- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
AMENDMENT NO. 3
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 E. Norris Tolson
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
- --------------------------------------------------------------------------------
(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
Statement File No. 0-15768
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 and Amended and
Restated as of January , 1998, 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 3,210,208 shares of Common
Stock of the Company, representing approximately 74.94% 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 ("B&M"), a North
Carolina corporation which is wholly owned by the DOT.
(a)-(d),(g)..................................... The DOT is an agency of the State of North Carolina.
Mr. E. Norris Tolson serves as Secretary of
the DOT and Mr. David D. King serves as Deputy
Secretary, Transit, Rail and Aviation of the DOT.
Mr. Tolson and Mr. King serve as President and
Treasurer, respectively, of the B & M and are its
only officers. They also serve as Directors of the
B & M along with Mr. Grayson G. Kelley, Esq., who
is Special Deputy Attorney General at the North
Carolina Department of Justice. The business address
of each of these individuals is One South Wilmington
Street, Raleigh, North Carolina 27611.
"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)......................................... None
(a)(2),(b)..................................... "SPECIAL FACTORS--Background of the Merger;--The
Merger; and--Summary of Special Committee Proceedings
and Negotiations." Sections of the Proxy Statement
are incorporated herein by this reference.
4. TERMS OF THE
TRANSACTION.
(a).............................................. "SPECIAL FACTORS--THE MERGER--The Merger Consideration
and Recommendations and Reasons; - Method of Delivery
of Merger Consideration; - Regulatory Approval; -
other conditions to the Merger; Provisions for
Termination; Effective Date; - Certain Federal
Income Tax Considerations; and - Directors and
Officers of NCRR upon Consummation of the Merger"
A-- Agreement and Plan of Merger" sections of the
Proxy Statement are incorporated herein by this
reference.
(b).............................................. "SPECIAL FACTORS--THE MERGER--The Merger Consideration
and Recommendations and Reasons" 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).............................................. "SPECIAL FACTORS--VALUE TO STATE OF NORTH CAROLINA,
PLANS OR PROPOSALS OF THE STATE" section of the Proxy
Statement is incorporated herein by this reference.
(b).............................................. None.
(c),(d),(e).................................... "SPECIAL FACTORS--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)......................................... "SPECIAL FACTORS--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", "SPECIAL
FACTORS--THE MERGER--Source and Amount of Funds" and
"ANNEX E-Legislation Authorizing" North Carolina
Railroad Acquisition" sections of the Proxy Statement
are incorporated herein by this reference.
(b).............................................. "SPECIAL FACTORS--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"; "SPECIAL
FACTORS--Background of the Merger; "SPECIAL
FACTORS--THE MERGER- Background of the Merger" and
"SPECIAL FACTORS- MATERIAL 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).............................................. "SPECIAL FACTORS--THE MERGER--Certain Federal
Income Tax Considerations" and "SPECIAL FACTORS
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)......................................... "SPECIAL FACTORS--THE MERGER--The Merger
Consideration and Recommendations and Reasons";
"SPECIAL FACTORS--SUMMARY OF SPECIAL COMMITTEE
PROCEEDINGS AND NEGOTIATIONS", "SPECIAL
FACTORS--MATERIAL REASONS FOR APPROVAL OF THE
MERGER AGREEMENT" and "SPECIAL FACTORS--Fairness of
the Merger." sections of the Proxy Statement are
incorporated herein by this reference.
(c).............................................. "SPECIAL FACTORS--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 "SPECIAL FACTORS--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).......................................... "SPECIAL FACTORS--OPINION OF THE SPECIAL COMMITTEE'S
FINANCIAL ADVISOR" and "SPECIAL FACTORS--SUMMARY
OF SPECIAL COMMITTEE 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.............................. "SPECIAL FACTORS--THE MERGER--The NCRR Capital
Stock;--The Merger Consideration and Recommendations
and Reasons", "THE CHARTER AMENDMENTS AND THE BYLAW
AMENDMENTS", "CERTAIN INFORMATION ABOUT 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)......................................... "SPECIAL FACTORS--THE MERGER--The Merger
Consideration and Recommendations and Reasons";
"SPECIAL FACTORS--MATERIAL 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 "SPECIAL
FACTORS--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.*
Exhibit (b)(3) Special Committee Presentation
of Credit Suisse First Boston Corporation
dated April 7, 1997.
Exhibit (b)(4) Special Committee Presentation
of Credit Suisse First Boston Corporation
dated January 30, 1997.
Exhibit (b)(5) August 12, 1994 Mercer Management
Consulting Letter to NCRR ("Mercer STB Analysis"
I).
Exhibit (b)(6) July 28, 1995 Mercer Management
Consulting Letter to NCRR ("Mercer STB Analysis"
II).
Exhibit (b)(7) North Carolina Railroad Company
Discussion Notes, dated January 14, 1997, prepared
by Mercer Management Consulting ("Mercer Report").
Exhibit (b)(8) March 3, 1992 Report of the Governor's
Special North Carolina Railroad Study Group.
Exhibit (b)(9) November 18, 1996 Corporate Strategies,
Inc. report on Strategic Rail Freight Value of the
North Carolina Railroad.
(c).............................................. Exhibit (c)(1) Agreement and Plan of Merger dated
October 3, 1997 and Amended and Restated as of
January 16, 1998, 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 March 31, 1998.
(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.
*Previously filed
</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.
February 20, 1998 NORTH CAROLINA RAILROAD COMPANY
By: /s/ J. Bradley Wilson
____________________________
Name: J. Bradley Wilson
Title: Secretary
February 20, 1998 NORTH CAROLINA DEPARTMENT OF
TRANSPORTATION
By: /s/ David D. King
____________________________
Name: David D. King
Title: Deputy Secretary,
Transit, Rail and Aviation
February 20, 1998 BEAUFORT AND MOREHEAD RAILROAD
COMPANY
By: /s/ David D. King
____________________________
Name: David D. King
Title: Treasurer
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.*
Exhibit (b)(3) Special Committee Presentation
of Credit Suisse First Boston Corporation
dated April 7, 1997.
Exhibit (b)(4) Special Committee Presentation
of Credit Suisse First Boston Corporation
dated January 30, 1997.
Exhibit (b)(5) August 12, 1994 Mercer Management
Consulting Letter to NCRR ("Mercer STB Analysis"
I).
Exhibit (b)(6) July 28, 1995 Mercer Management
Consulting Letter to NCRR ("Mercer STB Analysis"
II).
Exhibit (b)(7) North Carolina Railroad Company
Discussion Notes, dated January 14, 1997, prepared
by Mercer Management Consulting ("Mercer Report").
Exhibit (b)(8) March 3, 1992 Report of the Governor's
Special North Carolina Railroad Study Group.
Exhibit (b)(9) November 18, 1996 Corporate Strategies,
Inc. report on Strategic Rail Freight Value of the
North Carolina Railroad.
(c).............................................. Exhibit (c)(1) Agreement and Plan of Merger dated
October 3, 1997, and Amended and Restated as of
January 16, 1998 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 March 31, 1998.
(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.
*Previously filed
</TABLE>
10
<PAGE>
SCHEDULE 14A INFORMATION
------------------------
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
North Carolina Railroad Company
------------------------------------------------
(Name of Registrant as Specified in its Charter)
-------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, 0.50 par value
----------------------------
(2) Aggregate number of securities to which transaction applies:
1,073,262 shares of Common Stock
--------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): $66.00
-----
(4) Proposed maximum aggregate value of transaction: $70,835,292
----------
CALCULATION OF FILING FEE
- -------------------------------------------------------------------------------
Transaction value (*) Amount of filing fee (**)
$70,835,292 14,153.86
- -------------------------------------------------------------------------------
(*) Based on 1,073,262 shares of Common Stock to be converted into the right
to receive $66.00 in cash.
(**) The amount of the filing fee, calculated in accordance with Rule 0-11 of
the Exchange Act, equals 1/50th of one percent of the transaction value.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $14,153.86
2) Form, Schedule, or Registration Statement No.: Schedule 14A
3) Filing Party: North Carolina Railroad Company
4) Date Filed: November 25, 1997 ($14,153.86)
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
--------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
--------------------------
February 27, 1998
Notice is hereby given that a Special Meeting of Shareholders of North
Carolina Railroad Company ("NCRR") will be held at the North Raleigh Hilton
Hotel, 3415 Wake Forest Road, Raleigh, North Carolina, 27609 on March 31, 1998,
at 10:00 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 and Amended and Restated as of January 16,
1998 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 February 19, 1998 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,
J. Bradley Wilson
Secretary
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DESCRIPTION PAGE NO.
Introduction.............................................................................................1
Summary..................................................................................................3
General ................................................................................................7
Special Factors..........................................................................................9
Shareholder Vote and Quorum Requirements........................................................9
Background of the Merger.......................................................................10
The Merger.....................................................................................11
Summary of Special Committee Proceedings and Negotiations......................................16
Material Reasons for Approval of the Merger Agreement..........................................21
Fairness of the Merger.........................................................................24
Opinion of the Special Committee's Financial Advisor...........................................25
Alternatives to Merger Agreement...............................................................28
Alternative Lease Extension Agreement.................................................28
Abandonment of Norfolk Southern's Operations Over NCRR's Lines........................30
Operation Without Any Lessee..........................................................30
Litigation Against Norfolk Southern...................................................32
Other Purchasers And Lessees For All or Part of Line..................................36
Appraisals and Valuations......................................................................36
Value to State of North Carolina; Plans or Proposals of the State..............................38
Certain Conflicts of Interest and Litigation...................................................39
The Charter Amendments and the Bylaw Amendments....................................................42
Dissenting Shareholders' Rights of Appraisal............................................................44
Certain Information About NCRR..........................................................................46
Current Directors and Executive Officers................................................................49
Security Ownership of Certain Beneficial Owners and Management..........................................50
Available Information...................................................................................53
Incorporation of Certain Information by Reference.......................................................53
Accountants.............................................................................................54
Other Business..........................................................................................54
Annex A - Amended and Restated 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.................................................................
</TABLE>
<PAGE>
North Carolina Railroad Company
3200 Atlantic Avenue
Suite 110
Raleigh, North Carolina 27604
(919) 954-7601
PROXY STATEMENT
February 27, 1998
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 and Amended and
Restated as of January 16, 1998 (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. The aggregate Merger Consideration payable to holders of NCRR
Common Stock is approximately $70,835,000. 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. As of January 9, 1998
the bid price of a share of NCRR Common Stock was $62.75.
On January 16, 1998, the Merger Agreement was Amended and Restated
to provide that if there are any shares of B&M Preferred Stock outstanding at
the effective time of the Merger, such shares would be exchanged for equivalent
shares of Preferred Stock of NCRR. While there are currently no shares of
B&M Preferred Stock outstanding, the DOT anticipates that it will take steps
necessary for a limited number of such shares to be issued shortly before
consummation of the Merger for the purpose of allowing NCRR to continue to
qualify as a Real Estate Investment Trust. See "The Charter Amendments and
Bylaws."
As of January 9, 1998, the State owned approximately 74.94% of the
outstanding shares of NCRR Common Stock. After consummation of the Merger, NCRR
will continue to operate with the State as the sole owner of Common Stock and
other current owners of NCRR Common Stock will no longer have any interest in
NCRR and will not share in the future earnings and growth of NCRR.
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
<PAGE>
Department of Transportation (the "STB"). See "SPECIAL
FACTORS--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.
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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 or $2.21 per share. 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 January 9, 1998. NCRR's principal office is located at 3200
Atlantic Avenue, Suite 110, Raleigh, North Carolina 27604-1640.
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 B&M is a railroad trestle across the
Newport River in Carteret County, North Carolina and adjoining right of way. The
principal office of 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 holder 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
March 31, 1998 at 10:00 A.M., at the North Raleigh Hilton Hotel, 3415 Wake
Forest Road, Raleigh, North Carolina 27609
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(the "Special Meeting"). The purpose of the Special Meeting is to vote on the
approval of the Merger Agreement.
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 "SPECIAL
FACTORS--VALUE TO STATE OF NORTH CAROLINA; PLANS OR PROPOSALS OF THE STATE") and
owned as of January 9, 1998 approximately 74.94% of the outstanding shares of
NCRR Common Stock. Accordingly, the State is an interested party to this Merger
and the State has a conflict of interest with other shareholders. 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 "SPECIAL
FACTORS--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 the Minority Shareholders. Accordingly, the
NCRR Board has unanimously adopted the Merger Agreement and approved the Merger
and unanimously recommends that the Minority Shareholders vote in favor of
approval of the Merger Agreement at the Special Meeting. See "SPECIAL
FACTORS--THE MERGER -- Certain Conflicts of Interest." In the event the Merger
is not consummated the Board of Directors will consider the alternatives to the
Merger already considered by the Board and will evaluate whether other new
alternatives have arisen. See "SPECIAL FACTORS--ALTERNATIVES TO MERGER
AGREEMENT."
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 "SPECIAL FACTORS--MAJOR
REASONS FOR APPROVAL OF THE MERGER AGREEMENT - Opinion of the Special
Committee's Financial Advisor."
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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 "SPECIAL
FACTORS--SHAREHOLDER VOTE AND QUORUM REQUIREMENTS." During its corporate
history, this ownership and voting arrangement has from time to time posed
difficulties to NCRR as it has been perceived that the State and the other
holders of NCRR Common Stock had differing economic and other interests in how
NCRR should operate and Minority Shareholders have filed legal actions based in
part on allegations of such conflicts of interest. See "SPECIAL FACTORS--CERTAIN
CONFLICTS OF INTEREST AND LITIGATION". Allegations of conflict of interest
surfaced most recently, when certain long-term leases expired in 1994, and NCRR
was faced with a number of alternatives, including extending these leases,
operating the line as an independent operator, sale or lease of the line to one
or more third parties and litigation against Norfolk Southern. See "SPECIAL
FACTORS--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, 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
"SPECIAL FACTORS--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 February 19, 1998, the record date for the Special Meeting, the
State owned 3,210,208 shares, or approximately 74.94% 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
19,095 shares or approximately .45% 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
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<PAGE>
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 (iv) 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. There is no provision in the Merger
Agreement allowing either party to terminate the Merger Agreement in the event a
third party were to make a competing offer (a "fiduciary out provision") or a
provision calling for break-up fees should a third party's competing bid prevent
the Merger from being consummated. The State opposed such provisions. The NCRR
Board determined that given the State's 74.94% ownership interest and the long
period of time in which other bidders were sought without success it was
extremely unlikely that a competing bidder would arise. Accordingly, the NCRR
Board concluded it is in the interest of all shareholders to execute and deliver
the Merger Agreement notwithstanding the lack of a fiduciary out provision.
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. federal income tax purposes and
may also be a taxable transaction under other applicable state, local, foreign
or other tax laws. See "SPECIAL FACTORS--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. Based on the advice of their respective STB legal
counsel Steptoe & Johnson LLP for NCRR and Hogan & Hartson L.L.P. for B&M, 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
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STB require further review, NCRR and B&M intend to seek such review to obtain
STB approval. See "SPECIAL FACTORS--THE MERGER - Regulatory Approval."
Litigation. In September 1996, a lawsuit was filed in Wake County,
North Carolina alleging, among other things, that the NCRR Board breached its
fiduciary duty to the shareholders in the formation of the Special Committee. In
June 1997, the court dismissed this action. In July 1997 the plaintiffs appealed
that ruling. No ruling or decision has been issued with respect to this appeal.
See "SPECIAL FACTORS--CERTAIN CONFLICTS OF INTEREST AND LITIGATION"
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 "SPECIAL FACTORS--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.
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 on March 31, 1998 at 10:00 A.M., at the North
Raleigh Hilton Hotel, 3415 Wake Forest Road, Raleigh, North Carolina 27609 and
at any subsequent time as may be made necessary by its adjournment. If the
meeting is adjourned to a subsequent time proxies may continue to be solicited
until the time of the reconvened meeting date. The Proxy Statement and form of
proxy were first sent to shareholders on or about February 27, 1998.
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. As to any executed proxy
that specifies a vote against the Merger, the shares represented thereby will
not be voted in favor of an adjournment of the meeting to allow additional time
to solicit additional proxies.
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.
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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 February 19, 1998
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 3,210,208 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 1,073,262 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 January 9, 1998, directors and officers of the NCRR
beneficially owned 19,095 shares of NCRR Common Stock, or approximately .45% 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. All other shares owned by officers and directors will
not be deemed to be owned by the State for purposes of quorum and voting
requirements at the Special Meeting. While the members of the NCRR Board
unanimously approved the Merger Agreement and unanimously recommend approval of
the Merger Agreement by the shareholders of NCRR, no members have formally
indicated their intentions with respect to voting their respective shares at the
Special Meeting. See "SPECIAL FACTORS--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 "SPECIAL FACTORS--SHAREHOLDER VOTE AND
QUORUM REQUIREMENTS."
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SPECIAL FACTORS
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, Kilpatrick Stockton
LLP, 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. Any NCRR shareholder could challenge this provision. 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 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.
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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 Shareholders 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 "SPECIAL
FACTORS--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.
A Minority Shareholder's affirmative vote for the Merger Agreement
could and/or would later be used as evidence against him or her under an
estoppel or similar legal theory if such Minority Shareholder were to challenge
the fairness or the fiduciary aspects of the Merger in any future litigation
against NCRR. This evidence may or may not legally preclude such a challenge to
the Merger, depending upon the information available to the Minority
Shareholders at the time of his or her vote.
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 for corporate governance
procedures to allow shared decisionmaking by the State and the Minority
Shareholders. See "SPECIAL FACTORS--SHAREHOLDER VOTE AND QUORUM REQUIREMENTS."
During much of its corporate history, NCRR's principal business was being a
passive lessor of the line under exclusive leases with Norfolk Southern and its
predecessors. As a result, there were few, if any, strategic business decisions
to be made and, therefore, little opportunity for any differences between the
Minority Shareholders and the State to present themselves.
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The long-term leases expired at the end of 1994. As the expiration
dates approached, it became apparent that for the first time in over 100 years,
the line would not necessarily be utilized for the exclusive use of Norfolk
Southern. The State determined that it might desire to utilize the assets of
NCRR for purposes of economic development in a manner which would be beneficial
to the State and its citizens overall when considering the benefits of passenger
traffic, job growth, tax revenue and the like, which interests could conflict
with or might be perceived to conflict with the interests of the NCRR
shareholders. The NCRR Board, however, determined the best interests of NCRR's
shareholders would be served by maximizing shareholder values by maximizing
distributable after-tax income to the shareholders and minimizing the risks
that (i) income would be disrupted and (ii) the value of the assets of NCRR
would be impaired.
In March, 1992, at the request of the Governor of the State, the
Council of State created a special advisory group (the "Study Group") to study
the advisability and feasibility of acquiring all of the capital stock of NCRR.
Later in 1992, the Study Group concluded that it was both advisable and feasible
for the State to acquire the NCRR Common Stock owned by the Minority
Shareholders. However, the State did not make an offer or proposal to acquire
NCRR at that time, and a new governor of the State was elected in November,
1992. For more information regarding the Study Group and the perceived value of
NCRR to the State, see "SPECIAL FACTORS--VALUE TO STATE OF NORTH CAROLINA, PLANS
OR PROPOSALS OF THE STATE."
NCRR negotiated an agreement to extend the long-term leases and the
State supported approval of this agreement by the NCRR 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 was held
not to be valid. Shortly, thereafter, the State announced its intention to
consider entering into negotiations to acquire all of the outstanding shares of
NCRR Common Stock not already owned by the State. The negotiations which
proceeded are described under "SPECIAL FACTORS--SUMMARY OF SPECIAL COMMITTEE
PROCEEDINGS AND NEGOTIATIONS".
THE MERGER
The following summary of material 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.
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 1,000 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.
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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 NCRR's line prior to the Effective
Date of the Merger. On December 19, 1997 NCRR received approximately $3,990,000
(approximately $.93 per share on a pretax basis and $.57 per share on an
after-tax basis (if the proceeds of the sale are not reinvested in qualifying
property)) pursuant to an agreement for sale of property in Charlotte, North
Carolina which was entered into during the first quarter of 1997. See "SPECIAL
FACTORS--ALTERNATIVES TO MERGER AGREEMENT - Litigation Against Norfolk Southern"
and "SPECIAL FACTORS--ALTERNATIVES TO MERGER AGREEMENT - Charlotte Convention
Center Litigation." If the Merger is approved by the shareholders of NCRR,
the Minority Shareholders who do not exercise their dissenters' right to an
appraisal will not participate in any proceeds resulting from such claims
against NSR and AECR or any economic benefit from such sale of property.
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 "SPECIAL FACTORS--THE MERGER
- - Dissenting Shareholders' Rights of Appraisal" and "SPECIAL FACTORS--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 "SPECIAL FACTORS--SUMMARY OF SPECIAL COMMITTEE PROCEEDINGS AND
NEGOTIATIONS."
Source and Amount of Funds
The total Merger Consideration is estimated to be approximately
$70,835,000. 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
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borrowed by B&M from the State pursuant to legislation (the "Merger Related
Legislation") adopted by the State legislature. The $61 million loan to B&M will
be evidenced by an interest-bearing demand note in form prescribed by the State
Treasurer. Pursuant to the Merger Related Legislation, the loan is not subject
to repayment of principal or interest prior to action of the 1999 Session of the
North Carolina General Assembly. The Director of Budget is required to recommend
to the 1999 Session of the General Assembly, by February 1, 1999, a plan for the
repayment of the loan.
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 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
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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 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.
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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 "SPECIAL FACTORS--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 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;
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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 $7,077, legal fees
$100,000, accounting fees $7,000, proxy solicitation fees $12,500, printing and
mailing costs $17,500, and investment banking fees $550,000. The estimated
expenses of the DOT and B&M are as follows: filing fees $7,077, legal fees
$100,000, proxy solicitation fees $12,500, printing and mailing costs $17,500
and investment banking fees $250,000.
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 original
members of the Special Committee were Messrs. Melville Broughton, Jr., P.C.
Barwick, Sidney French, Alexander Graham and Chauncey Lever. Mr. Graham resigned
during the process and Mr. Lever declined to stand for reelection in 1996 (both
for reasons of age and health) and were replaced by Messrs. John Graham and
Porter Thompson. Melville Broughton died shortly after participating in the
Special Committee's decision to recommend a transaction involving receipt by the
Minority Shareholders of $66 per share for their NCRR Common Stock and was not
replaced. 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. Members of the Special Committee
were paid $600 per meeting and collectively have received a total of $21,400 in
director's fees. After the consummation of the Merger, the members of the
Special Committee will continue as members of the NCRR Board for the remainder
of their terms or as replaced, as provided by law and the bylaws of NCRR.
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, Kilpatrick Stockton LLP ("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 heard a report from representatives of CSFB about
preliminary conversations that they had had with representatives of the State's
consultant, NationsBanc Capital Markets, Inc. ("NationsBanc"), about the value
of the NCRR Common Stock, 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
("JP"), a large Minority Shareholder, attended the meeting and expressed JP's
desire to be bought out entirely for cash rather than for stock as suggested by
Jim Rucker representing his father, Walker Rucker, another Minority Shareholder.
Mr.
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Rucker, who stated that he spoke on behalf of an organization known as
"P.R.E.F.E.R.S." (an acronym for Protect Rights Equally for Every Railroad
Shareholder), made a presentation espousing a high value (up to $75 per share)
for the NCRR Common Stock owned by the Minority Shareholders and concluding with
the suggestion that a one-for-one "tax-free" exchange for a preferred stock of
NCRR paying a dividend of $5.00 per year and callable at $65.00 per share would
be fair. At the January 10, 1997 meeting, a Special Committee member reported on
a meeting with CSX Transportation Inc. ("CSX") attended by the member and
several representatives of each of NCRR and CSX at which the CSX representatives
expressed little interest in NCRR or a lease of any material portion of its
assets and stated that any proposal which CSX might make would be substantially
less than that of Norfolk Southern. The January 10, 1997 Special Committee
meeting was attended by Minority Shareholder Walker Rucker and his daughter. Mr.
Rucker reiterated his support for the preferred stock exchange espoused by his
son Jim Rucker at the Special Committee's December 17, 1996 meeting. A
representative of Craven County, North Carolina, a Minority Shareholder of NCRR,
attended and advised the Special Committee that Craven County was not interested
in a stock exchange and wanted to receive $40 to $65 per share in cash. 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.
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 Committee's legal and financial advisors. At the inception of the price
negotiations, representatives of the State suggested a price or range of prices
$40 per share (or possibly "low to mid 40s") which was only marginally above the
then quoted bid and asked prices for shares of NCRR Common Stock on the open
market at that time, 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
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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 on December 19, 1997 NCRR
received approximately $3,990,000 (approximately $.93 per share on a pre-tax
basis and $.57 per share on a after-tax basis (if the proceeds of the sale are
not reinvested in qualifying property)) from the sale of real property. 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 and that the $66 per
share offer was intended to be the complete consideration to be received by the
Minority Shareholders for their interests in NCRR, and any upward adjustment
would constitute a change to the Merger Consideration thereby potentially
jeopardizing the legislative support of the Merger. Thus, 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 "SPECIAL
FACTORS--THE MERGER - Dissenting Shareholders' Rights of Appraisal," "SPECIAL
FACTORS--THE MERGER - The Merger Consideration and Recommendations and Reasons,"
"SPECIAL FACTORS--ALTERNATIVES TO MERGER AGREEMENT - Litigation Against Norfolk
Southern" and "SPECIAL FACTORS--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. The material factors
discussed and considered 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 "SPECIAL
FACTORS--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
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the State would require the approval of the State Legislature.
(bullet) STB Litigation Uncertainty. Based on extensive discussions with
NCRR's General Counsel, Scott M. Saylor, Esq., and Outside
Counsel, Kilpatrick Stockton LLP, as well as NCRR's special
regulatory counsel, Steptoe & Johnson LLP, and regulatory counsel
to JP, Jenner & Block, the Special Committee concluded that that
the outcome of this litigation was uncertain.
(bullet) Possible Loss of Overhead Traffic. The analysis performed by CSI
and the analysis performed by NCRR's consultant, Mercer, in
January 1997 (the "MERCER REPORT") (see "SPECIAL
FACTORS--ALTERNATIVES TO MERGER AGREEMENT -- Overhead Traffic")
were radically different. From time to time, including in
connection with the pending acquisition of Consolidated Rail
Corporation by Norfolk Southern, Norfolk Southern has indicated a
willingness to divert substantial overhead traffic. 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 railroad traffic analyses by CSI and NCRR's railroad
management consultants of STB traffic data indicated that if NCRR
were independently operated, the Minority Shareholders would face
considerable uncertainty. See "SPECIAL FACTORS--ALTERNATIVES TO
MERGER AGREEMENT -- Operation Without Any Lessee."
(bullet) The History of NCRR. The Special Committee considered the
numerous problems encountered by NCRR over the last several years
as adding substantially to the risk of continued investment in
NCRR (either by continuing to hold NCRR Common Stock or by
participating in an exchange for new NCRR preferred stock) which
in turn made the Merger Consideration more attractive to the
Special Committee. Material problems so considered were (i) the
tension between the natural desire of the Minority Shareholders
for enhanced shareholder value and the needs of the State
concerning economic development, (ii) the alleged conflicts of
interest of members of the NCRR Board resulting from this tension
between the Minority Shareholders and the State, (iii) the
inequality of the bargaining position of NCRR and Norfolk Southern
as discussed above and the resulting difficulty of negotiating a
lease which the Minority Shareholders would view as fair to their
interests, (iv) historically low operating results as a
consequence of the leases which expired at the end of 1994 and the
absence of any lease payments from Norfolk Southern after the
Lease Extension Agreement was voided in July of 1996, (v) the
inability to retain REIT status if NCRR should attempt to operate
independently, and (vi) the general turmoil, uncertainty and
expense created by the pendency of shareholder lawsuits and the
Norfolk Southern litigation (see "SPECIAL FACTORS--ALTERNATIVES TO
MERGER AGREEMENT - Litigation Against Norfolk Southern").
(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 "SPECIAL
FACTORS--ALTERNATIVES TO MERGER AGREEMENT - Alternative Lease
Extension
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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. The perpetuity value of annual payments expected to
be generated by the Lease Extension Agreement, including the
after-tax value of the $5.0 million initial payment, was estimated
to be in a range of $127 million to $148 million assuming NCRR
qualified for REIT election, or approximately $29.65 to $34.50 per
share.
(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, which indicated implied equity reference
ranges for NCRR of approximately $19.03 to $128.93 per share and
$20.22 to $21.15 per share, respectively, and used the result of
Mercer's RCNLD analysis (the "Mercer STB 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 on 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 "SPECIAL FACTORS--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 "SPECIAL FACTORS--MAJOR
REASONS FOR APPROVAL OF THE MERGER AGREEMENT - Opinion of the
Special Committee's Financial Advisor."
(bullet) Other Factors. The Special Committee also considered recent
historical and current open market prices for the NCRR Common
Stock (all substantially below the Merger Consideration, ranging
between $26 per share in early 1996 to about $41 in late 1996 and
down to about $36 in late January 1997). The Special Committee did
not consider net book value because it was based on 1916
Interstate Commerce Commission valuations which, for financial
reporting purposes, are the basis for the historical cost of the
assets. Finally, the Special Committee considered as negative or
countervailing factors the inability of the Minority Shareholders
to benefit from either the proceeds of the sale by the NCRR of the
Charlotte property or any litigation recoveries from Norfolk
Southern and the possibility that the future prospects of the NCRR
and the ownership of stock therein might be better than indicated
by many of the factors discussed above and concluded that such
factors were of relative insignificance in the light of the $66
per share Merger Consideration.
The foregoing discussion is not intended to be exhaustive, but is
believed to include all the material factors, including any negative or
countervailing factors, considered by the Special Committee in determining to
recommend that the NCRR Board approve and recommend to the Minority Shareholders
a transaction involving receipt by the Minority Shareholders of $66.00 per share
in cash for their NCRR Common Stock. The Special Committee did not quantify or
otherwise attempt to assign relative or specific weights to the factors
considered in reaching its determination that this transaction is in the best
interests of the Minority Shareholders and different members of the Special
Committee may have given different weights to different factors.
On January 30, 1997 and April 7, 1997, CSFB reviewed with the Special
Committee certain preliminary valuation methodologies, which were subsequently
omitted from CSFB's final presentation to the NCRR Board on October 3, 1997 (for
a discussion of CSFB's October 3, 1997 presentation see "SPECIAL
FACTORS--Opinion of the Special Committee's Financial Advisor"). In particular,
valuation methodologies relating to (i) the Lease Extension Agreement were
omitted because this agreement was not ratified by the Minority Shareholders
(see the discussion set forth below under the caption "SPECIAL
FACTORS--ALTERNATIVES TO MERGER AGREEMENT--Alternative Lease Extension
Agreement"); (ii) the NLV were omitted following the conclusion of industry
experts that this valuation methodology is rarely utilized (see the discussion
set forth below under the caption "SPECIAL FACTORS--ALTERNATIVES TO MERGER
AGREEMENT-Litigation Against Norfolk Southern" and "SPECIAL FACTORS--APPRAISALS
AND VALUATIONS"); (iii) a potential lease of certain NCRR assets to third
parties (other than Norfolk Southern) were omitted because there were no third
parties interested in such a lease arrangement (see the discussion set forth
below under the caption "SPECIAL FACTORS-- ALTERNATIVES TO MERGER
AGREEMENT--Other Purchasers and Lessees for All or Part of Line"); and (iv) the
cost to Norfolk Southern of diverting traffic from the NCRR lines were omitted
because certain underlying assumptions were considered unrealistic by industry
experts (see the discussion set forth below under the caption "SPECIAL
FACTORS--ALTERNATIVES TO MERGER AGREEMENT--Overhead Traffic"). Similarly,
certain valuation ranges presented to the Special Committee on January 30, 1997
were subsequently revised when presented to the Special Committee on October 3,
1997. Specifically, valuation ranges relating to (i) railroad purchases were
revised to reflect updated and refined information and (ii) corridor purchases
were revised to reflect specific facts relating to the corridor purchase by the
State of Florida.
CFSB's January 30, 1997 and April 7, 1997 presentations were
prepared nine months and six months, respectively, prior to the Special
Committee's meeting held in October to approve the Merger. It was understood
by the Special Committee that the January 30, 1997 and April 7, 1997
presentations were necessarily preliminary and incomplete and intended
primarily as a framework for further discussion and, accordingly, such
presentations were not relied upon by the Special Committee in its
determination to approve the Merger or by CFSB in rendering its opinion.
20
<PAGE>
MATERIAL 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 "SPECIAL FACTORS--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 NCRR to solicit such bids. See
"SPECIAL FACTORS--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 "SPECIAL
FACTORS--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 for the Eastern District of North
Carolina that a quorum did not exist at the 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. Norfolk Southern's failure to
offer a higher rental or better economic terms substantially
limited the alternatives to obtain a higher per share value than
the Merger Consideration. Norfolk Southern is seeking to establish
the annual rental in the amount called for under the Lease
Extension Agreement. See "SPECIAL FACTORS--ALTERNATIVES TO MERGER
AGREEMENT - Alternative Lease Extension Agreement."
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<PAGE>
(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 NCRR
by the STB. See "SPECIAL FACTORS--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. From time to time, including in connection with the
acquisition of Consolidated Rail Corporation by Norfolk Southern,
Norfolk Southern has indicated a willingness to divert substantial
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 of the line to NCRR and any
operator of the line. See "SPECIAL FACTORS--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 lessee or
without leases producing qualified income would mean that NCRR
could not qualify for favorable tax status as a REIT, thereby
resulting in earnings being subject to corporate income taxes
prior to availability for distribution to shareholders. See
"SPECIAL FACTORS--ALTERNATIVES TO MERGER AGREEMENT - Other
Purchasers and Lessees for All or Part of Line."
(bullet) The History of NCRR. The NCRR Board considered the numerous
problems encountered by NCRR over the last several years as adding
substantially to the risk of continued investment in NCRR (either
by continuing to hold NCRR Common Stock or by participating in an
exchange for new NCRR preferred stock) which in turn made the
Merger
22
<PAGE>
Consideration more attractive to the Special Committee. Material
problems so considered were (i) the tension between the natural
desire of the Minority Shareholders for enhanced shareholder value
and the needs of the State concerning economic development, (ii)
the alleged conflicts of interest of members of the NCRR Board
resulting from this tension between the Minority Shareholders and
the State, (iii) the inequality of the bargaining position of NCRR
and Norfolk Southern as discussed above and the resulting
difficulty of negotiating a lease which the Minority Shareholders
would view as fair to their interests, (iv) historically low
operating results as a consequence of the leases which expired at
the end of 1994 and the absence of any lease payments from Norfolk
Southern after the Lease Extension Agreement was voided in July of
1996, (v) the inability to retain REIT status if NCRR should
attempt to operate independently, and (vi) the general turmoil,
uncertainty and expense created by the pendency of shareholder
lawsuits and the Norfolk Southern litigation. 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 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 in
the Mercer Report 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, Steptoe & Johnson LLP, 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 "SPECIAL FACTORS--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.
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<PAGE>
Although it is expected that settlement discussions will occur
following consummation of the Merger, at this time NCRR and Norfolk
Southern are not engaged in negotiations to settle these cases. The
Federal Court Case and the STB Case are currently stayed, and NCRR is
subject to an order of the STB with regard to interim rental payments.
See "SPECIAL FACTORS--ALTERNATIVES TO MERGER AGREEMENT - Litigation
Against Norfolk Southern" and "SPECIAL FACTORS--CERTAIN CONFLICTS OF
INTERESTS AND SHAREHOLDER DERIVATIVE ACTIONS."
The Merger Consideration compares with the alternatives to the Merger
Agreement set forth above as follows: The Merger Consideration consists of $66
per share; the alternative set forth above under "Revenues" could result in
annual pre-tax net income of $4.27 per share; and the alternative set forth
above under "Norfolk Southern Payments" could result in annual pre-tax net
income of $1.07 to $17.44 per share. The outcome of the Federal Court Case and
the STB Case is too uncertain to quantify the per share values of a positive
outcome or settlement of these cases. Further, under the alternatives presented
above, it is unclear if NCRR could maintain its REIT status.
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.
FAIRNESS OF THE MERGER
The NCRR Board. In determining to approve and recommend the Merger
Agreement, and in reaching its conclusion that the Merger is fair to, and in the
best interest of, the Minority Shareholders, all material factors considered by
the NCRR Board are those referred to above under "SPECIAL FACTORS--MATERIAL
REASONS FOR APPROVAL OF THE MERGER AGREEMENT". The NCRR Board expressly adopted
the Special Committee's analysis and recommendation as to the fairness of the
Merger to the Minority Shareholders and the fairness of the Merger Consideration
to the Minority Shareholders from a financial point of view. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the NCRR Board did not find it practical to and did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the NCRR Board may have given
different weights to different factors.
The DOT and B&M. The determination of the $66 per share Merger
Consideration resulted from negotiations between the State and the Special
Committee and their respective representatives (see "SPECIAL FACTORS--SUMMARY OF
SPECIAL COMMITTEE PROCEEDINGS AND NEGOTIATIONS") and appeared to the DOT and B&M
to be a reasonable premium over the historical trading price of NCRR Common
Stock. The DOT and B&M did not undertake any formal and informal evaluation of
their own as to the fairness of the Merger Consideration to the Minority
Shareholders. Based solely upon the determination of the Special Committee and
the NCRR Board that the Merger is fair to, and in the best interests of the
Minority Shareholders, the DOT and B&M believe that the Merger Consideration is
fair to the Minority Shareholders from a financial point of view and each
expressly adopts the conclusions of the Special Committee.
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<PAGE>
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 in merger and acquisition transactions generally
and particularly in the railroad industry. 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. CSFB has consented to the inclusion of the
CSFB Opinion attached as Annex C hereto. In giving such consent, CSFB does not
admit that it comes within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended (the "Securities
Act"), or the rules or regulations of the Securities and Exchange Commission
thereunder nor does it thereby admit that it is an expert with respect to any
part of this Proxy Statement within the meaning of the term "experts" as used in
the Securities Act or the rules and regulations of the Securities and Exchange
Commission thereunder. 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
the Mercer STB Analysis and the Mercer Report. 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 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
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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 $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.
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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, in the Mercer Report, 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 in the Mercer Report. 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 and included in the
Mercer Report; (iii) the Mercer STB Analysis, which estimated the 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 the caption "SPECIAL
FACTORS--ALTERNATIVES TO MERGER AGREEMENT--APPRAISALS AND VALUATIONS" on page
36 of the Proxy Statement); (iv) the present value of the estimated discounted
cash flows of the annual payments that NCRR would have received under the Lease
Extension Agreement (see the discussion set forth below under the caption
"SPECIAL FACTORS--ALTERNATIVES TO MERGER AGREEMENT--Alternative Lease Extension
Agreement" on pages 28 through 30 of the Proxy Statement); (v) the financial
terms of certain railway corridor purchases by the States of Florida and
California (see the discussion set forth below under the caption "SPECIAL
FACTORS--VALUE TO STATE OF NORTH CAROLINA; PLANS OR PROPOSALS OF THE STATE" on
pages 38 and 39 of the Proxy Statement); and (vi) the DOT estimate of the cost
of acquiring land to duplicate the NCRR right of way (see the discussion set
forth below under the caption "SPECIAL FACTORS--VALUE TO STATE OF NORTH
CAROLINA; PLANS OR PROPOSALS OF THE STATE" on pages 38 and 39 of the Proxy
Statement).
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
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related persons and entities against certain liabilities, including liabilities
under the federal securities laws, arising out of CSFB's engagement.
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. 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 Outside Counsel that the Lease
Extension Agreement would enable NCRR to qualify as a REIT.
Set forth below is a summary of all 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.
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(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.
(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
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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 to 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 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
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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
"SPECIAL FACTORS--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 the 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 operations (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. Norfolk Southern has
not filed for abandonment or discontinuance of service over the NCRR line, but
from time to time has threatened to do so.
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
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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, Kilpatrick Stockton LLP, 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 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.
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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 of 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 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
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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. On January 30, 1998, NCRR
and Norfolk Southern filed a joint motion to extend the stay until May 29, 1998.
By order dated February 5, 1998, the Court extended the stay of proceedings in
this lawsuit until May 29, 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 October 23 and November 4,
1996, respectively, petitions for leave to intervene, accompanied by replies,
were filed by two NCRR shareholders: JP and Walker F. Rucker, representing
himself and others (the "Rucker Group"). On December 5, 1996, the State filed a
petition for leave to intervene and a request to hold the proceeding in abeyance
pending the negotiation of a settlement. The court granted the intervention
requests of JP, the Rucker Group and the State. On May 29, 1997, the STB issued
a decision (the "STB Decision") instituting a proceeding to determine permanent
compensation but, upon the motion of the State, as intervenor, the STB 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) appear
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 intervenors 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 the 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
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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.
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:
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
STB Valuation Methodologies
Reconstruction Cost New Less Depreciation Analysis
Potential Gross Annual Rental Less
RCNLD Rental(3) Upkeep(4)
Potential Property Definitions(1) Valuation(2) @ 11.9% @ 11.9%
- ------------------------------ ---------- ------- -------
<S> <C> <C> <C>
(in millions)
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. 161 19.2
ROW
4) Land only - 200 ft. ROW 115 13.7
5) Land with grading and bridges - 200 ft. ROW 260 30.9
6) Land with grading only -- 200 ft. ROW 241 28.7
7) Land with grading, bridges, track and 400 47.6 $22.9
signals - 200 ft. ROW
8) Land with grading, bridges, track and 412 49.0 24.3
signals - 200 ft. ROW plus yards and shops
excluding Spencer (Linwood) Yard
9) Land with grading, bridges, track and 450 53.6 28.9
signals - 200 ft. ROW plus yards and shops
including Spencer (Linwood) Yard
</TABLE>
(1) Examines various definitions of property varying from narrow to broad.
(2) Based on the Mercer STB 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 the Mercer STB 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 $28.9 million if the STB uses the RCNLD formula.
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
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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
<TABLE>
<CAPTION>
Gross
Potential Annual
NLV Rental
Valuation 11.9%(1)
Potential Property Definitions (in millions)
- ------------------------------
<S> <C> <C>
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)
</TABLE>
(1) Includes a one-time charge for NCRR general and administrative
expenses of $11.5 million.
35
<PAGE>
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 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 in the Mercer STB Analysis 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 approximately $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
"SPECIAL FACTORS--ALTERNATIVES TO MERGER - Litigation Against Norfolk Southern."
Also in connection with consideration of bringing an STB action, Mercer
advised the NCRR Board in the Mercer STB Analysis 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 (or approximately $20.22 to $21.15 per share). See "SPECIAL
FACTORS--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
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<PAGE>
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.
1986-1988 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 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
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<PAGE>
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 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
($30 per share); its appraised value as an independent enterprise was
approximately $224 million ($56 per share). Prior to the 1988 study, AAA
reported the same categories in 1987 as follows: $141 million in value to
Norfolk Southern ($35.25 per share); and approximately $228 million ($57 per
share) as an independent going concern. For 1986, the categories were reported
as follows: approximately $125 million in value to Norfolk Southern ($31.25 per
share); approximately $225 million as a going concern ($56.25 per share); and
approximately $512 million for replacement cost ($128 per share).
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.
On March 3, 1992, the Council of State created the Study Group to study
the advisability and feasibility of acquiring all of the capital stock of NCRR.
Later in 1992, the Study Group concluded that it was both advisable and feasible
for the State to acquire the capital stock owned by the Minority Shareholders.
The Study Group concluded that NCRR might 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
38
<PAGE>
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 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. The DOT presently intends to continue NCRR's qualification as a REIT
(see "THE CHARTER AMENDMENTS AND THE BYLAW AMENDMENTS - The Charter
Amendments"). However, if NCRR fails to continue to qualify for REIT status, the
State may determine to modify the dividend policy of NCRR by retaining earnings
for future growth or other opportunities available to NCRR.
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 (approximately $73.54 per share) (which
represents the midpoint of the RCNLD methodology valuation to value the State of
Florida's purchase of CSX track) to $450 million (approximately $105.05 per
share) (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 (or
approximately $52 to $58 per share).
CERTAIN CONFLICTS OF INTEREST AND LITIGATION
Norfolk Southern
Norfolk Southern beneficially owns 113,855 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.
39
<PAGE>
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
"SPECIAL FACTORS--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 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. Pursuant to North Carolina statute the Governor of the State is
vested with the authority to elect directors on behalf of the State. In some
cases, the state legislature has attempted to amend the NCRR Charter. These
provisions will be eliminated by the Charter Amendments.
With respect to the Merger, the State of North Carolina owns
approximately 75% of the outstanding shares of NCRR Common Stock and all of the
outstanding shares of B&M common stock. Accordingly, the State is an interested
party to this Merger and has a conflict of interest with the Minority
Shareholders.
In certain litigation discussed below, plaintiffs have alleged that the
State's interest in economic development is inimical to the interests of the
other shareholders of NCRR because the State desires to promote industrial
growth in areas of North Carolina through which NCRR's line passes. The Board
believes this amounts to saying that the State's desire to increase the number
of shippers near NCRR's lines is in conflict with the interests of the other
shareholders of NCRR. The interests of all shareholders would be promoted by
increasing the value of NCRR's line. Consequently, the Board of Directors sees
no inimical conflict of interest between the economic development interests of
the State and the interests of other shareholders.
The Board of Directors believes that allegations of conflict of
interest between the State and other shareholders oversimplify the conflict of
interest issues. There are many conflicts of interest among the shareholders in
most public companies. Long-term investors and short-term investors have
different interests on some issues. Shareholders who are willing to incur high
risks in the hopes of earning high returns have interests that sometimes
conflict with those shareholders who do not desire to incur high risks.
The Board determined that the Lease Extension Agreement should not
contain terms that furthered economic development interests of the State to
the detriment of the interests of other shareholders. Consequently, the Lease
Extension Agreement did not impose economic development requirements on Norfolk
Southern.
The Board of Directors of NCRR unanimously approved the Lease Extension
Agreement because the Board of Directors determined that the Lease Extension
Agreement was in the best interest of all the shareholders of NCRR. The Board of
Directors determined the best interests of NCRR's shareholders would be served
by maximizing shareholder value by maximizing distributable after-tax income to
the shareholders and minimizing the risks that (i) income would be disrupted and
(ii) the value of the assets of NCRR would be impaired.
Following consummation of the Merger, the NCRR will be free to promote
the economic interests of the State without concern regarding conflicts of
interests. 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
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<PAGE>
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 proposed 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. On December 22, 1997, the Court issued an
order and judgment granting the fee petition in part and denying it in part. The
Court ordered NCRR to pay the plaintiff's counsel $276,365.00 in fees and
$35,837.98 for reimbursement of expenses, and denied the plaintiff's requests
for an incentive payment and plaintiff's counsel's request for a fee multiplier.
On January 2, 1998, the plaintiff's counsel filed a Motion to Alter or Amend
Judgment and Motion for Prejudgment Interest, seeking an unquantified
enhancement of the fee award, an incentive award for the plaintiff, and
prejudgment interest on fees and expenses. NCRR intends to respond to these
motions and oppose the additional relief requested.
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 "SPECIAL FACTORS--THE
MERGER - Indemnification of Directors."
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
"SPECIAL FACTORS--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
41
<PAGE>
("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 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 would pay NCRR $4,000,000
in exchange for the property and dismissal of the lawsuits. On December 19,
1997, NCRR received net proceeds of approximately $3,990,000 upon the closing of
the sale 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.
THE CHARTER AMENDMENTS AND THE BYLAW AMENDMENTS
The following summary of the material provisions 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 DOT presently intends 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. In order to continue the REIT qualification
of NCRR after the Merger, the DOT intends to 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 shareholders other than the
State in NCRR, those minority shareholders would own a limited number of shares
of non-voting Preferred Stock.
While there can be no assurance that the DOT will cause the issuance of
such shares prior to the Merger, it is anticipated that the shares will be
issued to approximately 99 accredited investors in a transaction which is exempt
from the registration requirements of the federal securities laws.
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
42
<PAGE>
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. 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 "SPECIAL
FACTORS--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
43
<PAGE>
Bylaw Amendments would make the amendment provision in the Bylaws consistent
with the NCRR Charter, as amended by the Charter Amendments.
DISSENTING SHAREHOLDERS' 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
44
<PAGE>
and have become, as of the Effective Date, the right to receive, without any
interest thereon, the Merger Consideration.
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 uncertificated 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.
45
<PAGE>
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 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.
A Minority Shareholder's affirmative vote for the Merger Agreement
could and/or would later be used as evidence against him or her under an
estoppel or similar legal theory if such Minority Shareholder were to challenge
the fairness or the fiduciary aspects of the Merger in any future litigation
against NCRR. This evidence may or may not legally preclude such a challenge to
the Merger, depending upon the information available to the Minority
Shareholders at the time of his or her vote.
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.
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
46
<PAGE>
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 1997.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------ --------------------------------- --------------------------------
Low High Low High Low High
--- ---- --- ------- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
38 1st 38 1/4 22 1/4 1st 27 1/2 24 1/4 1st 26
38 1/4 2nd 59 23 1/4 2nd 24 5/8 25 1/2 2nd 30 1/2
59 3rd 62 23 3rd 40 26 3rd 35
61 1/2 4th 62 1/2 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 38 1/4 bid and 39 1/4 ask. The closing bid and asked prices for NCRR Common
Stock on January 9, 1998, the latest practicable date for which such prices were
available, were 62.75 bid and 64 ask.
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 approximately 690 holders
of record of NCRR Common Stock as of January 9, 1998. The State owns
approximately 74.94% 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 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.
47
<PAGE>
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
NCRR Selected During the Nine Months
Financial Data At December 31 or for the Year Ended December 31 Ended September 30 (unaudited)
- -------------- -------------------------------------------------------------------------- ------------------------------
1996 1995 1994 1993 1992 1997 1996
----------- ------------- ----------- ----------- ----------- ------------ -----------
<S> <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.
48
<PAGE>
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and
the executive officers of NCRR:
<TABLE>
<CAPTION>
Period of Term
Name Age Offices Held Service Expires
- ---- --- ------------ ------- -------
<S> <C> <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 (1) 73 Director 3/97 to 1997
Present
*Robert W. Griffin (2) 45 Director 12/95 to 1998
Present
*M. Rex Harris 62 Director 7/93 to 1997
Present
*R. Samuel Hunt, III (2) 56 President 11/96 to 1999
Present
*William H. Kincheloe (2) 59 Director 7/87 to 1998
Present
*Lynn T. McConnell (2) 41 Director and 7/93 to 1999
Treasurer Present
*Jack A. Moody (2) 70 Director 7/93 to 1999
Present
*John S. Russell 42 Director 7/93 to 1998
Present
49
<PAGE>
Period of Term
Name Age Offices Held Service Expires
- ---- --- ------------ ------- -------
Scott M. Saylor 38 Executive VP/
General Counsel 8/89 to
Present
Porter B. Thompson (2) 63 Director 11/96 to 1998
Present
*J. Bradley Wilson (2) 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) 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.
(2) Elected at the 1996 Annual Meeting.
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 January 9, 1998, the
parties known to NCRR to be beneficial owners of more than five percent of
NCRR's voting securities:
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership* of Class
- -------------- ---------------- --------------------- --------
<S> <C> <C> <C>
Common Shares State of North 3,210,208 shares 74.94%
Carolina c/o
Governor James
B. Hunt, The State
Capital, Raleigh, NC 27611
- ---------------------------
</TABLE>
* Includes 1,635 shares the State of North Carolina holds 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. Also includes an additional 2,400 shares that, 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.
50
<PAGE>
The following table sets forth as of January 9, 1998 the shares of NCRR
Common Stock beneficially owned by all directors and nominees and all directors
and officers as a group:
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- ---------------- -------------------- --------
<S> <C> <C> <C>
Common Shares John McKnitt 287 shares owned directly, *
Alexander, Jr. 592 shares owned by minor
Director daughters, 50 shares owned by
P.O. Box 26837 spouse
Raleigh, NC 27603
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, NC 28207
51
<PAGE>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- ---------------- -------------------- --------
Jack A. Moody 3,300 shares *
Director owned directly
P.O. Box 249
Siler City, NC 27344
John S. Russell 100 shares owned directly; *
Director 500 shares owned
One Hannover Square directly (3)
Suite 1700
Raleigh, NC 27611
Scott M. Saylor 40 shares owned *
Exec. V.P./Gen. Counsel by minor children
3200 Atlantic Avenue
Suite 110
Raleigh, NC 27604
Porter B. Thompson 4,000 shares owned with *
Director spouse as joint tenants with
230 North Elm Street right of survivorship
Suite 1650
Greensboro, NC 27401
J. Bradley Wilson 500 shares owned directly (3) *
Director and Secretary
P.O. Box 2291
Durham, NC 27702
David T. Woodard 100 shares owned *
Director directly; 400 shares
P.O. Box 17647 owned directly (3)
Raleigh, NC 27619-7647
All directors and 19,095 *
officers as a 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 stock.
All officers and directors as a group (15 persons) beneficially own
19,095 NCRR Common Shares, or approximately .45% 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.
52
<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
(Commission File No. 0-15768) 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
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
53
<PAGE>
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.
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 above and elsewhere by NCRR should not
be construed as exhaustive. 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.
54
<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 Porter B.
Thompson; John W. Graham; and Sidney R. French 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 March 31, 1998, at 10:00 a.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
2. In their discretion to vote upon any other business as may properly come
before the meeting or any adjournment or adjournments thereof (except, as to
any executed proxy that specifies a vote against the Merger, the shares
represented thereby will not be voted in favor of an adjournment of the
meeting to allow additional time to solicit additional proxies).
[ ] 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 and
amended and restated as of January 16, 1998 (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;
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; and
WHEREAS, the B&M may authorize and issue shares of its preferred
stock and the DOT and the B&M have requested that the Company authorize shares
of preferred stock and that the Merger Agreement be amended to provide for
the conversion of the B&M's preferred stock into shares of the Company's
preferred stock.
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 (i) each share of the
common 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 common stock of the Surviving
Corporation and each share of the B&M's preferred stock, par value $.01 per
share (the "Preferred Shares"), if any, 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
preferred 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
4
<PAGE>
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
5
<PAGE>
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. To the extent that actions taken by the Company
at the request of the DOT in compliance with this provision are in conflict
with or contravene any of the Company's representations and warranties or
covenants hereunder, the parties hereto agree that any such action shall not
constitute a breach of the Company's representations and warranties, its
covenants or any of the Company's obligations hereunder.
(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
6
<PAGE>
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.
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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
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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
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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.
19
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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: David D. King
--------------------------------
Deputy Secretary,
Transit, Railroad, Aviation
BEAUFORT AND MOREHEAD RAILROAD
COMPANY
By: David D. King
--------------------------------
Secretary & Treasurer
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 1000
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
<PAGE>
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
February 20, 1998
Raleigh, North Carolina
April 7, 1997 Confidential PRELIMINARY
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
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SUISSE | BOSTON
<PAGE>
- ------------======================----------------------------------------------
North Carolina Railroad Company
- --------------------------------------------------------------------------------
1.
Overview
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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SUISSE | BOSTON
<PAGE>
- ------------======================----------------------------------------------
North Carolina Railroad Company
- --------------------------------------------------------------------------------
2.
Valuation Methodologies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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SUISSE | BOSTON
<PAGE>
- ------------======================----------------------------------------------
North Carolina Railroad Company
- --------------------------------------------------------------------------------
3.
Discount Rate Analysis
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE>
- ------------======================----------------------------------------------
North Carolina Railroad Company
- --------------------------------------------------------------------------------
4.
NCRR Stock Price Performance
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE>
CONFIDENTIAL 1
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
- --------------------------------------------------------------------------------
Overview
- --------------------------------------------------------------------------------
The State of North Carolina (the State) is preparing a proposal to
purchase the shares of the North Carolina Railroad Company (NCRR) that it
does not already own for $66.00 per share in cash.
Background
The major value of the NCRR is as owner of 317 miles of railroad right of
way and track in North Carolina. Most of the NCRR's property had been
leased primarily to Norfolk Southern (NS) and its predecessors in leases
that expired at the end of 1994.
The NCRR negotiated a lease extension agreement (the Agreement) with
Norfolk Southern that was unanimously approved by the NCRR Board of
Directors on August 10, 1995. On July 29, 1996, a federal judge
invalidated the lease agreement, on the basis that a majority of NCRR's
minority shareholders had not been represented at the annual meeting and
therefore there was no quorum.
Subsequent to the invalidation of the Agreement, the NCRR filed a motion
with the Surface Transportation Board (STB) to set an interim and
permanent rate for Norfolk Southern to pay to use the NCRR line.
On August 26, 1996, the State announced that it was considering a buyout
of the NCRR and that it had retained Nationsbanc as its financial advisor.
On November 13, 1996, the Special Committee of the Board of Directors of
the NCRR retained Credit Suisse First Boston as its financial advisor.
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<PAGE>
CONFIDENTIAL 2
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Valuation Methodologies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ in Millions except per share values)
====================================================================================================================================
PRELIMINARY
METHODOLOGY VALUATION RANGE PER SHARE VALUE COMMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Estimated Lease Value
Replacement Cost New Less $80 - $540 $19 - $125 Surface Transportation Board (STB) methodology
Depreciation (RCNLD)
Net Liquidation Value (NLV) $85 - $89 $20 - $21 STB methodology. Only used once previously
Estimated Value to Norfolk Southern
Income $218 - $261 $51 - $61 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* $320 - $450 $75 - $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
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
* 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>
CONFIDENTIAL 3
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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 is expected to rule on the NCRR's request to set
both interim and permanent lease rates for Norfolk Southern's use of
the NCRR.
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 by 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 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.
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<PAGE>
CONFIDENTIAL 4
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
STB Lease Rate Setting -- RCNLD
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reproduction Cost New Less Depreciation Analysis
($ in Millions)
=======================================================================================================================
POTENTIAL GROSS RENTAL LESS
POTENTIAL PROPERTY DEFINITIONS (1) RCNLD ANNUAL RENTAL (3) UPKEEP (4)
VALUATION(2) @11.7% @11.7%
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Land only - 50' ROW (Right of Way) $ 40 $ 4.7
2. Land with Grading and Bridges - 50' ROW 180 21.1
2a. Scenario 2 without Bridges 161 18.8
3. Land only - 200' ROW 115 13.5
4. Land with grading and bridges -200' ROW 260 30.4
4a. Scenario 4 without bridges 241 28.2
5. Land with grading, bridges, track and signals - 200' ROW 400 46.8 $22.1
6. Land with grading, bridges, track and signals - 200' ROW
plus yards and shops excluding Spencer (Linwood) Yard 412 48.2 23.5
7. Land with grading, bridges, track and signals - 200' ROW
plus yards and shops including Spencer (Linwood) Yard 450 52.7 28.0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 1995.
(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.
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<PAGE>
CONFIDENTIAL 5
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
RCNLD Lease Values
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Perpetuity Value of RCNLD Leases
(Dollars in Millions, except per share values)
====================================================================================================================================
PERPETUITY OF GROSS RENTAL LESS
RENTAL 5.25% (6) UPKEEP @5.25% (5,6)
-----------------------------------------------
POTENTIAL 11.7% PER 11.7% PER
POTENTIAL PROPERTY DEFINITIONS (1) RCNLD VALUATION (2) RENTAL (3) SHARE (4) RENTAL (3) SHARE(4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Land only - 50' ROW (Right of Way) $ 40 $ 80.0 $ 18.67
2. Land with Grading and Bridges - 50' ROW 180 400.0 93.39
2a Scenario 2 without Bridges 161 356.6 83.25
3. Land only - 200' ROW 115 251.4 58.70
4. Land with grading and bridges -200' ROW 260 582.9 136.09
4a Scenario 4 without bridges 241 539.5 125.95
5. Land with grading, bridges, track and signals - 200' ROW 400 903.0 210.82 $420.4 $ 98.14
6. Land with grading, bridges, track and signals - 200' ROW
plus yards and shops excluding Spencer (Linwood) Yard 412 930.5 217.22 447.8 104.54
7. Land with grading, bridges, track and signals - 200' ROW
plus yards and shops including Spencer (Linwood) Yard 450 1,017.3 237.50 534.7 124.82
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 1995.
(4) 4,283,470 shares outstanding 12/31/96 10-K.
(5) Assumes maintenance and capital expenditure of $24.7mm.
(6) Includes a one-time charge for NCRR general and administrative expenses of
$11.5mm and uses mid-year discounting of the lease payments.
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<PAGE>
CONFIDENTIAL 6
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
STB Lease Rate Setting -- Net Liquidation Value
- --------------------------------------------------------------------------------
NLV has been used on one occasion by the STB. It may be used if the STB were to
allocate maintenance to Norfolk Southern.
<TABLE>
<CAPTION>
NLV Methodology
($ in Millions)
=======================================================================================================
POTENTIAL NLV GROSS ANNUAL RENTAL
POTENTIAL PROPERTY DEFINITIONS VALUATION 11.7% (1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property including Spencer (Linwood) Yard $43.9 $5.1
Property excluding Spencer (Linwood) Yard 42.2 4.9
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) STB rail industry composite after-tax cost of capital for 1995.
Source: Mercer Management Consulting analysis.
<TABLE>
<CAPTION>
Perpetuity Value of NLV Based Rental at 5.25% (2)
($ in Millions, except per share values)
============================================================================================================================
POTENTIAL NLV PERPETUITY OF PER SHARE VALUE
POTENTIAL PROPERTY DEFINITIONS VALUATION RENTAL OF RENTAL (3)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property including Spencer (Linwood) Yard $43.9 $88.9 $20.75
Property excluding Spencer (Linwood) Yard 42.2 85.0 19.84
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(2) Includes a one-time charge for NCRR general and administrative expenses of
$11.5mm.
(3) 4,283,470 shares outstanding. 12/31/96 10-K.
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<PAGE>
CONFIDENTIAL 7
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Lease Extension Valuation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ in Millions except per share values)
====================================================================================================================================
DISCOUNT RATE
-----------------------------------------------------------------
VALUE 4.5% 5.0% 5.5% 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $188.1 $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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 12/31/96 10-K
(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>
CONFIDENTIAL 8
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Lease Extension Valuation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NCRR Revenue Sources
========================================================================================================================
REVENUE SOURCES PER YEAR(1) ISSUES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 & Tier 2 Revenue $8,550,819
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1995 dollars
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<PAGE>
CONFIDENTIAL 9
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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>
CONFIDENTIAL 10
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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 ==> $33.4 million
North Carolina State Reporting ==> $34.4 million
NS System Total Reporting ==> $28.7 million
- -------------------------------------------------------------------------------
Range $28.7 - $34.4 million
- -------------------------------------------------------------------------------
NS LTM Operating Cash Flow Multiple (3) 7.6x
- -------------------------------------------------------------------------------
Implied Enterprise Value $218.1 - $261.4 million
Implied Per Share Value $51 - $61
- -------------------------------------------------------------------------------
(1) Revenues were estimated and allocated based on gross-ton mileage
information derived from NS' traffic density map.
(2) Cost estimates were developed for three segments of the NCRR line:
Charlotte - Greensboro; Greensboro - Raleigh; Raleigh - Morehead City.
(3) As of 3/31/97 for year end 12/31/96
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<PAGE>
CONFIDENTIAL 11
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Selected Comparable Railroad Transactions
- --------------------------------------------------------------------------------
The comparable acquisitions analysis considers a number of railroad
transactions. Please note that while this analysis represents the potential
value to NS of controlling the NCRR, realization of this value by NCRR and it's
shareholders may be limited. Credit Suisse First Boston, and Morgan Stanley
before it, solicited indications of interest in acquiring NCRR from potential
strategic and financial investors. This process did not lead to the submission
by any parties contacted of indications of interest / firm proposals.
<TABLE>
<CAPTION>
U.S. Class 1 Railroad
($ 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
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <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
Pending CSX Corp.
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. $611.6 1.8x 7.6x 11.1x
Withdrawn Union Pacific Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mercer Management Consulting estimates. (Continued on next page) on next
page)
(Continued on next page)
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<PAGE>
CONFIDENTIAL 12
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Selected Comparable Railroad Transactions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Class 1 Railroad
($ 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
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <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
6/10/93 MidSouth Corporation/ $213.5 $350.0 $58.6 $318.2 3.2x 8.2x 11.1x
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 $375.8 2.8x 9.6x 13.3x
8/27/93 Wisconsin Central Transportation Corp.
(Itel Corp.)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mercer Management Consulting estimates.
(2) Multiples have been calculated using year-end 1994 numbers and acquiror's
stock price as of February 9, 1995.
(Continued on next page)
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<PAGE>
CONFIDENTIAL 13
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Selected Comparable Railroad Transactions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Class 1 Railroad
($ 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
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <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 miles $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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mercer Management Consulting estimates.
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<PAGE>
CONFIDENTIAL 14
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Discounted Cash Flow of NS's NCRR Earnings
- --------------------------------------------------------------------------------
Enterprise value range $150.0 - $200.0 million, equal to $35.02 - $46.69 per
share
NS's Estimated NCRR Cash Flows
=======================================================================
($ 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 $13.2
- -----------------------------------------------------------------------
(1) Assumes a cash tax rate of 25.4%.
Source: Mercer Management Consulting analysis
Perpetuity of NS's Estimated NCRR Cash Flows (1)
($ in Millions)
================================================================================
REVENUE GROWTH RATE
DISCOUNT -------------------------------------------------------------
RATE (2) 3.0% 4.0% 5.0%
- --------------------------------------------------------------------------------
11.0% $171.1 $194.6 $226.0
11.5% 161.4 182.1 209.1
12.0% 152.8 171.1 194.6
12.5% 145.1 161.4 182.1
13.0% 138.1 152.8 171.1
- --------------------------------------------------------------------------------
(1) Uses mid-year discounting.
(2) Weighted average cost of capital for US Class 1 railroads.
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<PAGE>
CONFIDENTIAL 15
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Diversion Analysis -- Roanoke/Bristol/Knoxville Line
- --------------------------------------------------------------------------------
Cost and Value Impact on NS
($ in Millions)
================================================================================
- --------------------------------------------------------------------------------
Annual Operating Cash Flow Impact on NS in 1995 $ 69.0
NS LTM Operating Cash Flow Multiple (1) 7.6x
Implied Loss of Value to NS Due to Lost Operating Cash Flow $ 524
Replacement Capital Requirement $ 271
Total Estimated Valuation Impact $ 795
- --------------------------------------------------------------------------------
Source: Mercer Management Consulting Analysis
(1) As of 3/31/97 for year end 12/31/96.
- --------------------------------------------------------------------------------
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 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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<PAGE>
CONFIDENTIAL 16
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 17
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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
Bull's Gap - Atlanta Passing Track/12 miles 18
2nd Main Track/135 miles 189
----
$271
- ------------------------ ----------------------------- ---------------------
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<PAGE>
CONFIDENTIAL 18
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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 the 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>
CONFIDENTIAL 19
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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 Encourage industry to locate close to the NCRR
Development(1) 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>
CONFIDENTIAL 20
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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 used in the Florida/CSX transaction was RCNLD.
<TABLE>
<CAPTION>
State Rail Corridor Purchases
($ in Millions except for per share values)
===========================================================================================================================
PRICE PER IMPLIED NCRR(1)
ACQUIROR/SELLER DATE DESCRIPTION PRICE MILE PRICE PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State of Florida/ 1988 81 miles of track from West Palm $263 $3.25 $240 (2)
CSX Corp Beach to Miami. CSX retained freight
rights
State of California/ 1992/1993 340 miles of track sold to 8 $482 $1.42 $105
Santa Fe transportation agencies in the Los
Angeles area
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on price per mile by 317 miles and 4,283,470 shares outstanding from
12/31/96 10-K.
(2) RCNLD valuation implied NCRR per share of $19 - $125.
Enterprise value range $320 - $450 million, equal to $75 - $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>
CONFIDENTIAL 21
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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
- --------------------------------------------------------------------------------
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 22
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
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 in 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%.
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 23
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Measures of Inflation
- --------------------------------------------------------------------------------
Consumer Price Index, Producer Price Index and IPD - GDP
Quarterly Year-on-Year Percent Changes
1950-1996 Q3
[LINE GRAPH OMITTED]
Source: PPI and CPI, Bureau of Labor Statistics, IPD - GDP, Bureau of Economic
Analysis.
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 24
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Discount Rate Analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
SECURITY/INDEX NOMINAL YIELD BENEFITS OF USING AS PROXY DOWNSIDES OF USING AS PROXY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
P&WV Common(1) 7.23% o All revenues derived from long-term o Under the terms of the lease, annual
operating 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) 6.34% o Reflects subordinated, unsecured position o Fixed rate coupon
in long-term NS obligation o Does not grow with inflation
o Preferred has DRD eligibility
S&P Utility Index(3) 5.28% o Dividends grow roughly with inflation o Reflects common stock and
o Distributes majority of earnings as utility-specific risk
dividends
NS Long Term Debt (4) 7.99% o Actual long term NS debt, reflecting o No inflation adjustment
(2021) unsecured position in long term NS o Low renewal risks
obligation
U.S. Government 3.38% o Reflects inflation premium o Controversy over the exact CPI
CPI Indexed Bond(5) definition and novelty may depress
yield.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) NS railroad lease that qualifies for REIT tax status. Assumes quarterly
dividend of $.13 per share; $7.19 per share closing price 3/31/97. Market
equity value of $10.9 million.
(2) Based on $2.60 annual dividends; $40.75 closing price 3/31/97.
(3) As of 3/31/97.
(4) As of 3/31/97.
(5) As of 3/31/97. First auction of 10 year U.S. Government CPI indexed bonds
occurred on 1/29/97, with an acceptance yield of 3.45%.
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 25
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Discount Rate Analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potential Estimates of Discount Rate
====================================================================================================================================
P&VW S&P UTILITY US GOV'T REFERENCE
SOURCE COMMON NS PREFERRED NS DEBT INDEX INDEXED BOND RANGE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Nominal Yield 7.23% - 7.23% 6.34% - 6.34%(3) 7.99% - 7.99% 5.28% 3.38%
Long-Term Inflation Expectation 3.00% - 1.00% 3.00% - 1.00% 3.00% - 1.00% - -
---- ---- ---- ---- ---- ----
4.23% - 6.23% 3.34% - 5.34% 4.99% - 6.99% 5.28% 3.38% 4.5 - 6.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Impact of Inflation Rate Escalation Cap
================================================================================
ANNUAL COMPOUND RATE
1960 - 1995 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.
Adjustment would result in a yield of 9.1% assuming a 38.0% tax rate.
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 26
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
Recent Stock Price Performance
- --------------------------------------------------------------------------------
Daily Closing Prices(1)
March 27, 1995 to March 26, 1997
[LINE GRAPH OMITTED]
- --------------------------------------------------------------------------------
Source: FactSet.
(1) Mid-point between the bid and the ask price at closing.
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<PAGE>
CONFIDENTIAL 1
- ------------======================----------------------------------------------
North Carolina Railroad Company PRELIMINARY
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
January 30, 1997 Confidential PRELIMINARY DRAFT
Materials Prepared for Discussion
North Carolina Railroad Company
<PAGE>
- ------------======================----------------------------------------------
North Carolina Railroad Company
Table of Contents
- --------------------------------------------------------------------------------
1. Overview
2. Alternatives for the NCRR Valuation
3. Discount Rate Analysis
4. NCRR Stock Price Performance
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL
- ------------======================----------------------------------------------
North Carolina Railroad Company Preliminary Draft
- --------------------------------------------------------------------------------
1.
Overview
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL
- ------------======================----------------------------------------------
North Carolina Railroad Company Preliminary Draft
- --------------------------------------------------------------------------------
2.
Alternatives for the NCRR Valuation
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL
- ------------======================----------------------------------------------
North Carolina Railroad Company Preliminary Draft
- --------------------------------------------------------------------------------
3.
Discount Rate Analysis
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL
- ------------======================----------------------------------------------
North Carolina Railroad Company Preliminary Draft
- --------------------------------------------------------------------------------
4.
NCRR Stock Price Performance
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 32
- ------------======================----------------------------------------------
North Carolina Railroad Company
Overview
- --------------------------------------------------------------------------------
The North Carolina Railroad Company (NCRR), through the Special
Committee of its Board of Directors, is considering the value of the
NCRR to its minority shareholders in expectation of receiving a
buyout offer from the State of North Carolina (the State), the
majority shareholder of the NCRR.
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 NCRR's property
had been leased primarily to Norfolk Southern 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 Nationsbank as its
financial advisor.
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 33
- ------------======================----------------------------------------------
North Carolina Railroad Company
Perspectives of Value
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
Value of Lease to NCRR Value of NCRR - to State
1. Value of lease payments 5. Similar values paid by states
under lease extension agreement for access to railroad corridors
2. Value of STB mandated lease payments
Value of NCRR - to Norfolk Southern Value of NCRR - to Others
3. Value up to the cost of diverting 6. ROW usage payments
traffic
4. Value of NCRR traffic
- --------------------------------------------------------------------------------
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 34
- ------------======================----------------------------------------------
North Carolina Railroad Company
Alternatives for the NCRR Valuation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=========================================================================================================================
ALTERNATIVE PROS CONS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lease Value
o Current NCRR Board approved lease o Represents a commercially o Valuation not supported by minority
extension agreement negotiated agreement shareholders
o Potential for state to renegotiate
o RCNLD o Potential for high valuation o Numerous interpretations
o Potential outcome from STB ruling o STB outcome uncertain
o Dispute over ownership of assets
o NLV -- o Low valuation
o Unlikely to be used by STB
o Lease to Third Party o Value enhancing amendment to the o Potential for State to renegotiate
current situation
Norfolk Southern Value
o Diversion Analysis o Yields high valuation o Uncertain as to how much NS would
give up
o Income Value o Higher valuation than lease o Uncertain as to how much NS would
extension give up
o Railroad purchases o Numerous transactions with o Not necessarily comparable to NCRR
available data situation
State of North Carolina Value
o Corridor purchases o Transactions are probably most o Difficult to correlate data
comparable to a state buyout
o Land Value o Base cost for replacing the ROW o Not a full costing (only land)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 35
- ------------======================----------------------------------------------
North Carolina Railroad Company
Valuation Methodologies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ in Millions except per share values)
====================================================================================================================================
PRELIMINARY
METHODOLOGY VALUATION RANGE PER SHARE VALUE COMMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lease Value
Lease Extension Agreement $145 - $190 $33.76 - $44.46 $8 million NS lease
Replacement Cost New Less $70 - $474 $16.39 - $110.60 Surface Transportation Board (STB) Methodology
Depreciation (RCNLD)
Net Liquidation Value (NLV) $75 - $78 $17.42 - $18.22 STB Methodology. Only used once previously
Third Party Lease $154 - $199 $35.95 - $46.46
Value to Norfolk Southern
Diversion $782 $182.56 Capital cost and extra operating cost
Income $212 - $255 $49.59 - $59.43 NCRR Share of NS North Carolina income
Railroad Purchases $280 - $330 $65.37 - $77.04 Income value plus sale price (Raleigh to
Morehead City)
Value to State
Corridor Purchases $450 - $740 $105.06 - $173.17 Florida and California corridor purchases -
purchase price based on RCNLD
Land Value NC DOT Estimates $225 - $250 $52.53 - $58.36 Cost of a 200 ft., 317 mile ROW between Morehead
City and Charlotte
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----- CREDIT | FIRST ----------------------------------------------------------
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<PAGE>
CONFIDENTIAL 36
- ------------======================----------------------------------------------
North Carolina Railroad Company
Preliminary DCF Valuation Ranges -- Lease Extension
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ in Millions except per share values)
================================================================================================================
REAL DISCOUNT RATE
-------------------------------------------------------
VALUE 4.5% 5.0% 5.5% 6.0%
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $188.1 $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
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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 9/30/96 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.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 37
- ------------======================----------------------------------------------
North Carolina Railroad Company
NCRR Revenue Sources-Lease Extension
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
REVENUE SOURCES PER YEAR(1) ISSUES
--------------------------------------------------------------------------------
<S> <C> <C>
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 & Tier 2 Revenue $8,550,819
================================================================================
</TABLE>
(1) 1995 dollars
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 38
- ------------======================----------------------------------------------
North Carolina Railroad Company
NCRR Cash Costs -- Lease Extension
- --------------------------------------------------------------------------------
====================================================================
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 (IDP - GDP)
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 39
- ------------======================----------------------------------------------
North Carolina Railroad Company
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 should rule on the NCRR's request to set both
interim and permanent lease rates for Norfolk Southern's use of the
NCRR.
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 rent to be paid by 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 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 ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 40
- ------------======================----------------------------------------------
North Carolina Railroad Company
STB Lease Rate Setting -- RCNLD
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reproduction Cost New Less Depreciation Analysis
($ in Millions)
====================================================================================================================
POTENTIAL GROSS RENTAL LESS
POTENTIAL PROPERTY DEFINITIONS (1) RCNLD ANNUAL RENTAL(3) UPKEEP (4)
VALUATION(2) @11.7% @11.7%
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Land only - 50' ROW (Right of Way) $ 40 $ 4.7
2. Land with Grading and Bridges - 50' ROW 180 21.1
2a. Scenario 2 without Bridges 161 18.8
3. Land only - 200' ROW 115 13.5
4. Land with grading and bridges -200' ROW 260 30.4
4a. Scenario 4 without bridges 241 28.2
5. Land with grading, bridges, track and signals - 200' ROW 400 46.8 $ 22.1
6. Land with grading, bridges, track and signals - 200' ROW plus yards
and shops excluding Spencer (Linwood) Yard 412 48.2 23.5
7. Land with grading, bridges, track and signals - 200' ROW plus yards
and shops including Spencer (Linwood) Yard 450 52.7 28.0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 1995.
(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.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 41
- ------------======================----------------------------------------------
North Carolina Railroad Company
RCNLD Lease Values
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Perpetuity Value of RCNLD Leases (6)
(Dollars in Millions, except per share values)
====================================================================================================================================
PERPETUITY OF GROSS RENTAL LESS
RENTAL @ 6.0% UPKEEP @ 6.0% (5)
--------------------------------------------
POTENTIAL 11.7% PER 11.7% PER
POTENTIAL PROPERTY DEFINITIONS(1) RCNLD VALUATION RENTAL(3) SHARE(4) RENTAL(3) SHARE(4)
(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Land only - 50' ROW (Right of Way) $ 40 $70.2 $16.39
2. Land with Grading and Bridges - 50' ROW 180 351.3 82.01
2a Scenario 2 without Bridges 161 313.1 73.10
3. Land only - 200' ROW 115 220.8 51.54
4. Land with grading and bridges -200' ROW 260 511.9 119.50
4a Scenario 4 without bridges 241 473.7 110.60
5. Land with grading, bridges, track and signals - 200' ROW 400 793.0 185.12 $369.1 $86.17
6. Land with grading, bridges, track and signals - 200' ROW plus yards 412 817.1 190.75 393.2 91.80
and shops excluding Spencer (Linwood) Yard
7. Land with grading, bridges, track and signals - 200' ROW plus yards 450 893.3 208.56 469.5 109.61
and shops including Spencer (Linwood) Yard
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 1995.
(4) 4,283,470 shares outstanding.
(5) Assumes maintenance and capital expenditure of $24.7mm.
(6) Includes a one-time charge for NCRR general and administrative expenses of
$10.1mm.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 42
- ------------======================----------------------------------------------
North Carolina Railroad Company
STB Lease Rate Setting -- Net Liquidation Value
- --------------------------------------------------------------------------------
Net Liquidation Value (NLV) has been used on one occasion by the
STB. It may be used if the STB were to allocate maintenance to
Norfolk Southern.
Net Liquidation Value Methodology
($ in Millions)
=============================================================================
POTENTIAL NLV GROSS ANNUAL
POTENTIAL PROPERTY DEFINITIONS VALUATION RENTAL 11.7% (1)
- -----------------------------------------------------------------------------
Property including Spencer (Linwood) Yard $43.9 $5.1
Property excluding Spencer (Linwood) Yard $42.2 $4.9
- -----------------------------------------------------------------------------
(1) STB rail industry composite after-tax cost of capital for 1995.
Source: Mercer Management Consulting analysis.
Perpetuity Value of NLV Based Rental(2)
($ in Millions, except per share values)
================================================================================
POTENTIAL NLV VALUE AT VALUE AT
POTENTIAL PROPERTY DEFINITIONS VALUATION 6.0% 6.0%
- --------------------------------------------------------------------------------
Property including Spencer (Linwood) Yard $43.9 $78.0 $18.22
Property excluding Spencer (Linwood) Yard $42.2 $74.6 $17.42
- --------------------------------------------------------------------------------
(2) Includes a one-time charge for NCRR general and administrative expenses of
$10.1mm.
(3) 4,283,470 shares outstanding.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 43
- ------------======================----------------------------------------------
North Carolina Railroad Company
Lease to Third Party
- --------------------------------------------------------------------------------
There may be some interest from a short line operator to lease or
purchase the right to operate freight service from Raleigh to
Morehead City.
NS also may be perceived as the only logical operator of the
Raleigh-to-Charlotte line.
Value Implications
o Mercer Management Consulting believes the Raleigh-Morehead
City line is currently a loss maker and therefore there should
be no loss of NS revenue (under the Lease Extension
Agreement).
o Assumes the freight rights on the Raleigh-to-Morehead City
segment are valued at 2.0x revenues ($9.0mm).
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 44
- ------------======================----------------------------------------------
North Carolina Railroad Company
Preliminary Diversion Analysis --
Roanoke/Bristol/Knoxville Line
- --------------------------------------------------------------------------------
Cost and Value Impact on NS
($ in Millions)
========================================================================
- ------------------------------------------------------------------------
Annual Operating Cash Flow Impact on NS in 1997 $ 69.0
NS 1997 Operating Cash Flow Multiple (1) 7.4x
Implied Loss of Value to NS Due to Lost Operating Cash Flow $ 511
Replacement Capital Requirement $ 271
Total Estimated Valuation Impact $ 782
- --------------------------------------------------------------------------------
Source: Mercer Management Consulting Analysis
(1) As of 1/28/97
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 45
- ------------======================----------------------------------------------
North Carolina Railroad Company
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.
The 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 (URCS)
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 46
- ------------======================----------------------------------------------
North Carolina Railroad Company
NS Replacement Cost for the NCRR
- --------------------------------------------------------------------------------
Mercer's estimate for the capital cost to replace the NCRR is $271MM
based upon:
o Upgrading the Roanoke/Bristol/Knoxville route to carry all
non-captive overhead traffic from the NCRR.
o 304,000 carloads to be diverted
o Estimates provided by NCRR and adjusted for recent events
<TABLE>
<CAPTION>
- ---------------------------- ---------------------------- ----------------------------
Line Segment Item/Quantity Total Cost ($MM)
- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C>
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
- ---------------------------- ---------------------------- ----------------------------
</TABLE>
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 47
- ------------======================----------------------------------------------
North Carolina Railroad Company
NCRR Operating Cash Flow to Norfolk Southern
- --------------------------------------------------------------------------------
Mercer Management Consulting prepared estimates of NS' NCRR derived
operating cash flow using three different methods. The yearly
figures are:
Regression Model --> $33.4 million
North Carolina State Reporting --> $34.4 million
NS System Total Reporting --> $28.7 million
- --------------------------------------------------------------------
Range $28.7 - $34.4 million
- --------------------------------------------------------------------
NS 1997 Operating Cash Flow Multiple 7.4x
(3)
- --------------------------------------------------------------------
Implied Enterprise Value $212.4 - $254.6 million
Implied Per Share Value $49.59 - $59.43
- --------------------------------------------------------------------
(1) Revenues were estimated and allocated based on gross-ton
mileage information derived from NS' traffic density map.
(2) Estimates were developed for three segments of the NCRR line:
Charlotte - Greensboro; Greensboro - Raleigh; Raleigh -
Morehead City.
(3) As of 1/28/97.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 48
- ------------======================----------------------------------------------
North Carolina Railroad Company
Selected Comparable Railroad Transactions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Class 1 Railroad
($ 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>
10/23/96 Conrail, Inc./ $10,465.7 $12,425.2 N.A. $701.4 3.3x 12.6x 17.7x
Pending Norfolk Southern Corp.
10/15/96 Conrail, Inc./ $9,762.9 $11,722.4 N.A. $661.8 3.1x 11.8x 16.6x
Pending CSX Corp.
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. $611.6 1.8x 7.6x 11.1x
Withdrawn Union Pacific Corp.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mercer Management estimates.
(Continued on next page)
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 49
- ------------======================----------------------------------------------
North Carolina Railroad Company
Selected Comparable Railroad Transactions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Class 1 Railroad
($ 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 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 $638.7 $1,573.7 $59.4 $551.2 3.1x 8.2x 11.1x
Withdrawn Industries, Inc.
(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 $7.7 $10.2 N.A. $40.0 0.5x N.M. N.M.
8/27/93 Railroad Co./
Wisconsin Central
Transportation Corp.
(Itel Corp.)
1/8/92 Fox River Valley Railroad Co./ $54.4 $79.3 $72.1 $375.8 2.8x 9.6x 13.3x
8/27/93 Wisconsin Central
Transportation Corp. (Itel
Corp.)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mercer Management estimates.
(Continued on next page)
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 50
- ------------======================----------------------------------------------
North Carolina Railroad Company
Selected Comparable Railroad Transactions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Class 1 Railroad
($ 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 $135.0 $135.0 N.A. $1,194.7 2.7x 6.5x 8.4x
10/10/91 Operations)/
CSX Corp.
-----------------------------------------------------------------------------------
High: $72.1 $1,194.7 3.3x 12.6x 18.7x
Average: 56.3 463.6 2.4x 9.0x 12.5x
Median: 59.0 427.4 2.6x 8.3x 11.8x
Low: 34.9 40.0 0.5x 4.4x 4.6x
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Implied Enterprise Value of NCRR
NCRR - Average $292.8 $147.0 $195.4 $309.6 $331.3
NCRR - Median 306.8 135.5 211.6 285.5 312.7
Implied Per Share Value of NCRR
NCRR - Average $68.35 $34.31 $45.61 $72.28 $77.33
NCRR - Median 71.62 31.63 49.41 66.66 73.00
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mercer Management estimates.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 51
- ------------======================----------------------------------------------
North Carolina Railroad Company
Value to the State
- --------------------------------------------------------------------------------
The NCRR represents a railroad operation and right of way (ROW) that
will be of increasing value to the State as time passes and the cost
of reproducing the ROW increases.
The use of the railroad for economic development and transit
purposes has 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.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 52
- ------------======================----------------------------------------------
North Carolina Railroad Company
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 Encourage industry to locate close to
Development(1) 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.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 53
- ------------======================----------------------------------------------
North Carolina Railroad Company
State Rail Corridor Purchases
- --------------------------------------------------------------------------------
Two recent purchases of railroad corridors give an indication of the value place
by a State on the ownership of a railroad corridor in fast growing and densely
populated areas.
<TABLE>
<CAPTION>
($ in Millions except for per share values)
====================================================================================================================
IMPLIED NCRR (1)
ACQUIROR/SELLER DATE DESCRIPTION PRICE PRICE PER MILE PRICE PER SHARE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State of Florida/ 1988 81 miles of track from $ 263 $ 3.25 $ 240.42
CSX Corp West Palm Beach to Miami.
CSX retained freight rights
State of California/ 1992/1993 340 miles of track sold to
Santa Fe 8 transportation agencies $ 482 $ 1.42 $ 104.91
in the Los Angeles area
Average
$ 2.34
NCRR at Average Price 317 Miles $ 740 $ 2.34 $ 173.17
NCRR RCNLD 317 Miles $ 450 $ 1.42 $ 105.06
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The valuation basis of the Florida/CSX transaction was RCNLD.
(1) Based on price per mile by 317 miles and 4,283,470 shares
outstanding.
The section of NCRR track from Raleigh to Charlotte offers the State
the section of the track most ready to be used for passenger
service, while the section of the track from Raleigh to Morehead
City is where the railroad is important to the economic development
aims of the State.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 54
- ------------======================----------------------------------------------
North Carolina Railroad Company
NCRR Right of Way Land Value - NCDOT 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
- ----------------------------------------------------------------------------
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 55
- ------------======================----------------------------------------------
North Carolina Railroad Company
IPD - GDP Estimate
- --------------------------------------------------------------------------------
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 IDP-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 in 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 IDP-GDP rate. For the CPI it
lowers the average 0.55% and for the Producer Price Index (PPI) by 0.42%.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 56
- ------------======================----------------------------------------------
North Carolina Railroad Company
Measures of Inflation
- --------------------------------------------------------------------------------
Consumer Price Index, Producer Price Index and IPD - GDP
Quarterly Year-on-Year Percent Changes
1950-1996 Q3
[LINE GRAPH OMITTED]
Source:
PPI and CPI, Bureau of Labor Statistics, IDP - GDP, Bureau
of Economic Analysis.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 57
- ------------======================----------------------------------------------
North Carolina Railroad Company
Preliminary Discount Rate Analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=====================================================================================================================
SECURITY/INDEX NOMINAL YIELD BENEFITS OF USING AS PROXY DOWNSIDES OF USING AS PROXY
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
P&WV Common(1) 7.86% o All revenues derived from o Under the terms of the lease,
long-term operating lease with NS annual payments do not grow with
REIT structure inflation
o Relatively small market capitalization
o P&WV lease goes through 2067 (less
renewal risk)
NS Preferred(2) 6.36% o Reflects subordinated, unsecured o Fixed rate coupon
position in long-term NS obligation
o Does not grow with inflation
o Preferred has DRD eligibility
S&P Utility Index(3) 5.05% o Dividends grow roughly with o Reflects common stock and
inflation utility-specific risk
o Distributes majority of earnings
as dividends
NS Long Term Debt (4) 7.54% o Actual long term NS debt, o No inflation adjustment
(2021) reflecting unsecured position in Low renewal risks
long term NS obligation
U.S. Government 3.45% o Reflects inflation premium o Controversy over the exact CPI
CPI Indexed Bond(5) definition and novelty may depress
yield.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) NS railroad lease that qualifies for REIT tax status. Assumes quarterly
dividend of $.14 per share; $7.13 per share closing price 1/28/97. Market
equity value of $10.6 million.
(2) Based on $2.60 annual dividends; $40.88 closing price 1/29/97.
(3) As of 1/28/97.
(4) As of 1/28/97.
(5) First auction of 10 year U.S. Government CPI indexed bonds occurred on
1/29/97, with an acceptance yield of 3.45%.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 58
- ------------======================----------------------------------------------
North Carolina Railroad Company
Preliminary Discount Rate Analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potential Estimates of Real Discount Rate
=============================================================================================================================
P&VW S&P UTILITY US GOV'T REFERENCE
SOURCE COMMON NS PREFERRED NS DEBT INDEX INDEXED BOND RANGE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Nominal Yield 7.86% - 7.86% 6.36% - 6.36%(3) 7.54% - 7.54% 5.05% 3.45%
Long-Term Inflation Expectation 3.00% - 1.00% 3.00% - 1.00% 3.00% - 1.00% - -
---- ---- ---- ---- ---- ----
4.86% - 6.86% 3.36% - 5.36% 4.54% - 6.54% 5.05% 3.45% 4.5 - 6.0%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Impact of Inflation Rate Escalation Cap
=========================================================================
ANNUAL COMPOUND RATE
1960 - 1995 1950 - 1995
- -------------------------------------------------------------------------
IPD - GDP 4.39% NA
Consumer Price Index 4.71% 4.16%
Producer Price Index 3.87% 3.45%
IDP-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 DRD. Adjustment would result in a
yield of 9.0% assuming a 38.0% tax rate.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
<PAGE>
CONFIDENTIAL 59
- ------------======================----------------------------------------------
North Carolina Railroad Company
Recent Stock Price Performance
- --------------------------------------------------------------------------------
Daily Closing Prices
January 3, 1996 to January 29, 1997
[BAR GRAPH OMITTED]
Source: IDD Information Services/Tradeline.
- ----- CREDIT | FIRST ----------------------------------------------------------
SUISSE | BOSTON
[LETTERHEAD OF MERCER MANAGEMENT CONSULTING]
Privileged and Confidential
Prepared for Use of Counsel
August 12, 1994
Betty Jo Christian, Esq.
Steptoe & Johnson
1330 Connecticut Avenue, NW
Washington, DC 20036-1795
Dear Betty Jo:
As requested by Betty Jo Christian in her memorandum of July 28, 1994, I am
enclosing our estimates of Reproduction Cost New Less Depreciation (RCNLD) for
NCRR properties for each of the six scenarios listed in her request. The results
of our analysis are summarized in the table immediately below and the
assumptions regarding unit reproduction costs, depreciation rates, and other key
valuation factors are detailed in the enclosed exhibits.
Summary of RCNLD Estimates
RCNLD Interest Rental*
Scenario ($ million) ($ million)
- ----------------------------------------------- ----------- ----------------
1 Land only - 50' ROW 40 4.6
2 Land with grading and bridges - 50' ROW 180 20.5
3 Land only - 200' ROW 115 13.1
4 Land with grading and bridges - 200' ROW 260 29.6
5 Land with grading, bridges, track and signals
- 200' ROW 400 45.6
6 Land with grading, bridges, track and signals
- 200' ROW plus yards and shops** 412 47.0
- ----------
* At ICC - determined rail industry composite cost of capital for 1993 of
11.4%
** Excludes Linwood Yard with RCNLD of $38 million
<PAGE>
[LETTERHEAD OF MERCER MANAGEMENT CONSULTING]
Betty Jo Christian, Esq. CONFIDENTIAL
August 12, 1994
Page 2
There are several cautions that need to be mentioned with respect to these
estimates. First, while these estimates represent a further refinement of our
initial RCNLD work in our September 1993 Preliminary Report, they are still
based on a "desktop" analysis of track charts, aerial photographs, and the like
and do not include any physical inspection on our part of any of the NCRR
properties.
Second, while we believe the estimates to be reasonable for purposes of
counsel's assessment of the RCNLD approach, additional work would have to be
conducted prior to submission of RCNLD values in any proceeding before the ICC.
Such work would include site-specific inspections of track, bridge and grading
condition, and site-particular values for real estate. These more detailed
on-site sample observations would be used to further refine the desktop
estimates and provide a basis for standing reply and cross-examination efforts
in any proceeding.
Finally, you will note per Exhibit 5 in the enclosure that approximately $38
million of the nearly $50 million in RCNLD value for yards and shops is
attributable to Linwood Yard. This $38 million is the estimated RCNLD for the
yard as a whole. To the extent that the NCRR-related portion of the yard is
deemed to be only a small portion of the total facility, most of this value
would drop from the scenario 6 value.
Per Scott Saylor's request, in his July 28, 1994 memorandum, we have also
separately estimated (Exhibit 8) the RCNLD value of the equipment at issue
between NCRR and NS to be $30 million. This value presumes replacement of early
20th Century locomotives and cars with their modern-era equivalent at the
depreciated rates shown in the exhibit.
We have not taken into account in this analysis the costs to maintain the rail
track and related rail facilities on NCRR, leaving this issue open for possible
future review.
Sincerely,
/s/ Timothy R. Murphy
- ------------------------------
Timothy R. Murphy
Principal
Enclosures
cc: Tim Walsh
Scott Saylor
<PAGE>
---------------------------
Privileged and Confidential
Prepared for Use of Counsel
---------------------------
Reproduction Cost New Less Depreciation (RCNLD)
Summary of Estimates
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Interest Rental Interest Rental
RCNLD at 11.4% at 16.6%
Scenario(a) ($ million) ($ million)(b) ($ million)(c)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Land Only - 50' ROW 40 4.6 6.6
2. Land with grading and bridges
- 50' ROW 180 20.5 29.9
2a. Scenario 2 without bridges 161 18.4 26.7
3. Land only - 200' ROW 115 13.1 19.1
4. Land with grading and bridges
- 200' ROW 260 29.6 43.2
4a. Scenario 4 without bridges 241 27.5 40.0
5. Land with grading, bridges,
track and signals - 200' ROW 400 45.6 66.4
6. Land with grading, bridges,
track and signals - 200' ROW
plus yards and shops(d) 412 47.0 68.4
=================================================================================
</TABLE>
(a) Per Steptoe & Johnson memorandum of July 28, 1994.
(b) ICC-determined rail industry composite cost of capital for 1993 (post
tax).
(c) The 11.4% cost of capital on a pre-tax basis using the Federal Statutory
tax rate.
(d) Excludes Linwood Yard with RCNLD of $38 million.
============================================================================== 2
<PAGE>
CONFIDENTIAL
Summary
Summary of NCRR Results According to Steptoe & Johnson Categories
Scenario 1. Land Only - 50 Ft ROW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $16,865 $16,865
Greensboro-Raleigh $8,647 $8,647
Subtotal $25,512 $25,512
Raleigh-Morehead City $14,974 $14,974
Total $40,486 $40,486
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
o land values are scaled downward from the values in 3. for 200 ft ROW assuming
a minimum constant of $50,000 per mile. For example, the 200 ft ROW value for
Charlotte-Greensboro is first reduced by $50,000 per mile ($4.55 million) and
then multiplied by 25%, reflecting the 50 ft vs 200 ft ROW. The resulting amount
is then added to $4.55 million.
Scenario 2. Land Plus Grading & Bridges- 50 Ft ROW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $55,112 $10,716 $16,865 $82,693
Greensboro-Raleigh $35,055 $3,972 $8,647 $47,674
Subtotal $90,167 $14,688 $25,512 $130,367
Raleigh-Morehead City $30,353 $3,917 $14,974 $49,244
Total $120,519 $18,605 $40,486 $179,611
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
o assuming 95% of grading and 100% of bridges shown in Exhibit 3.
Scenario 3. Land Only - 200 Ft ROW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $53,811 $53,811
Greensboro-Raleigh $22,288 $22,288
Subtotal $76,099 $76,099
Raleigh-Morehead City $38,596 $38,596
Total $114,695 $114,695
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
o based on per acre values in Exhibit 1 (times 1.5 for assemblage) and acres
shown in Exhibit 2.
<PAGE>
CONFIDENTIAL
Scenario 4. Land Plus Grading & Bridges- 200 Ft ROW
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $58,013 $10,716 $53,811 $122,540
Greensboro-Raleigh $36,900 $3,972 $22,288 $63,160
Subtotal $94,913 $14,688 $76,099 $185,700
Raleigh-Morehead City $31,950 $3,917 $38,596 $74,463
Total $126,863 $18,605 $114,695 $260,163
- ------------------------------------------------------------------------------------------------------------
</TABLE>
o see Exhibit 3 for grading and bridges assumptions
Scenario 5. Land Plus Grading - 200 Ft ROW- plus Track & Signals
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $11,375 $3,413 $58,013 $77,312 $10,716 $53,811 $0 $214,639
Greensboro-Raleigh $2,460 $36,900 $28,700 $3,972 $22,288 $0 $94,320
Subtotal $11,375 $5,873 $94,913 $106,012 $14,688 $76,099 $0 $308,959
Raleigh-Morehead City $3,195 $31,950 $14,910 $3,917 $38,596 $0 $92,568
Total $11,375 $9,068 $126,863 $120,922 $18,605 $114,695 $0 $401,527
- ------------------------------------------------------------------------------------------------------------
</TABLE>
o see Exhibit 4 for signals and track
Scenario 6. Land Plus Grading - 200 Ft ROW- plus Track & Signals & Yards & Shops
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $11,375 $3,413 $58,013 $77,312 $10,716 $53,811 $48,757 $263,396
Greensboro-Raleigh $2,460 $36,900 $28,700 $3,972 $22,288 $962 $95,282
Subtotal $11,375 $5,873 $94,913 $106,012 $14,688 $76,099 $49,720 $358,678
Raleigh-Morehead City $3,195 $31,950 $14,910 $3,917 $38,596 $0 $92,568
Total $11,375 $9,068 $126,863 $120,922 $18,605 $114,695 $49,720 $451,247
- ------------------------------------------------------------------------------------------------------------
</TABLE>
o see Exhibit 5 for yards and shops
<PAGE>
CONFIDENTIAL
Exhibit 1
Real Estate Land Values
Semi-Urban Semi-Rural
----------------------------------------
Value Per Value Per
Percent Acre Percent Acre
- -------------------------------------------------------------------
Unusable 0.0% $100 0.0% $100
Residential 10.3% 10,000 10.3% 10,000
Industrial 58.7% 20,000 10.0% 15,000
Ind'l/Resid 4.9% 12,000 4.9% 12,000
Low Value Ind'l 6.0% 2,000 6.0% 2,000
Rural 13.3% 3,000 62.0% 3,000
Comm'l/Ind'l 3.2% 35,000 3.2% 35,000
Mixed 3.6% 35,000 3.6% 35,000
Total 100.0% 16,262 100.0% 7,475
- -------------------------------------------------------------------
Assemblage Factor 1.5 1.5
Grand Total 24,392 11,212
- -------------------------------------------------------------------
<PAGE>
CONFIDENTIAL
Exhibit 2
RCNLD Land Derivation
(thousands of dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Real Estate - Land
---------------------------------------------------------
Reproduction Assem'age RCNLD
--------------------------------------------------------- Factor
ROW Acre
Miles Width-ft Acres Type Cost Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro 91 200 2,206 Semi-Urb $16,262 $35,874 150.0% $53,811
Greensboro-Raleigh 82 200 1,988 Semi-Rural $7,475 $14,859 150.0% $22,288
Subtotal 173 4,194 $50,733 $76,099
Raleigh-Morehead City 142 200 3,442 Semi-Rural $7,475 $25,731 150.0% $38,596
Total 315 7,636 $76,464 $114,695
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CONFIDENTIAL
Exhibit 3
RCNLD Subgrade and Bridge
(thousands of dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Subgrade Bridges
-------------------------------------------------------------------------------------------
Reproduction Reproduction
-------------------- ----------------------------
Cost per Depr'n Length Cost per Depr'n
Miles Mile Total Percent RCNLD in Feet Foot Total Percent RCNLD
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro 91 $850 $77,350 25.0% $58,013 7,144 $3,000 $21,432 50.0% $10,716
Greensboro-Raleigh 82 $600 $49,200 25.0% $36,900 3,783 $3,000 $11,349 65.0% $3,972
Subtotal 173 $126,550 $94,913 10,927 $32,781 $14,688
Raleigh-Morehead City 142 $300 $42,600 25.0% $31,950 4,352 $3,000 $13,057 70.0% $3,917
Total 315 $169,150 $126,863 15,279 $45,838 $18,605
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
o subgrade per mile costs from conversations with Wilbur Smith. Their
Winston-Salem route study of 1986 was used as reference.
o bridge feet from NS bridge lists and represent bridges NS maintains. The cost
per foot of bridge construction was taken from the Wilbur Smith study.
<PAGE>
CONFIDENTIAL
Exhibit 4
RCNLD Derivation Of Signals. Grade Crossing Protection and Track
(thousands of dollars)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Signals Grade Crossing Signals Roadway-Main Track
--------------------------------------------------------------------------------------------------------------
Reproduction Reproduction Reproduction
------------------ ---------------------- ---------------------
Cost No. Cost Cost
per Depr'n per per Depr'n Track per Depr'n
Miles Mile Total Percent RCNLD Mile Install'n Total Percent RCNLD Miles Mile Total Percent RCNLD
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro 91 $250 $22,750 50.0% $11,375 1 $75 $6,825 50.0% $3,413 147 $700 $103,082 25.0% $77,312
Greensboro-Raleigh 82 1 $75 $6,150 60.0% $2,460 82 $700 $57,400 50.0% $28,700
Subtotal 173 $22,750 $11,375 $12,975 $5,873 229 $160,482 $106,012
Raleigh-Morehead City 142 1 $75 $10,650 70.0% $3,195 142 $700 $99,400 85.0% $14,910
Total 315 $22,750 $11 375 $23,625 $9,068 371 $259,882 $120,922
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o cost per mile consistent with Wilbur Smith estimate of track construction on
Winston-Salem line and with Mercer's estimates.
o depreciation rates reflect superior condition of Charlotte-Greensboro line
which has a large proportion of new materials in the track structure. The other
lines tend to use a larger portion of reuse track materials.
<PAGE>
CONFIDENTIAL
Exhibit 5
RCNLD Yards & Shops
(thousands of dollars)
<TABLE>
<CAPTION>
Yards
-------------------------------------------------------------------------------
Linwood Charlotte Pomona Raleigh
---------------------------------------------------------------------
Within Within Within
Bldgs Only Other 200ft ROW 200ft ROW Other 200ft ROW Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $1,102 $37,460 $2,954 $2,680 $4,560 $48,757
Greensboro-Raleigh $962 $962
Subtotal $1,102 $37,460 $2,954 $2,680 $4,560 $962 $49,720
Raleigh-Morehead City $0
Total $1,102 $37,460 $2,954 $2,680 $4,560 $962 $49,720
- ----------------------------------------------------------------------------------------------------------
</TABLE>
o see Exhibits 6 and 7
<PAGE>
CONFIDENTIAL
Exhibit 6
Yard Characteristics Summary
Feet Total Trk
Tracks per Track Feet (thous) Acres
Linwood Yard-total 355 300
Class tracks 48 4000 192
Rec/dep 8 14000 112
Lead 4 6000 24
Loco servicing 7 2000 14
Rip 5 1000 5
Misc 2 4000 8
Class Yd 161
Length 5000
Width 1400
Loco/Rip 50
Length 2700
Width 800
Other 90
Length 11200
Width 350
Pomona-total 79 75
Class tracks 26 2200 57
Rec/dep
Lead 4 4000 16
Loco servicing
Rip
Misc 2 3000 6
Class Yd 29
Length 3000
Width 425
Loco/Rip
Length
Width
Other 46
Length 4000
Width 500
<PAGE>
<PAGE>
CONFIDENTIAL
Exhibit 7
Yard Value Calculations
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Pomona Linwood Charlotte
------------------------------------------------------------------------------------------------------------
Total Within 200 ft ROW Total Within 200 ft ROW
------------------------------------------ ------------------------------------------
Components Value Components Value Components Value Components Value Components Value
(000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Land
Acres 75 32 300 12 12
Value/Acre $25,000 $25,000 $3,000 $25,000 $25,000
Total Land $1,880 $803 $901 $298 $298
- ------------------------------------------------------------------------------------------------------------------------------
Grading
Trk Ft(thou) 79 55 355 59 59
$ Per Ft 57 57 57 57 57
Total Grading $4,500 $3,150 $20,170 $3,344 $3,344
- ------------------------------------------------------------------------------------------------------------------------------
Track
Trk Ft(thou) 79 55 355 59 59
$ Per Ft 70 70 100 70 70
Total Track $4,435 $3,105 $28,400 $3,296 $3,296
- ------------------------------------------------------------------------------------------------------------------------------
Equipment $6,600
- ------------------------------------------------------------------------------------------------------------------------------
Buildings-Other 6
Sq Ft 21,500
$/Sq Ft $50
Total Other $1,075
- ------------------------------------------------------------------------------------------------------------------------------
Buildings-Rip & Loco 2
Sq Ft 42,400
$/Sq Ft $40
Total Rip & Loco $1,696
- ------------------------------------------------------------------------------------------------------------------------------
Total Above $10,815 $7,058 $58,842 $6,938 $6,938
- ------------------------------------------------------------------------------------------------------------------------------
Non Land Subtotal $8,935 $6,255 $57,941 $6,640 $6,640
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation 70.0% 70.0% 35.0% 60.0% 60.0%
- ------------------------------------------------------------------------------------------------------------------------------
Non Land After Depre $2,681 $1,876 $37,662 $2,656 $2,656
- ------------------------------------------------------------------------------------------------------------------------------
Land $1,880 $803 $901 $298 $298
- ------------------------------------------------------------------------------------------------------------------------------
RCNLD $4,560 $2,680 $38,563 $2,954 $2,954
- ------------------------------------------------------------------------------------------------------------------------------
RCNLD-Bldg Only $1,102
- ------------------------------------------------------------------------------------------------------------------------------
UP's Livonia $58,000
31 Class tracks
Linwood Extrapolated based on class tracks $89,806
</TABLE>
------------------------------------------------
Raleigh
------------------------------------------------
Total Within 200 ft ROW Mile
------------------------------------------------
Components Value Components Value
(000) (000)
- ------------------------------------------------------------------
Land
Acres 9 9
Value/Acre $15,000 $15,000
Total Land $138 $138
- ------------------------------------------------------------------
Grading
Trk Ft(thou) 18 18
$ Per Ft 57 57
Total Grading $1,038 $1,038
- ------------------------------------------------------------------
Track
Trk Ft(thou) 18 18
$ Per Ft 70 70
Total Track $1,023 $1,023
- ------------------------------------------------------------------
Equipment
- ------------------------------------------------------------------
Buildings-Other
Sq Ft
$/Sq Ft
Total Other
- ------------------------------------------------------------------
Buildings-Rip & Loco
Sq Ft
$/Sq Ft
Total Rip & Loco
- ------------------------------------------------------------------
Total Above $2,199 $2,199
- ------------------------------------------------------------------
Non Land Subtotal $2,061 $2,061
- ------------------------------------------------------------------
Depreciation 60.0% 60.0%
- ------------------------------------------------------------------
Non Land After Depre $825 $825
- ------------------------------------------------------------------
Land $138 $138
- ------------------------------------------------------------------
RCNLD $962 $962
- ------------------------------------------------------------------
RCNLD-Bldg Only
- ------------------------------------------------------------------
Note on Linwood buildings and equipment:
The six other buildings include: 1 general yard office 3 floors @ 50ft
x 100ft, 1 misc @ 25ft x 100ft and 4
misc @ 20ft x 50ft
The loco and rip include: 1 locomotive servicing facility @ 60ft
x 140ft and one rip @ 170ft x 200ft
Equipment includes: Includes $1.6 million rip and $2
million loco and $3 million yard
<PAGE>
CONFIDENTIAL
Exhibit 8
Rolling Stock
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Locomotives Coaches Frt Cars Other Total
----------------------------------------
Passgr Freight Switcher
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number 8 12 3 14 123 18
Replacement Each $ 2,000,000 $ 1,500,000 $ 1,200,000 $ 1,200,000 $ 55,000 $ 55,000
Replacement Total $16,000,000 $18,000,000 $ 3,600,000 $16,800,000 $ 6,765,000 $ 990,000 $62,155,000
Depre % 50.0% 50.0% 80.0% 50.0% 50.0% 80.0%
RCNLD $ 8,000,000 $ 9,000,000 $ 720,000 $ 8,400,000 $ 3,382,500 $ 198,000 $29,700,500
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
MERCER
Management Consulting
------------------------
Memorandum
Scott M. Saylor
To: General Counsel
North Carolina Railroad Company
From: Timothy Murphy
Subject: The Net Liquidation Value(NLV) of NCRR
Date: July 28, 1995
9 Pages including exhibits
- --------------------------------------------------------------------------------
We have completed the NLV calculations for NCRR. Exhibit 1 summarizes the
results and contains comments on sources and methodology. Additional detail on
the calculations underlying key assets are shown in Exhibits 2 through 5. A
discussion of our approach, major assumptions, and results follow.
Approach
As you know this valuation represents a desk-top analysis which draws upon our
knowledge of and experience in calculating railroad NLVs. As the case with most
railroad NLV studies this analysis focused on three major inputs:
-the quantity of each type of asset to be valued
-the condition and/or quality of these assets
-their transaction prices and costs associated with disposal
Determining the quantity of track assets was relatively straight forward as
documents provided by NCRR provided information on the most important track
asset, the type of rail used. Other track asset components can be reasonably
estimated from past Mercer work as most railroads do not deviate widely from
their use of these materials. For example, other track metals (associated with
holding rail in place) can be readily estimated from other Mercer work on a per
mile basis and multiplied by NCRR miles. The number of ties per mile is fairly
standard and was obtained from other Mercer studies of railroads having the
similar operating conditions as NCRR. The amount of land was assumed to be what
we used in the RCNLD analysis -- a 200 foot right-of-way plus additional land at
Linwood and Pomona yards.
The second input of a NLV analysis, the condition of assets and/or their
quality, can vary widely over different railroads depending on maintenance
practices and capital investments and on geographic conditions. For this study
the condition of NCRR's key track asset, rail, was provided in general terms in
documents given Mercer. Mercer is also generally acquainted with maintenance
policies on Norfolk Southern and this was useful when judgments had to be made.
<PAGE>
Page 2
The greatest uncertainty was the quality of real estate in terms of the nature
of the properties immediately adjacent to the railroad properties. For example,
a railroad that transverses high quality industrial land would obtain greater
land liquidation value than a railroad surrounded by farm land. For this, Mercer
approximated the mix of land based on another NLV study of a railroad that
transversed a mixture of urban and rural properties.
Finally, the third input are the prices that can be obtained for the assets of
and the costs of disposing of them. For track, prices can be directly obtained
by surveying dealers and railroads. A contractor Mercer has used in the past to
collect price information on track components was retained for this study to
update Mercer's price database for certain critical items such as the price of
reusable rail and metal scrap. Other data such as track removal costs and
transportation of materials were taken from Mercer's railroad industry
experience. The most uncertain prices were the value of comparable real estate
surrounding NCRR's right-of-way. For this Mercer used prices from other studies
and which were used in the RCNLD study completed in 1994. Typically, railroad
real estate also suffers substantial mark-downs from the prices of surrounding
real estate due to the unique size and shape characteristics of railroad real
estate and these were also taken from Mercer's experience in other studies.
Assumptions
In developing this NLV Mercer assumed that all revenue service would be
terminated. The dismantling and disposal of assets, it was assumed, would take
place over a period of time consistent with the typical time frame for a
railroad abandonment: no longer than six months for track and signals and up to
a year for bridges. Land would be sold clear of track and structures and because
of the diverse nature of railroad properties to be sold (residential versus farm
versus industrial) and the unique size, shape, and access problems that are
typical of railroad rights-of-way, a three year sales period is anticipated.
Mercer assumed that all metal materials removed in the salvaging process would
be sold on the spot, removed to staging areas for further disposition, or
transported to local dealers for final disposition. Most of the reusable and
scrap ferrous materials would be sold to buyers in a 500 mile radius from the
railroad. Scrap metals other than the better rail scrap would most likely be
purchased by regional mini-mills and high-quality rail scrap would probably be
purchased by a mill with re-roller capability (typically rolled into shapes for
highway guard rails). High quality reusable rail, of which there are large
quantities on the Charlotte-Greensboro segment, would almost certainly be
purchased by a Class I or large regional railroad such as CSX, NS, KCS, or
Wisconsin Central. Ties would be sorted, banded, and sold on-site or from
regional material storage areas. Reusable ties would be of most interest to
industrial, shortline, and regional railroads.
Mercer also assumed that all public grade crossings would be removed and that
there would be minimal reconstruction to meet local and state requirements.
<PAGE>
Page 3
For bridges Mercer has assumed that the costs of dismantling and transportation
offset the value of the scrap proceeds so there is no net contribution to NLV
from this asset. State regulations are important to the liquidation value of
bridges. In some states the enforcement of all applicable regulations can
require extensive dismantling of most all structures including the bulldozing of
grades over culverts. Under these conditions bridges can be a sizable net
deduction to the NLV of the railroad line. In other states the railroads can
exercise greater latitude and be selective in recovering only those structures
where the scrap proceeds are greater than the dismantling and transportation
costs.
Land would be classified by its marketability, and marketing efforts would begin
with the most desirable parcels. Commercial and residential real estate brokers
at various locations along the line would be contacted, and property inspections
by the brokers arranged. Sales would take place through brokers but some sales
would result from direct contact with parties that have an immediate interest
such as abutters, utilities and others who have cross-over easements, and
municipalities. It is assumed that the value of NCRR real estate would be what
could be obtained by sale for non-corridor use. Any potential corridor use for
such purposes as power transmission towers, pipelines, or fiber optics is not
considered in this study as these opportunities are very specific to each
property being evaluated and Mercer has no knowledge of such opportunities in
this study. Further it is assumed that in those cases where such longitudinal
corridor use has already been established on NCRR properties by Norfolk Southern
their continued use will not detract from the property values developed in this
study. Finally, it is assumed that NCRR holds fee title (as opposed to easement
rights) to most of its ROW and these properties are largely unaffected by any
reversionary provisions of the land deeds.
Results
The NLV of the North Carolina Railroad is estimated to be about $44 million
(Exhibit 1). This is much lower than the value determined under the Reproduction
Cost New Less Depreciation (RCNLD) valuation approach which in August 1994 was
calculated by Mercer to be $450 million. The major reasons for this wide
difference are:
o the enormous expenses that are required to prepare the
subgrade for placement of track represent almost 30 percent of
NCRR's RCNLD, but have no value in a NLV approach -- in fact,
the subgrade itself also acts to reduce the value of the land
since the raised or depressed roadbed is almost always
inconsistent with the surrounding land use.
o land value is a double edge sword in that under RCNLD the
railroads pay a premium in acquiring land since corridor
purchases tend to bear the cost of tearing apart larger blocks
of real estate and changing the ability of owners to use
property that becomes divided by the right-of-way --
conversely, the sale of land in a railroad abandonment is
hindered by the peculiar ribbon shape of railroad ROW and the
ability to access and use the property under current zoning.
o bridges usually have very small value if any in a NLV.
<PAGE>
Page 4
o railroad ballast which can be a significant expense under
RCNLD usually have negligible value in a NLV.
o labor expense that is incurred to construct the railroad in a
RCNLD and is a sizable component of the RCNLD value becomes a
deduction to value in a NLV as labor is expended to remove
salvageable assets.
Another factor that will influence the NLV of railroad property is the price of
reusable rail and rail and other metals scrap. As shown in Exhibit 1 the
proceeds from the sale of metals was estimated to be $41 million. Just a few
years ago (1992) the proceeds would be 20 to 30 percent less as the price of
rail and scrap has since escalated in line with the improved economy.
- -----------------------------------------------------
Please do not hesitate to contact me or my colleague, Bob Waldner, should you
have any questions about this valuation.
<PAGE>
Exhibit 1
Summary of NLV Of NCRR
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Charlotte/ Greens- Subtotal Raleigh/ Total Comment
Greens- boro/ Moreh'd
boro Raleigh City
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mileages
Route Miles 91 82 173 142 315 All miles shown from Charlotte to
Components: Raleigh are from "Statement of Main
Main Track 147 82 229 142 371 Track Rail - NCRR" and from "Yard Side
Other Track 73 20 93 17 110 Tracks On NCRR Property". In the case
Total Track 221 102 323 159 481 of the line from Raleigh to Morehead
City the Other Track was exptrapolated
from the amount of other track shown
between Raleigh and Goldsboro.
Track NLV(000)
Gross Proceeds-
Rail $ 20,004 $ 5,657 $ 25,661 $ 4,243 $ 29,904 See Exhibit 2
OTM $ 4,722 $ 1,987 $ 6,709 $ 3,130 $ 9,840 See Exhibit 3
Turnouts $ 777 $ 192 $ 969 $ 333 $ 1,301 See Exhibit 3
Subtotal (Metals) $ 25,503 $ 7,836 $ 33,339 $ 7,706 $ 41,046
Cross Ties $ 1,465 $ 509 $ 1,974 $ 509 $ 2,483 See Exhibit 3
Subtotal of Gross Salvge $ 26,967 $ 8,346 $ 35,313 $ 8,216 $ 43,529
Deductions--
Track Removal Costs $ (147) $ (82) $ (229) $ (142) $ (371) $3 per foot for CWR and $3.30 for
jointed. See Note 1.
Transportation Costs $ (3,572) $ (1,636) $ (5,208) $ (2,529) $ (7,737) $10 per ton for metals and $1 per
useable tie
Crossing Repairs $ (1,082) $ (385) $ (1,468) $ (599) $ (2,067) Same source as Exhibit 3
Signal Removal Costs $ (339) $ (21) $ (360) $ (33) $ (393) Same source as Exhibit 3
Subtotal of Deductions $ (5,141) $ (2,125) $ (7,265) $ (3,303) $ (10,569)
Total NLV of Track $ 21,827 $ 6,221 $ 28,048 $ 4,912 $ 32,960
Bridges NLV(000) This is usually a relatively small
Gross Proceeds from Scrap amount if selective removal is allowed
Dismantling Costs by state regulations. Otherwise
Total NLV of Bridges $ 0 $ 0 $ 0 $ 0 $ 0 bridges could be negative.
Land NLV(000)
Within 200 Foot ROW $ 3,661 $ 1,736 $ 5,397 $ 3,006 $ 8,403 Exhibit 4 and 5
Linwood and Pomona $ 1,582 $ 0 $ 1,582 $ 0 $ 1,582 Exhibit 4
Total Land $ 5,243 $ 1,736 $ 6,979 $ 3,006 $ 9,985
Buildings NLV(000) $ 1,000 $ 0 $ 1,000 $ 0 $ 1,000 Assumed
(Linwood Only)
- ------------------------------------------------------------------------------------------
Grand Total NLV(000) $ 28,070 $ 7,957 $ 36,027 $ 7,918 $ 43,945
Per Route Mile $ 308,456 $ 97,038 $ 208,246 $ 55,763 $ 139,508
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
1. In estimating removal costs Mercer assumed all of the main line
track was welded rail and other track jointed rail.
<PAGE>
Exhibit 2
Gross Proceeds of Rail
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Miles Tons By Rail Class Total
- -------------------------------------------------------------------------------------------
Segment Route Main Other I II III IV Dollars
Track Track @$425 @$380 @$200 @$116 (000)
per ton per ton per ton per ton
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro 91 147 73 39,711 5,783 3,383 2,177 $20,004
Greensboro-Raleigh 82 82 20 0 8,491 8,491 6,308 $ 5,657
Subtotal 173 229 93 39,711 14,274 11,874 8,485 $25,661
Raleigh-Moreh'd City 142 142 17 0 0 0 36,559 $ 4,243
Total 315 371 110 39,711 14,274 11,874 45,044 $29,904
- ------------------------------------------------------------------------------------------------------
</TABLE>
Source: Prices per ton by class of rail were based on survey of dealers. Rail
condition was obtained from "Statement Of Main Track Rail - NCRR" with "Good"
condition treated as Class I rail, "Fair" as Class II, and "Poor" or "Worn" as
Class IV rail. According to the FRA Class I rail is generally main line quality
rail, Class II suitable for branch lines, and Class III for light density branch
lines. Class IV rail is generally found in yards and side tracks and is scrap
quality rail. Over 90% of the main line rail in the heavy tonnage line from
Charlotte to Greensboro was considered to be Class I rail.
<PAGE>
Exhibit 3
Gross Proceeds of OTM, Turnouts, And Ties
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
OTM Turnouts Cross Ties (main only)
---------------------------------------------------------------------------------------------------
$ Per Mile Total $ Per Mile Total Ties Per Main Line Mile Total
------------------- Dollars Main Dollars --------------------------- Dollars
Main Other (000) Track (000) Sec'd Land- Other
Track Track Hand scape
@$10 @$5 @$0
each each each
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte-Greensboro $23,455 $17,287 $ 4,722 $ 5,275 $ 777 587 1,465 928 $ 1,943
Greensboro-Raleigh $20,028 $17,287 $ 1,987 $ 2,342 $ 192 228 509 2,262 $ 396
Subtotal $ 6,709 $ 969 $ 2,339
Raleigh-Moreh'd City $20,028 $17,287 $ 3,130 $ 2,342 $ 333 228 509 2,262 $ 686
Total $ 9,840 $ 1,301 $ 3,025
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: All per mile amounts shown in this exhibit were developed from an
analysis of the main and branch operations of an eastern railroad and
extrapolated to NCRR based on rail type and distance.
<PAGE>
Exhibit 4
Land NLV
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Miles Acres Type A-T-F Cost (Exh 5) Adjustm't #1 - phy'cal & Adjustm't #2 - timing &
----------------- eco factors & liquidation marketing
Per Total -----------------------------------------------------
Acre Percent Adj Total Percent Adj Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within 200 Foot ROW:
Charlotte-Greensboro 91 2,206 Semi-Urb 9,044 19,951 65.7% 6,848 46.5% 3,661
Greensboro-Raleigh 82 1,988 Semi-Rural 4,717 9,377 65.4% 3,247 46.5% 1,736
Subtotal 173 4,194 29,328 10,095 5,397
Raleigh-Morehead City 142 3,442 Semi-Rural 4,717 16,238 65.4% 5,622 46.5% 3,006
Total ROW Land 315 7,636 45,566 15,717 8,403
- ---------------------------------------------------------------------------------------------------------------------------------
Add'l Outside of ROW:
Pomona N/A 43 Urban 25,000 1,076 1,076 20.0% 861
Linwood N/A 300 Rural 3,000 901 901 20.0% 721
- ---------------------------------------------------------------------------------------------------------------------------------
Grand Total N/A 7,980 47,542 17,694 9,985
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Adjustment #1 represents the reduction from A-T-F values due to size and
shape limitations of the railroad property to be sold and liquidation costs.
Attachment #2 represents the DCF impact of the timing of sales, the impact of
reversionary rights, and other reasons for the inability to sell properties,
<PAGE>
Exhibit 5
Calculation of Across-The-Fence Values
Per Acre
-------------------------------------------------------------------
Semi-Urban Semi-Rural
---------------------------------------------------
Percent A-T-F Percent A-T-F
Distribution Per Distribution Per
Of Acres Acre Of Acres Acre
-------------------------------------------------------------------
Unusable 44.7% $ 100 44.7% $ 100
Residential 5.7% $10,000 5.7% $10,000
Industrial 32.5% $20,000 10.0% $15,000
Ind'l/Resid 2.7% $12,000 2.7% $12,000
Low Value 3.3% $ 2,000 3.3% $ 2,000
Rural 7.4% $ 3,000 29.9% $ 3,000
Comm'l/In 1.8% $35,000 1.8% $35,000
Mixed 2.0% $35,000 2.0% $35,000
Total 100.0% $ 9,044 100.0% $ 4,717
-------------------------------------------------------------------
North Carolina Railroad Company
Discussion Notes
January 14, 1997
Prepared for:
Credit Suisse First Boston Corporation
Prepared by:
Mercer Management Consulting
2300 N Street NW
Washington, D.C. 20037
(202) 778-7000
<PAGE>
Contents
================================================================================
I. Summary
II. Estimation of Norfolk Southern's NCRR-Derived Net Operating Cash Flow
III. Estimation of Diversion-Related Impacts to Norfolk Southern
IV. Factors Affecting the Analysis
<PAGE>
Contents
================================================================================
- --> I. Summary
II. Estimation of Norfolk Southern's NCRR-Derived Net Operating Cash Flow
III. Estimation of Diversion-Related Impacts to Norfolk Southern
IV. Factors Affecting the Analysis
<PAGE>
Mercer was engaged by CS First Boston to conduct two analyses of the North
Carolina Railroad Company (NCRR)
================================================================================
o The North Carolina Railroad Company consists of three route segments
within the state of North Carolina, operated by Norfolk Southern
Corporation
-- Charlotte-Greensboro, 91 miles, high-density mainline
-- Greensboro-Raleigh, 77 miles, medium-density secondary mainline
-- Raleigh-Morehead City, 142 miles, light-density branchline
o The State of North Carolina owns the majority of NCRR shares and may
make an offer to minority shareholders for the remaining shares
o Mercer was asked to estimate the figures below, which will assist in
determining a fair value for NCRR shares
Value-Defining Concepts: Value derived by Cost to Norfolk Southern
Norfolk Southern of pursuing an alternative
from the NCRR to the NCRR
Figures Mercer Will Estimate: Operating cash flow Additional capital costs
which Norfolk Southern and operating impacts
receives from use of that NS would incur if it
the NCRR rerouted traffic to non-
NCRR lines
================================================================================
Mercer Management Consulting Page I-1
<PAGE>
This analysis intends to make reasonable estimates of key components of NCRR
value, but does not definitively calculate the NCRR's value
================================================================================
o Mercer's estimates of Norfolk Southern's NCRR-derived net operating
cash flow and potential diversion-related impacts take advantage of
the best data available
-- Norfolk Southern's state and federal reporting of revenues and
expenses
-- Mercer's recent experience in the area of capital requirements
for capacity expansion, track component, and signal system
costs
-- Database of 1995 traffic flows through the state of North
Carolina, including all traffic flowing over the NCRR,
provided by NCRR and ultimately obtained from the North
Carolina Department of Transportation
o Time frame, budget, and participation by interested parties was
limited
-- Analysis was done entirely "at the desktop" without the
involvement of NCRR or Norfolk Southern personnel
-- No physical inspection of either the NCRR or Norfolk
Southern's prospective diversion route was performed
-- No analysis of the non-freight-related elements of NCRR value
was performed
o Passenger train operations over NCRR and related
payments
o Lineside properties and the value derived from leases of
those properties
o Air and subsurface rights and the value derived from
easements of those rights
o The NCRR's value stems from many associated rights, assets,
functions, and services; the figures presented in this presentation
are useful to the understanding of some, but not all, components of
NCRR value
================================================================================
Mercer Management Consulting Page I-2
<PAGE>
Mercer used three methods to estimate Norfolk Southern's NCRR-derived operating
cash flow, yielding after-tax estimates of $11 to $15 million
================================================================================
Key Assumptions
o Revenues for NS' NCRR and non-NCRR movements in North Carolina were
estimated and allocated based on gross-ton mileage information derived
from NS' traffic density map
o Three methods of estimating operating expenses were used, each of which is
described in detail in the following chapter
o Pre-tax operating income was calculated by subtracting operating expenses
and cash capital expenditures from revenues for each NCRR line segment
o A 24.6% cash tax rate(1) was applied to pre-tax operating income, yielding
net operating cash flow
Net Operating Cash Flow Derived by NS from use of NCRR
(Millions of Dollars per Year)
Method 1 Method 2 Method 3
-------- -------- --------
Charlotte-Greensboro 13.7 13.9 12.0
Greensboro-Raleigh 1.7 1.9 1.0
Raleigh-Morehead City (1.3) (0.9) (2.3)
NCRR Total 14.2 15.0 10.7
(1) 1995 Figure. Source: Mercer analysis of federal taxes paid by United
States railroads. Calculated as (34%) x (actual payments) [divided by]
(required payments) to account for tax deferral. Any state taxes are not
included.
================================================================================
Mercer Management Consulting Page I-3
<PAGE>
Mercer's estimate of the cost of diverting traffic from the NCRR includes the
capital costs of line upgrading and the impacts of additional car mileage and
traffic loss
================================================================================
Key Assumptions
o NS would retain all divertable overhead traffic and upgrade the
Roanoke/Bristol/Knoxville line to accept rerouted traffic
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 truncated length of haul and diminished revenue and operating
costs
o Changes in NS operating costs due to diversion are based on analysis using
the Uniform Rail Costing System (URCS)
Costs to Norfolk Southern of Diverting Traffic from the NCRR
Capital Cost of Line Upgrade: $271,000,000
Operating Revenue/Cost Changes
(Millions of Dollars per Year)
------------------------------
Additional Car-Miles for
Diverted Traffic 34.9 (1)
Lost Revenue and Costs
for Local Traffic 4.3
Truncated Haul of
NCRR Originating and
Terminating Traffic 12.5 (1)
Net Post-Tax Impact
on Profitability 51.7
Positive numbers indicate increases in cost/decreases in revenue
(1) Figures shown represent the mean value of a range of estimates
================================================================================
Mercer Management Consulting Page I-4
<PAGE>
Contents
================================================================================
I. Summary
- --> II. Estimation of Norfolk Southern's NCRR-Derived Net Operating Cash Flow
III. Estimation of Diversion-Related Impacts to Norfolk Southern
IV. Factors Affecting the Analysis
<PAGE>
Chapter 2 details assumptions and methods used to calculate revenues and
expenses contributing to NS' operating cash flow from use of NCRR
================================================================================
o NCRR revenues are estimated by allocating NS' reported North
Carolina revenues to NCRR and non-NCRR lines according to the gross
ton-miles generated on each line, which were derived from NS traffic
density maps and state reporting
o Three methods were used to estimate expenses for each NCRR line
segment
North Carolina NS System
Regression Model State Reporting Total Reporting
NC State NS System
--------- ---------
Op.Ex. per Route-Mile Transportation $ -- Account 1 $ --
NCRR 3 MoW $ -- Account 2 $ --
NCRR 2 MoE $ -- Account 3 $ --
NCRR 1 G&A $ --
[Chart Omitted] NCRR <1 MGT
Non-NCRR 1-5 MGT
[Chart Omitted] 5-20 MGT
>20 MGT
Cost per Mile
[Chart Omitted]
o Each method has strengths and weaknesses derived from the quality
and completeness of the data available for analysis
================================================================================
Mercer Management Consulting Page II-1
<PAGE>
Revenue Allocation
Norfolk Southern's state-reported 1995 freight operating revenues for North
Carolina were allocated to NS' North Carolina lines on the basis of gross
ton-miles generated on each line
================================================================================
--------------------
NS 1995
Traffic Density Map*
[GRAPHIC OMITTED]
--------------------
Allocation of Norfolk Southern 1995 State-Reported
Revenue to North Carolina Lines
- --------------------------------------------------------------------------------
Line Segment Mileage Traffic Density Gross Ton-Miles Revenue
(Million GTM (Billions) ($ Millions)
per Mile)
- --------------------------------------------------------------------------------
Charlotte-Salisbury 41 40.1 1.6 $25.6
Salisbury-Greensboro 50 49.7 2.5 38.7
Charlotte-Greensboro 91 45.4 4.1 64.4
Subtotal
Greensboro-Raleigh 77 10.2 0.8 12.6
Raleigh-Morehead city 142 2.0 0.3 4.4
- --------------------------------------------------------------------------------
NCRR Subtotal 310 16.8 5.2 81.4
- --------------------------------------------------------------------------------
Non-NCRR NS Lines in 1,150 7.0 8.1 125.6
North Carolina
- --------------------------------------------------------------------------------
North Carolina Total 1,460 9.1 13.3 $207.0
- --------------------------------------------------------------------------------
* Total North Carolina GTMs calculated from NS 1995 Traffic Density Map
match NS state-reported figures to within 1%.
Mercer Management Consulting Page II-2
<PAGE>
Cost Allocation Method 1
Costs were allocated to NCRR lines by fitting NCRR data to a regression of
operating expense per route mile vs. traffic density
================================================================================
o Data was drawn from 1995 R-1 reports and Mercer benchmarking of
shortlines and regionals from 1995 and prior years
o The soundness of this method was verified by comparing the
regression's estimates of NS' total North Carolina state
expenditures with NS' reported totals, yielding variation of less
than 3%
o NCRR's Charlotte-Greensboro line exhibits higher density than
benchmarked Class Is because Class I data includes all lines while
NCRR Charlotte-Greensboro is high-density mainline
o Note that at lower densities, this method will produce lower costs
than NS experiences in reality because of the presence of low-cost
shortlines and regional railroads in the database
Regression of Operating Expenses Per Route Mile vs. Traffic Density
Based on 1995 and Prior North American Benchmark Data
[CHART OMITTED]
================================================================================
Mercer Management Consulting Page II-3
<PAGE>
Cost Allocation Method 1
Operating costs estimated by the regression and an estimate of cash
capital expenditures beyond depreciation were subtracted from revenues
to obtain pre-tax operating income of $19 million
- --------------------------------------------------------------------------------
Pre-Tax Operating Income for Three NCRR Lines, Derived from Cost
Regression Based on 1995 and Prior North American Benchmarks
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Traffic
Density Reported Operating Estimated
(Million Gross Operating Operating Expenses Operating
GTM per Ton-Miles Revenues Expenses(1) per Mile(2) Expenses(2)
Miles Mile) (Billions) ($Millions) ($Millions) ($Millions) ($Millions)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NCRR:
1. Charlotte-Greensboro 91 45.4 4.1 $64.4 $450,035 $41.0
2. Greensboro-Raleigh 77 10.5 0.8 $12.6 $120,329 $9.3
3. Raleigh-Morehead City 142 2.0 0.3 $4.4 $39,970 $5.7
Total NCRR 310 16.8 5.2 $81.4 $55.9
- ----------------------------------------------------------------------------------------------------------------------------
Other NS Lines in North Carolina 1,150 7.0 8.1 $125.6 $100.4
Total North Carolina 1,460 9.1 13.3 $207.0 $151.7 $87,317 $156.3
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------
Cap. Ex. Pre-Tax
Beyond Operating
Depreciation(3) Income
($Millions) ($Millions)
- -----------------------------------------------------------------
<S> <C> <C>
NCRR:
1. Charlotte-Greensboro $5.2 $18.2
2. Greensboro-Raleigh $1.0 $2.3
3. Raleigh-Morehead City $0.4 ($1.7)
Total NCRR $6.6 $18.9
- ---------------------------------- -----------------------------
Other NS Lines in North Carolina $10.2 $15.0
Total North Carolina $16.9 $33.8
- ---------------------------------- -----------------------------
</TABLE>
1Source: Norfolk Southern R-1 and North Carolina State Reports
2From regression line
3Based on Norfolk Souther 1995 R-1 figures; depreciation
of $389 million, capital expenditure of $716 million, and operating
revenues of $4.012 billion. Cash spent on capital expenditures beyond
depreciation is calculated as a percentage of revenue, equal to 8.2% in
1995.
=======================================================================
Mercer Management Consulting Page II-4
Cost Allocation Method 2
Norfolk Southern's 1995 state-reported operating costs for North Carolina (1)
were allocated to NCRR and non-NCRR lines on the basis of mileage or gross
ton-miles
================================================================================
Allocation Percentages for Mileage- and GTM-Based Expenses
- --------------------------------------------------------------------------------
Percent of Percent
Total Mileage Gross of GTM's
in North Ton-Miles in North
Line Segment Miles Carolina+ (Billions) Carolina++
- --------------------------------------------------------------------------------
Charlotte-Greensboro 91 6% 4.1 31%
Greensboro-Raleigh 77 5% 0.8 6%
Raleigh-Morehead city 142 10% 0.3 2%
NCRR Subtotal 310 21% 5.2 39%
- --------------------------------------------------------------------------------
Other NS Lines in North Carolina 1,150 79% 8.1 61%
- --------------------------------------------------------------------------------
North Carolina Total 1,460 100% 13.3 100%
- --------------------------------------------------------------------------------
+ Allocation Percentages for Mileage-Based Costs
++ Allocation Percentages for Gross Ton-Mile-Based Costs
o Costs are allocated based on mileage when they are fixed, i.e., costs that
are associated with or vary with a railroad's physical facilities or
presence in a location, rather than the traffic the railroad hauls
o Costs are allocated based on gross-ton miles when they are associated with
or vary with the amount of traffic a railroad hauls, irrespective of the
physical facilities in place
o Splits between mileage-based and GTM-based costs were made according to
past Mercer and ICC research into the variability of each expense category
(1) As reported annually to the state of North Carolina
================================================================================
Mercer Management Consulting Page II-5
<PAGE>
Cost Allocation Method 2
Allocations for Transportation, Maintenance of Way, Maintenance of Equipment,
and General & Administrative Costs were made separately
================================================================================
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Total 1995 Cost Mileage-Based GTM-Based
for North Carolina Portion Portion
Cost Category Allocation Rule ($ Millions) ($ Millions) ($ Millions)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transportation 90% of costs are GTM based; $ 63.5 $ 6.3 $ 57.2
10% are mileage-based
- ---------------------------------------------------------------------------------------------------------
Maintenance of Way $10,000 per mile; $ 32.6 $14.6 $ 18.0
remainder GTM-based
- ---------------------------------------------------------------------------------------------------------
Maintenance of Equipment 100% of costs are GTM-based $ 35.9 $ 0.0 $ 35.9
- ---------------------------------------------------------------------------------------------------------
General and Administrative 74% of costs are GTM-based; $ 19.7 $ 5.1 $ 14.6
26% are mileage-based
- ---------------------------------------------------------------------------------------------------------
Total $151.7 $26.1 $125.6
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Maintenance Maintenance General &
of Way of Equipment Transportation Administrative
---------------------------------------------------------------------------------------
Mileage- GTM- Mileage- GTM- Mileage- GTM- Mileage- GTM-
Based Based Based Based Based Based Based Based
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NCRR:
1. Charlotte-Greensboro $0.9 $5.6 $0.0 $11.2 $0.4 $17.8 $0.3 $4.5
2. Greensboro-Raleigh $0.8 $1.1 $0.0 $2.2 $0.3 $3.5 $0.3 $0.9
3. Raleigh-Morehead City $1.4 $0.4 $0.0 $0.8 $0.6 $1.2 $0.5 $0.3
Total NCRR $3.1 $7.1 $0.0 $14.1 $1.3 $22.5 $1.1 $5.7
- ------------------------------------------------------------------------------------------------------------------------
Other NS Lines in North Carolina $11.5 $10.9 $0.0 $21.8 $5.0 $34.7 $4.0 $8.9
Total North Carolina $14.6 $18.0 $0.0 $35.9 $6.3 $57.1 $5.1 $14.6
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Mercer Management Consulting Page II-6
<PAGE>
Cost Allocation Method 2
As was done in Method 1, costs allocated to NCRR lines using Method 2 and cash
capital expenditures were subtracted from operating revenues to obtain pre-tax
operating income
================================================================================
Pre-Tax Operating Income for Three NCRR Lines
Derived from Allocation of NS' North Carolina Reported Costs
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Traffic
Density Cap.Ex. Pre-Tax
(Million Gross Operating Allocated Beyond Operating
GTM per Ton-Miles Revenues Expenses Depreciation Income
Miles Mile) (Billions) ($Millions) ($Millions) ($Millions) ($Millions)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NCRR:
1. Charlotte-Greensboro 91 45.4 4.1 $64.4 $40.7 $5.2 $18.5
2. Greensboro-Raleigh 77 10.5 0.8 $12.6 $9.0 $1.0 $2.6
3. Raleigh-Morehead City 142 2.0 0.3 $4.4 $5.2 $0.4 ($1.2)
Total NCRR 310 16.8 5.2 $81.4 $54.9 $6.6 $19.9
- ----------------------------------------------------------------------------------------------------------------------
Other NS Lines in North Carolina 1,150 7.0 8.1 $125.6 $96.8 $10.2 $18.6
Total North Carolina 1,460 9.1 13.3 $207.0 $151.7 $16.9 $38.4
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Mercer Management Consulting Page II-7
<PAGE>
Cost Allocation Method 3
Norfolk Southern's systemwide operating costs were allocated to lines of
different density profiles based on mileage and GTMs; a regression
similar to that used in Method l was used to calculate NCRR costs
================================================================================
o As in Method 2, fixed costs were allocated based on mileage, while
variable costs were allocated based on gross ton-miles
o The details of the mileage- and GTM-based allocations are not shown
here due to the expanded number of categories in which NS reports
system total costs in its R-1 report; Mercer and prior ICC analyses
were used to develop cost variability factors
Norfolk Southern 1995 System Cost
Allocation by Density Category (Illustrative)
----------------------------------------------------------------
Density Categories
Mileage/GTM ----------------------------------
Account Percentages <1 1 to 5 5 to 20 >20
----------------------------------------------------------------
Account 1 --% --% $-- $-- $-- $--
Account 2 --% --% $-- $-- $-- $--
Account 3 --% --% $-- $-- $-- $--
----------------------------------------------------------------
- -------------------------------------------------------------------------------
1995 Traffic Allocated
1995 Revenue 1995 Gross Density 1995 Operating
Density Ton-Miles Ton-Miles Route (Million GTM Expenses
Category (Billions) (Billions) Miles per Mile) ($ Millions)
- -------------------------------------------------------------------------------
O to l MGT 0 1 2,247 0.3 $73
1 to 5 MGT 3 7 2,720 2.5 $147
5 to 20 MGT 27 55 4,064 13.5 $664
>20 MGT 96 194 5,384 36.1 $2,065
Total or Average 127 256 14,415 17.8 $2,950
- -------------------------------------------------------------------------------
Source: Norfolk Southern 1995 R-1 and Mercer Analysis
================================================================================
Mercer Management Consulting Page II-8
<PAGE>
Cost Allocation Method 3
Costs associated with each density category were regressed to determine fixed
and density-dependent per-mile costs
================================================================================
o Calculation of NCRR costs using the regression line used in Method 3
yields higher costs than with the regression line in Method 1
o Although NS is a cost leader among Class I railroads, the presence
of regional and shortline railroads in the Method 1 data make NS'
costs appear higher than the North American average displayed in the
Method 1 regression
o It is likely that Method 3 cost estimates reflect the true NCRR cost
structure more accurately, especially for the lower-density portions
of the NCRR because all data is drawn from the actual operator of
the NCRR, Norfolk Southern
Regression of Operating Expenses Per Route Mile vs. Traffic Density
Based on Allocation of NS 1995 System Operating Costs by Density Category
[CHART OMITTED]
================================================================================
Mercer Management Consulting Page II-9
<PAGE>
Cost Allocation Method 3
NCRR revenues, operating costs per mile derived from the regression, and cash
capital expenditures were converted to pre-tax operating income as in Methods 1
and 2
================================================================================
Pre-Tax Operating Income for Three NCRR Lines, Derived from Allocation
of and Regression of NS' System Operating Costs by Density Category
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Traffic
Density Operating Estimated Cap.Ex. Pre-Tax
(Million Gross Operating Expenses Operating Beyond Operating
GTM per Ton-Miles Revenues per Mile(2) Expenses Depreciation Income
Miles Mile) (Billions) ($Millions) ($Millions) ($Millions) ($Millions) $Millions
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NCRR:
1. Charlotte-Greensboro 91 45.4 4.1 $ 64.4 $475,210 $ 43.2 $ 5.2 $16.0
2. Greensboro-Raleigh 77 10.5 0.8 $ 12.6 $133,162 $ 10.3 $ 1.0 $ 1.3
3. Raleigh-Morehead City 142 2.0 0.3 $ 4.4 $ 49,795 $ 7.1 $ 0.4 $(3.1)
Total NCRR 310 16.8 5.2 $ 81.4 $195,382 $ 60.6 $ 6.6 $14.2
- ----------------------------------------------------------------------------------------------------------------------------------
Other NS Lines in North Carolina 1,150 7.0 8.1 $125.6 $ 98,914 $113.8 $10.2 $ 1.6
Total North Carolina 1,460 9.1 13.3 $207.0 $119,397 $174.3 $16.9 $15.8
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Mercer Management Consulting Page II-10
<PAGE>
Estimates of pre-tax operating income were converted to post-tax net operating
cash flow using a cash tax rate of 24.6%
================================================================================
Summary of Three Methods' Estimates of Net
Operating Cash Flow for Three NCRR Lines
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Method 1 Method 2 Method 3
---------------------------------------------------------------------------
PreTax Net Pre-Tax Net Pre-Tax Net
Operating Operating Operating Operating Operating Operating
Income Cash Flow Income Cash Flow Income Cash Flow
($Millions) ($Millions) ($Millions) ($Millions) ($Millions) ($Millions)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NCRR:
1. Charlotte-Greensboro $18.2 $13.7 $18.5 $13.9 $16.0 $12.0
2. Greensboro-Raleigh $ 2.3 $ 1.7 $ 2.6 $ 1.9 $ 1.3 $ 1.0
3. Raleigh-Morehead City ($1.7) ($1.3) ($1.2) ($0.9) ($3.1) ($2.3)
Total NCRR $18.9 $14.2 $19.9 $15.0 $14.2 $10.7
- ------------------------------------------------------------------------------------------------------------------
Other NS Lines in North Carolina $15.0 $11.3 $18.6 $14.0 $ 1.6 $ 1.2
Total North Carolina $33.8 $25.5 $38.4 $29.0 $15.8 $11.9
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Mercer Management Consulting Page II-11
<PAGE>
The three methods of calculating net operating cash flow yield a tight range of
estimates with important common characteristics
================================================================================
Characteristics Common to all Estimation Methods
o Economies of density cause the Charlotte-Greensboro segment to
contribute the overwhelming majority of net operating cash flow
o The Greensboro-Raleigh segment contributes marginally to net
operating cash flow as a stand-alone line
o As a stand-alone entity, the Raleigh-Morehead City segment
negatively contributes to net operating cash flow, although revenue
from traffic originating and terminating on the line contributes to
the profitability of the other NCRR lines
Net Operating Cash Flow Derived by NS from use of NCRR
Method 1 Method 2 Method 3
-------- -------- --------
Charlotte-Greensboro 13.7 13.9 12.0
Greensboro-Raleigh 1.7 1.9 1.0
Raleigh-Morehead City -1.3 -0.9 -2.3
NCRR Total 14.2 15.0 10.7
================================================================================
Mercer Management Consulting Page II-12
<PAGE>
Each of the three methods of calculating or allocating operating expenses have
advantages and disadvantages such that none of the three should be considered
superior to the others
================================================================================
o Method 1
-- Advantage: Pure regression (no allocation in data
preprocessing) with many data points
-- Disadvantage: Data represents diverse mix of railroads, some
with operations very different from NS'
o Method 2
-- Advantage: Data drawn from NS' state-reported costs
-- Disadvantage: Cost allocation based only on proxies of
underlying cost-generating activities, i.e. GTMs as a proxy
for train miles, route miles as a proxy for staff, etc.
o Method 3
-- Advantage: Data drawn from detailed NS' system-reported costs
-- Disadvantage: Allocation of costs to density categories
precedes regression; few data points
o None of the three estimates of net operating cash flow should be
considered to be the primary estimate
o Rather, the range of estimates, or the mean of the three estimates,
should be understood as the best measure of NS' NCRR-derived net
operating cash flow
================================================================================
Mercer Management Consulting Page II- 13
<PAGE>
Estimates of net operating cash flow calculated here do not include
non-freight-related income derived by NS from NCRR
================================================================================
o Amtrak and the state of North Carolina pay NS to operate passenger
trains over NCRR routes
-- Charlotte-Greensboro
-- Greensboro-Raleigh
-- Raleigh-Selma, NC
o NS has sub-leased portions of the NCRR right-of-way
-- Fiber-optic cable routes
-- Wire-crossings and other air crossings
-- Pipeline and other subsurface crossings
-- Lineside industrial property development
================================================================================
Mercer Management Consulting Page II- 14
<PAGE>
Contents
================================================================================
I. Summary
II. Estimation of Norfolk Southern's NCRR-Derived Net Operating
Cash Flow
- --> III. Estimation of Diversion-Related Impacts to Norfolk Southern
IV. Factors Affecting the Analysis
<PAGE>
Chapter 3 describes Mercer's estimates of the one-time and ongoing financial
impacts NS would experience if it no longer controlled the NCRR
================================================================================
o A major capital expenditure would be required to upgrade NS'
Roanoke/Bristol/Knoxville route in order to reroute overhead traffic
diverted from the NCRR
o Fixed and variable operating costs incurred on the NCRR and
associated with divertible overhead traffic could be shifted from
the NCRR to the alternate route, but variable operating costs would
rise with the mileage of diverted shipments
o NS would no longer participate in the movement of some NCRR-related
traffic, impacting both revenue and costs
-- Traffic local to the NCRR would no longer be controlled by NS
-- "Captive" or non-divertible overhead traffic--which originates
and terminates on non-NCRR lines but must move over the NCRR
for part of its route--would likely be lost due to NS' likely
reluctance to continue operating the several light-density
branchlines that would be isolated from the rest of the NS
system by the NCRR
-- NS' haul of traffic originating and terminating traffic on the
NCRR would be truncated at the point the traffic exited or
entered NCRR territory, lowering both revenue and costs
================================================================================
Mercer Management Consulting Page III- 1
<PAGE>
The material in Chapter 3 represents Mercer's estimate of the cost to NS of only
one of several possible scenarios that could occur if NS and NCRR failed to
agree on terms for NS' continuing operation over NCRR
================================================================================
o Mercer does not necessarily endorse this scenario as NS' most likely
strategic choice in response to any continuing inability to come to
terms with NCRR; instead, this scenario represents the consequences
that NS could face if no terms are reached and NS must vacate the
NCRR
o The estimates of capital and operating impacts to NS associated with
loss of NCRR can be used to construct a value for NCRR based on the
cost to NS of losing the NCRR, rather than the value that NS derives
from use of NCRR
o The potential cost of this alternative helps quantify the importance
of the NCRR to NS operations
================================================================================
Mercer Management Consulting Page III- 2
<PAGE>
Mercer's estimate of capital required to upgrade the Roanoke/Bristol/ Knoxville
line to handle traffic diverted from the NCRR is derived from prior estimates
provided by NCRR
================================================================================
o Mercer has based its estimates of capital requirements on the
following assumptions and criteria:
-- All non-captive overhead traffic on NCRR (304,000 carloads in
1994) would have to be moved over the alternate route
-- The alternate route would be upgraded to the extent necessary
to provide capacity and a unit-cost for transportation
comparable to that provided by the NCRR
o The NCRR-provided estimates of material and costs were revised as
follows:
-- Only projects that are specifically aimed at increasing line
capacity have been included; costs of changes in cyclical
maintenance practices are not considered because costs of more
frequent maintenance are assumed to be offset by elimination
of maintenance on NCRR lines
-- Signal system costs have been revised to reflect recent Mercer
experience
-- The amount of second main track specified as part of the
upgrade of the Bulls Gap-Atlanta line has been adjusted to
reflect NS' capacity utilization capabilities and recent
double-tracking of parts of the line
o No physical inspection of either the NCRR or the
Roanoke/Bristol/Knoxville route was performed
================================================================================
Mercer Management Consulting Page III- 3
<PAGE>
Even after downward adjustment, Mercer estimates that NS would have to spend
$271 million in capital to upgrade the Roanoke/Bristol/Knoxville route to
accomodate 304,000 annual diverted carloads
================================================================================
Comparison of Estimates of Capital Expenditure Required
for Diversion of Overhead Traffic from the NCRR
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
NCRR-Provided Estimate Mercer Estimate
Line Segment ----------------------------------------- ------------------------------------------
Item/Quantity Total Cost ($M) Item/Quantity Total Cost ($M)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hagerstown-Roanoke Passing Track/18 miles $28 None(1) $0
- ----------------------------------------------------------------------------------------------------------
Roanoke-Bristol Passing Track/10.5 miles $16 Passing Track/10.5 miles $16
- ----------------------------------------------------------------------------------------------------------
Bristol-Knoxville CTC/90 miles $90 CTC/90 miles $14
Passing Track/21 miles $21 Passing Track/l4 miles $21
New Rail/45 miles $45
- ----------------------------------------------------------------------------------------------------------
Knoxville-Ooltewah CTC/86 miles $86 CTC/86 miles $13
Passing Track/18 miles $18 Passing Track/l2 miles $18
- ----------------------------------------------------------------------------------------------------------
Bull's Gap-Atlanta 2nd Main Track/270 miles $378 2nd Main Track/135 miles $189
- ----------------------------------------------------------------------------------------------------------
Total $682 $271
- ----------------------------------------------------------------------------------------------------------
</TABLE>
*Traffic volume on this line is not affected by the elimination of the NCRR as a
through route; the entire line lies north of the branch between the NCRR and the
alternate route
================================================================================
Mercer Management Consulting Page III- 4
<PAGE>
Factors impact ongoing operating profitability include additional mileage for
overhead traffic, loss of traffic local to the NCRR, and truncated haul of
remaining traffic interchanged with an alternate NCRR operator
================================================================================
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Diversion Related Factor Impact on Revenue* Impact on Costs Magnitude of Effect
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Additional Car-Mileage -- (up) +++++++++
Loss of Local and Non-Divertible
Traffic (down) (down) +
Abbreviated Haul of Interchange
Traffic (down) (down) +++
</TABLE>
*Revenue may drop if additional transit time forces Norfolk Southern to discount
rates to avoid loss of traffic
================================================================================
Mercer Management Consulting Page III- 5
<PAGE>
Data on affected traffic used in this analysis is derived from a segmentation of
1994 traffic provided by NCRR, supplemented by 1995 Confidential Waybill Sample
data for traffic moving in North Carolina
================================================================================
<TABLE>
<CAPTION>
NCRR-Provided Segmentation of 1994 Traffic by Route(1)
- -------------------------------------------------------------------------------------------------------
Total Estimated NCRR Average
Revenue Revenue Annual Length of Haul
Traffic Category ($ Millions) ($ Millions) Carloads (Miles)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Divertible Overhead(2) $586.7 $60.1 304,459 917
Non-Divertible Overhead(2) $ 10.4 $ 1.3 4,084 649
Forwarded to NCRR $ 28.5 $ 5.3 27,720 1,003
Received from NCRR $106.7 $16.4 68,955 715
Local $ 1.2 $ 1.2 1,828 78
- -------------------------------------------------------------------------------------------------------
Total $733.4 $84.2 407,046 885
- -------------------------------------------------------------------------------------------------------
</TABLE>
o 1994 data was used to estimate carload counts and average length of haul
o 1995 data was used to determine the ultimate origins and destinations of
diverted traffic for purposes of estimating changes in variable operating
costs caused by additional car mileage
*Source: 1994 Confidential Waybill Sample, processed by ALK Associates and
provided to Mercer by NCRR.
(2) Divertible overhead traffic currently moves over the NCRR for which an
alternate all-NS routing exists. Although such routings may be highly
circuitous, they do not use any NCRR trackage. Non-divertible overhead traffic
either originates or terminates on one of several light-density branchlines that
are isolated from the rest of the NS system by the NCRR, but are not actually
part of the NCRR. Although the traffic technically moves overhead on the NCRR,
it has no alternative all-NS route that does not involve the NCRR.
================================================================================
Mercer Management Consulting Page III- 6
<PAGE>
Assumptions concerning traffic loss/retention are necessary to estimate changes
in operating profitability
================================================================================
<TABLE>
<CAPTION>
Mercer Assumptions on Diversion-Related Traffic Impacts by Traffic Category
- ------------------------------------------------------------------------------------------
Traffic Category Carloads Assumption Rationale
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Local to NCRR 1,828 Lost No longer served by N5
- ------------------------------------------------------------------------------------------
Non-Divertible 4,084 Lost Two interchanges in
Overhead relatively short route
would make rail
unappealing to customers;
NS would be reluctant to
operate isolated
light-density branchlines
- ------------------------------------------------------------------------------------------
Forwarded to 96,675 Retained; NS would deliver Replicates handling,
NCRR/ traffic to current NCRR revenue and cost effects
Received from endpoint, incur costs associated with
NCRR associated with the shorter divestiture of branchlines
haul, divide revenue with a to shortline/regional
new operator of NCRR operators
- ------------------------------------------------------------------------------------------
Divertible 304,459 Retained but diverted, with NCRR no longer available
Overhead change in mileage varying from as a through route
-73 to +243 miles
- ------------------------------------------------------------------------------------------
</TABLE>
o Divertible overhead was assumed to be retained for purposes of calculating
additional costs diversion would create
o However, it is likely that extreme circuity in some lanes created by
diversion would drive variable costs above revenue and cause some
combination of rate increases and traffic loss
o Analysis of revenue and costs associated with individual O/D pairs would
be required to quantify this effect; such analysis was not performed
================================================================================
Mercer Management Consulting Page III- 7
<PAGE>
1995 waybill records provided information concerning ultimate origins and
destinations of traffic necessary to estimate diversion-related cost changes
================================================================================
o Information concerning ultimate origin and destination points,
railroads involved in the movement, and states traversed during the
movement was used to isolate traffic moving over the NCRR from other
traffic moving in North Carolina
o Of the 304,000 carloads estimated to move overhead on the NCRR,
200,000 did not terminate in North Carolina, and were grouped as
follows:
-- Northern originating and terminating regions: Columbus and
Points West, Hagerstown Gateway, Alexandria Gateway
-- Southern originating and terminating regions: Birmingham and
Points West, Georgia & Florida, South Carolina
o The remaining 100,000 carloads originated or terminated on non-NCRR
lines in North CarolIna
-- Specific routing information for this group of traffic would
have required a detailed network analysis to generate and
therefore was not developed
-- This traffic was allocated among the regions listed above
using the same percentages as were developed for the 200,000
carloads originating and terminating in other states
-- Because traffic originating and terminating in North Carolina
would probably encounter more circuitous routes than is
represented by the allocation, actual diversion-related
increases in variable operating expenses would probably be
higher than the estimates generated by this analysis
================================================================================
Mercer Management Consulting Page III- 8
<PAGE>
To estimate the costs associated with diversion of overhead traffic,
lane-specific mileage-increases and associated costs were calculated and
assigned to traffic moving in each lane
================================================================================
Percentages of Overhead
Traffic Moving in Each Lane(1)
Columbus/West Hagerstown Alexandria
18% 45% 36%
[Diagram of routes omitted] NCRR
Birmingham West Georgia/ S. Carolina
20% Florida 59%
20%
[Legend omitted]
Overhead Carloads Moving in Each Lane(1)
- --------------------------------------------------------------------------------
To/From Columbus/West Hagerstown Alexandria
- --------------------------------------------------------------------------------
Birmingham/West 0% 0 6.2% 18,876 14.0% 42,624
- --------------------------------------------------------------------------------
Georgia/Florida 12.1% 36,840 4.7% 14,310 3.5% 10,656
- --------------------------------------------------------------------------------
South Carolina 6.3% 19,181 34.2% 104,125 19.0% 57,847
- --------------------------------------------------------------------------------
Mileage Changes in Each Lane(2)
- --------------------------------------------------------------------------------
To/From Columbus/West Hagerstown Alexandria
- --------------------------------------------------------------------------------
Birmingham/West -- -73 +24
- --------------------------------------------------------------------------------
Georgia/Florida +93 +93 +190
- --------------------------------------------------------------------------------
South Carolina +146(3) +146(3) +243(3)
- --------------------------------------------------------------------------------
o Allocation of carloads to each lane was based on sample of 200,000
carloads from 1995 Confidential Waybill Sample
o Traffic originating and terminating in North Carolina will probably
experience higher diversion-related costs than reflected by current
allocation
(*) Source: 1995 Confidential Waybill Sample containing all traffic moving
through North Carolina, compiled by NCDOT and provided to Mercer by NCRR
(2) Source: Mercer analysis
(3) Actual penalty associated with using this route will be higher because route
includes Saluda grade
================================================================================
Mercer Management Consulting Page III- 9
<PAGE>
The Uniform Rail Costing System (URCS) was used to estimate the impact of
additional mileage on variable operating costs for diverted traffic
================================================================================
Regression of Variable Operating Costs vs. Length of Haul
Based on URCS Analysis of Norfolk Southern 1995 Cost Data
[Graphic omitted]
o URCS calculates variable costs based on length of haul, car type
characteristics, and cost characteristics of the subject railroad
o The URCS system is maintained by the Surface Transportation Board
o Variable costs used in this analysis are estimated as the average of two
representative car types
o URCS estimates variable costs at approximately $1.32 per car-mile
Increase (Decrease) in Variable Cost per Carload in Each Lane
Derived from URCS Analysis of Length of Haul Changes
- ---------------------------------------------------------
To/From Columbus/ Hagerstown Alexandria
West
- ---------------------------------------------------------
Birmingham/West -- ($97) $32
- ---------------------------------------------------------
Georgia/Florida $123 $123 $251
- ---------------------------------------------------------
South Carolina $193 $193 $321
- ---------------------------------------------------------
================================================================================
Mercer Management Consulting Page III- 10
<PAGE>
As a check, an alternate analysis was performed in which changes in variable
operating costs were calculated from 1994 revenue information
================================================================================
Calculation of Change in Variable Costs due to Diversion of Overhead Traffic:
Revenue Multiplier Method
All dollar figures are in millions except Variable Cost per Car-Mile
- ---------------------------------------------
Total Revenues for Divertible
Overhead Traffic $586.7
NS System Operating Ratio(1) x 0.735
- ---------------------------- -----------
Total Operating Costs
for Divertible Overhead Traffic 431.2
- ---------------------------------------------
- ---------------------------------------------
Total Operating Costs for
Divertible Overhead Traffic $431.2
Cost Variability Ratio(2) x 0.7
- ---------------------------- -----------
<PAGE>
Total Variable Costs
for Divertible Overhead Traffic 301.9
- ---------------------------------------------
- ---------------------------------------------
Total Annual Divertible
Overhead Carloads (Thous.) $304.5
Average Haul Length (Miles) x 917
- ---------------------------- -----------
Total Annual Car-Miles for
Divertible OH Traffic (Millions) 279.2
- ---------------------------------------------
- ---------------------------------------------
Total Variable Costs for
Divertible Overhead Traffic $301.9
Total Annual Car-Miles + 279.2
- ---------------------------- -----------
Variable Cost per Car-Mile $1.081
- ---------------------------------------------
- ---------------------------------------------
Estimate of Increase in Car-
Miles for Divertible OH Traffic ___________ <-- Car-Mile Increase Estimate
Variable Cost per Car-Mile x $1.081
- ---------------------------- -----------
Increase in Variable Cost for
Divertible Overhead Traffic ___________
- ---------------------------------------------
*Source: NS 1995 R-1 report
(2) Source: Surface Transportation Board analysis of 1995 NS traffic. This
figure represents the proportion of total operating cost that are volume-driven
rather than facility-driven.
================================================================================
Mercer Management Consulting Page III- 11
<PAGE>
The two calculation methods estimate that diversion-related increases in
mileage would cause NS to incur $42 to $51 million per year in
additional variable operating costs
- --------------------------------------------------------------------------------
Diversion-Related Change in Car-Miles in Each Lane (Millions)
- --------------------------------------------------------------------------------
To/From Columbus/ Hagerstown Alexandria
West
- --------------------------------------------------------------------------------
Birmingham/West -- -1.4 +1.0
Georgia/Florida +3.4 +1.3 +2.0
South Carolina +2.8 +15.2 +14.1
- --------------------------------------------------------------------------------
URCS Method: $1.323 per Car-Mile
Increase (Decrease) in Variable Operating Costs due to
Diversion-Related Change in Car-Miles In Each Lane ($ Millions)
- --------------------------------------------------------------------------------
To/From Columbus/ Hagerstown Alexandria
West
- --------------------------------------------------------------------------------
Birmingham/West -- ($1.8) $ 1.4
Georgia/Florida $4.5 $ 1.8 $ 2.7
South Carolina $3.7 $20.1 $18.6
- --------------------------------------------------------------------------------
Total Using URCS Method: $50.9 Million
o Differences in car type mix, car-ownership mix, and train operations
profiles drive the difference in the two methods' estimated costs per
car mile
o The URCS estimate is probably high due to its assumption of 100%
railroad-owned equipment
o The Revenue Multiplier estimate is probably low due to its application
of the NS system operating ratio to revenues representing movement over
railroads other than NS
Revenue Multiplier Method: $1.081 per Car-Mile
Increase (Decrease) in variable Operating Costs due to
Diversion-Related Change in Car-Miles in Each Lane ($ Millions)
- --------------------------------------------------------------------------------
To/From Columbus/ Hagerstown Alexandria
West
- --------------------------------------------------------------------------------
Birmingham/West -- ($1.5) $1.4
Georgia/Florida $3.7 $1.4 $2.2
South Carolina $3.0 $16.4 $15.2
- --------------------------------------------------------------------------------
Total Using Rev. Mult. Method: $41.6 Million
================================================================================
Mercer Management Consulting Page III- 12
<PAGE>
Loss of NCRR local and non-divertible overhead traffic could reduce NS
pre-tax profits by $5.6 million
- --------------------------------------------------------------------------------
o Data provided by NCRR shows 5,912 cars per year are local or
captive overhead to NCRR, with estimated revenues of $11.5
million and variable costs of $5.9 million when calculated using
the revenue multiplier method
--Local traffic would be entirely out of NS' control
--Non-divertible overhead traffic is assumed to be lost for
two reasons
o The traffic either originates or terminates on several
light-density branchlines which are not part of the NCRR but
whose only connection to the rest of the NS system is via
the NCRR; NS would probably be reluctant to operate those
branchlines when isolated from the rest of the NS system
o If NS did choose to operate those branchlines, the traffic
would have to bear the burden of additional costs and
transit time imposed by creation of two additional
interchanges between NS and the new operator of the NCRR
o This analysis assumes that elements of operating cost not
directly associated with this traffic would be transferred to
the overhead traffic diversion route rather than eliminated,
increasing the estimate of loss in profitability
--Track and equipment maintenance staff and material
--Supervisory staff
================================================================================
Mercer Management Consulting Page III- 13
<PAGE>
Calculation of the revenue impact to NS due to truncation of haul for
NCRR originating and terminating traffic depends on the new operator's
switching charge and NS' share of current revenue
================================================================================
Key Assumptions on Revenue Loss
o The prospective alternate operator of the NCRR would receive a
switching charge of $350 per car, in line with industry benchmarks
for a 90-mile haul plus industry placement
o Some of the traffic originating and terminating on NCRR is
interchanged by NS with other railroads; Mercer assumes that 20% of
the revenue granted to the new operator would be lost by NS'
connections rather than by NS
<TABLE>
<CAPTION>
NCRR-Provided Segmentation of 1994 Traffic by Route(1)
- -------------------------------------------------------------------------------------------------------
Traffic Annual 1994 Total Revenue to NS' Share of
Category Carloads Revenue Alternate Lost Revenue
Operator
($ Millions) ($ Millions) ($ Millions)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Forwarded to NCRR 27,720 $ 28.5 $ 9.7 $ 7.8
Received from NCRR 68,955 $106.7 $24.1 $19.3
- -------------------------------------------------------------------------------------------------------
Total 96,675 $135.2 $33.8 $27.1
- -------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
Mercer Management Consulting Page III- 14
<PAGE>
Cost changes due to truncation of haul for originating/terminating traffic were
calculated using both the Uniform Rail Costing System and revenue multiplier
methods, as was done in analyzing diverted overhead traffic
================================================================================
o URCS specifically estimates the changes in cost associated with the
following changes in operating characteristics
-- Traffic Received from NCRR: 82-mile reduction in average
length of haul, substitution of pickup with interchange
-- Traffic Forwarded to NCRR: 90-mile reduction in average length
of haul, substitution of delivery with interchange
o The revenue multiplier method estimates the changes in cost based on
the change in mileage alone using the figures above
o The two methods again estimate lower and upper bounds of the cost
reduction that NS would experience for NCRR originating/terminating
traffic
-- The URCS method assumes all cars are railroad-owned, thus
overestimating NS' cost reduction
-- The revenue multiplier method does not separately cost the
pickup and delivery, thus underestimating NS' cost reduction
================================================================================
Mercer Management Consulting Page III- 15
<PAGE>
The two calculation methods estimate that NS would avoid costs of $8 to $13
million if the haul of traffic originating and terminating on the NCRR were
truncated
================================================================================
URCS Method: Avoided Costs Total $13.4 Million
Change Variable Operating Costs due to Truncation of Haul
of Traffic Originating and Terminating on the NCRR
- -------------------------------------------------------------------------------
Traffic Annual URCS-Estimated Total change in
Category Carloads Change in Variable
Variable Cost Operating Costs
per Car ($ Millions)
- -------------------------------------------------------------------------------
Forwarded to NCRR 27,720 ($132) ($3.7)
Received from NCRR 68,955 ($140) ($9.7)
- -------------------------------------------------------------------------------
Total 96,675 ($13.4)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Revenue Multiplier Method: Avoided Costs Total $7.6 Million
Change in Variable Operating Costs due to Truncation of Haul of Traffic
Originating and Terminating on the NCRR
- ------------------------------------------------------------------------------------------------------
Traffic Total Total Total Car- Variable Change in Total Change
Category Revenue Variable Miles Cost per Car-Miles in Variable
Cost Car-Mile(1) Operating Costa
($ Millions) ($ Millions) (Millions) (Millions) ($ Millions)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Forwarded to NCRR $ 28.5 $14.6 27.8 $0.527 -2.5 ($1.3)
Received from NCRR $106.7 $54.9 49.3 $1.113 -5.7 ($6.3)
- ------------------------------------------------------------------------------------------------------
Total $135.2 $69.5 77.1 -8.1 ($7.6)
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Fronthaul/backhaul pricing distorts the revenue multiplier method, as
illustrated in the large difference in calculated variable cost per car-mile;
the directional distortions cancel each other to a sufficient extent to render
the estimate usable
================================================================================
Mercer Management Consulting Page III- 16
<PAGE>
The combined effects of revenue loss and cost avoidance for traffic originating
and terminating on the NCRR decrease NS' pre-tax profit by $14 to $20 million
per year
================================================================================
URCS Method: Decrease in
Profitability of $13.7 Million
- ----------------------------------------
Lost Revenue ($ Millions) ($27.1)
Avoided Costs ($ Millions) - ($13.4)
- --------------------------- ----------
Net Impact on Profitability ($13.7)
- ----------------------------------------
Revenue Multiplier Method: Decrease
in Profitability of $19.5 Million
- ----------------------------------------
Lost Revenue ($ Millions) ($27.1)
Avoided Costs ($ Millions) - ($7.6)
- --------------------------- ----------
Net Impact on Profitability ($19.5)
- ----------------------------------------
o As was the case for local and non-divertible overhead traffic, this
analysis assumes that elements of operating costs not related to this
traffic would be transferred to diversion route rather than eliminated
-- Track and equipment maintenance staff and material
-- Supervisory staff
================================================================================
Mercer Management Consulting Page III- 17
<PAGE>
If NS lost access to the NCRR, the combination of diversion-related costs and
traffic loss could reduce NS pre-tax profit by $61 to $76 million per year
================================================================================
Summary of Traffic, Revenue, and Cost Impacts to NS Derived from Loss of Use of
NCRR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Traffic, Change In Change in Change in NS Change in Change in NS
Category Annual NS Revenue NS Variable Pre-Tax Profit
NS Car-Miles Op. Costs
Carloads (Millions) ($ Millions) ($ Millions) ($ Millions)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Local -1,828 -0.1 ($1.2) ($0.6) ($0.6)
Non-Divertible Overhead -4,084 -2.7 ($10.4) ($5.3) ($5.1)
Forwarded to NCRR NC -5.7 ($7.8) ($1.3)-($3.7) ($4.1)-($6.5)
Received from NCRR NC -2.5 ($19.3) ($6.3)-($9.7) ($9.6)-($13.0)
Divertible Overhead NC +38.5 NC $41.6-$50.9 ($41.6)-($50.9)
- ------------------------------------------------------------------------------------------------------
Total -5,912 +27.5 ($38.7) $22.3-$37.4 ($61.O)-($76.1)
- ------------------------------------------------------------------------------------------------------
================================================================================
</TABLE>
Mercer Management Consulting Page III- 18
<PAGE>
Estimates of pre-tax impacts on Norfolk Southern's profitability were converted
to post-tax estimates by application of a 24.6% cash tax rate, resulting in
estimates of post-tax impact to NS of $46 to $57 million
================================================================================
Summary of Pre-Tax impacts, Avoided Taxes, and Post-Tax
Impacts to NS Profitability Derived from Loss of Use of NCRR
- --------------------------------------------------------------------------------
Traffic Change in NS Avoided Taxes Change in NS
Category Pre-Tax Profit @ 24.6% Post-Tax Profit
($ Millions) ($ Millions) ($ Millions)
- --------------------------------------------------------------------------------
Local ($0.6) ($0.1) ($0.5)
Non-Divertible Overhead ($5.1) ($1.3) ($3.8)
Forwarded to NCRR ($4.1)-($6.5) ($1.0)-($1.6) ($3.1)-($4.9)
Received from NCRR ($9.6)-($13.0) ($2.4)-($3.2) ($7.2)-($9.8)
Divertible Overhead ($41.6)-($50.9) ($10.2)-($12.5) ($31.4)-($38.4)
- --------------------------------------------------------------------------------
Total ($61.0)-($76.1) ($15.0)-($18.7) ($46.O)-($57.4)
- --------------------------------------------------------------------------------
================================================================================
Mercer Management Consulting Page III- 19
<PAGE>
Contents
- --------------------------------------------------------------------------------
I. Summary
II. Estimation of Norfolk Southern's NCRR-Derived Net Operating Cash Flow
III. Estimation of Diversion-Related Impacts to Norfolk Southern
IV. Factors Affecting the Analysis
Chapter 4 describes factors influencing the estimates provided in Chapters 2 and
3 and assesses possible responses to uncertainties or data gaps
================================================================================
Factors Influencing Estimation of NS' NCRR-Derived Net Operating Cash Flow and
Diversion Costs
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Description of Factor Impact Response
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Cash Flow Estimation
o Lack of knowledge of true NS revenue o Analysis does not account for o Confidential Waybill Sample would
revenue implications of NCRR provide revenue information for
- Use of systemwide traffic mix traffic mix traffic handled by NS in North
and revenue per GTM Carolina; network analysis is
- Impact is probably minor for required to separate traffic into
overhead traffic because NCRR and non-NCRR flows and
large volume of mixed revenues
commodities should mirror NS
system average o Time and cost required for
analysis may not justify
- Impact for originating and incremental increase in accuracy
terminating revenue may be
significant in percentage
terms, as originating/
terminating traffic contains
relatively little coal and
intermodal traffic, resulting
in higher than average
revenue per GTM for
NCRR-originating and
terminating traffic
========================================================================================================================
</TABLE>
================================================================================
Mercer Management Consulting Page IV-1
<PAGE>
Factors Influencing the Estimates, continued
================================================================================
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Description of Factor Impact Response
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Cash Flow Estimation
(Continued)
o Lack of knowledge of true NS o Analysis relies on allocation and o NS cooperation would be required
operating costs regression to estimate NCRR costs to obtain detailed information on
rather than tabulation of actual operating costs generated on NCRR
- No activity basis for operating NCRR costs
costs (crew wages, fuel o If full NS cooperation were
consumption, etc.) o State reporting may be based on granted, costing exercise might
- Sources of cost information NS allocation of costs of require special study or similar
limited to NS' reports to state interstate operations allocation
and federal governments
- State-reported costs were o Time and cost required for
used in more aggregated form analysis probably does not
than R-1 costs justify incremental increase in
accuracy; NS cooperation is
o Impact is probably minor unlikely
- Similar allocation methods
have been upheld in
regulatory proceedings
- Multiple methods of
calculating operating costs
yield a tight range of
answers with similar
characteristics
========================================================================================================================
</TABLE>
================================================================================
Mercer Management Consulting Page IV-2
<PAGE>
Factors Influencing the Estimates, continued
================================================================================
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Description of Factor Impact Response
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Cash Flow Estimation
(Continued)
o Lack of knowledge of other elements o Lack of knowledge of passenger o Figures on passenger
of NCRR value train compensation affects train-related compensation could
estimate of net operating cash be obtained from Amtrak, NS, or
- Passenger train compensation flow public sources, then allocated on
a per-train-mile basis
- Because Greensboro-Raleigh
line has only moderate o Small value of payment and
traffic density, it is likely possibility of distortion may not
that the passenger trains justify effort to obtain
cause a higher standard of information
track maintenance to be
required than would otherwise
be the case
- Any cash contribution made by
passenger trains to help
offset track maintenance costs
should be recorded against
incremental maintenance costs
o Impact is probably minor; payments
to each railroad are relatively
small, and NCRR comprises a small
percentage of total
passenger-train mileage on
NS
o Attempts to include payment might
distort value because costing
method does not account for
special maintenance situation
========================================================================================================================
</TABLE>
================================================================================
Mercer Management Consulting Page IV-3
<PAGE>
Factors Influencing the Estimates, continued
================================================================================
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Description of Factor Impact Response
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Cash Flow Estimation
(Continued)
o Lack of knowledge of other elements o Lack of knowledge of non-railroad o Analysis of real-estate value of
of NCRR value development does not affect lineside parcels could be undertaken
estimate of net operating cash to estimate potential future cash
- Air, subsurface, other flow, but affects understanding streams from development
non-railroad development of of total value of NCRR
NCRR property
o The NCRR right-of-way covers a
large land area, some of which is
strategically located
o Potential cash streams from future
development of the NCRR
right-of-way may be more
significant than current cash
streams
o Impact of lack of knowledge of
cash streams on understanding of
value of NCRR could be major
=======================================================================================================================
</TABLE>
================================================================================
Mercer Management Consulting Page IV-4
<PAGE>
Factors Influencing the Estimates, continued
================================================================================
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Description of Factor Impact Response
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Cash Flow Estimation
(Continued)
o Lack of knowledge of the future o Analysis does not make o In calculating future cash
predictions of future net streams, assume no change to
- Changes in traffic flows or operating cash flow or value present net operating cash flow
revenue
- New passenger train initiatives
- New non-railroad development
activities
- -----------------------------------------------------------------------------------------------------------------------
Estimation of Capital Costs of Diversion-Related Line Upgrade
o Mercer's estimate of the capital costs required to upgrade the Roanoke/Bristol/Knoxville route to accomodate
traffic diverted from the NCRR is based on the assumption that the trackage and signaling system that would be
put in place would be sufficient to accomodate diverted traffic while maintaining a unit cost of transport
(influenced by line congestion) comparable to the former NCRR
o Refinement of the estimate would be possible with NS' participation in creating estimates of the work required
and contribution of data on costs of similar capital projects
o NS' combined capital and operating strategy in the face of potential loss of the NCRR would have a much greater
influence over the costs NS would incur than would variations in the price of track components and labor.
Therefore, it is recommended that if additional analysis of this topic is to be pursued, the analysis be
directed toward a finer understanding of NS' strategic options and the relative costs associated therewith
========================================================================================================================
</TABLE>
================================================================================
Mercer Management Consulting Page IV-5
<PAGE>
Factors Influencing the Estimates, continued
================================================================================
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Description of Factor Impact Response
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Estimation of Impact of Diversion/
Traffic Loss on NS Profitability
o Lack of knowledge of customers' o Negative customer reaction to o Mercer has capability to examine
prospective reactions to rerouting transit time deterioration and impact of probable customer
resulting traffic deterioration reactions to transit time
and/or traffic loss could have deterioration
major additional consequences for
NS that are not examined here o Analytical process is complex and
time consuming
- -----------------------------------------------------------------------------------------------------------------------
o Lack of information concerning o Attitude, experience, and ability o Development of profile of
prospective non-NS operator of NCRR of a prospective alternate alternate operator requires
operator of NCRR to cooperate better understanding of the
with connecting railroads will specific NCRR strategy that would
have a major impact on the value create such a situation
that NCRR can derive from
originating and terminating
traffic and the impact of loss on
NS profitability
o Lack of information of
prospective operator could have a
major impact on accuracy
========================================================================================================================
</TABLE>
================================================================================
Mercer Management Consulting Page IV-6
REPORT OF THE
GOVERNOR'S SPECIAL NORTH CAROLINA RAILROAD STUDY GROUP
I. PURPOSE OF THE GOVERNOR'S SPECIAL STUDY GROUP
On March 3, 1992, at the request of the Governor of the State of North
Carolina, the Council of State created a special advisory group to study the
advisability and feasibility of acquiring all of the capital stock of the North
Carolina Railroad Company ("NCRC") not currently owned by the State (the
"Minority Shareholders' Interest"). As majority shareholder, the State currently
owns approximately 75% of the outstanding shares of the NCRC. The Study Group
was formed to advise the Governor and the Council of State on whether the
acquisition of the Minority Shareholders' Interest in the NCRC is both in the
State's best interest and is feasible.
II. SUMMARY FINDINGS
After carefully analyzing the nature of the State's interest in the
NCRC, the potential future use of the NCRC's railway assets, and the competing
interests of the State and the minority shareholders, the Study Group has
concluded that it is both advisable and feasible for the State to acquire the
Minority Shareholders' Interest in the NCRC.
III. FINDINGS AS TO ADVISABILITY
A. NATURE OF THE NORTH CAROLINA RAILROAD COMPANY
In order to analyze whether the acquisition of the Minority
Shareholders' Interest is in the best interest of the State, it was necessary
for the Study Group to understand the nature of the State's existing interest in
the NCRC. In particular, the Study Group
<PAGE>
explored whether the NCRC was chartered under traditional private business
principles, or whether the NCRC had been chartered for a broader public purpose,
centering on the economic development of the State of North Carolina and its
citizens.
The general rule applicable to most business corporations is that the
directors must operate the affairs of the company in a fashion designed to
maximize the economic return to all of its shareholders, without furthering the
interest of the majority shareholders to the detriment of the minority
shareholders. Likewise, a majority shareholder is bound by a fiduciary duty not
to use its influence to the detriment of the minority shareholders. These
traditional corporate principles are not fully applicable, however, in the
context of a corporation "controlled" by a public entity such as the State of
North Carolina.
HISTORICAL PERSPECTIVE
The true nature of the NCRC cannot be understood without discerning the
historical reasons for the granting by the State Legislature of NCRC's charter.
During the early to mid 1800's, North Carolina had fallen behind its neighboring
states, becoming increasingly backward and poverty-stricken. Many citizens of
the time attributed this to the State's poor transportation system. By the
1840's a large portion of the State's population was joining the westward
migration and many in the State Legislature feared this migration would not stop
unless and until a feasible transportation network could be developed to link
the western part of the State with the eastern seaports. This concern grew
stronger with the formation of rail lines like the Richmond & Danville and the
Charlotte & South Carolina, whose link-up appeared imminent. It was feared that
a
2
<PAGE>
major North-South rail system would result in the State becoming a mere bypass
for major industries being started in states north and south of North Carolina.
Out of these concerns, the State Legislature "created" the NCRC by granting its
charter in 1849, with the express purpose of forming a major east-west rail line
between Wilmington and Charlotte.
Coupled with the poor condition of the State's infrastructure was the
Legislature's historical reluctance to spend State money on internal
improvements. As support for a state-wide rail system grew, concern continued to
be expressed over how to finance the project. As was the case with many other
railroads then being formed across the country, North Carolina decided on a
public-private venture. The private funds, $1,000,000 in all, were raised by the
work of fifteen appointed Commissioners. These Commissioners, who were named in
the original charter granted by the State, constituted some of the most
prominent civic leaders of the time, including three former governors.
The arguments advanced to support the private shareholder subscription
focused primarily on how the railroad would spur economic development along its
route. The most repeated arguments promised higher prices for farm products and
new manufacturing industries because of improved access to markets, telegraph
lines for improved communication and increased land values along the right of
way. As part of the process, regional groups were formed to promote their
regions as locations for the railroad right of way. These groups conditioned
their support of the railroad on assurances of where the line would be situated.
While the subscribers were told that, based on the experience of other similar
ventures in Georgia and South Carolina, the
3
<PAGE>
railroad was likely to be a profitable enterprise, the main focus of the
subscription campaign focused on the importance of the railroad to the economic
well-being of the State and its citizens as a whole. John Motley Morehead, one
of the principal proponents of the railroad, described the then proposed NCRC as
the "tree of life" to North Carolina.
"Let the North Carolina Railroad, like a huge tree, strike its roots
deeply into the shore of the Atlantic, and be moistened by its waters,
and at last stretch its noble trunk through the centre of the state,
and extend its overshadowing and protecting branches through the
valleys and along the mountain tops of the west, until it becomes,
indeed the Tree of Life to North Carolina." The Tree of Life, (The
North Carolina Railroad Company 1972) at 1.
JUDICIAL INTERPRETATIONS
Throughout the approximately 150 year history of the NCRC, the courts
of North Carolina have frequently been asked to discern the nature of the NCRC.
While the courts of North Carolina have always classified the NCRC as a private
corporation, they have also recognized the special status of the NCRC as a
"quasi governmental" entity. Even though the NCRC is a "private" as
distinguished from a "public" corporation, the courts of this State have noted
that where the State grants a private corporation special governmental powers,
such as eminent domain, these powers are to be used for the public benefit.
Further, these special "quasi-governmental corporations" must not use their
charter powers exclusively for the profit or advantage of their shareholders as
may ordinary private corporations; instead they are also obligated to carry out
the public purpose for which they were chartered. Article I, Section 32 of the
State Constitution (formerly codified in Article I, Section 7 of the
Constitution of 1868), has been cited by at least one court for the proposition
that the Legislature is warranted in granting
4
<PAGE>
extraordinary privileges to a private corporation only in consideration of
services to be rendered to the public, and such obligation to the public is
inseparable from the grant and the exercise of the corporate privileges.
While it is clear that the NCRC is obligated to provide a public
service to the citizens of North Carolina in exchange for the special rights
granted in its charter by the State, such as the power of eminent domain, the
caselaw does not provide a clear answer as to the exact nature of the public
service to be provided. The caselaw does not address whether the public service
of providing rail service to the citizens of North Carolina is merely ancillary
to the private shareholders' rights to profit from their enterprise, or is a
more fundamental purpose of the NCRC. While North Carolina courts have a long
history of protecting minority shareholders' reasonable expectations of
profiting from a business enterprise, given the historical basis for the State's
creation of the railroad - to spur statewide economic development - it would be
unreasonable to assume that the NCRC could abandon this purpose today to the
exclusive favor of the company's minority shareholders.
B. FUTURE POTENTIAL OF THE NORTH CAROLINA RAILROAD
As part of its analysis of the NCRC, the Study Group solicited input
from the State Department of Transportation ("NCDOT") on the potential role of
the railroad in the future economic growth of North Carolina. NCDOT pointed out
that the State's majority ownership of a continuous rail corridor is a
relatively rare occurrence nationally. Only the City of Cincinnati and the State
of Georgia have comparable intercity rail holdings. Recognizing the importance
of this type of asset, the State of Florida recently
5
<PAGE>
acquired the rail corridor from West Palm Beach to Miami from CSX Transportation
in order to exclusively control that corridor in the future. Likewise, through
its NCRC holdings, the State has the potential for control of an invaluable
economic development asset - a railroad right of way connecting the State's
largest cities along the length of the Piedmont Crescent, the corridor of
greatest urban density in the State.
The importance of the NCRC corridor for future rail passenger service
is demonstrated by NCDOT's recently announced commitment to invest as much as
$8.5 million in upgrading the NCRC's track bed and signal system, with the
prospect of making substantial additional investments in the future. These
commitments are being undertaken not just to speed up present and future
conventional Amtrak passenger service using the corridor, but also to begin
preparing for the inevitable role of moving people at higher speeds with new
technologies. Already the State of North Carolina has taken the lead with the
States of Virginia, South Carolina, Georgia and Florida in promoting high speed
rail corridors. In fact, on October 19, 1992, the United States Department of
Transportation announced that a corridor connecting Charlotte, Greensboro,
Raleigh and Richmond with Washington, D.C. had been selected as one of five
national corridors to develop high speed rail service. The
Charlotte-Greensboro-Raleigh designated portion of the corridor is on the NCRC
right of way.
Norfolk Southern Corporation's ("Norfolk Southern") long-term leases
for operating the NCRC corridor, which by their terms comprehensively assign to
Norfolk Southern all transportation rights and the control of all activities on
both operating and nonoperating properties, expire in December, 1994. The
negotiation process to decide
6
<PAGE>
whether there will be a renewal of the lease arrangement and if so, on what
terms, has already begun. According to NCDOT, whatever the outcome of the
negotiations, the NCRC corridor is a literally irreplaceable transportation
resource for the State.
Through the creative management of the NCRC's rail line, the State has
the potential to exert a positive influence on economic development in North
Carolina. A flexible lease structure could open new avenues for the productive
use of the NCRC corridor, considered by NCDOT to be the highest priority route
for expanded rail passenger service because of the population centers served.
This could reach beyond ventures in rail passenger and freight service, to
include other innovative entrepreneurial activities related to railroading and
the inherent geographical advantages of the corridor.
According to NCDOT, with the ability to control the use of NCRC's
assets, the State could spur the growth of new businesses and enhance the
State's transportation infrastructure. Creative use of these assets include:
1. Participating in industrial development activities.
o Attracting new industry or expanding existing industries
requiring industrial rail access.
o Offering favorable leases of NCRC-held land to new businesses
as a site location incentive.
o Influencing new businesses to locate along the corridor
through the use of freight rate incentives.
o Using the NCRC corridor for right of ways for oil, gas, water
or sewer pipelines; fiber optics or other mediums of
communications; and power transmission facilities.
2. Enhancing the State's transportation system.
7
<PAGE>
o Facilitating the establishment of commuter and intercity
passenger rail services, including participation in
multi-state and national high speed rail networks.
o Supporting the marketing efforts of the State Ports Authority.
o Encouraging and assisting the installation of direct rail
connections to major passenger airports, in addition to
participating as a partner in the Global Transpark
development.
In analyzing the value of the NCRC's assets to the State, it is
important to distinguish between monetary return on the State's "investment" in
the NCRC and the value of the assets to the State solely as an economic
development tool. Unlike the minority shareholders, the primary value of the
NCRC to the State is not based on the monetary return on its investment, but on
the ability to leverage the NCRC's assets to promote ancillary economic growth
throughout the State. In fact, it is quite possible that in order to best
utilize the assets of the NCRC for economic development, the NCRC will be
required to offer rate and other concessions to potential users of the right of
way and prospective new businesses needing access to railway services.
Inherent in these divergent goals is the potential for conflict.
Although the State would derive both direct and indirect benefits from ancillary
economic growth through increases in employment and tax base levels and other
similar public and economic benefits, the minority shareholders, with no
"investment interest" in these ancillary businesses, would not derive similar
economic benefits. Examples of situations where the State would benefit from the
creative use of the NCRC's rail assets without a similar benefit being realized
by the minority shareholders include:
o Use of rail service to promote economic activity at the State
Ports in Morehead City and Wilmington.
8
<PAGE>
o Use of rail service to promote the Global Transpark.
o Use of rail service and grade crossing improvements to promote
high speed passenger rail networks.
Further, without the need to pay cash dividends on a shareholder's investment in
the NCRC, the State could choose to fund the cost of many of these programs out
of NCRC's earnings.
C. STATE'S CURRENT ABILITY TO INFLUENCE RAILROAD PLANNING
Effective use of the NCRC's rail lines for economic development under
the presently shared public-private ownership structure is necessarily limited
by the Board of Directors' and the State's fiduciary obligation to balance the
needs of the State with the needs and expectations of the minority shareholders.
This balancing approach inevitably will lead to conflicts of interest between
the State's economic development and transportation priorities and the minority
shareholders' expectations of a reasonable return on their investment. Further,
because of the complexity of balancing these diverse interests, it is unlikely
that management of the NCRC will be able to respond fast enough or be flexible
enough to take advantage of many of the economic development opportunities that
will arise.
The awkwardness of NCRC's current ownership structure is highlighted by
the current lease negotiations with Norfolk Southern. While the charter of the
NCRC requires that its Board of Directors promote the State's important interest
of economic development in its future plans for the railroad, including its
current lease negotiations with Norfolk Southern, because of the NCRC's
reluctance to disclose to the State the
9
<PAGE>
details of its future plans or lease negotiations, the State is unable to
ascertain whether or not its important interests are being promoted. Even though
the State can insist that any final lease of the NCRC's trackage rights be
subject to shareholder approval, such after the fact review will not necessarily
allow the State to insure that its interest in economic development and
transportation will be protected.
D. RECOMMENDATIONS
The Study Group is of the clear opinion that the assets of the NCRC are
irreplaceable and invaluable to the State of North Carolina as an economic
development tool today and in the future. It is, therefore, critical that the
State take an active role in insuring that this important asset be used in a
manner that best promotes the State's public interest goals. However, because of
the private aspects of NCRC as well as the existence of the minority
shareholders, the NCRC has taken the position that the State, as simply one of
many shareholders, will not be allowed to actively participate in the most
important event in the last 100 years of the railroad's history - the current
lease negotiation process.
After careful consideration of these factors, it is the Study Group's
recommendation that, in order to insure that the railroad remains a valuable
asset to the State of North Carolina, it is in the best interest of the State to
acquire the Minority Shareholders' Interest in the NCRC, enabling the State to
utilize this asset in a manner that it deems best for the State and its citizens
as a whole.
IV. FINDINGS AS TO FEASIBILITY
10
<PAGE>
The State has several options available to it to consummate the
acquisition of the Minority Shareholders' Interest, including the making of a
tender offer in compliance with the "going private" and "tender offer" rules
embodied in Rules 13e-3 and 14d-1 of the Securities Exchange Act of 1934, or the
use of a cash-out merger under the provisions of the North Carolina Corporation
Law. While a tender offer is in effect a voluntary procedure, whereby the
selling shareholders each make their own decision of whether or not to sell
their shares, the cash-out merger is in effect a compulsory procedure, with
dissenting shareholders being given the right to have the value of their shares
independently appraised if they disagree with the cash-out price being offered.
In either instance, the interests of the State and the minority shareholders are
protected by legal safeguards designed to insure that the selling shareholders
receive full and fair disclosure of the terms of the transaction and receive a
fair price for their shares.
Because the availability of information about the NCRC and its future
operating plans is currently limited, the Study Group is unable to determine a
"fair value" for the Minority Shareholders' Interest at this time. However,
while its preliminary evaluation indicates that a fair price will be in the
millions of dollars, the Study Group anticipates that the finally determined
value will not be so great as to make the State's acquisition of the Minority
Shareholders' Interest unfeasible. The actual value of the Minority
Shareholders' Interest depends on a variety of factors, including but not
limited to, the value of the assets of the company, the economic terms of the
current operating agreements with Norfolk Southern, the future operating plans
for the company and the
11
<PAGE>
possible terms of any new operating agreements to be entered into by the company
at the expiration of the current leases in 1994.
A. RECOMMENDATIONS
The uncertainty of whether a new operating agreement with Norfolk
Southern will actually be obtained and, if obtained, what the terms of such
arrangement will be, makes it difficult at this time to place a value on the
Minority Shareholders' Interest. Further, the State must consider whether an
offer at this time to buy-out the Minority Shareholders' Interest would have a
negative effect on the on-going lease negotiations. These factors must be
weighed by the State in determining the timing of any offer to acquire the
Minority Shareholders' Interest.
To avoid these problems, the State could wait until a new lease has
been negotiated before making its offer to purchase the Minority Shareholders'
Interest. This approach would also simplify the evaluation process, because the
future operating structure will then be known, thereby removing a major
valuation uncertainty. However, a wait-and-see approach, without active
involvement by the State in the lease negotiation process, could result in a
proposed lease structure that does not promote the economic development goals of
the State or offer sufficient flexibility to meet the changing needs of the
State.
Accordingly, the Study Group recommends that the State notify
management of the NCRC of its desire that the assets of the company be used not
only as a source of economic return to the shareholders of the NCRC but for
economic development as well, and that any new operating agreements with Norfolk
Southern or any other party be
12
<PAGE>
structured in a manner that promotes these goals. The State should also take
appropriate steps to insure that its interests are being promoted, including, at
a minimum, requiring that any proposed lease be subject to the approval of the
NCRC's shareholders.
Further, the State should inquire as to whether management of the NCRC
would support a proposal by the State to acquire the Minority Shareholders'
Interest and if so, at what price and at what time during the lease negotiation
process. If the State decides to go forward with the acquisition, it should
first try to acquire the Minority Shareholders' Interest through voluntary means
at a price supported by management of the NCRC, such as through a tender offer
or a negotiated merger agreement, before it resorts to any compulsory means of
acquiring the shares.
Ultimately, the timing of the acquisition of the Minority Shareholders'
Interest by the State should be dependent upon the State's perception that its
economic development goals are being adequately addressed by management of the
NCRC. Insuring this result should be the principal focus of the State throughout
the acquisition process.
13
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**CONFIDENTIAL**
NationsBanc Capital Markets, Inc.
STRATEGIC RAIL FREIGHT VALUE
OF THE
NORTH CAROLINA RAILROAD
November 1996
- --------------------------------------------------------------------------------
Prepared by:
Corporate Strategies, Inc.
5415-A Backlick Road
Springfield, VA 22151
(703) 941-0560
<PAGE>
[Letterhead of Corporate Strategies, Inc.]
November 18, 1996
* * CONFIDENTIAL * *
John Laughlin, Vice President
NationsBanc Capital Markets, Inc.
11th Floor MC-1-007-1109
NationsBank
100 North Tryon St.
Charlotte, NC 28255
Dear Mr. Laughlin:
Corporate Strategies, Inc. (CSI) has completed its study to evaluate the
Strategic Rail Freight Value of the North Carolina Railroad. The objective of
our study was to help NationsBanc Capital Markets, Inc. determine a fair market
value for buying out minority shareholders, whether there is an underlying value
of NCRR that supports an offer that is significantly higher than the current
price for NCRR stock, marketed in the OTC market.
Our study supports earlier findings, that for use as a railroad, the $8
million lease rate agreed to by the Norfolk Southern is not an unreasonable
amount or basis for valuation (along with other lesser income considerations).
The study also notes that NS would incur higher costs to avoid NCRR, mostly
through loss of revenues, and that upgrading its alternate route from Charlotte
to Greensboro via Winston Salem would be costly, add transit time, and that
urban related issues could limit the amount of traffic that could be moved via
this route. In summary, NCRR needs NS and NS benefits from NCRR, but the $8
million lease approaches the threshold where NS may justify the cost to gain 100
percent control of its operations without dealing with the owners of the NCRR.
Our report is divided into an Executive Summary, four chapters, and two
appendices:
Executive Summary
I - Introduction
II - Review of Prior Studies
III - Additional Cost to NS to Bypass NCRR
IV - Pro Forma Analysis of NS Without a Lessee
Appendix A - NS Unit Cost Development
Appendix B - NCRR Pro Forma Development Without Lessee
We would be pleased to answer questions concerning the enclosed report.
Very truly yours,
/s/ Robert H. Leilich
Robert H. Leilich
President
<PAGE>
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**CONFIDENTIAL**
NationsBanc Capital Markets, Inc.
STRATEGIC RAIL FREIGHT VALUE
OF THE
NORTH CAROLINA RAILROAD
November 1996
- --------------------------------------------------------------------------------
Prepared by:
Corporate Strategies, Inc.
5415-A Backlick Road
Springfield, VA 22151
(703) 941-0560
<PAGE>
Corporate Strategies, Inc.
- --------------------------------------------------------------------------------
STRATEGIC RAIL FREIGHT VALUE
OF THE
NORTH CAROLINA RAILROAD
TABLE OF CONTENTS
EXECUTIVE SUMMARY
Chapter I - Introduction......................................... i
Chapter II - Review of Prior Studies............................. i
Chapter III - Additional Cost to NS to Bypass NCRR............... ii
Chapter IV - Pro Forma Analysis of NS without Lessee............. iii
Conclusions...................................................... iv
CHAPTER I - INTRODUCTION
Nature of the Problem............................................ I - 1
Study Objectives................................................. I - 2
CHAPTER II - REVIEW OF NEGOTIATIONS AND PREVIOUS STUDIES
NCRR Ownership.................................................. II - 1
Buyout of Minority Shares by North Carolina..................... II - 2
Summary of Least History........................................ II - 3
Summary of Rejected Lease Terms................................. II - 4
Applicable Interstate Commerce Act Law.......................... II - 5
Shareholder Derivative Legal Actions............................ II - 6
STB Petition.................................................... II - 7
Summary of Prior Studies........................................ II - 8
NCRR Comments................................................... II - 15
CSI Observations................................................ II - 20
CHAPTER III - ADDITIONAL COST TO NS TO BYPASS NCRR
Overview........................................................ III - 1
Diversion of Overhead Traffic................................... III - 1
Diversion of Other Traffic...................................... III - 3
Calculation of NS Cost Increases and Revenue Losses............. III - 3
CHAPTER IV - PRO FORMA ANALYSIS OF NCRR OPERATIONS WITHOUT NS AS
LESSEE
Overview......................................................... IV - 1
Pro Forma Development............................................ IV - 2
Conclusions...................................................... IV - 4
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LIST OF EXHIBITS
Exhibit Page
- ------- ----
I-1 Norfolk Southern and NCRR Leased Lines I - 3
II-1 1993 North Carolina Railroad Traffic Estimates II - 9
II-2 Summary of Pro Forma Evaluation II - 13
II-3 NCRR Action Alternatives II - 14
II-4 Charlotte to Greensboro Upgrade Costs (Existing Line) II - 16
II-5 Charlotte to Greensboro Second (Main) Track Construction II - 17
III-1 Summary of Estimated Incremental Ns Operating Statistics
to Bypass NCRR III - 4
III-2 Summary of Estimated Incremental NS Operating Costs to
Bypass NCRR - 1995 NS Cost Base - 3rd QTR 1996 Cost Level III - 5
III-3 North Carolina Railroad and Connecting Lines III - 9
III-4 Net NS Costs to Avoid NCRR III - 8
IV-1 Summary of First Year Pro Forma Estimates, NCRR as an
Independent Operator Under Ns Diverted Traffic
Assumptions IV - 3
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EXECUTIVE SUMMARY
The following summarizes observations, comments, findings, and conclusions
of the four chapters contained in this study.
CHAPTER I - INTRODUCTION
Principal study objectives are to:
1. Review the history of negotiations and contributing studies, making
constructive comments as appropriate;
2. Estimate the cost to NS to implement alternatives to using NCRR;
and,
3. Review the feasibility and financial impact of NCRR operations
without a lessee, including preparation of pro forma financial
statements for each of three NCRR segments (Charlotte-Greensboro,
Greensboro-Raleigh, and Raleigh-Morehead City).
A map of involved rail lines is shown in Exhibit I-1.
CHAPTER II - REVIEW OF PRIOR STUDIES
Key points extracted from prior studies, NCRR's Proxy Statement, and CSI's
comments are as follows:
o The $8 million lease accepted by NCRR after nearly two years of
negotiations is inadequate in the eyes of minority shareholders.
o By virtually every measure examined by the Board and consultants
(including CSI), the $8 million lease rate is reasonable or superior
in value.
o NS has indicated an unwillingness to increase its offer and is
threatening to divert up to 75 percent of all traffic (non-captive
overhead) to alternative routes if the lease is not renewed.
o NS could divert substantial additional NCRR originating and
terminating traffic in cities reached by its own lines (reducing
NCRR traffic to less than 12 percent of traffic currently handled,
as described in Chapters III and IV).
o The Surface Transportation Board (STB) has economic jurisdiction to
prescribe and apply a methodology for determining a reasonable lease
rate, but may not be able to force NS to accept a higher rate if NS
i **CONFIDENTIAL**
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decides not to renew the lease. A decision could take up to 18
months (longer with appeals).
o NS cannot discontinue service, nor can NCRR (or third party
operator) provide service without STB approval. This could take
months or years more to resolve.
o Meanwhile, NS is disinvesting in the property by withholding
maintenance expenditures and traffic development. Discussions with
the State on corridor development are on hold.
o One study determined that on a Net Reproduction Cost Less
Depreciation (NRCLD) basis the NCRR could be worth up to $400+
million. This exercise is meaningless as a measure of value, since
the railroad would never be built at this cost, given the far less
expensive alternatives which exist.
o Even though alternative use of NCRR property could increase value,
it is a fact of life that the property is a rail corridor, most of
which cannot be used for any other purpose (the public and STB would
not allow it).
o NCRR's primary value is as a railroad. Because so much traffic is
controlled by NS, it is of greatest value to NS. Without NS traffic,
NCRR would be of lesser value to the State or other third party.
o Alternatives of NS to divert traffic are real, though it will
require some major capital costs, some incrementally higher costs
per unit of traffic, and possibly longer transit times.
CHAPTER III - ADDITIONAL COST TO NS TO BYPASS NCRR
CSI's study concluded the following:
o All non-captive overhead traffic could be diverted via a variety of
alternate routes.
o Diversion of all traffic via NS's Charlotte-Greensboro line is
technically feasible, but severe constraints with respect to heavy
vehicular traffic and grade crossings, close proximity to
residential and industrial developments, bridges, sharp curves, and
even rolling (but not severe) gradients do not make this route a
practical alternative. However, we believe this line, properly
upgraded, could handle 15 - 20 trains per day.
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o Most line-haul traffic originating and terminating on NCRR in
Charlotte, Salisbury, Lexington, Greensboro, and Raleigh could be
retained by NS under switching rights or switching rates.
o NS could operate without Linwood (Spencer) yard and would not
require a new yard on any alternate route.
o Certain costs to upgrade the alternate NS line between Charlotte and
Greensboro are believed to be overestimated. For example:
- train control (signal costs) are too high;
- much less than 65 MPH second main track is required (CSI
believes long passing sidings every 5 - 10 miles would be
adequate); and
- the Winston-Salem Greensboro line is already a high quality,
heavy duty line (but without signals).
o The Wilbur Smith study did not address costly bridge rebuilding or
severe grade crossing issues which must be resolved.
The net cost for NS to bypass NCRR is estimated to be about:
NET NS COSTS TO AVOID NCRR
Annuity Dollars
Item (Millions)
Reduction in track maintenance costs ($9.4)
Savings in NCRR lease payments (8.0)
Savings in other operating costs (7.7)
Capital improvements amortization* 14.5
Lost revenue 13.8
-----
Net annual cost increase* $3.2
* This annuity is very sensitive to initial capital costs to upgrade
the alternative route. If costs are $50 million higher than the
$150 million assumed, it adds $4.6 million in annuity costs.
CHAPTER IV - PRO FORMA ANALYSIS OF NCRR WITHOUT LESSEE
Inadequate traffic details and uncertainties with respect to possible NS
actions and payments to NCRR make it impossible to reliably estimate NCRR
operating costs if NS were to divert traffic from NCRR. Other findings and
conclusions in this chapter were:
o The continued need for NCRR to maintain passenger level track
standards will far exceed payments from Amtrak and severely impact
the viability of NCRR on a stand alone basis.
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o The net cost of continuing passenger service is $1.8 million in
excess of Amtrak's $.6 million payments.
The probable "worst case" cost of independent operations of NCRR is:
SUMMARY OF FIRST YEAR PRO FORMA ESTIMATES
NCRR AS AN INDEPENDENT OPERATOR
UNDER NS DIVERTED TRAFFIC ASSUMPTIONS
($ Thousands*)
Charlotte- Greensboro- Raleigh-
Greensboro Raleigh Morehead City Total
---------- ------- ------------- -----
Revenue
- -------
Freight Divisions $ 2,126 $2,455 $ 2,122 $ 6,703
Switching 1,693 3,460 0 5,153
Demurrage 69 91 51 211
Property Rents 30 30 0 60
Amtrak 373 241 69 683
------- ------ ------- --------
Total Revenue $ 4,291 $6,276 $ 2,241 $ 12,808
Expenses
- --------
Maintenance of Way $ 3,618 $3,258 $ 2,335 $ 9,211
Maintenance of Equipment 270 327 174 771
Transportation 535 689 339 1,563
G & A 269 303 230 802
Car-Hire & Other 250 279 60 589
------- ------ ------- --------
Total Operating Expenses $ 4,943 $4,857 $ 3,138 $ 12,938
Net Ry Operating Expenses ($ 652) $1,420 ($ 897) ($ 129)
Fixed Charges (Debt) Interest 249 286 179 714
------- ------ ------- --------
Net Income ($ 902) $1,134 ($1,075) ($ 843)
*Numbers may not add exactly due to rounding.
CONCLUSIONS
None of the previous studies, nor this study support or justify
terminating the NS lease based on unreasonableness. Approached from every
reasonable viewpoint or basis of comparison using information available to CSI,
the $8 million lease rate offered by NS does not appear inequitable,
unreasonable, or below what NS should pay.
Delay in the resolution of the present disagreement between the Board and
the minority stockholders of the NCRR risks a significant, deleterious effect on
the value of the property. With uncertainty over continuing service over the
NCRR, Norfolk Southern can be expected to make incremental decisions that may
gradually shift more traffic away from NCRR. The longer the delay in resolving
lease related issues, the greater will be
iv **CONFIDENTIAL**
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NCRR's risk exposure (a greater likelihood of negative impacts on NCRR). NS is
already "banking" maintenance cost savings for application to the outcome of
lease negotiations (to invest in its own lines, or reinvest back in the NCRR
route).
v **CONFIDENTIAL**
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STRATEGIC RAIL FREIGHT VALUE
OF THE NORTH CAROLINA RAILROAD
I - INTRODUCTION
NATURE OF THE PROBLEM
In late 1994, after two years of negotiation, the Board of Directors of
the North Carolina Railroad (NCRR) approved an extension of the 1895 and 1939
leases (called the Lease Extension Agreement) for Norfolk Southern (NS) to
operate over 317 miles of railroad and properties owned by NCRR. Annual payments
were to be $8 million, subject to inflation. As part of, and in preparations for
negotiations, NCRR commissioned Wilbur Smith & Associates, ALK Associates,
American Appraisal Associates/Standard Research, and Morgan Stanley to assist it
and NCRR's counsel to determine both fair values of NCRR and a fair lease rate.
Minority stockholders believe that the lease rate is inadequate and, on a
technicality that there was not a quorum of minority shareholders represented
when the Board approved the lease, filed a suit to have the decision overturned.
The court ruled in favor of minority interests. Consequently, NS is presently
operating over the property without a formally approved, legally binding lease
agreement.
With much of NCRR strategically located in fast growing areas between
Charlotte-Greensboro-Durham-Raleigh, the value and best use of the rail corridor
is perceived differently by the State of North Carolina, the NS, and minority
NCRR shareholders.
The NS prefers to conduct operations over NCRR in a manner which best
serves its corporate interests, much as it has done in the past. The State,
however, is concerned about a broader potential for the corridor including more
passenger train operations, high speed rail passenger service, and the support
of certain commuter rail services.
In the absence of consensus among stockholders and a partnership approach
to developing the corridor's fullest potential, NCDOT seeks to strengthen its
control of NCRR and ability to negotiate with NS without the impediments of the
present ownership structure. Buying out minority shareholders would serve those
interests.
While NCDOT is evaluating its options, NS is also evaluating alternatives
to uncertainties with respect to its continued operations over NCRR.
Alternatives include ceasing or greatly reducing its operations over NCRR. The
NS can provide most services via alternate routes. Though not as well suited as
NCRR routes, they could meet, or be upgraded to meet, priority operational
requirements. NS could also give up all or portions of its local NCRR freight
operations.
The recent announcement of a merger between CSX Transportation and Conrail
and NS's own bid for Conrail could add a new dimension to the future of through
and local traffic on NCRR (and within the state) if concessions are negotiated
by or forced on the
**CONFIDENTIAL**
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Corporate Strategies, Inc.
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merging railroads. These changes could increase or decrease the strategic value
of NCRR, adding another issue that the state needs to consider.
If NS were to direct traffic away from NCRR either on its own or as an
outcome of a Conrail merger, it would greatly reduce the value of NCRR to NS. It
would make it easier for the state, however, to resolve some issues with respect
to planned passenger services.
If there is a possibility of increased freight traffic as a result of
merger or merger concessions, it could require more plant capacity enhancements
in certain NCRR corridors. From a positive viewpoint, this too, could serve both
NS and state interests.
If North Carolina were to buy out minority shareholders, it would have
greater flexibility to address competitive service issues that are important to
the state. The state could also decide to terminate the lease or reduce the
miles of line it leases to NS. The state could even grant trackage rights
instead of leasing the property to NS, leaving it in more control of NCRR
operations. Finally, in the absence of a lease, the state could, conceptually,
contract the operation of freight services, passenger services, or both to a
third party.
The actions of each of the parties, the issues involved, and external
railroad merger possibilities have created very complex questions and issues
that could affect minority stock valuation. In the public markets of actively
traded stocks, it is customarily assumed that the market price of stock reflects
its perceived value. Any premium paid to acquire controlling stock interests is
presumed to reflect a higher value perceived by the party making a tender offer.
With 75 percent of NCRR stock owned by the State of North Carolina and the
privately owned stock not widely traded, other factors need to be reviewed and
considered in making an offer to buy out minority shareholders. This study is
intended to further help the state take the initiative in creating an
environment where the NCRR can be developed to its fullest potential, resolving
the present ownership impediments and uncertainties.
STUDY OBJECTIVES
Principal objectives of CSI's study are to:
1. Review history of negotiations and contributing studies, making
constructive comments as appropriate;
2. Estimate cost to NS to implement alternatives to using NCRR; and,
3. Review feasibility and financial impact of NCRR operations without a
lessee, including preparation of pro forma financial statements for
each of three NCRR segments (Charlotte-Greensboro,
Greensboro-Raleigh, and Raleigh-Morehead City).
A map of NCRR and relevant NS lines is enclosed as Exhibit I-1.
I - 2 **CONFIDENTIAL**
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EXHIBIT I - 1
CORPORATE STRATEGIES, INC.
NORFOLK SOUTHERN AND NCRR LEASED LINES
[Map Omitted]
I - 3 **CONFIDENTIAL**
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II - REVIEW OF NEGOTIATIONS AND PREVIOUS STUDIES
NCRR OWNERSHIP
Out of 10 million authorized shares of common stock, 4,283,470 shares have
been issued, of which 3,207,173 shares are owned by North Carolina, or 74.87
percent of the total. Directors and officers own 26,700 shares. (Directors
elected by "privately owned" shares own 15,080 of those 26,700 shares.) The
balance of 1,049,597 are owned by private shareholders, including NS. NS
beneficially owns 113,855 shares of the common stock of NCRR, approximately 2.7
percent of all stock outstanding or 10.6 percent of private shares. Further,
NCRR owns 9.6 percent of outstanding common stock of the State University
Railroad, where the majority of that railroad is owned by NS.
The State of North Carolina is not a party to the Lease Extension
Agreement. Accordingly, the Board of Directors has not considered the state to
be an interested party. In some instances, state law treats NCRR somewhat
differently than other corporations. For example, Section 124-5 of the General
Statutes requires approval of the Governor and counsel of state prior to NCRR
being able to sell or lease its assets. However, the state believes NCRR is
useful in the economic development of the state and wants a more active role in
its development.
Quorum Requirements
The original charter and by-laws of NCRR contain unique provisions
designed to balance the interests of the state and other shareholders. An
example of this is the special requirements for voting shares, which require a
quorum of both public and private shares. The NCRR charter provides that 10
Board members are elected by the state and 5 (additional) members of the Board
are elected by private shareholders, the latter of which is disproportionate to
the private shareholders ownership share. If the state purchases additional
shares or sells shares, there is no provision for reducing or increasing the
number of Board members.
The Board of Directors believed that whatever economic development
interests the state may have, those interests are substantially consistent with
the interests of the other shareholders of NCRR to the extent the growth of
revenue traffic along the line is promoted. The board unanimously approved a
Lease Extension Agreement because it determined that the agreement is in the
best interest of all the shareholders of the railroad. The Board felt that the
Lease Extension Agreement met the following primary strategic objectives:
Maximize shareholder value by maximizing distributable after tax
income to the shareholders consistent with minimizing the risks (1)
that income will be disrupted, and (2) that the value of the assets
of the NCRR will be impaired.
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The Board believed that the Lease Extension agreement promoted the foregoing
objective better than any other alternative realistically available to the NCRR.
In certain litigation, it has been alleged that the state's interest in
economic development is inimical to the interests of the other shareholders of
NCRR because of the state's desire to promote industrial growth in areas
adjacent to NCRR. The Board believes that this is equivalent to saying that the
state's desire to increase the number of shippers near the NCRR is in conflict
with the interests of other shareholders.
The Board believes that it is in the interest of all shareholders that
volume of revenue traffic over NCRR increase. The Board sees no conflict of
interest between the economic development interests of the state and the
interests of private shareholders. The interest of all is promoted by increasing
the value of the NCRR.
Legal actions described later, were filed after the market price of NCRR
stock dropped significantly following announcement of tentative terms of the
Lease Extension Agreement in November 1994. Certain stockholders believed that
the lease rate negotiated by the Board was inadequate, and the result of
conflict of interest. The value of stock preceding the announcement reflected
the anticipation of more favorable lease terms.
The Board noted that if NCRR were to operate the railroad, it could be
exposed to conflicts of interest if it approved rates which were sufficiently
low to be a major factor in promoting industrial development along the line, but
depressed earnings and stockholder value.
BUYOUT OF MINORITY SHARES BY NORTH CAROLINA
During negotiations, certain shareholders suggested that it would be in
the best interest of shareholders to either sell all or substantially all of the
stock or assets of the NCRR to the State of North Carolina or to reorganize the
ownership of the railroad. As an alternative to buyout of minority shares, it
was proposed that the state would own 100 percent of the eastern portion of NCRR
lines with lower traffic densities and other shareholders would own a greater
percentage of the western portion of the NCRR. The NCRR's Board determined that
it would not pursue serious consideration of such proposals unless it were
determined that the state had serious interest in pursuing such a buyout or
reorganization.
Some shareholders expressed concern that the economic terms of the lease
agreement will be the basis for valuation of NCRR stock. The Board declined to
take a position in this determination or to get involved in the speculation of
alternatives.
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Early in its negotiations, NCRR discussed sale of NCRR to NS. NS did not
show significant interest in purchasing NCRR.(1)
SUMMARY OF LEASE HISTORY(2)
The North Carolina Railroad Company was incorporated in 1849, and began
operations in 1854. In 1871, the NCRR leased virtually all of its assets to a
predecessor of the Southern Railway which, in turn, merged with the Norfolk and
Western Railway in 1982 to form the Norfolk Southern (NS) Railway. The term of
lease was for 99 years, at a fixed annual rate of $266,000 until 1901,
thereafter at $286,000, not subject to escalation.
In 1989, the NCRR acquired the Atlanta and North Carolina Railroad, the
assets of which were subject to a lease dating to 1939 with the Atlantic and
East Carolina Railway Company, a wholly-owned subsidiary of NS. The last
combined payment on both the 1895 and 1939 leases was $306,958 for calendar year
1994.
Both the 1895 and 1939 leases expired on December 31, 1994, with no
requirement for renewal. NS, however, cannot discontinue operations over the
leased lines without Surface Transportation Board (STB) approval.
In 1968, NCRR and NS renegotiated a portion of the 1895 lease for three
parcels of land in the Charlotte area. These parcels were released from the 1895
lease and, separately and entirely, were covered by the 1968 lease, which
expires in 2067. Annual rental is for $81,319 until 2018, after which it becomes
6 percent of the current value of the leased properties.
In the fourth quarter 1994, NCRR and NS reached tentative terms on a long
term extension of the 1895 and 1939 leases, with the exception of an expiration
date. On August 10, 1995, the NCRR Board of Directors approved a Lease Extension
Agreement, retroactive to January 1, 1995. In December 1995, the state approved
and voted its majority of shares to accept the lease. However, a shareholder
legally challenged the validity of shareholder approval. Additional derivative
litigation was filed to enjoin the Lease Extension. The Lease Extension
Agreement is currently in escrow, though the NS began good faith payments as if
the Lease Extension Agreement were in place. In August 1996, with no solution in
sight, NS stopped making lease payments, depriving NCRR of its principal source
of revenue.
Until the lease was suspended by the courts, NS had worked with NCRR to
structure payments to NCRR in such a way to facilitate NCRR's desire to become a
Real Estate Investment Trust (REIT) in order to take advantage of its income and
capital earnings pass-
- ----------
(1) Presumably, this reflects NS' conclusions that a lease is economically
equally or more advantageous to NS than purchase.
(2) Abstracted from NCRR's proxy statement for a shareholder meeting held on
December 15, 1995.
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through (no tax) provisions. NCRR's plans to seek REIT status have been
postponed as a result of litigation.
SUMMARY OF REJECTED LEASE TERMS
A summary of lease terms accepted by majority shares (State of North
Carolina), but rejected by minority shareholders were as follows:
o $8 million for calendar year 1995, subject to inflationary increases
in subsequent years as measured by the Implicit Price Deflator for
the Gross National Product (IPD-GNP) (subject to certain
limitations), but never less than $8 million.
o Expiration on December 31, 2024 with an option by NS to extend for
another 20 years. Exercise of option requires a payment of an option
fee equal to 25 percent of the previous year's lease rate, or $5
million, whichever is greater.
o A one-time payment of $5 million in exchange for NCRR release of
NS's obligation to return certain personal property on expiration of
the original lease;
o The $5 million payment does not waive NCRR's claim to the Linwood
(Spencer) yard, or other payments, but provides that such claims are
postponed to the termination of the Lease Extension Agreement.
o 317 miles of road, between Morehead City and Charlotte are included
in the Lease Extension Agreement.
o NCRR has rights to utilize non-operating properties as it sees fit,
but NS retains control over operating properties.
o NS will pay to NCRR 75 percent of the income it receives for
granting of certain rights and easements, such as fiber optic cable,
along NCRR right-of-way.
o NS required to fully maintain and operate railroad and to indemnify
NCRR from liability claims related to its operation of the railroad.
o The December 31, 1968 ("Charlotte") lease is not affected, and
continues as is until December 31, 2067. The "Charlotte Lease"
covers three parcels of land in Charlotte, for which NS paid $81,319
in 1995.
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The Board of Directors approved the Lease Extension Agreement as in the
best interest of shareholders because:
o There was no other potential lessee which expressed an interest in
the properties;
o The terms of the lease would permit NCRR to elect a Real Estate
Investment Trust (REIT) tax status, avoiding Federal corporate
income taxes on ordinary income and capital gains tax on
distribution to shareholders;
o Other comparable leases have lower lease payments per million gross
ton-miles;
o Most NCRR traffic is overhead traffic outside control of NCRR;
o Risks associated with continued negotiations appeared to offer no
likelihood of improved benefit to NCRR;
o NS has ability to divert overhead traffic away from NCRR, reducing
its strategic value to any other potential operator; and,
o Strength of NS offers revenue stability.
In spring of 1994, when lease negotiation progress ceased, NCRR
contemplated requesting the ICC to set compensation. NCRR's counsel advised that
it was unpredictable what the ICC might determine, how long the proceeding might
take, and that NS would still be free to seek to discontinue operations on all
or part of the NCRR's line which, if granted, would eliminate the requirement to
pay compensation for that portion of the line. It could also open the door for
the NS to re-petition the ICC for a reduction in payments. Since the
compensation rate would not be a negotiated rate, it virtually guarantees that
one party or the other will be unhappy with the rate. NS appears to be in a
better position to make it difficult for NCRR to meet the financial objectives
of its shareholders.
NCRR's counsel noted that the Interstate Commerce Act does not prescribe a
particular formula or methodology for the determination of the compensation one
railroad pays to another for operations over a line of railroad. The selection
of a methodology is left to the discretion of the ICC (now STB). NCRR was
advised that a possible methodology could be Reproduction Cost New, Less
Depreciation (RCNLD), but that other methodologies also exist. The methodology
the ICC (STB) might use is determined on a case-by-case basis.
APPLICABLE INTERSTATE COMMERCE ACT LAW
NCRR researched provisions of the Interstate Commerce Act as it might
apply to the issues. Under Section 10903, a railroad is not permitted to abandon
or discontinue
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operations over any line (including a line leased from another party) without
the prior approval of the ICC (STB). Before a railroad can file an abandonment
application, the line must have been listed in its system diagram map on file
with the ICC (STB) for at least four months as potentially subject to
abandonment.
The same section also provides that the ICC (STB) may authorize an
abandonment or discontinuance of operations over all or part of a line only if
it finds the present or future public convenience and necessity requires or
permits the abandonment or discontinuance. In applying these criteria, the ICC
must balance 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 continuing operations. The railroad has the burden of
proof to demonstrate that abandonment or discontinuance is justified. Generally,
the ICC (STB) will not approve an abandonment or discontinuance unless the
railroad can demonstrate that the revenues received from an operation over a
line fail to cover its costs as defined by the ICC (STB) to yield a reasonable
return.
The Act is not clear what happens if either party decides not to renew the
lease. Presumably, since the ICC (STB) had to approve the lease from NCRR to NS
in the first instance, it must similarly approve the termination of the lease.
Should the STB approve the termination of the lease, NCRR would then have the
burden to operate the railroad or find an operator to do so (which, again, would
require STB approval).
Should the lease be terminated and operations transferred to NCRR or its
designated operator, the STB would still have jurisdiction to adjudicate the
lease rate for the period between the expiration of the lease and the time a
certificate for termination of NS services is granted (a proceeding that could
easily take 2 years).
CSI notes that the STB could make the finding that, since NS and the Board
of Directors agreed to an annual $8 million lease, it represents a fair value.
The STB need not be bound by the unusual structure of NCRR ownership which gives
minority stockholders a disproportionate voice in shareholder decisions.
SHAREHOLDER DERIVATIVE LEGAL ACTIONS
Four minority (private) shareholder derivative actions were filed between
December 1994 and February 1995. Two of the filings sought to enjoin the lease
between NCRR and NS and to recover for the NCRR unspecified damages and other
relief from the directors. Two of the other actions seek similar relief and also
named the state and the governor and the NS as defendants.
Two of the actions allege misconduct by the Board of Directors, including
breach of fiduciary duty, mismanagement, and waste of corporate assets. The
other two actions assert similar claims but also allege collusion between the
state and NS, producing a below-market lease rental rate. The actions further
assert that the state has condemned NCRR's properties for public uses for the
benefit of the state.
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NCRR, along with codefendants, filed motions to dismiss or stay the
actions. On October 18, 1995, however, the court denied the motions to dismiss,
granted the motions to stay the proceeding until such time as the stockholders
voted on the Lease Extension Agreement, and granted the motion by the plaintiffs
for leave to supplement their pleadings. The NCRR is opposing the actions
brought by the plaintiffs to the extent the actions seek to enjoin any lease
arrangement or seek recovery against NCRR, or seek any remedy against the best
interests of the NCRR or its shareholders.
Dissenters Rights
The general statutes of the state specify situations in which shareholders
have a right to dissent and have their shares appraised and purchased [by] a
corporation. It does not cover votes on leases of assets. Consequently, no
appraisal rights are available to shareholders who oppose the Lease Extension
Agreement.
In other legal actions, NCRR has filed a complaint with the Superior Court
of Wake County, North Carolina, to adjudicate a dispute with NS concerning
title, property ownership, and other claims with respect to certain other
assets.
STB PETITION
The NCRR's proxy statement contained arguments why the $8 million annual
lease is the best NCRR could obtain. It noted that there are many reasons why
the STB should not be asked to set the level of lease compensation. In late
summer of 1996, however, the Board of Directors reversed its position and
directed NCRR counsel to seek Trackage Rights Compensation and force NS to
continue making payments as if the lease were in effect. The Board changed its
mind because NS stopped making provisionary payments and because of additional
pending litigations that may partly be adjudicated by the STB's jurisdiction
over railroad operating leases.
On September 23, 1996, the NCRR filed a petition with the Surface
Transportation Board to set trackage compensation. The petition proposed two
phases:
o Phase I - Request for STB to determine the appropriate methodology
for valuing the NCRR line; and,
o Phase II - STB's application of that methodology to the facts in
this proceeding.
The NCRR requested expedited handling of this request, filed under Finance
Docket No. 33134. A second petition was also filed on the same date, requesting
interim relief, ordering NS to continue making lease payments.
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SUMMARY OF PRIOR STUDIES
Prior to this study, the NCRR sponsored at least five studies to support
its interests:
o 1982 Valuation of NCRR by Printon, Kane (not reviewed);
o 1986 Valuation study by American Appraisal Associates/Standard
Research (not reviewed);
o 1992 Track Evaluations to upgrade NS' Charlotte-Greensboro line;
o 1993 Traffic Study and preparation of NCRR Pro Forma by ALK
Associates;
o 1993 Valuation Study of NCRR by Mercer Management Consulting; and,
o 1995 Analysis of NCRR Options by financial advisors, Morgan Stanley.
Selected highlights of the last three studies are reviewed here.
1993 ALK Traffic Study and Pro Forma
ALK used four data sources for its study:
o 1993 ICC waybill sample to derive traffic and revenue data;
o Princeton Transportation Network Model for distances, locations, and
routings;
o Uniform Railroad Costing System to develop cost ratio factors and
average tare weights; and,
o Analysis of Class I railroads, published by AAR to verify overall
traffic levels represented in ICC sample and as a source of NS cost
and financial data.
According to ALK, the 1993 waybill sample for NS under represents cars,
tons and ton-miles and over represents revenue and car-miles.
The revenue allocation methodology used by ALK is based on dividing
movements into 100 mile blocks, rounding up to the nearest whole number. The
origin carrier was given an additional 100 mile block and the terminating
carrier was similarly given a 100 mile block. Revenue was then divided among the
carriers in relation to the mileage blocks
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attributable to each carrier. For purpose of ALK's study, the NCRR was treated
as a carrier separate from NS.
Exhibit II-1 is a summary of ALK's revenue estimates, derived from the
waybill sample of revenue movements. The column L,F,R,OC is the sum of Local,
Forwarded, Received, and Overhead Captive Traffic. Local traffic originates and
terminates on the NCRR. Forwarded traffic originates on NCRR but is delivered to
NS or interchanged to another railroad.
EXHIBIT II-1
1993 NORTH CAROLINA RAILROAD TRAFFIC ESTIMATES
Revenue Movements Only
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Total Total Overhead Overhead
All Traffic L,F,R,OC Local Forwarded Received Captive Non-Cap
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cars 392,686 95,488 1,188 27,956 56,756 9,588 297,198
- ----------------------------------------------------------------------------------------------------------------------
Tons (000) 24,686 5,528 84 886 3,731 827 19,158
- ----------------------------------------------------------------------------------------------------------------------
Revenue ($000) 84,441 25,098 757 5,851 14,905 3,585 59,343
- ----------------------------------------------------------------------------------------------------------------------
Car-Miles (000) 33,526 8,355 93 2,517 4,700 1,045 25,171
- ----------------------------------------------------------------------------------------------------------------------
Ton-Miles (000) 2,041,863 510,189 5,729 92,647 324,029 87,784 1,531,674
- ----------------------------------------------------------------------------------------------------------------------
Percent of Total
- ----------------------------------------------------------------------------------------------------------------------
Cars 100 24.4 .3 7.1 14.5 2.5 75.6
- ----------------------------------------------------------------------------------------------------------------------
Tons 100 22.3 .3 3.5 15.2 3.3 77.7
- ----------------------------------------------------------------------------------------------------------------------
Revenue 100 29.7 .8 7.0 17.7 4.2 70.3
- ----------------------------------------------------------------------------------------------------------------------
Car-Miles 100 24.9 .2 7.5 14.1 3.1 75.1
- ----------------------------------------------------------------------------------------------------------------------
Ton-Miles 100 24.9 .2 4.6 15.9 4.2 75.1
======================================================================================================================
Rev/Ton-Mile 4.14 4.92 13.21 6.32 4.60 4.08 3.87
(cents)
- ----------------------------------------------------------------------------------------------------------------------
Tons/Car 62.9 57.9 70.7 31.7 65.7 86.3 64.5
- ----------------------------------------------------------------------------------------------------------------------
Revenue/Car $215 $263 $637 $209 $263 $374 $200
- ----------------------------------------------------------------------------------------------------------------------
NOTE: L,F,R,OC is Local, Forwarded, Received, and Overhead Captive Traffic
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: ALK 1993 Traffic Study and Pro Forma for the North Carolina
Railroad, Table 2, p.5.
Received traffic terminates on the NCRR, coming from NS or another
railroad. Overhead captive is traffic which neither originates or terminates on
NCRR, but which must move over NCRR. A good example of this is traffic
originating or terminating on the Durham-Oxford branch or the Highpoint-Ashboro
branch of NS (see Exhibit I-1). Overhead noncaptive is traffic routed via NCRR
which neither originates nor terminates, but which could be diverted or
rerouted.
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The exhibit shows that over 75 percent of all carloads are noncaptive
overhead traffic which could be diverted away from NCRR. The revenue associated
with this traffic is approximately 70 percent of total NCRR revenues.(3)
Since the waybill sample contained only loaded movements, ALK estimated
empty car-miles by using system average ratios of empty to loaded car-miles for
NS for each car type (using the Association of American Railroads Fact Book).
Gross ton-miles were computed by adding net loaded ton-miles, tare weight
ton-miles for the loaded movement and corresponding percentage tare weight
ton-miles for empty movements. Average tare weights were calculated using 1993
Uniform Railroad Costing System (URCS) ratios.
To develop operating expenses assigned to NCRR, ALK appeared to use a "top
down" approach. This includes the use of URCS data, Rail Form R-1 Annual
Reports, and information compiled by the AAR, in its Analysis of Class I
Railroads (which also includes data from other AAR sources).
First, using URCS percentages, they calculated the variable portion of
total cost, which they then apportioned on a formula basis between operating
variables such as gross ton-miles and car-miles, etc., then assigned the
apportioned costs to the NCRR in relation to the number of operating units on
NCRR in relation to operating units for total NS.
In its study, ALK noted that its computer based methodology was unable to
estimate revenues and costs associated with switch movements.
The calculation of expenses was based on apportioning total NS expenses
based on ratios of NCRR to total NS operating statistics most closely associated
with those expenses. Their approach was, at best, simplistic, and given the wide
margin of error for both estimating revenue and expenses, it is not possible to
have confidence in the reliability and validity of their findings.(4)
Given the above constraints, ALK estimated that NCRR, as operated by NS,
contributed $17.1 million to NS' Net Railway Operating Income (NROI). If
non-captive overhead traffic is excluded, NROI drops to $3.4 millon.(5)
- ----------
(3) A significant percentage of originated and terminated traffic could also be
diverted, as discussed in Chapter III.
(4) CSI is also handicapped in its efforts to develop a pro forma because of
insufficient, detailed traffic and revenue divisions data, especially as it
might apply to a stand alone NCRR. Without good traffic data, it is difficult to
put together a good operating plan, from which many expenses derive.
(5) As CSI notes in the next chapter, substantial originating and terminating
traffic could still be retained by NS, with a much more adverse impact on NCRR
NROI.
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Mercer Valuation Study of NCRR
In September 1993, Mercer Management Consultants presented to NCRR its
determination of the going concern value of the railroad. The Mercer study was
done prior to the availability of information generated by ALK. Mercer estimated
the going concern value of NCRR to be $150 million comprised of the following
components:
Millions
--------
Charlotte-Greensboro Segment
-Overhead Traffic $64
-Originating and Terminating Traffic 72
Greensboro-Raleigh Segment 21
Raleigh-Morehead City Segment (16)
Amtrak Rental 6
Other Easements 3
----
TOTAL $150
Mercer noted that the $150 million going concern value could be increased
by rentals of right-of-way assets for nonrail purposes (such as fiber optics).
Mercer did not have information which could quantify existing or potential new
rentals.
On the down side, Mercer noted that the most critical risk to going
concern value is the potential for NS diversion of traffic of noncaptive
overhead traffic away from NCRR either on its newly upgraded line through
Knoxville-Bristol or by line sharing with CSX Transportation, such as NS was
proposing in South Carolina. The Mercer report emphasized that much of the
freight activity on NCRR is dependent on continued operation of the line by NS.
Initiatives ongoing at the time this 1993 study was prepared that could
jeopardize future NCRR traffic levels included:
o Significant upgrading by NS of its Atlanta-Hagerstown line, north of
Bristol (involving tunnel expansion and extension or reopening of
passing sidings); and,
o The beginning of major efforts by NS and CSXT to consolidate train
operations where they have parallel lines such as in the South
Carolina Columbia-Charleston-Spartanburg corridor.
Mercer noted that for a typical railroad line the sum of the parts is
often greater than the whole; i.e., the value of the right-of-way "unbundled" is
often higher than if it is treated solely as an operating railroad line. Mercer
provided no evidence to support this opinion, however. (See CSI evaluation of
NCRR as a stand alone operation in Chapter IV.)
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Mercer believed that maximizing the value of NCRR requires a two pronged
strategy of (1) securing a more equitable long-term lease with NS, providing for
a reasonable, guaranteed current dollar return in exchange for NS' intensive use
of NCRR properties; and, (2) preserving as much as possible NCRR's right to
independently develop and financially benefit from current and prospective
incremental uses of its properties.
Mercer estimated that NS receives approximately $66 million (1993) from
all freight traffic operated over NCRR properties. (This compares to ALK's
similar estimate of $84.4 million.) Mercer further noted that NS earns an
estimated additional $86 million in revenues attributable to traffic originating
or terminating on NCRR.
Mercer believes that for NCRR lines as a whole, estimated operating
expenses consumed about 72 percent of estimated operating revenues (compared to
75 percent for all NS, as reported to the ICC). Mercer estimates that the
Charlotte-Greensboro segment has the lowest operating ratio of approximately 66
percent, but that the Raleigh-Morehead City segment incurs operating expenses
which are almost twice its attributable revenues.
From its working papers, Mercer estimated that NCRR (excluding the money
losing Raleigh-Morehead City line) contributes approximately $20.4 million in
net railway operating income to NS (compared to ALK's estimate of $17.1
million). The Charlotte-Greensboro segment contributed $17.6 million of this
amount, with the balance coming from the Greensboro-Raleigh segment.
Mercer extended its financial analysis to also develop profit and cash
flow for the three distinct segments of the railroad and to make comparisons to
other NS lines in North Carolina, NS lines in other states, and the total NS
system.
Estimated, known post-tax net cash flows attributable to NCRR were
estimated at $15 million (which would have been about $1.5 million higher
without losses on the Raleigh-Morehead City segment). Discounting an assumed
stream of $15 million into perpetuity at a discount rate of 10 percent yields a
going concern value for NCRR of $150 million. This discounting approach is
consistent with other Mercer valuations of rail properties similar to NCRR.
Mercer noted that the estimated $150 million value is also consistent with
NCRR's trading price per share in the low to mid $30's, with 4.3 million shares
outstanding.
Mercer also examined valuation on the basis of transaction multiples, or
ratio of purchase price to revenues. This has ranged from less than 1.0 for
Canadian Pacific's purchase of the bankrupt Delaware and Hudson in 1991 to in
excess of 3.0 for Kansas City Southern's purchase of the profitable Mid-South.
At a value of $150 million, the ratio of NCRR would be 2.3 which lies at the
higher end of the range noted and is consistent with NCRR's overall
profitability.
From another valuation viewpoint, Mercer developed an estimated
Reproduction Cost New Less Depreciation (RCNLD). It calculated RCNLD for NCRR as
a whole at just under
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$400 million, divided into $225 million for the Charlotte-Greensboro and
Greensboro-Raleigh segment and $165 million for the money losing
Raleigh-Morehead City segment. It was not clear whether Linwood (Spencer) yard
was included in this total.
Tables making comparison of railroad sales transaction multiples and
components of estimated RCNLD costs were provided in Mercer's Executive Summary
Report.
Commenting on factors which could increase or decrease the value of NCRR,
Mercer was of the opinion that each 1 percent diversion of NS overhead traffic
would decrease NCRR's going concern value by about $.6 million. Mercer noted
that if NCRR claims additional derivative value for traffic originating or
terminating on NCRR, but handled beyond via NS, that each 1 percent of NS
operating income from this attributable revenue increases the value of NCRR by
about $1.6 million.(6)
Mercer believes that the Raleigh-Morehead City line drags down overall
NCRR valuation by about $15 million. Mercer noted that there are several
unknowns related to additional value NS derives from NCRR, such as Amtrak
payments to NS and easements let by NS from which it derives income.
Exhibit II-2 illustrates the contrast between ALK and Mercer estimates of
NS revenue, expenses, and profit attributed to NCRR.
EXHIBIT II-2
SUMMARY OF PRO FORMA EVALUATION
($ Millions)
----------------------------------------
ALK Mercer
----------------------------------------
Gross Revenue $87.2(1) $66.0(2)
----------------------------------------
Total Expenses 70.0 45.6
----------------------------------------
NROI $17.1 $20.4
----------------------------------------
1) Included $84.4 million in freight and
$2.8 million in non-freight revenue.
----------------------------------------
2) Freight revenue only.
----------------------------------------
Morgan Stanley
In January 1994, the NCRR Board retained Morgan Stanley to serve as its
financial advisor in connection with negotiations. Its finding with respect to
fairness of the lease agreement was provided to the shareholders, but did not
constitute a recommendation to how shareholders should vote to approve the
lease.
- ----------
(6) CSI notes that the reverse claim (NCRR derives derivative income from NS)
could also be made. One cancels out the other, making this claim of derivative
value totally irrelevant. It could easily be argued that NCRR benefits far more
from the NS than vice versa.
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In a presentation to the Board of Directors on August 10, 1995, Morgan
Stanley graphically presented a recent history of NCRR stock. For the first 10
months of 1994, the average between the bid and ask price of NCRR stock (OTC
symbol NORA) hovered in the mid to upper 30's per share. Almost immediately
after NCRR announced the primary terms of the lease extension with NS, as well
as intent to qualify for REIT status, the value of the stock dropped
approximately 10 points, to the mid 20's, reflecting stockholder disappointment
between expectations and realizations about the new proposed lease extension.
Subsequent to the lease extension announcement, stock prices climbed back
to the lower 30's by mid 1995. On November 5, 1996, the average of the bid and
ask price was approximately 39-7/8 ($37.75 bid, $42.00 asked) reflecting
stockholder expectations pending outcome of a new lease agreement, the result of
litigation, or a buyout by the State of North Carolina.
Morgan Stanley summarized its evaluation of alternatives as shown in the
Exhibit II-3. Comments in italics add CSI's comments to the Morgan Stanley
summary.
EXHIBIT II-3
NCRR ACTION ALTERNATIVES
(Summary by Morgan Stanley, to NCRR Board, 8/10/95)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Alternative Advantages Disadvantages
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Enter into Lease o Certainty of outcome o Potentially higher valuations available
with NS o Stability of income through other alternatives, although
o Inflation adjustment highly uncertain outcomes
- ----------------------------------------------------------------------------------------------------------------
Sale or Lease to o Certainty of outcome o No identified interest from parties other
Third Party o Stability of income than NS
- ----------------------------------------------------------------------------------------------------------------
Appeal to ICC via o Potentially higher o Uncertainty of valuation standard or
Litigation valuation valuation outcome
- A lower rate determination could be
enforced by the STB, replacing NS'
higher $8 million offer
- A higher lease rate could not be
enforced if NS decides not to renew
the lease
o Uncertainty of timing
o Disruption of income
o Significant expected cost
- ----------------------------------------------------------------------------------------------------------------
Operate Property o Potentially higher o Uncertainty of overhead traffic (potential
valuation diversion by NS)
o No experience operating railroad
o Unknown level of profitability
o No ability to qualify as a REIT
- ----------------------------------------------------------------------------------------------------------------
NOTE: Comments in italics are made by Corporate Strategies, Inc.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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Using comparative analysis and various discount rates, Morgan Stanley
converted an annual payment stream of $7.5 million ($8 million annual lease
minus NCRR overhead of $.5 million) to arrive at an implied equity value in a
nominal range of $143 million (at a 5.5 percent discount rate) or $33.42 per
share, assuming REIT election. If REIT status was not achieved, nominal implied
equity value would be approximately $90 million or roughly $21 per share. Morgan
Stanley's analysis did not include other miscellaneous lease and rental income
or the $5 million payment made by NS to waive certain claims against property.
In other studies, Morgan Stanley reviewed 13 purchase and sale
transactions in the railroad industry during the 1985 - 1995 period. Though not
directly comparable, these transactions had a median and mean aggregate value
per mile of $247,000 and $279,000/mile, as compared to the $416,000/mile for the
NCRR lease extension agreement (as suggested by perpetuity value analysis and
assuming REIT election and a 6 percent discount rate). On a per MGTM basis,
Morgan Stanley translated the above numbers to $22,900/MGTM and $34,500/MGTM
compared to $29,500/MGTM for the NCRR Lease Extension Agreement.
These transactions had a median and mean ratio of aggregate value to
revenues of 1.41x and 1.68x respectively, as compared to 1.56x for the NCRR
Lease Extension Agreement.
Wilbur Smith Study
In December 1992, Wilbur Smith submitted an estimate to upgrade NS' line
between Charlotte and Greensboro (via Winston-Salem), adding CTC, and adding
65.5 miles of second main line track.
Those tables are reproduced as Exhibits II-4 and II-5. CSI did not review
any written material that may have accompanied the text.
NCRR COMMENTS
Besides commenting on previous studies in some detail, additional comments
prepared by NCRR's general counsel in the 1995 proxy statement include the
following abstracts. In some instances, CSI has added comments to abstracts made
from the proxy. These comments are noted in italics.
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EXHIBIT II-4
CHARLOTTE TO GREENSBORO
UPGRADE COSTS (EXISTING LINE)
(Secondhand Rail)
- --------------------------------------------------------------------------------
ESTIMATED
COST ITEMS QUANTITY UNIT UNIT TOTAL COST
COSTS
- -------------------------------------------------------------------------------
Rail, 132 lb. S.H. CWR 105.3 Mile $237,600 $ 25,019,280
- -------------------------------------------------------------------------------
Cross Ties, New Main Line 105.3 Each 49 4,643,730
miles @
900/mi.
- -------------------------------------------------------------------------------
Turnouts, New 132 lb. No. 10 118 Each 35,000 4,130,000
- -------------------------------------------------------------------------------
Ballast, Granite 105.3 Ton 7.5 631,800
miles @
800/mi
- -------------------------------------------------------------------------------
Surfacing 105.3 Mile 5,808 611,582
- -------------------------------------------------------------------------------
Road Crossings 136 Each 3,600 489,600
- -------------------------------------------------------------------------------
Motion Detectors 36 Each 10,000 360,000
- -------------------------------------------------------------------------------
Circuit Controllers 118 Each 5,000 590,000
- -------------------------------------------------------------------------------
Train Control Signals 105.3 Mile 556,000 58,546,800
------------
- -------------------------------------------------------------------------------
Upgrade Subtotal $ 95,022,792
- -------------------------------------------------------------------------------
Engineering and Construction 9,502,279
Supervision @ 10%
- -------------------------------------------------------------------------------
Subtotal $104,525,071
- -------------------------------------------------------------------------------
Contingencies @ 10% 10,452,507
- -------------------------------------------------------------------------------
Subtotal $114,977,578
- -------------------------------------------------------------------------------
Less Salvage Value of Material
Released 2,001,294
------------
- -------------------------------------------------------------------------------
Net Upgrade Cost $112,976,284
============
- -------------------------------------------------------------------------------
Note: Unit values current as of December 1992.
- -------------------------------------------------------------------------------
Source: Wilbur Smith Associates
- -------------------------------------------------------------------------------
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EXHIBIT II-5
CHARLOTTE TO GREENSBORO
SECOND (MAIN) TRACK CONSTRUCTION
(Secondhand Rail)
- --------------------------------------------------------------------------------
UNIT ESTIMATED
COST ITEMS QUANTITY UNIT COSTS TOTAL COST
- --------------------------------------------------------------------------------
New Track Construction 65.5 Mile $564,960 $ 37,004,880
- --------------------------------------------------------------------------------
No. 20 Turnouts, New Complete 48 Each 100,000 4,800,000
- --------------------------------------------------------------------------------
No. 10 Turnouts, New Complete 20 Each 42,000 1,840,000
- --------------------------------------------------------------------------------
Remove turnouts from Existing 24 Each 15,000 360,000
Main & Install Track Panels
- --------------------------------------------------------------------------------
New Circuit Controllers 20 Each 5,000 100,000
- --------------------------------------------------------------------------------
Road Crossings 71 Each 3,600 255,600
- --------------------------------------------------------------------------------
Motion Detectors 9 Each 10,000 90,000
- --------------------------------------------------------------------------------
Move Crossing Signals 9 Each 5,000 45,000
- --------------------------------------------------------------------------------
Train Control Signals 65.5 Mile 204,000(1) 13,362,000
- --------------------------------------------------------------------------------
Subtotal $ 56,857,480
- --------------------------------------------------------------------------------
Engineering & Supervision @ 10% 5,685,748
------------
- --------------------------------------------------------------------------------
Subtotal 62,543,228
- --------------------------------------------------------------------------------
Contingencies @ 10% 6,254,322
- --------------------------------------------------------------------------------
Track Subtotal $ 68,797,550
- --------------------------------------------------------------------------------
Earthwork 4,196,895 CY 10.00 41,968,950
- --------------------------------------------------------------------------------
Bridges 3,649 LF 3,000 10,947,000
- --------------------------------------------------------------------------------
Extend Drainage Structures LS 118,500
- --------------------------------------------------------------------------------
Subtotal 53,034,450
- --------------------------------------------------------------------------------
Engineering & Supervision @ 10% 5,303,445
- --------------------------------------------------------------------------------
Subtotal $ 58,337,895
- --------------------------------------------------------------------------------
Contingencies @ 40% 23,335,158
- --------------------------------------------------------------------------------
Grading & Drainage Subtotal $ 81,674,053
============
- --------------------------------------------------------------------------------
Estimated New Construction Cost $150,476,603
- --------------------------------------------------------------------------------
(1) Difference in double and single track costs, single-track cost having
already been included in Exhibit II-4.
- --------------------------------------------------------------------------------
NOTE: Unit values current as of December, 1992.
- --------------------------------------------------------------------------------
Source: Wilbur Smith Associates
- --------------------------------------------------------------------------------
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Without overhead traffic, NCRR's consultants believe that if NCRR handled
only traffic originating or terminating online, or local to the NCRR, gross
revenues would be approximately $13.4 million and a net income of approximately
$3.8 million before taxes would be earned--substantially lower than the $8
million annual rental contained in the lease extension agreement. There were
many additional caveats noted by NCRR and its consultants, related to the need
for additional capital (which could dilute interests of NCRR's shareholders) and
whether it could operate the line as efficiently and effectively. Both studies
ignored the very real possibility that NS could continue to handle most
terminating and originating traffic in Charlotte, Lexington, Greensboro, and
Raleigh. This is discussed in Chapter IV.
NCRR and its consultants also noted higher operating risks and exposure to
liability from which it is currently insulated. A fixed annual lease rate and
defined indemnities to most risks and liabilities provides low risk to
shareholders.
NCRR's consultants noted that total diversion of overhead traffic, due in
part to high traffic volumes over NCRR lines, would require NS to spend
"hundreds of millions of dollars" in capital improvements to achieve total
diversion of overhead traffic. Additionally, higher operating costs would be
incurred. The combined effect, could reduce or minimize NS's diversion of such
overhead traffic. NCRR and its consultants further noted that if capital
investments were made by NS to divert traffic, it would likely result in
permanent diversion of that traffic. CSI believes capital costs to upgrade NS'
alternate route are uncertain, as discussed in Chapter IV.
If NS were to successfully divert overhead traffic, NCRR could find itself
acting as an overflow resource to be used in high traffic years or under other
circumstances when it is convenient to NS to route overhead traffic over NCRR.
NCRR management concluded that it would be in the best interest of shareholders
to accept a stable annual rental payment. In summary, NCRR found no compelling
reason to terminate NS' lease.
Under RCNLD, NCRR's consultants estimated that the gross annual lease rate
could be as high as $74.7 million or as low as $4.6 million.(7) The higher range
exceeds the gross annual revenues attributable to the line, at least as
estimated by Mercer. Under RCNLD, the railroad would never be built, as less
costly alternatives are available.
NCRR counsel noted many problems with a lease rate based on property
valuation. This included the observation that valuation is not based on traffic
or revenues or the perceived value of the property to NS, but simply the
appraised market value of property. Also, ownership of substantial property,
such as Linwood (Spencer) yard and the bypass around Thomasville, is in dispute.
These ownership issues cannot be resolved by the ICC (STB), and must be
adjudicated by the courts. This could further delay the determination of a lease
rate based on property valuation.
- ----------
(7) Proxy Statement for December 15, 1995 Board Meeting, p. 18.
II - 18 **CONFIDENTIAL**
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The Board of Directors has reviewed a number of prior appraisals and
evaluations of the NCRR and concluded that no single evaluation depicts a fair
value of the NCRR as a basis for defining a fair annual return on assets.
Under a variety of alternatives, the one most closely studied by the Board
was the Reproduction Cost New Less Depreciation (RCNLD). A major defect in this
formula is that it does not regard the income producing value of the property.
Even then, the value of NCRR's properties for RCNLD purposes ranged from a low
of $40 million to a high of $450 million, depending on which assets were
included in the valuation.
Ownership of significant portions of NCRR assets are disputed. While NS
invested in improvements or additions, NCRR claims ownership of these
improvements and additions under the terms of the lease.(8)
On a Net Liquidated Value (NLV), NCRR's assets (other than Spencer yard)
would be in the range of $42.2 to $43.9 million.(9)
Finally, the Board considered a going concern value for the property.
Their consultant, Mercer Management, estimated a going concern value of $150
million, including consideration of overhead traffic.
The NCRR Board also attempted to determine a fair trackage rights fee for
overhead traffic that at least equalled the estimated cost to NS of upgrading
the adjacent Winston-Salem line and replacing Spencer yard. These capital costs
were estimated at $263 million.(10) During negotiations, however, it developed
that NS has options other than the Winston-Salem line and that any assumptions
the Board might make are "dangerous."
In its presentation to the Board, Mercer made specific comparisons to the
NS lease of the Cincinnati, New Orleans and Texas Pacific railroad, owned by the
City of Cincinnati (frequently referred to as NS's "Rat Hole" division) and the
CSXT lease of the Western & Atlantic railroad, owned by the State of Georgia.
Both lines are modern, high density single or double track, well maintained
railroads. Though neither of these two leases involves private stock ownership,
Morgan Stanley noted that the current lease rate offered by NS is approximately
twice that paid by NS or CSXT as measured on a MGTM basis.
- ----------
(8) For the purpose of lease calculation, NS undoubtedly believes that the
investment it made in its own interest should not count in the determination of
value. It is nothing more than paying for the same investment a second time.
(9) Wilbur Smith & Associates.
(10) See Exhibit II-4 and II-5.
II - 19 **CONFIDENTIAL**
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CSI OBSERVATIONS
None of the NCRR's prior studies could anticipate the potential rail
environment of a merger of either NS or CSXT with Conrail; the potential
restructuring of service routes ("open access") or other concessions that could
make the re-routing of overhead traffic even more cost effective than operating
over NCRR. Conversely, the value of NCRR as a strategic partner to NS (or
perhaps even CXST) could increase under certain conditions that might emerge as
a result of a pending merger. It is impossible in the short time frame of this
study to assess potential outcomes. Critical information needed to make such
assessments is only available to CSXT, NS, and Conrail, and even then, they are
months away from concluding their assessments of the possibilities, if they are
even considering them.
In reviewing the alternatives of valuation, RCNLD is a fictitious number.
At the calculated cost, the railroad would never be built since less expensive
routing alternatives already exist. NLV is a real number for valuation purposes
(because the property exists), but still possibly hypothetical in the sense that
it is unthinkable that the rail corridor could or would be permitted to be
eliminated by the STB, state, or shippers. If neither alternative is
realistically possible, then their use in calculating an implied equity value of
the NCRR has no real merit. By reason of history, the NCRR's maximum value is as
a rail corridor as it now exists. If not of greatest value to NS, then it must
be of higher value to the NCRR as an independent operator, CSXT, or to a third
party operator. All studies convincingly argue that, with the proposed lease,
NCRR is not of higher value to any other operator. Even this argument, however,
does not, alone, answer whether the $8 million lease is fair.
If for no other reason than NS agreed to it, the NCRR is worth $8 million
per year to NS. Viewed from perspectives other than suggested by NCRR's
consultants, if the 317 route miles of the NCRR are representative of all NS,
then it suggests NS might be willing to pay an equivalent lease of $321 million
per year for the remaining 12,568 route miles it owns and operates. By
comparison, this "equivalent lease" (including NCRR) represents 8 percent of
gross freight operating revenues, as reported in the railroad's 1995 Annual
Report R-1 submitted to the ICC (now STB). Depending on whose NCRR revenue
estimates you use (ALK's $84.4 million, or Mercer's $66 million), the agreed
lease rate of $8 million represents 9.5 and 12 percent of revenue respectively,
higher than the equivalent of a lease price for all of NS.
From yet another perspective, the $8 million lease rate translates into
$1,792 per MGTM.(11) Applied to the remaining MGTM's of NS (256,408 as reported
in Schedule 755 of its Annual Report R-1 to the STB) the lease rate applied to
all freight traffic handled by NS would be $459 million per year or 11 percent
of its total 1995 freight revenues. By virtually any measure applied by previous
consultants or CSI, the lease rate appears to range from reasonable to generous.
- ----------
(11) As reported by Morgan Stanley, in its August 10, 1995 Board Meeting, based
on the 1993 ALK study.
II - 20 **CONFIDENTIAL**
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The attorney for minority shareholders has made it clear to CSI that
private shareholder interest in being bought out by the state is purely cash
driven. They perceive the NCRR is significantly undervalued because the NS lease
rate is unnecessarily low--below that which NS should and is willing to pay (and
further presumes would pay). CSI was also advised by minority shareholder
counsel that the potential value of the NCRR as a corridor for high speed
passenger and commuter service also adds significant additional value to the
owners. On top of minority shareholder claims, NS believes it should earn a
return on allowing passenger trains to operate over lines it owns, leases, and
maintains, at rates of return similar to those earned by freight service.
Claims noted above could undermine the very objectives of value that
minority shareholders seek. At some point, the whole concept of high speed rail
service and/or commuter service becomes economically unsupportable and/or
unaffordable. The same would apply to NS claims for compensation. In any event,
a substantial additional investment must be made to improve infrastructure and
capacity in order to provide either additional new passenger or improved freight
service.
Although outside the scope of study, it is reasonable to question that if
public moneys are spent to improve both freight service and line capacity in the
corridor (in order to meet passenger and/or commuter transportation needs),
whether NS (or any other railroad) is entitled to additional compensation. It is
also appropriate to examine whether the potential utility value of the NCRR adds
value to stockholders. An examination of past situations where property was
condemned for the purpose of building rail lines for commuter or other passenger
transportation could add insight whether the potential of providing these
services added value to these condemned properties. The fact that the NCRR is
the most logical and least expensive corridor in which to build may not be
relevant in public works projects.
The bottom line of value of the NCRR to NS centers on what NS is willing
to pay. There is simply no viable alternative, short of unthinkable liquidation
of the property or alternatives uses, all of which indicate substantially lower
value. Undoubtedly, a factor in NS's reluctance to increase its lease rate offer
is the danger of setting a precedent that could affect its other leases.
NS is also very much aware that no one else can match or exceed its offer
for NCRR. Given NS's bargaining position, the only recourse to obtaining a
higher rate is the STB. There is no assurance, given the facts we have reviewed,
that STB has an adequate basis to justify, let alone compel, NS to pay a higher
lease rate for NCRR.
What NS is willing to pay can be judged in other frames of reference such
as lease comparisons made by Morgan Stanley or in another context, the
alternative cost to NS of foregoing the lease. One portion of this study
attempts to estimate that incremental cost to Norfolk Southern.
In its valuation of the NCRR, Morgan Stanley assumed lease payments in
perpetuity to arrive at its implied equity value of $143.2 million. If the lease
rate were discounted for
II - 21 **CONFIDENTIAL**
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30 years (the initial term of the proposed lease) and the estimated residual
value of the property were similarly discounted, it is conceivable that the
implied equity value of NCRR could be greater than the $143.2 million. For
example, assuming a 30 year annual payment of $7.5 million, a discount rate of
5.5 percent (which factors in the inflationary increase in lease payments) and a
future property value of NCRR of $300 million (30 years from now), the implied
equity value would be as follows:
Millions
--------
$109.0 Present Value of $7.5 million net lease.
60.1 Present value of $300 million residual property value.
169.1 TOTAL
We concur with earlier studies that no single basis of valuation is
appropriate for establishing minority stockholder value.
The next two chapters address NS's incremental cost (i.e., cost increases
plus loss of revenue) to bypass NS, and a pro forma for NCRR without NS.
II - 22 **CONFIDENTIAL**
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III - ADDITIONAL COST TO NS TO BYPASS NCRR
OVERVIEW
If NS were to not renew the NCRR lease, it has alternatives to reroute 100
percent of all non-captive overhead traffic moved by NCRR and to handle
terminating traffic in Charlotte, Salisbury, Lexington, Greensboro, and Raleigh
that currently moves by NCRR. Under circumstances described below, NS could also
handle most, if not all, originating traffic from these cities.
Conceivably, NS could also work with CSXT to deliver traffic NS originates
on its own lines or receives from connection for delivery to destinations in
Durham. Under the worst scenario, NCRR could be reduced to an originating and
terminating carrier for traffic where NS does not have a competitive point of
entry and a switching provider for all other traffic in the above named cities.
Even if NCRR were to handle terminating traffic at other points not named above,
it would, most likely, receive only a short haul since NS is under no obligation
to maximize NCRR's length of haul by interchanging traffic at just Charlotte or
Greensboro.
DIVERSION OF OVERHEAD TRAFFIC
NS could conceivably divert all overhead traffic which currently moves
between Charlotte and Greensboro via its alternate line through Winston-Salem.
This light density line is not constructed or maintained to the same high
standards as the NCRR main line. Also, both Yadkin River bridges, on the
Winston-Salem - Mooresville Sub (MPL 13.8) would probably require rebuilding.
The same is true of many other lesser bridges, such as the present
out-of-service bridge over Peter's Creek in Winston-Salem. Many sections of the
line have heavily traveled at-grade crossings, curves, and gradients which will
be major obstacles to handling a major increase in traffic, especially in excess
of 15-20 trains per day. Many sections of line, besides bridges, will require
substantial engineering changes to reduce curvature and perhaps gradients. Large
numbers of private and public grade crossings will be a major problem to
resolve.
Access to the NS, from its yard in Charlotte, or directly via a
discontinued direct connection with its Atlanta main line, will be a problem. In
Greensboro, NS must operate over about 2 miles of NCRR to reach its main line to
Danville and beyond. CSI briefly inspected the line, by car and foot, to be
discussed in a separate, non-confidential report to be submitted to NCDOT
(December 1996).
Some of the diverted traffic could move north out of Winston-Salem to
Roanoke instead of back to the double tracked former Southern line running north
out of Greensboro. For some traffic, moving to and from the Hagerstown gateway,
this would actually reduce the length of haul, as well as reduce highway
conflict problems in Winston-Salem and east through Greensboro.
**CONFIDENTIAL**
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Consulting studies have variously estimated NS' costs to upgrade its line
through Winston-Salem as high as $250 million--$150 million to upgrade the line,
and another $100 million for 65 miles of additional double track. None of these
studies addressed the issue of moving Linwood yard or, at worst, building a
whole new classification facility.
In addition to the one time capital expenses to upgrade the line through
Winston-Salem, NS would annually incur incrementally higher annual maintenance
costs on the line due to the additional diverted traffic and required higher
track standards. But it would avoid all of the maintenance expense it now incurs
for the maintenance of NCRR--a more than substantial offset. Additionally, NS
would save the lease expense attributable to the Charlottesville-Greensboro
portion of the NCRR. Effectively, NS would pay for the ownership and maintenance
of only one railroad between Charlotte and Greensboro instead of two. The same
comments apply to NS' Greensboro-Raleigh route. NS would save all maintenance
expenses on the Raleigh-Morehead City route. NS' own route from Raleigh to New
Bern is capable of handling the additional diverted traffic without any capital
improvements.
NS would incur higher operating costs related to the additional length of
haul, increased traffic delays, and longer transit time to move trains by all
alternate routes.
In the real world, if NS were not to renew the NCRR lease, it would not
simply reroute overhead traffic from Charlotte to Greensboro via the alternate
Winston-Salem route, but would (or, more emphatically, must) consider other
alternatives, some of which were noted in previous studies (ALK and Mercer).
These include:
o All traffic originating in the Birmingham area or south and west of
Birmingham, which now moves via Atlanta-Charlotte-Greensboro and
north, could be routed via Chattanooga-Knoxville-Bristol.
o Traffic originating in the Atlanta area or coming from points
southeast of Atlanta could move via Rome-Knoxville-Bristol.
o Traffic originating northeast of Atlanta but south of the North
Carolina border could move by Saluda-Asheville;
o Some traffic could be interchanged to another railroad for
rerouting; and finally,
o NS would give up some marginal traffic which cannot bear the cost of
rerouting.
CSI does not have information to what extent traffic dispersion or traffic
loss might occur, but is safe to assume that less than 100 percent of overhead
traffic between Charlotte and Greensboro would be rerouted via Charlotte -
Winston-Salem - Greensboro. Thus CSI's estimate of incremental costs of traffic
diversion are the maximum NS might incur as a result of re-routing.
III - 2 **CONFIDENTIAL**
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DIVERSION OF OTHER TRAFFIC
It is highly probable that NS could force NCRR to either grant switching
rights within yard limits of Charlotte, Salisbury, Greensboro, Lexington, and
Raleigh or, alternatively, require NCRR to publish switching charges that are no
higher than what might be prescribed by the STB. With the NS able to control
most originating and traffic terminating in the above named cities, NCRR would
be left with very little originating and terminating traffic on the rest of its
railroad if NS were able to persuade shippers in these five cities to route by
NS (NS could absorb switching costs as an incentive to keep this traffic if it
so desires).
It is conceivable that NS could elect to give up its freight business east
of Raleigh, as it once contemplated prior to the construction of a new woodchip
producing facility west of Wilson. There is also some uncertainty with the
present lucrative movement of oil from Morehead City (Radio Island) to Cherry
Point, Seymour Johnson Air Force Base, and Fort Bragg. A proposed plan by the
Department of Defense to move this oil via the Colonial Pipeline to Selma and
thence by truck or rail to destination is uncertain at this time.
In summary, there are so many uncertainties with deteriorating
relationships between NCRR and NS that if NS were to terminate the lease and
aggressively to seek to preserve all traffic originating and terminating in
Lexington, Greensboro and Raleigh that now moves by NCRR, NCRR would be little
more than a light density shell railroad for its entire length of line.
CALCULATION OF NS COST INCREASES AND REVENUE LOSSES
Exhibits III-1 and III-2 develop CSI's estimates of NS' maximum
incremental cost and revenue losses to retain traffic currently moving via NCRR.
Not having access to detailed traffic and operating information needed, CSI used
the best available information, developed from prior studies, other information
obtained by CSI, and contributions from knowledgeable NCDOT staff.
In general, CSI attempted to estimate NS traffic and operating units as it
now exists (NS operation on NCRR) and then as it might exist (without dispersion
of traffic to alternate corridors) if NS were to operate only on its own
railroad. If NS could not handle the traffic, it was assumed as being delivered
to NCRR for line haul or switching placement.
Differences in operating and traffic units were multiplied by
corresponding unit costs or unit revenues to calculate increases and decreases
in cost and revenue payments. To these estimates, further adjustments were made
as shown in the two exhibits and described below.
Besides the described studies, additional information sources used by CSI
include the 1996 NS track chart, which shows 1995 millions of gross ton miles
(MGTM) by line segment (these statistics not always reliable, but are the best
we have), NS' Annual Report
III - 3 **CONFIDENTIAL**
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- --------------------------------------------------------------------------------
EXHIBIT III - 1
SUMMARY OF ESTIMATED INCREMENTAL NS OPERATING STATISTICS TO BYPASS NCRR
================================================================================
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Estimated Current Units Moving on Segment:
-----------------------------------------------------
N N N N
o o o o
t Charlotte- t Greensboro- t Raleigh - t
e Greensboro e Raleigh e Morehead City e
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Miles of Route 1 90 81 143
2. Average Running Time, Hours 2 2 3 7
3. MGTM 3,827 3 926 3 265 3
4.Carloads Handled on Segment
Overhead - Non Captive to NCRR 297,198 4 0 4 0 4
Overhead - Captive to NCRR 5,753 4 3,835 4 0 4
Forwarded and Received - To/From This Segment 28,209 4 49,430 4 7,074 4
- To/From Other Segments 39,553 5 6,367 6 0
Local 0 9 0 9 1,188 9
Total Carloads Handled on Segment 370,713 59,632 8,262
6. Equivalent Trains Operated (Total - Both Ways)
Intermodal & High Priority 11 10 0 0
Other Freight 14 10 5 10 0 10
Locals 2 10 1 10 2.5 10
Amtrak 6 10 4 10 4 10
7. No. of Switch Engine Tricks (Shifts) Operated 8 11 5 11 0 11
8. Ave Cars Per Train
Intermodal & High Priority 70 12 54 12 0
Other Freight 70 12 54 12 0
Locals 25 12 25 12 25 12
9. Freight Train-Miles Operated 18 874,800 174,960 128,700
10. Freight Car-Miles 19 58,548,656 8,627,284 3,217,500
11. Freight Locomotive Unit-Miles 20 2,595,240 443,232 154,440
12. Switch Engine Tricks (Shifts) Operated 21 2,288 1,430 0
13. Orig & Term loads Interchanged to NCRR for Line Haul - - - - - -
14. Captive Overhead Interchanged to NCRR (Bridge Move) - - - - - -
15. Carloads Lost (Local traffic) - - - - - -
16. Ave Lost Rev/Carload (Divisions on Orig & Term Loads) - - - - - -
17. Carloads Subject to Switching Charge - - - - - -
18. Assumed Bridge Divisions per Carload - - - - - -
19. Revenue per Local Carload
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Estimated Units Moving on NS
Segment If NCRR is Avoided
-------------------------------------------------
N N N N
o o o o
t Charlotte- t Greensboro- t Raleigh- t
e Greensboro e Raleigh e New Bern e
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Miles of Route 1 105 103 132
2. Average Running Time, Hours 2 3 6 6
3. MGTM 4,109 17 761.98 17 0
4.Carloads Handled on Segment
Overhead - Non Captive to NCRR 297,198 0 0
Overhead - Captive to NCRR 0 0 0
Forwarded and Received - To/From This Segment 16,925 7 34,601 7 0
- To/From Other Segments 27,002 8 3,973 7 0
Local 0 0 0
Total Carloads Handled on Segment 341,125 38,574 0
6. Equivalent Trains Operated (Total - Both Ways)
Intermodal & High Priority 11 0 0
Other Freight 13 4 0
Locals 0 0 0
Amtrak 0 0 0
7. No. of Switch Engine Tricks (Shifts) Operated 2 11 2 11 0
8. Ave Cars Per Train
Intermodal & High Priority 69 12 47 12 0
Other Freight 69 12 47 12 0
Locals 25 12 25 12 0
9. Freight Train-Miles Operated 18 907,200 148,320 0
10. Freight Car-Miles 19 62,323,611 6,913,268 0
11. Freight Locomotive Unit-Miles 20 2,831,220 415,296 0
12. Switch Engine Tricks (Shifts) Operated 21 572 572 0
13. Orig & Term loads Interchanged to NCRR for Line Haul 11,284 13 14,829 13 7,074 13
14. Captive Overhead Interchanged to NCRR (Bridge Move) 5,753 3,835 0
15. Carloads Lost (Local traffic) 0 0 1,188
16. Ave Lost Rev/Carload (Divisions on Orig & Term Loads) $193 14 $193 14 $193 14
17. Carloads Subject to Switching Charge 16,925 15 34,601 15 0
18. Assumed Bridge Divisions per Carload $91 16 $91 16 $91 16
19. Revenue per Local Carload $637 22
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Estimated Increase (Decrease) in
Units to Avoid NCRR Total
----------------------------------------------------
N
o
t Charlotte- Greensboro - Raleigh -
e Greensboro Raleigh New Bern
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Miles of Route 1 15 22 (11) - -
2. Average Running Time, Hours 2 1 3 (1) - -
3. MGTM 281.49 (164.37) (264.97) (147.85)
4.Carloads Handled on Segment
Overhead - Non Captive to NCRR 0 0 0 - -
Overhead - Captive to NCRR (5,753) (3,835) 0 - -
Forwarded and Received - To/From This Segment (11,284) (14,829) (7,074) - -
- To/From Other Segments (12,551) (2,394) 0 - -
Local 0 0 (1,188) - -
Total Carloads Handled on Segment (29,588) (21,058) (8,262) - -
6. Equivalent Trains Operated (Total - Both Ways)
Intermodal & High Priority 0 0 0 - -
Other Freight (1) (1) 0 - -
Locals (2) (1) (3) - -
Amtrak (6) (4) (4) - -
7. No. of Switch Engine Tricks (Shifts) Operated (6) (3) 0 - -
8. Ave Cars Per Train - -
Intermodal & High Priority (2) (8) 0 - -
Other Freight (2) (8) 0 - -
Locals 0 0 - -
9. Freight Train-Miles Operated 18 32,400 (26,640) (128,700) (122,940)
10. Freight Car-Miles 19 3,774,955 (1,714,016) (3,217,500) (1,156,561)
11. Freight Locomotive Unit-Miles 20 235,980 (27,936) (154,440) 53,604
12. Switch Engine Tricks (Shifts) Operated 21 (1,716) (858) 0 (2,574)
13. Orig & Term loads Interchanged to NCRR for Line Haul
14. Captive Overhead Interchanged to NCRR (Bridge Move)
15. Carloads Lost (Local traffic)
16. Ave Lost Rev/Carload (Divisions on Orig & Term Loads)
17. Carloads Subject to Switching Charge
18. Assumed Bridge Divisions per Carload
19. Revenue per Local Carload
- --------------------------------------------------------------------------------------------------------------
</TABLE>
III - 4 **CONFIDENTIAL**
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- --------------------------------------------------------------------------------
EXHIBIT III - 2
SUMMARY OF ESTIMATED INCREMENTAL NS OPERATING COSTS TO
BYPASS NCRR - 1995 NS COST BASE - 3RD QTR 1996 COST LEVEL
================================================================================
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
N Morehead
o City(NCRR)/
t Charlotte- Greensboro- New Bern
Summary of Applicable Unit Costs Unit Cost e Greensboro Raleigh (NS) Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Route Miles via NCRR 90 81 143 314
2. Route Miles via NS 105 103 132 340
3. Increase in Traffic Route Miles 15 22 (11) 26
- ---------------------------------------------------------------------------------------------------------------------------------
NS Incremental Operating Statistics via Alternate Route
4. Millions of Gross Ton-Miles (MGTM) 281.49 (164.37) (264.97) (147.85)
5. Locomotive Unit Miles (LUM) 235,980 (27,936) (154,440) 53,604
6. Freight Car-Miles (Loaded plus Empty) 3,774,955 (1,714,016) (3,217,500) (1,156,561)
7. Train-Miles 32,400 (26,640) (128,700) (122,940)
8. Switch Engine Tricks (Shifts) Operated (1,716) (858) 0 (2,574)
9. Cars Assessed Switching Charge 16,925 34,601 0 51,526
10. NCRR Cars Subject to Revenue Divisions Payment 11,284 14,829 7,074 33,187
11. Captive Overhead Cars Subject to Revenue Divisions 5,753 3,835 0 9,588
12. Local Traffic Carloads Lost 0 0 1,188 1,188
- ---------------------------------------------------------------------------------------------------------------------------------
13. Present MofW Long Run Costs Per Mile of Route - NCRR 23 $52,000 $46,000 $27,000
14. - NS Alternate Route 23 $20,000 $20,000 $26,000
15. MofW Costs Per Mile on Alternate Route if Traffic is Diverted 23 $48,000 $38,000 $26,000
------- ------- -------
16. Incremental Cost Increase Per Mile on Alternate Route $28,000 $18,000 $0
- ---------------------------------------------------------------------------------------------------------------------------------
Some cost increases (becreases) are based 1995 NS System Average Costs indexed to 396. Some costs decrease
because there are fewer units of traffic, in spite of the longer length of haul via NS Alternate Route.
17. Gross Ton-Mile Costs ($/GTM)
Fuel Portion $0.00080 25 $225,280 ($131,545) ($212,059) ($118,325)
MofE Portion $0.00022 25 $61,518 ($35,922) ($57,908) ($32,312)
MofW Portion $0.00147 25 $415,126 ($242,401) ($390,764) ($218,039)
All Other $0.00178 25 $501,883 ($293,060) ($472,429) ($263,606)
18. Locomotive Costs ($/LUM)
Fuel Portion $0.99343 25 $234,430 ($27,753) ($153,426) $53,262
MofE Portion $0.50399 25 $118,931 ($14,079) ($77,836) $27,016
MofW Portion $0.00466 25 $1,101 ($130) ($720) $250
All Other $2.71414 25 $640,483 ($75,822) ($419,172) $145,489
19. Train-Mile Costs ($/TRN-MILE)
Train Labor $5.10870 25 $165,522 ($136,096) ($657,490) ($628,063)
All Other $1.74352 25 $58,490 ($46,447) ($224,391) ($214,348)
20. Car-Mile Costs (Incl 38% Private Cars) ($/CAR-MILE) $0.06711 26 $253,340 ($115,029) ($215,929) ($77,618)
21. Yard Switching ($/ENGINE MINUTE) $4,493 25 ($3,701,168) ($1,850,584) $0 ($5,551,753)
------------ ------------ -- ------------
22. Subtotal Cost Changes, Based onSystem Average Costs ($1,027,065) ($2,968,869) ($2,882,123) ($6,878,056)
23. Subtotal, Excluding MofW Costs Included Above ($1,443,291) ($2,726,338) ($2,490,639) $6,660,268
Revenue and Other Cost Adjustments - Increase (Decrease)
Revenue Adjustments
24. Switching Payments to NCRR $100 24 $1,692,540 $3,460,100 $0 $5,152,640
25. Divisions Paid for NCRR Traffic Subject to Divisions $193 14 $2,177,735 $2,861,997 $1,365,282 $6,405,014
26. Divisions Paid to NCRR for Captive O'hd Traffic $91 16 $522,372 $348,218 $0 $870,590
27. Lost Revenue, NCRR Local Traffic $637 22 $0 $0 $757,000 $757,000
28. Amtrak Receipts 28 $331,967 $199,180 $68,852 $600,000
-------- -------- -------
29. Subtotal - Divisions Paid or Revenue Lost to NCRR $4,724,614 $6,869,495 $2,191,134 $13,785,244
MofW Cost Savings
30. Savings - No Longer Maintain NCRR ($4,680,000) ($3,726,000) ($3,861,000) ($12,267,000)
31. Additional Cost to Maintain NS Route $2,940,000 $1,854,000 $0 $4,794,000
32. Maintenance Cost Adjustment, first 5 years 31 ($1,093,419) ($849,136) ($1,942,555)
------------ ------------
33. Subtotal - Reduction in MofW Costs ($2,833,419) ($2,721,136) ($3,861,000) ($9,415,555)
Other Cost Increases (Decreases)
34. Car Hire Saved, Cars Interchanged to NCRR on Divisions 27 (350,459) (438,222) (231,336) ($1,020,017)
35. Lease Payments to NCRR 29 ($6,100,881) ($1,476,723) ($422,397) ($8,000,000)
36. Capital Improvements (Annuity Value) * 30 $9,760,759 $4,787,420 $0 $14,548,179
---------- ---------- --
37. Subtotal, other adjustments $3,309,420 $2,872,475 ($653,733) $5,528,162
40. GRAND TOTAL ANNUAL COST INCREASE $3,757,323 $4,294,497 ($4,814,237) $3,237,583
- ---------------------------------------------------------------------------------------------------------------------------------
SUMMARY
Cost Reductions
41. Reduction in Maintenance Costs ($2,833,419) ($2,721,136) ($3,861,000) ($9,415,555)
42. Savings in NCRR Lease Payments ($6,100,881) ($1,476,723) ($422,397) ($8,000,000)
43. Other Operating Costs ($1,793,750) ($3,164,560) $2,721,975 $7,680,285
Cost Increases
44. Amortization of Capital Improvements* $9,760,759 $4,787,420 $0 $14,548,179
45. Lost Revenue $4,724,614 $6,869,495 $2,191,134 $13,785,244
---------- ---------- ---------- -----------
46. GRAND TOTAL ANNUAL COST INCREASE $3,757,323 $4,294,497 ($4,814,237) $3,237,583
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*This annuity payment is very sensitive to initial cost, interest rate,
and life of amortization. If capital costs were $50 million higher than the $100
million assumed for Charlotte - Greensboro and $50 million Greensboro - Raleigh,
the annuity cost to NS would increase by about another $4.648 million per year.
III-5 **CONFIDENTIAL**
<PAGE>
Corporate Strategies, Inc.
- --------------------------------------------------------------------------------
NOTES TO EXHIBITS III - 1 AND III - 2
1 From NS Track Charts
2 CSI Estimated Average
3 From NS 1995 Track Charts:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Segment
Segment ----------------------------------
Miles from Station Name Miles from Miles (between Millions of Gross Ton MGTM
Station Name Raleigh Raleigh (stations) Gross Tons Miles Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charlotte 173.4 Salisbury 130.6 42.8 39.8 1703.44
Salisbury 130.6 Linwood 120.9 9.7 55.3 536.41
Linwood 120.9 High Point 96.5 24.4 43.3 1056.52
High Point 96.5 Greensboro 84.1 12.4 42.8 530.72 3827.09
Greensboro 84.1 Durham 25.5 58.6 11.5 673.9
Durham 25.5 Raleigh 0 25.5 9.9 252.45 926.35
Raleigh Selma 28.4 2.3 65.32
Selma Goldsboro 18.7 2.5 46.75
Goldsboro New Bern 56.5 1.2 67.8
New Bern Morehead City 37 2.3 85.1 264.97
Total 5018.41
----------------------------------------------------------------------------------------------------------
</TABLE>
4 Estimated Breakdown of Carloads by Segment, From ALK Data. Apportionments
to each segment are made from pooled knowledge of CSI and NCDOT staff,
since no other information was available to the Study Team upon which to
make such assignments.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Overhead Overhead
Total Total LFROC Local Forwarded Received Captive Non-Captive
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
On NCRR
Carloads - As Estimated by ALK 392,686 95,488 1,188 27,956 56,756 9,588 297,198
CSI Apportionment by Segment
Charlotte Greensboro 331,160 33,962 0 11,182 17,027 5,753 297,198
Greensbor - Raleigh 53,265 53,265 0 15,376 34,054 3,835 0
Raleigh - Morehead City 8,262 8,262 1,188 1,398 5,676 0 0
Distibution Assumptions made by study team:
Charlotte Greensboro 0% 40% 30% 60% 100%
Greensbor - Raleigh 0% 55% 60% 40% 0%
Raleigh - Morehead City 100% 5% 10% 0 0%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
5 CSI assumed that 70 Percent of all traffic orignating or terminating EAST
of Greensboro, moves over this segment to Charlotte (70% x (49430 + 7074)
= 39553)
6 CSI assumed that 90 percent of all traffic orginating or terminating EAST
of Raleigh, moves ove this segment to Greensboro.(90% x 7074 = 6367)
7 CSI assumed that NS could keep 60 percent of all traffic originating or
terminating on the Charlotte to Greensboro segment through switching
rights at Charlotte, Salisbury, and Greensboro, and possibly Lexington
through its 50% ownership in the Winston Salem Southbound (WSS) (60% x
(11182 + 17027 = 16925) For the Greensboro - Raleigh Segment, we have
assumed that NS could keep 70 percent of all originating and terminating
traffic - basically most of that orignates or terminates in Raleigh (again
through switching rights), or terminating traffic in the Raleigh area
which it could interchange to NCRR at Raleigh. (70% x (5676 +15376 +
34054) = 34601) For the Raleigh - Morehead City segment, we have assumed
that all other traffic orginating and terminating is lost, except for
grain and coal traffic which terminates in Selma, Goldsboro, and Morehead
City, which would be interchanged to NCRR at Raleigh (.7 x 5676 = 3973).
8 CSI assumed that 70 Percent of all traffic orignating or terminating EAST
of Greensboro, moves over this segment to Charlotte (70% x (34601 + 0) =
24221)
9 Local traffic is believed to be mostly jet fuel moving between Radio
Island and points served by NCRR
10 Estimated by NCDOT staff and CSI current data on NS operations. Some
trains originate or terminate at Linwood. CSI attempted to convert trains
operated to the equivalent of operations over the entire segment. Actual
operations vary as extra trains may be operated, or some schedules may be
annulled.
11 It is CSI's understanding that the following switch tricks (shifts) are
operated. Most are five day, but some are 7 day schedules.
1 Charlotte Switcher (5 day)
6 Linwood (7 day) is CSI's current estimate. Formerly, up to ten 5 and
7 day jobs were bulletined at this facility.
1 Greensboro
1 Durham
3 Glenwood Yard (Raleigh) (7 day)
1 Raleigh
Assuming NS pays NCRR to do switching, assume the number of tricks
(shifts) is cut back to 1 in Charlotte, 1 in Greensboro, and 2 in Raleigh.
12 Ave Car-Miles per Train-Mile is 64, according to AAR's Analysis of Class I
Railroads for NS. Average Cars Per Train were estimated by adding total
carloads handled on each segment, adding an allowance for empty cars
(equal to 74% of loads), subtracting an average of25 cars (loads and
empties) per local x 250 days (5 days per week, 50 weeks), and divinding
by the number of trains operated (360 day year).
13 Overhead Captive plus Carloads Originated and Terminated on NCRR Segment
Minus Cars Still Handled via NS Route Charlotte to Greensboro (5753 +
28209 - 16925 = 11284) Greensboro to Raleigh (3835 + 49430 - 34601 =
14829) Greensboro to Morehead City (0 + 7074 - 0 = 7074)
14 Average Divisions assumed using ALK formula = 100 Mile block plus an
assumed ave of 40 mile haul on NCRR, or basically the equivalent of 140
miles times average revenue per loaded car-mile of $2.27 would yield
$317per car, which we believe is much more than NS would allow. CSI
believes NS would more likely allow the equivalent of a switch charge,
some additional allowance for station clerical (NS's own costs is about
$12.82 per carload), and, at best, an average revenue per loaded car-mile
of $2.00, which is more than most regional or short lines earn per loaded
car-mile if orginating and terminating allowances are excluded. Under this
basis, an average division rate would be closer to 40 miles x $2.00 per
loaded car-mile + $100 switching + $13 clerical = $193
15 All orginating and terminating traffic which was not assumed interchanged
to NCRR was assumed to be handled by NCRR under a switch charge. This
study assumed no traffic losses to truck or interchange to CSXT.
III-6 **CONFIDENTIAL**
<PAGE>
Corporate Strategies, Inc.
- --------------------------------------------------------------------------------
NOTES TO EXHIBITS III - 1 AND III - 2
16 Assumed same average Revenue per Car-Mile as NS $2.27). Assumed 40 mile
payment.
17 Millions of Gross Ton Miles were calculated by Multiplying the ALK
estimated numbers by the ratio of route mileage, NS/NCRR and the ratio of
Carloads Handled over the segment, NS/NCRR. For example, from Charlotte to
Greensboro, Adjusted MGTM = (105/90 x 3827.09 x 341125/370713 = 4108.58)
18 Freight Train Miles Operated is calculated as segment length times trains
operated times 360 days year
19 Freight Car-Miles is calculated as the sum of cars per train type times
trains operated times 360 days per year
20 Locomotive Unit Miles are calculated as train miles by train type times a
CSI estimated average of 3.5 units for Intermodal and High Priority 2.8
Units for Other freight, and 1.2 unit for local trains. The NS average of
Locomotive Units Miles per Train-Mile is 2.5
21 Assume an average of 5.5 days per week, 52 weeks per year.
22 ALK, $757,000 divided by 1,188 Carloads
23 Based on AAR's Analysis of Class I Railroads (Lines 172, 174, and 335), NS
average Mofw Costs per mile of route operated were $43,910 in 1995,
includinding depreciation, and $30,246 excluding Road Property
Depreciation. Estimates assumed by CSI for this study are based on
reasonable assumptions relative to NS, personal observations of portions
of the routes involved, and industry experience. Actual costs may be more
or less than CSI's estimates. Without Amtrak on its own lines, NS will no
longer need to maintain track to 79MPH standards for passenger service.
24 Switching Charges may vary greatly. $100 is estimated as a reasonable
average composite rate for all traffic that may be handled, especially
since some some traffic is switched in multiples, and the line-haul
carrier typically absorbs car-hire for about 3 days.
25 See Appendix. Based on Rail Form A Costs for NS, prepared from NS's Annual
Report Form R-1. Though URCS unit costs are now officially used by the
Surface Transportation Board, URCS still uses the Rail Form A formula
defualts, yielding essentially the same unit costs used here. NS 1995 unit
costs were escalated to Third Quarter 1996 cost levels using AAR's
composite QMPW (Quarterly Price, Material, Wages) Indices.
26 CSI made rough estimate that 30 out of every 80 cars handled were private
line cars (38%), not subject to time (and, in most cases, mileage)
charges.
27 The average car delivered to NCRR is assumed to spend 2.5 days loading or
unloading, plus another 2 days on line, or a total of 4.5 days. Car-Hire
is assumed at roughly $10 per day for cars with railroad markings, or
$6.20 for a weighted average of both private and railroad owned cars. NS
cars are treated the same as foreign railroad cars (cars owned by other
railroads). Then, 4.5 days x $6.20 = about $28 per carload. For Captive
Bridge Traffic, only a 1 day savings per carload was assumed, or $6 per
carload.
28 Apportioned based on Passenger Train Miles. On Raleigh to Morehead City
section, passenger trains operate between Selma and Raleigh, a distance of
about 28 miles. Passenger train-miles per day are about 6 x 90 = 540
between Charlotte and Greensboro, 4 x 81 = 324 between Greensboro and
Raleigh, and 4 x 28 = 112 between Raleigh and Selma. Total daily passenger
train-miles are about 976.
29 Pro rated on MGTM by segment, calculated in Note 3.
30 CSI believes Wilbur Smith's estimates of about $250 million to upgrade
just NS's Charlotte - Greensboro line are high in some areas, low in
others. Based on informal onversations with a knowledgeable NS MofW
expert, and our own observations, we believe the upgrade costs for the
Charlotte to Greensboro line will be closer to $1 million per mile, and
perhaps on the Greensboro to Raleigh line, closer to $500,000 per mile.
The Winston Salem to Greensboro section is already in excellent condition,
and requires only additional passing sidings, train control, and grade
crossing improvements to handle much higher traffic volume. To calculate
annuity cost, we have assumed a 40 year life, and a 9% interest (discount)
rate.
31 As a result of major capital upgrade expenditures, average maintenance
expenses will be greatly reduced for the first five years or so. We have
estimated these savings at roughly 60 percent of average maintenance cost
per year, for the first 5 years. These savings were converted to an
annuity cost by first calculating the present value of these savings at 9%
interest, then converting that PV to an annuity equivalent over 40 years
Misc. NS Statistics for Analysis of Class I Railroads for 1995
Ave Tons Per Carload (Analysis of Class I Railroads, 1995 - NS)
Line 174 - Total MofW (1,000) 632957
Line 172 - Road Depreciation (1,000) 196958
Line 335 - Miles of Road Operated 14415
Ave MofW Per Mile of Road Operated $43,910
Ave MofW Per Mile of Road Operated (Excl. Deprn) $30,246
Line 528 - Total Carloads Originated 3,435,207
Line 529 - Total Tons Originated 223,000,888
Ave. Net Tons Per Carload Originated 64.9
Line 655 - Loaded Car-Miles (1,000) 1,702,523
Line 656 - Empty Car-Miles (1,000) 1,257,532
Ratio - Empty to Loaded Car-Miles 74%
Line 725 - Road Locomotive Unit-Miles per Train-Mile 3
Line 726 - Freight Car-Miles Per Train-Mile 64
Line 727 Gross Ton-Miles Per Train-Mile 5,289
Line 728 Net Ton-Miles Per Train-Mile 2,632
Line 734 - Rev Ton-Mile Per Gros Ton-Mile (Ex. Loco) 54%
Line 735 - Percent of Loaded to Total Frt Car-Miles 57.52%
Line 736 - Net Ton-Miles Per Loaded Car-Mile 72
Line 738 - Freight Revenue Per Rev Ton-Mile (Cents) 3.06
Line 739 - Freight Service Rev Per Rev Ton-Mile (Cents) 3.15
Line 740 - Freight Service Revenue Per Loaded Car-Mile $2.27
III-7 **CONFIDENTIAL**
<PAGE>
Corporate Strategies, Inc.
- --------------------------------------------------------------------------------
Form R-1 for 1995, as submitted to the STB, AAR's Analysis of Class I Railroads
(which contains additional information and useful statistics on NS and other
railroads), and the Rail Formula A unit cost database for NS for 1995. Exhibit
III-3 is a graphical summary of traffic density (MGTM's) on selected NS routes
(including NCRR).
CSI has attempted to be methodical in each step of its development of
incremental revenue and cost. Extensive footnotes to the Exhibits further
describe, in more detail, assumptions made or used in our calculations and, in
many cases, exactly how each computation was made.
Given that 1993 Waybill Samples developed by ALK and 1995 MGTM statistics
from NS track charts were used in the study, it was important to make cross
checks to determine if there is reasonable consistency and reliability in
combining data from different sources. One of these checks is in the calculation
of average cars per train. CSI used carload information supplied by ALK,
apportionments of certain carloads over segments using estimating factors
developed by CSI, average empty car return ratios from NS 1995 data, and average
number of trains operated as reported by NCDOT and NS. The calculation of
average cars per train, using information described, yielded an average cars per
train that compares favorably with NS system averages on the
Charlotte-Greensboro corridor and fits reasonably well with our knowledge of NS
operations on the Greensboro-Raleigh corridor. Given the assumptions made (and
possible variations), CSI is of the opinion that the costs developed, as
represented in the exhibits are within plus or minus 20-25 percent of actual
costs as they might have been calculated if better information were available.
While the development of cost calculations are shown in Exhibits III-1 and
III-2, the bottom section of Exhibit III-2 summarizes cost reductions, cost
increases, and lost revenue in the following categories:
EXHIBIT III-4
NET NS COSTS TO AVOID NCRR
Annuity Dollars
Item (Millions)
Reduction in track maintenance costs ($9.4)
Savings in NCRR lease payments (8.0)
Savings in other operating costs (7.7)
Capital improvements amortization* 14.5
Lost revenue 13.8
----
Net annual cost increase* $3.2
* This annuity is very sensitive to initial capital costs to
upgrade the alternative route. If costs are $50 million higher
than the $150 million assumed, it adds $4.6 million in annuity
costs.
III - 8 **CONFIDENTIAL**
<PAGE>
Corporate Strategies, Inc.
- --------------------------------------------------------------------------------
EXHIBIT III - 3
North Carolina Railroad
and Connecting Lines
Norfolk Southern Tonnage
Millions of Gross Tons - 1995
[GRAPHIC OMITTED]
III - 9 **CONFIDENTIAL**
<PAGE>
Corporate Strategies, Inc.
- --------------------------------------------------------------------------------
As noted above, the net increase in cost calculated is the maximum cost
(or loss of revenue) that NS would sustain under the assumptions made. Traffic
diversion options other than an assumed rerouting of all overhead traffic over
its own line between Charlotte and Greensboro may significantly reduce the net
annual cost summarized above.
Linwood (Spencer) Yard
Initially, CSI believed that Linwood (Spencer) yard was an indispensable
part of NS operations over the NCRR. We have learned from a variety of sources,
however, that this yard no longer has the importance it once had. First, the
yard was built by Southern Railway (the former lessor of NCRR) for its
particular needs. With the merger of the Norfolk and Western (N&W) and Southern,
other major yards on the former N&W made the Linwood yard less important. With
the increasing industry trend toward run through and intermodal trains (which do
not require switching), there is simply less need for yards, not only on the NS
but other railroads throughout the US. In fact, it is our understanding that
some traffic which could be classified elsewhere, is moved to Linwood for
classification, just to keep the yard busy. Thus, the need to move Linwood
(Spencer) yard or build a new yard in order for NS to move off NCRR does not
appear necessary.
Capital Upgrade Costs
Wilbur Smith Associates' estimate to upgrade NS' present Charlotte -
Winston-Salem - Greensboro line is, we believe, high in some respects, and low
in others. Specifically, we note that Wilbur Smith estimates over half of the
cost of upgrading the existing line is in installing train control signals.
While CSI staff are not qualified C&S (Communication and Signal) engineers, it
is our belief that NS' investment in train control would be far less than the
estimated half-million plus dollars per mile. We do note, however, that no
specific allowance for bridge upgrades was made, especially two major structures
over the Yadkin River. From conversations with NCDOT, and our own observations
in Chapter III, large increases in traffic over this line will cause problems in
Charlotte, Winston-Salem, and several smaller communities through which the
present light density line runs. The extent to which additional capital costs
would be required to alleviate concerns is not known.
III - 10 **CONFIDENTIAL**
- -------------------------Corporate Strategies, Inc------------------------------
IV - PRO FORMA ANALYSIS OF NCRR OPERATIONS
WITHOUT NS AS LESSEE
OVERVIEW
As noted in Chapter III, besides diverting all non-captive overhead
traffic, NS is in a decisive position to keep all traffic it presently
terminates in Charlotte, Salisbury, Lexington, Greensboro, and Raleigh that is
currently located on NCRR lines (assuming traffic did not originate on NCRR). NS
could also keep most if not all of originating traffic in the same switching
areas if it chose to do so, by providing rates and the service that induce
shippers (which remain with rail) to route via NS. NS can, in all probability,
obtain either switching rights in these towns or force NCRR to provide switching
service at STB prescribed rates.
If NS diverts traffic away from NCRR, it is likely to be an all-or-nothing
approach, at least with respect to non-captive overhead traffic, since it
spreads the high cost of plant improvements over more traffic. Other traffic
would be selectively diverted, depending on what NS determines is in its best
interests. Once the fixed plant upgrade investment is made, NS would not be
interested in resuming operations over NCRR except under terms which are much
more favorable than the present lease.
Traffic diversion would include all intermodal and time sensitive freight.
Fully upgraded, the alternate route would probably add 1 to 3 hours between
Charlotte and Danville (via Greensboro), and perhaps break even or save time on
traffic routed via the Hagerstown gateway (through Roanoke). Running time from
Greensboro to Raleigh could be 2 - 4 hours longer.
CSI notes that pro forma analyses were previously done by ALK in March
1995. Their approach focused on what NCRR's contribution is to NS, using a
pro-rata operating statistic basis of apportioning cost groups. This approach
has several weaknesses:
o At least 20 percent of railroad costs are fixed and statistically do
not vary with operating statistics;
o Many costs are a function of more than one operating statistic;
o There is auto-correlation between operating statistics and costs.
For example, train crew wages can be statistically proven to
correlate well with either train-miles (most logical), car-miles
(logical), or gallons of diesel fuel consumed (not logical, but
there is a strong relationship between fuel consumed and
train-miles);
o Productivity varies with volume; and, very significantly,
o The NCRR must still be maintained for passenger train speeds.
<PAGE>
**CONFIDENTIAL**
- -------------------------Corporate Strategies, Inc------------------------------
CSI's approach to pro forma development is similar to that used by a short
line operator interested in purchasing or leasing the railroad with the
exception that it makes no capital investment or lease payments (i.e., all
profits pass to the owner).
Because of insufficient traffic details, some uncertainties with actions
NS might take if the lease were not renewed, and further uncertainties with
respect to rate "divisions" (or other form of revenue sharing) our evaluations
contain many uncertainties, though we believe they represent a considerable
improvement to ALK's ratio approach to pro forma development.
PRO FORMA DEVELOPMENT
Chapter III develops possible traffic losses, divisions payments, and
switching payments to NCRR if NS were to bypass NCRR. These losses to NS
represent inputs to NCRR's traffic base and freight related income stream.
Additionally, NCRR will continue to derive payments from Amtrak, leases, and
other income associated with operating and nonoperating properties.
Similar to our analysis in Chapter III, the NCRR was divided into three
segments for the preparation of a pro forma. Each segment was analyzed as an
independent operation, though some consideration was given to the economies of a
single management organization and management covering all three segments.
With the above approach, costs were estimated based on reasonable
allowances for the size of railroad, traffic, and other considerations, similar
to an approach one might use to prepare a "zero based budget" for operation of
each "division" of the NCRR. Some costs, however, vary directly with traffic and
operating activities. These relationships are built into CSI's regional railroad
costing model.
Selected inputs to the pro forma model for each NCRR segment are contained
in Appendix B, Exhibits B-1 through B-9 for the Charlotte-Greensboro segment,
Exhibits B-13 through B-21 for the Greensboro-Raleigh segment, and Exhibits B-25
through B-33 for the Raleigh-Durham segment.
Among the many outputs which can be generated by the regional railroad pro
forma model, are 10 year pro forma statements of Profit and Loss, Cash Flow, and
the Balance Sheet. These outputs are included as Appendix Exhibits B-10 through
B-12 for the Charlotte-Greensboro section, Exhibits B-22 through B-24 for the
Greensboro-Raleigh section, and Exhibits B-34 through B-36 for the
Raleigh-Morehead City section. Summary findings from the pro formas are shown in
Exhibit IV-1.
IV - 2 **CONFIDENTIAL**
<PAGE>
- -------------------------Corporate Strategies, Inc------------------------------
EXHIBIT IV-1
SUMMARY OF FIRST YEAR PRO FORMA ESTIMATES
NCRR AS AN INDEPENDENT OPERATOR
UNDER NS DIVERTED TRAFFIC ASSUMPTIONS
($ Thousands*)
<TABLE>
<CAPTION>
Charlotte- Greensboro- Raleigh-
Greensboro Raleigh Morehead City Total
---------- ----------- ------------- -----
Revenue
- -------
<S> <C> <C> <C> <C>
Freight Divisions $2,126 $2,455 $2,122 $6,703
Switching 1,693 3,460 0 5,153
Demurrage 69 91 51 211
Property Rents 30 30 0 60
Amtrak 373 241 69 683
------ ------ ------ -------
Total Revenue $4,291 $6,276 $2,241 $12,808
Expenses
- --------
Maintenance of Way $3,618 $3,258 $2,335 $9,211
Maintenance of Equipment 270 327 174 771
Transportation 535 689 339 1,563
G & A 269 303 230 802
Car-Hire & Other 250 279 60 589
------ ------ ------ -------
Total Operating Expenses $4,943 $4,857 $3,138 $12,938
Net Ry Operating Expenses ($652) $1,420 ($897) ($129)
Fixed Charges (Debt) Interest 249 286 179 714
------ ------ ------ -------
Net Income ($902) $1,134 ($1,075) ($843)
*Numbers may not add exactly due to rounding.
</TABLE>
The pro forma, as developed by CSI under stated assumptions, suggests that
the Charlotte-Greensboro segment would lose approximately $.9 million annually
in net income, the Greensboro-Raleigh segment would earn approximately $1.1
million, and the Raleigh- Morehead City segment would lose approximately $1.1
million. Combined, the NCRR would lose approximately $.8 million per year as an
short line, independent of traffic NS could haul.
The most significant issue in operating NCRR as a stand alone railroad is
the need to maintain the railroad to passenger train standards (79 MPH in
signalled territory, 59 MPH in "dark" or unsignalled territory). CSI estimates
that NCRR could save approximately $12,000 per track mile if it need only
maintain track to Class III level, or 40 MPH operation. Applied to the line
between Selma and Charlotte, this would produce a reduction in maintenance of
way costs of $2.4 million per year. The $600,000 annual payment from Amtrak does
not come close to covering the extra maintenance costs required solely to
protect passenger service.
IV - 3 **CONFIDENTIAL**
<PAGE>
- -------------------------Corporate Strategies, Inc------------------------------
If passenger services were excluded, the $.8 million loss would turn into
a $1.0 million profit (a $2.4 million reduction in maintenance cost minus $.6
million loss Amtrak payments, minus $.8 million loss, equals $1.0 million
profit). This earning level, however, is far below current net earnings of
approximately $7.5 million based on the rejected minority shareholders lease. By
short line or regional railroad standards, a $1.0 million profit on $12.8
million in revenue is a marginal level of contribution to fixed charges not
considered in this study (capital costs of ownership) and profit.
Our study highlights the role of maintenance of way costs in running a
light traffic density railroad. With both heavy freight and passenger operation,
the freight operator benefits from a high speed, well maintained rail--a luxury
that a small short line or regional railroad operator with low traffic density
cannot afford. Should the NCRR be an independent operator, it then puts the
state in a difficult position of subsidizing the higher cost of track
maintenance required to support passenger trains or seeing passenger traffic
rerouted (some of it perhaps, ironically, over the NS upgraded bypass line).
CONCLUSIONS
None of the previous studies, nor this study support or justify
terminating the NS lease based on unreasonableness. Approached from every
reasonable viewpoint or basis of comparison using information available to CSI,
the $8 million lease rate offered by NS does not appear inequitable,
unreasonable, or below what NS should pay.
Delay in the resolution of the present disagreement between the Board and
the minority stockholders of the NCRR risks a significant, deleterious effect on
the value of the property. With uncertainty over continuing service over the
NCRR, Norfolk Southern can be expected to make incremental decisions that may
gradually shift more traffic away from NCRR. The longer the delay in resolving
lease related issues, the greater will be NCRR's risk exposure (a greater
likelihood of negative impacts on NCRR). NS is already "banking" maintenance
cost savings for application to the outcome of lease negotiations (to invest in
its own lines, or reinvest back in the NCRR route).
* * * * * * * *
CSI appreciates the opportunity to work with NationsBanc Capital Markets,
Inc. to assist in its value determination of NCRR as part of the State of North
Carolina's plan to buy out minority shareholders. We would be pleased to answer
questions about this report.
IV - 4 **CONFIDENTIAL**
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