UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[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, 1994.
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 25 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 $26,509,900 (based on last average
bid price of $25.25 per share of Registrant's Common Stock on March 28,
1995).
The number of shares outstanding of each of the Registrant's
classes of Common Stock, as of March 28, 1995, is as follows:
Outstanding as of
Class March 28, 1995
------- ----------------
Common Stock (par value $.50) 4,283,470
2
TABLE OF CONTENTS
ITEM Page
Part I 3. Legal Proceedings.......................... .................4
Part II 6. Selected Financial Data......................................6
7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations...................................................7
8. Financial Statements and Supplementary Data.................11
Signatures.................................................................12
3
PART I
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
operation of the Registrant.
Peele Site
During the fourth quarter of 1989, the Registrant was
notified by the North Carolina Department of Environment, Health,
and Natural Resources ("DEHNR") that DEHNR had been notified of a
possible abandoned pesticide disposal site on property owned by the
Registrant in Johnston County, North Carolina. Information about the
Site has been disclosed by the Registrant in prior quarterly and
annual reports to the Securities and Exchange Commission. In February
1991, the Registrant received notice from DEHNR that the site had been
included in the North Carolina Inactive Hazardous Waste Sites Priority
List. The sites on the Priority List are ranked in decreasing order
of danger to the public health and environment based on a ranking
system administered by DEHNR. In February 1995, the site ranked 98 out
of a total of 158 sites on the Priority List.
In January, 1994, 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 site. On
February 1, 1995, the Court granted partial summary judgement
holding all of the defendants, including the Registrant, jointly
and severally liable. The Court has not yet ruled on apportionment
of liability or cost sharing among the defendants. 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. The Registrant will vigorously defend the action by DEHNR,
and will aggressively pursue any other parties who may be liable for
any remediation, removal, or clean-up. The ultimate costs of any
remediation, removal, or clean-up are not known. However, if such costs
are not paid by other parties, the financial position of the
Registrant would be materially adversely affected.
Charlotte Convention Center Litigation
On December 10, 1991, the Registrant initiated a lawsuit
in the Mecklenburg County, North Carolina, Superior Court regarding
its railroad corridor through downtown Charlotte. The Registrant
alleged that both the City of Charlotte and Norfolk Southern Railway
have breached contract obligations and obligations based on real
property rights to the Registrant. The litigation has
4
been disclosed by the Registrant in prior quarterly and annual
reports to the Securities and Exchange Commission.
On December 7, 1993, the North Carolina Court of Appeals ruled
against the defendants' appeal and against the Registrant's
cross-appeal. Norfolk Southern Railway then petitioned the Supreme
Court of North Carolina to review the decision of the North Carolina
Court of Appeals, which petition was denied. In September, 1994,
Norfolk Southern Railway petitioned the United States Supreme Court
for review. The United States Supreme Court has not yet ruled on the
petition.
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. The complaints name the directors of the Registrant as
defendants and the Registrant as "nominal defendant". Two of the
actions, Kahn v. North Carolina Railroad Co., et al. ("Kahn"), Civil
Action No. 5:94-CV-936-F(2) and Norberg v. North Carolina Railroad Co.,
et al. ("Norberg"), Civil Action No. 5-95-CV-96-Br(2) seek to enjoin a
purported lease between the Registrant and Norfolk Southern Railway and
to recover for the Registrant unspecified damages and other relief from
the directors. Two other actions, Werner, et al. v. North Carolina
Railroad Co., et al. ("Werner"), Civil Action No. 5:94- CV-943-Bo(1) and
Taran v. North Carolina Railroad Co., et al. ("Taran"), Civil Action No.
5:95-CV-17-Bo(1), seek similar relief and also name the State of North
Carolina, the Governor of North Carolina, and Norfolk Southern Railway
as defendants.
The Kahn and Norberg actions allege misconduct by the
directors of the Registrant, including breach of fiduciary duty,
mismanagement, and waste of corporate assets. The Werner and Taran
actions assert similar claims, allege collusion between the State of
North Carolina and Norfolk Southern Railway producing a below-market
lease rental rate, and assert that the State of North Carolina has
condemned the Registrant's properties for public uses for the
benefit of the State. The Registrant will oppose the actions
brought by the plaintiffs to the extent the actions seek to enjoin any
lease arrangement or seek recovery against the Registrant or seek
any remedy against the best interests of Registrant or its
shareholders. The Bylaws of the NCRR provide that its Directors shall
have the right to be indemnified by the NCRR, to the fullest extent
permitted by law, against liabilities and expenses arising out of
their status as Directors. To the extent the Directors' conduct meets
the standard of conduct for indemnification set forth by the North
Carolina Business Corporation Act ("NCBCA"), as described below, they
will be so indemnified by the NCRR in connection with the shareholder
derivative actions described herein.
5
Under the NCBCA, a corporation is permitted to indemnify a
director who conducted himself in good faith and reasonably believed:
(i) in the case of conduct in his official capacity with the
corporation, that his conduct was in the best interest of the
corporation and (ii) in all other cases, that his conduct was at
least not opposed to the corporation's best interest. In the case of any
criminal proceeding, the director must not have had any reasonable
cause to believe his conduct was unlawful. In any proceeding by or in
the right of a corporation (such as the shareholder derivative actions
described herein), a corporation may not voluntarily indemnify a
director if the director is adjudged liable to the corporation. In
addition, a corporation may not indemnify a director if the director
is adjudged liable on the basis that personal benefit was improperly
received by him. Where a proceeding is by or in the right of a
corporation, indemnification of a director is limited to reasonable
expenses if the proceeding is concluded without a final
adjudication on the issue of liability. The NCBCA permits an advance
for expenses incurred by a director in defending a proceeding. The
expenses may be paid by a corporation in advance of the final
disposition of the legal action, upon receipt of an undertaking by or
on behalf of the director to repay such amounts unless it is
ultimately determined that he is entitled to be indemnified by the
corporation against such expenses. The Directors of the NCRR have
executed such undertaking and are receiving advances for expenses
incurred in defending the actions brought against them in connection
with the Lease Extension Agreement. Additionally, the NCBCA provides
that a corporation may purchase and maintain insurance on behalf of a
director of the corporation against any liability asserted against
or incurred by him in that capacity or arising from his status as a
director. The NCRR has an insurance policy that covers the NCRR
against the indemnification liability of the NCRR to its directors. The
policy has a aggregate limit of $5 million and a $75,000 retention per
occurrence. The NCRR's liability exposure to its Directors will,
therefore, not be material, unless (i) the Directors satisfy the
requirements for being indemnified as described above and (ii)
the indemnified liabilities and expenses exceed the NCRR's insurance
coverage. The NCRR is unable to determine this early in the legal
proceedings whether of the foregoing conditions will occur.
The Registrant also notified its general liability insurance
carrier of claims as a result of the shareholder actions, which claims
were denied.
PART II
Item 6. Selected Financial Data.
The following selected financial data are derived from the
6
financial statements of the Registrant. The data should be read in
conjunction with the financial statements, related notes and other
financial information included herein.
Selected Financial Data
At December 31 or During the Year Ended December 31
---------------------------------------------------
1994 1993 1992 1991 1990
Gross revenue.. $ 851,074 $ 777,770 $ 773,400 $ 790,150 $ 764,926
Lease revenue of
roadway and land.. $ 674,277 $ 642,817 $ 631,048 $ 601,352 $ 490,041
Net income (loss).. $ 107,145 ($ 54,027)* $ 43,847 $ 341,408 $ 378,831
Net income (loss)
per share .. $ .03 $ (0.01) $ .01 $ .08 $ .09
Deferred income
taxes.... $ 1,214,451 $1,241,451 $1,117,549 $1,177,549 $1,159,849
Total assets $10,084,797 $9,639,966 $9,803,679 $9,906,346 $9,573,413
Cash dividend
declared per
common share.. $ .03 $ .03 $ .03 $ .03 $ .04
* Net income for 1993 before cumulative effect of
accounting change was $86,875. See Note A to the
financial statements.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
There was little change in liquidity, capital resources, or asset
position from the end of the fiscal year 1993 to December 31, 1994.
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 1895 and 1939 Leases
expire and are not extended. The Registrant is negotiating for
extension of the leases. (See Item 1, Business above.) If the leases
are not extended or if 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.
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
7
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. Risks of independent
operation that would affect operating income and expenses would include
the potential for diversion of overhead traffic by Norfolk Southern,
loss of traffic to competitors, and unpredictable maintenance and labor
expenses.
The Registrant does not foresee any need for funds during
1995 which cannot be met primarily from its income from leases or in
part from available cash in the regular course of business, except
that (1) in the event the Registrant and Norfolk Southern litigate
ICC issues, claims under the 1895 and 1939 leases, or other matters,
the Registrant may be required to finance part of the litigation
expenses, and (2) if the Registrant seeks qualification for 1995 as a
REIT, the Registrant may be required to finance a portion of
accumulated earnings and profits required to be distributed to the
Registrant's shareholders in the first year of REIT status.
During 1994, $194,338 of net cash was provided by operations
and was related primarily to net income of $107,145, a decrease in
rent receivable of $111,901 and an increase in accrued expenses and
accounts payable of $364,686, all of which was partially offset by
capitalized lease negotiation costs of $365,267.
Investing activities provided $508,291 of net cash primarily
related to the release of restricted assets of $525,628. During the
year, short-term investments of $200,000 were purchased and matured.
There were no financing activities during 1994 that
impacted cash flows.
Income generated from the 1895 Lease and the 1968 Lease was
constant in 1994, 1993, and 1992 at $367,319 annually as stipulated by
the lease agreements.
The revenue generated by the 1939 Lease to AECR for the
years 1990 through 1994 is shown in the following chart:
Year End Lease Income % Change from Prior Year
-------- ------------ ------------------------
1990 $ 122,722 (65.6%)
1991 234,033 90.7%
1992 263,729 12.7%
1993 275,498 4.5%
1994 306,958 11.4%
8
In 1990, the 1939 Lease revenue decreased to $122,722 from
the prior year, and then increased to $234,033 for 1991 and to $263,729
in 1992. The 1939 Lease revenue increased to $275,498 for 1993 and
increased to $306,958 for 1994. According to Norfolk Southern Railway,
the swings in excess rental revenue prior to 1991 were attributable to
the fact that revenue accruals for AECR were made by Norfolk Southern
Railway based upon Norfolk Southern Corporation's system-wide
apportionment of estimated revenues among its subsidiaries,
including AECR. The estimates were based upon Norfolk Southern
Corporation's total system revenue from car movements and average
revenue per car by commodity from the prior year, and then adjusted
annually to reflect actual AECR revenue settlements.
Beginning in 1991, the 1939 Lease revenue was estimated by
Norfolk Southern Railway based upon AECR's previous quarter's billed
traffic, plus or minus adjustment to actual revenues as the amounts
are determined during the year. As a result, Norfolk Southern
Railway's estimates, upon which the Registrant's 1939 Lease revenue
accruals are based, more closely approximate actual revenue earned by
AECR.
Interest income decreased from $95,423 for 1992 to $87,837
for 1993, and increased to $94,361 for 1994. The increase for 1994 is
attributable to increases in yields on invested cash. Dividend income
was constant at $25,000 for 1992 and 1993 and decreased to $12,500 for
1994. For 1992, 1993, and 1994, dividend income was attributable to
special dividends received from common stock of the State University
Railroad Company. Other income decreased from $12,509 for 1992 to
$12,396 for 1993 and increased to $65,976 for 1994. The Registrant's
other income is derived primarily from proceeds of condemnations
of the Registrant's properties.
Salary and administrative expenses increased from $219,284 for
1992 to $229,274 for 1993 and $268,029 for 1994. The 5% increase from
1992 to 1993 is attributable to annual compensation increases. The
17% increase from 1993 to 1994 is attributable to the addition of
administrative staff, and increases in employee benefits and
compensation.
For 1994, professional fees paid by the Registrant
increased to $288,749 as compared to $160,221 for 1993 and $292,930
for 1992. Professional fees relate to attorneys' and accountants'
fees paid for various filing and reporting requirements, certain
litigation and other general items. The increases for 1994 and
1992 as compared to 1993 were attributable to higher professional
fees associated with the Registrant's preparation for termination of
its leases, negotiations with Norfolk Southern Railway, and
evaluation of REIT qualification. The Registrant expects to
continue to incur greater professional and investment banking fees
and expenses in future periods until resolution of matters
9
related to current and future leases or other transactions. The majority
of such fees are currently being capitalized for income tax purposes.
Insurance and taxes increased slightly to $57,766 for 1994 as
compared with $51,475 for 1993 and $54,422 for 1992. The Registrant
expects to incur higher property tax expense in future periods if
properties are excluded from any lease extension agreement for separate
management by the Registrant.
Consulting fees increased from $75,836 in 1992 to $146,197 in
1993 and decreased to $43,809 in 1994. The fluctuations in
consultant fees are attributable to the number and magnitude of
projects in process during each year. In 1992, consulting fees related
primarily to preparation for negotiations and related matters, and for
1993 and 1994 related primarily to valuation and traffic studies. The
Registrant expects to continue to incur substantial consultants'
fees/expenses in future periods at least until all matters related to
the extension or termination of the 1895 Lease and 1939 Lease are
resolved.
Other expenses include supplies, utilities, postage, office
rent and miscellaneous items and remained relatively constant at
$71,810 in 1992, $100,801 for 1993, and $94,599 for 1994.
Net income tax benefits were $17,000 for 1994 compared to
$4,000 for 1993 and $17,000 for 1992. The income tax benefits of
$17,000 for 1994 and $4,000 for 1993 are attributable to capitalized
lease negotiation costs and reorganization costs for income tax
purposes. Most of these costs have been expensed for financial
reporting purposes. Under the 1895 Lease, all taxes, including income
taxes attributable to the lease, are paid by Norfolk Southern Railway
as lessee. (See Note D to the financial statements.)
Inflation affects the Registrant primarily through increased
salary, administrative, property tax, and insurance expenses. Under the
existing leases, the Registrant's primary sources of revenue are
increased only to the extent changes in the general inflation rate
increase the excess rental payments under the 1939 Lease which are
based on a percentage of the lessee's operating revenues. Revenues
from the 1895 Lease do not increase or decrease with any changes in
the inflation rate. The Registrant expects to offset any negative
effects of inflation not offset by increased excess rental
payments by controlling current expenses. The Registrant is also
seeking inflation protection provisions in connection with its
negotiations for a lease extension agreement.
Effective January 1, 1993, the Registrant changed its
method of accounting for income taxes to the liability method
required by Financial Accounting Standard Board Statement No. 109
(see Note A-"Income Taxes" and Note D to the financial statements).
10
As permitted under the new rules, prior years' financial statements
have not been restated. The cumulative effect of adopting Statement 109
as of January 1, 1993 was to increase the deferred tax liability by
$140,902 for 1993. The Registrant previously accounted for income
taxes in accordance with Accounting Principals Board Opinion 11, which
has been superseded by Statement No. 109.
Item 8. Financial Statements and Supplementary Data
The Registrant's financial statements are submitted as a
separate section of this report.
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: November 9, 1995 By: /s/ John F. McNair III
-------------------- -----------------------------
John F. McNair 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: November 9, 1995
- ------------------------------ -----------------
John M. Alexander, Jr.,
Director
/s/ P. C. Barwick, Jr. Date: November 9, 1995
- ------------------------------ -----------------
P. C. Barwick, Jr.,
Secretary and Director
/s/ J. Melville Broughton, Jr. Date: November 9, 1995
- ------------------------------ -----------------
J. Melville Broughton, Jr.,
Vice President and Director
/s/ Sidney R. French Date: November 9, 1995
- ------------------------------ -----------------
Sidney R. French,
Director
/s/ Marvin D. Gentry Date: November 9, 1995
- ------------------------------ -----------------
Marvin D. Gentry,
Director
/s/ Alexander H. Graham, Jr. Date: November 9, 1995
- ------------------------------ -----------------
Alexander H. Graham, Jr.,
Director
/s/ M. Rex Harris Date: November 9, 1995
- ------------------------------ -----------------
M. Rex Harris,
Director
12
/s/ William H. Kincheloe Date: November 9, 1995
- ------------------------------ -----------------
William H. Kincheloe,
Director
/s/ Chauncey W. Lever Date: November 9, 1995
- ------------------------------ -----------------
Chauncey W. Lever,
Assistant Secretary-Treasurer and Director
/s/ Lynn T. McConnell Date: November 9, 1995
- ------------------------------ -----------------
Lynn T. McConnell,
Treasurer, Director, and Principal Financial Officer
/s/ John F. McNair, III Date: November 9, 1995
- ------------------------------ -----------------
John F. McNair, III,
President and Director
/s/ Jack A. Moody Date: November 9, 1995
- ------------------------------ -----------------
Jack A. Moody,
Director
/s/ John S. Russell Date: November 9, 1995
- ------------------------------ -----------------
John S. Russell,
Director
/s/ Van Wyck Webb, Sr. Date: November 9, 1995
- ------------------------------ -----------------
Van Wyck Webb, Sr.,
Director
/s/ David T. Woodard Date: November 9, 1995
- ------------------------------ -----------------
David T. Woodard,
Director
13
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, 1994
NORTH CAROLINA RAILROAD COMPANY
RALEIGH, NORTH CAROLINA
14
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 . . . . . . . . . . . .. . . . . . . 16
Balance Sheets, December 31, 1994 and 1993 . . . . . . . . . . . 17
Statements of Income for the Years
ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . 18
Statements of Shareholders' Equity for the Years
ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . 19
Statements of Cash Flows for the Years
ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . 20
Notes to Financial Statements . . . . . .. . . . . . . . . . . . . 21
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.
15
Report of Independent Auditors
Board of Directors
North Carolina Railroad Company
We have audited the accompanying balance sheets of North Carolina
Railroad Company as of December 31, 1994 and 1993, and the related
statements of income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1994. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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 amount 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, 1994 and 1993, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note D to the financial statements, in 1993 the Company
changed its method of accounting for income taxes.
Ernst & Young LLP
Raleigh, North Carolina
February 23, 1995
16
BALANCE SHEETS
NORTH CAROLINA RAILROAD COMPANY
December 31
1994 1993
---------------- ---------------
ASSETS
Cash and cash equivalents $1,615,284 $ 912,655
Rent receivable 246,030 357,931
Interest receivable and other assets 65,400 42,485
Income taxes recoverable -0- 17,811
------------ -------------
TOTAL CURRENT ASSETS 1,926,714 1,330,882
RESTRICTED ASSETS--Note B
Invested cash -0- 507,301
Accrued interest receivable -0- 2,477
------------ ------------
-0- 509,778
PROPERTIES
Roadway and land--Note C 7,848,842 7,848,842
Buildings and equipment 236,369 234,882
Less accumulated depreciation (292,395) (284,418)
------------ ------------
7,792,816 7,799,306
OTHER ASSETS
Lease negotiation costs 365,267 -0-
------------ ------------
$10,084,797 $9,639,966
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses and accounts payable $ 421,026 $ 56,340
Dividends payable 128,504 -0-
------------ -------------
TOTAL CURRENT LIABILITIES 549,530 56,340
DEFERRED INCOME TAXES--Note D 1,214,451 1,241,451
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:
Restricted -0- 509,778
Unrestricted 2,590,626 2,102,207
------------- -------------
2,590,626 2,611,985
------------- -------------
8,320,816 8,342,175
COMMITMENTS AND CONTINGENCIES--Note E ------------- -------------
$10,084,797 $9,639,966
========== =========
See notes to financial statements.
17
STATEMENTS OF INCOME
NORTH CAROLINA RAILROAD COMPANY
Year Ended December 31
1994 1993 1992
-----------------------------------------
Revenues:
Lease of roadway and land $ 674,277 $ 642,817 $631,048
Interest income 94,361 87,837 95,423
Dividend income 12,500 25,000 25,000
Rental income 3,960 9,720 9,420
Gain on sale of assets and other 65,976 12,396 12,509
--------- --------- ---------
851,074 777,770 773,400
Expenses:
Salaries and administrative 268,029 229,274 219,284
Professional fees 288,749 160,221 292,930
Insurance and taxes 57,766 51,475 54,422
Depreciation 7,977 6,927 7,329
Loss on retirement of property -0- -0- 24,942
Consulting fees 43,809 146,197 75,836
Other 94,599 100,801 71,810
--------- --------- ----------
760,929 694,895 746,553
--------- --------- ----------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME
TAXES 90,145 82,875 26,847
Income taxes--Note C and D:
Current 10,000 13,000 37,000
Deferred (27,000) (17,000) (54,000)
--------- --------- ----------
(17,000) (4,000) (17,000)
--------- --------- ----------
NET INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 107,145 86,875 43,847
Cumulative effect as of December 31, 1992
of change in method of accounting for
income taxes--Note D: -0- (140,902) -0-
-------- ---------- ----------
NET INCOME (LOSS) $ 107,145 $ (54,027) $ 43,847
======== ======== =======
Earnings per share:
Income before cumulative effect of accounting
change $ 0.03 $0.02 $ 0.01
Cumulative effect of account change 0.00 (0.03) 0.00
-------- --------- ---------
NET INCOME (LOSS) $ 0.03 $(0.01) $ 0.01
===== ===== =====
See notes to financial statements.
18
STATEMENTS OF SHAREHOLDERS' EQUITY
NORTH CAROLINA RAILROAD COMPANY
Additional
Common Paid-In Retained Earnings Shareholders'
Stock Capital Restricted Unrestricted Equity
------------ -------------- --------------- --------------- ---------------
BALANCE AT DECEMBER 31, 1991 2,141,735 $3,588,455 $ 472,597 $2,406,576 $8,609,363
Net income 20,644 23,203 43,847
Cash dividends ($0.03) (128,504) (128,504)
-------------- -------------- -------------- -------------- --------------
BALANCE AT DECEMBER 31, 1992 2,141,735 3,588,455 493,241 2,301,275 8,524,706
Net income (loss) 16,537 (70,564) (54,027)
Cash dividends ($0.03) (128,504) (128,504)
--------------- -------------- -------------- -------------- --------------
BALANCE AT DECEMBER 31, 1993 2,141,735 3,588,455 509,778 2,102,207 8,342,175
Net income 15,850 91,295 107,145
Cash dividends ($0.03) (128,504) (128,504)
Release of restricted assets--Note B (525,628) 525,628
--------------- -------------- -------------- -------------- --------------
BALANCE AT DECEMBER 31, 1994 $2,141,735 $3,588,455 $ -0- $2,590,626 $8,320,816
========= ========= ========= ========= =========
See notes to financial statements.
19
STATEMENTS OF CASH FLOWS
NORTH CAROLINA RAILROAD COMPANY
Year Ended December 31
1994 1993 1992
---------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 107,145 $ (54,027) $ 43,847
Cumulative effect as of change in method of
accounting for income taxes--Note D -0- 140,902 -0-
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (27,000) (17,000) (54,000)
Depreciation 7,977 6,927 7,329
Lease negotiation costs (365,267) -0- -0-
Change in operating assets and liabilities:
Rent receivable 111,901 (154,702) (29,696)
Interest receivable and other assets (22,915) 8,859 (313)
Income taxes recoverable 17,811 39,089 (52,144)
Accrued expenses and accounts payable 364,686 (105,084) 117,313
Unearned rental income -0- -0- (81,323)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 194,338 (135,036) (48,987)
INVESTING ACTIVITIES
Increase in restricted assets (15,850) (16,537) (20,644)
Release of restricted assets 525,628 -0- -0-
Purchase of properties (1,487) (2,733) (2,798)
Purchases of short-term investments (200,000) (817,382) (1,533,984)
Maturities of short-term investments 200,000 890,182 1,763,700
Retirement of property -0- -0- 24,942
------------ ------------ ------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 508,291 53,540 231,216
FINANCING ACTIVITIES
Dividends paid -0- (128,504) (128,504)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES -0- (128,504) (128,504)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 702,629 (210,000) 53,725
Cash and cash equivalents at beginning of year 912,655 1,122,655 1,068,930
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,615,284 $ 912,655 $1,122,655
========== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes was
$36,656, $38,600 and
$36,340 for the years ended December 31, 1994, 1993
and 1992, respectively.
Dividends of $128,504 were declared and accrued at December 31, 1994.
See notes to financial statements.
20
NOTES TO FINANCIAL STATEMENTS
NORTH CAROLINA RAILROAD COMPANY
December 31, 1994
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
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. All the property in the roadway and land account is
leased either to the Norfolk Southern Railway Company ("Norfolk
Southern Railway") or the Atlantic and East Carolina Railway Company
("AECR") (See Note C). Norfolk Southern Railway is a subsidiary of
Norfolk Southern Corporation. AECR is a subsidiary of Norfolk
Southern Railway. 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 during the 1940's.
Income Taxes: Income tax expense is disproportionate to income
before income taxes because the lessee of certain of the properties,
pursuant to the terms of the 1895 lease, pays all taxes attributable
from the lease arrangement. The Company considers the lessee's share of
the amortization of roadway costs to be a permanent difference and no
deferred taxes are provided thereon.
Cash and Cash Equivalents: Cash and cash equivalents include
investments due to mature within ninety days of the balance sheet date.
Short-term investments: Short-term investments include investments
in high quality commercial paper and U. S. Treasury Bills with
maturities within one year of the balance sheet date.
Lease/Transaction Costs: Certain lease negotiation costs
have been capitalized and will be amortized over the life of
any lease extension agreement, if consummated.
NOTE B--RESTRICTED ASSETS
The Company established and maintained a restricted cash
account as required by its lease agreement with AECR through December
30, 1994. The purpose of this account was to establish a depreciation
and reserve fund to replace worn-out rolling stock. In addition to
deposits for depreciation accruing on rolling stock, this account was
credited with revenues derived from the sale of obsolete equipment,
land and interest earned on restricted invested cash. The terms under
which these funds may be withdrawn are specified in the lease
agreement. At December 31, 1994, the balance of $525,628 in this
account became the property of the Company, and accordingly, these
assets are not classified as restricted.
Restricted cash revenues and expenses are reported by the
Company on the income statement; however, these funds are not
available for dividend distribution. Additionally, income taxes
applicable to these funds are not charged against the restricted cash
account. Accordingly, restricted retained earnings is increased for
applicable revenues and decreased for any applicable expenses.
NOTE C--LEASE ON ROADWAY AND LAND
The Company leases its roadway and land under two leases to
Norfolk Southern Railway and one lease to AECR.
21
NOTES TO FINANCIAL STATEMENTS--Continued
NORTH CAROLINA RAILROAD COMPANY
NOTE C--LEASE ON ROADWAY AND LAND--Continued
The first lease to Norfolk Southern Railway (the "1895 Lease")
expired on January 1, 1995, and provided for an annual lease rental of
$286,000. Under the terms of the lease, all income, property and
franchise taxes are paid by the lessee.
The Company leased additional roadway and land to AECR (the "1939
Lease") under the terms of an original lease dated August 30, 1939
between ANCRR and AECR. The original lease was amended on August 29,
1954, and provided for an expiration date of December 31, 1994. The
lessee is responsible for all state and federal taxes imposed upon
the lessee on account of the operation of the railroad. The lessor is
responsible for certain ad valorem property taxes, income taxes
assessed against it, and payroll taxes on account of its employees.
Under the terms of this lease, AECR pays an annual fixed lease rental of
$60,500 plus annual excess lease rentals based upon operating
revenues in excess of $475,000.
The 1895 Lease and the 1939 Lease were to expire by their terms on
January 1, 1995 and December 31, 1994, respectively, and did not
require either the Company or the current lessees to renew the
leases. However, the lessees' operation of the Company's railroad
line may not be discontinued by the lessees unless discontinuance is
authorized by the United States Interstate Commerce Commission ("ICC")
pursuant to the Interstate Commerce Act, and the lessees are continuing
to operate the Company's railroad line and to make rental payments to
the Company pursuant to the terms of the 1895 Lease and 1939 Lease
under a temporary arrangement between the Company and the lessees.
Either the Company or the lessees may terminate the temporary extension
at any time, however, any such termination would be subject to the ICC's
jurisdiction.
As a result of negotiations between the Company and Norfolk
Southern Railway since 1992, the Company issued a news release on
November 22, 1994 indicating that it had reached a "meeting of the
minds" with Norfolk Southern Railway on four primary terms of a lease
extension agreement. The terms of the proposed agreement to extend
the 1895 Lease and the 1939 Lease include a base annual rental of $8
million per year (subject to an annual inflation adjustment formula),
an initial term of fifteen years with two fifteen year renewals at the
lessees' option, and a one-time settlement payment of $5 million by
Norfolk Southern Railway for certain claims (hereinafter referred to
as the "November 1994 proposal").
In connection with a lease extension agreement, the Company intends
to seek qualification as a Real Estate Investment Trust ("REIT")
for income tax purposes. The Company's advisors believe the NCRR
could qualify under these guidelines, although it is unclear at this
time whether the initial year for REIT qualification would be 1995 or
1996. If the Company qualifies as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its income
that is currently distributed to stockholders.
The November 1994 proposal was conditioned upon reaching a
satisfactory definitive agreement on a number of other issues,
including terms that are required to enable the Company to qualify
for REIT status, settlement of the current litigation in Charlotte,
acceptable environmental indemnifications, determination of what real
estate parcels are to be excluded from an extension agreement and
managed separately by the Company,
22
NOTES TO FINANCIAL STATEMENTS--Continued
NORTH CAROLINA RAILROAD COMPANY
NOTE C--LEASE ON ROADWAY AND LAND--Continued
allocation of tax benefits, fiber optic rights, and commitments to
operate and maintain all segments of the Company's line. Following
the announcement in November of 1994, the Company and Norfolk
Southern Railway have conducted intensive negotiations over the
terms of a definitive agreement. Thus far, the negotiations have not
successfully produced a definitive agreement satisfactory to the
Company and Norfolk Southern Railway, but negotiations are continuing.
The second lease to Norfolk Southern Railway expires on December
31, 2067, and provides for an annual lease rental of $81,319 through
December 31, 2017. Beginning January 1, 2018, 6% of the appraised value
of the property will be the annual lease rental for the remainder of
the lease. Under the terms of the lease, all taxes connected with the
property, except income taxes, are paid by the lessee.
A comparison of lease revenue under all lease agreements is
presented below:
Year Ended December 31
1994 1993 1992
--------------------------------------------
Fixed lease revenue $427,819 $427,819 $427,819
Excess lease revenue 246,458 214,998 203,229
-------- -------- --------
TOTAL $674,277 $642,817 $631,048
======= ======= =======
NOTE D--INCOME TAXES
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the liability
method required by FASB Statement No. 109, "Accounting for Income
Taxes." As permitted under the new rules, prior years' financial
statements were not restated. The cumulative effect of adopting
Statement No. 109 as of January 1, 1993 was a reduction of income of
$140,902.
Significant components of the provision for income taxes
attributable to continuing operations are as follows:
Liability Method Deferred Method
---------------- ---------------
1994 1993 1992
---------- -------- ---------
Current:
Federal $ 6,000 $ 9,000 $ 25,000
State 4,000 4,000 12,000
---------- -------- ---------
Total current 10,000 13,000 37,000
Deferred:
Federal (24,000) (15,000) (40,000)
State (3,000) ( 2,000) (14,000)
---------- --------- --------
Total current (27,000) (17,000) (54,000)
---------- --------- --------
$ (17,000) $( 4,000) $ (17,000)
======== ======== ========
23
NOTES TO FINANCIAL STATEMENTS--Continued
NORTH CAROLINA RAILROAD COMPANY
NOTE D--INCOME TAXES--Continued
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax liability
as of December 31, are as follows:
1994 1993
Deferred tax liabilities: ------------ -----------
Tax over book amortization $1,138,550 $1,128,151
Land condemnation 196,500 196,500
------------ -----------
Total deferred tax liability $1,335,050 $1,324,651
Deferred tax asset:
Reorganization costs 120,599 83,200
------------ -----------
Total deferred tax asset 120,599 83,200
------------ -----------
Valuation allowance -0- -0-
------------ -----------
Net deferred tax assets 120,599 83,200
------------ -----------
Net deferred tax liability $1,214,451 $1,241,451
========= =========
The components of the provision for deferred income taxes for
the year ended December 31, 1992 was as follows:
1992
-------------
Amortization of railroad grading $ 15,000
Reorganization costs (69,000)
-------------
Provision for deferred income taxes $(54,000)
========
Year Ended December 31
1994 1993 1992
A reconciliation of the total tax expense to the amount ----------- ----------- ----------
computed by applying the statutory
income tax rates before income taxes follows:
Income taxes at the statutory rate $ 31,551 $ 28,178 $ 9,128
State income taxes, net of federal tax benefit 4,657 4,376 1,418
---------- --------- ---------
36,208 32,554 10,546
Less:
Surtax exemption 20,505 6,714 9,123
Dividend received deduction 3,063 11,550 11,550
Federal and state income taxes paid by lessee 25,131 8,594 8,532
Lessee deferred tax liability 4,851 -0- -0-
Other (342) 9,696 (1,659)
----------- ---------- ----------
53,208 36,554 27,546
----------- ---------- ----------
$ (17,000) $ (4,000) $(17,000)
======== ======== ========
24
NOTES TO FINANCIAL STATEMENTS--Continued
NORTH CAROLINA RAILROAD COMPANY
NOTE E--COMMITMENTS AND CONTINGENCIES
During the fourth quarter of 1989, the Company was notified by
the North Carolina Department of Environment, Health, and Natural
Resources ("DEHNR") of a possible abandoned pesticide disposal site on
property owned by the Company in Johnston County, North Carolina. It
is believed that the site was used by a predecessor owner to burn
and/or bury surplus pesticides from the predecessor's business, which
was not located at the site. In January, 1994, 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 site. On
February 1, 1995, the Court granted partial summary judgment holding
all of the defendants, including the Company, jointly and severally
liable for the site. The Court has not yet ruled on apportionment of
liability or cost sharing among the defendants. According to a
preliminary study conducted by the Company, the estimated costs of
remediation range between $500,000 to in excess of $2,000,000.
The Company will vigorously defend the action by DEHNR, and will
aggressively pursue any other parties who may be liable for any
remediation, removal, or clean-up. The ultimate costs of any
remediation, removal, or clean-up are not known. However, if such
costs are not paid by other parties, the financial position of the
Company would be materially adversely affected.
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
Company. The complaints name the directors of the Company as
defendants and the Company as "nominal defendant". Two of the actions
seek to enjoin a purported lease between the Company and Norfolk
Southern Railway and seek to recover for the Company unspecified
damages and other relief from the directors. Two other actions seek
similar relief and also name the State of North Carolina, the Governor
of North Carolina, and Norfolk Southern Railway as defendants. The
Company's officers and directors are indemnified in the bylaws of the
Company for certain claims and liabilities alleged in the actions,
including the defense costs and expenses. The Company notified its
directors and officers insurance carrier of claims as a result of the
actions, which claims have been acknowledged by the insurance
carrier. The directors and officers insurance policy has an
aggregate limit (annual) of $5,000,000 and a $75,000 aggregate
retention.
On December 10, 1991, the Registrant initiated a lawsuit in the
Mecklenburg County, North Carolina, Superior Court regarding its
railroad corridor through downtown Charlotte. The Registrant alleged
that both the City of Charlotte and Norfolk Southern Railway have
breached contract obligations and obligations based on real property
rights to the Registrant. The litigation has been disclosed by the
Registrant in prior quarterly and annual reports to the Securities
and Exchange Commission. On December 7, 1993, the North Carolina
Court of Appeals ruled against the defendants' appeal and
against the Registrant's cross-appeal. Norfolk Southern Railway then
petitioned the Supreme Court of North Carolina to review the decision
of the North Carolina Court of Appeals, which petition was denied. In
September, 1994, Norfolk Southern Railway petitioned the United States
Supreme Court for review. The United States Supreme Court has not yet
ruled on the petition.
25