UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the transition period from ___________ to ____________
Commission file number 0-15768
NORTH CAROLINA RAILROAD COMPANY
(Exact name of Registrant as specified in its charter)
NORTH CAROLINA 56-6003280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Atlantic Avenue, Suite 110
Raleigh, North Carolina 27604
(Address of principal executive offices) (Zip Code)
(919) 954-7601
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
North Carolina Railroad Company Common Stock ($.50 par value)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The total number of pages contained in this document is 58 pages.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $68,688,768 (based on last average bid price of $64.00 per
share of Registrant's Common Stock on March 4, 1998).
The number of shares outstanding of each of the Registrant's classes of
Common Stock, as of March 4, 1998, is as follows:
Outstanding as of
Class March 4, 1998
----- -------------
Common Stock (par value $.50) 4,283,470
Documents Incorporated by Reference. None.
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TABLE of CONTENTS
ITEM Page
---- ----
Part 1 1. Business........................................................4
2. Properties.....................................................11
3. Legal Proceedings..............................................12
4. Submission of Matters to a Vote of Security
Holders......................................................16
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters..................................16
6. Selected Financial Data....................................... 17
7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations...................................................18
8. Financial Statements and Supplementary Data....................28
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................28
Part III 10. Directors and Executive Officers of the
Registrant...................................................28
11. Executive Compensation.........................................32
12. Security Ownership of Certain Beneficial
Owners and Management........................................33
13. Certain Relationships and Related
Transactions.................................................37
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..........................................37
Signatures....................................................................38
Index to Exhibits.............................................................40
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PART I
Item 1. Business
Buyout by the State of North Carolina
During August, 1996, the State of North Carolina ("State") notified the
Registrant that the State retained NationsBank as a financial advisor to
evaluate the acquisition of the Registrant's shares not already owned by the
State. On August 22, 1996, the Board of Directors of the Registrant appointed a
Special Committee of five non-State elected directors of the Registrant
(directors elected by shareholders other than the State) responsible for
negotiating with the State ("Special Committee"). The Special Committee had
authority to make recommendations to the entire Board regarding any offer made
by the State, to formulate offers or counter offers, and to consider
alternatives to a transaction with the State.
On April 7, 1997, the Registrant, the State, and the Beaufort & Morehead
Railroad Company ("B&M"), a North Carolina corporation whose stock is wholly
owned by the State, executed a Letter of Intent to reach a definitive agreement
for a plan of merger, whereby the State would acquire the shares held by
shareholders other than the State at a cash price of $66.00 per share.
On August 27, 1997, the General Assembly of North Carolina approved
legislation authorizing a $61 million reserve fund which, in addition to other
funds of the State, is authorized for an investment to fund the acquisition of
the non-State shares consistent with the Letter of Intent.
On October 3, 1997, the Registrant reached a definitive agreement with the
North Carolina Department of Transportation of the State of North Carolina
("DOT") and the B&M for a plan of merger for the State, through the DOT, to
acquire the non-State shares at a cash price of $66.00 per share (the "Merger
Agreement"). The Merger Agreement, as amended and restated as of January 16,
1998, provides for authorization of a limited amount of non-voting preferred
stock of the Registrant to be exchanged for B&M preferred stock in order to
continue the Registrant's ability to meet certain shareholder requirements as a
Real Estate Investment Trust. See "Real Estate Investment Trust Election" below.
The Merger Agreement is subject to corporate and governmental approvals,
including approval by the shareholders of the Registrant and a majority of the
shares held by non-State shareholders and to other conditions, and also provides
that either the State or the Registrant may terminate the Merger Agreement if
closing does not occur on or before May 5, 1998. On October 7, 1997, the Merger
Agreement was approved by the Council of State of North Carolina. The Registrant
has scheduled a shareholder meeting on March 31, 1998 to vote on approval of the
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Merger Agreement, as amended and restated on January 16, 1998. If the Merger
Agreement is consummated, the State will be the only holder of the Registrant's
Common Stock, and the shares of the Registrant will no longer be traded in the
over-the-counter market and will be deregistered under the Exchange Act.
Background of Railroad Leases
The North Carolina Railroad Company (the "Registrant") was incorporated in
1849 in the State of North Carolina. The Registrant owns approximately 317 miles
of continuous railroad line running from Charlotte, North Carolina to Morehead
City, North Carolina. The Registrant has one office located at 3200 Atlantic
Avenue, Suite 110, Raleigh, North Carolina (27604) and four full time employees.
The Registrant conducted railroad operations beginning in 1856. In 1871,
the Registrant leased substantially all of its assets to the Richmond & Danville
Railroad Company, a predecessor of Southern Railway Company, for a term of
thirty years. In 1895, the Registrant leased substantially all of its assets to
Southern Railway Company, now known as Norfolk Southern Railway Company ("NSR"),
for ninety-nine years (the "1895 Lease"). In 1989, the Registrant acquired the
Atlantic and North Carolina Railroad Company, the assets of which were subject
to a lease dating to 1939 with the Atlantic & East Carolina Railway Company
("AECR"), a wholly-owned subsidiary of Norfolk Southern Railway Company (the
"1939 Lease"). NSR and AECR are hereinafter referred to as "Norfolk Southern."
Information about the 1895 and 1939 Leases has been disclosed by the Registrant
in prior quarterly and annual reports to the Securities and Exchange Commission
("Commission").
The terms of the 1895 Lease and 1939 Lease provided for expiration on
January 1, 1995 and December 31, 1994, respectively, and did not require either
the Registrant or Norfolk Southern to renew the leases. However, Norfolk
Southern's operation of the Registrant's railroad line may not be discontinued
unless discontinuance is authorized by the Surface Transportation Board of the
United States Department of Transportation ("STB"), the successor agency to the
Interstate Commerce Commission ("ICC"). Neither the Registrant nor Norfolk
Southern have sought regulatory authority for discontinuance of service by
Norfolk Southern (see "Regulatory Matters," below), and Norfolk Southern is
continuing to operate the Registrant's railroad line under the circumstances
described below.
On August 10, 1995, the Board of Directors of the Registrant approved a
Lease Extension Agreement ("Lease Extension") with Norfolk Southern to extend
the 1895 and 1939 Leases. Information about the Lease Extension has been
disclosed by the Registrant in prior quarterly and annual reports to the
Commission. On December 15, 1995, the shareholders of the
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Registrant voted on approval of the Lease Extension. Following the shareholder
meeting, a shareholder commenced a legal action challenging the validity of
shareholder approval, and on July 29, 1996, the United States District Court for
the Eastern District of North Carolina entered an order enjoining the Registrant
from implementing the terms of the Lease Extension due to the lack of a quorum
at the 1995 shareholder meeting. Other shareholder derivative litigation which
sought to enjoin the Lease Extension is also pending. See Item 3, Legal
Proceedings, for a description of the actions. Notwithstanding Norfolk
Southern's knowledge of the shareholder derivative actions challenging approval
of the Lease Extension and the Registrant's failure to confirm the effectiveness
of the Lease Extension, on December 28, 1995 Norfolk Southern paid the
Registrant approximately $7.8 million, which, along with other amounts paid by
Norfolk Southern in 1995, is the amount that would have been owed to the
Registrant under the terms of the Lease Extension had the Lease Extension become
retroactively effective as of January 1, 1995. Norfolk Southern also made
monthly payments to the Registrant in amounts that would have been due if the
Lease Extension was effective until August 1996, when it notified the Registrant
that payments would be discontinued. On September 13, 1996, the Registrant
entered into an interim agreement with Norfolk Southern regarding the
Registrant's ability to retain certain payments by Norfolk Southern. On
September 20, 1996, the Registrant commenced a legal action against Norfolk
Southern asserting rental, property ownership, environmental, and other claims
and on September 23, 1996 commenced proceedings before the STB to prescribe both
interim and long term compensation for Norfolk Southern's use of the
Registrant's assets. See Item 3, Legal Proceedings.
Real Estate Investment Trust Election
On September 16, 1996, the Registrant elected tax status as a Real Estate
Investment Trust ("REIT") for the tax year ended December 31, 1995. A REIT is
generally not subject to federal corporate income taxes on that portion of its
ordinary income or capital gain that is currently distributed to its
shareholders. The REIT provisions of the Internal Revenue Code ("I.R.C.")
generally allow a REIT to deduct distributions paid to its shareholders.
However, the Norfolk Southern litigation and certain shareholder litigation
could delay or affect the Registrant's ability to receive rental income or the
timing or amount of shareholder distributions, which could cause the Registrant
to be unable to continue to qualify for REIT status. Failure to continue to
qualify as a REIT would substantially decrease the after-tax net income
available for distribution to shareholders of the Registrant.
The Registrant believes that if it makes the required shareholder
distributions and continues to meet certain shareholder requirements, it will
continue to qualify as a REIT.
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In order to continue to qualify as a REIT, the Registrant must declare a
dividend of at least 95% of REIT taxable income prior to the due date of its
1997 tax return, as extended. In addition, the State has advised the Registrant
that if the Merger Agreement is approved, the Registrant will not continue to
qualify as a REIT unless the Registrant has at least one hundred shareholders.
In connection with approval of the Merger Agreement, the Registrant is seeking
shareholder approval of a charter amendment to authorize a limited amount of
non-voting preferred stock. However, if the Merger Agreement is consummated
there can be no assurance that the Registrant will continue to qualify as a
REIT. The I.R.C. provides that if a taxpayer's REIT election is terminated by
its failure to satisfy the qualification requirements, the taxpayer may not make
a new election to be taxed as a REIT prior to the fifth taxable year after
disqualification, unless the taxpayer fits within certain narrow exceptions. Any
distributions to shareholders for any year in which the Registrant fails to
qualify as a REIT will not be deductible by the Registrant nor will they be
required to be made.
The Registrant will evaluate all relevant factors in determining whether to
maintain its qualification for REIT status for its 1997 taxable year. Such
factors will include, for example, whether the Merger Agreement is approved, the
status of the rental and other litigation against Norfolk Southern before the
STB and the courts, alternatives to litigation, the Registrant's cash flow,
advice from the Registrant's professional advisors about the feasibility of
continued qualification for REIT status, the status of the shareholder
derivative actions and the tax consequences of the Registrant failing to qualify
as a REIT for 1998 or subsequent years. Due to the uncertainty, the Registrant
has determined to delay a determination as to whether it will qualify as a REIT
for its 1997 taxable year until the earlier of the date the uncertainty has been
resolved or the latest date by which the Registrant may file its 1997 federal
income tax return. The provisions of the I.R.C. and related regulations
governing the federal income tax treatment of REIT's are highly technical and
complex. At present, the Registrant intends to continue its qualification for
REIT status, however, there can be no assurance that the Registrant will
maintain its qualification for REIT status for 1997 or later years due to
possible cash flow requirements and other uncertainties discussed above.
By delaying certain distributions of 1997 income past January 31, 1998, the
Registrant incurred an additional federal excise tax liability of approximately
$68,000 for 1997. If the Registrant does not qualify as a REIT for 1997, the
Registrant would incur an additional 1997 income tax liability of approximately
$2 million.
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Strategic Goals and Alternatives
The Registrant is evaluating its strategic goals and the alternatives
available to achieve such goals, including how the Registrant's goals and
alternatives may change if the Registrant is acquired by the State. (See "Buyout
by the State of North Carolina" above.) Alternatives which the Registrant is
considering include seeking an order from the STB requiring Norfolk Southern to
operate the Registrant's properties under terms more favorable to the Registrant
than otherwise available, negotiating a new lease or other agreement with
Norfolk Southern, leasing all or part of its properties to one or more
independent railroad operators, or operating all or part of its properties as an
independent railroad. The Registrant previously evaluated many of the foregoing
alternatives. For example, prior to 1997 the Registrant and its financial
advisors attempted to interest alternative lessees/operators in its railroad
properties. These efforts did not produce a satisfactory alternative to leasing
its property to Norfolk Southern.
The Registrant has been advised by its STB counsel that it may have a
residual common carrier duty to provide railroad service if Norfolk Southern
were to discontinue railroad service, in the absence of any abandonment of all
or any part of the Registrant's railroad lines. If the Registrant were to
operate the railroad lines itself, the Registrant anticipates that it would have
to incur substantial capital expenditures. See Item 7, Registrant's Discussion
and Analysis of Financial Condition and Results of Operations. If the Registrant
operates its railroad lines, it would not qualify as a REIT for income tax
purposes, but instead would be treated as an operating railroad for income tax
purposes, in which event ordinary corporate income tax treatment would apply to
the Registrant. See "Real Estate Investment Trust Election" above regarding a
failure of the Registrant to qualify for REIT status for 1997 or later years.
It is possible that Norfolk Southern would seek to discontinue its
responsibility as a common carrier to operate all or part of the Registrant's
lines and/or to re-route certain railroad traffic that does not either originate
or terminate on the Registrant's lines (known as "overhead traffic") to other
Norfolk Southern controlled lines. The Registrant does not have complete or
reliable information about the overhead traffic because Norfolk Southern refused
to disclose overhead traffic data to the Registrant, but the Registrant believes
that a substantial majority of the traffic on its lines is overhead traffic
according to analyses of ICC carload waybill sample information. A portion of
the property leased by the Registrant, the segment between Greensboro, North
Carolina and Charlotte, North Carolina, forms part of a major system route for
Norfolk Southern.
The Registrant believes the volume and type of overhead traffic diverted by
Norfolk Southern would be the most significant factor in determining the
revenues of the Registrant
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or any other operator of the Registrant's railroad lines. Many of the factors
affecting routing of overhead traffic would be beyond the control of the
Registrant. For example, it is unclear how the acquisition of control by Norfolk
Southern and CSX Transportation ("CSXT") of all or part of Consolidated Rail
Corporation ("Conrail"), a major Class I railroad company in the northeastern
United States, will change railroad traffic, volume and movements between the
northeastern and southeastern United States. It is possible that such
acquisition could materially affect the volume and type of overhead traffic over
the Registrant's railroad lines, particularly with respect to the segment
between Greensboro and Charlotte, North Carolina. Other factors that would
likely affect the profitability of operating the railroad include whether the
operator would lose traffic to trucking companies or other competitors, the
percentage of revenues required for operation (railway operating ratio), the
revenues the operator would receive for traffic moving to and from connecting
railroads, including Norfolk Southern, and revenues and expenses associated with
operations of National Rail Passenger Corporation ("Amtrak"), which operations
are governed in part by federal law.
A significant portion of railroad traffic on the eastern segment of the
Registrant's railroad line is derived from shipments of aviation fuel to
military installations. During 1997, the U. S. Department of Defense, after a
comprehensive review of alternative aviation fuel delivery methods, shifted a
portion of the aviation fuel movements to non-rail delivery methods. The
Registrant has not yet been able to determine the effects of such diversions,
which could have a material adverse effect upon the revenues derived from the
operation of the eastern segment of the Registrant's railroad line. These
operations are currently conducted by Norfolk Southern. See "Background of
Railroad Leases" above, and Item 3, Legal Proceedings - "Norfolk Southern
Litigation."
CSXT Agreement
In 1862, the Registrant entered into an agreement with the Chatham Railroad
Company ("Chatham"), a predecessor of CSXT, for parallel construction and
operation of a railroad track by Chatham within the Registrant's right of way
between Raleigh and Cary, North Carolina, a distance of approximately eight
miles (hereinafter referred to as the "1862 agreement"). The 1862 agreement made
no provision for rental to be paid to the Registrant by Chatham. CSXT succeeded
to the interests of Chatham and the railroad track and facilities subject to the
agreement are currently owned and operated by CSXT as a part of its branch line
between Henderson and Hamlet, North Carolina. The Registrant and CSXT have been
negotiating for renewal and modification of the 1862 agreement, but a final
agreement has not been reached.
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Other Leases
Under a lease dated December 31, 1968 (the "1968 Lease"), the Registrant
and Norfolk Southern renegotiated a portion of the 1895 Lease. Three parcels of
land located in Charlotte, North Carolina were released from the 1895 Lease and
became subject to the 1968 Lease. This lease expires on December 31, 2067, and
provides for an annual rental of $81,319 until 2018, when the rent becomes six
percent (6%) annually of the current value of the leased land as determined by
the parties.
In addition to the leases and agreements described above, the Registrant
leases several small parcels of property producing approximately $2,500 of lease
revenues monthly.
Regulatory Matters
Railroads and other transportation companies are subject to state and
federal regulations administered by agencies such as the STB, United States
Department of Transportation, Federal Railroad Administration, state
departments of transportation and state utilities commissions.
During the past two decades, regulatory agencies have exhibited a trend toward
less regulation of transportation industries. Railroads are affected not only by
the regulation of the railroad industry, but by regulation of other modes of
transportation, which can change the cost structures of competitive modes of
transportation. For example, proposals to have regulations changed to increase
the size and weight limits of certain trucks are submitted to Congress from time
to time. If permitted, such increases could have a material adverse effect upon
railroads by decreasing the cost of shipping goods by truck. The Registrant
monitors the regulation of railroads and competing modes of transportation on a
regular basis, primarily through railroad industry publications.
Other Matters - Environmental
The Registrant and its lessees are responsible for compliance with state,
federal, local or other provisions relating to discharge of materials or the
protection of the environment. State and federal environmental provisions may
impose joint and several liability upon the Registrant and its lessees and
sublessees for environmental damage or clean up (or associated costs) of any
real properties owned by the Registrant and adjoining properties if the source
of any problem is the property of the Registrant. The Registrant believes that
damage or clean up (or the associated costs) would be the responsibility of the
lessees and any sublessees or other parties who may have
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created any actionable environmental condition. The Registrant's litigation
against Norfolk Southern includes claims for environmental liability. See Item
3, Legal Proceedings. The Registrant may also determine it is in its interest to
initiate substantial environmental assessments of its properties and commence
environmental litigation against Norfolk Southern's sublessees or other parties
who may have created or who are responsible for any actionable environmental
conditions. If such parties are not able to meet their responsibilities, under
certain statutes, regulations, and rules, the Registrant could ultimately be
held responsible. See Item 3, Legal Proceedings, regarding the Peele site
environmental matter.
Item 2. Properties
The principal asset of the Registrant is 317 miles of railroad property,
averaging less than 200 feet in width, between Morehead City, North Carolina,
and Charlotte, North Carolina. Some of the property is owned in fee, and the
majority of the road extends over rights of way and perpetual easements
purchased or granted in the 19th century. The line extends from Morehead City in
an arc across North Carolina westward through New Bern, Kinston, Goldsboro,
Selma, Raleigh, Research Triangle Park (unincorporated), Durham, Burlington,
Greensboro, High Point, Lexington, Salisbury, Kannapolis, and Charlotte. The
route between Greensboro and Charlotte is a primary line of Norfolk Southern's
north-south freight route between Washington, D.C. and Atlanta, Georgia. The
Registrant's line intersects CSXT railroad lines at Selma, Goldsboro, Raleigh,
Cary, Durham, and Charlotte, North Carolina.
The Registrant's tracks on the Greensboro to Charlotte segment have been
upgraded since original construction so that today the track is laid with
132-lb. continuous welded rail with alternating double and single track. Speeds
of up to 79 miles per hour may be maintained over substantial portions of the
line, and centralized traffic control exists for the entire stretch. On the
Greensboro to Goldsboro segment, the line is constructed with both welded and
jointed rail of varying weights. No signal system is in use on this segment.
Speeds of up to 50 miles per hour (higher for passenger trains) may be
maintained over substantial portions of this segment. The road segment from
Goldsboro to Morehead City is unsignalled, single-trackage with continuous
welded and jointed rail of 85- to 132-lb. weight. Several short segments of the
line are operated jointly with railroads other than the Registrant's lessees.
The Registrant's line between New Bern and Morehead City currently provides
Norfolk Southern's only access to the port at Morehead City. At the current
time, Amtrak operates passenger trains on the Registrant's railroad line between
Selma and Charlotte, North Carolina.
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The Registrant also owns approximately 208 acres of land divided into 24
parcels that mostly adjoin its rail corridor. Among these parcels are the three
in Mecklenburg County which are located in the downtown Charlotte business
district and subject to the 1968 Lease with Norfolk Southern. Some of the
properties have improvements, the ownership of which depends on the terms of the
arrangements with the sublessees of the properties. The Registrant is evaluating
whether properties which are not necessary for current railroad operations have
income-generating potential in excess of projected expenses. According to
information provided by Norfolk Southern, these properties currently are
producing approximately $330,000 of annual gross lease revenue. Norfolk Southern
has advised the Registrant that Norfolk Southern believes it is entitled to
continue management responsibility for and to collect the lease income from such
properties notwithstanding the absence of a lease or other written agreement
with the Registrant. Norfolk Southern has asserted that a majority of the
Registrant's properties are subject to the jurisdiction of the STB. The
Registrant is evaluating Norfolk Southern's assertion regarding any such
jurisdiction and has demanded that Norfolk Southern pay the income from such
properties to the Registrant. See Item 3, Legal Proceedings, regarding the
Registrant's litigation against Norfolk Southern.
Item 3. Legal Proceedings
Except as described below, there are no legal proceedings pending to which
the Registrant is a party that are material to the operations of the Registrant.
Norfolk Southern Litigation (Federal Court)
On September 20, 1996, the Registrant filed an action against Norfolk
Southern and certain subsidiaries or affiliates thereof in the Superior Court of
Wake County, North Carolina, which action was removed to the United States
District Court for the Eastern District of North Carolina. The action seeks a
declaratory judgment of the Registrant's property ownership and other rights and
obligations of the parties arising out of the expiration of the Registrant's
leases with Norfolk Southern, and asserts other claims, including breach of
contract and environmental claims. Norfolk Southern filed counterclaims against
the Registrant, including a claim for approximately $12 million. Information
about the litigation has been disclosed by the Registrant in prior quarterly and
annual reports to the Securities and Exchange Commission. On October 17, 1997,
the Registrant and Norfolk Southern filed a joint motion to stay the proceeding
pending negotiations and consummation or failure of an acquisition of the
Registrant by the State. On October 22, 1997, the court entered an order staying
the proceeding until February 1, 1998. On February 5, 1998, the court extended
the stay until
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May 29, 1998. There have been no other changes in the litigation since the last
report that are material to the Registrant.
Norfolk Southern Litigation (U. S. Surface Transportation Board)
On September 23, 1996 the Registrant filed (i) a petition for interim
relief and (ii) a petition to set trackage compensation before the STB for the
use of the Registrant's property by Norfolk Southern, STB Finance Docket No.
33134. The petition for interim relief sought an order requiring Norfolk
Southern to pay rental on a temporary basis in the amount of $680,700 monthly
pending a final adjudication or other resolution of the Registrant's federal
court action against Norfolk Southern and the Registrant's petition to the STB
to set trackage compensation. In response, Norfolk Southern petitioned the STB
to establish rental on a interim basis in an amount not greater than the rental
called for in the 1895 and 1939 leases, or approximately $600,000 annually.
Information about the litigation has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange Commission.
The STB issued a decision and order dated May 29, 1997 ("STB decision")
with respect to the Registrant's petition for interim relief. The STB decision
denied the rental amount requested by the Registrant and provides (i) that the
Registrant's petition for interim compensation is granted at the level of
out-of-pocket expenses incurred by the Registrant due to Norfolk Southern's
continued operation of the line, (ii) that the petition of the State of North
Carolina to hold the proceeding in abeyance pending a negotiated buy-out of
minority shareholders and subsequent reopening of lease negotiations is granted
subject to the requirement that the State and the Registrant report monthly to
the STB on the progress of negotiations, and (iii) other procedural and related
findings. Beginning in July 1997, Norfolk Southern has made payments to the
Registrant pursuant to the STB decision. The payments represent certain
out-of-pocket expenses of the Registrant for such periods, but exclude expenses
of the Norfolk Southern federal court litigation and other miscellaneous
expenses of the Registrant. There can be no assurance that any such payments
will continue to be made or the basis of any such payments. On July 7, 1997, the
STB granted a petition by the Registrant for an extension of time for the
Registrant to petition to reopen the STB decision until 90 days after
consummation of any acquisition of the Registrant by the State of North Carolina
or the failure of acquisition negotiations. On June 27, 1997 and July 28, 1997,
motions were filed by Walker F. Rucker Intervenors to reopen the STB decision.
The STB has not yet ruled on the motions.
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Shareholder Litigation
Four shareholder derivative actions were filed in the United States
District Court for the Eastern District of North Carolina during December 1994
and January and February 1995 by shareholders of the Registrant, which actions
were consolidated into one case by the court. Information about the actions has
been disclosed in prior quarterly and annual reports to the Commission. There
have been no changes in the litigation since the last report that are material
to the Registrant.
On September 24, 1996, a lawsuit filed as a purported class action by the
same plaintiffs as the December 1994 and February 1995 federal court actions was
filed in the Superior Court of Wake County, North Carolina. The action alleged
that the Board of Directors of the Registrant breached their fiduciary duty to
shareholders in the formation of the Special Committee and asserted other
claims. On June 19, 1997, the court granted the Registrant's motion to dismiss
the action. On July 7, 1997, the plaintiffs appealed the dismissal to the North
Carolina Court of Appeals. The North Carolina Court of Appeals has not yet ruled
on the appeal.
On December 21, 1995, a shareholder derivative legal action was filed in
Federal District Court in the Eastern District of North Carolina, Rucker v.
North Carolina Railroad Company, et al., Case No. 5-95-CV-1054-BO(2). The action
sought to enjoin the Lease Extension or invalidate the December 15, 1995
shareholders meeting held to approve the Lease Extension on the basis of a lack
of a quorum of shareholders other than the State of North Carolina, and included
other allegations against the defendants, including alleged proxy rule
violations. Information about the action has been disclosed in prior quarterly
and annual reports to the Commission. On November 5, 1997, the court held a
hearing on the plaintiff's application for attorneys fees of approximately $1
million, which the Registrant 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 the Registrant to pay the plaintiff's counsel
$276,365 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. The Registrant has responded
opposing the additional relief requested, and has filed a motion to deposit the
attorney's fees and expenses into the registry of the court pending resolution
of the case. The court has not ruled on the motions.
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Greensboro Segment Trackage Rights
On July 8, 1996, the Registrant filed a petition before the STB to revoke
(the "Petition to Revoke") a Notice of Exemption filed by NSR of a grant of
certain trackage rights by NSR to Norfolk & Western Railway Company ("N&W"), an
affiliate of Norfolk Southern, over a 2.4 mile segment of the Registrant's
railroad line in Greensboro, North Carolina, STB Finance Docket No. 32961. The
trackage rights affect the segment of the Registrant's railroad line which
connects NSR's main north-south route through North Carolina on the Registrant's
railroad line with a Norfolk Southern owned route to Winston-Salem, North
Carolina, which segment the Registrant believes might be utilized by Norfolk
Southern to divert traffic away from the Registrant's lines to Norfolk Southern
owned railroad lines. Information about the proceeding has been disclosed in
prior quarterly and annual reports to the Commission. The Registrant challenged
the Notice of Exemption and the amendment by NSR on the basis that NSR failed to
recognize the Registrant's ownership of the 2.4 mile segment affected by the
purported trackage rights and NSR's inability to grant trackage rights in the
absence of the Lease Extension. On August 22, 1997, the court denied the
petition of the Registrant. The Registrant has determined not to appeal the
matter and to enter into negotiations with Norfolk Southern to address the
matter.
Peele Site
In January, 1994, North Carolina Department of Environment, Health, and
Natural Resources ("DEHNR") initiated a lawsuit against the Registrant and other
parties seeking reimbursement of $84,354 in response costs incurred by DEHNR and
remediation of the Peele pesticide disposal site (the "site"). The Registrant is
one of several defendants that have been held jointly and severally liable for
response costs and remediation of the site. On February 26, 1997, the Registrant
and other parties entered into an agreement among themselves and an agreement
with DEHNR to remediate the site and share in assessment and clean-up costs. As
a result, the Registrant accrued $200,000 in 1996 as an estimate of its share of
remediation costs. During the third quarter, the Registrant and other parties
completed a remediation plan for the site and on October 29, 1997 DEHNR accepted
the remediation report, subject to satisfactory testing of groundwater at the
site. On February 13, 1998, the Registrant conveyed by gift deed approximately
five acres of land including the site to the Town of Clayton, North Carolina,
pursuant to a deed which restricts the use of the site to non-residential use
and other restrictions. During 1997, the Registrant paid $151,015 in clean-up
costs, which costs the Registrant believes constitutes the majority of its share
of clean-up costs. However, there can be no assurance of the total amount of
financial exposure or the timing of the resolution of the matter. If such costs
are not paid by other parties, the financial
15
<PAGE>
position of the Registrant could be materially adversely affected. The
Registrant does not have insurance to minimize its potential exposure.
Charlotte Convention Center Litigation
During 1991, the Registrant initiated lawsuits in the Mecklenburg County,
North Carolina, Superior Court regarding its railroad corridor through downtown
Charlotte. The Registrant alleged that both the City of Charlotte ("City") and
Norfolk Southern have breached contract obligations and obligations based on
real property rights to the Registrant. Information about the litigation has
been disclosed by the Registrant in prior quarterly and annual reports to the
Securities and Exchange Commission. During the first quarter of 1997, the
Registrant and the City reached an agreement for a sale by the Registrant of
certain inactive railroad property less than one mile in length to the City,
subject to certain conditions of closing, whereby the City was to pay the
Registrant $4,000,000 in exchange for the property and dismissal of the
lawsuits. On December 19, 1997, the Registrant received net proceeds of
approximately $3,990,000 upon the closing of the sale, and the parties dismissed
the lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during 1997. The
Registrant has scheduled a special shareholder meeting on March 31, 1998 to vote
on approval of the Merger Agreement. See Item 1, Business - "Buyout by the State
of North Carolina."
PART II
Item 5. Market for Registrant's Common Equity and Related Stock-
holder Matters
(a) Market Information
Common shares of the Registrant are currently traded in the
over-the-counter market (symbol "NORA"). Quarterly high and low bids are as
follows for fiscal years 1996 and 1997:
16
<PAGE>
1997 1996
Low High Low High
--- ---- --- ----
1st 1st
--- ---
38 38 1/4 22 1/4 27 1/2
2nd 2nd
--- ---
38 1/4 59 23 1/4 24 5/8
3rd 3rd
--- ---
59 62 23 40
4th 4th
--- ---
61 1/2 62 1/2 37 1/4 38 1/4
These over-the-counter market quotations reflect interdealer prices,
without retail markup, markdown or commission, and may not necessarily represent
market transactions.
(b) Holders
There were approximately 676 holders of common shares of the Registrant of
record as of March 4, 1998.
(c) Dividends
During 1997, a dividend was declared in the amount of $.91 per share, or
$3,897,958, relating to the Registrant's 1996 tax year as required in order to
maintain the Registrant's REIT status. During 1996, the Registrant declared a
dividend in the amount of $3.06 per share, or $13,107,418 relating to the
Registrant's 1995 tax year. During 1995, no dividends were declared. The Merger
Agreement restricts the Registrant's ability to pay dividends. See Item 1,
Business -"Buyout by the State of North Carolina." If the Registrant declares a
dividend during 1998 in an amount which is required in order to continue the
Registrant's REIT status for the 1997 tax year, the dividend would be
approximately $.47 per share, or approximately $2,013,000.
The amount and timing of future dividends will depend upon
whether the Merger Agreement is consummated, any ruling(s) by the STB to set
interim or other compensation for the use of the Registrant's properties, the
Registrant's REIT status, the Norfolk Southern litigation, the shareholder
litigation, and the future profitability of the Registrant. The Registrant
expects to continue to have substantial uncertainty with respect to each of
these matters. See Item 3, Legal Proceedings, regarding the Norfolk Southern
litigation and certain shareholder litigation. See "Real Estate Investment Trust
Election" under Item 1, Business, above, regarding the relationship between tax
matters and dividend policy, and Note D to the financial statements.
Item 6. Selected Financial Data
The following selected financial data are derived from the financial
statements of the Registrant. The data should be read
17
<PAGE>
in conjunction with the financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
Selected Financial Data
At December 31 or For the Year Ended December 31
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Gross revenue ..... $ 7,590,948(a) $ 5,620,469 $15,132,553 $ 851,074 $ 777,770
Lease revenue of
roadway and land .. 3,159,013 4,846,216 8,134,656(b) 674,277 642,817
Net income (loss) . 5,090,469(a) 8,603,973 8,864,922 107,145 (54,027)(c)
Net income (loss)
per share ......... 1.19 2.01 2.07 0.03 (0.01)
Deferred income
taxes ............. -0- -0- 1,209,851 1,214,451 1,241,451
Total assets ...... 14,285,550 13,144,991 24,480,264 10,084,797 9,639,966
Cash dividends
declared per
common share ...... .91 3.06 -0- .03 .03
</TABLE>
(a) Includes gain on sale of real estate of $4,094,390
relating primarily to the Charlotte property sale.
(b) Includes payment of $7.8 million from Norfolk Southern.
See Item 7, Management's Discussion and Analysis,
below.
(c) Net income for 1993 before cumulative effect of
accounting change was $86,875.
Item 7. The Registrant's Discussion and Analysis of Financial
Condition and Results of Operations
Buyout by the State of North Carolina
During August, 1996, the State notified the Registrant that the State
retained NationsBank as a financial advisor to evaluate the acquisition of the
Registrant's shares not already owned by the State. On August 22, 1996, the
Board of Directors of the
18
<PAGE>
Registrant appointed a Special Committee of five non-State directors of the
Registrant (directors elected by shareholders other than the State) responsible
for negotiating with the State. The Special Committee had authority to make
recommendations to the entire Board regarding any offer made by the State, to
formulate offers or counter offers, and to consider alternatives to a
transaction with the State.
On April 7, 1997, the Registrant, the State, and the B&M (a North Carolina
corporation whose stock is wholly owned by the State) executed a Letter of
Intent to reach a definitive agreement for a plan of merger, whereby the State
would acquire the shares held by shareholders other than the State at a cash
price of $66.00 per share.
On August 27, 1997, the General Assembly of North Carolina approved
legislation authorizing a $61 million reserve fund which, in addition to other
funds of the State, is authorized for an investment to fund the acquisition of
the non-State shares consistent with the Letter of Intent.
On October 3, 1997, the Registrant reached a definitive agreement with the
DOT and the B&M for a plan of merger for the State, through the DOT, to acquire
the non-State shares at a cash price of $66.00 per share. The Merger Agreement
is subject to corporate and governmental approvals, including approval by the
shareholders of the Registrant and a majority of the shares held by non-State
shareholders and to other conditions, and also provides that either the State or
the Registrant may terminate the Merger Agreement if closing does not occur on
or before May 5, 1998. On October 7, 1997, the Merger Agreement was approved by
the Council of State of North Carolina. The Registrant has scheduled a
shareholder meeting on March 31, 1998 to vote on approval of the Merger
Agreement. If the Merger Agreement is consummated, the State will be the only
holder of the Registrant's Common Stock, and the shares of the Registrant will
no longer be traded in the over-the-counter market and will be deregistered
under the Exchange Act.
Liquidity and Capital Resources
Pursuant to the terms of the Lease Extension, the Registrant's lessees were
obligated to continue paying for maintenance and property taxes relating to the
Registrant's property subject to the Lease Extension. If the Registrant is
unable to negotiate other leases or obtain orders by the STB upon acceptable
terms, or if Norfolk Southern were to discontinue railroad operations over the
Registrant's line, operating its own line without a lessee would subject the
Registrant to a number of risks that would materially affect the Registrant's
liquidity and capital resources. The Registrant anticipates that it would have
to incur substantial operating expenses over time, but that it
19
<PAGE>
would initially not likely incur substantial capital expenditures with respect
to fixed plant. Under the terms of the 1895 Lease, the lessee is required to
return the leased properties, or equivalent replacements of leased properties,
including equipment, in as good a condition and repair as the property was at
the inception of the lease, less ordinary depreciation. However, the Registrant
may be required to incur substantial capital expenditures and other expenses for
the operation of the railroad line if the equipment is not returned in operating
condition upon termination of the leases or if the quantities or type of the
returned equipment is insufficient to operate the railroad line. See Item 1,
Business, for a discussion of risks of independent operation by the Registrant.
The Registrant's cash and cash equivalents were approximately $6.2 million
as of March 4, 1998. Of that amount, $4,094,390 represents proceeds from the
sale of real estate that is required to be reinvested in certain types of
property prior to December 31, 2000 in order for the Registrant to avoid
recognizing such as a gain for income tax purposes. If the Registrant continues
to qualify for REIT status for 1997, a distribution of approximately $2 million
would be required to be made. However, see Item 1, Business -"Buyout by the
State of North Carolina" regarding the Merger Agreement, which restricts the
Registrant's payment of dividends. The Registrant does not foresee any need for
funds during 1998 which cannot be met primarily from available cash or the funds
eligible for reinvestment discussed above. However, the egistrant's litigation
described in this report is expected to be protracted and costly and may exceed
$1 million per year. The Registrant may be required to finance (i) litigation
expenses, (ii) expenses associated with seeking alternative operators or lessees
of the Registrant's railroad property, (iii) operating expenses, maintenance,
equipment costs, or capital expenditures associated with railroad operations
in the event Norfolk Southern discontinues or abandons operation of the
Registrant's railroad lines or ceases to maintain the Registrant's property at
a level acceptable to the Registrant or at levels acceptable to regulatory
agencies such as the U.S. Federal Railroad Administration.
Pursuant to an agreement for the payment of $5 million (plus interest) by
Norfolk Southern on December 1, 1995 and an Interim Agreement with Norfolk
Southern dated September 13, 1996, Norfolk Southern made payments of
approximately $17 million in 1995 and 1996 (described in "Results of Operations"
below) which were not required to be returned to Norfolk Southern
notwithstanding the court order enjoining the effectiveness of the Lease
Extension. Pursuant to the agreements, the payments are to be credited against
any sums or rentals ultimately determined to be due to the Registrant from
Norfolk Southern. However, notwithstanding the agreements, Norfolk Southern has
asserted counterclaims
20
<PAGE>
against the Registrant for unjust enrichment and conversion with respect to the
payments which include a claim of approximately $12 million. See Item 3, Legal
Proceedings.
The Registrant's liquidity (cash and short-term investments) increased from
$5,318,933 at December 31, 1996 to $6,224,843 at December 31, 1997. On September
16, 1996, the Registrant elected tax status as a REIT effective for the tax year
ended December 31, 1995. The Registrant declared a cash dividend in the amount
of $.91 per share, or $3,897,958 for the 1996 tax year which was paid during the
fourth quarter of 1997. Dividends are not indicative of future dividends or
continued REIT qualification.
To the extent the Registrant receives qualifying rental income, qualifies
for and elects REIT status for federal income tax purposes for 1997 and future
years, the Registrant is required to make distributions to its stockholders of
at least 95% of REIT taxable income, which will limit the Registrant's ability
to accumulate working capital necessary to fund litigation or other expenses.
However, the Merger Agreement restricts the Registrant's ability to make
shareholder distributions. See Item 1, Business - "Buyout by the State of North
Carolina." If the Registrant continues to elect REIT status, the Registrant
expects to use its cash flow from operating activities for distributions to
shareholders and for payment of operating expenses. Other information about the
REIT status of the Registrant has been disclosed in prior quarterly and annual
reports to the Commission.
For the year ended December 31, 1997, $734,856 of net cash was provided by
operating activities and was primarily attributable to net income of $5,090,469,
which was partially offset by the gain on sale of real estate.
Investing activities provided net cash of $4,069,012 attributable to
proceeds from the sale of real estate. The Registrant has not recognized gain on
sale of real estate for income tax purposes for 1997.
Results of Operations
Results of operations for the periods covered hereby reflect payments to
the Registrant from Norfolk Southern. Payments received until December, 1995
were received pursuant to the terms of the 1895 Lease and 1939 Lease under a
temporary arrangement between the Registrant and the lessees which continued the
rental and other terms of the Leases. In December, 1995, Norfolk Southern made a
payment of approximately $7.8 million called for in the Lease Extension for
additional 1995 rental, and from January through July, 1996, made monthly
payments in the amount called for in the Lease Extension for 1996 rental
totaling approximately $4.8 million. On August 9, 1996, Norfolk Southern
21
<PAGE>
notified the Registrant that payments of approximately $680,000 monthly would be
discontinued. The STB issued a decision and order dated May 29, 1997 with
respect to the Registrant's petition for interim relief to the STB. See Item 3,
Legal Proceedings, regarding the Registrant's petition before the STB. The STB
decision provides, among other things, that the Registrant's petition for
interim compensation is granted at the level of out-of-pocket expenses incurred
by the Registrant due to Norfolk Southern's continued operation of the line.
During the third quarter of 1997, Norfolk Southern made payments totaling
$1,932,446 to the Company for the period from August, 1996 to July, 1997
pursuant to the STB decision. For the fourth quarter of 1997, Norfolk Southern
made monthly payments totaling $1,145,248 for the period from August, 1997 to
December, 1997 pursuant to the STB decision. There can be no assurance that any
such payments will continue to be made or the amounts of any such payments. If
Norfolk Southern continues to make payments pursuant to the STB decision, the
amounts of any such payments are not expected to exceed the operating expenses
of the Registrant. See Item 3, Legal Proceedings, regarding certain Norfolk
Southern litigation. The Registrant expects its revenues in future periods will
remain at current low levels until alternate sources of revenue are secured.
Results of operations for 1996 reflect payments to the Registrant from Norfolk
Southern from January through July, 1996.
Total revenues were $7,590,948 for 1997 as compared to $5,620,469 for 1996
and $15,132,553 for 1995. The increase in total revenues for 1997 as compared to
1996 was attributable to an increase in gain on sale of real estate of
$4,094,390, which was partially offset by a decrease in lease of roadway and
land. The decrease for 1996 as compared to 1995 was attributable primarily to
decreases in rental revenue from leases of roadway and land and the settlement
payment of approximately $5.2 million (including interest) in 1995. The decrease
in rental revenue from leases of roadway and land for 1997 as compared to 1996
is attributable to the reduction in payments received from Norfolk Southern.
Revenues generated by the 1895 and 1939 Leases from 1993 to 1995 and by payments
by Norfolk Southern in 1995, 1996 and 1997 are shown in the following chart:
22
<PAGE>
Revenue from Leases of Roadway and Land
---------------------------------------
Year % Change from
End Lease Income Total Prior Year
- --- ------------ ----- ----------
1993 1895 Lease 286,000
1939 Lease 275,498
1968 Lease 81,319 642,817 1.9%
1994 1895 Lease 286,000
1939 Lease 306,958
1968 Lease 81,319 674,277 4.9%
1995 Norfolk 8,000,000
Southern Payments
1968 Lease 81,319
Other 53,337 8,134,656 1106.4%
1996 Norfolk 4,764,897
Southern Payments
1968 Lease 81,319 4,846,216 (40.4)%
1997 Norfolk 3,077,694
Southern Payments
1968 Lease 81,319 3,159,013 (34.8)%
Interest income increased from $601,556 for 1995 to $747,576 for 1996 and
decreased to $245,761 for 1997. The increase for 1996 as compared to 1995 and
the decrease for 1997 as compared to 1996 were primarily attributable to
increases and decreases in average levels of invested cash. Dividend income was
$15,000 for 1997 as compared to $15,000 for 1996 and $7,500 for 1995. For 1995,
1996, and 1997, dividend income was attributable to special dividends received
from the common stock of State University Railroad Company.
Rental income increased from $9,540 for 1995 to $11,400 for 1996 and
increased to $72,929 for 1997. The Registrant's rental income is derived from
miscellaneous leases of the Registrant's properties.
Gains on sale of real estate decreased from $688,055 for 1995 to $-0- for
1996 and increased to $4,094,390 for 1997. Gains on sale of real estate and
other income are derived primarily from sales and condemnations of the
Registrant's property. During 1995, the Registrant recognized a gain of $473,956
from the sale of property and recognized other gains of approximately $210,000
from condemnations, forced sales, and sales of stock. In December 1997, the
Registrant received proceeds of $3,990,000 upon the sale of certain property in
Charlotte, North Carolina in connection with a settlement of litigation. See
Item 3, Legal Proceedings - "Charlotte
23
<PAGE>
Convention Center Litigation." The proceeds are required to be reinvested in
certain types of property prior to December 31, 2000 in order for the Registrant
to avoid recognizing a gain for income tax purposes.
Other lease income for 1995 represented the settlement of a claim for a
lump sum tax benefit payment which was due upon the expiration of the 1895 Lease
from Norfolk Southern pursuant to a 1982 tax benefit agreement between the
Registrant and Norfolk Southern. Under the terms of the settlement agreement,
the Registrant received a lump sum payment in the amount of $691,246.
On December 1, 1995, Norfolk Southern made a payment of $5 million, plus
interest of approximately $200,000, to the Registrant pursuant to the Lease
Extension with respect to a release of Norfolk Southern from its obligation to
return certain personal property upon expiration of the 1895 Lease and 1939
Lease. The Registrant and Norfolk Southern entered into an agreement whereby the
settlement payment made in early December 1995 in order to facilitate the
Registrant seeking REIT status at the earliest practicable date. As the
implementation of the Lease Extension was enjoined by a court, pursuant to
agreements with Norfolk Southern the Registrant believes it is entitled to
retain the payment and interest for application against other amounts due from
Norfolk Southern. However, See Item 3, Legal Proceedings, regarding claims by
Norfolk Southern against the Registrant with respect to certain payments by
Norfolk Southern.
Salary and administrative expenses increased from $273,563 for 1995 to
$366,869 for 1996 and $428,337 for 1997. The increases are primarily
attributable to increases in employee compensation and benefits and meeting
expenses.
For 1997, professional fees increased to $748,831 as compared to $616,340
for 1996 and $414,740 for 1995. Professional fees relate to attorneys' and
accountants' fees paid for various filing and reporting requirements, certain
litigation, and other general items. The increases are primarily attributable to
higher professional fees associated with the Norfolk Southern litigation, issues
relating to the Lease Extension, legal fees of the Special Committee, evaluation
of REIT qualification, and shareholder litigation fees and expenses. The
Registrant expects professional fees to decrease if the Merger Agreement is
consummated, but expects to continue to incur substantial professional fees
associated with the Norfolk Southern litigation and related matters until such
matters are resolved.
Insurance and taxes increased to $400,091 for 1997 as compared to $126,146
for 1996 and $59,100 for 1995. The increases are primarily attributable to
increases in excise taxes and directors and officers insurance and general
liability
24
<PAGE>
insurance premiums. In future periods, if Norfolk Southern refuses to pay
property taxes the Registrant expects to incur higher property tax expense. The
Registrant is also continuing to evaluate risks associated with railroad
operations by Norfolk Southern in the absence of express indemnification or
other contractual obligations of Norfolk Southern to the Registrant. The
Registrant expects to incur substantially higher insurance expense in future
periods if any such insurance is purchased by the Registrant.
Amortization expense of $35,057 for 1996 and $46,743 for 1995 related to
capitalized lease negotiations costs. In December 1996, capitalized investment
banking fees and other fees of $732,685 associated with the Lease Extension were
written-off. During the fourth quarter of 1996, the Special Committee retained
legal counsel and a financial advisor. If the Merger Agreement is consummated,
the Registrant expects investment banking fees and legal fees associated with
the Special Committee to decrease in future periods.
Consulting fees increased from $80,742 for 1995 to $137,559 for 1996 and
increased to $757,099 for 1997. Consulting fees vary according to the number and
magnitude of projects, primarily in connection with ongoing litigation, the
Special Committee and its financial advisor, and other matters. The increase for
1997 as compared to 1996 and 1995 was primarily attributable to increases in
Special Committee financial advisor fees and related railroad consulting fees
and expenses. The Registrant expects to continue to incur substantial consulting
fees, investment banking fees, attorneys' and accountants' fees and related
expenses in future periods until litigation matters, matters related to the
lease or operation of the Registrant's properties, and matters relating to the
Merger Agreement are resolved.
The provision for environmental remediation costs of $200,000 for 1996 is
attributable to agreements between the Registrant and other parties to remediate
the Peele pesticide disposal site and share in certain assessment and clean-up
costs.
See Item 3, Legal Proceedings.
Other expenses include supplies, utilities, postage, office rent, printing,
and miscellaneous items. For 1997, other expenses were $136,799 as compared to
$133,451 for 1996 and $106,579 for 1995. The increases were primarily
attributable to increases in office rent, printing expenses, office equipment,
telephone expenses and supplies.
Current income tax expense was $20,462 for 1997 as compared to $96,000 for
1996 and $5,283,600 for 1995. The decreases for 1996 and 1997 as compared to
1995 are attributable to the September 1996 REIT election. Prior to the REIT
election, the Registrant was taxed as a "C" corporation. In 1995, the
25
<PAGE>
corporate income tax provision represented an effective tax rate of 37%. With
the REIT election, the income tax provision was reduced and reflected as a
benefit in change of corporate entity during 1996. See Note D to the financial
statements.
During 1996, the Registrant's 1994 federal income tax return was examined
by the Internal Revenue Service ("I.R.S."). The I.R.S. determined that
additional taxes and interest in the amount of approximately $56,000 was due;
however, the Registrant has filed a protest of the assessment amount. The final
outcome of the audit and protest is not expected to have a material effect upon
the Registrant's financial condition.
Inflation affects the Registrant primarily through increased salary,
administrative, property tax, and insurance expenses. The Registrant's primary
sources of revenue prior to 1995, rental from the 1895 Lease and 1939 Lease,
increased only to the extent changes in the general inflation rate increased the
excess rental payments under the 1939 Lease. The Registrant intends to offset
the effects of inflation by seeking inflation adjustments in any compensation
order by the STB, or securing leases or other agreements for the lease or
operation of the Registrant's properties with inflation adjustment provisions.
However, if the uncertainties regarding the litigation against Norfolk
Southern's failure to pay rental to the Registrant are not resolved, inflation
will tend to increase any expenses required to be financed by the Registrant in
future periods.
The Registrant and its lessees are responsible for compliance with state,
federal, local or other provisions relating to discharge of materials or the
protection of the environment. The risk of incurring environmental liability is
inherent in conducting railroad operations. Some of the commodities which are
transported over the Registrant's railroad lines are classified as hazardous
materials. The 1895 and 1939 Leases did not make provision for the lessees to
disclose environmental problems affecting the Registrant's properties.
Environmental problems may exist on properties owned by the Registrant which are
known to Norfolk Southern or its sublessees but have not been disclosed to the
Registrant or which are unknown to the lessee or the Registrant. State and
federal environmental provisions may impose joint and several liability upon the
Registrant and its lessees and sublessees for environmental damage or clean up
(or associated costs) of any real properties owned by the Registrant and
adjoining properties if the source of any problem is the property of the
Registrant. The Registrant believes that damage or clean up (or the associated
costs) would be the responsibility of the lessees and any sublessees or other
parties who may have created any actionable environmental condition. The
Registrant may determine that it is in its interest to initiate substantial
environmental assessments of its properties in connection with the litigation
26
<PAGE>
against Norfolk Southern. If Norfolk Southern, its sublessees, or other parties
who are responsible for any actionable environmental conditions fail to pay for
damage or remediation, under certain statutes, regulations, and rules, the
Registrant could ultimately be held responsible for any remediation, removal, or
cleanup of the property it owns. See Item 3, "Legal Proceedings," regarding the
status of the Peele environmental site.
Cautionary Statement Identifying Important Factors That Could Cause the
Registrant's Actual Results to Differ From Those Projected in Forward Looking
Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document, and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements,
which include statements about litigation, REIT status, the Merger Agreement,
and alternatives the Registrant is considering are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include, but are not limited to (i) projections of revenues, income
or loss, earnings or loss per share, capital expenditures, dividends, capital
structure and other financial items, (ii) statements of the plans and objectives
of the Registrant or its management or Board of Directors, including estimates
or predictions of actions by other parties or regulatory authorities, (iii)
statements of future economic performance, and (iv) statements of assumptions
underlying other statements and statements about the Registrant or its business.
This document and any document incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include the Registrant's litigation against Norfolk Southern, the
court's disposition of the shareholder legal actions, Norfolk Southern's ability
or willingness to divert traffic from the Registrant's line, the Registrant's
ability to qualify for tax treatment as a REIT or the timing of any such REIT
election, the effect of the July 29, 1996 court order upon the Registrant's
ability to reach any future agreement with Norfolk Southern for rental or other
terms for the continued operation of the Registrant's railroad lines, the
consummation of the Merger Agreement, and other matters which are described
herein and/or in documents incorporated by reference herein.
The cautionary statements made pursuant to the Private
27
<PAGE>
Litigation Securities Reform Act of 1995 above and elsewhere by the Registrant
should not be construed as exhaustive or as any admission regarding the adequacy
of disclosures made by the Registrant prior to the effective date of such Act.
Forward looking statements are beyond the ability of the Registrant to control
and in many cases the Registrant cannot predict what factors would cause actual
results to differ materially from those indicated by the forward looking
statements.
Item 8. Financial Statements and Supplementary Data
The Registrant's financial statements are submitted as a separate section
of this report.
Item 9. Changes in and Disagreements with Accountants in
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The persons listed below are directors of the Registrant. Pursuant to
Article III, Section 2 of the Bylaws of the Registrant, each director shall hold
office for a three-year term until his death, resignation, retirement, removal,
disqualification or until his successor shall have been elected and qualified.
Except as described above, there are no arrangements or understandings between
any director and any other person pursuant to which he was selected as a
director. Pursuant to the charter of the Registrant, the State of North Carolina
elects ten directors and the remaining shareholders elect five directors.
At the 1996 annual meeting, ten directors were elected.
<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/Treasurer
1985 to
1990
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Period of Term
Name Age Offices Held Service Expires
- ---- --- ------------ ------- -------
<S> <C> <C> <C> <C>
P. C. Barwick, Jr. (1) 60 Director 9/90 to 1999
Present
Vice Pres. 4/97 to
Present
Assistant
Secretary/Treasurer
11/96 to
4/97
Secretary 9/89 to
12/95
Sidney R. French 70 Director 9/89 to 1997
Present
John W. Graham (2) 74 Director 3/97 to 1997
Present
*Robert W. Griffin (1) 46 Director 12/95 to 1998
present
*M. Rex Harris 63 Director 7/93 to 1997
Present
*R. Samuel Hunt, III (1) 56 President 11/96 to 1999
Present
*William H. Kincheloe (1) 60 Director 7/87 to 1998
Present
*Lynn T. McConnell (1) 42 Director and 7/93 to 1999
Treasurer Present
*Jack A. Moody (1) 70 Director 7/93 to 1999
Present
*John S. Russell (1) 43 Director 7/93 to 1998
Present
Porter B. Thompson (1) 63 Director 11/96 to 1999
Present
*J. Bradley Wilson (1) 45 Director and 11/96 to 1998
Secretary Present
*David T. Woodard 49 Director 7/93 to 1997
Present
</TABLE>
29
<PAGE>
* Elected by the State of North Carolina
(1) Elected at the 1996 Annual Meeting.
(2) On March 5, 1997 Alexander H. Graham, Jr., resigned as a director.
Pursuant to the bylaws of the Registrant, on March 19, 1997, John W. Graham
was elected by the "private" directors to serve until the next annual
meeting of shareholders or until his successor is duly elected and
qualified. John W. Graham is the brother of Alexander H. Graham, Jr.
The persons listed below are officers of the Registrant. Pursuant to
Article II, Section 2 of the Bylaws of the Registrant, each officer shall hold
office until his death, resignation, retirement, removal, disqualification, or
his successor is elected and qualified. Except as described above, there are no
arrangements between any officer and any other person pursuant to which the
officer was selected as an officer. Officers are elected by the directors. Only
directors elected by shares held by shareholders other than the State of North
Carolina are entitled to vote for and elect a Vice President and an Assistant
Secretary-Treasurer.
Period of
Name Age Offices Held Service
- ---- --- ------------ -------
R. Samuel Hunt, III 56 President 11/96 to
Present
Scott M. Saylor 38 Exec. V.P./ 8/89 to
General Counsel Present
P. C. Barwick, Jr. 60 Vice President 4/97 to
Present
J. Bradley Wilson 45 Secretary 11/96 to
Present
Lynn T. McConnell 42 Treasurer 7/93 to
Present
The business experience during the past five (5) years of each member of
the Board of Directors and each executive officer of the Registrant is
summarized below.
30
<PAGE>
John McKnitt Alexander, Jr. - President & Chief Operating Officer, Cardinal
International Trucks, a heavy truck dealership, 1968 to present.
Secretary/Treasurer, Raleigh Truck Rentals, 1976 to present.
Vice-President, Alexander Realty Company, 1980 to present. Director, First
Citizens BancShares, Inc., from 1990 to present.
P. C. Barwick, Jr. - Attorney at Law, Principal, Wallace, Morris & Barwick,
P.A., Kinston, North Carolina (1986- present). Director, State University
Railroad Company from 1993 to present. The Registrant owns a minority
position in State University Railroad Company, a majority whose stock is
owned by Norfolk Southern.
Sidney R. French - Self-employed farmer, Cove City, North Carolina. No
outside directorships.
John W. Graham - President and owner of Graham Realty, Inc., a commercial
and industrial real estate brokerage, Raleigh, North Carolina.
Robert W. Griffin - Attorney at Law, Griffin & Griffin, Kinston, North
Carolina, from 1977 to present.
M. Rex Harris - Chief Executive Officer, International and Domestic
Development Corp., 1976 to present. Director, United National Bank.
R. Samuel Hunt, III - President, Hunt Electric Supply Company, 1971 to
present. President, Atlas Electric Corp., 1992 to present. Secretary, North
Carolina Department of Transportation, 1993 to 1995.
William H. Kincheloe - President of Bulluck Furniture, Inc. retailer of
furniture, and President of Wildwood Lamps & Accents, Inc., Rocky Mount,
North Carolina, a manufacturer of lamps. Director, Centura Banks, Inc.,
Rocky Mount, North Carolina, from 1990 to present.
Lynn T. McConnell - Senior Vice-President and Transaction Manager,
Nationsbanc Capital Markets, Inc., Charlotte, North Carolina, 1989 to
present. No outside directorships.
Jack A. Moody - Attorney at Law, 1955 to 1990. Director, Centura Bank of
North Carolina, Rocky Mount, North Carolina.
John S. Russell - Senior Vice-President and General Counsel, Quintiles
Transnational Corporation; 1998 to present. Member, law firm of Moore & Van
Allen, PLLC, Raleigh, North Carolina; 1985 to 1997. No outside
directorships.
31
<PAGE>
Scott M. Saylor - Executive Vice-President and General Counsel, North
Carolina Railroad Company, 1989 to present. No outside directorships.
Porter B. Thompson - President and owner of LEADS Corporation, a management
consulting firm, 1989 to present. Certified Public Accountant since 1964.
J. Bradley Wilson - Senior Vice President & General Counsel, Blue Cross
Blue Shield of North Carolina, Inc., 1995 to present. General Counsel,
Office of the Governor of North Carolina, 1993 to 1995.
David T. Woodard - General Agent, Union Central Life Insurance Co.,
Raleigh, North Carolina, 1978 to present. Chairman and Director, Hamlet
Federal Credit Union, Hamlet, North Carolina.
Item 11. Executive Compensation
The following table and narrative text discuss the compensation paid during
1997 and the two prior fiscal years to the Registrant's President and Chief
Executive Officer. No executive officer of the Registrant had an annual salary
of and bonuses in excess of $100,000 during 1997 that requires disclosure under
rules and regulations of the Securities and Exchange Commission.
Summary Compensation Table
Long Term
Annual Compensation Compensation
- --------------------------------------------------------------------------------
Name and Other Annual
Principal Position Year Salary Bonus Compensation (1)
- --------------------------------------------------------------------------------
R. Samuel Hunt, III 1997 $12,000 $-0- $-0- None
President and 1996 * 1,643 -0- -0- None
Chief Executive
Officer
John F. McNair, III 1996 *$ 6,000 $-0- $-0- None
President and 1995 12,000 -0- -0-
Chief Executive
Officer
*partial year's compensation.
(1) Other Annual Compensation for executive officers is not reported as it is
32
<PAGE>
less than the required reporting threshold of the Securities and Exchange
Commission.
Stock Option and Stock Appreciation Rights Plans, Long-term Incentive Plans
and Pension Plans
No stock options or stock appreciation rights were outstanding at the end
of 1997 and none were either granted or exercised during 1997. The Registrant
has no stock option plans or stock appreciation rights plans. The Registrant
does not contribute to any "long-term" incentive plan or pension plan for its
executive officers as those terms are defined in the rules of the Securities and
Exchange Commission. The Registrant and its employees participate in the
retirement/benefit program under the Railroad Retirement Act, administered by
the U.S. Railroad Retirement Board. The Registrant also contributes to a SEP-IRA
for its employees. For 1997, the Registrant contributed a total of $33,772 to
the fund.
Compensation of Directors
Directors are compensated $600 per day, plus travel expenses, for each day
of attendance at directors' meetings. Directors are compensated $600 per diem,
plus travel expenses, for attending meetings of committees and other business on
behalf of the Registrant conducted other than in conjunction with meetings of
the Board of Directors.
Employment Contracts
Mr. Hunt, the President and Chief Executive Officer, has no employment
contract with the Registrant. Mr. McNair had no employment contract with the
Registrant.
Compensation Committee and Decision Making
The Budget and Compensation Committee of the Board of Directors is
responsible for decisions concerning the compensation of officers, directors and
employees of the Registrant. The Committee consists of the following four
members of the Board of Directors of the Registrant: Lynn McConnell, Porter
Thompson, Rex Harris, and John Russell.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
(a) Security Ownership of Certain Beneficial Owners
Of the 10,000,000 shares authorized to be issued, 4,283,470 shares are
currently outstanding. The following table sets forth as of March 4, 1998, the
parties known to the Registrant to be
33
<PAGE>
beneficial owners of more than five percent of the Registrant's
voting securities:
Title of Name & Address of Amount & Nature of Percent
Class Beneficial Owner Beneficial Ownership of class
- ----- ---------------- -------------------- --------
Common State of North 3,210,208 shares, 74.94%
Shares Carolina c/o owned directly*
Governor James
B. Hunt,
The State Capitol,
Raleigh, NC 27611
* Includes 2,166 shares the State of North Carolina holds in escheat
subject to the claims of unknown owners. The State of North Carolina had
been advised that it does not customarily vote shares held in escheat. Also
includes 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.
Chapter 1046 of the 1951 Session Laws of the General Assembly of North
Carolina states "no stock owned by the State of North Carolina in the North
Carolina Railroad Company shall be sold except with the prior consent of the
General Assembly." See Item 1, Business, regarding the proposed acquisition of
shares held by shareholders other than the State.
(b) Security Ownership of Management
The following table sets forth as of March 4, 1998, the shares beneficially
owned by all officers and directors of the Registrant.
<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 Alexander, Jr. 287 shares owned directly *
Director 592 shares owned by
P.O. Box 26837 minor daughters
Raleigh, NC 27603 50 shares owned by spouse
P. C. Barwick, Jr. 600 shares owned directly *
Director and Assistant
Secretary/Treasurer
P. O. Box 3557
Kinston, NC 28502
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- ---------------- -------------------- --------
<S> <C> <C> <C>
Sidney R. French 500 shares owned directly (1)
Director
105 Wetherington Farm Road
Cove City, NC 28523
John W. Graham 5,500 shares owned directly *
Director
403 E. Six Forks Road
Raleigh, NC 27609
Robert W. Griffin 526 shares owned directly (2) *
Director
P.O Box 3062
Kinston, NC 28502-3062
M. Rex Harris 500 shares owned directly *
Director
4511 Bragg Boulevard
Fayetteville, NC 28303
R. Samuel Hunt, III 500 shares owned directly (3) *
Director and President
P.O. Box 2440
Burlington, NC 27216
William H. Kincheloe 500 shares owned directly *
Director
P.O. Box 671
Rocky Mount, NC 27802
Lynn T. McConnell 100 shares owned directly *
Director and Treasurer 500 shares owned directly (3)
138 Cherokee Road
Charlotte, NC 28207
Jack A. Moody 3,300 shares owned directly *
Director
P.O. Box 249
Siler City, NC 27344
John S. Russell 100 shares owned directly *
Director 500 shares owned directly (3)
101 Huntington Drive
Chapel Hill, NC 27611
Scott M. Saylor 40 shares owned by minor *
Exec. V.P./General Counsel children
3200 Atlantic Ave, Ste 110
Raleigh, NC 27604-1640
Porter B. Thompson 4,000 shares, owned with spouse *
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- ---------------- -------------------- --------
<S> <C> <C> <C>
Director as joint tenants with right of
230 North Elm Street survivorship
Suite 1650
Greensboro, NC 27401
J. Bradley Wilson 500 shares owned directly (3) *
Director and Secretary
P.O. Box 2291
Durham, NC 27702
David T. Woodard 100 shares owned directly *
Director 400 shares owned directly (3)
P.O. Box 17647
Raleigh, NC 27619-7647
</TABLE>
* Less than 1% of the class
(1) Mr. French's shares are held subject to a transfer agreement with A.J.
Ballard Tire & Oil Pension and Profit Sharing Plan.
(2) Mr. Griffin's shares are held subject to a transfer agreement with
Thomas B. Griffin.
(3) Shares acquired without cash consideration from the State of North
Carolina pursuant to an agreement which entitles the State to receive all
dividends and to reacquire the stock.
As of March 4, 1998, all officers and directors as a group (15 persons)
beneficially own 19,095 common shares of the Registrant, or approximately .45%
of the total shares issued and outstanding.
(c) Changes in Control
Pursuant to provisions of the charter and Article III, Section 3 of the
bylaws of the Registrant, the shares held by the State are entitled to vote for
and elect ten of the Registrant's fifteen directors. The remaining shareholders
are entitled to vote for and elect the remaining five directors. The bylaws
provide that the directors elected by the shares held by the State shall be
named in the proxy given by the Governor to his designee who shall attend the
annual meeting of shareholders. Inasmuch as the Governor of North Carolina is an
elected official, changes in control of the Registrant can occur whenever a new
governor is elected subject to the timing of the expiration of the terms of
directors elected by the State. A general election electing a new Governor in
North Carolina will occur in November, 2000. See also "Security Ownership of
Certain Beneficial Owners" for legislative control over the sale of shares owned
by the State and Item 1, Business, regarding the proposed acquisition of shares
by the State.
36
<PAGE>
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) List of Documents Filed as Part of This Report
1 and 2. Financial Statements and Schedules
The financial statements and supplemental schedules listed in
the accompanying index to financial statements and schedules are
filed as part of this report.
3. Exhibits
Exhibits to this report are listed in the accompanying index
to exhibits.
(b) Reports on Form 8-K
None.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the North Carolina Railroad Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH CAROLINA RAILROAD COMPANY
Date: March 26, 1998 By: /s/ R. Samuel Hunt, III
---------------------- --------------------------
R. Samuel Hunt, III, President
and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the North
Carolina Railroad Company and in the capacities and on the dates indicated.
/s/ John M. Alexander, Jr. Date: March 25, 1998
- --------------------------------
John M. Alexander, Jr.,
Director
/s/ Sidney R. French Date: March 26, 1998
- --------------------------------
Sidney R. French,
Director
/s/ John W. Graham Date: March 25, 1998
- --------------------------------
John W. Graham
Director
/s/ Robert W. Griffin Date: March 25, 1998
- --------------------------------
Robert W. Griffin,
Director
/s/ M. Rex Harris Date: March 25, 1998
- --------------------------------
M. Rex Harris,
Director
/s/ R. Samuel Hunt, III Date: March 26, 1998
- --------------------------------
R. Samuel Hunt, III,
President and Director
/s/ William H. Kincheloe Date: March 25, 1998
- --------------------------------
William H. Kincheloe,
Director
38
<PAGE>
/s/ Lynn T. McConnell Date: March 25, 1998
- --------------------------------
Lynn T. McConnell,
Treasurer, Director,
and Principal
Financial Officer
/s/ Jack A. Moody Date: March 25, 1998
- --------------------------------
Jack A. Moody,
Director
/s/ John S. Russell Date: March 25, 1998
- --------------------------------
John S. Russell,
Director
/s/ Porter B. Thompson Date: March 26, 1998
- --------------------------------
Porter B. Thompson,
Director
/s/ J. Bradley Wilson Date: March 25, 1998
- --------------------------------
J. Bradley Wilson,
Secretary and Director
/s/ David T. Woodard Date: March 26, 1998
- --------------------------------
David T. Woodard,
Director
Supplemental Information to be Furni shed With Reports Filed Pursuant to Section
15 (d) of the Act by Registrant Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report or proxy statement has been sent to the shareholders of the
Registrant; however, proxy statemen ts and annual reports will be sent prior to
the annual meeting of shareholders.
39
<PAGE>
NORTH CAROLINA RAILROAD COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Charter of Registrant and Amendment thereto, filed as Exhibit No.
1 to Registrant's Form 10 filed with the Securities and Exchange
Commission on April 27, 1987, which is incorporated by reference
into this Form 10-K.
3.2 Articles of Merger (with Agreement and Plan of Merger) of the
Atlantic and North Carolina Railroad Company into the Registrant
dated September 29, 1989 filed as Exhibit No. 2 to Registrant's
Form 8-K dated September 29, 1989 filed with the Securities and
Exchange Commission, which is incorporated by reference into this
Form 10-K.
3.3 Bylaws of Registrant filed as Exhibit No. 2 to Registrant's Form
10 filed with the Securities and Exchange Commission on April 27,
1987, which is incorporated by reference into this Form 10-K.
3.4 Amendment to Charter of Registrant filed as Exhibit No. 3(c) to
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on November 14, 1990, which is incorporated by
reference into this Form 10-K.
3.5 Amendment of Bylaws of Registrant filed as Exhibit No. 3(d) to
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on November 14, 1990, which is incorporated by
reference into this Form 10-K.
3.6 Bylaws of the Registrant, August 20, 1993, as amended and
restated, filed as Exhibit No. 3(f) to Registrant's Form 10-Q
filed with the Securities and Exchange Commission on November 12,
1993, which is incorporated by reference into this Form 10-K.
40
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
4.1 Specimen Common Stock ($.50 par value) Certificate, filed as
Exhibit No. 4(a) to Registrant's Form 10-K filed with the
Securities and Exchange Commission on March 29, 1991, which is
incorporated by reference into this Form 10-K.
10.1 Lease dated August 16, 1895 between Registrant and Southern
Railway Company filed as Exhibit No. 3(a) to Registrant's Form 10
filed with the Securities and Exchange Commission on April 27,
1987, which is incorporated by reference into this Form 10-K.
10.2 Lease dated December 31, 1968 between Registrant and Southern
Railway Company filed as Exhibit No. 3(b) to Registrant's Form 10
filed with the Securities and Exchange Commission on April 27,
1987, which is incorporated by reference into this Form 10-K.
10.3 Lease dated August 30, 1939 between Atlantic and North Carolina
Railroad Company and Atlantic East Carolina Railway Company filed
as Exhibit No. 28 (h) to Registrant's Form S-4 filed with the
Securities and Exchange Commission on July 20, 1989, which is
incorporated by reference into this Form 10-K.
10.4 Agreement dated November 25, 1862 between the Registrant and the
Chatham Railroad Company, which is incorporated by reference into
this Form 10-K.
10.5 Amended and Restated Agreement and Plan of Merger dated as of
January 16, 1998, filed as Annex A to the Registrant's Proxy
Statement dated February 27, 1998, filed with the Securities and
Exchange Commission on February 27, 1998, which is incorporated
by reference into this Form 10-K.
41
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.6 Form of proposed Charter Amendments to the Registrant's Charter,
filed as Annex B to the Registrant's Proxy Statement dated
February 27, 1998, filed with the Securities and Exchange
Commission on February 27, 1998, which is incorporated by
reference into this Form 10-K.
23 Consent of Independent Auditors dated March 26, 1998, which is
incorporated by reference into this Form 10-K.
27 Financial Data Schedule (This exhibit is required to be submitted
electronically pursuant to the rules and regulations of the
Securities and Exchange Commission and shall not be deemed filed
for purposes of Section 11 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of 1934.)
99.1 Complaint, Civil Action No. 5:96-CV-900-BO, U.S. District Court
for the Eastern District of North Carolina, filed on September
20, 1996, in the Superior Court of Wake County, North Carolina,
filed as Exhibit 99.1 to the Registrant's Form 8-K filed with the
Securities Exchange Commission on October 3, 1996, which is
incorporated by reference into this Form 10-K.
99.2 Petition to set Trackage Compensation and Petition for Interim
Relief, filed on September 23, 1996, before the United States
Surface Transportation Board, Finance Docket No. 33134, filed as
Exhibit 99.2 to the Registrant's Form 8-K filed with the
Securities Exchange Commission on October 3, 1996, which is
incorporated by reference into this Form 10-K.
99.3 Lease Extension Agreement between the Registrant, Norfolk
Southern Railway Company and Atlantic and East Carolina Railway
Company, filed as Appendix A to the Registrant's Proxy Statement
filed with the Securities and Exchange Commission on November 13,
1995, which is incorporated by reference into this Form 10-K.
42
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
99.4 Escrow Agreement between the Registrant, Norfolk Southern Railway
Company, Atlantic and East Carolina Railway Company, and Lawyers
Title of North Carolina, Inc. dated September 29, 1995, filed as
Exhibit 10.5 to Registrant's Form 10-Q filed with the Securities
and Exchange Commission on November 14, 1995, which is
incorporated by reference into this Form 10-K.
99.5 Interim Agreement between the Registrant and Norfolk Southern
dated September 13, 1996, filed as exhibit 99.5 to Registrant's
Form 10-K filed with the Securities and Exchange Commission on
March 31, 1997, which is incorporated by reference into this Form
10-K.
99.6 Decision of the U. S. Surface Transportation Board, served May
29, 1997, Finance Docket No. 33134, filed as Exhibit 99.1 to
Registrant's Form 8-K filed with the Securities and Exchange
Commission on June 3, 1997, which is incorporated by reference
into this Form 10-K.
99.7 Excerpt from Senate Bill 352, Section 32.30, General Assembly of
North Carolina, filed as Exhibit 99.1 to Registrant's Form 8-K
filed with the Securities and Exchange Commission on August 29,
1997, which is incorporated by reference into this Form 10-K.
43
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
NORTH CAROLINA RAILROAD COMPANY
RALEIGH, NORTH CAROLINA
44
<PAGE>
FORM 10-K - ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)
NORTH CAROLINA RAILROAD COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of North Carolina Railroad Company are
included in Item 8:
Report of Independent Auditors . . . . . . . . . . . . . . . . 47
Balance Sheets, December 31, 1997 and 1996 . . . . . . . . . . 48
Statements of Income for the Years
ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . 49
Statements of Shareholders' Equity for the Years
ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . 50
Statements of Cash Flows for the Years
ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . 51
Notes to Financial Statements . . . . . . . . . . . . . . . . 52
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
45
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
North Carolina Railroad Company
We have audited the accompanying balance sheets of North Carolina Railroad
Company as of December 31, 1997 and 1996, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North Carolina Railroad Company
at December 31, 1997 and 1996, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/Ernst & Young LLP
Raleigh, North Carolina
February 25, 1998
46
<PAGE>
BALANCE SHEETS
NORTH CAROLINA RAILROAD COMPANY
December 31 December 31
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents $ 6,224,843 $ 5,318,933
Rent receivable 125,685 -0-
Prepaid expenses 14,081 -0-
Income taxes recoverable 47,466 -0-
------------ ------------
TOTAL CURRENT ASSETS 6,412,075 5,318,933
PROPERTIES
Roadway and land--Note E 7,848,742 7,848,842
Buildings and equipment 311,112 285,635
Less accumulated depreciation (317,279) (308,419)
------------ ------------
7,842,575 7,826,058
------------ ------------
$ 14,254,650 $ 13,144,991
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payables $ 330,861 $ 262,698
Accrued environmental remediation costs 48,985 200,000
------------ ------------
TOTAL CURRENT LIABILITIES 379,846 462,698
SHAREHOLDERS' EQUITY
Common stock, par value $0.50 per share--
10,000,000 shares authorized, 4,283,470
shares issued and outstanding 2,141,735 2,141,735
Additional paid-in capital 3,588,455 3,588,455
Retained earnings 8,144,614 6,952,103
------------ ------------
13,874,804 12,682,293
------------
COMMITMENTS AND CONTINGENCIES--Note G
$ 14,254,650 $ 13,144,991
============ ============
See notes to financial statements.
47
<PAGE>
STATEMENTS OF INCOME
NORTH CAROLINA RAILROAD COMPANY
Year Ended December 31
1997 1996 1995
------------ ------------ ------------
Revenues:
Lease of roadway and land- $ 3,159,013 $ 4,846,216 $ 8,134,656
Note E
Interest income 245,761 747,576 601,556
Dividend income 15,000 15,000 7,500
Rental income 72,929 11,400 9,540
Gain on sale of real estate- 4,094,390 -0- 688,055
Note F
Other lease income -0- -0- 691,246
Settlement income -0- -0- 5,000,000
Other income 3,855 277 -0-
------------ ------------ ------------
7,590,948 5,620,469 15,132,553
Expenses:
Salaries and administrative 428,337 366,869 273,563
Professional fees 748,831 616,340 414,740
Insurance and taxes 400,091 126,146 59,100
Write-off of lease
negotiation costs -0- 732,685 -0-
Amortization expense -0- 35,057 46,743
Depreciation 8,860 8,860 7,164
Consulting fees 757,099 137,559 80,742
Provision for environmental
remediation costs -0- 200,000 -0-
Other 136,799 133,451 106,579
------------ ------------ ------------
2,480,017 2,356,967 988,631
------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 5,110,931 3,263,502 14,143,922
Income taxes--Note D:
Current 20,462 96,000 5,283,600
Deferred -0- -0- (4,600)
Benefit from change in
corporate entity from
corporation to REIT -0- (5,436,471) -0-
------------ ------------ -----------
20,462 (5,340,471) 5,279,000
------------ ------------ -----------
NET INCOME $ 5,090,469 $ 8,603,973 $ 8,864,922
============ ============ ===========
Earnings per share
(basic and diluted): $ 1.19 $ 2.01 $ 2.07
============ ============ ===========
See notes to financial statements.
48
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Shareholders'
Stock Capital Earnings Equity
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 2,141,735 $ 3,588,455 $ 2,590,626 $ 8,320,816
Net income -0- -0- 8,864,922 8,864,922
----------- ----------- ------------ ------------
Balance at December 31, 1995 $ 2,141,735 $ 3,588,455 $ 11,455,548 $ 17,185,738
Net income -0- -0- 8,603,973 8,603,973
Cash dividends ($3.06 per share) -0- -0- (13,107,418) (13,107,418)
----------- ----------- ------------ ------------
Balance at December 31, 1996 $ 2,141,735 $ 3,588,455 $ 6,952,103 $ 12,682,293
Net income -0- -0- 5,090,469 5,090,469
Cash dividends ($.91 per share) -0- -0- (3,897,958) (3,897,958)
----------- ----------- ------------ ------------
Balance at December 31, 1997 $ 2,141,735 $ 3,588,455 $ 8,144,614 $ 13,874,804
=========== =========== ============ ============
</TABLE>
See notes to financial statements.
49
<PAGE>
STATEMENTS OF CASH FLOWS
NORTH CAROLINA RAILROAD COMPANY
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,090,469 $ 8,603,973 $ 8,864,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes -0- (1,209,851) (4,600)
Depreciation and amortization 8,860 43,917 53,907
Capitalized lease negotiation costs -0- 587,826 (1,037,044)
Write-off of lease negotiation costs -0- 732,685 -0-
Gain on sale of land (4,094,390) -0- (688,055)
Change in operating assets and liabilities:
Rent receivable (125,685) -0- 246,030
Interest receivable -0- 4,447 60,953
Income taxes recoverable (47,466) -0- -0-
Accrued expenses and other payables 68,164 (591,700) 433,372
Accrued environmental remediation costs (151,015) 200,000 -0-
Income taxes payable -0- (5,230,277) 5,230,277
Prepaid insurance (14,081) -0- -0-
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 734,856 3,141,020 13,159,762
INVESTING ACTIVITIES
Purchase of buildings and equipment (25,478) (45,666) (5,100)
Proceeds from sale of property & equipment 4,094,490 1,500 688,055
Purchase of short-term investments -0- -0- (1,643,000)
Maturities of short-term investments -0- 190,000 1,453,000
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 4,069,012 145,834 492,955
FINANCING ACTIVITIES
Dividends paid (3,897,958) (13,107,418) (128,504)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (3,897,958) (13,107,418) (128,504)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 905,910 (9,820,564) 13,524,213
Cash and cash equivalents at
beginning of period 5,318,933 15,139,497 1,615,284
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,224,843 $ 5,318,933 $ 15,139,497
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes was $34,000, $-0- and
$44,254 for the years ended December 31,
1997, 1996 and 1995, respectively.
</TABLE>
See notes to financial statements.
50
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NORTH CAROLINA RAILROAD COMPANY
December 31, 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The North Carolina Railroad Company (the "Company"), owns
approximately 317 miles of continuous railroad line extending from Charlotte,
North Carolina to Morehead City, North Carolina. Substantially all of the
Company's property is operated by Norfolk Southern. (See Note E and Note G.)
PROPERTIES: Buildings and equipment are reported at cost. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets. Buildings are depreciated over thirty years and equipment is depreciated
over three to five years. Properties in the roadway and land account are carried
at an amount which approximates the 1916 valuation by the Interstate Commerce
Commission. These properties are not depreciated because they represent fully
depreciated roadway or non-depreciable land. However, a rehabilitation project
of $200,000 was amortized over a five year period in the 1940's.
REVENUE RECOGNITION: Revenue is reflected in the statements of income when
earned in accordance with the Company's lease arrangements on the accrual
method. (See Note E.)
INCOME TAXES: The Company is a real estate investment trust ("REIT") for
federal income tax purposes. A corporate REIT is a legal entity that holds real
estate interests, and through distributions to shareholders, is permitted to
reduce or avoid the payment of federal income taxes at the corporate level. To
maintain qualification as a REIT, the Company must distribute to shareholders at
least 95% of REIT taxable income. No provision has been made for income taxes
related to REIT taxable income to be distributed to shareholders as the Company
believes it will continue to qualify for REIT status. A provision has been made,
however, related to a portion of REIT taxable income that will not be
distributed to shareholders in such event. (See Note D.)
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include investments in
commercial paper, U. S. Treasury Bills, and certificates of deposit with
original maturities of three months or less. Cash deposits are placed with high
credit quality financial institutions. At times, deposits exceed amounts insured
by the Federal Deposit Insurance Corporation.
LEASE/TRANSACTION COSTS: Certain lease negotiation costs were capitalized
and were being amortized over thirty years. As a result of the discontinuance of
rental payments by Norfolk Southern during 1996 and the uncertainty of any
future lease arrangements, the
51
<PAGE>
capitalized lease negotiation costs were written off in December 1996. (See Note
E.)
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: In 1997, the Financial
Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings per
Share" ("SFAS 128"). SFAS Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. At December 31, 1997, 1996 and 1995 the Company had no stock
options, warrants, or convertible securities outstanding, and accordingly, the
adoption of SFAS 128 had no impact on earnings per share.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: In 1997, the FASB issued
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which are effective for fiscal years beginning after December 15,
1997. SFAS 130 addresses reporting amounts of other comprehensive income, and
SFAS 131 addresses reporting of segment information. The Company does not
believe that the adoption of these new standards will have a material impact on
its financial statements.
RECLASSIFICATIONS: Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation. These
reclassifications had no effect on net income or shareholders' equity as
previously reported.
NOTE B--LEASE COMMITMENTS
The Company leases its office space under an operating lease which expires
in 2001. Aggregate future minimum lease payments under operating leases having
remaining terms in excess of one year are as follows:
1998 $ 44,312
1999 44,312
2000 44,312
2001 29,542
--------
$162,478
========
Rent expense totaled approximately $43,648, $28,285 and $20,345 for the years
ended December 31, 1997, 1996 and 1995, respectively.
52
<PAGE>
NOTE C--EMPLOYEE BENEFIT PLAN
The Company sponsors a SEP-IRA Plan covering substantially all employees,
and made employee contributions in the amount of 15% of employee salaries in
1997 and 10% in 1996. Employer contributions for the years ended December 31,
1997 and 1996 were $33,772 and $29,840, respectively. No plan administrative
expenses were incurred by the Company during 1997 or 1996.
NOTE D--REAL ESTATE INVESTMENT TRUST
On September 16, 1996, the Company elected REIT status effective as of the
Company's 1995 tax year. The REIT provisions of the Internal Revenue Code
generally allow a REIT to deduct distributions paid to its shareholders. There
can be no assurance that the Company can continue to qualify for REIT status;
however, the Company believes it will continue to qualify as a REIT for 1997.
By delaying certain distributions of 1997 and 1996 income past January 31,
1998 and 1997, respectively, the Company incurred an additional federal excise
tax liability of approximately $68,000 and $143,000 for 1997 and 1996,
respectively. If the Company declares a dividend during 1998 in an amount which
is required in order to continue the Company's REIT status for the 1997 tax
year, the dividend would be approximately $.47 per share, or $2,013,000. If the
Company had not qualified as a REIT for 1997 and 1996, the Company would have
incurred an additional income tax liability of approximately $2 million and
$1.4 million, respectively.
Prior to election of REIT status, the Company calculated its provisions for
income taxes and reported the results of its operations and financial condition
assuming that it would be taxed as a "C" corporation. The Company's 1995 and
first and second quarter of 1996 financial statements were prepared and
presented on this basis. For the year ended December 31, 1996, the Company
calculated its provision for income taxes based upon its REIT
53
<PAGE>
election. The effect of changing from a "C" corporation to a REIT is reflected
as a component of income tax expense (benefit) in the Company's statements of
income. The Company's current and deferred income tax liability amounts
presented on the December 31, 1996 balance sheet have been adjusted to reflect
the REIT election.
For the year ended 1995, significant components of the provision for income
taxes attributable to continuing operations are as follows:
Current:
Federal $ 4,736,216
State 547,384
-----------
Total current 5,283,600
Deferred:
Federal (4,000)
State (600)
-----------
(4,600)
-----------
Total current $ 5,279,000
===========
A reconciliation of the total tax expense to the amount computed by
applying the statutory income tax rates before income taxes for the year
ended December 31, 1995 follows:
Income taxes at the statutory rate $ 4,564,359
State income taxes, net of federal tax
benefit 1,096,029
-----------
5,660,388
Less:
Surtax exemption 100,000
Dividend received deductions 5,250
Federal and state income taxes
paid by lessee 276,578
Other (400)
-----------
381,388
-----------
5,279,000
===========
NOTE E--LEASES ON ROADWAY AND LAND
In 1895, the Company leased substantially all of its assets to Southern
Railway Company, now known as Norfolk Southern Railway Company ("NSR"), for
ninety-nine years (the "1895 Lease"). In 1989, the Company acquired the Atlantic
and North Carolina Railroad Company, the assets of which were subject to a lease
dating to 1939 with the Atlantic & East Carolina Railway Company ("AECR"), a
wholly-owned subsidiary of Norfolk Southern Railway Company (the "1939 Lease").
NSR and AECR are hereinafter referred to as "Norfolk Southern". The terms of the
1895 Lease and 1939 Lease provided for expiration on January 1, 1995 and
December 31, 1994, respectively, and did not require either the Company or
Norfolk Southern to renew the leases.
On August 10, 1995, the Board of Directors of the Company approved a Lease
Extension Agreement ("Lease Extension") to extend the terms of the 1895 Lease
and the 1939 Lease, with its effectiveness retroactive to January 1, 1995. The
Lease Extension provided for Norfolk Southern to make a one-time settlement
payment of $5.0 million, plus interest, to the Company in exchange for the
Company's release of Norfolk Southern from its obligation to return certain
personal property upon expiration of the 1895 Lease and 1939 Lease. The
settlement payment was made in December 1995. However,
54
<PAGE>
on July 29, 1996 a federal court in North Carolina enjoined the Company from
implementing the terms of the Lease Extension in a shareholder legal action
challenging the shareholder meeting held to approve the Lease Extension. The
Lease Extension provided for base annual rental of eight million dollars
($8,000,000) for the period from January 1, 1995, through December 31, 1995,
with certain annual inflation adjustments thereafter. In December, 1995, Norfolk
Southern made a payment of approximately $7.8 million called for in the Lease
Extension for additional 1995 rental, and from January through July, 1996, made
monthly payments of base rental in the amount called for in the Lease Extension
for 1996 rental totaling approximately $4.8 million. On August 9, 1996, Norfolk
Southern notified the Company that payments of approximately $680,000 monthly
would be discontinued as a result of the July 29, 1996 court order enjoining
implementation of the Lease Extension. During the third quarter of 1997, Norfolk
Southern made payments totaling $1,932,446 to the Company for the period from
August, 1996 to July, 1997 pursuant to a decision and order of the U.S. Surface
Transportation Board ("STB decision"). For the fourth quarter of 1997, Norfolk
Southern made monthly payments totaling $1,145,248 for the period from August,
1997 to December, 1997 pursuant to the STB decision. (See Note G.)
A lease of certain properties in Charlotte, North Carolina to Norfolk
Southern (the "1968 Lease") expires on December 31, 2067, and provides for an
annual rental of $81,319 through December 2017. Beginning on January 1, 2018, 6%
of the appraised value of the property will be the annual rental for the
remaining term of the 1968 Lease. Under the terms of the 1968 Lease, all taxes
connected with the property, except income taxes, are paid by the lessee.
NOTE F--GAIN ON SALE OF REAL ESTATE
In December 1997, the Company received proceeds of $3,990,000 upon the sale
of certain property in Charlotte, North Carolina. In connection with this sale,
previous litigation related to the property was dismissed. The remaining gain on
sale of real estate is attributable to proceeds received from condemnation of
other property. The Company has not recognized the gains for income tax
purposes for 1997.
NOTE G--COMMITMENTS AND CONTINGENCIES
During August, 1996, the State of North Carolina ("State") notified the
Registrant that the State retained NationsBank as a financial advisor to
evaluate the acquisition of the Registrant's shares not already owned by the
State. On August 22, 1996, the Board of Directors of the Registrant appointed a
Special Committee of five non-State elected directors of the Registrant
(directors elected by shareholders other than the State) responsible for
negotiating with the State ("Special Committee"). The Special Committee had
authority to make recommendations to the entire Board regarding any offer made
by the State, to formulate offers or counter offers, and to consider
alternatives to a transaction with the State.
On April 7, 1997, the Registrant, the State, and the Beaufort & Morehead
Railroad Company ("B&M"), a North Carolina corporation whose stock is wholly
owned by the State, executed a Letter of Intent to reach a definitive agreement
for a plan of merger, whereby the State would acquire the shares held by
shareholders other than the State at a cash price of $66.00 per share.
On August 27, 1997, the General Assembly of North Carolina approved
legislation authorizing a $61 million reserve fund which, in addition to other
funds of the State, is authorized for an investment to fund the acquisition of
the non-State shares consistent with the Letter of Intent.
On October 3, 1997, the Registrant reached a definitive agreement with the
North Carolina Department of Transportation of the State of North Carolina
("DOT") and the B&M for a plan of merger for the State, through the DOT, to
acquire the non-State shares at a cash price of $66.00 per share (the "Merger
Agreement"). The Merger Agreement, as amended and restated as of January 16,
1998, provides for authorization of a limited amount of non-voting preferred
stock of the Registrant to be exchanged for B&M preferred stock in order to
continue the Registrant's ability to meet certain shareholder requirements as a
Real Estate Investment Trust. The Merger Agreement is subject to corporate and
governmental approvals, including approval by the shareholders of the Registrant
and a majority of the shares held by non-State shareholders and to other
conditions, and also provides that either the State or the Registrant may
terminate the Merger Agreement if closing does not occur on or before May 5,
1998. On October 7, 1997, the Merger Agreement was approved by the Council of
State of North Carolina. The Registrant has scheduled a shareholder meeting on
March 31, 1998 to vote on approval of the Merger Agreement, as amended and
restated on January 16, 1998. If the Merger Agreement is consummated, the State
will be the only holder of the Registrant's Common Stock, and the shares of the
Registrant will no longer be traded in the over-the-counter market and will be
deregistered under the Exchange Act.
On August 9, 1996, Norfolk Southern notified the Company that it did not
intend to continue making rental payments to the Company. On September 20 and
September 23, 1996, the Company filed actions against Norfolk Southern and its
affiliates in state court in North Carolina (which action was removed to federal
court) and before the STB asserting rental, property ownership, environmental
and other claims as a result of Norfolk Southern's discontinuance of rental
payments and the expiration of the 1895 and 1939 leases. In October, 1996,
Norfolk Southern filed counterclaims against the Company of approximately $12
million asserting unjust enrichment, conversion, environmental contribution, and
other claims. The STB issued a decision and order dated May 29, 1997 with
respect to the Company's petition for interim relief to the STB, STB Finance
Docket
55
<PAGE>
No. 33134 (the "STB decision"). The STB decision provides (i) that the Company's
petition for interim compensation is granted at the level of out-of-pocket
expenses incurred by the Company due to Norfolk Southern's continued operation
of the line, (ii) that the petition of the State of North Carolina ("State") to
hold the proceeding in abeyance pending a negotiated buy-out of minority
shareholders and subsequent reopening of lease negotiations is granted subject
to the requirement that the State and the Company report monthly to the STB on
the progress of negotiations, and (iii) other procedural and related findings.
Four shareholder derivative actions relating to the Lease Extension were
filed in the United States District Court for the Eastern District of North
Carolina during December 1994 and January and February 1995 by shareholders of
the Company. The complaints name the directors of the Company as defendants and
the Company as "nominal defendant." The actions seek to enjoin a purported lease
between the Company and Norfolk Southern and seek to recover for the Company
unspecified damages and other relief from the directors. The Company and the
other defendants filed motions to dismiss the actions, and the court has not yet
ruled on the motions. On September 24, 1996, a lawsuit filed as a purported
class action by the same plaintiffs as the December 1994 and February 1995
federal court actions were filed in the Superior Court of Wake County, North
Carolina. The action alleged that the Board of Directors of the Company breached
their fiduciary duty to shareholders in the formation of the Special Committee
of the Company's Board of Directors and asserts other claims. On June 19, 1997,
the court granted the Company's motion to dismiss the action. On July 7, 1997,
the plaintiffs appealed the ruling to the North Carolina Court of Appeals. The
North Carolina Court of Appeals has not yet ruled on the appeal.
On December 21, 1995, a shareholder derivative legal action was filed in
Federal District Court in the Eastern District of North Carolina, seeking to
enjoin the Lease Extension or invalidate the December 15, 1995 shareholders
meeting. On November 5, 1997, the court held a hearing on the plaintiff's
application for attorneys fees of approximately $1 million. 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 the Company to pay the plaintiff's
counsel $276,365 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. The
court has not yet ruled on the motion.
The directors and officers named as defendants in the suits, represented by
separate counsel, are defending damage claims brought against the directors and
officers. The Company's officers and directors are indemnified in the bylaws of
the Company from certain claims and liabilities alleged in the actions,
including the defense
56
<PAGE>
costs and expenses. The Company notified its directors and officers insurance
carriers of claims as a result of the actions. Except with respect to the action
filed on September 24, 1996, claims have been accepted by the relevant insurance
carrier on behalf of the directors and officers. With regard to the September
24, 1996 action, the insurance carrier has asserted that coverage is not
available under the policy in effect at that time. The Company is evaluating the
insurance carrier's assertion. The directors and officers insurance policy has
an aggregate limit of $5,000,000 and a $75,000 retention per occurrence.
In January, 1994, North Carolina Department of Environment, Health, and
Natural Resources ("DEHNR") initiated a lawsuit against the Company and other
parties seeking reimbursement of $84,354 in response costs incurred by DEHNR and
remediation of the Peele pesticide disposal site (the "site"). The Company is
one of several defendants that have been held jointly and severally liable for
response costs and remediation of the site. On February 26, 1997, the Company
and other parties entered into an agreement among themselves and an agreement
with DEHNR to remediate the site and share in assessment and clean-up costs. As
a result, the Company accrued $200,000 in 1996 as an estimate of its share of
remediation costs. During the third quarter, the Company and other parties
completed a remediation plan for the site and on October 29, 1997 DEHNR accepted
the remediation report, subject to satisfactory final testing of groundwater at
the site. During 1997, the Company paid $151,015 in clean-up costs, which costs
the Company believes constitutes the majority of its share of clean-up costs.
However, there can be no assurance of the total amount of financial exposure or
the timing of the resolution of the matter. If and such additional costs are not
paid by other parties, the financial position of the Company could be materially
adversely affected. The Company does not have insurance to minimize its
potential exposure.
57
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Proxy Statement of North
Carolina Railroad Company, filed with the Securities and Exchange Commission on
February 27, 1998, of our report dated February 25, 1998, with respect to the
financial statements of North Carolina Railroad Company included in this Annual
Report (10-K) for the year ended December 31, 1997.
/s/ERNST & YOUNG LLP
Raleigh, North Carolina
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,224,843
<SECURITIES> 0
<RECEIVABLES> 125,685
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,412,075
<PP&E> 8,159,854
<DEPRECIATION> (317,279)
<TOTAL-ASSETS> 14,254,650
<CURRENT-LIABILITIES> 379,846
<BONDS> 0
0
0
<COMMON> 2,141,735
<OTHER-SE> 11,733,069
<TOTAL-LIABILITY-AND-EQUITY> 14,254,650
<SALES> 0
<TOTAL-REVENUES> 7,590,948
<CGS> 0
<TOTAL-COSTS> 2,480,017
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,110,931
<INCOME-TAX> 20,462
<INCOME-CONTINUING> 5,090,469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,090,469
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 0.00
</TABLE>
