UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
[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, 1995.
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.)
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
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 15
pages.
1
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 $24,604,220 (based on last
average bid price of $23.25 per share of Registrant's Common
Stock on March 18, 1996).
The number of shares outstanding of each of the Registrant's
classes of Common Stock, as of March 18, 1996, is as follows:
Outstanding as of
Class March 18, 1996
Common Stock (par value $.50) 4,283,470
Documents Incorporated by Reference. None.
2
TABLE OF CONTENTS
ITEM Page
Part II 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . .4
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3
ITEM 7. THE REGISTRANT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview and Background
A majority of the Registrant's assets were subject to two
railroad operating leases dating to 1895 and 1939, which by their
terms provided for expiration at the end of 1994. Information
about the leases has been disclosed by the Registrant in prior
quarterly and annual reports to the Securities and Exchange
Commission.
During the fourth quarter of 1994, the Registrant and
Norfolk Southern reached tentative agreement on the primary terms
of a long term agreement to extend the 1895 and 1939 Leases.
However, a definitive agreement had not been reached as of the
expiration dates of the 1895 and 1939 Leases at the end of 1994,
and the Registrant and Norfolk Southern entered into a temporary
arrangement to continue the rental and other terms of the 1895
and 1939 Leases beginning in 1995. During 1995, Norfolk Southern
continued to make rental payments under the terms of the 1895 and
1939 Leases.
On August 10, 1995, the Board of Directors of the Registrant
approved a Lease Extension with Norfolk Southern. The Lease
Extension would extend the terms of the 1895 Lease and the 1939
Lease, and the effectiveness of the Lease Extension is
retroactive to January 1, 1995. On August 24, 1995, the Board of
Directors of NSR and the Board of Directors of AECR approved the
Lease Extension. For a discussion of the Lease Extension and
conditions to its effectiveness, see Item 1, Business.
Liquidity and Capital Resources
Pursuant to the Lease Extension, the Registrant's lessees
pay for maintenance and all operating railroad equipment.
Therefore, the Registrant does not anticipate any need for
substantial capital expenditures unless the Lease Extension is
deemed not to have been approved by the shareholders at the
December 15, 1995 shareholder meeting. See Item 3, Legal
Proceedings, regarding litigation seeking to enjoin the Lease
Extension and challenging the validity of shareholder approval.
If shareholder approval of the Lease Extension is deemed
invalid and the Lease Extension is not approved by the
shareholders at a future shareholder meeting, and the Registrant
is unable to negotiate other leases upon acceptable terms,
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 would initially not likely incur
substantial capital expenditures with respect to fixed plant.
4
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. Pursuant to a
separate agreement for the payment of $5.2 million (including
interest) by Norfolk Southern on December 1, 1995 in settlement
of certain personal property and equipment claims, the settlement
payment is not required to be returned to Norfolk Southern in the
event the Lease Extension is invalidated or enjoined. Pursuant
to the agreement, the payment is to be credited against any sums
or rentals ultimately determined to be due to the Registrant from
Norfolk Southern. Therefore, in such event, the Registrant's
claims for certain personal property and equipment or other
claims would be offset by the payment amount. See Item 1,
Business, for a discussion of risks of independent operation by
the Registrant.
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 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. During
1996 to date, Norfolk Southern has continued to make payments to
the Registrant in amounts that would be due if the Lease
Extension is effective, approximately $680,000 monthly. There
can be no assurance, however, that Norfolk Southern will continue
to make such payments. Nonetheless, the Registrant does not
foresee any need for funds during 1996 which cannot be met
primarily from available cash. However, see Item 1, Business,
for a discussion of the status of the Lease Extension and
payments by Norfolk Southern. In the event shareholder approval
of the Lease Extension is deemed invalid, if the Registrant and
Norfolk Southern litigate lease compensation or abandonment
issues before the STB, claims under the 1895 and 1939 Leases, or
other matters, the Registrant may be required to finance part of
the litigation expenses.
In order to qualify as a REIT for federal income tax
purposes, 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.
The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of
5
operating expenses. The Company intends to invest amounts
accumulated for distribution in short-term investments.
The Registrant's liquidity (cash and short-term investments)
improved from $1,615,284 at December 31, 1994 to $15,329,497 at
December 31, 1995. Short-term investments in high quality
commercial paper and U. S. Treasury Bills of $190,000 are
classified as held-to-maturity, and will mature within the first
six months of 1996. The Registrant's cash and cash equivalents
increased by $13,524,213 from December 31, 1994 to $15,139,497 at
December 31, 1995.
For the year ended December 31, 1995, $13,847,817 of net
cash was provided by operating activities and was primarily
related to net income of $8,864,922, an increase in accrued
expenses and accounts payable of $433,372, income taxes payable
of $5,230,277, and unearned rental income of $246,030, which were
partially offset by capitalized lease negotiation costs of
$1,037,044.
Investing activities resulted in a net use of cash of
$195,100 as $1,643,000 of short-term investments were purchased
and $1,453,000 matured during 1995. Property of $5,100 was also
purchased during the year.
Financing activities resulted in a net use of cash of
$128,504 representing dividends which were paid during 1995.
Results of Operations
Results of operations for the period covered hereby reflect
payments to the Registrant from Norfolk Southern. Payments
through 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 payments in the amounts called for in the Lease Extension
for additional 1995 rental. See Item 1, Business, for a
description of the Lease Extension, and Item 3, Legal
Proceedings, regarding shareholder litigation to enjoin the Lease
Extension or invalidate shareholder approval of the Lease
Extension.
Total revenues increased to $15,132,553 for 1995 as compared
to $851,074 for 1994 and $777,770 for 1993. The increases were
attributable primarily to increases in rental revenue from leases
of roadway and land and the settlement payment of approximately
$5.2 million (including interest). Increases in rental revenue
from leases of roadway and land are attributable to payments
received from Norfolk Southern. Revenues generated by the 1895
and 1939 Leases from 1991 to 1994 and by additional payments in
1995 are shown in the following chart:
6
Revenue from Leases of Roadway and Land
Year % Change from
End Lease Income Total Prior Year
1991 1895 Lease $ 286,000
1939 Lease 234,033
1968 Lease 81,319 $ 601,352 22.7%
1992 1895 Lease 286,000
1939 Lease 263,729
1968 Lease 81,319 631,048 4.9%
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%
* Additional rental under the 1939 Lease for the period
1991-1994 as a result of an audit performed during 1995 by the
Registrant of rentals paid by AECR.
Interest income increased from $87,837 for 1993 to $94,361
for 1994 and $601,556 for 1995. The increase for 1994 was
attributable to increases in yields on invested cash. The
increase for 1995 was primarily attributable to increases in
average levels of invested cash and interest paid by Norfolk
Southern. Dividend income decreased from $25,000 for 1993 to
$12,500 for 1994 and $7,500 for 1995. For 1993, 1994, and 1995,
dividend income was attributable to special dividends received
from common stock of the State University Railroad Company. A
portion of the Registrant's holdings in the State University
Railroad Company was disposed of during the first quarter of 1995
in order to promote the Registrant's ability to qualify for REIT
status.
Rental income decreased from $9,720 for 1993 to $3,960 for
1994 and increased to $9,540 for 1995. The Registrant's rental
income is derived from miscellaneous leases of the Registrant's
properties.
Gains on sale of real estate increased from $12,396 for 1993
to $65,976 for 1994 and $688,055 for 1995. Gains on sale of real
7
estate and other income are derived primarily from sales and
condemnations of the Registrant's property. During 1995, the
Registrant sold approximately 16 acres of land in Johnston
County, North Carolina, recognizing a gain of $473,956,
recognized gains of approximately $180,027 from condemnations or
forced sales, and recognized a gain of $30,000 from the sale of
stock of the State University Railroad Company.
Other lease income represents 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. Norfolk
Southern has agreed to reimburse the Registrant for any income
taxes owed by the Registrant on the lump sum payment, and
accordingly the Registrant has not provided for income taxes
related to the receipt of the settlement.
On December 1, 1995, Norfolk Southern made a one-time
payment of $5 million, plus interest of approximately $200,000,
to the Registrant pursuant to the Lease Extension 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 Registrant and Norfolk Southern
entered into an agreement whereby the settlement payment was made
in early December 1995 in order to facilitate the Registrant
seeking REIT status at the earliest practicable date. In the
event the Lease Extension is deemed not to have been approved by
the shareholders, the Registrant is entitled to retain the
payment and interest for application against any future rental or
other amounts due from Norfolk Southern.
Salary and administrative expenses increased from $229,274
for 1993 to $268,029 for 1994 and $273,563 for 1995. The 17%
increase from 1993 to 1994 and the 2% increase from 1994 to 1995
are primarily attributable to the addition of administrative
staff and increases in employee benefits and compensation, which
were partially offset by decreases in directors' fees and
expenses.
For 1995, professional fees paid by the Registrant increased
to $414,740 as compared to $288,749 for 1994 and $160,221 for
1993. Professional fees relate to attorneys' and accountants'
fees paid for various filing and reporting requirements, certain
litigation and other general items. The increase for 1995, as
compared to 1993 and 1994, was attributable to higher
professional fees associated with the Registrant's preparation
for termination of its leases, negotiations with Norfolk
Southern, evaluation of REIT qualification, and litigation fees.
Insurance and taxes increased slightly to $59,100 for 1995
as compared to $57,766 for 1994 and $51,475 for 1993. The
8
Registrant expects to incur higher property tax expense in future
periods to the extent properties are excluded from the Lease
Extension for separate management by the Registrant.
The majority of investment banking fees and other fees
associated with the Lease Extension are currently being
capitalized for financial reporting and income tax purposes and
will be amortized over the 30-year term of the Lease Extension.
Amortization expense of $46,743 related to capitalized lease
negotiations costs was recognized for 1995.
Consulting fees decreased from $146,197 in 1993 to $43,809
in 1994 and increased to $80,742 in 1995. The fluctuations in
consulting fees are attributable to the number and magnitude of
projects, primarily in connection with the Lease Extension
negotiations, in process during each year. Consulting fees over
the three-year period are related primarily to railroad valuation
and traffic studies.
The Registrant expects to continue to incur substantial
consultants' fees/expenses, investment banking fees, attorneys'
and accountants' fees and related expenses in future periods
until litigation and matters related to the Lease Extension are
resolved.
Other expenses include supplies, utilities, postage, office
rent, printing, and miscellaneous items and remained relatively
constant at $100,801 for 1993, $94,599 for 1994 and $106,579 for
1995.
Net income tax expense was $5,279,000 for 1995 as compared
to net income tax benefits of $17,000 for 1994 and $4,000 for
1993. The increase in income tax expense for 1995 is
attributable to the increase in income before income taxes of
$14,053,777. The income tax benefits for 1994 and 1993 are
attributable to capitalized lease negotiation costs and
reorganization costs for income tax purposes, most of which have
been expensed for financial reporting purposes. Under the 1895
Lease, all taxes, including income taxes attributable to the
lease, were the responsibility of Norfolk Southern as lessee.
Under the Lease Extension, all income taxes become the
responsibility of the Registrant as of January 1, 1995. The 1995
income tax provision does not take into account the Registrant's
possible REIT election for 1995 or Norfolk Southern's potential
liability for the Registrant's taxes should the Lease Extension
not be effective. (See Note B and Note D to the financial
statements.)
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 increase the excess rental
9
payments under the 1939 Lease. The Lease Extension contains an
inflation adjustment provision (See Item 1 above). The
Registrant expects to offset any negative effects of inflation
not offset by increased rental payments by controlling current
expenses.
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 the lessees 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 Lease
Extension contains extensive provisions governing the rights and
obligations of the parties for various environmental liabilities
and expenses. If the Lease Extension is invalidated or enjoined,
the Registrant may determine that it is in its interest to
initiate substantial environmental assessments of its properties
and commence environmental litigation against Norfolk Southern
and its sublessees or other parties who may have created or who
are responsible for any actionable environmental conditions.
However, if such parties are not able to meet their
responsibilities, under certain statutes, regulations, and rules,
the Registrant could ultimately be held responsible for any
remediation, removal, or cleanup of the property it owns. The
Lease Extension does not affect the responsibility of the
Registrant with respect to the Peele Site.
The status of the Peele site is disclosed in Item 3 "Legal
Proceedings." According to a preliminary study conducted by the
Registrant, the estimated costs of remediation range between
$500,000 to in excess of $2,000,000. At this time, the
Registrant does not know the total amount of its financial
exposure, the timing of the resolution of the matter, or the
extent to which the Registrant's potential exposure may be
reduced by contribution or indemnification from other parties.
The Registrant does not have insurance to minimize its potential
exposure. Legal expenses and the costs of remediation, removal,
or cleanup represent a possible substantial future drain on the
10
financial resources of the Registrant which cannot be quantified
at this time. Any future remediation, removal, or cleanup at the
site should have no effect upon railroad operations.
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 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
court's disposition of various legal actions challenging the
Lease Extension Agreement, Norfolk Southern's ability and
willingness to divert traffic from the Registrant's line should
the Lease Extension Agreement not become effective, the
Registrant's ability to qualify for tax treatment as a REIT and
other matters which are described herein and/or in documents
incorporated by reference herein.
The cautionary statements made pursuant to the Private
Litigation Securities Reform Act of 1995 above and elsewhere by
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.
11
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: April 25, 1996 By: /s/ John F. McNair III
John F. McNair III, President
and Principal Executive Officer
12
NORTH CAROLINA RAILROAD COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1995
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.
13
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, filed as Exhibit 10.4 to
Registrant's Form 10-K filed with the
Securities and Exchange Commission on March
29, 1995, which is incorporated by reference
into this Form 10-K.
10.5 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.
14
Exhibit No. Description of Exhibit
10.6 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.
99.1 Decision of the Interstate Commerce
Commission in Finance Docket No. 32820,
served December 22, 1995, filed as Exhibit
(c)(4) to Registrant's Form 8-K filed with
the Securities and Exchange Commission on
January 5, 1996, which is incorporated by
reference into this Form 10-K.
99.2 Letter dated December 30, 1994 from Petree
Stockton, L.L.P. to Norfolk Southern Railway
Company, filed as Exhibit 28.9 to
Registrant's Form 10-K filed with the
Securities and Exchange Commission on March
29, 1995, which is incorporated by reference
into this Form 10-K.
15