or injunction that is then in effect or
has the effect of making the Merger illegal or otherwise preventing or
prohibiting the consummation of the Merger or the transactions contemplated
thereby.
The Merger Agreement provides that the obligations of the parties to
effect the Merger are subject to the fulfillment of certain conditions, any one
or more of which may be waived by the DOT or NCRR, including, among others, that
the parties have complied with all agreements and obligations required by the
Merger Agreement and that no order or similar instrument has been filed which
prohibits the consummation of the Merger or otherwise adversely effects the
Merger or materially restricts the operation of NCRR's business or its exercise
of its rights to own and vote its shares of NCRR Common Stock.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be
terminated and abandoned at any time prior to the Effective Time, whether before
or after approval by the shareholders (i) by mutual written consent of the DOT
and NCRR; (ii) by the DOT or NCRR if, other than due to the willful failure of
the party seeking to terminate the Merger Agreement to perform its material
obligations thereunder, the Merger has not been consummated on or before May 5,
1998, which date may be extended; (iii) by the DOT or NCRR, if a court of
competent jurisdiction issues an order or similar instrument or takes other
action permanently restraining, enjoining or prohibiting the Merger and the
order, similar instrument or action becomes final and nonappealable; or (d) by
the DOT or NCRR, if a vote of the NCRR Shareholders at the Special Meeting
results in the rejection of the adoption of the Merger Agreement or NCRR fails
to obtain a quorum at the Special Meeting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The receipt of cash for shares
of NCRR Common Stock in the Merger or pursuant to the exercise of dissenters'
rights will be a taxable transaction for U.S.
6
<PAGE>
federal income tax purposes and may also be a taxable transaction under other
applicable state, local, foreign or other tax laws. See "THE MERGER - Certain
Federal Income Tax Considerations."
REQUIRED REGULATORY APPROVAL. The proposed Merger falls under the
jurisdiction of the STB and cannot be consummated unless approved by the STB or
exempted from the approval requirement. However, the STB has issued regulations
(49 CFR ss. 1180.2(d)) that provide that certain "classes" of transactions are
exempt from the prior review and approval requirements of the applicable
statute. Among the exempt transactions are transactions within a corporate
family that do not result in adverse changes in service levels, significant
operational changes, or a change in the competitive balance with carriers
outside the corporate family. NCRR and B&M believe that, based on the precedent
of the STB and its predecessor agency, the proposed Merger falls within the
scope of the corporate family exemption described above because, among other
things, the State for a number of years has controlled and owned all of the
stock of B&M and a majority of the stock of NCRR. Accordingly, NCRR and B&M
intend to invoke the corporate family exemption by filing a Notice of Exemption,
in the form prescribed by STB regulations, 49 CFR ss. 1180.4(g), at least seven
days prior to consummation of the transaction. Under STB regulations, the
exemption will become effective seven days after the Notice is filed unless
rejected by the STB Board for containing false or misleading information or on
the ground that the class exemption is not available to this transaction. The
STB has the power to revoke an exemption if it concludes that the notice
contains false or misleading information, that the class exemption is not
applicable, or that regulation of the particular transaction is necessary to
carry out the rail transportation policy or that the transaction is not of
limited scope and that regulation is necessary to protect shippers from abuse of
market power. The STB may also stay an exemption pending a determination as to
whether to revoke it. If the STB Board were to reject or revoke the exemption,
further STB review and either approval or exemption of the Merger (a more
rigorous procedure than the class exemption process) would be required before
the Merger could be consummated. Following such review, the STB could disallow
the Merger and could require divestiture or impose other conditions. Should the
STB require further review, NCRR and B&M intend to seek such review to obtain
STB approval. See "THE MERGER -- Regulatory Approval."
DISSENTERS' RIGHTS. Under North Carolina law, holders of NCRR Common
Stock will be entitled to dissent from the consummation of the proposed Merger
and to demand payment in cash for the "fair value" of their shares of NCRR
Common Stock in the event that the Merger Agreement is approved and the Merger
is consummated and such shareholders satisfy the required statutory procedures.
The right of NCRR shareholders to receive such payment is contingent upon strict
compliance with the requirements set forth in Article 13 of the North Carolina
Business Corporation Act (the "NCBCA"). The full text of Article 13 of the NCBCA
is set forth as Annex D to this Proxy Statement. Failure to take any necessary
step in connection with the exercise of such rights may result in termination or
waiver of dissenters' rights. Any shareholder who intends to exercise
dissenters' rights must give written notice of such intent to NCRR and such
written notice must be actually received by NCRR before the actual vote on the
approval of the Merger Agreement is taken at the Special Meeting. A shareholder
who wishes to exercise dissenters' rights must not vote any shares of NCRR
Common Stock in favor of the Merger Agreement. See "THE MERGER -- Dissenting
Shareholders' Rights of Appraisal."
DEQUOTATION AND DEREGISTRATION. If the Merger is consummated, the
shares of the NCRR Common Stock will no longer be traded in the over-the-counter
market and will be deregistered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
ADDRESS OF NCRR. The mailing address of the principal executive office
of NCRR is 3200 Atlantic Avenue, Suite 110, Raleigh, North Carolina 27604.
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GENERAL
This Proxy Statement is furnished in connection with the solicitation
by the NCRR Board of proxies in the accompanying form to be used at the Special
Meeting of Shareholders to be held _________________,
___________________________, 199__, at _________ A.M., at
_________________________________ Raleigh, North Carolina ________ and at any
subsequent time as may be made necessary by its adjournment. The Proxy Statement
and form of proxy were first sent to shareholders on or about _____________,
1997.
The shares represented by any proxy given as a result of this request
will be voted as specified in the proxy. As to any matter for which no choice
has been specified in an executed proxy, the shares represented thereby will be
voted by the persons named in the proxy for the Merger Agreement and in their
discretion with respect to any other business as may properly come before the
meeting or any adjournment or adjournments thereof.
THE NCRR'S ANNUAL REPORT TO SHAREHOLDERS, INCLUDING FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1996, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES, WAS
SENT TO SHAREHOLDERS IN JULY 1997. COPIES OF SUCH FORM 10-K AND ANY EXHIBIT
THERETO ARE AVAILABLE UPON REQUEST, WITHOUT CHARGE, TO THE PERSONS WHOSE PROXIES
ARE SOLICITED. WRITTEN REQUESTS SHOULD BE MADE TO SECRETARY, NORTH CAROLINA
RAILROAD COMPANY, 3200 ATLANTIC AVENUE, SUITE 110, RALEIGH, NORTH CAROLINA
27604.
PROXY SOLICITATION
The entire cost of solicitation of proxies will be borne by NCRR. In
addition to mailing proxy material, NCRR expects to solicit proxies by
telephone, facsimile, telegraph or personally by directors, officers and
employees of NCRR. Officers and directors will not receive additional
compensation for their efforts. NCRR expects to pay an independent proxy
solicitor up to $25,000 as compensation for the solicitation of proxies. In
addition, NCRR may reimburse brokers and other custodians, nominees and
fiduciaries for their expenses for sending proxy material to beneficial owners
in accordance with the rules and regulations of the Securities and Exchange
Commission.
PROXY REVOCATION
Any shareholder who has executed a proxy and attends the Special
Meeting may elect to vote in person rather than by proxy. A shareholder may
revoke his, her, or its proxy at any time before it is voted by filing written
notice of revocation or by filing a later valid proxy with the Secretary of the
NCRR. Revocations will be effective if delivered to the principal office of NCRR
by 5:00 p.m. on the day prior to the day of the Special Meeting, or if delivered
to the Secretary of NCRR at the Special Meeting any time prior to the time the
Chairman of the Special Meeting closes voting on the matter for which the proxy
is sought to be revoked.
RECORD DATE; VOTING
Pursuant to the Bylaws of NCRR, the NCRR Board fixed [40
days]___________ 1997 as the record date for shareholders entitled to vote at
the Special Meeting and only shareholders of record at the close of business on
that date will be entitled to vote. As of the record date there were outstanding
4,283,470 shares of the NCRR Common Stock of which 3,211,208 shares are owned by
the State (including shares held in escheat and shares as to which the State may
exercise voting rights) with the remaining 1,072,262 shares being owned by the
Minority Shareholders. (The State holds 1,635 shares in escheat subject to the
claim of unknown owners. The State has advised NCRR that it does not currently
vote shares held in escheat.)
As a group, as of October 31, 1997, directors and officers of the NCRR
beneficially owned 19,546 shares of NCRR Common Stock,
8
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or approximately .46% of the total issued and outstanding shares. As a group, as
of the same date, the Minority Directors beneficially owned 10,600 shares of
NCRR Common Stock, or approximately .25% of the total issued and outstanding
shares, and approximately .99% of the total shares held by the Minority
Shareholders.
Pursuant to agreements with some of the directors elected by the State,
the State is entitled to dividends from, and retains the right to repurchase, an
additional 2,400 shares. Shares of NCRR Common Stock owned of record by NCRR
Directors that are subject to repurchase by the State will be deemed shares
owned by the State for purposes of quorum requirements and voting requirements
at the Special Meeting. See "SHAREHOLDER VOTE AND QUORUM REQUIREMENTS."
VOTING
Each share of NCRR Common Stock is entitled to one vote on all matters
presented at the Special Meeting. See "SHAREHOLDER VOTE AND QUORUM
REQUIREMENTS."
SHAREHOLDER VOTE AND QUORUM REQUIREMENTS
QUORUM REQUIREMENTS
Section 55-11-03 of the General Statutes of the State of North Carolina
requires that the Merger be approved by the vote of the holders of a majority of
the outstanding capital stock of NCRR if a quorum is present at the Special
Meeting. Section 7 of Article II of the Bylaws of NCRR provides as follows with
respect to quorums:
A MAJORITY OF THE OUTSTANDING SHARES OF THE CORPORATION ENTITLED
TO VOTE, REPRESENTED IN PERSON OR BY PROXY, SHALL CONSTITUTE A
QUORUM AT A MEETING OF SHAREHOLDERS, PROVIDED, HOWEVER, THAT A
MAJORITY OF THE SHARES HELD BY SHAREHOLDERS OTHER THAN THE STATE
OF NORTH CAROLINA MUST BE REPRESENTED, IN PERSON OR BY PROXY, IN
ORDER TO CONSTITUTE A QUORUM AT A MEETING OF SHAREHOLDERS.
NCRR has obtained an opinion of its legal counsel, which advises NCRR
that counsel believes that this Bylaw is valid under the corporate laws of the
State of North Carolina, as such laws existed at the time of adoption of this
Bylaw, at the date hereof and at all intervening dates. Such legal opinion,
however, notes that a similar Bylaw of NCRR was declared invalid under the
State's corporate law in effect until 1957, and there can be no assurance that
this Bylaw provision would ultimately be upheld as valid if it is challenged.
The circumstances giving rise to the case in which the Bylaw was held to be
invalid, involved shareholders other than the State of North Carolina boycotting
a shareholders' meeting. The legal opinion obtained by NCRR with respect to the
validity of this Bylaw provision is based on an analysis of current North
Carolina corporate law. There can be no assurance that the State legislature
would not seek to alter the corporate law as it applies to NCRR if a quorum is
not present at the Special Meeting.
Unless and until advised otherwise by a court of competent
jurisdiction, NCRR will consider this Bylaw valid and a quorum will not be
deemed to be in existence at the Special Meeting, unless both (i) a majority of
the outstanding shares of NCRR are represented at the Special Meeting, in person
or by proxy, and (ii) a majority of the shares of NCRR held by the Minority
Shareholders are represented at the Special Meeting, in person or by proxy.
The effect of attending the Special Meeting in person or signing and
returning a form of proxy, whether or not a shareholder votes or abstains on any
matter, is to have the shareholder's shares counted towards a quorum being
present. Whether a quorum is present at the Special Meeting will be determined
by the vote described below.
Abstentions and "broker non-votes" are counted for purposes of
determining whether a quorum is present, but do not represent votes cast with
respect to any proposal. "Broker non-votes" are shares of NCRR Common Stock held
by a broker or nominee for which an executed proxy is received by NCRR, but are
not voted
9
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as to one or more proposals because instructions have not been received from the
beneficial owners or persons entitled to vote and the broker or nominee does not
have discretionary voting power.
VOTE REQUIREMENTS
Under North Carolina law, the Merger Agreement can be approved by the
shareholders only if the holders of a majority of the outstanding shares of NCRR
Common Stock affirmatively vote to approve the Merger Agreement at a meeting
duly called and at which a quorum is present. In addition, in order to give the
Minority Shareholders voting power in the approval process, the NCRR Board has
determined that approval of the Merger will also require the approval of a
majority of the votes cast by the Minority Shareholders.
Shareholders who oppose the approval of the Merger Agreement can choose
whether their opposition is best effectuated by not voting or by voting against
the Merger Agreement. Failure to execute and return a proxy will have the
practical effect of voting against the Merger Agreement if the holders of a
majority of the outstanding shares of NCRR Common Stock do not attend the
meeting in person or by proxy. However, if the holders of a majority of NCRR
Common Stock held by the Minority Shareholder attend the Special Meeting in
person or by proxy, opposition to the Merger Agreement will be effective only if
the number of votes cast for approval by the Minority Shareholders is less than
a majority of the number of outstanding shares held by the Minority
Shareholders.
DISSENTERS' RIGHTS
Section 55-13-01, ET SEQ., of the NCBCA gives any holder of NCRR Common
Stock who objects to the Merger Agreement and who complies with the provisions
of Sections 55-13-01, ET SEQ., the right to receive a cash payment from NCRR for
the "fair value," as appraised immediately before the Effective Date, of the
shareholder's NCRR Common Stock, subject only to the surrender by the
shareholder of the shareholder's certificates representing the shareholder's
shares. Any such payment may be higher or lower than the Merger Consideration.
"Dissenting shares" are shares of NCRR Common Stock as to which dissenters'
rights are properly exercised pursuant to Section 55-13-01, ET SEQ., of the
NCBCA.
To exercise the right to object to the Merger Agreement, a shareholder
must give to NCRR, and NCRR must receive, prior to the actual vote taken at the
Special Meeting, a written notice of such shareholder's intent to demand payment
for shares of NCRR Common Stock. A shareholder who wishes to object to the
Merger Agreement must not vote any shares in favor of the Merger Agreement.
Failure to take any necessary step in connection with the exercise of such
rights may result in termination or waiver of dissenters' appraisal rights.
NEITHER A VOTE AGAINST THE MERGER AGREEMENT NOR THE FAILURE TO VOTE
WILL BY ITSELF CONSTITUTE A PROPER WRITTEN OBJECTION TO THE MERGER. If proper
and timely written objection to the Merger Agreement is given by a shareholder,
a failure to vote against the Merger Agreement will not constitute a waiver of
the shareholder's right to dissent and demand the fair value of the
shareholder's shares. A VOTE BY A SHAREHOLDER TO APPROVE THE MERGER AGREEMENT
TERMINATES THE SHAREHOLDER'S RIGHT TO OBJECT UNDER THE NCBCA. See "THE MERGER --
Dissenting Shareholders' Rights of Appraisal."
IF THE MERGER IS APPROVED, NO MINORITY SHAREHOLDER SHOULD SUBMIT
CERTIFICATES FOR MERGER CONSIDERATION TO BE PAID TO SUCH NCRR SHAREHOLDER UNTIL
RECEIPT OF THE TRANSMITTAL FORM DISCUSSED BELOW.
THE MERGER
The following summary of certain terms and provisions of the Merger
Agreement is qualified in its entirety by reference to the terms and conditions
of the Merger Agreement which is set forth in full in Annex A to this Proxy
Statement and is incorporated herein by reference.
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BACKGROUND OF THE MERGER. Since its inception, NCRR has been majority
owned by the State with the remaining shares of NCRR Common Stock fairly widely
dispersed among the public. However, the Charter and Bylaws of NCRR provide the
Minority Shareholders certain rights independent from the State. See
"SHAREHOLDER VOTE AND QUORUM REQUIREMENTS." During its corporate history, this
ownership and voting arrangement has from time to time posed difficulties to
NCRR. Most recently, when certain long-term leases expired in 1994, NCRR
was faced with a number of alternatives, including extending these leases,
most of which would require shareholder approval. See "ALTERNATIVES TO
MERGER AGREEMENT."
THE NCRR CAPITAL STOCK
The NCRR Common Stock is NCRR's sole class of capital stock of which
10,000,000 shares are authorized and 4,283,470 shares are outstanding. All
outstanding shares are fully paid and non-assessable. Each share of NCRR Common
Stock is entitled to one vote. NCRR is a reporting company pursuant to the
Exchange Act. NCRR Common Stock is traded in the over-the-counter market.
The dividend and liquidation rights of NCRR Common Stock do not differ
from common stock generally. All shares of NCRR Common Stock are entitled to
share equally in such dividends as the NCRR Board may declare from sources
legally available for that purpose. Upon any liquidation or dissolution of NCRR,
whether voluntary or involuntary, all shares of NCRR Common Stock are entitled
to share equally in the assets available for distribution to shareholders after
payment of all prior obligations of NCRR.
If the Merger Agreement is approved (thereby constituting an approval
of the Charter Amendments), NCRR would have __________ shares of Preferred Stock
authorized but unissued. Such shares could not be issued prior to the
consummation of the Merger. The designations, powers, preferences, terms and
rights and qualifications, limitations or restrictions of the NCRR Preferred
Stock could be established by the NCRR Board on or after the Effective Date of
the Merger.
THE MERGER CONSIDERATION AND RECOMMENDATIONS AND REASONS
At the Effective Date, each of the shares of NCRR Common Stock
outstanding (other than shares owned by B&M or the State or shares as to which
dissenters' rights have been perfected) will be converted into the right to
receive the Merger Consideration payable following effectiveness of the Merger
to the holders of the NCRR Common Stock, without interest, upon surrender of the
stock certificate(s) evidencing such NCRR Common Stock. Each share of B&M
Preferred Stock outstanding immediately prior to the Effective Date of the
Merger shall, by virtue of the Merger and without any action on the part of the
holders thereof, be converted into a right to receive following the
effectiveness of the Merger one share of NCRR Preferred Stock. The Merger
Agreement provides for payment to the Minority Shareholders of the Merger
Consideration of $66.00 per share in exchange for their shares of NCRR Common
Stock, which will mean that Minority Shareholders other than those who exercise
their dissenters' rights to an appraisal, will forego all economic benefits
afforded holders of such shares of Common Stock, whether such economic benefits
accrue or are received before or after the Effective Date. Terms of the Merger
Agreement restrict the payment of dividends to the Minority Shareholders prior
to the Effective Date and do not provide for any upward adjustment to the Merger
Consideration or other payment to the Minority Shareholders on account of any
amounts that accrue or are received by NCRR prior to the Effective Date. NCRR
has substantial claims against Norfolk Southern Railway Company (formerly known
as Southern Railway Company) ("NSR") and Atlantic and East Carolina Railway
Company, a wholly-owned subsidiary of NSR ("AECR") (NSR and AECR are
collectively referred to herein as "Norfolk Southern") for amounts that may be
deemed to have accrued prior to the Effective Date, including claims for
payments for use by Norfolk Southern of the NCRR's line prior to the Effective
Date of the Merger, and NCRR has a contract for sale of property in Charlotte
for approximately $4,000,000, which may close
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before or after the Effective Date. "See ALTERNATIVES TO MERGER AGREEMENT -
Litigation Against Norfolk Southern" and "ALTERNATIVES TO MERGER AGREEMENT -
Charlotte Convention Center Litigation." If the Merger is approved by the
shareholders of the NCRR, the Minority Shareholders who do not exercise their
dissenters' right to an appraisal will thereby forego any economic benefit from
any such amounts. However, the extent, if any, to which such amounts may used by
a court in determining the fair value of the shares held by Minority
Shareholders who exercise their dissenters' rights is uncertain. See "THE
MERGER- Dissenting Shareholders' Rights of Appraisal" and "SUMMARY OF SPECIAL
COMMITTEE PROCEEDINGS AND NEGOTIATIONS - The Special Committee Proceedings."
The Merger Consideration was negotiated by the Special Committee (with
the advice of financial advisors and legal counsel selected by the Special
Committee), and the DOT, and approved by the Special Committee and the NCRR
Board. In negotiating the Merger Consideration, the Special Committee and the
NCRR Board took into account several factors, including the absence of competing
bidders for either NCRR's lines or the NCRR Common Stock, ongoing litigation,
the possible loss by NCRR of overhead traffic, risks NCRR would face operating
the railway independently and the proposed Lease Extension Agreement dated
January 1, 1995 between NCRR and Norfolk Southern (the "Lease Extension
Agreement") and the CSFB Opinion, to the effect that, as of the date of the CSFB
Opinion and based upon and subject to certain matters stated therein, the Merger
Consideration was fair to the Minority Shareholders from a financial point of
view. See "SUMMARY OF SPECIAL COMMITTEE PROCEEDINGS AND NEGOTIATIONS."
METHOD OF DELIVERY OF MERGER CONSIDERATION
The conversion of the shares of NCRR Common Stock will be automatic at
the Effective Date. As soon as practicable after the Effective Date, NCRR will
instruct a bank or trust company reasonably acceptable to the State and B&M (the
"Agent") to send to the Minority Shareholders transmittal forms for use in
forwarding to the Agent stock certificates representing NCRR Common Stock for
surrender and exchange for the Merger Consideration. Upon surrender of stock
certificates by a NCRR shareholder (or in the case of lost certificates,
satisfactory evidence of ownership of NCRR Common Stock), the Agent will deliver
the Merger Consideration to which such shareholder is entitled. Shareholders who
have lost their certificates may be required to execute an indemnity bond and
pay any premium relating thereto.
IF THE MERGER IS APPROVED, NO MINORITY SHAREHOLDER SHOULD SUBMIT
CERTIFICATES FOR MERGER CONSIDERATION TO BE PAID TO SUCH NCRR SHAREHOLDER UNTIL
RECEIPT OF THE TRANSMITTAL FORM DISCUSSED ABOVE.
REGULATORY APPROVAL
The proposed Merger falls under the jurisdiction of the STB and cannot
be consummated unless approved by the STB or exempted from STB approval.
However, the STB has issued regulations (49 CFR ss. 1180.2(d)) that provide that
certain "classes" of transactions are exempt from the prior review and approval
requirements of the statute. Among the exempt transactions are transactions
within a corporate family that do not result in adverse changes in service
levels, significant operational changes, or a change in the competitive balance
with carriers outside the corporate family. NCRR and B&M believe that based on
the precedent of the STB and its predecessor agency, the proposed Merger falls
within the scope of the corporate family exemption described above because,
among other things, the State for a number of years has controlled and owned all
of the stock of B&M and a majority of the stock of NCRR. Accordingly, NCRR and
B&M intend to invoke the corporate family exemption by filing a Notice of
Exemption, in the form prescribed by STB regulations (49 CFR ss. 1180.4(g)) at
least seven days prior to consummation of the transaction. Under STB
regulations, the exemption will become effective seven days after the Notice of
Exemption is filed unless rejected by the STB Board for containing false or
misleading information or on the ground that the class exemption is not
available to this transaction. A notice of the Notice of Exemption will
be published in the Federal Register within thirty days of the filing of the
Notice of
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Exemption, and any party may file a petition to revoke the exemption. The STB
has the power to revoke an exemption if it concludes that the Notice of
Exemption contains false or misleading information, that the class exemption is
not applicable, or that regulation of the particular transaction is necessary to
carry out the rail transportation policy or that the transaction is not of
limited scope and that regulation is necessary to protect shippers from abuse of
market power. The STB may also stay an exemption pending a determination as to
whether to revoke. B&M and NCRR do not believe revocation is likely. However, if
the STB Board were to reject or revoke the exemption further STB review and
either approval or exemption of the Merger (a more rigorous procedure than the
class exemption process) would be required before it could be consummated.
Review by the STB of the transaction, without the availability of a class
exemption, could substantially delay the Merger's effectiveness.
OTHER CONDITIONS TO THE MERGER; PROVISIONS FOR TERMINATION; EFFECTIVE DATE
In addition to the regulatory approval described above, the proposed
Merger is subject to the fulfillment of certain conditions. If any one or more
of the conditions to the Merger is not satisfied, the party whose obligation to
proceed is made subject to the satisfaction of such condition may nevertheless
waive satisfaction of the condition and elect to proceed with the Merger.
The Merger will be abandoned if the holders of the requisite number of
shares of NCRR Common Stock do not vote for the Merger Agreement as described
herein on or before May 5, 1998, or if necessary regulatory approvals have not
been obtained before the Effective Date. Further, the Merger may be abandoned
prior to the Effective Date by mutual agreement of the NCRR Board and the
Directors of B&M, notwithstanding approval by the NCRR shareholders. The Merger
also may be abandoned if any permanent injunction or action by any governmental
entity preventing consummation of the Merger becomes final and nonappealable.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.
The following is a summary of the material federal income tax
consequences of the Merger to a shareholder of NCRR (other than a holder of
Canceled Shares) that holds its shares of NCRR Common Stock as a capital asset
(a "holder"). The discussion set forth below is for general information only and
may not apply to holders subject to special treatment under the Internal Revenue
Code of 1986, as amended (the "Code"), such as broker-dealers, financial
institutions, persons who are not citizens or residents of the United States,
and stockholders who acquired their NCRR Common Stock as compensation. This
summary is based upon federal income tax laws, regulations, rulings, and
decisions in effect as of the date hereof, all of which are subject to change,
retroactively or prospectively, and to differing interpretation.
The receipt of cash for NCRR Common Stock in the Merger or pursuant to
the exercise of dissenters' rights will be a taxable transaction for federal
income tax purposes under the Code and may also be a taxable transaction under
applicable state, local or foreign tax laws. In general, a Minority Shareholder
will recognize gain or loss for federal income tax purposes equal to the
difference between the amount of cash received in exchange for the NCRR Common
Stock surrendered and the holder's adjusted tax basis in the NCRR Common Stock
surrendered pursuant to the Merger or pursuant to the exercise of dissenters'
rights. Assuming the NCRR Common Stock constitutes a capital asset in the hands
of the holder, such gain or loss will be capital gain or loss and will be
long-term capital gain or loss if the holder held the NCRR Common Stock for more
than one year as of the Effective Date. Under recently enacted legislation,
effective as of May 7, 1997, long-term capital gain of individuals will be taxed
at a maximum rate of 20%, in the case of NCRR Common Stock held more than
eighteen months, and 28%, in the case of NCRR Common Stock held more than one
year.
A holder (other than certain exempt holders including, among others,
all corporations and certain foreign individuals and entities) may be subject to
31% backup withholding unless the holder
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provides its taxpayer identification number or social security number (a "TIN")
and certifies that such number is correct or properly certifies that it is
awaiting a TIN, or unless an exemption applies. A holder who does not furnish
its TIN may be subject to a penalty imposed by the Internal Revenue Service (the
"IRS").
If backup withholding applies to a holder, the Agent is required to
withhold 31% from payments to such holder. Backup withholding is not an
additional tax. Rather, the amount of the backup withholding can be credited
against the federal income tax liability of the person subject to the backup
withholding, provided that the required information is given to the IRS. If
backup withholding results in an overpayment of tax, a refund can be obtained by
the holder upon filing an appropriate income tax return.
EACH HOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE
SPECIFIC CONSEQUENCES OF THE MERGER, INCLUDING ANY FEDERAL, STATE, LOCAL OR
OTHER TAX CONSEQUENCES AND ANY TAX RETURN FILING AND REPORTING REQUIREMENTS.
INDEMNIFICATION OF DIRECTORS
Under the NCBCA, a corporation is permitted to indemnify a director who
conducted himself in good faith and reasonably believed: (i) in the case of
conduct in his official capacity with the corporation, that his conduct was in
the best interest of the corporation and (ii) in all other cases, that his
conduct was at least not opposed to the corporation's best interest. In the case
of any criminal proceeding, the director must not have had any reasonable cause
to believe his conduct was unlawful. In any proceeding by or in the right of a
corporation (such as the four shareholder derivative actions described herein),
a corporation may not voluntarily indemnify a director if the director is
adjudged liable to the corporation. In addition, a corporation may not indemnify
a director if the director is adjudged liable on the basis that personal benefit
was improperly received by him. Where a proceeding is by or in the right of a
corporation, indemnification of a director is limited to reasonable expenses if
the proceeding is concluded without a final adjudication on the issue of
liability.
The NCBCA permits an advance for expenses incurred by a director in
defending a proceeding. The expenses may be paid by a corporation in advance of
the final disposition of the legal action, upon receipt of an undertaking by or
on behalf of the director to repay such amount, unless it is ultimately
determined that he is entitled to be indemnified by the corporation against such
expenses. The Directors of the NCRR who have executed such undertakings are
receiving advances for expenses incurred in defending the actions brought
against them. See "ALTERNATIVES TO MERGER AGREEMENT -- Shareholder Litigation"
Additionally, the NCBCA provides that a corporation may purchase and
maintain insurance on behalf of a director of the corporation against any
liability asserted against or incurred by him in that capacity or arising from
his status as a director. NCRR has an insurance policy that covers itself
against the indemnification liability of NCRR to its Directors. The policy has
an aggregate limit of $5 million and a $75,000 retention per occurrence. NCRR's
liability exposure to its Directors will, therefore, not be material, unless (i)
the Directors satisfy the requirements for being indemnified as described above
and (ii) the indemnified liabilities and expenses exceed NCRR's insurance
coverage. NCRR is unable to determine this early in the legal proceedings
whether either of the foregoing conditions will occur.
DIRECTORS AND OFFICERS OF NCRR UPON CONSUMMATION OF THE MERGER
The members of the NCRR Board on the Effective Date shall continue to
serve as members of the Board of Directors of NCRR as the surviving corporation.
Their service on the NCRR Board will be governed by the charter and Bylaws of
NCRR and by Section 124-6(b) of the General Statutes of North Carolina. All
Directors will serve until their successors have been elected and duly
qualified. Upon the Effective Date, the officers of NCRR shall be the officers
of the surviving corporation. These officers shall
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serve until their successors are elected or appointed in accordance with the
Bylaws of NCRR and have been duly qualified.
For certain biographical information regarding the directors and
officers of NCRR as the surviving corporation, see "CURRENT DIRECTORS AND
EXECUTIVE OFFICERS."
DEQUOTATION AND DEREGISTRATION OF NCRR COMMON STOCK
If the Merger is consummated, the State will be the only holder of
NCRR Common Stock and the shares of the NCRR Common Stock will no longer be
traded in the over-the-counter market and will be deregistered under the
Exchange Act.
COSTS AND EXPENSES OF THE MERGER
The DOT and B&M, on the one hand, and NCRR, on the other hand, will
bear their respective expenses incurred in connection with the contemplated
Merger, whether or not the Merger is consummated; provided that the DOT will
bear one-half of the expenses of the filing fees, and printing, mailing and
solicitation costs relating to this Proxy Statement. The estimated expenses of
NCRR are as follows: filing fees $14,154, legal fees $100,000, accounting fees
$7,000, proxy solicitation fees $25,000, printing and mailing costs $35,000, and
investment banking fees $550,000. The estimated expenses of the DOT and B&M are
as follows: filing fees [$ ], legal fees [$ ], proxy solicitation fees [$ ],
printing and mailing costs [$ ] and investment banking fees [$ ].
THE CHARTER AMENDMENTS AND THE BYLAW AMENDMENTS
The following summary of the Charter Amendments and the Bylaw
Amendments is qualified in its entirety by reference to the form of the Charter
Amendments and the Bylaw Amendments which is set forth in full in Annex B to
this Proxy Statement and is incorporated herein by reference.
THE CHARTER AMENDMENTS
The State is in the process of determining whether it desires to
continue NCRR's qualification as a Real Estate Investment Trust ("REIT") after
the Merger. While many issues affect this decision, the primary issue relates to
the federal income tax consequences to NCRR if REIT status is discontinued.
One of the requirements for continued REIT qualification is that NCRR
maintain at least 100 shareholders. If the State determines to continue the REIT
qualification of NCRR after the Merger, it would satisfy this ongoing
shareholder requirement by issuing a limited amount of non-voting Preferred
Stock of B&M which would be converted to newly issued shares of NCRR Preferred
Stock in the Merger. While this would result in a continuation of minority
shareholders in NCRR, those minority shareholders would own a limited number of
shares of non-voting Preferred Stock.
The primary purpose of the proposed Charter Amendments is to provide
for NCRR Preferred Stock to be issued to holders of B&M Preferred Stock to
enable the State to preserve REIT status after the Merger.
The Charter Amendments would authorize a series of NCRR Preferred Stock
which would be issued only if the Merger is consummated. The NCRR Preferred
Stock cannot be issued under any circumstances involving continued ownership of
NCRR Common Stock by existing Minority Shareholders.
The Charter Amendments also contain certain provisions which are
intended to cause corporate governance after the consummation of the Merger to
reflect the private ownership structure of NCRR.
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The Charter Amendments will not be effective unless and until the Merger is
consummated and therefore the Charter Amendments will have no effect on NCRR
while the Minority Shareholders are shareholders of NCRR.
The Charter Amendments would (i) limit the liability of members of the
NCRR Board to the maximum extent permissible under North Carolina law, (ii)
provide for the indemnification of members of the NCRR Board and officers of
NCRR to the fullest extent permissible under North Carolina law, (iii) allow the
Bylaws of NCRR to be amended by the NCRR Board, including provisions adopted,
amended or repealed by the shareholders of NCRR, and (iv) provide that the NCRR
Board be elected by shareholders of NCRR and that the number of directors that
constitutes the entire NCRR Board be fixed in NCRR's Bylaws.
In addition, because the State may desire to use NCRR for various
purposes generally promoting transit within the State and the economic
development of the State, the Charter Amendments provide that the directors and
officers of NCRR, in determining the best interests of NCRR, may consider the
effects of their actions upon the economic development of the State, the
transportation of goods and public transportation within the State and the
communities located therein, and upon employees, suppliers and customers of
NCRR.
Finally, NCRR's current Charter provides that five members of the
fifteen member NCRR Board are to be elected by the Minority Shareholders and the
remaining members are to be elected by the State. See "CERTAIN INFORMATION ABOUT
NCRR -- Shareholders; Changes in Control." After the consummation of the Merger,
this method of electing directors to the NCRR Board will no longer serve its
purpose of ensuring substantial representation of the Minority Shareholders in
the governance of NCRR because the Minority Shareholders will no longer be
shareholders of NCRR. Thus, the Charter Amendments contain a provision which
eliminates the election of the Minority Directors by the Minority Shareholders
and simply provides that the directors will be elected by the shareholders of
NCRR at the annual meeting of shareholders.
THE BYLAW AMENDMENTS
The Bylaw Amendments are intended to cause the corporate governance
after the consummation of the Merger to reflect the private status of NCRR and
to make the Bylaws consistent with the NCRR Charter as amended by the Charter
Amendments. The Bylaw Amendments will not be effective unless and until the
Merger is consummated and therefore the Bylaw Amendments will have no effect on
NCRR while the Minority Shareholders are shareholders of NCRR.
The Bylaw Amendments would amend the Bylaws by (i) deleting the
provision requiring that the holders of a majority of the outstanding shares
entitled to vote and a majority of the outstanding shares held by the Minority
Shareholders be present at a meeting to constitute a quorum (see "SHAREHOLDER
VOTE AND QUORUM REQUIREMENTS"), (ii) removing the requirement that directors be
shareholders of NCRR and residents of North Carolina and hold 500 shares of NCRR
stock, (iii) deleting the current requirement that there be 15 directors, 5 of
which are to be elected by shareholders of NCRR other than the State and fixing
the number of directors that constitute the Board of Directors from between 9
and 15, and (iv) providing that directors be elected by NCRR's shareholders.
The Bylaw Amendments would also amend the provision in the current NCRR
Bylaws which provides that Bylaws adopted by shareholders may not be altered or
repealed by the NCRR Board. The Bylaw Amendments would make the amendment
provision in the Bylaws consistent with the NCRR Charter, as amended by the
Charter Amendments.
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DISSENTING SHAREHOLDER' RIGHTS OF APPRAISAL
Holders of shares of NCRR Common Stock are entitled to dissenters'
rights under Article 13 of the NCBCA ("Article 13"), provided that they comply
with the conditions established by Article 13. Article 13 is reprinted in its
entirety as Annex D to this Proxy Statement. The following discussion is not a
complete statement of the law relating to dissenters' rights and is qualified in
its entirety by reference to Annex D. This discussion and Annex D should be
reviewed carefully by any holder who wishes to exercise statutory dissenters'
rights or who wishes to preserve the right to do so, as failure to comply with
the procedures set forth herein or therein will result in the loss of
dissenters' rights.
Pursuant to Article 13, any NCRR shareholder who (i) gives written
notice of his or her intent to demand payment for his or her shares if the
Merger is consummated and becomes effective, which notice is actually received
by NCRR before the vote is taken at the Special Meeting and (ii) does not vote
his or her shares at the Special Meeting in favor of the proposal to approve the
Merger Agreement, shall be entitled, if the Merger Agreement is approved and the
Merger is consummated, to receive payment of the fair value of such
shareholder's shares of NCRR Common Stock upon compliance with the applicable
procedural requirements. Such payment shall be made by the "Surviving
Corporation" which, for purposes of this summary of the rights of dissenting
NCRR shareholders, shall mean NCRR, with respect to action taken before or after
the Effective Date.
Any written notice of a NCRR shareholder's intent to demand payment for
such shareholder's shares of NCRR Common Stock if the Merger is consummated must
be received by NCRR at: 3200 Atlantic Avenue, Suite 110, Raleigh, North Carolina
27604, Attention: Secretary, prior to the shareholder vote at the Special
Meeting. A shareholder who votes for the Merger will have no dissenters' rights.
The submission by a shareholder of a proxy card without voting instructions with
respect to the proposal to approve the Merger Agreement or a proxy voted in
favor of the Merger Agreement (if not revoked) will count as a vote in favor of
the Merger Agreement and will serve to waive dissenters' rights. However,
failure to return a proxy card or vote against approval of the Merger Agreement
will not serve to waive dissenters' rights assuming the compliance with the
other procedural requirements of Article 13. A shareholder who does not satisfy
each of the aforementioned requirements is not entitled to payment for such
shareholder's shares of NCRR Common Stock under the dissenters' rights
provisions of the NCBCA and will be bound by the terms of the Merger Agreement.
No later than ten (10) days after the Special Meeting (if the holders
of the requisite number of shares of NCRR Common Stock approve the Merger
Agreement), the Surviving Corporation must mail, by registered or certified
mail, return receipt requested, a written dissenters' notice (a "Dissenters'
Notice") to all shareholders who have given the required notice and not voted in
favor of the Merger Agreement as described above. The Dissenters' Notice will
(i) supply a form for demanding payment; (ii) state where the payment
demand must be sent and where and when certificates for shares must
be deposited; (iii) inform holders of uncertificated shares to what
extent transfer of the shares will be restricted after the payment
demand is received; (iv) set a date by which the Surviving Corporation must
receive the payment demand, which date may not be fewer than thirty
(30) nor more than sixty (60) days after the date the Dissenters' Notice
is mailed; and (v) be accompanied by a copy of Article 13. An
NCRR shareholder who is sent a Dissenters' Notice and who wishes to assert
dissenters' rights must demand payment and deposit his or her certificates in
accordance with the terms of the Dissenters' Notice. An NCRR shareholder who
demands payment and deposits such certificates in accordance with the terms of
the Dissenters' Notice retains all other rights of an NCRR shareholder until
these rights are canceled or modified by the consummation and effectiveness of
the Merger. An NCRR shareholder who does not demand payment or deposit such
shareholders' share certificates where required, each by the date set in the
Dissenters' Notice will not be entitled to payment for such Shareholders' shares
of NCRR Common Stock under the NCBCA. If any such holder of NCRR Common Stock
shall have failed to perfect or shall have effectively withdrawn or lost such
right, each share of such holder's NCRR Common Stock shall thereupon be deemed
to have been converted into and have become, as of the Effective Date, the right
to receive, without any interest thereon, the Merger Consideration.
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As soon as the Merger is consummated, or upon receipt of a payment
demand, the Surviving Corporation must offer to pay each dissenter who complied
with the requirements of Article 13 the amount the Surviving Corporation
estimates to be the fair value of such shareholder's shares of NCRR Common
Stock, plus interest accrued to the date of payment (the "Offer of Payment"),
and must pay this amount to each dissenting shareholder who agrees in writing to
accept such payment in full satisfaction of his or her demand. The Offer of
Payment must be accompanied by (i) the Surviving Corporation's most recent
available balance sheet as of the end of a fiscal year ending not more than
sixteen (16) months before the date of the Offer of Payment, an income statement
for that year, a statement of cash flows for that year and the latest available
interim financial statements, if any; (ii) a statement of the Surviving
Corporation's estimate of the fair value of the shares of NCRR Common Stock;
(iii) an explanation of how the interest was calculated; (iv) a statement of the
dissenters' right to demand payment under the provisions of the NCBCA described
in the next succeeding paragraph; and (v) a copy of Article 13. If the Merger is
not effected within sixty (60) days after the date set for demanding payment and
depositing share certificates, the Surviving Corporation will return the
deposited certificates and release the transfer restrictions imposed on
uncertificated shares. If after returning deposited certificates and releasing
transfer restrictions, the Merger is effected, the Surviving Corporation will
deliver a new Dissenters' Notice and repeat the payment demand procedure.
A dissenting shareholder may notify the Surviving Corporation in
writing of his or her own estimate of the fair value of such shares and the
amount of interest due, and demand payment of his or her estimate, or reject the
Surviving Corporation's Offer of Payment and demand payment of the fair value of
his or her shares and interest due (in either case, a "Demand for Payment") if:
(i) the dissenting shareholder believes that the amount
offered by the Surviving Corporation is less than the
fair value of his or her shares or that the interest
due is incorrectly calculated;
(ii) the Surviving Corporation fails to make payment to a
dissenting shareholder who accepts the Surviving
Corporation's Offer of Payment within thirty (30) days
after the dissenting shareholder's acceptance; or
(iii) the Surviving Corporation, having failed to take the
proposed action, does not return the deposited
certificates or release the transfer restriction
imposed on uncertified shares within sixty (60) days
after the date set for demanding payment.
A dissenting shareholder waives his or her right to make a Demand for
Payment under subparagraphs (i), (ii) and (iii) above unless he notifies the
Surviving Corporation of his demand in writing under subparagraph (i) above
within thirty (30) days after the Surviving Corporation's Offer of Payment for
his shares or under subparagraph (ii) or (iii) above within thirty (30) days
after the Surviving Corporation has failed to perform in a timely manner. A
dissenting shareholder who fails to notify the Surviving Corporation of his
Demand for Payment under subparagraph (i), (ii) or (iii) above within the
applicable thirty (30) day period will be deemed to have withdrawn his Demand
for Payment.
If a Demand for Payment remains unsettled, the dissenting shareholder
may commence a proceeding within sixty (60) days after the date of his or her
Demand for Payment and petition the court to determine the fair value of the
shares and accrued interest. Upon service upon it of the petition filed with the
court, the Surviving Corporation shall pay to the dissenting shareholder the
amount previously offered by the Surviving Corporation in its Offer of Payment.
If the dissenting shareholder does not commence the proceeding within the sixty
(60) day period, the dissenting shareholder has an additional thirty (30) days
to either (i) accept in writing the amount offered by the Surviving Corporation
in its Offer of Payment, upon which the Surviving Corporation shall pay such
amount to the dissenting shareholder in full satisfaction of his or her demand,
or (ii) withdraw his Demand for Payment and resume the status of a nondissenting
shareholder. A dissenting shareholder who takes no action within such thirty
(30) day period is deemed to have withdrawn his dissent and Demand for Payment.
A shareholder of record may assert dissenters' rights as to fewer than
all the shares registered in his or her name only if he or she complies with the
conditions established by Article 13 with respect to all shares
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beneficially owned by any one person and notifies NCRR in writing of the name
and address of each person on whose behalf he or she asserts dissenters' rights.
The rights of such a partial dissenting shareholder are determined as if the
shares as to which such shareholder dissents and such shareholder's other shares
were registered in the names of different shareholders.
A beneficial shareholder may assert dissenters' rights as to shares
held on his or her behalf only if: (i) such shareholder submits to NCRR the
record shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights and (ii) such shareholder does
so with respect to all shares of which he or she is the beneficial owner.
SUMMARY OF SPECIAL COMMITTEE PROCEEDINGS AND NEGOTIATIONS
The Special Committee was formed on August 22, 1996 following an
announcement by the State that the State was considering entering into
negotiations to acquire all of the outstanding shares of NCRR Common Stock not
already owned by the State. The Special Committee consists of the Minority
Directors elected by the Minority Shareholders and was formed to negotiate with
the State and to consider alternatives to the State's offer. The Special
Committee was given broad authority to make recommendations to the NCRR Board
regarding any proposal made by the State, to make offers and counteroffers and
to consider alternatives to a transaction with the State. The work of the
Special Committee extended over the period from August 22, 1996 through
September 30, 1997.
THE SPECIAL COMMITTEE PROCEEDINGS
The work of the Special Committee can be divided into three fairly
distinct periods: (i) organizing, (ii) gathering information and (iii)
negotiating with the State (which includes both negotiating the price of the
shares of NCRR Common Stock and negotiating the terms and conditions of the
Merger and related matters).
The "organizing" period extended from August 22, 1996 through November
12, 1996 and included six meetings. During this period, the Special Committee
received its "Charter" (board resolutions creating the Special Committee) and
advice from outside general counsel to NCRR ("Outside Counsel") about the
purpose and necessity of a special committee. Outside Counsel advised the
Special Committee to obtain separate legal and financial advisors. After
interviewing several law firms, the Special Committee engaged Womble Carlyle
Sandridge & Rice, PLLC ("WCSR") as its legal counsel. The Special Committee also
considered five investment banking firms to act as its financial advisor and
finally selected CSFB as financial advisor.
The "gathering information" period extended from November 13, 1996
through January 30, 1997 and included four substantive meetings. During this
period, the Special Committee gathered and analyzed initial data from the State
prepared by Corporate Strategies, Inc. ("CSI") which was provided by the State's
consultant, NationsBanc Capital Markets, Inc. ("NationsBanc"), authorized the
engagement of Mercer Management Consulting ("Mercer"), a railway industry
consultant, to assist CSFB, received legal advice from WCSR regarding
confidentiality, fiduciary duties and similar legal matters and established a
timetable. At the December 17, 1996 meeting, the Special Committee allowed a
number of major Minority Shareholders an opportunity to present their views. A
representative of Jefferson Pilot Insurance Company, a large Minority
Shareholder and another Minority Shareholder made presentations and provided
backup information. At the January 10, 1997 meeting, a Special Committee member
reported on a meeting with representatives of CSX Transportation ("CSX") and
several Minority Shareholders or their representatives gave reports. During the
January 30, 1997 meeting, CSFB reviewed with the Special Committee the valuation
methodologies to be utilized by CSFB in connection with its financial analysis
with respect to NCRR and updated the Special Committee as to inquiries made of
certain parties to solicit their interest in the possible acquisition of NCRR.
During this period, none of the possible purchasers contacted expressed an
interest in purchasing the NCRR Common Stock held by the Minority Shareholders
or the NCRR line.
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The price "negotiating" period extended from February 1, 1997 through
April 7, 1997. During this period, the Special Committee held five meetings and
there were numerous other meetings and telephone conferences between
representatives of the State, certain members of the Special Committee and the
Special Committees' legal and financial advisors. At the inception of the price
negotiations, representatives of the State suggested a price or range of prices
only marginally above the then quoted bid and asked prices for shares of NCRR
Common Stock on the open market, which the representatives of the Special
Committee informed the State was unacceptable even as a basis for further
discussion. When the State refused to change its position for several weeks, the
Special Committee suggested a price substantially higher than that suggested by
the State; however, representatives of the State did not respond with a
counterproposal.
In early March, 1997, the Special Committee concluded that negotiations
had made little progress to date and that prospects for an agreement were
dimming. The Special Committee determined that quick resolution of the impasse
was essential because it was aware that approval by the State legislature of
funding for the Merger Consideration would be required and that legislative
rules for the introduction of bills would soon prohibit funding bills to be
introduced in the 1997 legislative session. The Special Committee requested Sam
Hunt, President of NCRR, to participate in negotiations with the State to urge
the State to substantially increase the dollar range the State was considering
so that funding bills could be introduced in time to have the legislature
approve funding for the Merger Consideration in the 1997 session. The Special
Committee called upon the President of NCRR for this mission due to his
knowledge of State government processes gained during prior service in State
government, including as a former State Legislator and secretary of the DOT.
After the Chairman of the Special Committee conferred with the President of NCRR
and the President, in turn, conferred with State officials, on or about March
27, 1997, the State made an offer of $66.00 per share to representatives of the
Special Committee. The Special Committee considered this offer and with the
advice of its legal and financial advisors approved the Merger Consideration and
the Merger as set forth in the April 7, 1997 Letter of Intent between NCRR, B&M
and the DOT (the "Letter of Intent").
Negotiations with the State with respect to the terms of the Merger
Agreement were concluded and the Merger Agreement was approved and executed
after the State legislature authorized funding for the Merger. One issue that
received substantial consideration in Merger Agreement negotiations was whether
the Minority Shareholders would (i) receive any dividends prior to the Effective
Date with respect to any amounts collected by NCRR prior to the Effective Date,
(ii) have any upward adjustment of the Merger Consideration as a result of not
receiving any such dividends or (iii) retain any rights to receive any
distributions after the Effective Date with respect to any amounts received by
NCRR after the Effective Date that might be deemed to have accrued prior to the
Effective Date. NCRR has substantial claims against Norfolk Southern for amounts
that may be deemed to have accrued prior to the closing of the Merger, including
claims for payments for use by Norfolk Southern of the NCRR's line prior to the
Effective Date of the Merger, and NCRR has a contract for sale of property in
Charlotte for approximately $4,000,000, which may close before or after the
Effective Date. In view of the delays by the State in obtaining State
legislative authorization of funding of the Merger, the Special Committee
requested that the Minority Shareholders receive dividends or other payments for
amounts received or that might be deemed to have accrued prior to the Effective
Date. The State, however, took a firm position that any such payments would
constitute a change to the Merger Consideration approved by the State
legislature. For this and other reasons, the State rejected all demands for
additional payments to the Minority Shareholders. Both the Special Committee on
September 30, 1997 and the NCRR Board on October 3, 1997 concluded that in the
face of opposition by the State it was in the interests of the Minority
Shareholders to proceed with the Merger so as not to jeopardize receipt of the
Merger Consideration, legislative authorization of the funding thereof, or risk
the State refusing to proceed with the Merger. If the Merger is approved by the
shareholders of the NCRR, the Minority Shareholders who do not exercise their
dissenters' right to an appraisal will thereby forego any economic benefit from
any such amounts. However, the extent, if any, to which such amounts may be
used by a court in determining the fair value of the shares held by Minority
Shareholders who exercise their dissenters' rights is uncertain. See "THE
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MERGER- Dissenting Shareholders' Rights of Appraisal," "THE MERGER - The Merger
Consideration and Recommendations and Reasons" "ALTERNATIVES TO MERGER AGREEMENT
- - Litigation Against Norfolk Southern" and "ALTERNATIVES TO MERGER AGREEMENT -
Charlotte Convention Center Litigation."
From April 8, 1997 through September 30, 1997, the Special Committee
held three meetings. These meetings concerned negotiations with the State with
respect to the terms of the Merger, the definitive Merger Agreement and other
related matters and culminated in the Special Committee's recommendation dated
October 2, 1997 that at its October 3, 1997 meeting, the NCRR Board approve and
recommend to the shareholders of NCRR the Merger Agreement.
SPECIAL COMMITTEE CONSIDERATIONS
The Special Committee considered numerous factors in assessing the
potential for additional value to the shareholders of NCRR, given NCRR's present
divided ownership and the fact that its viable options are apparently limited to
the leasing of its primary assets to Norfolk Southern in part due to the
jurisdiction of the STB over NCRR's assets and contracts. Among the most salient
factors discussed by the Special Committee were the following:
(bullet) NO COMPETING BIDDERS FOR NCRR'S LINE OR THE COMMON STOCK HELD BY
THE MINORITY SHAREHOLDERS. The Special Committee considered the
discussion in NCRR's 1995 Proxy Statement furnished to its
shareholders in connection with the 1995 Annual Meeting (under the
section entitled "Other Lessees for All or Part of Line") of
Morgan Stanley's efforts to solicit bids from other railroads or
shortline operators for lease of all or part of NCRR's line that
resulted in "no bids [being] received nor did any entity seek to
enter into serious discussions with NCRR concerning lease of all
or part of its line." Thereafter, the Special Committee continued
to search for a possible purchaser (through the efforts of CSFB)
of the shares of NCRR Common Stock held by the Minority
Shareholders in addition to searching for an alternate lessee. The
Special Committee was unable to generate interest either from
logical alternative lessees or logical acquirors of the shares of
NCRR Common Stock held by the Minority Shareholders. See
"ALTERNATIVES TO MERGER AGREEMENT -- Other Purchasers and Lessees
for All or Part of Line." The possibility of a sale of all of the
shares of NCRR to a purchaser other than the State was determined
highly unlikely because the sale of all of the shares of NCRR
Common Stock held by the State would require the approval of the
State Legislature.
(bullet) STB LITIGATION UNCERTAINTY. Based on extensive discussions with
NCRR's in-house and Outside Counsel as well as NCRR's special
regulatory counsel and regulatory counsel to Jefferson Pilot
Insurance Company, the Special Committee concluded that that the
outcome of this litigation was uncertain.
(bullet) POSSIBLE LOSS OF OVERHEAD TRAFFIC. The railroad traffic analyses
performed by CSI and NCRR's expert, Mercer (See "ALTERNATIVES TO
MERGER AGREEMENT -- Overhead Traffic") were radically different.
The Special Committee concluded that, under the circumstances, the
loss of overhead traffic could result in adverse financial
consequences to NCRR.
(bullet) RISKS OF INDEPENDENT OPERATION. The Special Committee noted that
the analyses of CSI and Mercer indicated that if NCRR were
independently operated, the Minority Shareholders would face
considerable uncertainty. See "ALTERNATIVES TO MERGER AGREEMENT --
Operation Without Any Lessee."
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(bullet) THE PROPOSED LEASE EXTENSION AGREEMENT. The Special Committee
noted that the Lease Extension Agreement was no longer available
to NCRR given its inability to obtain Shareholder approval and the
subsequent STB proceeding. Accordingly, the Special Committee
considered the proposed Lease Extension Agreement only to the
extent of receiving information respecting the per share value of
a share of NCRR Common Stock implied by the economic terms of the
proposed Lease Extension Agreement. See "ALTERNATIVES TO MERGER
AGREEMENT - Alternative Lease Extension Agreement." The Special
Committee concluded that the per share value based on the revenue
that would have been received under the Lease Extension Agreement
was substantially less than the Merger Consideration.
(bullet) APPRAISALS AND VALUATIONS; MERGER CONSIDERATION. The Special
Committee considered STB valuation methodologies (primarily
Reproduction Cost New Less Depreciation ("RCNLD") and Net
Liquidation Value("NLV")) in determining the fair value of shares
of the NCRR Common Stock and used the result of Mercer's RCNLD
analysis (as well as its railroad traffic analysis) in
negotiations with representatives of the State to support a higher
per share valuation. The Special Committee requested from the
State that the Minority Shareholders receive dividends of
amounts that would accrue or be received by NCRR
prior to the Effective Date.
The State rejected this request maintaining that any such
dividends would constitute a change to the Merger Consideration.
In light of the State's firm opposition to this request, the
Special Committee concluded that it was in the interest of the
Minority Shareholders to proceed with the Merger. See "SUMMARY OF
SPECIAL COMMITTEE PROCEEDINGS AND NEGOTIATIONS - The Special
Committee Proceedings."
(bullet) OPINION OF SPECIAL COMMITTEE'S FINANCIAL ADVISOR. The Special
Committee considered the CSFB Opinion as to the fairness of the
Merger Consideration from a financial point of view to the
Minority Shareholders and the financial analyses performed by CSFB
in connection with the CSFB Opinion. See "REASONS FOR APPROVAL OF
THE MERGER AGREEMENT -- Opinion of the Special Committee's
Financial Advisor."
REASONS FOR APPROVAL OF THE MERGER AGREEMENT
The NCRR Board unanimously approved the Merger Agreement following the
recommendation of the Special Committee which had consulted with independent
legal and financial advisors. The NCRR Board determined that the Merger
Consideration was likely to afford greater economic return to the Minority
Shareholders than would any of the alternatives, including (i) sale to another
buyer, (ii) lease of NCRR's assets to Norfolk Southern or any other railroad
operators, (iii) independent operation of its rail line by NCRR or (iv) legal
action against Norfolk Southern in court or at the STB. The NCRR Board also
determined that it is in the best interest of all the shareholders of NCRR
to end the risks of conflicts of interest that arise from shared ownership of
NCRR by the State and other shareholders. See "CERTAIN CONFLICTS OF INTEREST
AND SHAREHOLDER ACTIONS."
SUMMARY OF REASONS ALTERNATIVES TO THE MERGER ARE LESS ATTRACTIVE FOR
SHAREHOLDERS
THE NCRR BOARD DETERMINED THE ALTERNATIVES CONSIDERED BY THE NCRR BOARD
WERE LESS ATTRACTIVE FOR THE SHAREHOLDERS OF NCRR THAN THE MERGER. THE NCRR
BOARD DETERMINED THE ALTERNATIVES TO THE MERGER ALL PRESENTED SUBSTANTIAL RISKS
THAT OUTWEIGHED THE OPPORTUNITIES FOR FUTURE PROFITS TO SHAREHOLDERS IN EXCESS
OF THE MERGER CONSIDERATION AND THAT THE MERGER CONSIDERATION WAS THE BEST
COMBINATION OF PROFIT WITH NO RISK THAT WAS AVAILABLE TO THE MINORITY
SHAREHOLDERS.
(bullet) NO COMPETING BIDDERS FOR LINE. No class I railroad or short line
operator bid for the purchase or lease of NCRR's line despite
efforts undertaken on behalf of
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NCRR to solicit such bids. See "ALTERNATIVES TO MERGER
AGREEMENT--Other Purchasers and Lessees For All or Part of Line."
(bullet) NO COMPETING PURCHASERS FOR THE NCRR COMMON STOCK. A press release
was issued on August 26, 1996, announcing that the State had
retained a financial advisor to evaluate a buyout of all the
shares held by the Minority Shareholders. The Letter of Intent
was signed on April 7, 1997 and the Merger
Consideration was announced on the same date. No other competing
offer was received before or after announcement of the Merger
Consideration. See "ALTERNATIVES TO MERGER AGREEMENT--Other
Purchasers and Lessees for All or Part of Line."
(bullet) NO ADDITIONAL OFFERS FROM NORFOLK SOUTHERN. Following the finding
of the U.S. District Court of the Eastern District of North
Carolina that a quorum did not exist at the December 15, 1995
Annual Meeting of shareholders at which shareholders approved the
Lease Extension Agreement, the NCRR requested Norfolk Southern to
increase the annual rental payable under the Lease Extension
Agreement. Norfolk Southern refused to increase the rental and
following determination by NCRR not to appeal the court decision
invalidating the shareholder vote approving the Lease Extension
Agreement and not to resubmit the Lease Extension Agreement for
another vote of NCRR's shareholders, Norfolk Southern refused to
increase the annual rent under the Lease Extension Agreement and
ceased paying any rent to NCRR, prompting NCRR to take legal
action against Norfolk Southern. See "ALTERNATIVES TO MERGER
AGREEMENT--Alternative Lease Extension Agreement."
(bullet) LITIGATION UNCERTAINTY. On September 20, 1996 NCRR filed an action
against Norfolk Southern and certain subsidiaries and affiliates
in the Superior Court of Wake County, North Carolina, which action
was removed to the U.S. District Court for the Eastern District of
North Carolina (the "Federal Court Case") and on September 23,
1996, filed proceedings against Norfolk Southern before the STB
(the "STB Case"). After approval by the Special Committee of the
Letter of Intent on April 7, 1997, the STB rejected NCRR's
petition to establish interim rent to be paid by Norfolk Southern
in a decision and order dated May 29, 1997, but prescribed interim
compensation at the level of out-of-pocket expenses incurred by
NCRR due to Norfolk Southern's continued operation of the line.
The NCRR Board concluded that this decision would result in long
and expensive litigation in the Federal Court Case and the STB
Case with a risk that the result would not afford NCRR the
remedies it believes are warranted. The NCRR Board also concluded
that financing the expenses of the court litigation without
interim rent payments could create substantial cash flow problems
for NCRR as Norfolk Southern has interpreted the STB's ruling on
out-of-pocket expenses to exclude expenses associated with
litigation against Norfolk Southern. Norfolk Southern is seeking
to have the Lease Extension Agreement imposed upon the NCRR by the
STB. See "ALTERNATIVES TO MERGER AGREEMENT--Litigation Against
Norfolk Southern."
(bullet) POSSIBLE LOSS OF OVERHEAD TRAFFIC. Most of the traffic over NCRR's
line is overhead traffic (traffic that originates and terminates
off NCRR's line), which is controlled by Norfolk Southern. Norfolk
Southern could divert a substantial amount of overhead traffic to
other routes, including Norfolk Southern owned routes. Diversion
of substantial amounts of overhead traffic would substantially
decrease revenue produced by the line and would therefore reduce
profitability
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of the line to NCRR and any operator of the line. See
"ALTERNATIVES TO MERGER AGREEMENT-Operation Without Any Lessee."
(bullet) RISKS OF INDEPENDENT OPERATION. Operating its own line without a
lessee would subject NCRR to a number of risks, including (i)
diversion of overhead traffic by Norfolk Southern, (ii) loss of
freight to competitors, including trucking companies, (iii)
unpredictable maintenance and labor expenses and capital
improvement costs, and (iv) operation by management which is
inexperienced in operations or unable to find and hire such a
management team. Operating its own line without a lesse or without
leases producing qualified income would mean that NCRR could not
qualify for favorable tax exempt status as a REIT, thereby
resulting in earnings being subject to corporate income taxes
prior to availability for distribution to shareholders. See
"ALTERNATIVES TO MERGER AGREEMENT-Other Purchasers and Lessees
for All or Part of Line."
POTENTIAL ADVANTAGES OF CERTAIN ALTERNATIVES TO THE MERGER AGREEMENT
The NCRR Board believes that the approximately 317 miles of railroad
right of way and track and other assets owned by NCRR are very valuable assets.
Despite difficulties and risks faced in generating profit from NCRR's assets,
the NCRR Board believes that in the future substantial profits could be
generated from these assets. The alternatives to the Merger reviewed and
rejected by the NCRR Board offer some potential to afford the NCRR greater
revenues, and, possibly, greater after-tax net profits, than is afforded by the
Merger. By approving the Merger Agreement, the shareholders will be giving up
the substantial value associated with NCRR's assets and transferring the same to
the State in exchange for the Merger Consideration. That substantial value of
NCRR assets includes, but is not limited to, the following:
REVENUES. NCRR's management consultants, Mercer, have estimated that, if
NCRR operates its own line without a lessee and Norfolk Southern
does not divert any overhead traffic, NCRR could generate $66 million of
annual revenues, annual pre-tax net income of $18.3 million and annual
after-tax net income of $11.25 million.
NORFOLK SOUTHERN PAYMENTS. NCRR's railroad management consultants have
estimated that the STB could order Norfolk Southern to pay NCRR as much
as $74.7 million or as little as $4.6 million annually for use of
NCRR's lines based on the advice of special STB counsel as to the
valuation methods that might be utilized by the STB, the property to
which the STB might apply the valuation method, and the interest rates
that might be utilized by the STB in setting compensation. At the high
end of the range of valuation, the distributions to 24.9% of the
revenue to the Minority Shareholders may yield an imputed value in
excess of the Merger Consideration. See "ALTERNATIVES TO MERGER
AGREEMENT - Litigation Against Norfolk Southern."
COURT ORDERED PAYMENTS. It is possible that NCRR will be awarded
substantial damages in the Federal Court Case or that in the STB Case,
the STB would order Norfolk Southern to pay substantial amounts for use
of NCRR's assets following termination at the end of 1994 of the leases
covering NCRR's assets. Such court and STB ordered payments could exceed
the Merger Consideration. If the Merger is consummated, the Minority
Shareholders would have no right to any portion of such payments.
SETTLEMENT OF CASES. Although the NCRR Board believes that continuing
the litigation in the Federal Court Case and the STB Case would be an
expensive and drawn out process, it is also possible that Norfolk
Southern may settle the litigation by offering NCRR a lease with better
economic terms. See
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"ALTERNATIVES TO MERGER AGREEMENT - Litigation
Against Norfolk Southern" and "CERTAIN CONFLICTS OF INTERESTS AND
SHAREHOLDER DERIVATIVE ACTIONS."
For the reasons described herein, the NCRR Board has determined that
the risks associated with alternatives to the Merger make it unwise to assume
(i) that the potential high revenues and profits would in fact be achieved if
NCRR pursued such alternatives, (ii) that NCRR would be awarded substantial
damages in the Federal Court Case or the STB Case, or (iii) that Norfolk
Southern would settle any litigation on terms more favorable to NCRR than the
Merger.
OPINION OF THE SPECIAL COMMITTEE'S FINANCIAL ADVISOR
CSFB has acted as financial advisor to the Special Committee in
connection with the Merger. CSFB was selected by the Special Committee based on
CSFB's experience and expertise. CSFB is an internationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
In connection with CSFB's engagement, the Special Committee requested
that CSFB evaluate the fairness of the consideration to be received in the
Merger by the Minority Shareholders from a financial point of view. On October
3, 1997, at a meeting of the NCRR Board held to evaluate the proposed Merger,
CSFB rendered to the Special Committee the CSFB Opinion, a written opinion to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Merger Consideration was fair to the Minority
Shareholders from a financial point of view.
THE FULL TEXT OF THE CSFB OPINION, WHICH SETS FORTH THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE. HOLDERS OF NCRR COMMON STOCK ARE URGED TO READ THE CSFB
OPINION CAREFULLY IN ITS ENTIRETY. THE CSFB OPINION IS DIRECTED TO THE SPECIAL
COMMITTEE AND RELATES ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION FROM A
FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED
MERGER OR ANY RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
THE SUMMARY OF THE CSFB OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE CSFB OPINION.
In arriving at the CSFB Opinion, CSFB reviewed the Merger Agreement and
certain publicly available business and financial information relating to NCRR.
CSFB also reviewed certain other information relating to NCRR, including
analyses of Mercer, an industry consultant. CSFB met with the management of NCRR
and representatives of the State to discuss the business and prospects of NCRR
and also had discussions with Mercer concerning its analyses and the railway
industry generally. CSFB also considered certain financial and stock market data
of NCRR and, to the extent publicly available, the financial terms of certain
other business combinations and other transactions recently effected. CSFB also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which CSFB deemed
relevant.
In connection with its review, CSFB did not assume any responsibility
for independent verification of any of the foregoing information and relied on
such information being complete and accurate in all material respects. With
respect to analyses prepared by Mercer, CSFB assumed that such analyses were
reasonably prepared reflecting the best currently available estimates and
judgments of Mercer and other third party sources on which Mercer relied. CSFB
was not requested to make and did not make an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise)
of NCRR, nor was CSFB furnished with any such evaluations or
appraisals. CSFB's opinion was necessarily based upon information available
to CSFB, and financial, economic, market and other conditions as they
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existed and could be evaluated, on the date of the CSFB Opinion. In
connection with CSFB's engagement, CSFB was requested to
approach selected third parties to solicit indications of interest in a possible
acquisition of NCRR, and held discussions with certain of these parties prior to
the date of the CSFB Opinion. Although CSFB evaluated the Merger Consideration
from a financial point of view, CSFB was not requested to, and did not,
recommend the specific consideration payable in the Merger, which consideration
was determined through negotiation between the Special Committee acting for NCRR
and the DOT. No other limitations were imposed by the Special Committee on CSFB
with respect to the investigations made or procedures followed by CSFB in
rendering its opinion.
In preparing its opinion to the Special Committee, CSFB performed a
variety of financial and comparative analyses, including those described below.
The summary of CSFB's analyses set forth below does not purport to be a complete
description of the analyses underlying CSFB's opinion. A copy of CSFB's written
presentation to the Special Committee with respect to its opinion has been filed
as an exhibit to the Schedule 13E-3 which has been filed with the Securities and
Exchange Commission (the " Commission") and will be available for inspection and
copying at the principal executive offices of NCRR during regular business hours
by any interested shareholder of NCRR who has been designated in writing and may
be inspected, copied and obtained by mail from the Commission. The preparation
of a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. In arriving at its opinion, CSFB made qualitative judgments as to
the significance and relevance of each analysis and factor considered by it.
Accordingly, CSFB believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, CSFB made
numerous assumptions with respect to NCRR, industry performance, regulatory,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of NCRR. No company, transaction or
business used in such analyses as a comparison is identical to NCRR or the
proposed Merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, such analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions being analyzed. The estimates contained in
such analyses and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty. The
CSFB Opinion and financial analyses were only one of many factors considered by
the Special Committee in its evaluation of the proposed Merger and should not be
viewed as determinative of the views of the Special Committee or NCRR
management with respect to the Merger Consideration or the proposed Merger.
The following is a summary of the material analyses performed by CSFB
in connection with the CSFB Opinion:
INCOME ANALYSIS. CSFB analyzed the estimated value of the operating
cash flows derived by Norfolk Southern from its operations over NCRR,
based on certain estimates provided to CSFB by Mercer. Norfolk
Southern's NCRR derived revenues and expenses, including overhead
traffic, were estimated by Mercer by allocating Norfolk Southern's
reported North Carolina revenues and operating costs to NCRR and
non-NCRR lines according to the gross ton miles generated on each line,
which Mercer derived from Norfolk Southern's traffic density maps and
state reporting. Applying Norfolk Southern's operating cash flow
multiple of 6.8x for the latest 12 months ended June 30, 1997 (pro
forma for the Conrail, Inc. acquisition), to Norfolk Southern's
estimated NCRR derived 1995 operating cash flow of approximately $28.7
million to
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$34.4 million resulted in an implied enterprise reference range for
NCRR of approximately $195 million to $234 million, or an implied
equity reference range for NCRR of approximately $46.00 to $55.00 per
share.
DISCOUNTED CASH FLOW ANALYSIS. CSFB estimated the present value of the
future streams of after-tax free cash flows that Norfolk Southern could
generate from operating over the NCRR, including overhead traffic,
based on certain estimates provided to CSFB by Mercer, by applying
perpetuity revenue growth rates of between 3% and 5%. The free cash
flows were then discounted to present value using discount rates of
between 11% and 13%. This analysis resulted in a stand-alone equity
reference range for NCRR of approximately $35.00 to $47.00 per share.
SELECTED TRANSACTIONS ANALYSIS. Using publicly available information,
CSFB analyzed the purchase price and implied transaction value
multiples paid or proposed to be paid in 13 selected merger and
acquisition transactions in the railroad industry during the period
1990 to 1997, including: Conrail, Inc./CSX Corp./Norfolk Southern; CCP
Holdings, Inc./Illinois Central Corporation; Mexrail Inc./Kansas City
Southern Industries; Southern Pacific Rail Corp./Union Pacific Corp.;
Chicago & North Western/Union Pacific Corp.; Santa Fe Pacific
Corp./Union Pacific Corp.; Santa Fe Pacific Corp./Burlington Northern
Inc.; Kansas City Southern Industries, Inc. (Railway Division)/Illinois
Central Corporation; MidSouth Corporation/Kansas City Southern
Industries, Inc.; Green Bay & Western Railroad Co./Wisconsin Central
Transportation Corp.; Fox River Valley Railroad Co./Wisconsin Central
Transportation Corp.; Delaware & Hudson Railway/Canadian Pacific Ltd.;
and RF&P Corp. (Railway Operations)/CSX Corp. (collectively, the
"Selected Transactions"). CSFB compared, among other things, adjusted
purchase prices (purchase price, plus total debt and preferred stock,
less cash) as multiples of latest 12 months, operating cash flow. All
data for the Selected Transactions were based on information available
at the time of announcement of the transactions, except million gross
ton miles, which was based on Mercer estimates. This analysis indicated
a range of multiples for the Selected Transactions of latest 12 months
operating cash flow of 4.4x to 12.5x (with a mean of 8.7x and a median
of 8.3x). Applying median and mean multiples of the latest 12 months
operating cash flows and adjusted purchase prices paid in the Selected
Transactions to corresponding financial statistics of NCRR resulted in
a stand-alone equity reference range for NCRR of approximately $65.00
to $70.00 per share.
CERTAIN OTHER FACTORS. In addition to the analyses described above,
CSFB considered, among other things, (i) the recent stock performance
of the NCRR; (ii) certain railroad traffic data and certain other
related information prepared by Mercer concerning NCRR and Norfolk
Southern; (iii) certain analyses prepared by Mercer as to the estimated
value of and potential return on NCRR assets based on certain STB
methodologies which the STB has used in precedent cases to set railroad
compensation levels, including the Reproduction Cost New Less
Depreciation methodology and the net liquidation value methodology (see
the discussion set forth below under "ALTERNATIVES TO MERGER
AGREEMENT"); (iv) the present value of the estimated discounted cash
flows of the annual payments that NCRR would have received under the
Lease Extension Agreement; (iv) the financial terms of certain railway
corridor purchases by the States of Florida and California; and (v) the
DOT estimate of the cost of acquiring land to duplicate the NCRR right
of way.
MISCELLANEOUS. Pursuant to the terms of CSFB's engagement, NCRR has
agreed to pay CSFB for its services in connection with the proposed Merger an
aggregate financial advisory fee of $500,000 which was payable upon delivery by
CSFB of the CSFB Opinion. NCRR also has agreed to reimburse CSFB for
out-of-pocket expenses incurred by CSFB in performing its services, including
reasonable fees and expenses of legal counsel and any other advisor retained by
CSFB, and to indemnify CSFB and certain related persons and entities against
certain liabilities, including liabilities under the federal securities laws,
arising out of CSFB's engagement.
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In the ordinary course of its business, CSFB and its affiliates may
actively trade the debt and equity securities of NCRR for their own accounts and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
ALTERNATIVES TO MERGER AGREEMENT
ALTERNATIVE LEASE EXTENSION AGREEMENT
NCRR and Norfolk Southern entered into the Lease Extension Agreement,
which was voted on by the shareholders at the 1995 Annual Meeting of
Shareholders held on December 15, 1995 (the "1995 Annual Meeting"). On July 29,
1996, the U.S. District Court for the Eastern District of North Carolina
determined that a quorum was not present at the 1995 Annual Meeting.
Consequently, the approval of the Lease Extension Agreement at the 1995 Annual
Meeting was held not to be valid. Because the lack of a quorum was caused by a
boycott of the 1995 Annual Meeting by shareholders, the NCRR Board determined it
was not in the best interest of the shareholders to expend the time and money
required to hold another shareholder meeting to obtain approval of the Lease
Extension Agreement, unless Norfolk Southern agreed to increase the annual
rental payments provided in the Lease Extension Agreement. Norfolk Southern,
however, refused NCRR's request to increase the annual rental payments provided
in the Lease Extension Agreement, and is seeking to have the essential economic
terms of the Lease Extension Agreement imposed upon NCRR by the STB. The NCRR
Board believes that Norfolk Southern may well still agree to execute another
lease extension agreement (an "alternative Lease Extension Agreement") on
substantially the same terms as the Lease Extension Agreement submitted to the
shareholders of NCRR if it were certain the alternative Lease Extension
Agreement would be approved by the NCRR shareholders and binding on the parties
thereto. The NCRR Board, however, believes the value of any alternative Lease
Extension Agreement to the shareholders is less than the Merger Consideration
payable to the shareholders under the Merger Agreement.
The Lease Extension Agreement would have extended the terms of (i) the
Lease dated August 16, 1895, as amended and supplemented thereafter, between
NCRR and NSR (the "1895 Lease") and (ii) the Lease dated August 30, 1939, as
amended and supplemented thereafter, between Atlantic and North Carolina
Railroad Company (which merged into NCRR in 1989) and AECR, (the "1939 Lease").
The 1895 Lease and the 1939 Lease are hereinafter collectively referred to as
the "Leases." NCRR had received an opinion from its tax counsel that the Lease
Extension Agreement would enable the NCRR to qualify as a REIT.
Set forth below is a summary of some of the material terms of the Lease
Extension Agreement for which approval was invalidated. While no alternative
Lease Extension Agreement is presently available to NCRR, the following summary
is provided as a basis for a comparison with a possible alternative Lease
Extension Agreement. In the STB Case, Norfolk Southern has sought to impose the
essential economic terms of the Lease Extension Agreement upon NCRR. However, no
assurances can be given that Norfolk Southern would enter into an alternative
Lease Extension Agreement on substantially the same terms.
(1) The base annual rental under the Lease Extension Agreement
was eight million dollars ($8,000,000) for the period from
January 1, 1995 through December 31, 1995. Following
effectiveness of the Lease Extension Agreement, Norfolk
Southern was to pay NCRR the amount by which (i) annual
accrued rental payments ($8 million during 1995), plus
interest at the 90-day U.S. Treasury bill rate for the period
commencing the date payment would have been due under the
Lease Extension Agreement and ending on the date Norfolk
Southern would pay, exceeded (ii) the aggregate amount of
rental payments made to NCRR by Norfolk Southern for use of
NCRR's property under the Leases for the period between
December 31, 1994 and the effective date of the Lease
Extension Agreement.
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(2) Annual base rent for 1996 and each year thereafter was
adjustable each year to account for inflation during the
preceding calendar year according to the implicit price
deflator for the gross domestic product ("IPD-GDP"). In no
event, however, could the base annual rental for any calendar
year be less than eight million dollars ($8,000,000). The base
rent adjustment in any year could not exceed the sum of: (i)
four (4%) percent of the base rent for the preceding year,
plus (ii) seventy-five (75%) percent of the IPD-GDP in excess
of four (4%) percent. There was a one-year delay in
application of the IPD-GDP. For example, adjustment of 1995
rental payments to determine 1996 rental payments would have
been based upon the IPD-GDP for 1994.
(3) The Leases were to be extended for an additional term of thirty
(30) years, through December 31, 2024 and were extendible for
an additional twenty (20) years at the option of Norfolk
Southern. Exercise of the 20-year extension option would
require that Norfolk Southern pay to NCRR an option fee equal
to the lesser of (i) twenty-five (25%) percent of the base rent
in effect during the year prior to Norfolk Southern giving
notice to exercise its extension option or (ii) $5 million. If
the extension option was exercised by Norfolk Southern, NCRR
expected to recognize the renewal fee ratably over the 20-year
lease renewal term.
(4) Norfolk Southern was to make a one-time payment to NCRR of five
million dollars ($5,000,000) in exchange for NCRR's release of
Norfolk Southern from its obligation to return to NCRR certain
personal property upon expiration of the Leases. The carrying
value of the personal property that would have been released
would be fully depreciated and therefore have no book value.
Thus, NCRR would have recognized a gain on the full amount of
the payment. The Lease Extension Agreement did not waive or
otherwise affect any claims of NCRR to Spencer (Linwood) Yard
or other such property or facilities, but provided that such
claims would be postponed until the termination of the Lease
Extension Agreement and any renewal pursuant to its terms.
(5) The Lease Extension Agreement covered approximately 317 miles
of railroad property (including the railroad right of way and
certain improvements yard areas and other structures situated
adjacent to, under or along the lines) located between Morehead
City and Charlotte, North Carolina. NCRR had the right,
however, to have certain properties outside the right of way
not used in operating a railroad released from the Leases.
Norfolk Southern's rental payments would not have been reduced
if NCRR exercised this right. NCRR intended to exercise its
right to have released from the Leases those properties it
determined had income-generating potential in excess of
projected expenses. NCRR estimated these properties at
the time the Lease Extension Agreement was entered into
were producing less than $100,000 of annual lease
income. NCRR could have determined which properties it
would seek to have released to it after
evaluating environmental liability and other relevant factors.
(6) Norfolk Southern was required to pay to NCRR seventy-five (75%)
of any revenues (in excess of de minimis amounts) obtained by
Norfolk Southern for longitudinal leases and licenses granted
by Norfolk Southern to third parties for certain fiber optic
and other uses
(7) The Lease Extension Agreement contained extensive provisions
governing the rights and obligations of the parties for various
environmental liabilities and expenses.
(8) Norfolk Southern was required to pay to maintain and operate
the leased railroad lines and facilities, to fulfill all
railroad common carrier duties pertaining to the leased
railroad lines and to indemnify NCRR against certain liability
claims by third parties.
Except as modified or supplemented by the Lease Extension
Agreement, the terms of the Leases were to continue in full
force and effect. The Lease Extension Agreement did not
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affect the Lease dated December 31, 1968 between NCRR and
Norfolk Southern, ("the "1968 Charlotte Lease"), which will
continue to be in effect until its December 31, 2067 expiration
date. The 1968 Charlotte Lease covers three parcels of land in
Charlotte, North Carolina, for which NCRR currently receives an
aggregate of $81,319 in rental payments annually.
If the Lease Extension Agreement had become effective and NCRR
exercised its right to the return of nonoperating properties,
NCRR was expected to have the following sources of revenues:
(1) $8 million annually from Norfolk Southern pursuant to the
Lease Extension Agreement; (2) $81,319 annually from Norfolk
Southern pursuant to the 1968 Charlotte Lease; (3)
approximately $100,000 annually from leases of nonrailroad
operating property; (4) possible revenues from fiber optic
leases and licenses along its railroad line; and (5)
miscellaneous sales or condemnations of operating and
nonoperating properties.
NCRR and Norfolk Southern discussed the sale of NCRR to Norfolk
Southern early in their negotiations. Norfolk Southern, however, did not show
substantial interest in purchasing NCRR and no serious negotiations about the
sale of NCRR occurred. In soliciting bids from potential lessees other than
Norfolk Southern, NCRR also left the door open to sale discussions, but neither
a lessee nor a buyer made any bid or entered into serious negotiations. See also
"CERTAIN CONFLICTS OF INTEREST AND SHAREHOLDER DERIVATIVE ACTIONS."
ABANDONMENT OF NORFOLK SOUTHERN'S OPERATIONS OVER NCRR'S LINES
Under Section 10903 of the Interstate Commerce Act (the "ICA"), a
railroad is not permitted to abandon or discontinue its operations over any line
(including a line leased from another party) without the prior approval of the
STB.
Section 10903 of the ICA provides that the STB may authorize an
abandonment of, or discontinuance of operations over, all or part of a line only
if it finds that the present or future public convenience and necessity requires
or permits the abandonment or discontinuance. In applying this criterion, the
STB balances the harm to the shipping public that would result from the
abandonment or discontinuance against the burden imposed on the carrier and on
interstate commerce by continued operations. The railroad has the burden of
proof to demonstrate that abandonment or discontinuance is justified. Generally,
the STB will not approve an abandonment or discontinuance unless the railroad
can demonstrate that the revenues received from its operations over a line fail
to cover its costs (as defined by the STB) and yield it a reasonable return.
If the STB were to approve Norfolk Southern's abandonment or
discontinuance of all or part of Norfolk Southern's operations over NCRR line,
then shippers on NCRR's line could argue that NCRR would have the residual
common carrier obligation to provide railroad service. NCRR could satisfy this
obligation either by conducting the operations itself or by retaining a carrier
(such as a short line railroad) to conduct the operations on NCRR's behalf. NCRR
would be required to continue such operation (which could require NCRR to
acquire the necessary equipment and facilities) until such time as NCRR itself
obtained abandonment or discontinuance authority from the STB, pursuant to the
criteria described above.
If the STB were to deny Norfolk Southern's application for abandonment
or discontinuance, Norfolk Southern could appeal that decision to a United
Stated Court of Appeals. In addition, Norfolk Southern would be free to file a
new abandonment or discontinuance application at a future time, contending that
changes in the traffic flow, revenues or costs justify abandonment or
discontinuance. As many of these factors are within the power of Norfolk
Southern to control, the NCRR Board believed the risk of abandonment or
discontinuance was real. Consequently, the NCRR Board concluded that STB
litigation could be an open ended expense lasting for years even if NCRR
initially received a favorable determination from the STB.
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OPERATION WITHOUT ANY LESSEE
NCRR investigated whether it should operate all or part of its line
without any lessee. Since NCRR's primary potential source of business as an
independent operator would be overhead traffic controlled by Norfolk Southern,
the NCRR Board deemed overhead traffic to be the primary variable in its
determination of whether independent operation of its line was an attractive
alternative to leasing the line. The NCRR Board's investigation of this
alternative was hampered by the fact that information about overhead traffic was
either incomplete, unreliable or not available because Norfolk Southern declined
to provide detailed overhead traffic data requested by NCRR. NCRR did, however,
carefully evaluate this alternative with the assistance of railroad management
consultants.
A great number of variables would affect revenues, expenses and profits
if NCRR were to operate its own line without a lessee. Consequently, no estimate
of operating results could be a guarantee of actual operating results.
Nevertheless, the NCRR Board asked its management consultants to provide it with
estimates of operating results should NCRR decide to operate its line without a
lessee. However the NCRR Board took the speculative nature of such estimates
into account in deciding what weight to give to these estimates.
The NCRR Board asked its management consultants to provide two
estimates of operating results, one of which assumes that Norfolk Southern would
not divert any of the overhead traffic it currently runs over NCRR's line and
the second of which assumes that Norfolk Southern would divert all the overhead
traffic it currently runs over NCRR's line.
ESTIMATE INCLUDING OVERHEAD TRAFFIC. The railroad management
consultants retained by NCRR concluded that based on 1993 STB railroad traffic
information available to them, the gross revenues of Norfolk Southern from
operation of NCRR's line including revenues from overhead traffic was
approximately $66 million and that this produced pre-tax net income of
approximately $17.7 million for Norfolk Southern. In addition, NCRR believes
Norfolk Southern receives an annual subsidy from Amtrak of approximately
$600,000. Accordingly, the consultants advised the NCRR Board that one possible
result of NCRR operating its line without Norfolk Southern or any lessee would
be a pre-tax net income from rail operations of approximately $18.3 million.
Legal counsel has advised NCRR that operating its own line without a lessee
would result in NCRR losing its REIT status. Consequently, on an after-tax basis
(assuming a 38% tax rate) NCRR could earn from the operation of the line without
a lessee income of approximately $11.35 million.
ESTIMATE WITHOUT OVERHEAD TRAFFIC. NCRR's management consultants
advised the NCRR Board that the traffic originating or terminating on NCRR's
line or captive feeder lines (nonoverhead traffic) could produce revenues of
approximately $18.4 million and net income of approximately $3.8 million ($2.35
million after taxes), which would be substantially lower than the $8 million
annual rental set forth in the Lease Extension Agreement.
VARIABLES AND RISKS. In addition to overhead traffic, the NCRR Board
determined there were other variables and risks associated with NCRR operating
its line without a lessee, including the following: (i) estimates of before and
after-tax net income were based on the operating margins of Norfolk Southern;
(ii) there could be no assurance that the operating margins of an inexperienced
and much smaller railroad, such as NCRR, would be as high as Norfolk Southern's
operating margins; (iii) labor, maintenance and other expenses could be higher
or lower than estimated by NCRR's consultants; (iv) operating its own line would
require NCRR to raise capital to fund operations, purchase equipment and to
maintain and improve its line which would add capital cost and could dilute the
interests of its current shareholders; and (v) the lack of experienced
management of NCRR to operate this new business.
A lease provides NCRR with certain protections against expenses by
requiring the lessee to maintain the line and indemnify NCRR against
environmental liabilities. Operating independently of a lessee would subject
NCRR to substantially greater risk in these areas. Finally, revenue assumptions
for both overhead and nonoverhead traffic assume that market conditions will be
such that Norfolk Southern and NCRR will be
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successful in maintaining their levels of overhead and nonoverhead traffic. NCRR
would be subject to the risk that other transportation competitors, such as the
trucking industry, would be better able to compete with NCRR for nonoverhead
traffic than with an experienced operator such as Norfolk Southern.
OVERHEAD TRAFFIC. During negotiations with respect to the Lease
Extension Agreement, Norfolk Southern advised NCRR that it had the ability to
divert overhead traffic from NCRR's line. NCRR's management consultants,
however, advised the NCRR Board that Norfolk Southern would probably have to
make substantial capital expenditures, probably in the hundreds of millions of
dollars. The precise amount of such expenditures would depend on many factors,
including the routing selected by Norfolk Southern, to create the additional
capacity on its other rail lines to achieve total diversion of overhead traffic
due in part to high traffic volumes over the lines Norfolk Southern would use
for such diversion. The management consultants, however, advised NCRR that such
capital expenditures estimates were based on very incomplete information and
that it was impossible to determine the amount and timing of actual required
capital expenditures.
The NCRR Board weighed the potential to generate an estimated $11.35
million of after-tax profits against the risk that after-tax profits would be
substantially lower ($2.35 million) due to diversion of overhead traffic by
Norfolk Southern. The NCRR Board determined that the risk of substantial
diversion of overhead traffic was a real and substantial risk, but that the
likelihood of diversion or the volume and timing of diversions would not be
determinable to a reasonable degree of certainty, due to the lack information
available to NCRR.
If Norfolk Southern decided not to divert all overhead traffic, the
amount of NCRR's revenues for overhead traffic would depend upon the division of
rates that would be negotiated between NCRR and Norfolk Southern or prescribed
by the STB if either party requested such prescription. As the primary source of
overhead traffic, and, therefore having the ability to determine the level of
profitability of NCRR, Norfolk Southern would have substantial leverage in
negotiating the division of revenues between NCRR and Norfolk Southern.
Consequently, charging Norfolk Southern for trackage rights or other access fees
would not necessarily result in a better economic deal for NCRR than a lease of
the entire line. If Norfolk Southern's systemwide traffic volumes decreased,
Norfolk Southern might have the capacity to divert traffic without substantial
costs. NCRR could find itself acting as Norfolk Southern's overflow resource to
be used in high traffic years and being ignored in low traffic years. In
addition, if Norfolk Southern invested substantial amounts in capital
improvements to alternate routes, Norfolk Southern's additional capacity could
result in permanent diversion of overhead traffic and leave NCRR with continued
maintenance obligations.
In light of the foregoing variables and risks, the NCRR Board
determined that it would be in the best interest of the shareholders to approve
the Merger Agreement unless it was clear that the new business would result in
greater of post-tax distribution income to the Minority Shareholders than would
the Merger Consideration. The NCRR Board determined that, as NCRR has been in
the business of leasing its rail line for more than 100 years, it was not
reasonable to subject its shareholders to the risks of being in a new business,
unless it was clear that the new business would result in greater after-tax
income which would provide a better return for shareholders than the Merger
Consideration. The NCRR Board also considered the fact that even if NCRR
generated the high estimate of post-tax income from independent operation, the
distribution to the Minority Shareholders would nevertheless yield an imputed
value substantially less than the Merger Consideration.
FOR THE FOREGOING REASONS THE NCRR BOARD HAS DETERMINED THAT THE MERGER
CONSIDERATION IS LIKELY TO PROVIDE A BETTER RETURN FOR SHAREHOLDERS THAN THE
RETURN THE SHAREHOLDERS WOULD REALIZE IF THEY RETAINED THEIR HOLDINGS AND NCRR
OPERATED ALL OR PART OF ITS LINE WITHOUT A LESSEE.
LITIGATION AGAINST NORFOLK SOUTHERN
FEDERAL COURT. On September 20, 1996, NCRR filed an action against
Norfolk Southern and certain of its subsidiaries and affiliates in the Superior
Court of Wake County, North Carolina, which action was removed to the United
States District Court for the Eastern District of North Carolina. The action
seeks a
32
declaratory judgment of NCRR's property ownership and other rights and
obligations of the parties arising out of the expiration of NCRR's leases with
Norfolk Southern, and asserts other claims including breach of contract and
environmental claims. Norfolk Southern has filed counterclaims including unjust
enrichment relating to the amount of certain rental payments, and
misrepresentation relating to the issue of whether a quorum was present at the
1995 Annual Meeting. On October 3, 1997, the NCRR Board authorized the filing of
a motion to stay this litigation pending completion of the State acquisition of
the Minority Shareholders' interest in NCRR. On October 17, 1997, NCRR and all
defendants filed a motion to stay all proceedings in this lawsuit until 120 days
following the consummation or failure of the State's proposal to acquire 100% of
the shares of NCRR. On October 22, 1997, the Court entered an order staying this
litigation until February 1, 1998.
U.S. SURFACE TRANSPORTATION BOARD: PETITION TO FIX REASONABLE
COMPENSATION. On September 23, 1996, NCRR petitioned the STB to set the
compensation to be paid by Norfolk Southern to NCRR for Norfolk Southern's use
of NCRR's assets and to set interim rent payments. On May 29, 1997, the STB
issued a decision (the "STB Decision") instituting a proceeding to determine
permanent compensation but then held that proceeding in abeyance pending a
negotiated buyout of the Minority Shareholders and subsequent reopening of lease
negotiations with Norfolk Southern. The STB Decision further prescribed interim
compensation at the level of out-of-pocket expenses incurred by NCRR due to
Norfolk Southern's continued operation of the line. In the STB decision, the STB
indicated that its determination of permanent compensation would not necessarily
be governed by the methodologies developed in prior decisions setting
compensation for trackage rights. It noted that lease compensation differs in
several respects from trackage rights compensation and that some elements of its
most common trackage rights compensation methodology (Reproduction Cost New Less
Depreciation) appears to be inapplicable to NCRR's situation. The STB thus
stated that, in a permanent compensation proceeding, the parties would be
required to support their respective valuation methodologies and the
compensation that they yield. The STB further stated that if the parties seek to
have other terms and conditions prescribed, they should explain how those terms
and conditions relate to and affect the compensation proposed. On June 27, 1997
and July 28, 1997 motions were filed by Walker F. Rucker Intervenor to reopen
the STB Decision. The STB has not yet ruled on the motions.
The selection of methodology for the determination of compensation is
in the discretion of the STB. Prior to the issuance of the STB's May 29, 1997
decision, the special STB counsel advised the NCRR Board that, in their
judgment, it was most likely that the RCNLD methodology would be used to
prescribe compensation should NCRR petition the STB. However, special STB legal
counsel indicated other methodologies were employed by the STB in earlier cases,
and in a recent case the STB has emphasized that its selection of methodology is
made on a case-by-case basis. Consequently, STB counsel could not assure the
NCRR Board that RCNLD would be the methodology ultimately applied by the STB.
This uncertainty has been enhanced by the STB's May 29, 1997 decision.
RCNLD fixes compensation by determining the cost of replacing the
property required for the lessee's operations in its present condition, and then
applying an interest component designed to yield the lessor a reasonable return
for the use of its assets. The formula itself is simple, but special STB counsel
advised that there is substantial uncertainty as to the application of that
methodology to the facts of each case. Special STB counsel advised the NCRR
Board that there have been no prior cases in which the STB has applied the RCNLD
formula to leases similar to NCRR's Leases or in circumstances in which the
lessee has been obligated to pay for all maintenance to the line, as is required
under the Leases.
Special STB counsel also advised that Norfolk Southern would be likely
to argue that among the factors the STB should take into account in determining
whether and how to apply the RCNLD formula is Norfolk Southern's profitability
from operating over NCRR's line or that Norfolk Southern could request the STB
to apply an income-based valuation methodology. Accordingly, the NCRR Board
concluded that one possible outcome is that the STB would apply RCNLD in a way
that awarded NCRR a reasonable share of Norfolk Southern's profits from
operating NCRR's line, which NCRR's railroad management consultants estimated to
be approximately $18.3 million on a pre-tax basis as of the time of the
estimate.
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Set forth below is a table prepared for NCRR by its management
consultants, which reflects the range of possible RCNLD calculations using the
variables of what property the STB would include in the valuation and whether
the STB would reduce the rate of return normally employed by it (the nominal
pre-tax cost of capital of the railroad industry, which in 1996 was 11.9%) to
reflect that NCRR would be a REIT that is not subject to federal corporate taxes
on that portion of its ordinary income or capital gain that is currently
distributed to its shareholders:
<TABLE>
<CAPTION>
NORTH CAROLINA RAILROAD COMPANY
STB Valuation Methodologies
Reconstruction Cost New Less Depreciation Analysis
POTENTIAL Gross Annual RENTAL
RCNLD Rental(3) LESS UPKEEP(4)
POTENTIAL PROPERTY DEFINITIONS(1) VALUATION(2) @ 11.9% @ 11.9%
- ------------------------------ ---------- -------- ----------
(in millions)
<S> <C> <C> <C> <C>
1)Land Only - 50 ft. Right of Way ("ROW") $40 $4.8
2)Land with Grading and Bridges - 50 ft. ROW 180 21.4
3)Land with Grading without Bridges - 50 ft. ROW 161 19.2
4)Land only - 200 ft. ROW 115 13.7
5)Land with grading and bridges - 200 ft. ROW 260 30.9
6)Lane with grading only -- 200 ft. ROW 241 28.7
7)Land with grading, bridges, track and signals--200 400 47.6 $22.9
ft.ROW
8)Land with grading, bridges, track and signals--200 412 49.0 24.3
ft.ROW plus yards and shops excluding Spencer
(Linwood) Yard
9)Land with grading, bridges, track and signals--200 450 53.6 28.9
ft.ROW plus yards and shops including Spencer
(Linwood) Yard
</TABLE>
1 Examines various definitions of property varying from narrow to broad.
2 Based upon Mercer analysis.
3 STB rail industry composite pre-tax cost of capital for 1996.
4 Assumes maintenance of $10.2 million and capital expenditures of $14.5
million. Based on Mercer analysis.
The foregoing RCNLD table indicates the possibility that annual rentals
less upkeep ordered by the STB could range from a low of $4.8 million to a high
of $30.9 million if the STB uses the RCNLD formula.
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Since the RCNLD formula values all segments of the line by replacement
cost, without regard to the income produced by the property, special STB counsel
advised the NCRR Board that Norfolk Southern might seek to discontinue its
operations over substantial portions of the line that produce little income in
an effort to substantially reduce the total value of the asset it is using or
seek to remove assets from the formula after diverting traffic. Norfolk Southern
could use its discontinuance or reduced use of NCRR's line as a basis for
adjusting downward the compensation payable to the NCRR under the RCNLD formula.
Under the RCNLD formula, NCRR would be entitled to compensation only
for assets owned by NCRR and used by Norfolk Southern. One of the matters that
would be in dispute should litigation occur is the determination of what
property is owned by NCRR. For example, NCRR has asserted claims to assets, such
as Spencer (Linwood) Yard. Norfolk Southern, however, asserts that Spencer
(Linwood) Yard is owned by Norfolk Southern. The ownership of property and
matters relating to interpretation of the Leases are a matter of state law,
which the STB would not adjudicate. Consequently, these matters would be decided
in a separate court action. If the STB were to delay a final decision as to
compensation until completion of such court action, including all appeals, the
time required to obtain an STB decision could be substantially delayed.
The timing of an STB decision was of concern to the NCRR Board as
annual litigation expenses in the STB and the courts would exceed the annual
lease payments Norfolk Southern was paying NCRR under the Leases. Special STB
legal counsel advised that NCRR could petition the STB to establish interim
compensation at a higher rate after the Leases expired, but special STB counsel
could not estimate the likelihood that the STB would grant such interim relief.
The May 29, 1997 STB decision prescribed interim compensation at the level of
out-of-pocket expenses incurred by NCRR due to Norfolk Southern's continued
operation of the line. Norfolk Southern has been paying these expenses to the
extent that such expenses are not used by NCRR in its litigation against Norfolk
Southern in the Federal Court Case. Accordingly, the NCRR Board determined that
litigation expenses for several years might have to be financed by borrowing.
The NCRR Board's concern that the STB might not apply the RCNLD formula
was heightened by a recent compensation case decided by the STB in which the STB
applied a formula based on the net liquidation value of the line. NCRR's
railroad consultants advised NCRR that valuation factors producing higher RCNLD
values tend to decrease NLV values and the consultants produced the following
possible compensation alternatives if the NLV method were applied to NCRR:
NET LIQUIDATION VALUE METHODOLOGY
GROSS
POTENTIAL ANNUAL
NLV RENTAL
VALUATION 11.9%(1)
POTENTIAL PROPERTY DEFINITIONS ------------------------
- ------------------------------ (in millions)
Property including Spencer (Linwood) Yard $43.9 $5.2
Property excluding Spencer (Linwood) Yard $42.2 $5.0
1 STB rail industry composite pre-tax cost of capital for 1996.
PERPETUITY VALUE OF NLV BASED RENTAL AT 5.25% DISCOUNT RATE
POTENTIAL PERPETUITY
NLV OF
VALUATION RENTAL
---------------------------
POTENTIAL PROPERTY DEFINITIONS (in millions)
- ------------------------------
Property including Spencer (Linwood) Yard $43.9 $90.6
Property excluding Spencer (Linwood) Yard $42.2 $86.6(1)
1 Includes a one-time charge for NCRR general and administrative
expenses of $11.5 million.
The NCRR Board was also concerned with the advice of STB counsel that
the STB would set compensation, but the STB might not set other terms that were
important to minimize risks, such as requiring Norfolk Southern to maintain the
line or to indemnify NCRR against environmental liabilities. Accordingly, the
NCRR Board concluded that an STB award for compensation would have to be
substantially higher than $8
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<PAGE>
million to offset expected and unexpected expenses and liabilities associated
with operating without a lessee in order to achieve the same economic results as
the Lease Extension Agreement.
OTHER PURCHASERS AND LESSEES FOR ALL OR PART OF LINE
The Special Committee, with the assistance of its financial advisor,
CSFB, sought to solicit bids from other railroad or short line operators for the
purchase or lease of all or part of NCRR's line. No bids were received, nor did
any entity seek to enter into serious discussions with NCRR, concerning the
lease or purchase of all or part of its line. The NCRR Board believes that
Norfolk Southern's control of the overhead traffic which constitutes a majority
of the traffic over NCRR's line, was a significant factor in other potential
purchasers or lessees not bidding. If Norfolk Southern were to divert overhead
traffic, the operator would risk having substantially decreased revenues from
operating NCRR's line. In addition, the State's power, both voting as a
shareholder and under State law, to block the sale or lease of NCRR's line may
have discouraged other bidders after the State announced its intention to
purchase the remaining outstanding shares of NCRR not already owned by the
State.
FOR THE FOREGOING REASONS, THE NCRR BOARD DETERMINED THAT THE MERGER
CONSIDERATION IS LIKELY TO PROVIDE A BETTER RETURN FOR SHAREHOLDERS THAN WOULD
BE THE CASE IF THE SHAREHOLDERS RETAIN OWNERSHIP OF THEIR SHARES OF NCRR AND
NCRR CONTINUES THE STB CASE AND/OR THE FEDERAL COURT CASE.
APPRAISALS AND VALUATIONS
The NCRR Board has reviewed numerous appraisals and valuations during
the past several years. The NCRR Board does not believe any single valuation is,
by itself, dispositive of the value of NCRR or of what would constitute a fair
annual return on the assets of NCRR.
RECENT VALUATIONS
The valuation on which the NCRR Board focused most closely is the RCNLD
evaluation prepared for the NCRR Board by Mercer in connection with NCRR's
considering whether to bring an action in the STB to request the STB to
establish reasonable compensation for Norfolk Southern's continued use of NCRR's
line. The RCNLD formula values all segments of the line by replacement cost,
without regard to the income produced by the property. The value of NCRR's
properties (less upkeep) for RCNLD purposes ranged from a low of $40 million to
a high of $450 million (or $19.03 to $128.93 per share) depending on which
assets are included in the valuation. Different combinations of assets were
valued by NCRR's consultants because NCRR's special STB legal counsel indicated
it could not be certain which assets the STB would include in the valuation
formula. See "ALTERNATIVES TO MERGER--Litigation Against Norfolk Southern."
Also in connection with consideration of bringing an STB action, Mercer
advised the NCRR Board that if the STB used a NLV formula to determine
compensation, the net liquidation value of NCRR's assets other than Spencer
(Linwood) Yard would be in the range of $42.2 million to $43.9 million. See
"ALTERNATIVES TO MERGER--Litigation Against Norfolk Southern."
The NCRR Board also considered going concern valuations based upon
estimates of income earned by Norfolk Southern from its use of NCRR's line. A
valuation study conducted by Mercer, based upon 1990, 1991 and 1992 information
in connection with negotiations over the Lease Extension Agreement, indicated a
value of $150 million (or approximately $35 per share), taking all overhead
traffic into account.
ATLANTIC AND NORTH CAROLINA RAILROAD MERGER VALUATIONS
For the purpose of establishing an exchange ratio in connection with
the merger of the Atlantic and North Carolina Railroad Company (the "ANCR") into
NCRR in 1989, appraisals of the assets of the ANCR
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<PAGE>
and NCRR were performed in 1986 and up-dated in 1988. The NCRR Board believed
that such merger appraisals, which may have been useful in comparing the two
railroad lines to establish the comparative value of one line to the other to
negotiate an exchange ratio, were less useful to the NCRR Board in determining
the fair lease price.
Because of the age of these appraisals and the fact that these
appraisals were based on certain assumptions which are now questionable or no
longer accurate, the NCRR Board and the Special Committee did not
give much weight to these appraisals in determining the value of
NCRR or the fairness of the Merger Consideration or in its assessment
of the various alternatives to the Merger.
Certain assumptions which were key to these 1986-1988 valuations, while
appropriate at the time, are now of questionable applicability in light of
information obtained during the negotiations with Norfolk Southern regarding the
Lease Extension Agreement and later discussions regarding the Merger. For
example, in determining the value of NCRR as part of Norfolk Southern, it was
assumed that Norfolk Southern would be willing to pay a premium of 40% above the
market price of NCRR's stock in order to gain the benefits of total control of
NCRR. This premium over market price added approximately $35 million to NCRR's
valuation. Given the absence of lessors or buyers willing to compete with
Norfolk Southern for control of NCRR's properties, Norfolk Southern was
unwilling in lease negotiations to pay the assumed premium.
Similarly, the valuation of NCRR as an independent enterprise assumed
(i) that no overhead traffic would be diverted by Norfolk Southern from an
independent NCRR to other north-south lines and, further, that (ii) Norfolk
Southern would agree to pay NCRR a trackage rights fee for the overhead traffic
that at least equaled the estimated cost to Norfolk Southern of upgrading the
adjacent Winston-Salem line and replacing Spencer (Linwood) Yard. This amount
accounted for $175 million of the estimated value of NCRR as an independent
enterprise. However, subsequent analysis conducted during the lease negotiations
with Norfolk Southern, as discussed herein, revealed that estimates concerning
the risk of Norfolk Southern's diversion of overhead traffic from NCRR are
difficult to make, and that Norfolk Southern now has options other than the
Winston-Salem line for routing such traffic around NCRR. Thus the assumption
that Norfolk Southern would necessarily pay NCRR trackage rights fees in an
amount at least equal to the estimated cost of upgrading specific alternative
facilities is now questionable.
With regard to NCRR, American Appraisal Associates ("AAA") appraised
the fair market value of its transportation properties as of July 1, 1986, using
two bases of value, and subsequently updated the appraisal to July 1, 1987, and
July 1, 1988. With regard to the ANCR, AAA appraised the fair market value of
its railroad transportation properties as of July 1, 1987, using two bases of
value, and subsequently updated the appraisal to July 1, 1988. In the case of
both companies, AAA first estimated the value of each to Norfolk Southern, and,
second, AAA evaluated the value of each as an independent enterprise. The NCRR
appraisal performed by AAA in 1986 and updated in 1988 included estimates of
value based upon replacement cost. The ANCR appraisal performed by AAA in 1987
also included estimates of value based upon replacement cost. However, these
values were not subsequently updated in 1988 because they were not among the
values that AAA ultimately advised the representative boards to consider in
arriving at the Exchange Ratio in the 1989 merger of the ANCR into NCRR.
The determination of the value of each company to Norfolk Southern was
based on an analysis of what Norfolk Southern would be willing to pay for each
company as an operating entity within the Norfolk Southern system, and did not
consider the amount others might be willing to pay should the companies have
been offered for sale as going concerns. AAA determined the value to Norfolk
Southern of ANCR and NCRR by the following valuation method: (i) AAA considered
the railroad operating revenues derived from the lessee's operations of the
lines leased from ANCR and NCRR and created pro forma income statements for both
NCRR and ANCR for the five years prior to the respective appraisals, modifying
the lessee's income statements by excluding interest expense and interest
income, applying Norfolk Southern's systemwide five-year average tax rate,
excluding income not derived from railroad operations, and excluding lease
payments for the railroad lines; (ii) AAA compared the pro forma financial and
operating characteristics of ANCR and NCRR with a group of publicly held
railroad companies on a number of comparative criteria and the price earnings
ratios of their common shares; (iii) AAA applied the median price earnings
ratios to the pro forma earnings of ANCR
37
<PAGE>
and NCRR; and (iv) AAA applied a 25% premium for the sale of a 100% interest in
ANCR and a 40% premium for the sale of a 100% interest in NCRR. In arriving at
the valuations of each company as an independent enterprise, AAA did not
consider the amounts third parties might be willing to pay upon the sale of the
respective companies.
The value of ANCR to Norfolk Southern was appraised to be approximately
$9.5 million as of July 1, 1988; the value of ANCR as an independent enterprise
was appraised to be approximately $12.8 million as of that date. Prior to the
1988 study, the same categories in 1987 were reported as follows: Approximately
$10 million in value to Norfolk Southern; and approximately $13.6 million as an
independent enterprise. The 1987 study also took into account replacement costs
for the line, which were appraised at approximately $149 million.
In 1988, AAA applied two of the same categories of measurement to NCRR.
The appraised value of NCRR to Norfolk Southern was approximately $122 million;
its appraised value as an independent enterprise was approximately $224 million.
Prior to the 1988 study, AAA reported the same categories in 1987 as follows:
$141 million in value to Norfolk Southern; and approximately $228 million as an
independent going concern. For 1986, the categories were reported as follows:
approximately $125 million in value to Norfolk Southern; approximately $225
million as a going concern; and approximately $512 million for replacement cost.
The appraisals discussed above were concerned with the values of NCRR
and ANCR as railroad properties as of the dates of the appraisals; they were not
concerned with the nonoperating assets of either. In 1982, ANCR's nonoperating
assets were valued by a third party at approximately $1.7 million and the
nonoperating assets of NCRR were valued by a third party at approximately $7.9
million. In 1987, the ANCR nonoperating assets were valued by a third party at
approximately $2.9 million. NCRR's nonoperating assets have not been valued
since 1982. The nonoperating assets at ANCR consisted primarily of approximately
33 acres of land divided into 18 parcels, some with improvements that mostly
adjoin its right-of-way.
The nonoperating properties of NCRR presently consist of approximately
208 acres of land divided into 24 parcels, some with improvements, mostly
adjoining its right-of-way, including three in the downtown Charlotte, North
Carolina business district that are subject to the 1968 Charlotte Lease with
Norfolk Southern.
VALUE TO STATE OF NORTH CAROLINA; PLANS OR PROPOSALS OF THE STATE
NCRR owns a railroad operation and right of way that is expected to be
of increasing value to the State over time and as the cost of reproducing the
right of way increases. The use of the railroad for economic development and
transit purposes has potential value to the State in a number of ways, including
taxation revenue, reduced highway spending, environmental priorities, right of
way usage and employment.
The Governor's Special North Carolina Railroad Study Group concluded
that NCRR may be used for various purposes, including the following: (1) the
NCRR line between Charlotte and Raleigh has been designated by the U.S.
Department of Transportation as part of a high speed rail corridor linking
Charlotte to Washington, D.C.; (2) rail service along NCRR's route is seen as a
major supporting element for the establishment of the Global Transpark in
eastern North Carolina; (3) by encouraging industry to locate close to NCRR
through the use of concessional freight rates and favorable leases on NCRR
property, the State can promote economic development, especially with respect to
the Morehead City port; and (4) the NCRR right of way can be used for oil, gas,
water or sewer lines as well as for communications lines and power
transmissions. In addition, the Triangle Transit Authority is proposing to run
passenger commuter service over NCRR lines in the Research Triangle Area. The
State has not yet finalized its plans with respect to any of these alternative
uses of NCRR.
If the Merger is consummated, the State will be the sole voting
shareholder of NCRR. As such, it will have authority to modify the corporate
structure of NCRR or change the present NCRR Board or management. The State has
not yet finalized its plans in this regard, but may well adopt amendments to
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<PAGE>
the Charter of NCRR to provide for modifications of the size and terms of the
NCRR Board and implement such changes to the NCRR Board as it deems appropriate
and in accordance with the legislation authorizing funding of the Merger.
Consistent with NCRR's election to qualify as a REIT, it has carried
out a dividend policy in accordance with the requirements for maintaining REIT
status. If the Merger is consummated the NCRR could fail to continue to qualify
for REIT status. In such circumstance, the State may determine to modify the
dividend policy of NCRR by retaining earnings for future growth or other
opportunities available to NCRR. In addition, if the Merger is consummated, the
State may determine to issue a limited amount of non-voting preferred stock in
order to continue to qualify for REIT status. No plans regarding either of these
possibilities have been finalized.
The estimated value of NCRR to the State was considered by examining
the purchase by other states of certain railway corridors, specifically the 1988
purchase by the State of Florida of 81 miles of railway corridor from CSX for
passenger service for $3.25 million per mile and the 1992/93 purchase of 340
miles of corridor in the Los Angeles area by the State of California from Santa
Fe for $1.42 million per mile. Applying these financial statistics to
corresponding financial data for NCRR resulted in an equity reference range for
NCRR of approximately $315 million (which represents the midpoint of the RCNLD
methodology valuation to value the State of Florida's purchase of CSX track) to
$450 million (based on the per mile price paid by the State of California for
track in the Los Angeles region). However, the valuation of the benefits of full
ownership of NCRR by the State is difficult to quantify, especially considering
that passenger rail services, while often desired by a government, are usually
cash flow negative. In addition, valuations may be based on, among other things,
demographics and necessity for passenger service and the ability to create
earnings from trackage rights and other sources. The State has indicated that,
while it may utilize NCRR for public use in the long term, it does not have any
near term plans to utilize such property for public use other than current
freight railroad service.
In addition to the value of the NCRR railway corridor, in December
1996, the DOT estimated the cost of acquiring land to duplicate the NCRR 317
miles of the NCRR's right of way from Morehead City to Charlotte (excluding the
price of track, signals and grading) to be between $225 to $250 million.
CERTAIN CONFLICTS OF INTEREST AND LITIGATION
NORFOLK SOUTHERN
Norfolk Southern beneficially owns 113,053 shares of the NCRR Common
Stock, which represents an ownership interest of 2.7% of NCRR, or approximately
10.6% of the shares held by Minority Shareholders. Further, NCRR owns
approximately 9.6% of the outstanding common stock of the State University
Railroad Company, the majority of which is owned by Norfolk Southern.
STATE OF NORTH CAROLINA
The long history of NCRR and the State's ownership of its stock have
resulted in state law treating NCRR somewhat differently than other
corporations. For example, Section 124-5 of the General Statutes of the State
requires that NCRR obtain the approval of the Governor and the Council of State
for sales or leases of its assets.
The current Charter and Bylaws of NCRR contain provisions designed to
balance the interests of the State and the other shareholders. For instance, the
Bylaws contain special quorum requirements discussed in detail above. See
"SHAREHOLDER VOTE AND QUORUM REQUIREMENTS." Also, NCRR's Charter provides that
ten members of the NCRR Board be elected by the State and five members of the
NCRR Board be elected by the Minority Shareholders. This provision provides the
State and the Minority Shareholders with voting rights in NCRR Board elections
which are disproportionate to their share ownership. If the State
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<PAGE>
purchases additional shares or sells shares, there is no Charter provision for
reducing or increasing the number of members of the NCRR Board that the State
has a right to elect. This method of electing members of the NCRR Board differs
from the method prescribed by statutes for other North Carolina corporations. In
some cases, the state legislature has attempted to amend the NCRR Charter. These
provisions will be eliminated by the Charter Amendments.
From the date of and after the consummation of the Merger, the Charter
Amendments will limit the liability of members of the NCRR Board to the maximum
extent permissible under North Carolina law and provide for the indemnification
of members of the NCRR Board and officers of NCRR to the fullest extent
permissible under North Carolina law.
SHAREHOLDER DERIVATIVE LEGAL ACTIONS
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 NCRR. The complaints named the
Directors of NCRR as defendants and NCRR as "nominal defendant." The actions
sought to enjoin the Lease Extension Agreement and to recover for NCRR
unspecified damages and other relief from the directors. NCRR and the other
defendants filed motions to dismiss the actions and the court has not ruled on
those motions.
On September 24, 1996, a lawsuit filed as a purported class action by
the same plaintiffs as in the December 1994 and February 1995 federal court
actions was filed in the Superior Court of Wake County, North Carolina. The
complaint alleged that the NCRR Board breached its fiduciary duty to
shareholders in the formation of the Special Committee and asserts other claims.
On June 19, 1997, the court granted NCRR's motion to dismiss the action. On July
7, 1997, the plaintiffs appealed that ruling to the North Carolina Court of
Appeals. The North Carolina Court of Appeals has not issued any ruling or
decision on this appeal.
On December 21, 1995, a shareholder derivative action was filed in the
United States District Court for the Eastern District of North Carolina, seeking
to enjoin the proposed Lease Extension Agreement and to otherwise invalidate
action taken at the 1995 Annual Meeting on the basis of a lack of a quorum of
shareholders other than the State, and alleged other claims including alleged
proxy rule violations. On July 29, 1996, the federal court enjoined NCRR from
implementing the terms of the propose Lease Extension Agreement. The plaintiff
has filed a petition seeking an award in excess of $1 million in legal fees,
which NCRR has vigorously opposed. The court has not ruled on the fee petition.
In these shareholder derivative actions, the Directors and officers who
are named as defendants are defending claims brought against them and are
represented by separate counsel. NCRR's officers and Directors are indemnified
in the NCRR Bylaws against certain claims and liabilities alleged in the
actions, including the defense costs and expenses. NCRR notified its
Directors and officers liability insurance carriers of claims as
a result of the actions. Except with respect to the state court
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 that state court action, the insurance carrier has asserted that
coverage is not available under the policy in effect at that time.
NCRR is evaluating the insurance carrier's assertion. The Directors and officers
liability insurance policy has an aggregate limit of $5,000,000 and a $75,000
retention per occurrence. See "THE MERGER -- Indemnification of Directors."
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The Bylaws of NCRR provide that its Directors shall have the right to
be indemnified by NCRR, to the fullest extent permitted by law, against
liabilities and expenses arising out of their status as directors. To the extent
the Directors' conduct meets the standard of conduct for indemnification set
forth by the NCBCA, as described below, they will be so indemnified by NCRR in
connection with the shareholder derivative actions described herein. See "THE
MERGER -- Indemnification of Directors."
GREENSBORO SEGMENT TRACKAGE RIGHTS
On July 8, 1996, NCRR 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 NCRR railroad line in
Greensboro, North Carolina, STB Finance Docket No. 32961. The trackage rights
affect the segment of NCRR's railroad line which connects NSR's main north-south
route through North Carolina on NCRR's railroad line with a Norfolk Southern
owned route to Winston-Salem, North Carolina, which segment NCRR believes might
be utilized by Norfolk Southern to divert traffic away from NCRR's lines to
Norfolk Southern owned railroad lines. NCRR challenged the Notice of Exemption
and the amendment by NSR on the basis that NSR failed to recognize NCRR'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
Agreement. In a decision served August 22, 1997, the STB denied the NCRR's
motion to reopen the matter. On October 3, 1997, the NCRR Board determined not
to appeal the August 22, 1997 STB decision.
CHARLOTTE CONVENTION CENTER LITIGATION
During 1991, NCRR initiated lawsuits in the Mecklenburg
County, North Carolina Superior Court regarding its railroad corridor through
downtown Charlotte. NCRR alleged that both the City of Charlotte and Norfolk
Southern Railway breached contract obligations and obligations based on real
property rights to NCRR. During the first quarter of 1997, NCRR and the City of
Charlotte reached an agreement for a sale by NCRR of certain inactive railroad
property less than one mile in length to the City of Charlotte, subject to
certain conditions of closing, whereby the City of Charlotte will pay NCRR
$4,000,000 in exchange for the property and dismissal of the lawsuits.
The proceeds of sale will not result in a distribution to shareholders of
NCRR Common Stock prior to or following the Effective Date if the Merger
is consummated.
CERTAIN INFORMATION ABOUT NCRR
PROPERTIES. The principal asset of NCRR is approximately 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 Southern's north-south freight route between Washington, D.C. and
Atlanta, Georgia. NCRR's line intersects CSXT railroad lines at Selma,
Goldsboro, Raleigh, Cary, Durham, and Charlotte, North Carolina.
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NCRR's tracks on the Greensboro to Charlotte segment have been upgraded
since the original construction so that today the track is laid with 132-lb.
continuous welded rail with alternating double and single tracks. 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. Several short segments of the line are operated jointly
with railroads other than NCRR's lessees. NCRR'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 NCRR's
railroad line between Selma and Charlotte, North Carolina.
NCRR 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. Some of the properties have improvements, the
ownership of which depends on the terms of the arrangements with the sublessees
of the properties. NCRR 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 annual gross lease
revenue. Norfolk Southern has advised NCRR 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 NCRR.
MARKET PRICE OF AND DIVIDENDS ON NCRR COMMON STOCK. The following
information relates to the historical price of NCRR Common Stock and the current
ownership of NCRR Common Stock by directors, officers and major shareholders,
and to NCRR Common Stock dividends.
Shares of NCRR Common Stock are currently traded on the
over-the-counter market: Quarterly high and low bids are as follows for fiscal
years 1995, 1996 and the first three quarters of 1997.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------ ----------------------------------- ---------------------------------
Low High Low High Low High
--- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st 22 1/4 1st 27 1/2 24 1/4 1st 26
2nd 23 1/4 2nd 24 5/8 25 1/2 2nd 30 1/2
3rd 23 3rd 40 26 3rd 35
37 1/4 4th 38 1/4 25 4th 30
</TABLE>
The preceding over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent market transactions.
The closing bid and asked prices of NCRR Common Stock on April 4, 1997,
the date immediately prior to the public announcement that the NCRR Board and
the board of directors of B&M had agreed in principle to the proposed Merger,
were ____________. The closing bid and asked prices for NCRR Common Stock on
___________________, the latest practicable date for which such prices were
available, were ________________.
During 1996, a dividend was declared in the amount of $3.06 per share,
or $13,107,418, relating to NCRR's REIT election for tax year 1995. During 1995,
no dividends were declared. On September 8, 1997, a dividend of $.91 per share
was declared payable on October 15, 1997 to shareholders of record as of
September 22, 1997. The amount and timing of future dividends will depend upon
the approval of the Merger Agreement by Minority Shareholders, which restricts
the payment of dividends, any ruling(s) by the STB to set interim or other
compensation for the use of NCRR's properties, NCRR's REIT status, the Norfolk
Southern litigation, the shareholder litigation and the future profitability of
NCRR. NCRR expects to continue to have substantial uncertainty with respect to
each of these matters.
SHAREHOLDERS; CHANGES IN CONTROL. There were 690 holders of record of
NCRR Common Stock as of September 22, 1997. The State owns approximately 74.97%
of the outstanding shares. No other holder is believed by NCRR to own 5% or more
of the outstanding shares of NCRR Common Stock. NCRR has no commitments by
option, contract or pre-emptive right to issue shares to any current
shareholder. For further information regarding the ownership of the NCRR Common
Stock by certain holders of more than 5% of the NCRR Common Stock and certain
directors and officers of NCRR, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
Pursuant to provisions of NCRR's Charter and Article III, Section 3 of
the Bylaws of NCRR, the shares held by the State are entitled to vote to elect
ten (10) of NCRR's fifteen (15) directors. The
42
<PAGE>
remaining shareholders are entitled to vote for and elect the remaining five (5)
directors. The Bylaws provide that the directors elected by the shares held by
the State shall be named in proxy given by the Governor to his designee who
shall attend the annual meeting of shareholders. The next gubernatorial election
in North Carolina will occur in November 2000.
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 1996 are derived from the audited financial statements of NCRR. The
financial data for the nine month periods ended September 30, 1997 and 1996 are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which NCRR
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1997. The data should be
read in conjunction with the financial statements, related notes, and other
financial information incorporated by reference herein.
<TABLE>
<CAPTION>
At September 30, or
During the Nine Months
Ended September 30
(unaudited)
NCRR SELECTED -------------------
FINANCIAL DATA At December 31 or for the Year Ended December 31
- --------------
--------------------------------------------------------------------------
1996 1995 1994 1993 1992 1997 1996
------------ --------------- ------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross revenue........$5,620,469 $15,132,553 $851,074 $777,770 $773,400 $2,311,421 $5,492,692
Lease revenue of
roadway and land....4,846,216 8,134,656(a) 674,277 642,817 631,048 1,993,435 4,825,887
Net income (loss).....8,603,973 8,864,922 107,145 (54,027) (b) 43,847 665,612 10,004,856
Net income (loss)
per share............. 2.01 2.07 .03 (0.02) .01 .16 2.33
Deferred income
taxes................. -0- 1,209,851 1,214,451 1,241,451 1,117,549 -0- -0-
Total assets.........13,144,991 24,480,264 10,084,797 9,639,966 9,803,679 13,821,642 28,055,125
Book value
per common
share.............. 2.96 4.01 1.94 1.95 1.99 2.21 3.29
Cash dividend
declared per
common share......... 3.06(c) -0- .03 .03 .03 .91(d) 3.06(c)
</TABLE>
(a) Includes payment of $7.8 million from Norfolk Southern in December 1995 in
connection with the Lease Extension Agreement.
(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.
(d) Dividend declared in connection with REIT election for 1996 tax year.
EXPERTS
The financial statements of NCRR in NCRR's Annual Report for the year
ended December 31, 1996, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
43
<PAGE>
<TABLE>
<CAPTION>
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and
the executive officers of NCRR:
Period of Term
NAME Age Offices Held Service Expires
- ---- --- ----------- --------- ---------
<S> <C> <C> <C>
*John McKnitt Alexander, Jr. 48 Director 7/93 to 1997
Present
Secretary 12/95 to
11/96
Assistant Secretary/ 1985 to
Treasurer 1990
P.C. Barwick, Jr. 60 Director 9/90 to 1999
Present
Vice President 4/97 to
Present
Assistant Secretary/ 11/96 to
Treasurer 4/97
Secretary 9/89 to
12/95
Sidney R. French 70 Director 9/89 to 1997
Present
John W. Graham (2) 73 Director 3/97 to 1997
Present
*Robert W. Griffin (1) 45 Director 12/95 to 1998
Present
*M. Rex Harris 62 Director 7/93 to 1997
Present
*R. Samuel Hunt, III (1) 56 President 11/96 to 1999
Present
*William H. Kincheloe (1) 59 Director 7/87 to 1998
Present
*Lynn T. McConnell (1) 41 Director 7/93 to 1999
and Treasurer Present
*Jack A. Moody (1) 70 Director 7/93 to 1999
Present
*John S. Russell 42 Director 7/93 to 1998
Present
<CAPTION>
44
<PAGE>
Period of Term
Name Age Offices Held Service Expires
- ----- --- ------------ --------- --------
<S> <C> <C>
Scott M. Saylor 38 Executive 8/89 to
VP/General Present
Counsel
Porter B. Thompson (1) 63 Director 11/96 to 1998
Present
*J. Bradley Wilson (1) 44 Director and 11/96 to 1997
Secretary Present
*David T. Woodard 48 Director 7/93 to 1997
Present
</TABLE>
*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 NCRR, on March 19, 1997, John W. Graham was elected by the
Minority 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Of the 10,000,000 shares authorized to be issued, 4,283,470 shares are
currently outstanding. The following table sets forth as of October 31, 1997,
the parties known to NCRR to be beneficial owners of more than five percent of
NCRR's voting securities:
Name & Address of Amount & Nature of Percent
TITLE OF CLASS Beneficial Owner Beneficial Ownership* of Class
- ------------- ---------------- ------------------- ---------
Common Shares State of North 3,211,208 shares 74.97%
Carolina c/o
Governor James
B. Hunt, The State
Capital, Raleigh, NC 27611
- ---------------------------
* The State of North Carolina also holds 1,635 shares in escheat
subject to the claims of unknown owners. The State of North
Carolina has been advised that it does not customarily vote
shares held in escheat. 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.
45
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth as of October 29, 1997 the shares of
NCRR Common Stock beneficially owned by all directors and nominees and all
directors and officers as a group:
Name & Address of Amount & Nature of Percent
TITLE OF CLASS Beneficial Owner Beneficial Ownership of Class
- ------------- ----------------- ------------------- --------
<S> <C>
Common Shares John McKnitt Alexander, Jr. 700 shares owned directly,
Director 570 shares owned by
P.O. Box 26837 minor daughters, 50 shares
Raleigh, NC 27603 owned by spouse
P.C. Barwick, Jr. 600 shares owned *
Vice President and directly
Director
P.O. Box 3557
Kinston, NC 28502
Sidney R. French 500 shares owned *
Director directly (1)
105 Wetherington Farm Road
Cove City, NC 28523
John W. Graham 5,500 shares *
Director owned directly
403 E. Six Forks Road
Raleigh, NC 27609
Robert W. Griffin 526 shares owned *
Director directly (2)
P.O. Box 3062
Kinston, NC 28502
M. Rex Harris 500 shares *
Director owned directly
4511 Bragg Boulevard
Fayetteville, NC 28303
R. Samuel Hunt, III 500 shares owned *
Director and President directly (3)
P.O. Box 2440
Burlington, NC 27216
William H. Kincheloe 500 shares *
Director owned directly
P.O. Box 671
Rocky Mount, NC 27802
Lynn T. McConnell 100 shares owned *
Director and Treasurer directly: 500 shares
138 Cherokee Road owned directly (3)
Charlotte, N.C. 28207
Jack A. Moody 3,300 shares *
Director owned directly
P.O. Box 249
Siler City, N.C. 27344
<CAPTION>
46
<PAGE>
Name & Address of Amount & Nature of Percent
TITLE OF CLASS Beneficial Owner Beneficial Ownership of Class
- ------------- ----------------- ------------------- --------
<S> <C>
John S. Russell 100 shares owned directly; *
Director 500 shares owned
One Hannover Square directly (3)
Suite 1700
Raleigh, N.C. 27611
Scott M. Saylor 100 shares owned *
Exec. V.P./Gen. Counsel with spouse as joint
3200 Atlantic Avenue tenants with right
Suite 110 of survivorship
Raleigh, N.C. 27604
Porter B. Thompson 4,000 shares owned with *
Director spouse as joint tenants
230 North Elm Street with right of survivorship
Suite 1650
Greensboro, N.C. 27401
J. Bradley Wilson 500 shares owned directly *
Director and Secretary (3)
P.O. Box 2291
Durham, N.C. 27702
David T. Woodard 100 shares owned *
Director directly; 400 shares
P.O. Box 17647 owned directly(3)
Raleigh, N.C. 27619-7647
All directors and officers as a 19,546 *
group
</TABLE>
* 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
reacquire the stock.
All officers and directors as a group (15 persons) beneficially own
19,546 NCRR Common Shares, or approximately .46% of the total shares issued and
outstanding. No officer or director has indicated to NCRR that such officer or
director intends to vote against the adoption of the Merger Agreement.
47
<PAGE>
AVAILABLE INFORMATION
NCRR is subject to the informational requirements of the Exchange Act,
and in accordance therewith, files reports, proxy statements and other documents
with the Securities and Exchange Commission. Such reports, proxy statements and
other documents relating to the business, financial statements, directors,
officers and principal holders of NCRR's securities and other matters may be
inspected and copies at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; 7
World Trade Center, New York, New York 10048; and the Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may be obtained
by mail upon payment of prescribed fees and from the Public Reference Section of
the SEC, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The
SEC maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC. The address of the Web site is http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, each of which was previously filed by NCRR
with the Commission pursuant to Section 13 of the Exchange Act, are incorporated
herein by reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1996;
(2) Quarterly Report on Form 10-Q for the quarter ended March 31,
1997;
(3) Quarterly Report on Form 10-Q for the quarter ended June 30, 1997;
(4) Quarterly Report on Form 10-Q for the quarter ended September 30,
1997;
(5) Form 8-K dated April 7, 1997;
(6) Form 8-K dated June 3, 1997;
(7) Form 8-K dated August 27, 1997; and
(8) Form 8-K dated October 3, 1997.
All documents filed by NCRR pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the Special Meeting of Shareholders to which this Proxy Statement
relates shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of the filing of such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in any accompanying Proxy Statement Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
NCRR will provide without charge to each person to whom a Proxy
Statement is delivered upon written or oral request to such person, within one
business day of receipt of such request, a copy of any documents incorporated
herein by reference (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference into the documents that this Proxy
Statement incorporates). Requests for such copies should be directed to NCRR's
Secretary, 3200 Atlantic Avenue, Suite 110, Raleigh, North Carolina 27604.
Cautionary Statement Identifying Important Factors That Could Cause NCRR'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 proxy statement, and
any document incorporated by reference herein, are advised that this proxy
statement and documents incorporated by reference into this proxy statement
contain both statements of historical facts and forward looking statements.
Forward looking statements, which include statements about litigation and
payments from Norfolk Southern are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those indicated by
the forward looking statements. Examples of forward looking statements include,
but are not limited to (i) projections of revenues, income or loss, earnings or
loss per share, capital expenditures, dividends, capital structure and other
financial items, (ii) statements of the plans and objectives of NCRR or the NCRR
Board, including estimates or predictions of actions by other parties or
regulatory authorities, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying other statements and statements about
NCRR or its business.
48
<PAGE>
This proxy statement 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 litigation against Norfolk Southern, the court's
disposition of the shareholder legal actions, Norfolk Southern's ability or
willingness to divert traffic from NCRR's line, and NCRR's ability to reach any
future agreement with Norfolk Southern for rental or other terms for the
continued operation of NCRR's railroad lines, and other matters which are
described herein and/or in documents incorporated by reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by NCRR should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by NCRR prior to the effective date of the Private Litigation
Securities Reform Act of 1995. Forward looking statements are beyond the ability
of NCRR to control and in many cases NCRR cannot predict what factors would
cause actual results to differ materially from those indicated by the forward
looking statements.
ACCOUNTANTS
Representative(s) of Ernst & Young LLP, NCRR's independent public
auditors, will attend the Special Meeting with the opportunity to make a
statement if such representative(s) desires to do so and to respond to
appropriate questions.
OTHER BUSINESS
Management does not intend to bring any business before the Special
Meeting other than the matters referred to in the accompanying notice and at
this date has not been informed of any matters that may be presented to the
Special Meeting by others.
49
<PAGE>
********************************************************************************
APPENDIX
<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
NORTH CAROLINA RAILROAD COMPANY
The undersigned shareholder of the North Carolina Railroad Company hereby
acknowledges receipt of the Notice of Special Meeting of Shareholders and the
accompanying Proxy Statement and hereby constitutes and appoints
; ; and and each of them, attorneys
and proxies with full power of substitution, to act and vote the shares of the
undersigned at the Special Meeting of Shareholders of the said corporation to be
held , , 1998, at .m. and at any adjournment or
adjournments thereof. The undersigned hereby directs this proxy to be voted as
follows:
1. Approving the Agreement and Plan of Merger and the related Charter Amendments
and Bylaw Amendments, described in the Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion to vote upon any other business as may properly come
before the meeting or any adjournment or adjournments thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
[ ] PLEASE CHECK BOX IF YOU INTEND TO ATTEND THE SPECIAL MEETING IN PERSON.
PLEASE COMPLETE, SIGN AND RETURN PROXY WHETHER OR NOT YOU INTEND TO ATTEND THE
MEETING.
ANY PROXY HERETOFORE GIVEN BY THE UNDERSIGNED IS HEREBY REVOKED.
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. IN THE ABSENCE OF ANY DIRECTION
TO THE CONTRARY, THE PROXYHOLDERS WILL VOTE THIS PROXY FOR THE APPROVAL OF THE
MATTER LISTED ABOVE AND IN THEIR DISCRETION WITH RESPECT TO ANY OTHER MATTERS
WHICH PROPERLY COME BEFORE THE MEETING.
______________________________________
Number of Shares
Date _________________________________
______________________________________
Signature of Shareholder
IMPORTANT: PLEASE SIGN YOUR NAME
EXACTLY AS IT APPEARS ON YOUR
CERTIFICATE. PLEASE ADD YOUR FULL
TITLE TO YOUR SIGNATURE. EXECUTORS,
ADMINISTRATORS, TRUSTEES, AND OTHER
FIDUCIARIES SHOULD SO INDICATE WHEN
SIGNING AND FURNISH PROOF OF SUCH
FIDUCIARY CAPACITY. ALL PERSONS
SIGNING ON BEHALF OF CORPORATIONS
AND/OR PARTNERSHIPS SHOULD SO INDICATE
WHEN SIGNING.
NOTE: IF YOU RECEIVE MORE THAN ONE
PROXY, PLEASE DATE AND SIGN EACH ONE
AND RETURN ALL PROXIES IN THE SAME
ENVELOPE.
PLEASE RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of October 3, 1997 (the
"Agreement"), among NORTH CAROLINA RAILROAD COMPANY, a North Carolina
corporation (the "Company"), THE NORTH CAROLINA DEPARTMENT OF TRANSPORTATION
(the "DOT") and BEAUFORT AND MOREHEAD RAILROAD COMPANY, a North Carolina
corporation and a wholly owned subsidiary of the DOT (the "B&M"). The Company
and B&M are hereinafter sometimes collectively referred to as the "Constituent
Corporations."
RECITALS
WHEREAS, the Board of Directors of the Company (the "Board of
Directors") and the Special Committee (the "Special Committee") of the Board of
Directors have each considered the proposed merger of B&M with and into the
Company upon the terms set forth in this Agreement; the Special Committee has
adopted resolutions recommending to the Board of Directors the approval of this
Agreement and the transactions contemplated hereby; and the Board of Directors
has adopted resolutions approving this Agreement and the transactions
contemplated hereby;
WHEREAS, the Board of Directors of B&M and the DOT, as the sole
shareholder of B&M, have determined that the merger of B&M with and into the
Company upon the terms set forth in this Agreement would be fair to and in the
best interests of the shareholders of B&M, and such Board of Directors and sole
shareholder have adopted resolutions approving this Agreement and the
transactions contemplated hereby;
WHEREAS, the Company, B&M, and the DOT desire to make certain
representations, warranties, covenants and agreements in connection with the
proposed merger of B&M with and into the Company and desire to prescribe various
conditions to such merger; and
WHEREAS, the Special Committee has recommended that the Board of
Directors in turn recommend that the shareholders of the Company adopt and
authorize this Agreement and the transactions contemplated hereby, and the Board
of Directors has resolved so to recommend such shareholder adoption and
authorization.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements, and conditions contained
herein, the parties hereto, for themselves, their successors, and assigns, agree
as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. (a) In accordance with the provisions of this
Agreement and the North Carolina Business Corporation Act ("North Carolina
Corporate Law"), at the Effective Time (as defined in Section 1.5), B&M shall be
merged with and into the Company (the
<PAGE>
"Merger"), and the Company shall be the surviving corporation (hereinafter
sometimes called the "Surviving Corporation") and shall continue its corporate
existence under North Carolina Corporate Law. The name of the Surviving
Corporation shall be "North Carolina Railroad Company." At the Effective Time,
the separate existence of B&M shall cease.
(b) The Merger shall have the effects set forth in Section 55-11-06 of
North Carolina Corporate Law. Without limiting the generality of the foregoing,
and subject thereto, the Surviving Corporation shall possess all the rights,
properties, privileges, immunities, powers, and purposes of each of the
Constituent Corporations and shall by operation of law assume and be liable for
all the liabilities, obligations and penalties of each of the Constituent
Corporations.
Section 1.2 Charter and Bylaws. (a) At the Effective Time, the Charter
of the Company, as in effect immediately prior to the Effective Time, shall be
the Charter of the Surviving Corporation following the Merger, until thereafter
further amended as provided therein and under North Carolina Corporate Law.
(b) The bylaws of the Company as in effect immediately prior to the
Effective Time shall be the bylaws of the Surviving Corporation until thereafter
amended as provided by North Carolina Corporate Law, the Charter of the
Surviving Corporation and such bylaws.
Section 1.3 Directors and Officers. The directors of the Company
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Charter and
bylaws of the Surviving Corporation, and the President, Executive Vice
President, Secretary and Treasurer of the Company immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed and
qualified.
Section 1.4 Shareholders' Meeting. The Company will take all action
necessary in accordance with and subject to applicable law and its Charter and
bylaws to convene a meeting of its shareholders (the "Shareholders' Meeting") as
soon as practicable after the date of this Agreement to consider and vote upon
the adoption and authorization of this Agreement. Subject to the fiduciary
duties of the Board of Directors to the shareholders of the Company, the
Company, through its Board of Directors, shall recommend to its shareholders
adoption and authorization of this Agreement and the transactions contemplated
hereby and shall use all reasonable efforts to obtain adoption and authorization
of this Agreement and the Merger by the shareholders of the Company.
Section 1.5 Effective Time. The Merger shall become effective on the
date and at the time of filing of articles of merger, in the form required by
and executed in accordance with North Carolina Corporate Law, with the Secretary
of State of the State of North Carolina in accordance with the provisions of
Section 55-11-05 of North Carolina Corporate Law (the "Articles of Merger") or
at such other time as may be specified in the Articles of Merger. The date and
time when the Merger shall become effective is herein referred to as the
"Effective Time."
2
<PAGE>
Section 1.6 Required Filings. At the Closing (as defined in Section
9.1), the DOT, B&M and the Company shall cause (i) the Articles of Merger to be
executed and filed with the Secretary of State of the State of North Carolina
and (ii) a certificate as specified in Section 47- 18.1 of the General Statutes
of North Carolina to be recorded in the office of the register of deeds of each
county in which B&M owns real estate, if any, in each case as provided in North
Carolina Corporate Law, and shall take any and all other lawful actions and do
any and all other lawful things to cause the Merger to become effective.
Section 1.7 Further Assurances. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Constituent Corporations acquired
or to be acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets in the Surviving Corporation or otherwise to
carry out this Agreement.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 Shares. (a) All shares of the Company's common stock, par
value $.50 per share (the "Shares"), issued and outstanding immediately prior to
the Effective Time, other than Canceled Shares as defined in subsection (c)
hereof and Dissenting Shares as defined in Section 2.2 hereof, shall be referred
to herein as the "Converted Shares." By virtue of the Merger and without any
action on the part of the holder thereof, each Converted Share shall be canceled
and converted at the Effective Time into the right to receive Sixty-six Dollars
($66.00) in cash (the "Merger Consideration") payable to the holder thereof,
without interest, upon surrender of the certificate evidencing such Converted
Share in the manner provided in Section 2.4.
(b) All Shares (including Dissenting Shares and Canceled Shares), by
virtue of the Merger and without any action on the part of the holders thereof,
shall at the Effective Time no longer be outstanding and shall be canceled and
retired and shall cease to exist, and each holder of a certificate representing
any such Shares shall thereafter cease to have any rights with respect to such
Shares, except, in the case of Converted Shares, the right to receive the Merger
Consideration for such Shares upon the surrender of such certificate in
accordance with Section 2.4, and, in the case of Dissenting Shares, the right,
if any, to receive payment from the Surviving Corporation of the "fair value" of
such Shares as determined in accordance with Sections 55-13- 01 et. seq. of
North Carolina Corporate Law.
3
<PAGE>
(c) Notwithstanding anything contained in this Section to the contrary,
each Share held in the treasury of the Company and each such Share owned by B&M
or the State of North Carolina (including shares held by the State of North
Carolina as a result of the escheat laws of such State) immediately prior to the
Effective Time ("Canceled Shares") shall be canceled without any conversion
thereof and no payment shall be made with respect thereto.
Section 2.2 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, Shares that are outstanding immediately prior to the
Effective Time and that are held by shareholders who shall not have voted in
favor of the Merger and who otherwise shall have properly exercised their rights
for appraisal of such Shares in the manner provided in Sections 55- 13-01 et.
seq. of North Carolina Corporate Law ("Dissenting Shares") shall not be
converted into or be exchangeable for the right to receive the Merger
Consideration, but the holders thereof shall be entitled to payment of the
appraised value of such Dissenting Shares in accordance with the provisions of
Sections 55-13-01 et. seq. of North Carolina Corporate Law; provided, however,
that if any such shareholder shall withdraw his demand, for appraisal or shall
fail to perfect his appraisal rights in accordance with the North Carolina
Corporate Law, such Shares shall thereupon be deemed to have been converted into
and to have become exchangeable for, as of the Effective Time, the right to
receive the Merger Consideration, without any interest thereon (and such Shares
shall not, for purposes hereof, then be deemed to be Dissenting Shares). The
Surviving Corporation shall pay to a holder of Dissenting Shares who
subsequently fails to perfect or otherwise withdraws such holder's claim for
appraisal rights as provided above, against surrender of the certificate
representing such Shares in accordance with Section 2.4, the Merger
Consideration payable with respect to such Shares.
Section 2.3 B&M Stock. By virtue of the Merger and without any action
on the part of the holder thereof, at the Effective Time each share of the
capital stock of B&M issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one validly issued, fully paid,
and non-assessable corresponding share of capital stock of the Surviving
Corporation.
Section 2.4 Exchange of Shares. (a) At or prior to the Closing Date (as
defined in Section 9.1), the Company shall designate a bank or trust company
reasonably acceptable to the DOT and B&M to serve as exchange agent (the
"Exchange Agent") for the Converted Shares. As soon as reasonably practicable at
or after the Effective Time, the DOT shall deposit, or shall cause to be
deposited, with the Exchange Agent for the benefit of the holders of
certificates (the "Certificates") that represented Converted Shares immediately
prior to the Effective Time, immediately available funds in United States
dollars in an amount that equals the aggregate Merger Consideration. Such funds
(the "Payment Fund") shall be invested by the Exchange Agent as directed by the
DOT in obligations of or guarantees by the United States of America, in
commercial paper obligations rated A-l or P-l or better by Moody's Investor
Services, Inc. or Standard & Poor's Corporation, respectively, or in
certificates of deposit, bank repurchase agreements, or bankers acceptances of
commercial banks with capital exceeding $500 million; provided, however, that in
the event that the Payment Fund shall realize a loss on any such investment, the
Surviving Corporation or DOT shall promptly thereafter deposit in such Payment
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Fund cash in an amount sufficient to enable such Payment Fund to satisfy all
remaining obligations originally contemplated to be paid out of such Payment
Fund.
(b) Promptly after the Effective Time (but in no event more than two
days thereafter), the Surviving Corporation shall instruct the Exchange Agent to
mail to each record holder, as of the Effective Time, of an outstanding
Certificate a form of letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the Certificates for payment
therefor. The form of letter of transmittal shall be subject to approval by the
Company prior to the Effective Time. Upon surrender to the Exchange Agent of a
Certificate, together with such letter of transmittal duly executed, the holder
of such Certificate shall be entitled to receive in exchange therefor the amount
of cash that such holder has the right to receive under this Article, and such
Certificate shall forthwith be canceled. If payment (or any portion thereof) is
to be made to a person other than the person in whose name the Certificate
surrendered is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment shall pay to the
Exchange Agent any transfer or other taxes or indemnity bond fee required by
reason of the payment to a person other than the registered holder of the
Certificate surrendered or such person shall establish to the satisfaction of
the Exchange Agent that such tax or fee has been paid or is not applicable.
Until surrendered in accordance with the provisions of this Section, each
Certificate shall represent, for all purposes, the right to receive the Merger
Consideration in respect of the number of Converted Shares previously evidenced
by such Certificate, without any interest thereon.
(c) From and after the Effective Time there shall be no transfers on
the stock transfer books of the Surviving Corporation of the Converted Shares.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this Article.
(d) At any time following the date one year after the Effective Time,
the Surviving Corporation shall be entitled to require the Exchange Agent to
deliver to it any funds (including any interest received with respect thereto)
that have been made available to the Exchange Agent and that have not been
disbursed to holders of Certificates and, thereafter, such holders shall be
entitled to look to the Surviving Corporation (subject to abandoned property,
escheat or other similar laws) only as general creditors thereof with respect to
the Merger Consideration payable upon due surrender of their Certificates.
Notwithstanding the foregoing, neither the Surviving Corporation nor the
Exchange Agent shall be liable to any holder of a Certificate for the Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
Section 2.5 Reservation of Right to Revise Transaction; Further
Actions. (a) Subject to approval by the Company, which shall not be unreasonably
denied, the DOT may at any time change the method of effecting the acquisition
of the Company by the DOT if and to the extent that it deems such a change to be
reasonably desirable; provided, however, that no such change shall (A) alter or
change the amount or the kind of the consideration to be received by the holders
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of Converted Shares as provided for in this Agreement; (B) unfavorably change
the tax consequences to the holders of the Converted Shares compared to the
Merger; (C) cause a delay in the consummation of the transactions contemplated
by this Agreement; and, further provided that such modified structure results in
the DOT or the State of North Carolina owning directly or indirectly all of the
Common Stock of the Company (or in the case of a modification to the structure
resulting in the Company merging into a successor, all of the Common Stock of
such successor to the Company). Without limiting the foregoing, the parties
expressly agree that at the request of the DOT, the parties will use their best
efforts take steps necessary or desirable to allow for the Surviving Corporation
to remain eligible as a Real Estate Investment Trust ("REIT") including the
authorization of a series of non-voting preferred stock of the Company, the
Surviving Corporation and/or the B&M and the issuance thereof to sufficient
holders as to allow for the preservation of such REIT status. In the event
complying with this provision requires any expenditures prior to the Closing,
the Company shall not be obligated to take such action unless the DOT or B&M pay
such expenses in advance.
(b) To facilitate the Merger and the acquisition, the Company will
execute such additional agreements and documents and take such other actions as
the DOT and the Company reasonably determine necessary or appropriate.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE DOT AND B&M
The DOT and B&M represent and warrant to the Company as follows:
Section 3.1 Organization. B&M is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation
and has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its business as now being conducted. B&M is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed or in good
standing would not reasonably be expected to have a material adverse effect on
the business, financial condition or results of operations of B&M.
Section 3.2 Authority Relative to This Agreement. Subject to approval
or ratification by North Carolina Council of State if required by N.C.G.S. ss.
124-5, each of the DOT and B&M has the requisite power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. Subject to approval or ratification by North Carolina Council of State,
the execution and delivery of this Agreement by B&M and the consummation by it
of the transactions contemplated hereby have been duly and validly authorized
and approved by the Board of Directors of B&M and by the shareholder B&M, and no
other corporate proceedings on the part of B&M are necessary to authorize this
Agreement or the consummation by it of the transactions contemplated hereby
except as set forth in Section 6.3 hereof. This Agreement has been duly and
validly executed and delivered by each of the DOT and B&M and, assuming this
Agreement constitutes a legal, valid and binding agreement of the Company, this
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Agreement constitutes a legal, valid and binding agreement of each of the DOT
and B&M, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
Section 3.3 Broker's Fees. Except for the engagement of NationsBanc
Capital Markets, Inc., the fees and expenses of which engagement will be paid by
the DOT, neither the DOT nor B&M, has employed any broker, finder or financial
advisor or incurred any liability for any broker's fees, commissions, finder's
or financial advisory fees in connection with the transactions contemplated
hereby.
Section 3.4 Proxy Statement. None of the information to be supplied by
or through the DOT or B&M for inclusion or incorporation by reference in (i) the
final proxy statement on Schedule 14A, including any amendments or supplements
thereto (the "Proxy Statement"), to be delivered to the Company's shareholders,
or (ii) any other filings required to be made by the Company, the DOT or B&M
under the Securities Exchange act of 1934, as amended (the "Exchange Act"), the
Securities Act of 1933, as amended (the "Securities Act") or any other state or
federal securities laws (including without limitation a filing on Schedule
13E-3, if required) in connection with the Merger or the transactions
contemplated by this Agreement ("Other Filings") will, at the respective times
that the Proxy Statement or any Other Filings and any amendments or supplements
thereto are filed with the Securities and Exchange Commission ("SEC"), at the
time any amendment or supplement thereto is mailed to the Company's
shareholders, and at the time of the Shareholders' Meeting, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they are made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each of the DOT and B&M as
follows:
Section 4.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. The Company is duly qualified or licensed to do business and is in
good standing in North Carolina, which is the only jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed or in good standing would not reasonably
be expected to have a Material Adverse Effect. For purposes of this Agreement,
"Material Adverse Effect" means any change or effect that would be materially
adverse to the business, operations, assets, condition (financial or otherwise)
or results
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of operations of the Company or that would materially impair the ability of the
Company to perform its obligations hereunder.
Section 4.2 Authority Relative to this Agreement. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby, subject to the approval
of the Merger and the adoption and authorization of this Agreement by the
shareholders of the Company in accordance with North Carolina Corporate Law. The
execution and delivery of this Agreement by the Company, and the consummation by
the Company of the transactions contemplated hereby, have been duly and validly
authorized and approved by the Board of Directors and except for the adoption
and authorization of this Agreement by the shareholders of the Company in
accordance with North Carolina Corporate Law, no other corporate proceedings on
the part of the Company are necessary to authorize the transactions contemplated
hereby except as set forth in Section 6.3 hereof. This Agreement has been duly
and validly executed and delivered by the Company, and assuming this Agreement
constitutes a legal, valid and binding agreement of each of the DOT and B&M,
this Agreement constitutes a legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights and
remedies generally, general equitable principles (whether considered in a
proceeding at law or in equity) and an implied covenant of good faith and fair
dealing.
Section 4.3 SEC Documents; Financial Statements. (a) The Company has
filed all documents required by law to be filed by it with the SEC under the
Securities Act or the Exchange Act since April 1, 1995 (the "SEC Documents"). As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act or Exchange Act, as the case may be,
and applicable rules and regulations promulgated by the SEC thereunder, and none
of the SEC Documents, at the time they were filed (or at the effective date
thereof in the case of registration statements) contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) Except as set forth in the SEC Documents, or press releases of the
Company since April 1, 1995, copies of which have been made available to the
DOT, (the "Press Releases"), the balance sheets of the Company, and the related
statements of operations and cash flows, including the footnotes thereto,
included in the SEC Documents, fairly present the consolidated financial
position of the Company as of the respective dates thereof and the consolidated
results of operations and cash flows, as the case may be, of the Company and its
subsidiaries for the periods set forth therein (subject, in the case of
unaudited quarterly statements, to normal year-end audit adjustments), all in
accordance with generally accepted accounting principles ("GAAP") consistently
applied during the periods involved, except as may be noted therein.
(c) Except as disclosed in the SEC Documents (including, without
limitation, the financial statements therein) filed, or the Press Releases,
there are no liabilities or obligations, accrued, absolute, contingent or
threatened, and whether due or to become due, which would be required
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to be reflected in a balance sheet or in the notes thereto prepared in
accordance with GAAP ("Liabilities"), other than Liabilities that, individually
or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect and other than Liabilities incurred in the ordinary course of business.
Section 4.4 Absence of Certain Changes. Except as disclosed in the SEC
Documents or the Press Releases, since April 1, 1995, the Company has conducted
its business only in, and has not engaged in any material transaction other than
in the ordinary and usual course of such business and there has not been (i) any
material adverse change in the financial condition, business or results of
operations of the Company taken as a whole; (ii) any declaration, setting aside
or payment of any dividend or other distribution with respect to the capital
stock of the Company; or (iii) any change by the Company in accounting
principles, practices or methods.
Section 4.5 Investment Bankers and Finders. Except for the engagement
of Credit Suisse First Boston Corporation ("CSFB") and Morgan Stanley & Co.
Incorporated pursuant to engagement letters, copies of which have previously
been delivered to the DOT and its consultants, advisers, or legal counsel, the
fees and expenses of which engagements will be paid by the Company, the Company
has not employed any broker, finder or financial advisor or incurred any
liability for any broker's fees, commissions, finders' or financial advisory
fees in connection with the transactions contemplated hereby. No amendment has
been or shall be made to the Company's agreement with CSFB that would increase
the amount of fees or other compensation required thereunder.
Section 4.6 Proxy Statement. None of the information to be supplied by
or through the Company for inclusion or incorporation by reference in the Proxy
Statement or Other Filings will, at the respective times that the Proxy
Statement to be delivered to the Company's shareholders or any Other Filings are
filed with the SEC, at the time any amendment or supplement thereto is mailed to
the Company's shareholders, and at the time of the Shareholders' Meeting,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they are made, not
misleading.
Section 4.7 Tax Reports.
(a) All reports and returns with respect to Taxes (as defined
below) that are or have been required to be filed by or with respect to
the Company (collectively, the "Company's Tax Returns"), including
without limitation the federal income tax returns of the Company (the
"Company's Federal Income Tax Returns") have been duly filed, or
requests for extensions have been timely filed and have not expired,
and such Company's Tax Returns were true, complete and accurate in all
material respects.
(b) All taxes (which shall include (i) federal and (ii)
material state, local or foreign income, gross receipts, windfall
profits, severance, property, production, sales, use, license, customs,
import, export, excise, franchise, employment, withholding or similar
taxes, duties or governmental charges, together with any interest,
additions, or
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penalties with respect thereto and any interest in respect of such
additions or penalties, collectively "Taxes") shown to be due on the
Company's Tax Returns have been paid in full to the best of the
Company's information. B&M and DOT acknowledge that certain property
and other taxes have been represented to have been paid by Norfolk
Southern Railway Company (or its affiliates) and not independently
verified by the Company.
(c) The Company's Federal Income Tax Returns have been
examined by the Internal Revenue Service ("I.R.S.") or the period of
assessment of the Taxes in respect of which such Company's Federal Tax
Returns were required to be filed has expired, and all Taxes due with
respect to completed and settled examinations have been paid in full
through the taxable year of the Company ended December 31, 1993, except
that the I.R.S. has claimed an additional $56,000 tax liability with
respect to the Company's 1994 Federal Income Tax Return (the "1994
Claim"). The Company has appealed such claim through the I.R.S.
administrative appeals process, and such appeal is still pending. The
1994 Claim is subject to adjustment by the I.R.S. during the course of
the administrative appeals. Other than the 1994 claim, no issues have
been raised by the relevant taxing authority in connection with the
examination of any of the Company's Federal Tax Returns that are
reasonably likely to result in a determination that would have a
Material Adverse Effect, and no waivers of statutes of limitations have
been given by or requested with respect to any liability of the Company
for Taxes.
Section 4.8 Capitalization. The authorized capital stock of the Company
consists of 10,000,000 Shares. As of the close of business on the date of this
Agreement, there were 4,283,470 Shares issued and outstanding, there were no
options, warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating the Company to issue, transfer or sell any shares of
capital stock of the Company or any other securities convertible into or
evidencing the right to subscribe for any such shares or obligating the Company
to grant, extend or enter into any such option, warrant, call, subscription,
right or agreement. All issued and outstanding Shares are duly authorized and
validly issued, fully paid, non-assessable.
Section 4.9 Opinion of the Special Committee's Financial Advisor. The
Special Committee has received the opinion of CSFB, financial advisor to the
Special Committee, to the effect that, as of the date of this Agreement, the
Merger Consideration is fair, from a financial point of view, to the holders of
Converted Shares (other than the DOT and its affiliates).
ARTICLE V
COVENANTS
Section 5.1 Conduct of Business of the Company. Except (i) as disclosed
in the SEC Documents or the Press Releases, or (ii) as specifically and
expressly permitted by this Agreement (including the matters set forth in
Section 5.2) or (iii) as expressly agreed to in writing by the DOT, during the
period from the date of this Agreement to the Effective Time, the Company will
not, without the prior written consent of the Secretary of the DOT:
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(a) amend its Charter or bylaws (or equivalent organizational
documents);
(b) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver any shares of its capital stock or any
options, warrants, calls, subscriptions or other securities or rights
convertible or exchangeable into, exercisable for or evidencing the
right to subscribe for any shares of its capital stock;
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock, or purchase, redeem or otherwise acquire
any shares of its own capital stock;
(d) (i) create, incur or assume any long-term debt or any
short-term debt for borrowed money, in excess of $2,000,000 in the
aggregate, other than under existing lines of credit; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person;
(e) sell, transfer, lease, license, pledge, mortgage, or
otherwise dispose of, or encumber any assets or properties, real,
personal or mixed, that are material, individually or in the aggregate,
to the Company;
(f) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in
principle or an agreement with respect to, any merger, consolidation,
plan of liquidation or dissolution (other than the Merger), or
acquisitions of assets material to the Company;
(g) authorize or commit to make capital expenditures other
than of the types and in the amounts set forth in the Company's current
budget for capital expenditures, a copy of which has been delivered to
the Secretary of the DOT, except (1) as previously approved by the
Board of Directors and as identified to the Secretary of the DOT prior
to the date hereof or otherwise consistent with past practice and (2)
for additional capital expenditures in an amount not to exceed
1,000,000, in the aggregate;
(h) cancel or take steps intended to cause the cancellation of
any material insurance policy naming it as a beneficiary or a loss
payee, except in the ordinary and usual course of business;
(i) make any change to its accounting methods, principles or
practices, except as may be required or permitted by GAAP;
(j) maintain the books and records of the Company in a manner
not consistent with past business practices; or
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(k) agree to do any of the foregoing.
Section 5.2 Access to Information. (a) From the date of this Agreement
until the Effective Time, the Company will give the DOT and B&M and their
authorized representatives (including counsel, environmental and other
consultants, accountants, auditors and financing sources and their authorized
representatives) (the "Representatives"), at their expense upon reasonable
notice and in a manner so as not to interfere unduly with the Company's
operations, reasonable access during normal business hours to all facilities,
personnel and operations and to all books and records of the Company, will
permit the DOT and B&M and such authorized representatives to make such
inspections at the DOT's expense as they may reasonably require and will cause
its officers to furnish the DOT and B&M with such financial and operating data
and other information with respect to the business and properties of the Company
as the DOT and B&M may from time to time reasonably request (including
information regarding litigation matters if such information does not require
the disclosure of privileged information or information subject to
confidentiality agreements or protective orders); provided, that nothing in this
Section 5.3(a) shall require the Company to take action which would result in a
waiver of any attorney-client privilege with respect to any book, record or
other information subject to such privilege.
(b) Each of the DOT and B&M will hold, and will cause the
Representatives to hold, in strict confidence all documents and information
concerning the Company furnished to the DOT or B&M in connection with the
transactions contemplated by this Agreement, and the Company will hold, and will
cause its consultants and advisors to hold, in strict confidence all documents
and information concerning the DOT or B&M furnished to the Company in connection
with the transactions contemplated by this Agreement; provided, however, that in
each case any party may disclose any document or information (i) that is already
public knowledge prior to such disclosure and (ii) to the extent such disclosure
is required by corporate or securities law or legal process, but (to the extent
consistent with such law or legal process) only after the disclosing party has
given prior written notice of the disclosure to the other parties. The
confidentiality obligations set forth herein shall remain in full force and
effect regardless of whether the Merger is completed or this Agreement is
terminated for any reason.
(c) All information provided pursuant to this Agreement shall be
subject to the existing Confidentiality Agreement between the Company, and the
State of North Carolina dated as of October 1, 1996.
Section 5.3 Proxy Statement; Filings and Other Action. (a) In
connection with the Shareholders' Meeting, the Company will commence the
preparation of and file a preliminary proxy statement relating to the
transactions contemplated by this Agreement (the "Preliminary Proxy Statement")
with the SEC and use its reasonable best efforts to respond to the comments of
the SEC and to cause the final Proxy Statement to be mailed to the Company's
shareholders, all as soon as reasonably practicable. The DOT and the Company,
will, if required, jointly prepare and the DOT and the Company will, if
required, file with the SEC the Schedule 13E-3 (or any amendment or supplement
thereto) that shall be filed together with the Preliminary Proxy Statement. The
Company will notify the DOT promptly of the receipt of the comments of the
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SEC and of any request by the SEC for amendments or supplements to the
Preliminary Proxy Statement or the Schedule 13E-3 (if required) or for
additional information from the SEC or members of its staff. The DOT and the
Company will cooperate in responding to all comments or requests from the SEC or
members of its staff with respect to the Preliminary Proxy Statement, the final
Proxy Statement, the Schedule 13E-3, or the Merger. If at any time prior to the
Shareholders' Meeting, any event should occur relating to the Company that
should be set forth in an amendment of, or a supplement to, the Proxy Statement
or the Schedule 13E-3, the Company will promptly inform the DOT. If at any time
prior to the Shareholders' Meeting any event should occur relating to the DOT or
any of its affiliates or associates that should be set forth in an amendment of,
or a supplement to, the Proxy Statement or the Schedule 13E-3, the DOT will
promptly notify the Company. Whenever any event occurs that should be set forth
in an amendment of' or a supplement to, the Proxy Statement or the Schedule
13E-3, the Company and the DOT will, upon learning of such event, promptly,
jointly prepare and the Company will file and mail such amendment or supplement.
(b) Subject to the terms and conditions herein provided, the Company,
the DOT and B&M shall use all commercially reasonable efforts promptly to take,
or cause to be taken, all other actions and do, or cause to be done, all other
things necessary, proper or appropriate under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
At the Shareholders' Meeting, the DOT, shall cause all Shares directly or
indirectly owned or controlled by it, to be voted in favor of the transactions
pursuant to this Agreement.
(c) The Company shall not settle or compromise any claim with respect
to Dissenting Shares prior to the Effective Time without the prior written
consent of the DOT (which consent shall not be unreasonably withheld).
(d) Nothing in this Agreement shall prohibit accurate disclosure by the
Company that is required in any SEC document, proxy statement or other filing or
otherwise under applicable law with respect to the transactions contemplated
hereby.
Section 5.4 Public Announcements. The DOT and B&M, on the one hand, and
the Company, on the other hand, will consult with each other before issuing any
press release or otherwise making any public statements with respect to the
Merger and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or court
order, or which legal counsel advise would be required by prudent disclosure
policy, in which case the parties will make reasonable efforts (to the extent
consistent with such law or court order) to consult with each other prior to the
making of such public statement.
Section 5.5 Litigation. The Company shall keep the DOT reasonably
informed of the status of all pending or subsequently commenced litigation and
administrative proceedings involving the Company (the "Litigation"), shall
communicate to the DOT the Company's intent to settle any such Litigation and
will keep the DOT reasonably apprised of any other significant developments with
regard to the Litigation.
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Section 5.6 Expenses. The DOT and B&M, on the one hand, and the
Company, on the other hand, shall bear their respective expenses incurred in
connection with the contemplated sale of the Company, including without
limitation the preparation, execution and performance of this Agreement and the
transactions contemplated hereby and all fees and expenses of investment
bankers, finders, brokers, agents, representatives, consultants, counsel and
accountants, provided that the DOT shall bear one-half of the expense of the
filing fees and printing, mailing and solicitation costs of the Proxy Statement.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES
The respective obligations of all parties to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:
Section 6.1 Shareholder Approval. At the Shareholders' Meeting this
Agreement shall have been (i) adopted by the affirmative vote of the holders of
a majority of the issued and outstanding Shares and (ii) approved by the
affirmative vote of the holders of a majority of the issued and outstanding
Shares not owned or controlled by the State of North Carolina or the DOT.
Section 6.2 No Orders. No United States, or state governmental
authority or other agency or commission shall have enacted, issued, promulgated,
enforced, or entered any statute, law, rule, regulation, executive order,
decree, injunction, or other order (whether temporary, preliminary, or
permanent) that is then in effect and has the effect of making the Merger
illegal or otherwise preventing or prohibiting the consummation of the Merger
and other transactions contemplated hereunder.
Section 6.3 STB Order. The issuance by the Surface Transportation Board
("STB") of an appropriate order authorizing the merger, if required by law.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF
THE DOT AND B&M
The obligation of the DOT and B&M to effect the Merger and to perform
their other obligations to be performed at or subsequent to the Closing shall be
subject to the fulfillment at or prior to the Closing of the following
additional conditions, any one or more of which may be waived by the DOT:
Section 7.1 Representations and Warranties True. The representations
and warranties of the Company contained herein shall be true and correct in all
material respects on the date of
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this Agreement and at and on the Closing Date as though such representations and
warranties were made at and on such dates, except to the extent any such
representation or warranty relates to a date prior to the Closing Date and
except for changes permitted or contemplated by this Agreement.
Section 7.2 Performance. The Company shall have performed and complied
in all material respects with all agreements and obligations required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date.
Section 7.3 Certificates. The Company shall have furnished a
certificate of its Chief Executive Officer and Chief Financial Officer to
evidence compliance with the conditions set forth in Sections 7.1 and 7.2.
Section 7.4 Certain Proceedings. No writ, order, decree or injunction
of a court of competent jurisdiction or governmental entity shall have been
entered against the DOT, B&M or the Company that prohibits or restricts the
consummation of the Merger, limits or restricts the operation of the businesses
of the Company as they are currently conducted in a manner that would reasonably
be expected to result in a Material Adverse Effect, or would otherwise
materially restrict the Surviving Corporation's exercise of its rights to own
and vote its equity interest in the Company.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to effect the
Merger shall be subject to the fulfillment at or prior to the Closing of the
following additional conditions, any one or more of which may be waived by the
Company:
Section 8.1 Representations and Warranties True. The representations
and warranties of the DOT and B&M contained herein shall be true and correct in
all material respects on the date of this Agreement and at and on the Closing
Date as though such representations and warranties were made at and on such
dates, except to the extent any such representation or warranty relates to a
date prior to the Closing Date and except for changes permitted or contemplated
by this Agreement.
Section 8.2 Performance. Each of the DOT and B&M shall have performed
and complied in all material respects with all agreements and obligations
required by this Agreement to be performed or complied with by it on or prior to
the Closing Date.
Section 8.3 Certificates. Each of the DOT and B&M shall have furnished
a certificate of the Secretary of the DOT and B&M shall have furnished a
certificate of its Chief Executive Officer and Chief Financial Officer to
evidence compliance with the conditions set forth in Sections 8.1 and 8.2.
15
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Section 8.4 Certain Proceedings. No writ, order, decree or injunction
of a court of competent jurisdiction or governmental entity shall have been
entered against the DOT, B&M, or the Company that prohibits or restricts the
consummation of the Merger or imposes criminal or material civil penalties or
unreimbursed damages by any governmental entity, on the officers or directors of
the Company.
ARTICLE IX
CLOSING
Section 9.1 Time and Place. Subject to the provisions of Articles VI,
VII, VIII and X, the closing of the Merger and all related transactions
contemplated hereby (the "Closing") shall take place at the offices of Smith
Helms Mulliss & Moore, L.L.P., 2800 Two Hannover Square, Raleigh, North
Carolina, 27601, as soon as practicable after the day the Merger is adopted and
authorized by the shareholders of the Company pursuant to Section 1.4, and all
other conditions to the Closing are satisfied or waived, or on such other date
or at such other place as the DOT and the Company may mutually agree. The date
on which the Closing actually occurs is herein referred to as the "Closing
Date."
Section 9.2 Filings at the Closing. Subject to the provisions of
Articles VI, VII, VIII and X hereof, B&M and the Company shall file at the
Closing the Articles of Merger and shall cause the Articles of Merger to be
recorded in accordance with the applicable provisions of North Carolina
Corporate Law and shall take any and all other lawful actions and do any and all
other lawful things necessary to cause the Merger to become effective.
ARTICLE X
TERMINATION AND ABANDONMENT
Section 10.1 Termination. This Agreement may be terminated and
abandoned at any time prior to the Effective Time, whether before or after
approval by the shareholders of the Company:
(a) by mutual written consent of the DOT and the Company;
(b) by the DOT or the Company if, other than due to the
willful failure of the party seeking to terminate this Agreement to
perform its material obligations hereunder required to be performed at
or prior to the Effective Time, the Merger shall not have been
consummated on or before May 5, 1998 (the "Outside Date"), which date
may be extended by mutual consent of the parties hereto;
(c) by the DOT or the Company, if any court of competent
jurisdiction in the United States or other governmental body in the
United States shall have issued a final order, decree, or ruling or
taken any other action permanently restraining, enjoining or
16
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otherwise prohibiting the Merger, and such order, decree, ruling or
other action shall have become final and nonappealable; or
(d) by the DOT or the Company, if a vote of the shareholders
of the Company at the Shareholders' Meeting results in the rejection of
the adoption or authorization of this Agreement by the shareholders of
the Company or if the Company attempts to hold a Shareholders' meeting
but fails to obtain a quorum at such meeting.
Section 10.2 Procedure for Termination. In the event of termination and
abandonment of the Merger by the DOT or the Company pursuant to this Article X,
written notice thereof shall forthwith be given to the other.
Section 10.3 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article, no party hereto (or any of its directors or officers) shall have any
liability or further obligation to any other party to this Agreement.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Nonsurvival of Representations, Etc. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time or the termination of this Agreement pursuant to Article X, as the case may
be, except that the agreements contained in Section 1.7, Article II and Section
5.6 shall survive the Effective Time and the agreements contained in Sections
5.2(b), 10.3, 11.6, 11.8, 11.10, 11.11 and 11.12 shall survive any termination.
Section 11.2 Amendment and Modification. Subject to applicable law,
this Agreement may be amended, modified or supplemented only by written
agreement of the DOT, B&M and the Company at any time prior to the Effective
Time with respect to any of the terms contained herein; provided, however, that
after this Agreement is adopted by the shareholders of the Company pursuant to
Section 1.4, no such amendment or modification shall reduce the Merger
Consideration or change the kind of the Merger Consideration or rights to be
received in exchange for or on conversion of all or any of the Shares, or alter
or change any of the terms and conditions of the Agreement if such alteration or
change would adversely affect the holder of any stock of any of the Constituent
Corporations.
Section 11.3 Waiver of Compliance; Consents. Any failure of the DOT,
B&M or the Company to comply with any obligation, covenant, agreement or
condition herein may be waived by the Company, on the one hand, or the DOT, and
B&M, on the other hand, only by a written instrument signed by the party or
parties granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be
17
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given in writing in a manner consistent with the requirements for a waiver of
compliance as set forth in this Section 11.3.
Section 11.4 Investigations. The respective representations and
warranties of the DOT and the Company contained herein or in any certificates or
other documents delivered prior to or at the Closing shall not be deemed waived
or otherwise affected by any investigation made by any party hereto.
Section 11.5 Reasonable Efforts. Subject to the terms and conditions
herein provided and, in the case of the Company, subject to the fiduciary duties
of the Board of Directors to the shareholders of the Company, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
and advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement.
Section 11.6 Notices. All notices and other communications hereunder
shall be in writing and shall be delivered personally or mailed by registered or
certified mail (return receipt requested), first class postage prepaid, or
telecopied with confirmation of receipt, to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice; provided that notices of a change of address shall be effective
only upon receipt thereof). Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or three days after mailing, if deposited in
the U.S. mail, first class postage prepaid.
(a) if to the Company, to
North Carolina Railroad Company
3200 Atlantic Avenue, Suite 110
Raleigh, North Carolina 27604
Attention: Scott M. Saylor
with copies to
Kilpatrick Stockton LLP
4101 Lake Boone Trail, Suite 400
Raleigh, North Carolina 27607-6519
Attention: James F. Verdonik
Womble, Carlyle Sandridge & Rice PLLC
P. O. Drawer 84
Winston-Salem, NC 27102
Attention: Murray Greason
and
18
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Mr. P. C. Barwick
Chairman, Special Committee
Post Office Box 3557
131 S. Queen Street
Kinston, North Carolina 28501
(b) if to the DOT, or B&M to
Department of Transportation
P. O. Box 25201
Raleigh, North Carolina 27611-5201
Attention: David D. King
with a copy to
Smith Helms Mulliss & Moore, L.L.P.
214 North Church Street
Charlotte, North Carolina 28202
Attention: Larry J. Dagenhart
Section 11.7 Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
operation of law or otherwise by any of the parties hereto without the prior
written consent of the other parties (and any such assignment that is not so
consented to shall be null and void, ab initio).
Section 11.8 Governing Law. This Agreement shall be governed by the
laws of the State of North Carolina (regardless of the laws that might otherwise
govern under applicable North Carolina principles of conflicts of law) as to all
matters, including but not limited to matters of validity, construction, effect,
performance and remedies.
Section 11.9 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 11.10 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, such invalidity, illegality or unenforceability
shall only apply as to such party in the specific jurisdiction where such
judgment shall be made, and the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby, except that this Agreement shall not be reformed in any way
that will deny to any party the essential benefits of this Agreement, unless
such party waives in writing its rights to such benefits.
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Section 11.11 Parties in Interest. Nothing in this Agreement, express
or implied, other than the right to receive the consideration payable in the
Merger pursuant to Article II hereof, is intended to or shall confer upon any
other person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement.
Section 11.12 Interpretation. The article and section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the meaning
or interpretation of this Agreement.
Section 11.13 Entire Agreement. This Agreement embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and supersedes all prior agreements and understandings,
written and oral, among the parties with respect to such subject matter. There
are no representations, promises, warranties, covenants, or undertakings, other
than those expressly set forth or referred to herein and therein.
IN WITNESS WHEREOF, the DOT, B&M and the Company have caused this
Agreement to be signed by their respective duly authorized officers or
representatives as of the date first above written.
NORTH CAROLINA RAILROAD COMPANY
By: R. Samuel Hunt, III
--------------------------------
President
NORTH CAROLINA DEPARTMENT OF
TRANSPORTATION
By: Garland B. Garrett, Jr.
--------------------------------
Secretary of Transportation
BEAUFORT AND MOREHEAD RAILROAD
COMPANY
By: Garland B. Garrett, Jr.
--------------------------------
President
20
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Annex B
FORM OF CHARTER AMENDMENTS
(a) The following provisions shall not become effective until the
merger of Beaufort and Morehead Railroad Company with and into the
Corporation shall be consummated.
(b) There shall be added the following new provisions:
"The corporation is hereby authorized to issue up to ________
shares of Preferred Stock, par value [$0.01] per share (the "Preferred
Stock"). Such Preferred Stock shall constitute the only preferred stock
the corporation shall be authorized to issue and any provision in the
corporation's Charter which may provide otherwise shall be without
effect. Except as provided in this Charter, the Board of Directors of
the corporation shall have the power and authority to fix by resolution
or resolutions the designations, powers, preferences, terms and rights
and qualifications, limitations or restrictions of the Preferred Stock,
which may be divided into one or more classes or series having the same
or such different powers, preferences, terms and rights and
qualifications, limitations and restrictions as the Board of Directors
fixes by resolution or resolutions. The holders of Preferred Stock
shall have no voting rights, except as required by North Carolina law.
No director of the corporation shall have personal liability
arising out of an action whether by or in the right of the corporation
or otherwise for monetary damages for breach of any duty as a director;
provided, however, that the foregoing shall not limit or eliminate the
personal liability of a director with respect to (i) acts or omissions
that such director at the time of such breach knew or believed were
clearly in conflict with the best interests of the corporation, (ii)
any liability under Section 55-8-33 of the North Carolina General
Statutes or any successor provision, (iii) any transaction from which
such director derived an improper personal benefit, or (iv) acts or
omissions occurring prior to the date of the effectiveness of this
provision. As used in this provision, the term "improper personal
benefit" does not include a director's reasonable compensation or other
reasonable incidental benefit for or on account of his or her services
as a director, officer, employee, independent contractor, attorney, or
consultant of the corporation.
Furthermore, notwithstanding the foregoing provision, in the
event that Section 55-2-02 or any other provision of the North Carolina
General Statutes is amended or enacted to permit further limitation or
elimination of the personal liability of the directors, the personal
liability of the
1
<PAGE>
corporation's directors shall be limited or eliminated
to the fullest extent permitted by the applicable law.
The foregoing provisions shall not affect a provision
permitted under the North Carolina General Statutes in the Charter,
bylaws or contract or resolution of the corporation indemnifying or
agreeing to indemnify a director against personal liability nor shall
the foregoing provisions in any way affect, limit or modify any
immunity or privilege with respect to a director pursuant to North
Carolina law. Any repeal or modification of these provisions shall not
adversely affect any limitation hereunder on the personal liability of
the director with respect to acts or omissions occurring prior to such
repeal or modification.
To the fullest extent permitted by the law, the corporation
may indemnify its directors, officers, employees or agents against any
liability in any proceeding (including without limitation a proceeding
brought by or on behalf of the corporation itself) arising out of their
status as such or their activities in any of the foregoing capacities.
Further, to the fullest extent permitted by the law, the corporation
may indemnify any person who, at the request of the corporation, is or
was serving as a director, officer, partner, trustee, employee or agent
of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise or as a trustee or administrator under any
employee benefit plan. A person seeking indemnification pursuant to
this provision may recover from the corporation reasonable costs,
expenses and attorneys' fees in connection with the enforcement of his
rights to indemnification granted herein.
In discharging the duties of their respective positions, the
Board of Directors, committees of the Board and individual directors
and individual officers may (but are not required to), in considering
the best interests of the corporation, consider the effects of any
action upon the economic development of the State of North Carolina,
the transportation of goods and public transportation within the State
of North Carolina and the communities located therein, upon employees
and upon suppliers and customers of the corporation, and all other
pertinent factors. This provision shall not confer any rights upon any
person or give rise to any claim, action, cause of action, suit or
other proceeding, including without limitation, to require the Board of
Directors, the committees thereof and individual directors or
individual officers to consider such factors in considering the best
interests of the corporation or to hold them liable for not having
considered such factors in considering the best interests of the
corporation or to challenge the validity of an action or inaction by
the corporation.
2
<PAGE>
The Bylaws of the corporation, including without limitation,
any provision of the Bylaws adopted, amended or repealed by
shareholders of the corporation may be readopted, amended or repealed
by the Board of Directors by the affirmative vote of a majority of the
directors then in office."
(c) Section 3 of the Act of 1855, as amended on August 15, 1989 and
revised and restated on September 13, 1990, shall be revised and
restated as follows:
"The affairs of the corporation shall be managed and directed
by a Board of Directors, who shall be elected at the annual meeting of
shareholders by holders of the corporation's Common Stock. The number
of directors of the corporation shall be fixed by the Bylaws. A
director may be removed in such manner as prescribed in the Bylaws. Any
provision in the corporation's Charter or Bylaws contrary to this
provision shall be without effect."
(d) To the extent that any of the foregoing amendments conflict with
any provisions contained in the corporation's Charter prior to these
amendments, such earlier provisions of the Charter shall be superseded
by the foregoing amendments and shall be without effect.
FORM OF BYLAW AMENDMENTS
(a) The following provisions shall not become effective until
the merger of Beaufort and Morehead Railroad Company with and into the
Corporation shall be consummated.
(b) Article II. Section 7 shall be deleted in its entirety.
(c) Article III. Section 2 and Section 3 shall each be deleted
in their entirety and the following be substituted in lieu thereof:
"Section 2. Number, Term and Qualifications. The number of
Directors of the Corporation shall be between nine (9) and fifteen (15)
as fixed from time to time by the Board of Directors or shareholders.
Each Director shall hold office until his death, resignation,
retirement, removal, disqualification or his successor is elected and
qualifies. Directors need not be residents of the State of North
Carolina or shareholders of the Corporation.
Section. 3. Election of Directors. Except as provided in
Paragraph 5 of this Article III, Directors shall be elected at the
annual meeting of
3
<PAGE>
shareholders; and those persons who receive the
highest number of votes at a meeting at which a quorum is present shall
be deemed to have been elected. If any shareholder so demands, election
of Directors shall be by ballot."
(d) Article VIII. Section 5 shall be deleted in its entirety
and the following be substituted in lieu thereof:
"Section 5. Amendments.
(a) Except as otherwise provided herein or in the
North Carolina General Statutes, these Bylaws may be amended or
repealed and new Bylaws may be adopted by the affirmative vote of a
majority of the Directors then holding office at any regular or special
meeting of the Board of Directors or by affirmative vote of
shareholders entitled to exercise a majority of voting power of the
Corporation
(b) The Bylaws of the corporation, including without
limitation, any provision of the Bylaws adopted, amended or repealed by
shareholders of the corporation may be readopted, amended or repealed
by the Board of Directors by the affirmative vote of a majority of the
directors then in office."
4
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ANNEX C
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
October 3, 1997
Special Committee of the Board of Directors
North Carolina Railroad Company
3200 Atlantic Avenue
Raleigh, North Carolina 27604
Members of the Special Committee:
You have asked us to advise you with respect to the fairness to the holders of
the common stock of North Carolina Railroad Company ("NCRR"), other than the
North Carolina Department of Transportation (the "DOT") and its affiliates, from
a financial point of view of the consideration to be received by such holders
pursuant to the terms of the Agreement and Plan of Merger, dated as of October
3, 1997 (the "Merger Agreement"), by and between NCRR, the DOT and Beaufort and
Morehead Railroad Company, a wholly owned subsidiary of the DOT ("BMRC"). The
Merger Agreement provides for, among other things, the merger of BMRC with and
into NCRR (the "Merger") pursuant to which each outstanding share of the common
stock, par value $0.50 per share, of NCRR (the "NCRR Common Stock") will be
converted into the right to receive $66.00 in cash (the "Merger Consideration").
In arriving at our opinion, we have reviewed the Merger Agreement and certain
publicly available business and financial information relating to NCRR. We have
also reviewed certain other information relating to NCRR, including analyses of
Mercer Management Consulting ("Mercer"), an industry consultant. We have had
discussions with the management of NCRR and representatives of the State of
North Carolina to discuss the business and prospects of NCRR, and also have had
discussions with Mercer concerning its analyses and the railway industry
generally.
We have also considered certain financial and stock market data of NCRR and, to
the extent publicly available, the financial terms of certain other business
combinations and other transactions which have recently been effected. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
<PAGE>
The Special Committee of the Board of Directors
North Carolina Railroad Company
October 3, 1997
Page 2
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to
analyses prepared by Mercer, we have assumed that such analyses were reasonably
prepared reflecting the best currently available estimates and judgments of
Mercer and other third party sources on which Mercer relied. We have not been
requested to conduct, and have not conducted or made, an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of NCRR, nor
have we been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon information available to us, and financial, economic,
market and other conditions as they exist and can be evaluated, on the date
hereof. In connection with our engagement, we were requested to approach
selected third parties to solicit indications of interest in a possible
acquisition of NCRR, and held discussions with certain of these parties prior to
the date hereof.
We have acted as financial advisor to the Special Committee in connection with
the Merger and will receive a fee for our services. In the ordinary course of
business, Credit Suisse First Boston and its affiliates may actively trade the
debt and equity securities of NCRR for their own accounts and for the accounts
of customers and, accordingly, may at any time hold long or short positions in
such securities.
It is understood that this letter is for the information of the Special
Committee in connection with its evaluation of the Merger, does not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the Merger, and is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, or in any
other document used in connection with the offering or sale of securities, nor
shall this letter be used for any other purposes, without our prior written
consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Merger Consideration is fair to the holders of NCRR Common Stock
(other than the DOT and its affiliates) from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
<PAGE>
ANNEX D
ARTICLE 13.
DISSENTERS' RIGHTS.
Part 1. Right to Dissent and Obtain Payment for Shares.
SS. 55-13-01. DEFINITIONS.
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation
by merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when
and in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion
would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances, giving due consideration to the rate
currently paid by the corporation on its principal bank loans, if any,
but not less than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955,
c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c.
265, s. 1.)
SS. 55-13-02. RIGHT TO DISSENT.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation
(other than a parent corporation in a merger under G.S.
55-11-04) is a party unless (i) approval by the shareholders
of that corporation is not required under G.S. 55-11-03(g) or
(ii) such shares are then redeemable by the corporation at a
price not greater than the cash to be received in exchange for
such shares;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, unless such
<PAGE>
shares are then redeemable by the corporation at a price not
greater than the cash to be received in exchange for such
shares;
(3) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other
than as a permitted by G.S. 55-12-01, including a sale in
dissolution, but not including a sale pursuant to court order
or a sale pursuant to a plan by which all or substantially all
of the net proceeds of the sale will be distributed in cash to
the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a
dissenter's shares because it (i) alters or abolishes a
preferential right of the shares; (ii) creates, alters, or
abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or
repurchase, of the shares; (iii) alters or abolishes a
preemptive right of the holder of the shares to acquire shares
or other securities; (iv) excludes or limits the right of the
shares to vote on any matter, or to cumulate votes; (v)
reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to
be acquired for cash under G.S. 55-6-04; or (vi) changes the
corporation into a nonprofit corporation or cooperative
organization;
(5) Any corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain
payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in exchange
for cash or other property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation. (1925, c. 77, s.1; c. 235; 1929,
c. 269; 1939, c. 279; 1943, c.270; G.S., ss. 55-26, 55-167; 1955, c. 1371, s. 1;
1959, c. 1316, ss. 30, 31; 1969, c. 751, ss. 36, 39; 1973, c.469, ss. 36, 37; c.
476, s. 193; 1989, c. 265, s.1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.18;
1991, c. 645, s. 12.)
SS. 55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's
written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
<PAGE>
(2) He does so with respect to all shares of which he is the
beneficial shareholder. (1925, c. 77, s. 1; 1943, c. 270;
G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39;
1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
SS.SS. 55-13-04 THROUGH 55-13-19: Reserved for future codification purposes.
Part 2. Procedure for Exercise of Dissenters' Rights.
SS. 55-13-20. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenter's rights
under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02
is taken without a vote of shareholders, the corporation shall no later than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this
section, such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S.
55-13-02 unless he voted for such corporate action. (1925, c. 77, s. 1; c. 235;
1929, c. 269; 1939, c. 5; c. 279; 1943, c. 270, G.S., ss. 55-26, 55-165,
55-167,; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37;
1989, c. 265, s. 1)
SS. 55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must
actually receive, before the vote is taken written notice of
his intent to demand payment for his shares if the proposed
action is effectuated; and (2) Must not vote his shares in
favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for his shares under this Article. (1925, c. 77,
s. 1; 1943, c.270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39;
1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
SS. 55-13-22. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified
<PAGE>
mail, return receipt requested, a written dissenters' notice to all shareholders
who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken, and must:
(1) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment
demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than 30 nor more
than 60 days after the date the subsection (a) notice is
mailed; and
(5) Be accompanied by a copy of this Article. (1925, c. 77, s.
1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969,
c. 751, s. 39, 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
SS. 55-13-23. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22
must demand payment and deposit his share certificates in accordance with the
terms of the notice.
(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article. (1925, c. 77, s. 1;
1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973,
c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
SS. 55-13-24. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c.
751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s.
1.)
SS. 55-13-25. OFFER OF PAYMENT.
(a) As soon as the proposed corporate action is taken, or upon receipt
of a payment demand, the corporation shall offer to pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus
<PAGE>
interest accrued to the date of payment, and shall pay this amount to each
dissenter who agrees in writing to accept it in full satisfaction of his demand.
(b) The offer of payment must be accompanied by:
(1) The corporation's most recent available balance sheet as
of the end of a fiscal year ending not more than 16 months
before the date of offer of payment, an income statement for
that year, a statement of cash flows for that year, and the
latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair
value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment
under G.S. 55-13-28; and
(5) A copy of this Article. (1925, c. 77, s. 1; 1943, c. 270;
G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39;
1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; c. 770, s. 69.)
SS. 55-13-26. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
(1925, c. 77, s. 1; 1943; c. 270; G.S., s. 55-167, 1955, c. 1371, s. 1; 1969, c.
751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
SS. 55-13-27: Reserved for future codification purposes.
SS. 55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S OFFER
OR FAILURE TO PERFORM.
(a) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate or reject the corporation's offer under G.S. 55-13-25
and demand payment of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under G.S.
55-13-25 is less than the fair value of his shares or that the
interest due is incorrectly calculated;
(2) The corporation fails to make payment to a dissenter who
accepts the corporation's offer under G.S. 55-13-25 within 30
days after the dissenter's acceptance; or
(3) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release
the transfer restrictions imposed
<PAGE>
on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(1) within 30 days after the corporation offered payment for his
shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days after the
corporation has failed to perform timely. A dissenter who fails to notify the
corporation of his demand under subsection (a) within such 30-day period shall
be deemed to have withdrawn his dissent and demand for payment. (1925, c. 77, s.
1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39;
1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
SS. 55-13-29: Reserved for future codification purposes.
Part 3. Judicial Appraisal of Shares.
SS. 55-13-30. COURT ACTION.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the date of his payment
demand under G.S. 55-13-28 and petition the court to determine the fair value of
the shares and accrued interest. Upon service upon it of the petition filed with
the court, the corporation shall pay the dissenter the amount offered by the
corporation under G.S. 55-13-25.
(a1) If the dissenter does not commence the proceeding within the
60-day period, the dissenter shall have an additional 30 days to either (i)
accept in writing the amount offered by the corporation under G.S. 5-13-25, upon
which the corporation shall pay such amount to the dissenter in full
satisfaction of his demand, or (ii) withdraw his demand for payment and resume
the status of a nondissenting shareholder. A dissenter who takes no action
within such 30-day period shall be deemed to have withdrawn his dissent and
demand for payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether
or not residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The parties are entitled to the same discovery
rights as parties in other civil proceedings. However, in a proceeding by a
dissenter in a public corporation, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation. (1925, c. 77,
s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39;
1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)
<PAGE>
SS. 55-13-31. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall assess
the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not
substantially comply with the requirements of G.S. 55-13-20
through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of
either or any other party, if the court finds that the party
against whom the fees and expenses are assessed acted
arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited. (1925, c. 77, s. 1; 1943, c. 270;
G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36,
37; 1989, c. 265, s. 1.)
<PAGE>
ANNEX E
NORTH CAROLINA RAILROAD ACQUISITION
Section 32.30. (a) In order to help promote trade, industry, and
transportation within the State of North Carolina and to advance the economic
interests of the State and its citizens, the General Assembly finds it
advantageous for the State to acquire the outstanding shares of the North
Carolina Railroad Company not held by the State.
(b) The sum of sixty-one million dollars ($61,000,000) of the
unreserved General Fund balance as of June 30, 1997, is placed in a Railroad
Reserve Account.
(c) Notwithstanding G.S. 147-69.1, if a majority of the outstanding
shares held by shareholders other than the State are represented in person or by
proxy at a North Carolina Railroad Company shareholder meeting where a plan for
merger between the Beaufort and Morehead Railroad Company and the North Carolina
Railroad Company is approved, then the State Treasurer shall invest on a
one-time basis up to sixty-one million dollars ($61,000,000) from the reserve
account created in subsection (b) of this section in obligations of the Beaufort
and Morehead Railroad Company or any successor company. This investment shall be
an interest-bearing demand note and shall be in a form prescribed by the State
Treasurer. The loan is not subject to repayment of principal or interest prior
to action of the 1999 Session of the General Assembly. The Director of the
Budget shall recommend to the 1999 Session of the General Assembly, by February
1, 1999, a plan for the repayment of the loan.
(d) Section 54 of Chapter 82 of the Laws of 1848-49, as added by
Chapter 1046 of the 1951 Session Laws, reads as rewritten:
"No stock owned by the State of North Carolina in the North Carolina
Railroad Company shall be sold or transferred except with the prior consent of
the General Assembly, except as part of a transaction or series of transactions
relating to a plan of merger or consolidation of that company with another
company, and where the State will be the owner of all of the voting stock in the
merged or consolidated corporation."
(e) In accordance with subsection (d) of this section, the State
Treasurer, as part of the plan of merger and consolidation, shall transfer the
stock owned by the State of North Carolina in the North Carolina Railroad
Company to the Beaufort and Morehead Railroad Company.
(f) G.S. 136-16.6(c) reads as rewritten:
"(c) There is annually appropriated to the Department of Transportation
for railroad purposes, including capital contributions to the Beaufort and
Morehead Railroad Company or any successor company, one hundred percent (100%)
of the funds credited to the Highway Fund pursuant to subsection (a) of this
section."
(g) Subsection (f) of this section also applies to funds previously
appropriated under G.S. 136-16.6(c).
(h) No monies appropriated for highway construction or maintenance from
the Highway Fund, the Highway Trust Fund, or transferred to the Highway Fund
under G.S. 136-176(c), may be used by the State of North Carolina or any of its
political subdivisions to acquire stock in the North Carolina Railroad Company
or make a capital contribution or loan to either that company or the Beaufort
and Morehead Railroad Company.
(I) Investments by the State in the Beaufort and Morehead Railroad
Company or any successor company shall be recorded in the General Fund, and such
evidence of ownership shall be held by the State Treasurer.
<PAGE>
(j) Effective July 1, 1999, G.S. 147-12(7) is repealed.
(k) Effective July 1, 1999, G.S. 124-6 reads as rewritten:
"SS. 124-6. APPOINTMENT OF PROXIES, DIRECTOR OF RAILROAD COMPANIES, ETC.
(a) The Governor shall appoint on behalf of the State all such officers
or agents as, by any act, incorporating a company for the purpose of internal
improvement, are allowed to represent the stock or other interests which the
State may have in such company; and such person or persons shall cast the vote
to which the State may be entitled in all the meetings of the stockholders of
such company under the direction of said Governor; and the said Governor may, if
in his opinion the public interest so requires, remove or suspend such persons,
officers, agents, proxies, or directors in his discretion.
(b) Notwithstanding subsection (a) of this section, for any railroad
company organized as a corporation in which the State is the owner of all the
voting stock and which has trackage in more than two counties, five of the
members of the Board of Directors shall be appointed by the Governor, two of the
members of the Board of Directors shall be appointed by the General Assembly
upon the recommendation of the Speaker of the House of Representatives in
accordance with G.S. 120-121, and two of the members of the Board of Directors
shall be appointed by the General Assembly upon the recommendation of the
President Pro Tempore of the Senate in accordance with G.S. 120-121. Of the
Governor's five appointments, three shall be either an investment banker, a
person with railroad management experience, a person on an economic development
commission whose region contains track of the company, or an attorney with
corporate experience. The remaining two shall be at-large members. The Speaker
of the House of Representatives shall recommend two at-large members. The
President Pro Tempore of the Senate shall recommend two at-large members. The
Board of Directors shall consist of nine members. Of the initial members
appointed by the Governor, three shall be appointed for terms of four years and
two shall be appointed for terms of two years. Of the initial members
recommended to the General Assembly by the Speaker of the House of
Representatives, one shall be appointed for a term of four years and one shall
be appointed for a term of two years. Of the initial members recommended to the
General Assembly by the President Pro Tempore of the Senate, one shall be
appointed for a term of four years and one shall be appointed for a term of two
years. Thereafter all Board members shall serve four-year terms. The Board shall
elect the chairman from among its membership."
(l) Any railroad company covered by G.S. 124-6(b) shall present to the
Joint Legislative Transportation Oversight Committee, by November 20, 1998, a
business plan for the railroad including, but not limited to:
(1) A mission statement with goals and objectives;
(2) Areas and types of services to be provided;
(3) Pro forma financial statements that cover a five-year period
beginning January 1, 1999; and
(4) Alternative forms of organization.
(m) Upon ownership of all voting stock in the North Carolina Railroad
Company by the State of North Carolina, and upon the request of the
Board of Directors of the North Carolina Railroad Company, the Public
Officers and Employees Liability Insurance Commission shall effect and
place coverage for the officers, directors, and employees of the North
Carolina Railroad under G.S. 58-32-15. The North Carolina
<PAGE>
Railroad Company shall pay the premiums for this insurance at rates established
by the Commission, and shall make any other payments required by G.S. 143-300.6.
Coverage of the officers, directors, and employees of the North Carolina
Railroad Company under this subsection shall not be construed as defining the
North Carolina Railroad Company as a public body or as defining its officers,
directors, or employees as public officials or employees for any other purpose.
<PAGE>
ANNEX F
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Proxy Statement of North Carolina Railroad Company and to the incorporation
by reference therein of our report dated March 7, 1997, with respect to the
financial statements of North Carolina Railroad Company included in its
Annual Report (Form 10-K) for the year ended December 31, 1996, filed with
the Securities and Exchange Commission.
ERNST & YOUNG LLP
November 21, 1997
Raleigh, North Carolina
