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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:
1,072,262 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: $70,769,292
----------
CALCULATION OF FILING FEE
- -------------------------------------------------------------------------------
Transaction value (*) Amount of filing fee (**)
$70,769,292 14,153.86
- -------------------------------------------------------------------------------
(*) Based on 1,072,262 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)
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NORTH CAROLINA RAILROAD COMPANY
--------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
--------------------------
_________________, 1998
Notice is hereby given that a Special Meeting of Shareholders of North
Carolina Railroad Company ("NCRR") will be held at
_______________________________________, Raleigh, North Carolina, ______ on
______________, ______________, 1998, at ___________ A.M., for the following
purpose:
To consider and vote upon a proposal to approve and
adopt an Agreement and Plan of Merger dated October
3, 1997 and Amended and Restated as of January ___,
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 __________, 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
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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
Major Reasons for Approval of the Merger Agreement.............................................20
Fairness of the Merger.........................................................................24
Opinion of the Special Committee's Financial Advisor...........................................24
Alternatives to Merger Agreement...............................................................27
Alternative Lease Extension Agreement.................................................27
Abandonment of Norfolk Southern's Operations Over NCRR's Lines........................30
Operation Without Any Lessee..........................................................30
Litigation Against Norfolk Southern...................................................32
Other Purchasers And Lessees For All or Part of Line..................................35
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............................................................43
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>
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North Carolina Railroad Company
3200 Atlantic Avenue
Suite 110
Raleigh, North Carolina 27604
(919) 954-7601
PROXY STATEMENT
_________________, 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 ___, 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 _____, 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
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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
_________________________ at _________ A.M., in ______________________________,
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Raleigh, North Carolina _________ (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 __________________, 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
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NCRR, including, among others, that the parties have complied with all
agreements and obligations required by the Merger Agreement and that no order or
similar instrument has been filed which prohibits the consummation of the Merger
or otherwise adversely effects the Merger or materially restricts the operation
of NCRR's business or its exercise of its rights to own and vote its shares of
NCRR Common Stock.
Termination of the Merger Agreement. The Merger Agreement may be
terminated and abandoned at any time prior to the Effective Time, whether before
or after approval by the shareholders (i) by mutual written consent of the DOT
and NCRR; (ii) by the DOT or NCRR if, other than due to the willful failure of
the party seeking to terminate the Merger Agreement to perform its material
obligations thereunder, the Merger has not been consummated on or before May 5,
1998, which date may be extended; (iii) by the DOT or NCRR, if a court of
competent jurisdiction issues an order or similar instrument or takes other
action permanently restraining, enjoining or prohibiting the Merger and the
order, similar instrument or action becomes final and nonappealable; or (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
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exemption is not applicable, or that regulation of the particular transaction is
necessary to carry out the rail transportation policy or that the transaction is
not of limited scope and that regulation is necessary to protect shippers from
abuse of market power. The STB may also stay an exemption pending a
determination as to whether to revoke it. If the STB Board were to reject or
revoke the exemption, further STB review and either approval or exemption of the
Merger (a more rigorous procedure than the class exemption process) would be
required before the Merger could be consummated. Following such review, the STB
could disallow the Merger and could require divestiture or impose other
conditions. Should the STB require further review, NCRR and B&M intend to seek
such review to obtain STB approval. See "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 _________________,
___________________________, 1998, at _________ A.M., at
_________________________________ Raleigh, North Carolina ________ 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 _____________, 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.
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 [40
days] ___________ 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.
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Vote Requirements
Under North Carolina law, the Merger Agreement can be approved by the
shareholders only if the holders of a majority of the outstanding shares of NCRR
Common Stock affirmatively vote to approve the Merger Agreement at a meeting
duly called and at which a quorum is present. In addition, in order to give the
Minority Shareholders voting power in the approval process, the NCRR Board has
determined that approval of the Merger will also require the approval of a
majority of the votes cast by the Minority Shareholders.
Shareholders who oppose the approval of the Merger Agreement can choose
whether their opposition is best effectuated by not voting or by voting against
the Merger Agreement. Failure to execute and return a proxy will have the
practical effect of voting against the Merger Agreement if the holders of a
majority of the outstanding shares of NCRR Common Stock do not attend the
meeting in person or by proxy. However, if the holders of a majority of NCRR
Common Stock held by the Minority 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
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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.
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.
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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.
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
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dissenters' right to an appraisal will thereby forego any economic benefit from
any such amounts. However, the extent, if any, to which such amounts may used by
a court in determining the fair value of the shares held by Minority
Shareholders who exercise their dissenters' rights is uncertain. See "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 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
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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 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
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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.
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
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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; 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 $_____.
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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. 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
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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
Walter 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 any
distributions after the Effective Date with respect to any amounts received by
NCRR after the
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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
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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
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 railroad traffic analyses
performed by CSI and NCRR's expert, Mercer (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 analyses of CSI and Mercer 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
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implied by the economic terms of the proposed Lease Extension
Agreement. See "SPECIAL FACTORS--ALTERNATIVES TO MERGER AGREEMENT
- Alternative Lease Extension Agreement." The Special Committee
concluded that the per share value based on the revenue that would
have been received under the Lease Extension Agreement was
substantially less than the Merger Consideration. 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 (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.
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.
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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
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Extension Agreement. See "SPECIAL FACTORS--ALTERNATIVES TO MERGER
AGREEMENT - Alternative Lease Extension Agreement."
(bullet) Litigation Uncertainty. On September 20, 1996 NCRR filed an
action against Norfolk Southern and certain subsidiaries and
affiliates in the Superior Court of Wake County, North Carolina,
which action was removed to the U.S. District Court for the
Eastern District of North Carolina (the "Federal Court Case") and
on September 23, 1996, filed proceedings against Norfolk Southern
before the STB (the "STB Case"). After approval by the Special
Committee of the Letter of Intent on April 7, 1997, the STB
rejected NCRR's petition to establish interim rent to be paid by
Norfolk Southern in a decision and order dated May 29, 1997, but
prescribed interim compensation at the level of out-of-pocket
expenses incurred by NCRR due to Norfolk Southern's continued
operation of the line. The NCRR Board concluded that this decision
would result in long and expensive litigation in the Federal Court
Case and the STB Case with a risk that the result would not afford
NCRR the remedies it believes are warranted. The NCRR Board also
concluded that financing the expenses of the court litigation
without interim rent payments could create substantial cash flow
problems for NCRR as Norfolk Southern has interpreted the STB's
ruling on out-of-pocket expenses to exclude expenses associated
with litigation against Norfolk Southern. Norfolk Southern is
seeking to have the Lease Extension Agreement imposed upon 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."
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(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 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 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
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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. 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
pre-tax net income of $4.27 per share; and the alternative set forth above under
"Norfolk Southern Payments" could result in 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, the NCRR Board considered a number
of factors, including those referred to above under "SPECIAL FACTORS--MATERIAL
REASONS FOR APPROVAL OF THE MERGER AGREEMENT". The discussion of factors
considered and given weight by the NCRR Board under that heading is not intended
to be exhaustive. 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 DOT and B&M have each concluded, based primarily
upon the determinations and recommendations of the Special Committee, that the
Merger is fair to the Minority Shareholders and that the $66 per share
consideration to be received by the Minority Shareholders in the Merger is fair
to such holders from a financial point of view. In reaching their conclusion,
each of the DOT and B&M took into consideration the factors referred to above as
having been taken into account by the Special Committee and the NCRR Board. In
addition, the DOT and B&M have considered the measures taken by the NCRR Board
to ensure the procedural fairness of the transaction, including the formation of
the Special Committee, the retention of independent legal and financial advisors
by the Special Committee, the arms-length nature of the negotiations, and the
requirement imposed by the NCRR Board that the Merger be authorized by the
affirmative vote of a majority of the votes cast by the Minority Shareholders.
The DOT and B&M did not find it practical to and did not quantify or otherwise
assign relative weights to the specific factors considered by the NCRR Board and
the Special Committee.
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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
analyses of Mercer, an industry consultant. CSFB met with the management of NCRR
and representatives of the State to discuss the business and prospects of NCRR
and also had discussions with Mercer concerning its analyses and the railway
industry generally. CSFB also considered certain financial and stock market data
of NCRR and, to the extent publicly available, the financial terms of certain
other business combinations and other transactions recently effected. CSFB also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which CSFB deemed
relevant.
In connection with its review, CSFB did not assume any responsibility
for independent verification of any of the foregoing information and relied on
such information being complete and accurate in all material respects. With
respect to analyses prepared by Mercer, CSFB assumed that such analyses were
reasonably prepared reflecting the best currently available estimates and
judgments of Mercer and other third party sources on which Mercer relied. CSFB
was not requested to make and did not make an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of NCRR, nor
was CSFB furnished with any such evaluations or appraisals. CSFB's opinion was
necessarily based upon information available to CSFB, and financial, economic,
market and other conditions as they existed and could be evaluated, on the date
of the CSFB Opinion. In connection with CSFB's
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engagement, CSFB was requested to approach selected third parties to solicit
indications of interest in a possible acquisition of NCRR, and held discussions
with certain of these parties prior to the date of the CSFB Opinion. Although
CSFB evaluated the Merger Consideration from a financial point of view, CSFB was
not requested to, and did not, recommend the specific consideration payable in
the Merger, which consideration was determined through negotiation between the
Special Committee acting for NCRR and the DOT. No other limitations were imposed
by the Special Committee on CSFB with respect to the investigations made or
procedures followed by CSFB in rendering its opinion.
In preparing its opinion to the Special Committee, CSFB performed a
variety of financial and comparative analyses, including those described below.
The summary of CSFB's analyses set forth below does not purport to be a complete
description of the analyses underlying CSFB's opinion. A copy of CSFB's written
presentation to the Special Committee with respect to its opinion has been filed
as an exhibit to the Schedule 13E-3 which has been filed with the Securities and
Exchange Commission (the "Commission") and will be available for inspection and
copying at the principal executive offices of NCRR during regular business hours
by any interested shareholder of NCRR who has been designated in writing and may
be inspected, copied and obtained by mail from the Commission. The preparation
of a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. In arriving at its opinion, CSFB made qualitative judgments as to
the significance and relevance of each analysis and factor considered by it.
Accordingly, CSFB believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, CSFB made
numerous assumptions with respect to NCRR, industry performance, regulatory,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of NCRR. No company, transaction or
business used in such analyses as a comparison is identical to NCRR or the
proposed Merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, such analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions being analyzed. The estimates contained in
such analyses and the ranges of valuations resulting from any particular
analysis are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty. The
CSFB Opinion and financial analyses were only one of many factors considered by
the Special Committee in its evaluation of the proposed Merger and should not be
viewed as determinative of the views of the Special Committee or NCRR management
with respect to the Merger Consideration or the proposed Merger.
The following is a summary of the material analyses performed by CSFB
in connection with the CSFB Opinion:
Income Analysis. CSFB analyzed the estimated value of the operating
cash flows derived by Norfolk Southern from its operations over NCRR, based on
certain estimates provided to CSFB by Mercer. Norfolk Southern's NCRR derived
revenues and expenses, including overhead traffic, were estimated by Mercer by
allocating Norfolk Southern's reported North Carolina revenues and operating
costs to NCRR and non-NCRR lines according to the gross ton miles generated on
each line, which Mercer derived from Norfolk Southern's traffic density maps and
state reporting. Applying Norfolk Southern's operating cash flow multiple of
6.8x for the latest 12 months ended June 30, 1997 (pro forma for the Conrail,
Inc. acquisition), to Norfolk Southern's estimated NCRR derived 1995 operating
cash flow of approximately $28.7 million to $34.4 million resulted in an implied
enterprise reference range for
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NCRR of approximately $195 million to $234 million, or an implied equity
reference range for NCRR of approximately $46.00 to $55.00 per share.
Discounted Cash Flow Analysis. CSFB estimated the present value of the
future streams of after-tax free cash flows that Norfolk Southern could generate
from operating over the NCRR, including overhead traffic, based on certain
estimates provided to CSFB by Mercer, by applying perpetuity revenue growth
rates of between 3% and 5%. The free cash flows were then discounted to present
value using discount rates of between 11% and 13%. This analysis resulted in a
stand-alone equity reference range for NCRR of approximately $35.00 to $47.00
per share.
Selected Transactions Analysis. Using publicly available information,
CSFB analyzed the purchase price and implied transaction value multiples paid or
proposed to be paid in 13 selected merger and acquisition transactions in the
railroad industry during the period 1990 to 1997, including: Conrail, Inc./CSX
Corp./Norfolk Southern; CCP Holdings, Inc./Illinois Central Corporation; Mexrail
Inc./Kansas City Southern Industries; Southern Pacific Rail Corp./Union Pacific
Corp.; Chicago & North Western/Union Pacific Corp.; Santa Fe Pacific Corp./Union
Pacific Corp.; Santa Fe Pacific Corp./Burlington Northern Inc.; Kansas City
Southern Industries, Inc. (Railway Division)/Illinois Central Corporation;
MidSouth Corporation/Kansas City Southern Industries, Inc.; Green Bay & Western
Railroad Co./Wisconsin Central Transportation Corp.; Fox River Valley Railroad
Co./Wisconsin Central Transportation Corp.; Delaware & Hudson Railway/Canadian
Pacific Ltd.; and RF&P Corp. (Railway Operations)/CSX Corp. (collectively, the
"Selected Transactions"). CSFB compared, among other things, adjusted purchase
prices (purchase price, plus total debt and preferred stock, less cash) as
multiples of latest 12 months, operating cash flow. All data for the Selected
Transactions were based on information available at the time of announcement of
the transactions, except million gross ton miles, which was based on Mercer
estimates. This analysis indicated a range of multiples for the Selected
Transactions of latest 12 months operating cash flow of 4.4x to 12.5x (with a
mean of 8.7x and a median of 8.3x). Applying median and mean multiples of the
latest 12 months operating cash flows and adjusted purchase prices paid in the
Selected Transactions to corresponding financial statistics of NCRR resulted in
a stand-alone equity reference range for NCRR of approximately $65.00 to $70.00
per share.
Certain Other Factors. In addition to the analyses described above,
CSFB considered, among other things, (i) the recent stock performance of the
NCRR; (ii) certain railroad traffic data and certain other related information
prepared by Mercer concerning NCRR and Norfolk Southern; (iii) certain analyses
prepared by Mercer as to the estimated value of and potential return on NCRR
assets based on certain STB methodologies which the STB has used in precedent
cases to set railroad compensation levels, including the Reproduction Cost New
Less Depreciation methodology and the net liquidation value methodology (see the
discussion set forth below under "SPECIAL FACTORS--ALTERNATIVES TO MERGER
AGREEMENT"); (iv) the present value of the estimated discounted cash flows of
the annual payments that NCRR would have received under the Lease Extension
Agreement; (iv) the financial terms of certain railway corridor purchases by the
States of Florida and California; and (v) the DOT estimate of the cost of
acquiring land to duplicate the NCRR right of way.
Miscellaneous. Pursuant to the terms of CSFB's engagement, NCRR has
agreed to pay CSFB for its services in connection with the proposed Merger an
aggregate financial advisory fee of $500,000 which was payable upon delivery by
CSFB of the CSFB Opinion. NCRR also has agreed to reimburse CSFB for
out-of-pocket expenses incurred by CSFB in performing its services, including
reasonable fees and expenses of legal counsel and any other advisor retained by
CSFB, and to indemnify CSFB and certain related persons and entities against
certain liabilities, including liabilities under the federal securities laws,
arising out of CSFB's engagement.
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In the ordinary course of its business, CSFB and its affiliates may
actively trade the debt and equity securities of NCRR for their own accounts and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
ALTERNATIVES TO MERGER AGREEMENT
Alternative Lease Extension Agreement
NCRR and Norfolk Southern entered into the Lease Extension Agreement,
which was voted on by the shareholders at the 1995 Annual Meeting. 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.
(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 gross domestic product
("IPD-GDP"). In no event, however, could the base annual rental for
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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 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.
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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.
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 Southern's profits from
operating NCRR's line, which NCRR's railroad management consultants estimated to
be approximately $18.3 million on a pre-tax basis as of the time of the
estimate.
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Set forth below is a table prepared for NCRR by its management
consultants, which reflects the range of possible RCNLD calculations using the
variables of what property the STB would include in the valuation and whether
the STB would reduce the rate of return normally employed by it (the nominal
pre-tax cost of capital of the railroad industry, which in 1996 was 11.9%) to
reflect that NCRR would be a REIT that is not subject to federal corporate taxes
on that portion of its ordinary income or capital gain that is currently
distributed to its shareholders:
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 upon Mercer analysis.
(3) STB rail industry composite pre-tax cost of capital for 1996.
(4) Assumes maintenance of $10.2 million and capital expenditures of $14.5
million. Based on Mercer analysis.
The foregoing RCNLD table indicates the possibility that annual rentals
less upkeep ordered by the STB could range from a low of $4.8 million to a high
of $30.9 million if the STB uses the RCNLD formula.
Since the RCNLD formula values all segments of the line by replacement
cost, without regard to the income produced by the property, special STB counsel
advised the NCRR Board that Norfolk Southern might seek to discontinue its
operations over substantial portions of the line that produce little income in
an effort to substantially reduce the total value of the asset it is using or
seek to remove assets from the formula after diverting traffic. Norfolk Southern
could use its discontinuance or reduced use of NCRR's line as a basis for
adjusting downward the compensation payable to the NCRR under the RCNLD formula.
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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.
The NCRR Board was also concerned with the advice of STB counsel that
the STB would set compensation, but the STB might not set other terms that were
important to minimize risks, such as requiring Norfolk Southern to maintain the
line or to indemnify NCRR against environmental liabilities. Accordingly, the
NCRR Board concluded that an STB award for compensation would have to be
substantially higher than $8
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million to offset expected and unexpected expenses and liabilities associated
with operating without a lessee in order to achieve the same economic results as
the Lease Extension Agreement.
Other Purchasers and Lessees for All or Part of Line
The Special Committee, with the assistance of its financial advisor,
CSFB, sought to solicit bids from other railroad or short line operators for the
purchase or lease of all or part of NCRR's line. No bids were received, nor did
any entity seek to enter into serious discussions with NCRR, concerning the
lease or purchase of all or part of its line. The NCRR Board believes that
Norfolk Southern's control of the overhead traffic which constitutes a majority
of the traffic over NCRR's line, was a significant factor in other potential
purchasers or lessees not bidding. If Norfolk Southern were to divert overhead
traffic, the operator would risk having substantially decreased revenues from
operating NCRR's line. In addition, the State's power, both voting as a
shareholder and under State law, to block the sale or lease of NCRR's line may
have discouraged other bidders after the State announced its intention to
purchase the remaining outstanding shares of NCRR not already owned by the
State.
For the foregoing reasons, the NCRR Board determined that the Merger
Consideration is likely to provide a better return for shareholders than would
be the case if the shareholders retain ownership of their shares of NCRR and
NCRR continues the STB case and/or the Federal Court case.
APPRAISALS AND VALUATIONS
The NCRR Board has reviewed numerous appraisals and valuations during
the past several years. The NCRR Board does not believe any single valuation is,
by itself, dispositive of the value of NCRR or of what would constitute a fair
annual return on the assets of NCRR.
Recent Valuations
The valuation on which the NCRR Board focused most closely is the RCNLD
evaluation prepared for the NCRR Board by Mercer in connection with NCRR's
considering whether to bring an action in the STB to request the STB to
establish reasonable compensation for Norfolk Southern's continued use of NCRR's
line. The RCNLD formula values all segments of the line by replacement cost,
without regard to the income produced by the property. The value of NCRR's
properties (less upkeep) for RCNLD purposes ranged from a low of $40 million to
a high of $450 million (or 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 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 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.
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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 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
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<PAGE>
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 Transpark in eastern North Carolina; (3) by
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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).
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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.
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
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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
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
43
<PAGE>
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 ("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.
44
<PAGE>
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 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
45
<PAGE>
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 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
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<PAGE>
Special Meeting. A shareholder who votes for the Merger will have no dissenters'
rights. The submission by a shareholder of a proxy card without voting
instructions with respect to the proposal to approve the Merger Agreement or a
proxy voted in favor of the Merger Agreement (if not revoked) will count as a
vote in favor of the Merger Agreement and will serve to waive dissenters'
rights. However, failure to return a proxy card or vote against approval of the
Merger Agreement will not serve to waive dissenters' rights assuming the
compliance with the other procedural requirements of Article 13. A shareholder
who does not satisfy each of the aforementioned requirements is not entitled to
payment for such shareholder's shares of NCRR Common Stock under the dissenters'
rights provisions of the NCBCA and will be bound by the terms of the Merger
Agreement.
No later than ten (10) days after the Special Meeting (if the holders
of the requisite number of shares of NCRR Common Stock approve the Merger
Agreement), the Surviving Corporation must mail, by registered or certified
mail, return receipt requested, a written dissenters' notice (a "Dissenters'
Notice") to all shareholders who have given the required notice and not voted in
favor of the Merger Agreement as described above. The Dissenters' Notice will
(i) supply a form for demanding payment; (ii) state where the payment demand
must be sent and where and when certificates for shares must be deposited; (iii)
inform holders of uncertificated shares to what extent transfer of the shares
will be restricted after the payment demand is received; (iv) set a date by
which the Surviving Corporation must receive the payment demand, which date may
not be fewer than thirty (30) nor more than sixty (60) days after the date the
Dissenters' Notice is mailed; and (v) be accompanied by a copy of Article 13. An
NCRR shareholder who is sent a Dissenters' Notice and who wishes to assert
dissenters' rights must demand payment and deposit his or her certificates in
accordance with the terms of the Dissenters' Notice. An NCRR shareholder who
demands payment and deposits such certificates in accordance with the terms of
the Dissenters' Notice retains all other rights of an NCRR shareholder until
these rights are canceled or modified by the consummation and effectiveness of
the Merger. An NCRR shareholder who does not demand payment or deposit such
shareholders' share certificates where required, each by the date set in the
Dissenters' Notice will not be entitled to payment for such Shareholders' shares
of NCRR Common Stock under the NCBCA. If any such holder of NCRR Common Stock
shall have failed to perfect or shall have effectively withdrawn or lost such
right, each share of such holder's NCRR Common Stock shall thereupon be deemed
to have been converted into and have become, as of the Effective Date, the right
to receive, without any interest thereon, the Merger Consideration.
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:
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<PAGE>
(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.
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.
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<PAGE>
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 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.
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<PAGE>
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.
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
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<PAGE>
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.
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<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
52
<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.
53
<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
54
<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.
55
<PAGE>
AVAILABLE INFORMATION
NCRR is subject to the informational requirements of the Exchange Act,
and in accordance therewith, files reports, proxy statements and other documents
with the Securities and Exchange Commission. Such reports, proxy statements and
other documents relating to the business, financial statements, directors,
officers and principal holders of NCRR's securities and other matters may be
inspected and copies at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; 7
World Trade Center, New York, New York 10048; and the Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may be obtained
by mail upon payment of prescribed fees and from the Public Reference Section of
the SEC, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The
SEC maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC. The address of the Web site is http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, each of which was previously filed by NCRR
with the Commission pursuant to Section 13 of the Exchange Act, are incorporated
herein by reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1996;
(2) Quarterly Report on Form 10-Q for the quarter ended March 31,
1997;
(3) Quarterly Report on Form 10-Q for the quarter ended June 30, 1997;
(4) Quarterly Report on Form 10-Q for the quarter ended September 30,
1997;
(5) Form 8-K dated April 7, 1997;
(6) Form 8-K dated June 3, 1997
(7) Form 8-K dated August 27, 1997; and
(8) Form 8-K dated October 3, 1997.
All documents filed by NCRR pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the Special Meeting of Shareholders to which this Proxy Statement
relates shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of the filing of such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in any accompanying Proxy Statement Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
NCRR will provide without charge to each person to whom a Proxy
Statement is delivered upon written or oral request to such person, within one
business day of receipt of such request, a copy of any documents incorporated
herein by reference (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference into the documents that this Proxy
Statement incorporates). Requests for such copies should be directed to NCRR's
Secretary, 3200 Atlantic Avenue, Suite 110, Raleigh, North Carolina 27604.
Cautionary Statement Identifying Important Factors That Could Cause NCRR's
Actual Results to Differ From Those Projected in Forward Looking Statements
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
56
<PAGE>
include, but are not limited to (i) projections of revenues, income or loss,
earnings or loss per share, capital expenditures, dividends, capital structure
and other financial items, (ii) statements of the plans and objectives of NCRR
or the NCRR Board, including estimates or predictions of actions by other
parties or regulatory authorities, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying other statements and
statements about NCRR or its business.
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.
57
<PAGE>
********************************************************************************
APPENDIX
<PAGE>
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
NORTH CAROLINA RAILROAD COMPANY
The undersigned shareholder of the North Carolina Railroad Company hereby
acknowledges receipt of the Notice of Special Meeting of Shareholders and the
accompanying Proxy Statement and hereby constitutes and appoints
; ; and and each of them, attorneys
and proxies with full power of substitution, to act and vote the shares of the
undersigned at the Special Meeting of Shareholders of the said corporation to be
held , , 1998, at .m. and at any adjournment or
adjournments thereof. The undersigned hereby directs this proxy to be voted as
follows:
1. Approving the Agreement and Plan of Merger and the related Charter Amendments
and Bylaw Amendments, described in the Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion to vote upon any other business as may properly come
before the meeting or any adjournment or adjournments thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
[ ] PLEASE CHECK BOX IF YOU INTEND TO ATTEND THE SPECIAL MEETING IN PERSON.
PLEASE COMPLETE, SIGN AND RETURN PROXY WHETHER OR NOT YOU INTEND TO ATTEND THE
MEETING.
ANY PROXY HERETOFORE GIVEN BY THE UNDERSIGNED IS HEREBY REVOKED.
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. IN THE ABSENCE OF ANY DIRECTION
TO THE CONTRARY, THE PROXYHOLDERS WILL VOTE THIS PROXY FOR THE APPROVAL OF THE
MATTER LISTED ABOVE AND IN THEIR DISCRETION WITH RESPECT TO ANY OTHER MATTERS
WHICH PROPERLY COME BEFORE THE MEETING.
______________________________________
Number of Shares
Date _________________________________
______________________________________
Signature of Shareholder
IMPORTANT: PLEASE SIGN YOUR NAME
EXACTLY AS IT APPEARS ON YOUR
CERTIFICATE. PLEASE ADD YOUR FULL
TITLE TO YOUR SIGNATURE. EXECUTORS,
ADMINISTRATORS, TRUSTEES, AND OTHER
FIDUCIARIES SHOULD SO INDICATE WHEN
SIGNING AND FURNISH PROOF OF SUCH
FIDUCIARY CAPACITY. ALL PERSONS
SIGNING ON BEHALF OF CORPORATIONS
AND/OR PARTNERSHIPS SHOULD SO INDICATE
WHEN SIGNING.
NOTE: IF YOU RECEIVE MORE THAN ONE
PROXY, PLEASE DATE AND SIGN EACH ONE
AND RETURN ALL PROXIES IN THE SAME
ENVELOPE.
PLEASE RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of October 3, 1997 and
amended and restated as of January __, 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
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Agreement constitutes a legal, valid and binding agreement of each of the DOT
and B&M, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
Section 3.3 Broker's Fees. Except for the engagement of NationsBanc
Capital Markets, Inc., the fees and expenses of which engagement will be paid by
the DOT, neither the DOT nor B&M, has employed any broker, finder or financial
advisor or incurred any liability for any broker's fees, commissions, finder's
or financial advisory fees in connection with the transactions contemplated
hereby.
Section 3.4 Proxy Statement. None of the information to be supplied by
or through the DOT or B&M for inclusion or incorporation by reference in (i) the
final proxy statement on Schedule 14A, including any amendments or supplements
thereto (the "Proxy Statement"), to be delivered to the Company's shareholders,
or (ii) any other filings required to be made by the Company, the DOT or B&M
under the Securities Exchange act of 1934, as amended (the "Exchange Act"), the
Securities Act of 1933, as amended (the "Securities Act") or any other state or
federal securities laws (including without limitation a filing on Schedule
13E-3, if required) in connection with the Merger or the transactions
contemplated by this Agreement ("Other Filings") will, at the respective times
that the Proxy Statement or any Other Filings and any amendments or supplements
thereto are filed with the Securities and Exchange Commission ("SEC"), at the
time any amendment or supplement thereto is mailed to the Company's
shareholders, and at the time of the Shareholders' Meeting, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they are made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each of the DOT and B&M as
follows:
Section 4.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. The Company is duly qualified or licensed to do business and is in
good standing in North Carolina, which is the only jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where the
failure to be so qualified or licensed or in good standing would not reasonably
be expected to have a Material Adverse Effect. For purposes of this Agreement,
"Material Adverse Effect" means any change or effect that would be materially
adverse to the business, operations, assets, condition (financial or otherwise)
or results
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of operations of the Company or that would materially impair the ability of the
Company to perform its obligations hereunder.
Section 4.2 Authority Relative to this Agreement. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby, subject to the approval
of the Merger and the adoption and authorization of this Agreement by the
shareholders of the Company in accordance with North Carolina Corporate Law. The
execution and delivery of this Agreement by the Company, and the consummation by
the Company of the transactions contemplated hereby, have been duly and validly
authorized and approved by the Board of Directors and except for the adoption
and authorization of this Agreement by the shareholders of the Company in
accordance with North Carolina Corporate Law, no other corporate proceedings on
the part of the Company are necessary to authorize the transactions contemplated
hereby except as set forth in Section 6.3 hereof. This Agreement has been duly
and validly executed and delivered by the Company, and assuming this Agreement
constitutes a legal, valid and binding agreement of each of the DOT and B&M,
this Agreement constitutes a legal, valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights and
remedies generally, general equitable principles (whether considered in a
proceeding at law or in equity) and an implied covenant of good faith and fair
dealing.
Section 4.3 SEC Documents; Financial Statements. (a) The Company has
filed all documents required by law to be filed by it with the SEC under the
Securities Act or the Exchange Act since April 1, 1995 (the "SEC Documents"). As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act or Exchange Act, as the case may be,
and applicable rules and regulations promulgated by the SEC thereunder, and none
of the SEC Documents, at the time they were filed (or at the effective date
thereof in the case of registration statements) contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) Except as set forth in the SEC Documents, or press releases of the
Company since April 1, 1995, copies of which have been made available to the
DOT, (the "Press Releases"), the balance sheets of the Company, and the related
statements of operations and cash flows, including the footnotes thereto,
included in the SEC Documents, fairly present the consolidated financial
position of the Company as of the respective dates thereof and the consolidated
results of operations and cash flows, as the case may be, of the Company and its
subsidiaries for the periods set forth therein (subject, in the case of
unaudited quarterly statements, to normal year-end audit adjustments), all in
accordance with generally accepted accounting principles ("GAAP") consistently
applied during the periods involved, except as may be noted therein.
(c) Except as disclosed in the SEC Documents (including, without
limitation, the financial statements therein) filed, or the Press Releases,
there are no liabilities or obligations, accrued, absolute, contingent or
threatened, and whether due or to become due, which would be required
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to be reflected in a balance sheet or in the notes thereto prepared in
accordance with GAAP ("Liabilities"), other than Liabilities that, individually
or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect and other than Liabilities incurred in the ordinary course of business.
Section 4.4 Absence of Certain Changes. Except as disclosed in the SEC
Documents or the Press Releases, since April 1, 1995, the Company has conducted
its business only in, and has not engaged in any material transaction other than
in the ordinary and usual course of such business and there has not been (i) any
material adverse change in the financial condition, business or results of
operations of the Company taken as a whole; (ii) any declaration, setting aside
or payment of any dividend or other distribution with respect to the capital
stock of the Company; or (iii) any change by the Company in accounting
principles, practices or methods.
Section 4.5 Investment Bankers and Finders. Except for the engagement
of Credit Suisse First Boston Corporation ("CSFB") and Morgan Stanley & Co.
Incorporated pursuant to engagement letters, copies of which have previously
been delivered to the DOT and its consultants, advisers, or legal counsel, the
fees and expenses of which engagements will be paid by the Company, the Company
has not employed any broker, finder or financial advisor or incurred any
liability for any broker's fees, commissions, finders' or financial advisory
fees in connection with the transactions contemplated hereby. No amendment has
been or shall be made to the Company's agreement with CSFB that would increase
the amount of fees or other compensation required thereunder.
Section 4.6 Proxy Statement. None of the information to be supplied by
or through the Company for inclusion or incorporation by reference in the Proxy
Statement or Other Filings will, at the respective times that the Proxy
Statement to be delivered to the Company's shareholders or any Other Filings are
filed with the SEC, at the time any amendment or supplement thereto is mailed to
the Company's shareholders, and at the time of the Shareholders' Meeting,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they are made, not
misleading.
Section 4.7 Tax Reports.
(a) All reports and returns with respect to Taxes (as defined
below) that are or have been required to be filed by or with respect to
the Company (collectively, the "Company's Tax Returns"), including
without limitation the federal income tax returns of the Company (the
"Company's Federal Income Tax Returns") have been duly filed, or
requests for extensions have been timely filed and have not expired,
and such Company's Tax Returns were true, complete and accurate in all
material respects.
(b) All taxes (which shall include (i) federal and (ii)
material state, local or foreign income, gross receipts, windfall
profits, severance, property, production, sales, use, license, customs,
import, export, excise, franchise, employment, withholding or similar
taxes, duties or governmental charges, together with any interest,
additions, or
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penalties with respect thereto and any interest in respect of such
additions or penalties, collectively "Taxes") shown to be due on the
Company's Tax Returns have been paid in full to the best of the
Company's information. B&M and DOT acknowledge that certain property
and other taxes have been represented to have been paid by Norfolk
Southern Railway Company (or its affiliates) and not independently
verified by the Company.
(c) The Company's Federal Income Tax Returns have been
examined by the Internal Revenue Service ("I.R.S.") or the period of
assessment of the Taxes in respect of which such Company's Federal Tax
Returns were required to be filed has expired, and all Taxes due with
respect to completed and settled examinations have been paid in full
through the taxable year of the Company ended December 31, 1993, except
that the I.R.S. has claimed an additional $56,000 tax liability with
respect to the Company's 1994 Federal Income Tax Return (the "1994
Claim"). The Company has appealed such claim through the I.R.S.
administrative appeals process, and such appeal is still pending. The
1994 Claim is subject to adjustment by the I.R.S. during the course of
the administrative appeals. Other than the 1994 claim, no issues have
been raised by the relevant taxing authority in connection with the
examination of any of the Company's Federal Tax Returns that are
reasonably likely to result in a determination that would have a
Material Adverse Effect, and no waivers of statutes of limitations have
been given by or requested with respect to any liability of the Company
for Taxes.
Section 4.8 Capitalization. The authorized capital stock of the Company
consists of 10,000,000 Shares. As of the close of business on the date of this
Agreement, there were 4,283,470 Shares issued and outstanding, there were no
options, warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating the Company to issue, transfer or sell any shares of
capital stock of the Company or any other securities convertible into or
evidencing the right to subscribe for any such shares or obligating the Company
to grant, extend or enter into any such option, warrant, call, subscription,
right or agreement. All issued and outstanding Shares are duly authorized and
validly issued, fully paid, non-assessable.
Section 4.9 Opinion of the Special Committee's Financial Advisor. The
Special Committee has received the opinion of CSFB, financial advisor to the
Special Committee, to the effect that, as of the date of this Agreement, the
Merger Consideration is fair, from a financial point of view, to the holders of
Converted Shares (other than the DOT and its affiliates).
ARTICLE V
COVENANTS
Section 5.1 Conduct of Business of the Company. Except (i) as disclosed
in the SEC Documents or the Press Releases, or (ii) as specifically and
expressly permitted by this Agreement (including the matters set forth in
Section 5.2) or (iii) as expressly agreed to in writing by the DOT, during the
period from the date of this Agreement to the Effective Time, the Company will
not, without the prior written consent of the Secretary of the DOT:
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(a) amend its Charter or bylaws (or equivalent organizational
documents);
(b) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver any shares of its capital stock or any
options, warrants, calls, subscriptions or other securities or rights
convertible or exchangeable into, exercisable for or evidencing the
right to subscribe for any shares of its capital stock;
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock, or purchase, redeem or otherwise acquire
any shares of its own capital stock;
(d) (i) create, incur or assume any long-term debt or any
short-term debt for borrowed money, in excess of $2,000,000 in the
aggregate, other than under existing lines of credit; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person;
(e) sell, transfer, lease, license, pledge, mortgage, or
otherwise dispose of, or encumber any assets or properties, real,
personal or mixed, that are material, individually or in the aggregate,
to the Company;
(f) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in
principle or an agreement with respect to, any merger, consolidation,
plan of liquidation or dissolution (other than the Merger), or
acquisitions of assets material to the Company;
(g) authorize or commit to make capital expenditures other
than of the types and in the amounts set forth in the Company's current
budget for capital expenditures, a copy of which has been delivered to
the Secretary of the DOT, except (1) as previously approved by the
Board of Directors and as identified to the Secretary of the DOT prior
to the date hereof or otherwise consistent with past practice and (2)
for additional capital expenditures in an amount not to exceed
1,000,000, in the aggregate;
(h) cancel or take steps intended to cause the cancellation of
any material insurance policy naming it as a beneficiary or a loss
payee, except in the ordinary and usual course of business;
(i) make any change to its accounting methods, principles or
practices, except as may be required or permitted by GAAP;
(j) maintain the books and records of the Company in a manner
not consistent with past business practices; or
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(k) agree to do any of the foregoing.
Section 5.2 Access to Information. (a) From the date of this Agreement
until the Effective Time, the Company will give the DOT and B&M and their
authorized representatives (including counsel, environmental and other
consultants, accountants, auditors and financing sources and their authorized
representatives) (the "Representatives"), at their expense upon reasonable
notice and in a manner so as not to interfere unduly with the Company's
operations, reasonable access during normal business hours to all facilities,
personnel and operations and to all books and records of the Company, will
permit the DOT and B&M and such authorized representatives to make such
inspections at the DOT's expense as they may reasonably require and will cause
its officers to furnish the DOT and B&M with such financial and operating data
and other information with respect to the business and properties of the Company
as the DOT and B&M may from time to time reasonably request (including
information regarding litigation matters if such information does not require
the disclosure of privileged information or information subject to
confidentiality agreements or protective orders); provided, that nothing in this
Section 5.3(a) shall require the Company to take action which would result in a
waiver of any attorney-client privilege with respect to any book, record or
other information subject to such privilege.
(b) Each of the DOT and B&M will hold, and will cause the
Representatives to hold, in strict confidence all documents and information
concerning the Company furnished to the DOT or B&M in connection with the
transactions contemplated by this Agreement, and the Company will hold, and will
cause its consultants and advisors to hold, in strict confidence all documents
and information concerning the DOT or B&M furnished to the Company in connection
with the transactions contemplated by this Agreement; provided, however, that in
each case any party may disclose any document or information (i) that is already
public knowledge prior to such disclosure and (ii) to the extent such disclosure
is required by corporate or securities law or legal process, but (to the extent
consistent with such law or legal process) only after the disclosing party has
given prior written notice of the disclosure to the other parties. The
confidentiality obligations set forth herein shall remain in full force and
effect regardless of whether the Merger is completed or this Agreement is
terminated for any reason.
(c) All information provided pursuant to this Agreement shall be
subject to the existing Confidentiality Agreement between the Company, and the
State of North Carolina dated as of October 1, 1996.
Section 5.3 Proxy Statement; Filings and Other Action. (a) In
connection with the Shareholders' Meeting, the Company will commence the
preparation of and file a preliminary proxy statement relating to the
transactions contemplated by this Agreement (the "Preliminary Proxy Statement")
with the SEC and use its reasonable best efforts to respond to the comments of
the SEC and to cause the final Proxy Statement to be mailed to the Company's
shareholders, all as soon as reasonably practicable. The DOT and the Company,
will, if required, jointly prepare and the DOT and the Company will, if
required, file with the SEC the Schedule 13E-3 (or any amendment or supplement
thereto) that shall be filed together with the Preliminary Proxy Statement. The
Company will notify the DOT promptly of the receipt of the comments of the
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SEC and of any request by the SEC for amendments or supplements to the
Preliminary Proxy Statement or the Schedule 13E-3 (if required) or for
additional information from the SEC or members of its staff. The DOT and the
Company will cooperate in responding to all comments or requests from the SEC or
members of its staff with respect to the Preliminary Proxy Statement, the final
Proxy Statement, the Schedule 13E-3, or the Merger. If at any time prior to the
Shareholders' Meeting, any event should occur relating to the Company that
should be set forth in an amendment of, or a supplement to, the Proxy Statement
or the Schedule 13E-3, the Company will promptly inform the DOT. If at any time
prior to the Shareholders' Meeting any event should occur relating to the DOT or
any of its affiliates or associates that should be set forth in an amendment of,
or a supplement to, the Proxy Statement or the Schedule 13E-3, the DOT will
promptly notify the Company. Whenever any event occurs that should be set forth
in an amendment of' or a supplement to, the Proxy Statement or the Schedule
13E-3, the Company and the DOT will, upon learning of such event, promptly,
jointly prepare and the Company will file and mail such amendment or supplement.
(b) Subject to the terms and conditions herein provided, the Company,
the DOT and B&M shall use all commercially reasonable efforts promptly to take,
or cause to be taken, all other actions and do, or cause to be done, all other
things necessary, proper or appropriate under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
At the Shareholders' Meeting, the DOT, shall cause all Shares directly or
indirectly owned or controlled by it, to be voted in favor of the transactions
pursuant to this Agreement.
(c) The Company shall not settle or compromise any claim with respect
to Dissenting Shares prior to the Effective Time without the prior written
consent of the DOT (which consent shall not be unreasonably withheld).
(d) Nothing in this Agreement shall prohibit accurate disclosure by the
Company that is required in any SEC document, proxy statement or other filing or
otherwise under applicable law with respect to the transactions contemplated
hereby.
Section 5.4 Public Announcements. The DOT and B&M, on the one hand, and
the Company, on the other hand, will consult with each other before issuing any
press release or otherwise making any public statements with respect to the
Merger and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or court
order, or which legal counsel advise would be required by prudent disclosure
policy, in which case the parties will make reasonable efforts (to the extent
consistent with such law or court order) to consult with each other prior to the
making of such public statement.
Section 5.5 Litigation. The Company shall keep the DOT reasonably
informed of the status of all pending or subsequently commenced litigation and
administrative proceedings involving the Company (the "Litigation"), shall
communicate to the DOT the Company's intent to settle any such Litigation and
will keep the DOT reasonably apprised of any other significant developments with
regard to the Litigation.
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Section 5.6 Expenses. The DOT and B&M, on the one hand, and the
Company, on the other hand, shall bear their respective expenses incurred in
connection with the contemplated sale of the Company, including without
limitation the preparation, execution and performance of this Agreement and the
transactions contemplated hereby and all fees and expenses of investment
bankers, finders, brokers, agents, representatives, consultants, counsel and
accountants, provided that the DOT shall bear one-half of the expense of the
filing fees and printing, mailing and solicitation costs of the Proxy Statement.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES
The respective obligations of all parties to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:
Section 6.1 Shareholder Approval. At the Shareholders' Meeting this
Agreement shall have been (i) adopted by the affirmative vote of the holders of
a majority of the issued and outstanding Shares and (ii) approved by the
affirmative vote of the holders of a majority of the issued and outstanding
Shares not owned or controlled by the State of North Carolina or the DOT.
Section 6.2 No Orders. No United States, or state governmental
authority or other agency or commission shall have enacted, issued, promulgated,
enforced, or entered any statute, law, rule, regulation, executive order,
decree, injunction, or other order (whether temporary, preliminary, or
permanent) that is then in effect and has the effect of making the Merger
illegal or otherwise preventing or prohibiting the consummation of the Merger
and other transactions contemplated hereunder.
Section 6.3 STB Order. The issuance by the Surface Transportation Board
("STB") of an appropriate order authorizing the merger, if required by law.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF
THE DOT AND B&M
The obligation of the DOT and B&M to effect the Merger and to perform
their other obligations to be performed at or subsequent to the Closing shall be
subject to the fulfillment at or prior to the Closing of the following
additional conditions, any one or more of which may be waived by the DOT:
Section 7.1 Representations and Warranties True. The representations
and warranties of the Company contained herein shall be true and correct in all
material respects on the date of
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this Agreement and at and on the Closing Date as though such representations and
warranties were made at and on such dates, except to the extent any such
representation or warranty relates to a date prior to the Closing Date and
except for changes permitted or contemplated by this Agreement.
Section 7.2 Performance. The Company shall have performed and complied
in all material respects with all agreements and obligations required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date.
Section 7.3 Certificates. The Company shall have furnished a
certificate of its Chief Executive Officer and Chief Financial Officer to
evidence compliance with the conditions set forth in Sections 7.1 and 7.2.
Section 7.4 Certain Proceedings. No writ, order, decree or injunction
of a court of competent jurisdiction or governmental entity shall have been
entered against the DOT, B&M or the Company that prohibits or restricts the
consummation of the Merger, limits or restricts the operation of the businesses
of the Company as they are currently conducted in a manner that would reasonably
be expected to result in a Material Adverse Effect, or would otherwise
materially restrict the Surviving Corporation's exercise of its rights to own
and vote its equity interest in the Company.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to effect the
Merger shall be subject to the fulfillment at or prior to the Closing of the
following additional conditions, any one or more of which may be waived by the
Company:
Section 8.1 Representations and Warranties True. The representations
and warranties of the DOT and B&M contained herein shall be true and correct in
all material respects on the date of this Agreement and at and on the Closing
Date as though such representations and warranties were made at and on such
dates, except to the extent any such representation or warranty relates to a
date prior to the Closing Date and except for changes permitted or contemplated
by this Agreement.
Section 8.2 Performance. Each of the DOT and B&M shall have performed
and complied in all material respects with all agreements and obligations
required by this Agreement to be performed or complied with by it on or prior to
the Closing Date.
Section 8.3 Certificates. Each of the DOT and B&M shall have furnished
a certificate of the Secretary of the DOT and B&M shall have furnished a
certificate of its Chief Executive Officer and Chief Financial Officer to
evidence compliance with the conditions set forth in Sections 8.1 and 8.2.
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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
17
<PAGE>
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
<PAGE>
Section 11.11 Parties in Interest. Nothing in this Agreement, express
or implied, other than the right to receive the consideration payable in the
Merger pursuant to Article II hereof, is intended to or shall confer upon any
other person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement.
Section 11.12 Interpretation. The article and section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the meaning
or interpretation of this Agreement.
Section 11.13 Entire Agreement. This Agreement embodies the entire
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and supersedes all prior agreements and understandings,
written and oral, among the parties with respect to such subject matter. There
are no representations, promises, warranties, covenants, or undertakings, other
than those expressly set forth or referred to herein and therein.
IN WITNESS WHEREOF, the DOT, B&M and the Company have caused this
Agreement to be signed by their respective duly authorized officers or
representatives as of the date first above written.
NORTH CAROLINA RAILROAD COMPANY
By: R. Samuel Hunt, III
--------------------------------
President
NORTH CAROLINA DEPARTMENT OF
TRANSPORTATION
By: Garland B. Garrett, Jr.
--------------------------------
Secretary of Transportation
BEAUFORT AND MOREHEAD RAILROAD
COMPANY
By: Garland B. Garrett, Jr.
--------------------------------
President
20
<PAGE>
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
January 12, 1998
Raleigh, North Carolina
