<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934)
DELAWARE OTSEGO CORPORATION
(NAME OF ISSUER)
DOCP ACQUISITION LLC
CSX CORPORATION
NORFOLK SOUTHERN CORPORATION
WALTER G. RICH
(NAME OF PERSONS FILING STATEMENT)
COMMON STOCK, PAR VALUE $0.125 PER SHARE
(TITLE OF CLASS OF SECURITIES)
246244 10 7
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------
PETER J. SHUDTZ
GENERAL COUNSEL
CSX CORPORATION
ONE JAMES CENTER
901 EAST CARY STREET
RICHMOND, VIRGINIA 23219-4031
(804) 782-1400
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON PERSONS FILING STATEMENT)
COPIES TO:
<TABLE>
<S> <C> <C> <C>
PAMELA S. SEYMON RONALD B. RISDON J. GARY LANE ERIC J. FRIEDMAN
WACHTELL, LIPTON, ROSEN & KATZ KELLEY DRYE & WARREN LLP GENERAL COUNSEL CORPORATE SKADDEN, ARPS, SLATE,
51 WEST 52ND STREET 101 PARK AVENUE NORFOLK SOUTHERN CORPORATION MEAGHER & FLOM LLP
NEW YORK, NEW YORK 10019 NEW YORK, NEW YORK 10178 THREE COMMERCIAL PLACE 919 THIRD AVENUE
TELEPHONE: (212) 403-1000 TELEPHONE: (212) 808-7800 NORFOLK, VIRGINIA 23510-9241 NEW YORK, NEW YORK 10022
TELEPHONE: (757) 629-2600 TELEPHONE: (212) 735-3000
</TABLE>
------------------------
AUGUST 22, 1997
(DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS)
THIS STATEMENT IS FILED IN CONNECTION WITH A TENDER OFFER
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
CALCULATION OF FILING FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C>
TRANSACTION VALUATION* AMOUNT OF FILING FEE**
$46,157,408 $9,232
- -------------------------------------------------------------------------------------------------------------
* For purposes of calculating the filing fee only. This calculation assumes the purchase of an aggregate of
2,098,064 shares of common stock, par value $.125 per share, of Delaware Otsego Corporation (the
"Shares") at $22.00 net per share in cash.
** The amount of the filing fee, calculated in accordance with Rule 0-11(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), equals 1/50th of 1% of the aggregate value of cash offered by
DOCP Acquisition LLC for such number of shares.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with
which the offsetting fee was previously paid. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
Amount Previously Paid: $9,231.64 Filing Parties: CSX Corporation
Norfolk Southern Corporation
DOCP Acquisition LLC
Walter G. Rich
Form: Schedule 14D-1 Date Filed: August 22, 1997
</TABLE>
================================================================================
<PAGE> 2
INTRODUCTION
This Transaction Statement on Schedule 13E-3, filed jointly by DOCP
Acquisition LLC, a New York limited liability company ("Purchaser") formed by
CSX Corporation, a Virginia corporation ("CSX"), Norfolk Southern Corporation, a
Virginia corporation ("NSC"), and Walter G. Rich ("Mr. Rich") (with any
amendments, supplements, exhibits or schedules thereto, this "Schedule 13E-3),
relates to the offer by Purchaser to purchase all outstanding Shares of Delaware
Otsego Corporation, a New York corporation (the "Company"), at a price of $22.00
per Share, net to the seller in cash, upon the terms and subject to the
conditions set forth in Purchaser's Offer to Purchase dated August 22, 1997 (the
"Offer to Purchase") and in the related Letter of Transmittal (which together
constitute the "Offer"), copies of which are attached hereto as Exhibits (d)(1)
and (d)(2), respectively.
This Schedule 13E-3 is being filed jointly by Purchaser, CSX, NSC and Mr.
Rich. By filing this Schedule 13E-3, none of the signatories concedes that Rule
13e-3 under the Exchange Act is applicable to the Offer, the Merger (as defined
in the Offer) or other transactions contemplated by the Agreement and Plan of
Merger, dated as of August 17, 1997, by and among the Company, CSX, NSC and Mr.
Rich; or that any of such persons "control" or are "affiliates" of the Company
or of one another within the meaning of the applicable United States securities
laws.
The cross-reference sheet below is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Tender Offer
Statement on Schedule 14D-1 filed by CSX, NSC and Mr. Rich with the Securities
and Exchange Commission pursuant to Rule 14d-3 of the Exchange Act (with any
amendments, supplements, exhibits or schedules thereto, the "Schedule 14D-1"),
filed with the Securities and Exchange Commission (the "Commission"), of the
information required to be included in response to the items of this Schedule
13E-3. A copy of the Offer to Purchase, including all exhibits and annexes
thereto, is attached hereto as exhibit (d)(1) and is hereby expressly
incorporated herein by reference, and the responses to each item in this
Schedule 13E-3 are qualified in their entirety by the information contained in
the Schedule 14D-1.
<PAGE> 3
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM IN SCHEDULE 13E-3 WHERE LOCATED IN SCHEDULE 14D-1
- ------------------------------------------------------------------ -------------------------------
<S> <C>
Item 1(a)......................................................... Item 1(a)
Item 1(b)......................................................... Item 1(b)
Item 1(c)......................................................... Item 1(c)
Item 1(d)-(g)..................................................... *
Item 2(a)-(d),(g)................................................. Item 2(a)-(d), (g)
Item 2(e)-(f)..................................................... Item 2(e) and (f)
Item 3............................................................ Item 3
Item 4............................................................ *
Item 5............................................................ Item 5
Item 6............................................................ Item 4(a)-(b)
Item 7(a)......................................................... Item 5
Item 7(b)......................................................... Item 5
Item 7(c)......................................................... *
Item 7(d)......................................................... Item 5
Item 8............................................................ *
Item 9............................................................ *
Item 10........................................................... Item 6
Item 11........................................................... Item 7
Item 12........................................................... *
Item 13........................................................... *
Item 14(a)........................................................ *
Item 14(b)........................................................ *
Item 15........................................................... Item 8
Item 16........................................................... Item 10
Item 17........................................................... Item 11
</TABLE>
<PAGE> 4
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The name of the subject company is Delaware Otsego Corporation, a New
York corporation, which has its principal executive offices at One Railroad
Avenue, Cooperstown, New York 13326.
(b) The class of equity securities being sought is all the outstanding
shares of common stock, par value $0.125 per share, of the Company. The
information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Terms of the
Offer; Expiration Date" in the Offer to Purchase is incorporated herein by
reference.
(c) The information concerning the principal market in which the Shares are
traded and certain high and low sales prices for the Shares in such principal
market set forth in "THE TENDER OFFER -- Price Range of Shares" in the Offer to
Purchase is incorporated herein by reference.
(d) The information concerning dividends set forth in "THE TENDER
OFFER -- Dividends and Distributions" in the Offer to Purchase is incorporated
herein by reference.
(e) Not applicable.
(f) On January 31, 1996, CSX Transportation, Inc., a Virginia corporation
and wholly owned subsidiary of CSX ("CSXT"), acquired 100,000 Shares, which
represented approximately 6% of the Company's outstanding Shares at such date,
at a per Share price of $10.00, for an aggregate purchase price of $1,000,000 in
an acquisition directly from the Company. CSXT subsequently acquired an
additional 10,250 Shares as a result of stock dividends. By virtue of its
ownership of all the capital stock of CSXT, CSX is deemed to share beneficial
ownership of the Shares with CSXT.
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(d) and (g) This Schedule 13E-3 is filed by Purchaser, CSX, NSC and Mr.
Rich. The information concerning the name, state or other place of organization,
principal business and address of the principal office of each of Purchaser,
CSX, NSC, and Mr. Rich, the information concerning the name, business address,
present principal occupation or employment and the name, principal business and
address of any corporation or other organization in which such employment or
occupation is conducted, material occupations, positions, offices or employments
during the last five years, and citizenship of Mr. Rich and each of the
executive officers and directors of Purchaser, CSX and NSC are set forth under
"INTRODUCTION", "THE TENDER OFFER -- Certain Information Concerning Purchaser,
CSX, NSC and Mr. Rich" and Schedule I in the Offer to Purchase and are
incorporated herein by reference.
(e) and (f) During the last five years, none of Purchaser, CSX, NSC or Mr.
Rich, or, to the best knowledge of Purchaser, CSX, NSC, and Mr. Rich, none of
the individuals listed in Schedule I of the Offer to Purchase, has been (i)
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or (ii) a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting activities subject to, United States federal or
state securities laws or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) The information set forth under "SPECIAL FACTORS -- Background of the
Offer and the Merger", "SPECIAL FACTORS -- Interests of Certain Persons in the
Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related
Agreements" and "THE TENDER OFFER -- Certain
1
<PAGE> 5
Information Concerning Purchaser, CSX, NSC and Mr. Rich" in the Offer to
Purchase is incorporated herein by reference.
(b) The information set forth under "INTRODUCTION", "SPECIAL
FACTORS -- Background of the Offer and the Merger", "SPECIAL
FACTORS -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL
FACTORS -- The Merger Agreement and Related Agreements", "SPECIAL
FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for the
Offer and the Merger", "SPECIAL FACTORS -- Plans for the Company after the Offer
and the Merger", "THE TENDER OFFER -- Certain Information Concerning the
Company" and "THE TENDER OFFER -- Certain Information Concerning Purchaser, CSX,
NSC and Mr. Rich" in the Offer to Purchase is incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth under "SPECIAL FACTORS -- The Merger
Agreement and Related Agreements" in the Offer to Purchase is incorporated
herein by reference.
(b) The information set forth under "SPECIAL FACTORS -- The Merger
Agreement and Related Agreements" and "SPECIAL FACTORS -- Interests of Certain
Persons in the Offer and the Merger" in the Offer to Purchase is incorporated
herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(g) The information set forth under "SPECIAL FACTORS -- Purpose and
Effects of the Offer and the Merger; Reasons for the Offer and the Merger" and
"SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger" in the
Offer to Purchase is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(d) The information set forth under "THE TENDER OFFER -- Source and
Amount of Funds" in the Offer to Purchase is incorporated herein by reference.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a)-(d) The information set forth under "INTRODUCTION", "SPECIAL
FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Purpose
and Effects of the Offer and the Merger; Reasons for the Offer and the Merger",
"SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger" and
"SPECIAL FACTORS -- The Merger Agreement and Related Agreements" in the Offer to
Purchase is incorporated herein by reference.
The information set forth under "SPECIAL FACTORS -- Plans for the Company
After the Offer and the Merger" and "THE TENDER OFFER -- Effect of the Offer on
the Market for Shares; Exchange Listing and Exchange Act Registration" in the
Offer to Purchase is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a)-(f) The information set forth under "SPECIAL FACTORS -- Background of
the Offer and the Merger", "SPECIAL FACTORS -- Recommendation of the Special
Committee and the Board; Fairness of the Offer and the Merger", "SPECIAL
FACTORS -- Opinion of Financial Advisor to the Company", "SPECIAL
FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for the
Offer and the Merger", and "SPECIAL FACTORS -- Purpose and Effects of the Offer
and the Merger; Reasons for the Offer and the Merger" in the Offer to Purchase
is incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a)-(c) The information set forth under "SPECIAL FACTORS -- Background of
the Offer and the Merger", "SPECIAL FACTORS -- Recommendation of the Special
Committee and the Board; Fairness of
2
<PAGE> 6
the Offer and the Merger", "SPECIAL FACTORS -- Opinion of Financial Advisor to
the Company", "SPECIAL FACTORS -- Purpose and Effects of the Offer and the
Merger; Reasons for the Offer and the Merger", "SPECIAL FACTORS -- Rights of
Shareholders in the Merger" and "THE TENDER OFFER -- Certain Information
Concerning the Company" in the Offer to Purchase is incorporated herein by
reference.
ITEM 10. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
(a) and (b) The information set forth under "INTRODUCTION", "SPECIAL
FACTORS -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL
FACTORS -- The Merger Agreement and Related Agreements", "THE TENDER
OFFER -- Certain Information Concerning Purchaser, CSX, NSC and Mr. Rich" in the
Offer to Purchase is incorporated herein by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE SUBJECT COMPANY'S SECURITIES.
The information set forth under "INTRODUCTION", "SPECIAL FACTORS
- --Background of the Offer and the Merger", "SPECIAL FACTORS -- Purpose and
Effects of the Offer and the Merger; Reasons for the Offer and the Merger",
"SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger",
"SPECIAL FACTORS -- Interests of Certain Persons in the Offer and the Merger",
"SPECIAL FACTORS -- The Merger Agreement and Related Agreements", "THE TENDER
OFFER -- Certain Information Concerning Purchaser, CSX, NSC and Mr. Rich" and
"THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is
incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a)-(b) The information set forth under "SPECIAL FACTORS -- The Merger
Agreement and Related Agreements" and "SPECIAL FACTORS -- Position of Purchaser,
CSX, NSC and Mr. Rich Regarding Fairness of the Offer and the Merger" in the
Offer to Purchase is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a)-(c) The information set forth under "SPECIAL FACTORS -- Rights of
Shareholders in the Merger" is incorporated herein by reference.
ITEM 14. FINANCIAL INFORMATION.
(a)-(b) The information set forth under "THE TENDER OFFER -- Certain
Information Concerning the Company" in the Offer to Purchase is incorporated
herein by reference.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a)-(b) The information set forth under "INTRODUCTION" and "THE TENDER
OFFER -- Fees and Expenses" in the Offer to Purchase is incorporated herein by
reference.
ITEM 16. ADDITIONAL INFORMATION.
The information set forth under "THE TENDER OFFER -- Certain Legal Matters;
Regulatory Approvals", "THE TENDER OFFER -- Effect of the Offer on the Market
for the Shares, Exchange Listing and Exchange Act Registration" and "SPECIAL
FACTORS -- Certain Litigation Relating to the Offer and the Merger" in the Offer
to Purchase is incorporated herein by reference. The information set forth in
the Offer to Purchase, the Letter of Transmittal and the Agreement and Plan of
Merger, dated as of August 17, 1997, among CSX, NSC, Mr. Rich and the Company,
copies of which are attached hereto as Exhibits (a)(1), (a)(2) and (c)(1),
respectively, is incorporated herein by reference.
3
<PAGE> 7
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<S> <C>
(a) None.
(b)(1) Opinion of Smith Barney Inc., dated August 17, 1997, included as Annex A to Exhibit
(d)(1).
(b)(2) Presentation to the Board by Smith Barney Inc., dated August 17, 1997.
(c)(1) Agreement and Plan of Merger, dated as of August 17, 1997, by and among CSX, NSC,
Mr. Rich and the Company, incorporated by reference to Exhibit 3 to Amendment No. 3
to Schedule 13D of CSX and CSXT, filed with the Commission on August 18, 1997.
(c)(2) Letter Agreement, dated August 17, 1997 by and among CSX, NSC and Mr. Rich,
incorporated by reference to Exhibit 4 to Amendment No. 3 to Schedule 13D of CSX
and CSXT, filed with the Commission on August 18, 1997.
(c)(3) Proposal Letter and Term Sheet, dated August 8, 1997, incorporated by reference to
Exhibit 2 to Amendment No. 2 to Schedule 13D of CSX and CSXT, filed with the
Commission on August 11, 1997.
(d)(1) Form of Offer to Purchase, dated August 22, 1997, incorporated by reference to
Exhibit (a)(1) to the Schedule 14D-1.
(d)(2) Form of Letter of Transmittal, incorporated by reference to Exhibit (a)(2) to the
Schedule 14D-1.
(d)(3) Form of Notice of Guaranteed Delivery, incorporated by reference to Exhibit (a)(3)
to the Schedule 14D-1.
(d)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees,
incorporated by reference to Exhibit (a)(4) to the Schedule 14D-1.
(d)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and
Nominees to Clients, incorporated by reference to Exhibit (a)(5) to the Schedule
14D-1.
(d)(6) Form of Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9, incorporated by reference to Exhibit (a)(6) to the Schedule
14D-1.
(d)(7) Summary Advertisement as published in The Wall Street Journal on August 22, 1997,
incorporated by reference to Exhibit (a)(7) to the Schedule 14D-1.
(d)(8) Text of Press Release issued by the Company on August 17, 1997, incorporated by
reference to Exhibit (a)(8) to the Schedule 14D-1.
(e) Sections 623 and 910 of the New York Business Corporation Law, incorporated by
reference to Schedule III to the Offer to Purchase.
(f) None.
(g)(1) Certain Financial Statements of the Company.
</TABLE>
4
<PAGE> 8
SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
August 22, 1997
DOCP ACQUISITION LLC
By:
/s/ MARK G. ARON
------------------------------------
Name: Mark G. Aron
Title: Authorized Person
By:
/s/ JAMES C. BISHOP, JR.
------------------------------------
Name: James C. Bishop, Jr.
Title: Authorized Person
CSX CORPORATION
By: /s/ MARK G. ARON
------------------------------------
Name: Mark G. Aron
Title: Executive Vice President
-- Law and Public Affairs
NORFOLK SOUTHERN CORPORATION
By: /s/ JAMES C. BISHOP, JR.
------------------------------------
Name: James C. Bishop, Jr.
Title: Executive Vice
President -- Law
/s/ WALTER G. RICH
--------------------------------------
Walter G. Rich
5
<PAGE> 9
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
(a) None.
(b)(1) Opinion of Smith Barney Inc., dated August 17, 1997, included as Annex A to Exhibit
(d)(1).
(b)(2) Presentation to the Board by Smith Barney Inc., dated August 17, 1997.
(c)(1) Agreement and Plan of Merger, dated as of August 17, 1997, by and among CSX, NSC,
Mr. Rich and the Company, incorporated by reference to Exhibit 3 to Amendment No. 3
to Schedule 13D of CSX and CSXT, filed with the Commission on August 18, 1997.
(c)(2) Letter Agreement, dated August 17, 1997 by and among CSX, NSC and Mr. Rich,
incorporated by reference to Exhibit 4 to Amendment No. 3 to Schedule 13D of CSX and
CSXT, filed with the Commission on August 18, 1997.
(c)(3) Proposal Letter and Term Sheet, dated August 8, 1997, incorporated by reference to
Exhibit 2 to Amendment No. 2 to Schedule 13D of CSX and CSXT, filed with the
Commission on August 11, 1997.
(d)(1) Form of Offer to Purchase, dated August 22, 1997, incorporated by reference to
Exhibit (a)(1) to the Schedule 14D-1.
(d)(2) Form of Letter of Transmittal, incorporated by reference to Exhibit (a)(2) to the
Schedule 14D-1.
(d)(3) Form of Notice of Guaranteed Delivery, incorporated by reference to Exhibit (a)(3)
to the Schedule 14D-1.
(d)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees,
incorporated by reference to Exhibit (a)(4) to the Schedule 14D-1.
(d)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Nominees
to Clients, incorporated by reference to Exhibit (a)(5) to the Schedule 14D-1.
(d)(6) Form of Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9, incorporated by reference to Exhibit (a)(6) to the Schedule 14D-1.
(d)(7) Summary Advertisement as published in The Wall Street Journal on August 22, 1997,
incorporated by reference to Exhibit (a)(7) to the Schedule 14D-1.
(d)(8) Text of Press Release issued by the Company on August 17, 1997, incorporated by
reference to Exhibit (a)(8) to the Schedule 14D-1.
(e) Sections 623 and 910 of the New York Business Corporation Law, incorporated by
reference to Schedule III to the Offer to Purchase.
(f) None.
(g)(1) Certain Financial Statements of the Company.
</TABLE>
<PAGE> 1
Exhibit (b)(2)
Delaware Otsego Corp.
PRESENTATION TO THE BOARD OF DIRECTORS
August 17, 1997
SMITH BARNEY INC.
<PAGE> 2
CONFIDENTIAL
MATERIAL FOR THE BOARD OF DIRECTORS
OF
DELAWARE OTSEGO CORP.
The following pages contain material provided to the Board of Directors of
Delaware Otsego Corp. ("Delaware") by Smith Barney Inc. ("Smith Barney") in
connection with the potential business combination involving Delaware. The
accompanying material was compiled or prepared on a confidential basis solely
for the use by the Board of Directors of Delaware and not with a view toward
public disclosure under state and federal securities laws or otherwise. The
information contained in this material was obtained from Delaware and other
sources. Any estimates and projections for Delaware contained herein have been
prepared by the management of Delaware or are based upon such estimates and
projections, and involve numerous and significant subjective determinations,
which may or may not be correct. No representation or warranty, expressed or
implied, is made as to the accuracy or completeness of such information and
nothing contained herein is, or shall be relied upon as, or representation,
whether as to the past or the future. This material was not prepared for use by
readers not as familiar with the business and affairs of Delaware as the Board
of Directors and, accordingly, neither Delaware nor Smith Barney nor their
respective legal or financial advisors or accountants take any responsibility
for the accompanying material when used by persons other than the Board of
Directors of Delaware.
<PAGE> 3
CONFIDENTIAL DELAWARE OTSEGO CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TAB
---
<S> <C>
Transaction Summary ................................................. 1
Summary of Market Process ............................................. 2
Delaware Overview ................................................... 3
Valuation Overview .................................................. 4
Exhibits
Comparable Company Trading Analysis ................................. A
Comparable Transactions ............................................. B
</TABLE>
<PAGE> 4
TAB 1
<PAGE> 5
TRANSACTION SUMMARY
<PAGE> 6
CONFIDENTIAL DELAWARE OTSEGO CORP.
TRANSACTION SUMMARY
STRUCTURE: - Cash tender offer into a voting trust with a
minimum condition of 66.67% of the shares
outstanding
CONSIDERATION: - $22.00 per share in cash for approximately
80% of the shares outstanding or an
enterprise value of approximately $65
million
- Price represents:
- 6.0% premium over the 7/29/97 price
(confirmation of discussions)
- 18.9% premium over the 7/15/97 price
(1 month)
- 31.3% premium over the 5/15/97 price
(3 months)
- 137.0% premium over the 2/15/97 price
(6 months)
STOCK OPTIONS: - Each outstanding option, whether or not
exercisable, shall be entitled to receive
the difference between $22.00 and the
exercise price
TAX/ACCOUNTING TREATMENT: - The transaction will be taxable to DOC
shareholders and accounted for under
purchase accounting treatment
TRANSACTION PROTECTIONS: - Standard fiduciary outs
- $3 million break-up fee
CONDITIONS TO CLOSE: - No material adverse change
Other customary conditions to closing
<PAGE> 7
TAB 2
<PAGE> 8
MARKETING PROCESS SUMMARY
<PAGE> 9
CONFIDENTIAL DELAWARE OTSEGO CORP.
PROCESS SUMMARY
[TRIANGLE GRAPHIC]
14 Potential Buyers Contacted
6 Confidential Memorandums Sent
2 Indications of Interest Received (1)
Meetings & extensive Negotiations with 2 Potential Buyers.
Due Diligence was Performed
Sign agreement w/CSX Group
Notes:
(1) 2 Indications of Interest Received for TP&W.
<PAGE> 10
TAB 3
<PAGE> 11
DELAWARE OVERVIEW
<PAGE> 12
\CONFIDENTIAL DELAWARE OTSEGO CORP.
TRADING HISTORY
LATEST TWELVE MONTHS
[Two line charts, one showing closing price per day for the past twelve
months, and the other showing trading volume per day for the past twelve
months, plotting the following data:]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DATE PRICE VOLUME DATE PRICE VOLUME DATE PRICE VOLUME
- ---- ------- -------- ---- ----- ------ ---- ----- ------
1996 1996
8/1 8 21/64 2625 12/30 5/26
8/2 12/31 9 17/32 315 5/27 18 1/2 7000
1997
1/1 5/28 19 3/4 11000
8/5 1/2 525 5/29 21 3/4 31200
8/6 1/3 9 11/64 1470 5/30 19 3/4 7800
8/7 8 21/64 1050
8/8 7 55/64 2310 1/6 6/2 22 8900
8/9 1/7 6/3 21 1/4 6400
1/8 6/4 20 1/2 7800
8/12 8 3/32 5985 1/9 6/5 19 4200
8/13 8 3/32 945 1/10 9 17/32 525 6/6 19 3100
8/14 7 55/64 315
8/15 7 55/64 525 1/13 9 9/32 1995 6/9 19 10100
8/16 8 3/32 525 1/14 6/10 19 3800
1/15 9 9/32 2310 6/11 21 8000
8/19 1/16 9 41/64 1050 6/12 20 1400
8/20 1/17 9 37/64 1365 6/13 19 2400
8/21
8/22 1/20
8/23 1/21 9 49/64 420 6/16 19 6400
1/22 6/17 19 4600
8/26 1/23 9 49/64 1050 6/18 20 13700
8/27 7 5/8 1050 1/24 9 49/64 2490 6/19 18 1/4 7600
8/28 H 8 21/64 630 6/20 17 1/2 2500
8/29 7 5/8 105 1/27 9 9/32 3465
8/30 7 3/8 210 1/28 10 1575 6/23 19 1/2 2900
1/29 9 9/32 1575 6/24 18 1/4 1200
9/2 1/30 6/25 18 1/2 17800
9/3 1/31 6/26 19 1/2 900
9/4 7 47/64 3255 6/27 18 1/8 10200
9/5 2/3
9/6 2/4 9 9/32 1575 6/30 18 1/2 9700
2/5 9 9/32 1050 7/1 18 3/8 17000
9/9 8 3/32 1575 2/6 9 49/64 105 7/2 19 10600
9/10 7 3/8 315 2/7 9 3/64 2205 7/3 18 3/4 200
9/11 7/4
9/12 8 3/32 1260 2/10
9/13 8 3/32 210 2/11 9 11/64 1680 7/7 18 5/8 13000
2/12 9 49/64 1155 7/8 18 1/2 17900
9/16 7 9/64 210 2/13 10 6300 7/9 18 1/2 3000
9/17 8 3/32 315 2/14 9 9/32 1050 7/10 18 12000
9/18 7/11 18 1500
9/19 7 5/8 210 2/17
9/20 8 3/32 840 2/18 9 9/32 1260 7/14 18 2600
2/19 10 1260 7/15 18 1/2 2500
9/23 7 5/8 2625 2/20 9 17/32 525 7/16 18 1/4 6100
9/24 7 5/8 3150 2/21 9 9/32 8925 7/17 18 4800
9/25 7/18 18 1/4 6500
9/26 7 3/8 840 2/24 10 15/64 2100
9/27 8 3/32 1260 2/25 9 17/32 7980 7/21 19 4600
2/26 10 1/2 300 7/22 19 1/2 17600
9/30 7 3/8 5460 2/27 7/23 19 1/2 4400
10/1 7 51/64 3150 2/28 10 500 7/24 19 1/8 6800
10/2 8 3/32 105 7/25 19 5600
10/3 7 55/64 5250 3/3 11 16100
10/4 7 5/8 525 3/4 13 3/8 18400 7/28 20 3/4 27300
3/5 15 3/4 45100 7/29 20 3/4 5300
10/7 7 3/8 105 3/6 15 3/4 14000 7/30 22 49100
10/8 3/7 15 3/4 6700 7/31 23 1/4 51300
10/9 7 3/8 105 8/1 H 24 21300
10/10 7 55/64 5460 3/10 15 27100
10/11 L 7 9/64 315 3/11 13 1/2 16100 8/4 22 3/4 39500
3/12 14 3/4 6200 8/5 22 1/4 9100
10/14 L 7 9/64 420 3/13 14 8400 8/6 23 1/4 14500
10/15 7 55/64 3990 3/14 14 1/2 9500 8/7 23 5/8 10100
10/16 7 5/8 7245 8/8 23 7800
10/17 8 3/32 210 3/17 14 7/8 9500
10/18 7 5/8 3465 3/18 15 9000 8/11 21 6000
3/19 16 25000 8/12 20 9800
10/21 8 37/64 5250 3/20 16 1/2 6200 8/13 21 1200
10/22 8 13/16 525 3/21 15 3/8 21000 8/14 21 17200
10/23 8 13/16 9975 8/15 22 5800
10/24 9 3/64 840 3/24 16 1/2 5300
10/25 8 3/32 1155 3/25 16 3/4 5500 8/18 20 7/8 15200
3/26 16 1/2 11000 8/19 21 3/4 11900
10/28 8 37/64 525 3/27 16 1/4 4800 8/20 21 7/86 8200
10/29 8 3/32 105 3/28 8/21 21 9/16 29300
10/30 8 11/16 3045
10/31 3/31 16 1/2 3300
11/1 9 3/64 525 4/1 17 2200
4/2 16 1/2 1600
11/4 9 3/64 105 4/3 16 8400
11/5 9 3/64 1050 4/4 16 1900
11/6 9 9/32 8610
11/7 9 17/32 1785 4/7 16 1/8 2700
11/8 10 105 4/8 16 1/4 5300
4/9 15 1/4 1800
11/11 9 3/64 420 4/10 15 1/2 5200
11/12 10 15/64 1260 4/11 15 1/4 6900
11/13 10 15015
11/14 10 15/32 1050 4/14 15 1/4 1300
11/15 4/15 16 13300
4/16 15 1/2 700
11/18 9 49/64 1575 4/17 16 500
11/19 9 49/64 210 4/18 16 1500
11/20 9 17/32 7350
11/21 9 17/32 4830 4/21 15 1/4 2500
11/22 9 41/64 2100 4/22 15 1/4 600
4/23 15 1700
11/25 9 41/64 2100 4/24 15 1/4 8200
11/26 9 9/32 105 4/25 15 800
11/27 9 9/32 630
11/28 4/28 15 1/4 1500
11/29 4/29 16 7700
4/30 15 3/4 1000
12/2 5/1 16 400
12/3 5/2 16 5/8 6200
12/4 9 9/32 105
12/5 9 9/32 8085 5/5 16 1/2 4300
12/6 9 3/64 1155 5/6 16 1/2 1500
5/7 16 9/16 2300
12/9 9 9/32 105 5/8 17 1100
12/10 9 9/32 735 5/9 17 8400
12/11 9 13/32 9975
12/12 9 17/32 9585 5/12 16 1/2 7400
12/13 9 3/64 525 5/13 17 3100
5/14 1000
12/16 9 21/64 3045 5/15 15 3/4 400
12/17 9 3/64 420 5/16 16 1/2 2200
12/18 9 3/64 315
12/19 9 3/64 210 5/19 16 1/2 4200
12/20 9 17/32 105 5/20 16 3/4 3300
5/21 17 1/4 800
12/23 5/22 17 15900
12/24 9 17/32 525 5/23 18 14600
12/25
12/26 9 3/64 630
12/27 9 11/64 1260
</TABLE>
3/6/97: Delaware Otsego's shares increase on potential benefits from Conrail
split
4/3/97: Delaware Otsego reports Q4 Net Income of $11,555 versus loss of
$499,728
5/3/97: Delaware Otsego reports Q1 loss of $690,796 versus $974,267 loss
7/15/97: The ending of the Conrail tender offer sends Delaware Otsego's stock
higher
csx announces it has submitted an offer to Delaware
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
9-Sep-96 23-Oct-96 6-Dec-96 21-Jan-97 6-Mar-97 21-Apr-97 4-Jun-97 18-Jul-97
</TABLE>
Daily Prices: August 14, 1996 to August 15, 1997
<PAGE> 13
CONFIDENTIAL DELAWARE OTSEGO CORP.
TRADING HISTORY
LATEST THREE MONTHS
[Two line charts, one showing closing price per day for the past three
months, and the other showing trading volume per day for the past three
months, plotting the following data:]
<TABLE>
<CAPTION>
<S> <C> <C> <S> <C> <C>
DATE PRICE VOLUME DATE PRICE VOLUME
- ---- ----- ------ ---- ----- ------
5/22 17 15900 7/7 18 5/8 13000
5/23 18 14600 7/8 18 1/2 17900
7/9 18 1/2 3000
5/26 7/10 18 12000
5/27 18 1/2 7000 7/11 18 1500
5/28 19 3/4 11000
5/29 21 3/4 31200 7/14 18 2600
5/30 19 3/4 7800 7/15 18 1/2 2500
7/16 18 1/4 6100
6/2 22 8900 7/17 18 4800
6/3 21 1/4 6400 7/18 18 1/4 6500
6/4 20 1/2 7800
6/5 19 4200 7/21 19 4600
6/6 19 3100 7/22 19 1/2 17600
7/23 19 1/2 4400
6/9 19 10100 7/24 19 1/8 6800
6/10 19 3800 7/25 19 5600
6/11 21 8000
6/12 20 1400 7/28 20 3/4 27300
6/13 19 2400 7/29 20 3/4 5300
7/30 22 49100
7/31 23 1/4 51300
6/16 19 6400 8/1 H 24 21300
6/17 19 4600
6/18 20 13700 8/4 22 3/4 39500
6/19 18 1/4 7600 8/5 23 1/4 9100
6/20 17 1/2 2500 8/6 23 1/4 14500
8/7 23 5/8 10100
6/23 19 1/2 2900 8/8 23 7800
6/24 18 1/4 1200
6/25 18 1/2 17800 8/11 21 6000
6/26 19 1/2 900 8/12 20 9800
6/27 18 1/8 10200 8/13 21 1200
8/14 21 17200
6/30 18 1/2 9700 8/15 22 5800
7/1 18 3/8 17000
7/2 19 10600 8/18 20 7/8 15200
7/3 18 3/4 200 8/19 21 3/4 11900
7/4 8/20 21 7/8 8200
8/21 21 9/16 29300
</TABLE>
5/29: Rumors that CSX and NS may be looking at Delaware as a possible takeover
candidate.
7/31: Discussions between CSX/NS and were made public and Delaware confirmed
the discussions.
8/11: CSX/NS/Rich announce that they have formally communicated an offer to
Delaware at $19/share.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
22-May-97 3-June-97 13-Jun-97 25-Jun-97 7-Jul-97 17-Jul-97 29-Jul-97 8-Aug-97
Daily Prices: May 15, 1997 to August 15, 1997
</TABLE>
<PAGE> 14
CONFIDENTIAL DELAWARE OTSEGO CORP.
- ---------------------------------------------------------------------
TRADING HISTORY
[BAR CHART GRAPHIC]
PERCENT OF TOTAL VOLUME TRADED AT SPECIFIED PRICES
- -- LATEST TWELVE MONTHS
August 16, 1996 to August 15, 1997
DAILY CLOSING PERCENT TRADED
7-9 6.28%
P 9-11 11.36% P
E E
R -25 11-13 1.29% -25 R
C C
E -20 13-15 5.47% -20 E
N N
T -15 15-17 23.48% -15 T
-10 17-19 15.20% -10
T T
R - 5 19-21 13.83% - 5 R
A A
D - 0 21-23 13.92% - 0 D
E E
D 23-25 9.17% D
Graph shown 1,244,715 cumulative shares, 68% of
1,831,000 shares outstanding at reported on 8/15/97.
<PAGE> 15
CONFIDENTIAL DELAWARE OTSEGO CORP.
FINANCIAL STATEMENTS SUMMARY
(Figures in thousands)
<TABLE>
<CAPTION>
Historical Projected(1)
-------------------------------------------- ------------
1994 1995 1996 LTM (2) 1997
------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues (3) $27,462 $34,323 $32,281 $32,317 $32,087
Operating income (loss) (2,459) (1,562) (789) 454 1,183
Operating margin -9.0% -4.5% -2.4% 1.4% 3.7%
Net income (4) (2,650) (1,584) (1,394) (712) 94
Net income margin -9.7% -4.6% -4.3% -2.2% 0.3%
Depreciation & Amortization $ 3,885 $ 4,186 $ 4,604 $ 4,740 $ 4,949
EBITDA 1,426 2,624 3,815 5,194 6,132
Cash flow 1,235 2,602 3,210 4,028 5,043
Balance Sheet Data:
Cash $ 1,297 $ 1,431
Total debt $19,504 19,544
Shareholder's equity $35,062 42,152
</TABLE>
Notes:
- ------------------
(1) Based on Management's projections. Management did not prepare projections
past 1997 due to the expiration of the CSX agreement.
(2) As of June 30, 1997.
(3) Excludes Real Estate Revenue.
(4) Excludes Gain on Sale of Property, Equipment & Other
<PAGE> 16
TAB 4
<PAGE> 17
VALUATION OVERVIEW
<PAGE> 18
CONFIDENTIAL DELAWARE OTSEGO CORP.
VALUATION SUMMARY
[BAR GRAPH]
<TABLE>
<CAPTION>
$4.00 $9.00 $14.00 $19.00 $24.00 $29.00 $34.00
<S> <C>
Comparable Companies(1)(2)............................ $17.27 -- $22.50
Precedent Transactions(1)(2).......................... $16.35 -- $21.37
52-Week Price Range................................... $ 7.14 -- $24.50
CSX Offer............................................. $22.00
</TABLE>
Notes:
- -----------------
(1) Valuation is dependent on Delaware's ability to resolve long-term revenue
issues.
(2) Valuation ranges exclude Operating Income and Net Income multiples due to
Delaware's lack of operating income and net income.
<PAGE> 19
CONFIDENTIAL DELAWARE OTSEGO CORP.
VALUATION ANALYSIS
(Figures in thousands, except per share data)
<TABLE>
<S> <C>
Shares Outstanding 2,332
Total Debt $19,504
w/o convertible $15,924
Total Cash $1,297
</TABLE>
<TABLE>
<CAPTION>
Implied per
Share Values
------------------
Methodology Adj. Range Data Range
- ----------- ---------------- --------- -------------------
Comparable Companies
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LTM Revenue 2.0 -- 2.4 $32,316.7 $21.17 -- $27.26
LTM EBITDA 8.8 -- 10.8 5,194.0 13.37 -- 17.74
LTM Operating Income 13.5 -- 16.5 454.0 NA -- NA
1997E Net Income 13.0 15.8 94.2 0.52 0.64
- -------------------------------------------------------------------------
Reference range -
Revenue and EBITDA $17.27 $22.50
- -------------------------------------------------------------------------
PRECEDENT TRANSACTIONS
- -------------------------------------------------------------------------
LTM Revenue 1.9 -- 2.3 $32,316.7 $19.92 -- $25.74
LTM EBITDA 8.6 -- 10.5 5,194.0 12.77 -- 17.00
LTM Operating Income 11.3 -- 13.9 454.0 NA -- NA
1997E Net Income 15.6 -- 19.0 94.2 0.63 0.77
- -------------------------------------------------------------------------
Reference range -
Revenue and EBITDA $16.35 $21.37
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
CONFIDENTIAL DELAWARE OTSEGO CORP.
- ---------------------------------------------------------------------------------------------------------------------
VALUATION MATRIX
(Figures in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Purchase Price per Share $19.00 $20.00 $21.00 $22.00 $23.00 $24.00
Premium to Market -13.6% -9.1% -4.5% 0.0% 4.5% 9.1%
Common Shares Outstanding 1.831 1.831 1.831 1.831 1.831 1.831
Options
Options Outstanding(1) 0.243 0.243 0.243 0.243 0.243 0.243
Strike Price(1) $8.76 $8.76 $8.76 $8.76 $8.76 $8.76
Treasury Method Shares 0.131 0.137 0.142 0.146 0.151 0.154
Convertible Debt
Shares from Convertible Debt 0.355 0.355 0.355 0.355 0.355 0.355
Fully Diluted Shares Outstanding 2.317 2.323 2.328 2.332 2.337 2.340
====== ====== ====== ====== ====== ======
Total Equity Value $44.0 $46.5 $48.9 $51.3 $53.7 $56.2
Net Debt(2) 15.9 15.9 15.9 15.9 15.9 15.9
Total Enterprise Value $60.0 $62.4 $64.8 $67.3 $69.7 $72.1
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Comparable Regionals Precedent Transactions
Mean Range Mean Range
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LTM Revenue $32.3
Multiple 1.9x 1.9 2.0x 2.1x 2.2x 2.2x 2.20x 1.80x 2.90x 2.10x 0.80x 3.30x
LTM EBITDA $5.2
Multiple 11.55 12.01 12.48 12.95 13.42 13.88 9.80x 7.00x 13.40x 9.50x 7.90x 13.80x
LTM Operating
Income $0.5
Multiple 132.1 137.4 142.8 148.1 153.5 158.8 15.00x 10.60x 18.80x 12.60x 7.10x 20.50x
LTM Net Income $0.1
Multiple 467.4 493.1 518.9 544.7 570.5 596.3 23.90x 17.80x 35.10x 20.20x 12.60x 26.30x
1997E Net
Income(3) $2.3
Multiple 25.6 26.7 27.7 28.7 29.8 30.8 14.40x 11.80x 16.90x 17.30x 14.50x 20.10x
</TABLE>
__________________________________
(1) Per Delaware Management
(2) Based on 6/30/97 10Q
(3) Per Management's internal projections.
<PAGE> 21
EXHIBITS
<PAGE> 22
TAB A
<PAGE> 23
COMPARABLE COMPANY TRADING ANALYSIS
<PAGE> 24
CONFIDENTIAL DELAWARE OTSEGO CORP.
- -------------------------------------------------------------------------------
TRADING MULTIPLES OF SELECTED RAILROADS
(Figures in millions, except per share data)
<TABLE>
<CAPTION>
MARKET VALUE /
PRICE / EARNINGS(1) AFTER-TAX CASH FLOW(2)
CLOSE DIV. MARKET --------------------------- -------------------------
8/15/97 YIELD VALUE LTM 1997E 1998E LTM 1997E 1998E
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Emons Trans. Group, Inc. (EMON) $3.13 0.0% $18.1 53.9 N/A N/A 9.9 N/A N/A
Prov. & Worcester Railroad Co. (PWRR) $12.25 1.0% $27.5 17.8 N/A N/A 6.7 N/A N/A
RailAmerica, Inc. (RAIL) $4.50 0.0% $37.9 35.1 11.8 8.2 12.0 N/A N/A
Railtex, Inc. (RTEX) $19.13 0.0% $175.0 18.7 16.9 12.7 7.6 N/A N/A
MEAN: 23.9 14.4 10.4 9.0
MEDIAN: 18.7 14.4 10.4 8.7
HIGH: 35.1 16.9 12.7 12.0
LOW: 17.8 11.8 8.2 6.7
</TABLE>
<TABLE>
<CAPTION>
ADJUSTED MARKET VALUE /
-----------------------------------------------------
ADJ. LTM 1997E (4)
TANG. MARKET -----------------------------------------------------
B.V. VALUE(3) REV. EBITDA OP. INC. EBITDA OP. INC.
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emons Trans. Group, Inc. (EMON) 3.0 $28.6 1.8 9.7 17.5 N/A N/A
Prov. & Worcester Railroad Co. (PWRR) 0.8 $41.2 1.9 7.0 10.6 N/A N/A
RailAmerica, Inc. (RAIL) 2.0 $79.3 2.9 13.4 18.8 N/A N/A
Railtex, Inc. (RTEX) 1.4 $293.6 2.3 8.9 13.2 N/A N/A
1.8 2.2 9.8 15.0
1.7 2.1 9.3 15.4
3.0 2.9 13.4 18.8
0.8 1.8 7.0 10.6
</TABLE>
<TABLE>
<CAPTION>
OP. LEASE ADJ.
MARKET VALUE /
OP. LEASE -----------------
ADJ. EBITDAR
MARKET ----------------
VALUE(5) LTM 1997E
-----------------------------
<S> <C> <C> <C>
Emons Trans. Group, Inc. (EMON) $35.3 8.7 N/A
Prov. & Worcester Railroad Co. (PWRR) $44.8 6.9 N/A
RailAmerica, Inc. (RAIL) $84.0 12.6 N/A
Railtex, Inc. (RTEX) $315.5 8.6 N/A
9.2
8.7
12.6
6.9
</TABLE>
NOTES:
(1) Wall Street earnings estimates.
(2) Cash flow defined as net income plus deferred income taxes and depreciation
and amortization.
(3) Adjusted market value defined as market value of equity plus total debt,
minority interest and preferred stock less cash and equivalents.
(4) EBITDA and EBIT projections from Value Line and other Wall Street research;
in cases where no estimates are available, projections have been
extrapolated from earnings estimates and LTM operating margins.
(5) Adjusted market value has been restated to include operating lease expense
on revenue equipment, capitalized at 6 times, in order to reflect
"off-balance" sheet operating lease financing.
Note: Where applicable, company latest twelve months operating data has been
adjusted to exclude extraordinary or one-time gains/losses.
Note: Italics indicate outlier excluded from the summary calculation.
<PAGE> 25
Confidential DELAWARE OTSEGO CORP.
- --------------------------------------------------------------------------------
OPERATING STATISTICS OF SELECTED RAILROADS
(Figures in millions, except per share data)
<TABLE>
<CAPTION>
RAILROAD SEGMENT CONSOLIDATED
------------------------ ---------------------------------------------- EST. 5YR
% OF LTM LTM LTM AS A % OF LTM REVENUE NET INC.
REVENUE OP. RATIO REVENUE EBITDAR EBITDA OP. INC. NET INC. GROWTH(1)
--------------------------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Emons Trans. Group, Inc. 100.0% 89.5% $ 15.6 26.0% 18.9% 10.5% 2.2% N/A
(EMON)
Prov. & Worcester Railroad 100.0% 82.1% $ 21.6 29.8% 27.0% 17.9% 7.1% N/A
Co. (PWRR)
RailAmerica, Inc. (RAIL) 46.9% 70.0% $ 27.6 24.2% 21.4% 15.3% 3.9% 20.0%
Railtex, Inc. (RTEX) 100.0% 82.5% $126.7 28.9% 26.1% 17.5% 7.4% 16.4%
--------------------------------------------------------------------------------------------
MEAN: 27.3% 23.3% 15.3% 5.1% 18.2%
MEDIAN: 27.5% 23.7% 16.4% 5.5% 18.2%
HIGH: 29.8% 27.0% 17.9% 7.4% 20.0%
LOW: 24.2% 18.9% 10.5% 2.2% 16.4%
-------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA CREDIT QUALITY STATISTICS
EST. 1998 -------------------------- ---------------------------------
P/E RATIO / TOTAL TOTAL BOOK DEBT / EBITDA / DEBT /
GROWTH ASSETS DEBT VALUE CAP.(2) INT. EXP. EBITDA
----------------------- -------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emons Trans. Group, Inc. N/A $ 23.7 $ 12.0 $ 6.1 66.2% 2.9 4.1
(EMON)
Prov. & Worcester Railroad N/A $ 67.9 $ 13.8 $ 36.1 27.6% 4.3 2.4
Co. (PWRR)
RailAmerica, Inc. (RAIL) 40.9% $ 77.7 $ 42.8 $ 22.4 65.7% 2.5 7.3
Railtex, Inc. (RTEX) 77.2% $291.8 $121.5 $124.3 49.4% 4.2 3.7
----------------------------------------------------------------------------------------------
MEAN: 59.1% 52.2% 3.5 4.3
MEDIAN: 59.1% 57.6% 3.6 3.9
HIGH: 77.2% 66.2% 4.3 7.3
LOW: 40.9% 27.6% 2.5 2.4
----------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) Median Wall Street estimates.
(2) Total capitalization defined as total debt plus minority interest, preferred
stock, common shareholders' equity and deferred income taxes.
Note: Where applicable, company latest twelve months operating data has been
adjusted to exclude extraordinary or one-time gains/losses.
Note: Italics indicate outlier excluded from the summary calculation.
<PAGE> 26
================================================================================
TAB B
<PAGE> 27
================================================================================
------------------------------------------
COMPARABLE TRANSACTIONS
------------------------------------------
<PAGE> 28
CONFIDENTIAL DELAWARE OTSEGO CORP.
- --------------------------------------------------------------------------------
SELECTED COMPARABLE TRANSACTIONS IN THE RAILROAD INDUSTRY
(Figures in millions, except per share data)
<TABLE>
<CAPTION>
Purchase Price as a Multiple of:
---------------------------------------------
Net Income
Annc. Target / Purchase Transaction ------------------- Tang. After Tax
Date Acquiror Price Value LTM 1Yr. Fwd. Bk. Val. Cash Flow
- --------- -------------------------------------------------- -------- ----------- ----- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
10/15/96 Conrail Inc. / $10,200 $12,261 22.7x 20.1x 3.5x 13.7x
Joint Acquirors (Norfolk Southern and CSX Corp.)
8/2/95 Southern Pacific Rail Corp. / $4,037 $5,612 Neg. N/A 3.8x 36.7x
Union Pacific Corp. (1)
3/10/95 Chicago & North Western Trans. Co. / $2,197 $3,220 26.2x N/A 7.0x 13.3x
Union Pacific Corp.
6/29/94 Santa Fe Pacific Corp. - Rail Oper. / $3,748 $4,836 26.3x N/A 3.4x 11.5x
Burlington Northern
8/13/93 Amoskeag Co. (2) / $139 $770 21.4x N/A 1.2x 3.4x
Fieldcrest Cannon Inc.
9/21/92 MidSouth Corp.(2) / $210 $346 20.6x 17.2x 3.5x 9.9x
Kansas City Southern Ind.
1/8/92 Fox River Valley Railroad / $54 $63 17.6x N/A 1.3x 10.0x
Wisconsin Central
9/14/90 RF&P Corp. (Railroad Oper.) / $135 $122 14.3x N/A 1.1x N/A
CSX Corp. (3)
10/19/89 Soo Line Corp. / $204 $509 N/A 121.5x 0.8x N/A
Canadian Pacific
6/6/89 CNW Railway / $933 $1,583 12.6x 14.5x 1.8x 7.3x
CNW Acquisition Co.
1/27/89 Illinois Central Trans. Co. / $433 $689 N/A N/A 0.9x N/A
The Prospect Group (3)
--------------------------------------------------------------------------
MEAN: 20.2x 17.3x 2.6x 13.2x
MEDIAN: 21.0x 17.2x 1.8x 10.8x
HIGH: 26.3x 20.1x 7.0x 36.7x
LOW: 12.6x 14.5x 0.8x 3.4x
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Transaction Value as a Multiple of:
---------------------------------------------
LTM
Annc. Target / -------------------------------- Total
Date Acquiror Revenues EBITDA EBIT Assets
- --------- -------------------------------------------------- -------- ------- ----- ------
<S> <C> <C> <C> <C> <C>
10/15/96 Conrail Inc. / 3.3x 13.8x 20.5x 1.5x
Joint Acquirors (Norfolk Southern and CSX Corp.)
8/2/95 Southern Pacific Rail Corp. / 2.4x 26.0x 56.1x 1.2x
Union Pacific Corp. (1)
3/10/95 Chicago & North Western Trans. Co. / 2.9x 10.5x 14.3x 1.5x
Union Pacific Corp.
6/29/94 Santa Fe Pacific Corp. - Rail Oper. / 2.0x 9.2x 14.0x 0.9x
Burlington Northern
8/13/93 Amoskeag Co. (2) / 0.8x 7.9x 12.1x 0.8x
Fieldcrest Cannon Inc.
9/21/92 MidSouth Corp.(2) / 3.2x 8.1x 11.0x 1.3x
Kansas City Southern Ind.
1/8/92 Fox River Valley Railroad / 2.1x 8.0x 11.3x 0.9x
Wisconsin Central
9/14/90 RF&P Corp. (Railroad Oper.) / 2.4x N/A 7.1x 0.9x
CSX Corp. (3)
10/19/89 Soo Line Corp. / 0.9x 10.0x 10.0x 0.6x
Canadian Pacific
6/6/89 CNW Railway / 1.6x 9.2x 13.5x 1.0x
CNW Acquisition Co.
1/27/89 Illinois Central Trans. Co. / 1.2x 9.3x 38.5x 0.5x
The Prospect Group (3)
---------------------------------------------------------------
MEAN: 2.1x 9.5x 12.6x 1.0x
MEDIAN: 2.1x 9.2x 12.1x 0.9x
HIGH: 3.3x 13.8x 20.5x 1.5x
LOW: 0.8x 7.9x 7.1x 0.5x
---------------------------------------------------------------
</TABLE>
NOTES:
(1) Union Pacific announced on October 13, that it was prepared to increase its
offer to $20 per share if additional information would be made available to
justify the higher price.
(2) These transactions were grossed up to 100% for the purpose of this analysis.
(3) CSX Corp. purchased only the railroad assets of the RF&P Corporation,
Virginia Retirement System bought the remaining assets and liabilities in a
stock purchase.
December 1990 financials were used since segment breakdowns were
unavailable in quarterly numbers.
In certain cases, company LTM operating data has been adjusted to exclude
extraordinary and other one time charges and gains.
Note: Italics indicate outlier excluded from the summary calculation.
<PAGE> 1
Exhibit (g)(1)
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,297 $ 1,179
Accounts receivable 6,377 5,269
Reimbursable construction costs 892 1,794
Materials and supplies 732 1,179
Deferred income taxes 332 332
Prepaid expenses 966 730
Other current assets 149 369
-------- --------
Total Current Assets 10,745 10,852
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 99,427 97,724
Less: accumulated depreciation and
amortization (36,052) (33,790)
-------- --------
Total Property, Plant and Equipment 63,375 63,934
OTHER ASSETS
Other Assets 1,204 1,195
Investments in Affiliates 2,371 2,342
-------- --------
Total Other Assets 3,575 3,537
-------- --------
TOTAL ASSETS $ 77,695 $ 78,323
======== ========
</TABLE>
<PAGE> 2
The accompanying notes are an integral part of the financial statements.
Part I - Financial Information
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Notes payable to bank $ 2,600 $ 2,400
Accounts payable 9,714 11,020
Accrued and other current liabilities 2,493 1,686
Current maturities of long-term debt 1,771 1,768
------- -------
Total Current Liabilities 16,578 16,874
LONG-TERM LIABILITIES
Long-term debt 11,553 12,383
Deferred income taxes 10,922 10,892
SUBORDINATED NOTES
6.5% Convertible subordinated notes 3,580 3,580
------- -------
Total Long-Term Liabilities 26,055 26,855
------- -------
Total Liabilities 42,633 43,729
STOCKHOLDERS' EQUITY
Common stock and additional
paid-in capital 6,777 6,355
Contributed capital 20,951 20,092
Retained earnings 7,334 8,147
------- -------
Total Stockholders' Equity 35,062 34,594
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $77,695 $78,323
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(Thousands, except share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Railway operating revenues $7,580 $7,166 $14,292 $14,469
Other operating revenues 552 481 1,070 857
------ ------ ------- -------
Total Operating Revenues 8,132 7,647 15,362 15,326
OPERATING EXPENSES
Maintenance, transportation
and car hire 5,591 5,909 10,970 12,425
Depreciation and amortization 1,198 1,137 2,400 2,264
General, administrative and other 1,171 1,260 2,421 2,309
------ ------ ------- -------
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C>
Total Operating Expenses 7,960 8,306 15,791 16,998
------ ------ ------ -------
INCOME (LOSS) FROM OPERATIONS 172 (659) (429) (1,672)
Other Income (Expense)
Interest expense, net (425) (363) (829) (754)
Gain on sale of property
and equipment 0 231 3 251
------ ------ ------- -------
Other Expense, Net (425) (132) (826) (503)
------ ------ ------- -------
Loss before income taxes and
equity interest in earnings
(loss) of Affiliate (253) (791) (1,255) (2,175)
Provision for income tax benefit 84 269 413 739
------ ------ ------- -------
Loss before equity interest
in earnings (loss) of Affiliate (169) (522) (842) (1,436)
Equity interest in earnings
(loss) of Affiliate 47 2 29 (59)
------ ------ ------- -------
NET LOSS $ (122) $ (520) $ (813) $(1,495)
====== ====== ======= =======
Loss per Share $(0.07) $(0.28) $ (0.44) $ (0.83)
====== ====== ======= =======
Weighted Average
Shares Outstanding 1,856 1,831 1,844 1,808
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION> Six Months Ended
-----------------------------
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (813) $ (1,495)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 2,400 2,264
Provision for losses on accounts receivable 12 0
Provision for deferred income taxes (412) (733)
Gain on sale of fixed assets (3) (253)
Equity interest in (income) loss of affiliate (29) 59
Changes in operating assets and liabilities:
Increase in accounts receivable (1,120) (1,472)
Decrease in materials, supplies, prepaids
and other current assets 1,333 527
(Decrease) Increase in accounts payable and
accrued expenses (492) 798
Increase in other assets (25) (213)
-------- --------
Net Cash Provided (Used) by Operating Activities 851 (518)
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,825) (2,484)
Investment in Affiliate 0 (2,000)
Proceeds from sale of assets 1 276
Contributed capital 1,301 1,204
-------- --------
Net Cash Used by Investing Activities (523) (3,004)
-------- --------
FINANCING ACTIVITIES
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
Increase in notes payable 200 1,200
Proceeds from long-term borrowings 7 1,171
Principal payments on long-term debt (834) (563)
Proceeds from other borrowings 0 556
Issuance of common stock 422 998
Dividends paid (5) (8)
------- -------
Net Cash (Used) Provided by Financing Activities (210) 3,354
------- -------
Increase (Decrease) in Cash and Cash Equivalents 118 (168)
Cash and cash equivalents at beginning of period 1,179 1,213
------- -------
Cash and Cash Equivalents at End of Period $1,297 $1,045
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included.
2. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the year ended
December 31, 1997, due to certain freight revenues subject to seasonal
variations. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
3. Earnings per common share have been adjusted retroactively to reflect a 5%
stock dividend declared February 19, 1997.
4. Investment in Affiliate on the consolidated balance sheet and equity
interest in income (loss) of Affiliate on the consolidated statement of
operations reflects the Company's acquisition of a 40% interest in The
Toledo, Peoria and Western Railroad Corporation (TP&W) on January 31, 1996.
The investment is accounted for under Accounting Principles Board Opinion
No. 18, The Equity Method of Accounting for Investments in Common Stock.
5. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. The impact of Statement 128 is not expected to be material.
6. On March 1, 1997, the Company granted 10,000 nonqualified stock options at an
exercise price of $10.00 per share. In addition, on March 21, 1997, the
Company granted 24,927 incentive stock options and 4,236 nonqualified stock
options at exercise prices of $15.75 per share. During the six months ended
June 30, 1997, 49,575 stock options were exercised at prices ranging from
$8.43 to $8.64.
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS, EXCEPT SHARE AMOUNTS)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,179 $ 1,213
Accounts receivable 5,269 5,406
Reimbursable construction costs 1,794 1,212
Materials and supplies 1,179 742
Deferred income taxes 332 332
Prepaid expenses 730 698
Other current assets -- Note 12 369 665
------- -------
TOTAL CURRENT ASSETS 10,852 10,268
PROPERTY, PLANT AND EQUIPMENT
Land 1,731 1,658
Buildings, machinery, equipment and
leasehold improvements 95,993 90,743
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C> <C>
-------- --------
97,724 92,401
Less accumulated depreciation and amortization (33,790) (29,414)
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT 63,934 62,987
OTHER ASSETS
Other assets 838 1,134
Intangible assets, net 357 389
Investment in affiliate 2,342 --
-------- --------
3,537 1,523
-------- --------
TOTAL ASSETS $ 78,323 $ 74,778
======== ========
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to bank $ 2,400 $ 2,100
Accounts payable 11,020 10,400
Accrued and other current liabilities 1,686 1,977
Current maturities of long-term debt - Note 4 1,768 1,075
-------- --------
TOTAL CURRENT LIABILITIES 16,874 15,552
LONG-TERM LIABILITIES
Long-term debt - Note 4 12,383 12,802
Deferred income tax 10,892 10,398
SUBORDINATED NOTES
6.5% Convertible subordinated notes 3,580 3,580
-------- --------
TOTAL LONG-TERM LIABILITIES 26,855 26,780
-------- --------
COMMITTMENTS - Note 8 and 11
TOTAL LIABILITIES 43,729 42,332
-------- --------
STOCKHOLDERS' EQUITY
Common stock,par value, $.125 per share - authorized
10,000,000 shares; issued and outstanding -
1,830,880 in 1996 and 1,612,927 in 1995 229 202
Additional paid-in capital 6,126 4,029
Contributed capital 20,092 18,021
Retained earnings 8,147 10,194
-------- --------
TOTAL STOCKHOLDERS' EQUITY 34,594 32,446
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 78,323 $ 74,778
======== ========
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
<PAGE> 7
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES
Railway operating revenues $30,213 $32,484 $24,981
Real property revenues 1,283 1,448 1,283
Other operating revenue 786 592 1,199
------- ------- -------
TOTAL OPERATING REVENUES 32,282 34,524 27,463
------- ------- -------
OPERATING EXPENSES
Maintenance of way and structures 3,902 4,267 3,604
Maintenance of equipment 3,078 2,969 2,449
Transportation 14,896 18,021 14,288
Car hire expense 1,810 1,455 1,194
Depreciation and amortization 4,604 4,186 3,885
Taxes other than income taxes 239 256 243
General, administrative and other 4,542 4,932 4,259
------- ------- -------
TOTAL OPERATING EXPENSES 33,071 36,086 29,922
LOSS FROM OPERATIONS (789) (1,562) (2,459)
Other (expense) income
Interest expense, net (1,459) (1,276) (1,226)
Gain on sale of property, equipment and other 381 5,331 337
------- ------- -------
Other (expense) income, net (1,078) 4,005 (889)
------- ------- -------
(Loss) income before income taxes, extraordinary
item and equity interest in income of affiliate (1,867) 2,493 (3,348)
Provision for income tax benefit (expense) 610 (878) 1,128
------- ------- -------
(Loss) income before extraordinary item and
equity interest in income of affiliate (1,257) 1,615 (2,220)
Extraordinary item, net of tax -- -- (228)
------- ------- -------
(Loss) income before equity interest in income
of affiliate (1,257) 1,615 (2,448)
Equity interest in income of affiliate 92 -- --
------- ------- -------
NET (LOSS) INCOME $(1,165) $ 1,615 $(2,448)
======= ======= =======
Primary (Loss) Earnings per Share:
(Loss) earnings before extraordinary item $ (0.64) $ 0.95 $ (1.31)
Extraordinary item -- -- (0.13)
------- ------- -------
Net (loss) earnings per share $ (0.64) $ 0.95 $ (1.44)
======= ======= =======
Fully Diluted (Loss) Earnings per Share:
(Loss) earnings before extraordinary item $ (0.64) $ 0.86 $ (1.31)
Extraordinary item -- -- (0.13)
------- ------- -------
Net (loss) earnings per share $ (0.64) $ 0.86 $ (1.44)
======= ======= =======
</TABLE>
[FN]
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(THOUSANDS)
- -----------------------------------------------------------------------------
<PAGE> 8
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN CONTRIBUTED RETAINED
PAR VALUE CAPITAL CAPITAL EARNINGS
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $183 $2,544 $14,214 $12,552
Net Loss (2,448)
5% Stock Dividend declared
January 12, 1995 9 734 (750)
Rehabilitation Subsidies 2,473
------------ ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1994 192 3,278 16,687 9,354
Net Income 1,615
5% Stock Dividend declared
January 29, 1996 10 751 (775)
Rehabilitation Subsidies 1,334
------------ ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1995 202 4,029 18,021 10,194
------------ ---------- ----------- ---------
Net Loss (1,165)
5% Stock Dividend declared
February 19, 1997 12 866 (882)
Rehabilitation Subsidies 2,071
Issuance of Common Stock -
Note 12 15 1,231
------------ ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1996 $229 $6,126 $20,092 $ 8,147
</TABLE>
[FN]
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(1,165) $ 1,615 $(2,448
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization 4,604 4,186 3,885
Provision for losses on accounts receivable 20 110 31
Provision for deferred income taxes (642) 829 (1,346)
Gain on sale of fixed assets (379) (5,336) (328)
Amortization of deferred income - (158) (8)
Write-off of loan origination fees - - 334
Equity interest in income of affiliate (92) - -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 118 569 (1,914)
(Increase) decrease in materials, supplies,
prepaids and other current assets (710) (1,173) 954
Increase in accounts payable and
accrued expenses 392 135 1,932
Increase in other assets (281) (338) (71)
------ ------- -------
Net Cash Provided by Operating Activities 1,865 439 1,021
------ ------- -------
INVESTING ACTIVITIES
Additions to property, plant and equipment (5,584) (9,879) (7,182)
Acquisition of intangible assets - - (282)
Proceeds and deposits from sale of assets
and easement 406 6,346 1,357
Contributed capital 3,138 2,021 4,491
Investment in affiliate (2,000) - -
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C> <C> <C>
------- ------- -------
Net Cash Used in Investing Activities (4,040) (1,512) (1,616)
------- ------- -------
FINANCING ACTIVITIES
Increase (decrease) in notes payable 300 (1,300) 2,185
Proceeds from long-term borrowings 1,496 4,680 5,565
Principal payments on long-term debt (1,222) (1,990) (7,057)
Proceeds from (payments on) other borrowings 577 (406) 406
Dividends paid (8) (6) (6)
Issuance of common stock 998 -- --
------- ------- -------
Net Cash Provided by Financing Activities 2,141 978 1,093
------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (34) (95) 498
Cash and cash equivalents at beginning of year 2,213 1,308 810
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,179 $ 1,213 $ 1,308
======= ======= =======
</TABLE>
[FN]
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
December 31, 1996, 1995 and 1994
- ------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------
BUSINESS: The Company operates a 500 mile regional railroad system extending
into the states of New York, Pennsylvania and New Jersey. The principal freight
carried by the Company consists of manufactured goods, industrial raw
materials, paper products and agricultural commodities. The principal markets
for this freight are the New York City metropolitan area, Northern New Jersey
and Central New York. The Company relies on, and its ability to compete is
dependent upon, its rail connections with the CP Rail System and Consolidated
Rail Corporation (Conrail.) Changes in the operations of either of these
carriers could have a material adverse impact on the Company. See discussion of
proposed changes in the ownership of Conrail as set forth in Note 13.
Due to the volume of business concentration, two major customers accounted for
69%, 72% and 64% of the Company's revenue from operations for 1996, 1995 and
1994, respectively. The Company generated revenues of approximately $15.8
million in 1996, $17.2 million in 1995 and $9.8 million in 1994 from CSX
Intermodal, Inc. The Company generated revenues of approximately $6.3 million
in 1996, $7.5 million in 1995 and $7.7 million in 1994 from Hanjin Shipping
Lines. The loss of either customer or a material reduction in their operations
would have a material adverse effect on the Company's results of operations.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated accounts of the
Company and its subsidiaries, all of which are wholly-owned. All significant
intercompany transactions and balances have been eliminated in consolidation.
Unconsolidated investees are stated at cost plus equity in unremitted earnings
since acquisition. The Company's share of earnings of unconsolidated investees
is included in consolidated income using the equity method.
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION: Accounts receivable in the
consolidated balance sheet reflect interline transactions with other railroads
which the Company is required to enter into as part of settling freight
payments received from customers. The system follows Railway Accounting Rules
as adopted by member
<PAGE> 10
railroads of The Association of American Railroads, of which the Company is a
member. At year end, in
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)-
- ------------------------------------------------------------------------------
accordance with industry practice, accrued revenue on a completed service basis
is reflected in the consolidated statements of operations for unsettled freight
not yet part of the interline accounting system.
At December 31, 1996, the Company's trade receivables include approximately
$4.0 million or 76% of total receivables, representing balances due from the
two major customers. At December 31, 1995, the Company's trade receivables
include $4.1 million or 76% of total receivables, representing balances due
from the same two major customers. The Company does not require collateral. The
credit risk associated with this concentration is not deemed significant.
Allowances for doubtful accounts of $194 thousand and $171 thousand have been
applied as a reduction of accounts receivable at December 31, 1996 and 1995,
respectively.
Commodity Agreement Used to Hedge Price Fluctuations: The Company enters into a
- -----------------------------------------------------
diesel fuel supply agreement to hedge its exposure to price fluctuations on
approximately 35% of its anticipated fuel requirements during an eight month
period, from Fall to early Spring, for its freight transportation business. The
nature of the hedging transaction does not result in any significant risk to
the Company.
Materials and Supplies: Materials and supplies are stated at the lower of cost
- -----------------------
or market determined by the average cost method.
Materials and supplies are charged to expense, construction-in-progress or
property, plant and equipment at the time of use.
Property, Plant and Equipment: Property, plant and equipment is recorded at
- ------------------------------
cost including capitalized interest during periods of construction.
Depreciation is provided over the estimated useful lives of the related assets
and is computed principally by the straight-line method for financial statement
purposes.
Costs of reimbursable rehabilitation projects not yet complete are recorded in
reimbursable construction costs. Charges incurred during the project phase are
billed to the respective state or federal government agency. The proceeds from
these subsidies are recorded in the consolidated statement of stockholders'
equity as contributed capital at the time of receipt, net of applicable income
taxes.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ------------------------------------------------------------------------------
The cost of property retired or sold and related accumulated depreciation are
removed from the asset and allowance accounts. Gain or loss on disposition of
property is reflected in earnings. Maintenance and repairs are charged to
earnings as incurred. Renewals and betterments are capitalized.
Leasehold improvements are amortized on the straight-line method over the
remaining life of the lease or the estimated life of the improvement, whichever
is shorter.
Intangible Assets: Intangibles are amortized by the straight-line method over a
- ------------------
period of 5 to 40 years. Accumulated
10 of 33
<PAGE> 11
amortization was $169 thousand and $1.1 million at December 31, 1996 and 1995,
respectively. During 1996, $943 thousand of fully amortized intangible assets
were written off resulting in no net change to the financial statements.
Estimated Self-Insurance Liability: The Company is self-insured to various
- ----------------------------------- limits for public liability and property
loss. The liability for self-insurance is generally accrued based on
occurrence, with liability for possible escalation on unsettled claims being
estimated based on individual situation. The Company does not accrue an
estimated liability for unasserted claims unless (i) it is aware of the
possibility of such claim; (ii) it is considered probable such claim will be
asserted at a future date; and (iii) it has a basis to estimate its potential
exposure and there is a reasonable possibility of an unfavorable outcome. In
the opinion of management, after review with attorneys for the Company, such
claims are of a nature that they will not have a material adverse effect on the
financial position of the Company.
Income Taxes: The Company provides for income taxes in accordance with the
- ------------- liability method as set forth in Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes. Under the liability
method, deferred taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
(See Note 7.)
Per Share Amounts: Primary earnings per share is computed by dividing net
- ------------------ income (loss) by the weighted average number of shares
outstanding of 1.820 mission in 1996 and 1.694 million in 1995 and 1994,
including the effects of a 5% stock dividend declared February 19, 1997. Fully
diluted net income per share is computed by dividing net income (loss) plus
after tax interest incurred on the convertible debentures by the weighted
average number of common shares outstanding, after giving effect to share
assumed to be
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- -----------------------------------------------------------------------
issued on conversion of the convertible debentures, of 2.048 million shares in
1995. Stock options and warrants are not considered in the calculation as their
effect is anti-dilutive or not material. Reported fully diluted and primary net
income per share are the same for 1996 and 1994 as dilution form the assumed
conversion of the convertible debentures issued in 1993 is antidilutive.
Cash Equivalents: The Company considers all highly liquid investments with a
- ----------------- maturity of three months or less when purchased to be cash
equivalents.
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.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
A summary of property, plant and equipment balances by major classes at
December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
THOUSANDS
1996 1995
-------- --------
<S> <C> <C>
Land $1,731 $1,658
</TABLE>
1 of 33
<PAGE> 12
Buildings and bridges 6,673 6,527
Machinery, equipment and roadway 88,330 83,604
Leasehold improvements 990 612
------- -------
Less: allowance for depreciation
and amortization (33,790) (29,414)
------- -------
PROPERTY, PLANT and EQUIPMENT, NET $63,934 $62,987
======= =======
NOTE 3 - NOTES PAYABLE TO BANK
- ------------------------------
Notes payable at December 31, 1996 and 1995 consist of a secured advance under
a $5 million line of credit with Manufacturers and Traders Trust Company.
Interest on these borrowings is at Prime plus 1.25% (Prime at December 31, 1996
was 8.25%). Available borrowings are based on and secured by eligible accounts
receivable. At December 31, 1996 and 1995, eligible accounts receivable were
$3.7 and $3.6 million and borrowings on the line were $2.4 million and $2.1
million, respectively. The weighted average interest rate on the borrowings is
9.2% and 9.7% for 1996 and 1995, respectively.
NOTE 4 - LONG-TERM DEBT
- -----------------------
Long-term debt obligations at December 31 are summarized as follows: (in
thousands)
1996 1995
------ ------
Term loan payable to Manufacturers and
Traders Trust Company in quarterly
principal installments of $92 thousand
plus interest through 2004, with a balloon
payment of $1.33 million in same year.
Interest on portions of the term loan are
based on the prime rate plus 1.5% or LIBOR,
and the greater of a 3.5% fixed rate above
the yield on United States Treasury
Obligations, or 8%.
(Prime at 8.25% on December 31, 1996). $4,083 $4,133
Loan payable to the New Jersey Economic
Development Authority due in monthly
installments of $18 - $20 thousand plus
interest, through 1999, with interest at
a rate between 2% and 9% (6% at December
31, 1996) secured by a mortgage on real
property. 693 927
Loan payable to the federal government
through the Federal Railroad Administration
(FRA) due in quarterly installments of
$88 thousand, including interest of 6.276%
with a balloon payment of $1.46 million on
March 31, 2000, secured by a mortgage on
real property. 2,147 2,356
NOTE 4 - LONG-TERM DEBT (continued)
- ----------------------------------
Loan payable to the federal government
through the Federal Railroad Administration
(FRA) due in quarterly installments of $93
thousand, including interest at 6.4% through
2015, secured by railway equipment. 4,034 4,143
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C> <C>
Various promissory notes, mortgage notes and
capital leases, payable, due in monthly
installments, with interest varying from 4.9%
- - 10.9% at December 31, 1996. The notes
are secured by land, buildings or equipment. 3,194 2,318
------ ------
14,151 13,877
Less current portion (1,768) (1,075)
------ ------
Long-term debt $12,383 $12,802
====== ======
</TABLE>
During 1994, the Company completed the refinancing of its major bank debt with
Manufacturers and Traders Trust Company. In conjunction with this refinancing,
the Company wrote-off $334 thousand, representing the unamortized balance of
deferred financing costs incurred in 1990 in conjunction with its prior loans.
The write-off was recorded as an extraordinary item net of applicable income
taxes of $106.
Substantially all assets of the Company are pledged as collateral under debt
agreements. In addition to other requirements, the Company is required to meet
certain minimum tangible net worth, working capital, and current ratio
requirements under certain debt agreements. At December 31, 1996, the Company
met all the minimum requirements.
The Company's loan agreement with Manufacturers & Traders Trust Company provides
that the Company may not declare cash dividends in any fiscal year in excess of
40% of Consolidated Net Income in such fiscal year, and that cumulative
dividends paid during the term of the loan may not exceed 10% of cumulative
retained earnings.
In addition, the financing agreements between the Company and its subsidiary,
NYS&W, and the federal government provides that yearly dividends may not exceed
50% of the total additions to retained earnings of the Company for the previous
year, nor 50% of the total additions to retained earnings for 1985 and each year
thereafter. One agreement further stipulates that the ratio of dividends paid to
net income for any fiscal year, may not be greater than that ratio for the 5
years prior to the agreement.
Interest expense, net (in thousands) is comprised of interest expense of $1,719,
$1,465 and $1,444 for 1996, 1995 and 1994 respectively, net of respective
amounts for capitalized interest of $190, $104 and $147, and interest income of
$70, $85 and $71. Interest paid (in thousands) was $1,640, $1,455 and $1,332 for
the 1996, 1995 and 1994 periods.
A summary of maturities of long-term debt at December 31, 1996 is as follows (in
thousands):
1997 $ 1,768
1998 1,623
1999 1,566
2000 2,464
2001 897
Thereafter 5,833
------
$14,151
======
NOTE 5 - 6.5% CONVERTIBLE SUBORDINATED NOTES
- --------------------------------------------
<PAGE> 14
During 1993, the Company completed a private placement of $3.6 million of 6.5%
convertible subordinated notes due September 1, 2003. The notes are convertible
into shares of the Company's presently authorized common stock at a conversion
price of $10.08 per share, after giving effect to stock dividends. Interest on
the notes is payable semi-annually on the first day of March and September of
each year. The notes may be converted into shares anytime prior to maturity. The
Company has reserved 355 thousand shares of authorized common stock for the
conversion of the notes. Directors of the Company purchased $850 thousand of the
notes.
NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------
The estimated fair values of the Company's financial instruments at December 31,
1996 and 1995 and the methods and assumptions used to estimate the fair value of
each class of financial instruments held by the Company were as follows:
Cash and Cash Equivalents: The carrying amount approximated fair value
- ------------------------- because of the short maturity of these
instruments.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
- -------------- using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amount reported in the balance sheet approximates its fair value.
NOTE 7 - INCOME TAXES
- ---------------------
The components of the provision for federal and state income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Current tax expense $ (32) $ (49) $ (218)
Deferred tax benefit
(expense) 642 (829) 1,346
------ ------ ------
TOTAL INCOME TAX
BENEFIT (EXPENSE) $ 610 (878) 1,128
====== ====== ======
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
------ ------ ------
Statutory income tax
rate 34.00% 34.00% 34.00%
State taxes, net of
federal tax benefit 1.12 1.28 (2.72)
Other (2.45) (.06) 2.41
------ ------ ------
EFFECTIVE TAX RATE 32.67% 35.22% 33.69%
====== ====== ======
</TABLE>
State taxes are based on a combination of pre-tax earnings, allocated capital
and gross transportation receipts. Amounts included in current tax expense were
$32 thousand, $49 thousand and $218 thousand for 1996, 1995 and 1994
respectively.
The Company has general business credit carryovers of approximately $1.5 million
which expire at various dates through the year 2003, net operating loss
carryforwards of $12.4 million which expire at various dates through 2011, and
alternative minimum tax credits of $983 thousand available to reduce income
taxes otherwise currently
<PAGE> 15
payable.
NOTE 7 -- INCOME TAXES (continued)
- ----------------------------------
Net income tax payments amounted to $63 thousand, $237 thousand, and $28
thousand in 1996, 1995 and 1994, respectively.
Deferred income taxes reflect the net tax effects of temporary difference
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 liabilities and assets as of December 31 are as
follows:
<TABLE>
<CAPTION>
Thousands
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Book basis in excess of tax basis of
property, plant and equipment $17,555 $16,811
Deferred tax assets:
Vacation reserve $ 154 $ 142
Bad debt reserve 66 58
Litigation reserve 34 55
Other-net 11 59
Net operating loss carryforwards 4,228 3,929
General business credit carryforwards 1,519 1,519
AMT credit carryforwards 983 983
------- -------
Total deferred tax assets 6,995 6,745
------- -------
Net deferred tax liabilities $10,560 $10,066
======= =======
Classification of deferred taxes:
Non-current liabilities $10,892 $10,398
Current assets (332) (332)
------- -------
$10,560 $10,066
======= =======
</TABLE>
NOTE 8 -- LEASES
- ----------------
The Company leases certain equipment and real estate under operating lease
agreements for periods ranging from one to ten years. The annual rental
expenses were $2.7 million, $2.9 million and $2.9 million for 1996, 1995 and
1994, respectively.
NOTE 8 -- LEASES (continued)
- ----------------------------
Future minimum lease payments for noncancelable operating leases as of December
31, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1997 $ 656
1998 654
1999 681
2000 680
2001 676
Thereafter 1,021
------
TOTAL MINIMUM OPERATING LEASE PAYMENTS $4,368
======
</TABLE>
NOTE 9 -- STOCK OPTIONS, WARRANTS AND PREFERRED STOCK
- -----------------------------------------------------
The Stockholders of the Company have approved stock option plans
<PAGE> 16
for officers, directors and employees. At December 31, 1996 there are 186
thousand exercisable shares under option, which includes the effects of any
stock dividends declared after options were granted, and 63 thousand options
available for future grants. The exercise price of options granted is equal to
the fair market value of the common stock on the date of grant, adjusted for
stock dividends declared after grant date. The options expire ten years from
the date of grant and the options range in exercise price from $8.43 to $9.52.
the weighted average exercise price at December 31, 1996 was $8.63 and the
weighted average remaining contractual life of those options is 6.6 years. No
options have been exercised during the years of 1996, 1995 or 1994. Options
granted were 2,500, 6,300 and 0 in 1996, 1995 and 1994, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations
in accounting for its stock options. Under APB 25, because the exercise price
of the Company's stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by Statement 123, Accounting for Stock-Based Compensation, which also requires
that the information be determined as if the Company has accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994 and most of the Company's
outstanding options were granted prior to that date, its pro forma effect is
not material and therefore, not presented.
NOTE 9 - STOCK OPTIONS, WARRANTS AND PREFERRED STOCK (CONTINUED)
- ----------------------------------------------------------------
The Company issued 60,000 warrants to purchase stock at $10.00 per share to a
party involved in the financing of the TP&W acquisition in January, 1996. Due
to the effects of stock dividends paid after issuance of warrants, there are
currently 66,150 warrants available at an exercise price of $9.07.
The Company in 1996 authorized 1 million shares of preferred stock issuable in
series, the voting, dividend, liquidation and other rights of which may be
determined by the Board of Directors at the time of issuance. No such preferred
stock has been issued.
NOTE 10 - EMPLOYEE BENEFIT PLAN
- -------------------------------
On August 1, 1990, the Company established a defined contribution plan covering
substantially all employees. Employees can contribute a portion of their salary
or wages as prescribed under section 401(k) of the Internal Revenue Code and,
subject to certain limitations, the Company will match a portion of the
employees' contribution. the amounts of employer contributions were $93
thousand in 1996, $91 thousand in 1995 and $78 thousand in 1994.
NOTE 11 - COMMITMENTS
- ---------------------
The Company has outstanding commitments of approximately $8.6 million in
connection with the completion of various rehabilitation projects and
construction in progress. Completion dates range from six months to three
years. The commitments are expected to be partially offset by government agency
funding of approximately $8.2 million.
The Company entered into an agreement in August, 1992 to purchase certain
property currently under lease for a total inflation adjusted purchase price of
approximately $3.75 million. During the
<PAGE> 17
second quarter of 1995, the Company deposited $500 thousand towards the
purchase. The Company will be required to pay an additional $750 thousand at
closing, which is anticipated to occur during the first half of 1997. Early in
1996, the Company received a commitment for a credit facility from
Manufacturers and Traders Trust Company for $2.5 million to finance the
purchase. The commitment expires on March 31, 1997. The property is presently
being used for relocation and expansion of its bulk distribution operations.
During the fourth quarter of 1995, the Company entered into a contract to sell
certain parcels of railroad property of a non-
NOTE 11 - COMMITMENTS (continued)
- ---------------------------------
operating Company subsidiary for $500 thousand, which is anticipated to close
during the first half of 1997. The carrying amount is estimated at $110
thousand. The proceeds will be used for working capital purposes.
Certain claims have been filed against the Company or its subsidiaries and have
not been finally adjudicated. These claims when finally concluded and
determined, will not, in the opinion of management based upon information that
it presently possesses, have a material adverse effect on the consolidated
financial position or results of operations.
NOTE 12 - INVESTMENT IN AFFILIATE
- ---------------------------------
On January 31, 1996, the Company completed the purchase of a 40% interest in
The Toledo, Peoria and Western Railroad Corporation (TP&W) for consideration
totaling $2.25 million, including 25,000 shares of the Company's common stock.
The non-stock portion of the consideration for the acquisition was funded
through a $1 million loan and the private placement of 100,000 shares of the
Company's common stock. Additionally, the Company issued warrants to purchase
60,000 common shares to another party involved in the transaction. The
investment is accounted for under the provisions of APB 18, The Equity Method
of Accounting for Investments in Common Stock.
The TP&W owns a 284 mile Class III regional railroad which provides rail
service on a generally East-West route across one of the top grain producing
regions in the world. It stretches from Fort Madison, Iowa through Central
Illinois (approximately 70 miles south of Chicago) to Logansport, Indiana and
includes service to two company-operated intermodal facilities. The TP&W hauls
agricultural products, chemicals, coal, fertilizer, food products, steel,
manufactured goods and consumer products for such customers as ADM, Cilco,
Witco, Lonza and Caterpillar.
The TP&W showed a net income of $230 for the eleven months ended December 31,
1996. Accordingly, the Company is reporting 40% or $92 as Equity Interest in
Income of Affiliate in its Consolidated Statement of Operations for 1996.
Under an Administrative Services Agreement by and between the TP&W dated
January 31, 1996, the Company performs certain administrative services for the
TP&W. Total administrative services performed and billed by the Company for the
eleven month period ended December 31, 1996 totaled $1 million. In the normal
course of business,
NOTE 12 - INVESTMENT IN AFFILIATE (continued)
- ---------------------------------------------
certain other transactions exist between the Company and the TP&W. For the
above mentioned period, these types of billings to the TP&W
<PAGE> 18
totaled approximately $336 thousand, offset in part by TP&W billings to the
Company totaling approximately $99 thousand.
At December 31, 1996 the Company had a net receivable from the TP&W of
approximately $198 thousand, the majority of which is included in other current
assets. Of this amount, $60 thousand represents amounts receivable under the
Administrative Services Agreement and the remaining $138 are various direct
charges incurred or services performed by the Company, not of direct payables
to the TP&W. At December 31, 1995, the Company had incurred $592 thousand of
advances related to the purchase which were recorded in other current assets
and reimbursed at closing on January 31, 1996.
The following is summarized financial information for the unconsolidated
investee as of and for the eleven months ended December 31, 1996: (in thousands)
Current assets $ 3,601
Noncurrent assets 18,478
Current liabilities 6,594
Noncurrent liabilities 9,847
Operating revenues 10,283
Operating expenses 9,282
Income from operations 1,001
Net income 230
In connection with a $7 million term loan between the TP&W and Creditanstalt
Corporate Finance, Inc., (CCF) entered into on January 31, 1996, the Company,
along with the other owners of TP&W entered into a cash collateral agreement
and deficiency guarantee. The cash collateral agreement required the Company to
make deposits totaling $400 thousand to CCF as collateral to secure the loan in
the event of default by the TP&W. These deposits are included in other assets
at December 31, 1996. The deficiency guarantee obligates the Company,
severally, with the other owners of TP&W, to guarantee payment of the term loan
in accordance with the terms of the loan agreement.
The Company has also entered into a back-up agreement, dated January 31, 1996,
with another owner of the TP&W (who is a member of the Board of Directors)
whereby the Company agrees to reimburse this party for any amounts that the
party is required to pay under the deficiency guarantee or for any portion of
the party's deposits, paid in under the cash collateral agreement, that are
applied by the CCF towards the loan.
NOTE 13 - POTENTIAL CHANGE IN OWNERSHIP OF CONRAIL
- --------------------------------------------------
On October 15, 1996 CSX Corporation and Conrail announced plans to merge.
Thereafter, Norfolk Southern announced a competing tender offer to acquire
ownership of Conrail. At March 24 1997, press reports indicate that the rail
lines will be divided between CSX and NS, although the details of this division
are not currently available. The Company's main operating subsidiary, NYS&W,
derives approximately 49% of its operating revenue from traffic hauled for a
CSX subsidiary, and derives approximately 20% of its operating revenue from
intermodal traffic hauled in conjunction with Norfolk Southern. The Company
has multi-year contracts for both of these revenue sources. The Company is
unable to predict either the final outcome of the restructuring of the eastern
U.S. railroad system at this time, or the impact such restructuring, if it
occurs, will have on the Company in the future.
