UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 22, 1995
NORTH CAROLINA RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation)
0-15768 56-6003280
(Commission File Number) (IRS Employer Identification No.)
234 Fayetteville Street Mall, Suite 600
P. O. Box 2248
Raleigh, North Carolina 27602
(Address of principal executive offices) (Zip Code)
(919) 829-7355
(Registrant's telephone number, including area code)
This document contains 37 pages.
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Table of Contents
Item 2. Acquisition or Disposition of Assets . . . . . 3
Item 5. Other Events . . . . . . . . . . . . . . . . . 6
Item 7. Financial Statements and Exhibits. . . . . . . 7
Signatures . . . . . . . . . . . . . . . . . . . . . . . 8
Index to Exhibits . . . . . . . . . . . . . . . . . . . 9
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Item 2. Acquisition or Disposition of Assets
Lease Extension Agreement
On August 10, 1995, the Board of Directors of the
Registrant approved a Lease Extension Agreement in the form
attached as an exhibit hereto (the "Lease Extension"). The Lease
Extension extends the terms of (i) the lease dated August 16,
1895 between the Registrant and Norfolk Southern Railway Company,
formerly known as Southern Railway Company ("NSR"), as amended
and supplemented thereafter (the "1895 Lease") and (ii) the lease
dated August 30, 1939, as amended and supplemented thereafter,
between Atlantic and North Carolina Railroad Company (merged into
the Registrant in 1989) and Atlantic and East Carolina Railway
Company, a wholly owned subsidiary of NSR ("AECR") (the "1939
Lease"). The 1895 Lease and the 1939 Lease are collectively
referred to hereinafter as the "Leases". NSR and AECR are
hereinafter referred to as "Norfolk Southern." On August 24,
1995, the Board of Directors of NSR and the Board of Directors of
AECR approved the Lease Extension.
Conditions to effectiveness of the Lease Extension were as
follows: (i) approval or exemption from approval from the
Interstate Commerce Commission and any successor entity, (ii)
obtaining all required governmental and corporate approvals and
(iii) the expiration or termination of any existing court-ordered
injunctions.
In a decision effective December 22, 1995, the Interstate
Commerce Commission exempted the Lease Extension from the prior
approval requirements of the Interstate Commerce Act. On
December 22, 1995, the Governor and Council of State of the State
of North Carolina approved the Lease Extension Agreement pursuant
to North Carolina law.
Shareholder Approval, Litigation, and REIT Election
On December 15, 1995, the shareholders of the Registrant
voted to approve the Lease Extension. A shareholder, however,
has commenced a legal action challenging the validity of
shareholder approval. Other shareholder derivative litigation
seeking to enjoin the Lease Extension is also pending. See Item
5, Other Events, for a description of the actions.
Notwithstanding the shareholder actions, on December 29, 1995,
Norfolk Southern paid approximately $7.8 million to the
Registrant as payment for rental due for 1995, including interest
according to the terms of the Lease Extension.
On August 10, 1995, the Board of Directors of the Registrant
voted to cause the Registrant to elect Real Estate Investment
Trust ("REIT") status for income tax purposes. The REIT
provisions of the Internal Revenue Code generally allow a REIT to
deduct distributions paid to its stockholders. The Registrant
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received an opinion of counsel that the Registrant can qualify as
a REIT based upon the effectiveness and terms of the Lease
Extension, although the timing of the REIT election may be
affected by the receipt of the $5 million payment under the Lease
Extension. The Registrant is seeking a ruling from the Internal
Revenue Service that the receipt of such payment will not prevent
the Registrant from qualifying as a REIT for 1995, but the
Registrant has not yet received such ruling.
The provisions of the Internal Revenue Code and related
regulations governing the federal income tax treatment of REIT's
are highly technical and complex. The shareholder
litigation could enjoin, delay, or otherwise affect the
effectiveness of the Lease Extension, the terms of the Lease
Extension, or the timing or amount of shareholder distributions.
In that event, the litigation may delay or even cause the
Registrant to be unable to qualify for REIT status, which would
substantially decrease the after tax net income available for
distribution to shareholders of the Registrant. See Item 5,
Other Events, for a description of the shareholder litigation.
Summary of Lease Extension
Set forth below is a summary of some of the material terms
of the Lease Extension, which summary should be read in
conjunction with the complete terms of the Lease Extension.
(1) The base annual rental under the Lease Extension is eight
million dollars ($8,000,000) for the period from January
1, 1995 through December 31, 1995.
(2) Annual base rent for 1996 and each year thereafter will
be adjusted each year to account for inflation during the
preceding calendar year according to the implicit price
deflator for the gross domestic product (IPD-GDP). In no
event, however, will the base annual rental for any
calendar year be less than eight million dollars
($8,000,000). The base rent adjustment in any year
cannot exceed the sum of: (i) four (4%) percent of the
base rent for the preceding year, plus (ii) seventy-five
(75%) percent of the IPD-GDP in excess of four (4%)
percent. There is a one-year delay in application of the
IPD-GDP. For example, adjustment of 1995 rental payments
to determine 1996 rental payments is based upon the IPD-
GDP for 1994.
(3) The Leases are extended for an initial term of thirty
(30) years, through December 31, 2024 and are extendable
for an additional twenty (20) years at the option of
Norfolk Southern. Exercise of the twenty-year extension
option requires that Norfolk Southern pay to the
Registrant an option fee equal to the lesser of (i)
twenty-five (25%) percent of the base rent in effect
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during the year prior to Norfolk Southern giving notice
to exercise its extension option or (ii) $5 million. If
the extension option is exercised by the lessee, the
Registrant expects to recognize the renewal fee ratably
over the 20-year lease renewal term.
(4) On December 1, 1995, Norfolk Southern made a one-time
payment of approximately $5.2 million, including
interest, to the Registrant in exchange for the
Registrant's release of Norfolk Southern from its
obligation to return certain personal property upon
expiration of the 1895 Lease and 1939 Lease. The NCRR
and Norfolk Southern entered into an agreement whereby
the $5,000,000 payment was made in December of 1995 in
order to facilitate the Registrant seeking Real Estate
Investment Trust ("REIT") status at the earliest
practicable date. The Registrant is seeking a ruling
from the Internal Revenue Service as to the effect and
tax treatment of the payment with respect to the timing
of the Registrant's REIT election. The Lease Extension
does not waive or otherwise affect any claims of the
Registrant to Spencer (Linwood) Yard or other such
property or facilities, but provides that such claims are
postponed until the termination of the Lease Extension
and any renewal pursuant to its terms.
(5) 317 miles of railroad property (including the railroad
right of way and certain improvements yard areas and
other structures situated adjacent to, under or along the
lines) located between Morehead City and Charlotte, North
Carolina, are covered by the Lease Extension. The
Registrant has the right, however, to have certain
properties outside the right of way not used in operating
a railroad released from the Leases. Norfolk Southern's
rental payments will not be reduced if the Registrant
exercises this right. The Registrant intends to exercise
its right to have released from the Leases those
properties it determines have income-generating potential
in excess of projected expenses. The Registrant
estimates these properties currently are producing less
than $100,000 of annual lease income. The Registrant
will determine which properties it will seek to have
released to it after evaluating environmental liability
and other relevant factors.
(6) Norfolk Southern is required to pay to the Registrant
seventy-five (75%) of any revenues (in excess of de
minimis amounts) obtained by Norfolk Southern for
longitudinal leases and licenses granted by Norfolk
Southern to third parties for certain fiber optic and
other uses.
(7) The Lease Extension contains extensive provisions
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governing the rights and obligations of the parties for
various environmental liabilities and expenses.
(8) Norfolk Southern is required pay the expenses to maintain
and operate the leased railroad lines and facilities, to
fulfill all railroad common carrier duties pertaining to
the leased railroad lines and to indemnify the Registrant
from certain liability claims by third parties.
Except as modified or supplemented by the Lease Extension,
the terms of the 1895 and 1939 Leases continue in full force and
effect.
Norfolk Southern beneficially owns 113,855 shares of the
common stock of the Registrant, which represents an ownership
interest of 2.7% of the Registrant.
Item 5. Other Events
Four shareholder derivative legal actions were filed
following public announcement during November of 1994 of
tentative agreement by the Registrant and Norfolk Southern on
several terms of the Lease Extension, and seek to enjoin the
Lease Extension. The litigation has been disclosed in prior
quarterly and annual reports to the Securities and Exchange
Commission.
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 seeks to invalidate
the December 15, 1995 shareholders meeting held to approve the
Lease Extension on the basis of a lack of a quorum of
shareholders other than the State of North Carolina, and makes
other allegations against the defendants, including alleged proxy
rule violations. The bylaws of the Registrant provide that, in
order to constitute a quorum for a shareholders' meeting, the
presence at the meeting, either in person or by proxy, of the
holders of a majority of the shares of stock of the Registrant is
required, excluding for this calculation shares of stock of the
Registrant owned by the State of North Carolina. The plaintiff
also sought a temporary restraining order seeking permission to
review the proxy records of the shareholder meeting, which access
was granted by the court, and to enjoin the Lease Extension. The
court has not enjoined the Lease Extension. See Item 2,
Acquisition or Disposition of Assets, regarding the possible
effects of the shareholder litigation on the Registrant's ability
to qualify for REIT status.
The Registrant is opposing the actions to the extent the
action seek to enjoin the Lease Extension or seek recovery
against the Registrant.
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Item 7. Financial Statements and Exhibits
(c) (1) 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 herein.
(2) Lease dated August 16, 1895 between the Registrant and
Southern Railway Company filed as Exhibit 3 (a) to the
Registrant's Form 10 filed with the Securities and
Exchange Commission on April 27, 1987, which is
incorporated by reference herein.
(3) Lease dated August 30, 1939 between the Atlantic and
North Carolina Railroad and Atlantic East Carolina
Railway Company filed as Exhibit 28 (h) to the
Registrant's Form S-4 filed with the Securities and
Exchange Commission on July 20, 1989, which is
incorporated by reference herein.
(4) Decision of the Interstate Commerce Commission in
Finance Docket No. 32820, served December 22, 1995.
(5) Complaint, Civil Action No. 5-95-CV-1054-BO(2), United
States District Court, Eastern District of North
Carolina.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
NORTH CAROLINA RAILROAD COMPANY
Date: January 5, 1996 By: /s/ John F. McNair III
President and Director
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EXHIBIT INDEX
Exhibit No. Description
(c) (1) Lease Extension Agreement between North Carolina
Railroad Company, 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 herein.
(c) (2) Lease dated August 16, 1895 between the Registrant
and Southern Railway Company filed as Exhibit 3
(a) to the Registrant's Form 10 filed with the
Securities and Exchange Commission on April 27,
1987, which is incorporated by reference herein.
(c) (3) Lease dated August 30, 1939 between the Atlantic
and North Carolina Railroad and Atlantic East
Carolina Railway Company filed as Exhibit 28 (h)
to the Registrant's Form S-4 filed with the
Securities and Exchange Commission on July 20,
1989, which is incorporated by reference herein.
(c) (4) Decision of the Interstate Commerce Commission in
Finance Docket No. 32820, served December 22,
1995.
(c) (5) Complaint, Civil Action No. 5-95-CV-1054-BO(2),
United States District Court, Eastern District of
North Carolina.
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