Aggregate No. Pages: 49
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File # 0-12985
DELAWARE OTSEGO CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-0913491
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1 Railroad Ave., Cooperstown, New York 13326
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (607) 547-2555
-----------------------
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.125 per share
---------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes ___X___ No_______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $20,676,585 as of March 18, 1997.
1,830,880
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(Number of shares of Common Stock outstanding as of March 18, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
Information with respect to Directors in Item 10 and the information
required by Items 11-13 is incorporated herein by reference from the proxy
material of the Registrant in connection with its annual meeting of
shareholders scheduled for June 7, 1997.
<PAGE>
PART I
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Item 1. BUSINESS
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General
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Delaware Otsego Corporation, a New York corporation, is a railroad
holding company. The Company's principal executive offices are located at
1 Railroad Avenue, Cooperstown, New York 13326, and its telephone number
is (607) 547-2555. As used in this Form 10-K, unless the context requires
otherwise, the term "Company" or "DOC" refers to Delaware Otsego Corporation
and its wholly-owned subsidiaries.
The Company operates in one business segment - railroad transport-
ation. DOC's rail system provides rail service for customers along its
routes in Upstate New York and Northern New Jersey and access to the
national rail system through interchange facilities with two of the major
northeastern railroads, Conrail, Inc. ("Conrail") and the CP Rail System
("CP"). Additionally, pursuant to a Haulage Agreement with CP, the Company
has direct access with the Norfolk Southern rail system and other carriers
in Buffalo, NY. DOC's railroad system is devoted principally to carrying
freight, but also generates revenue through the operation of passenger
excursion trains. DOC seeks to encourage development on and near, and
utilization of, its real estate and rights-of-way by potential shippers and
as a possible source of additional revenue. The Company also generates
revenues by granting to various entities, such as utilities, pipeline and
communication companies and non-industrial tenants, the right to occupy its
railroad right-of-way and other real property. The Company also hires rail
equipment to, and repairs rail equipment owned by, others, provides services
related to the transfer of bulk commodities from railcar to truck, and
provides administrative services related to railroad operations.
On January 31, 1996, the Company acquired a 40% interest in The Toledo,
Peoria and Western Railroad Corporation ("TP&W"). The investment is
accounted for under the provisions of APB 18, The Equity Method of
Accounting for Investments in Common Stock. TP&W owns a 284 mile Class III
regional railroad which provides rail service on a generally East-West
route from Fort Madison, Iowa through Central Illinois (approximately 70
miles south of Chicago) to Logansport, Indiana. TP&W hauls agricultural
products, chemicals, coal, fertilizer, food products, steel and manufactured
goods and consumer products, and operates two intermodal facilities. In
addition to its ownership interest, the Company derives revenue by
providing certain administrative services to TP&W.
Railroad Operations
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The Company operates a 500 mile regional railroad in New York, New
Jersey and Pennsylvania, of which 200 miles consist of trackage rights over
the lines of other railroads. The Company's rail lines have been
integrated into a coordinated rail system which connects upstate New York
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<PAGE>
with the Northern New Jersey - New York City metropolitan area and provides
rail service via two Class I carriers (through its connections with Conrail
and CP).
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. Recent announcements in the press as of the
date of this filing indicate that the rail lines of Conrail will be divided
between CSX and Norfolk Southern. 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 at this time either the final outcome of
this possible restructuring of the eastern U.S. railroad system arising
from the proposed sale of Conrail, or the impact such restructuring, if it
occurs, will have on the Company in the future.
The Company presently serves over 110 customers in its railroad
operations, two of which accounted for approximately 69% of its traffic
volume. In 1996, the Company earned approximately $15.8 million from CSX
Intermodal, Inc., representing 49% of operating revenues, on traffic moving
to CSXI's owned facility located adjacent to the NYS&W at Little Ferry, NJ.
1996 revenues for container traffic moved on behalf of Hanjin Shipping
Lines to the Resources Warehousing and Consolidation Services, Incorporated
facility ("RWCS"), were approximately $6.3 million, representing 20% of
operating revenues. No assurance can be given that such revenue levels
will be attained in the future. The principal freight carried by the
Company consists of manufactured goods, industrial raw materials, paper
products, and agricultural commodities.
The operation of a railroad requires significant expenditures for
maintenance-of-way and equipment, the availability of railcars in diverse
locations for the carriage of customer freight, and reliance upon other
carriers who participate in the transportation of almost all freight
transported by the Company.
The Company, as a substantial property owner, is subject to potential
liability for personal injury and property damages to trespassers and
others present on its property. Additionally, attendant to the Company's
railroad operations is potential liability for personal injury and property
damage arising from derailments, collisions at highway-rail grade
crossings, and from job-related employee injuries pursuant to Federal
Employer Liability Act.
Real Estate Activities & Other Operations
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Through its subsidiaries, the Company seeks to maximize utilization
of and revenues from its real estate holdings. Leasing and right-of-way
agreements, sales where favorable prices can be obtained for property that
is deemed unnecessary for the Company's rail operations, and the
encouragement of industrial development are the focus of the Company's
activities in this regard.
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<PAGE>
Marketing
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The Company markets its services primarily through its sales and
customer service personnel, under the supervision of its Executive Vice
President and Vice President-Marketing and Sales of its NYS&W subsidiary.
In addition, the Company's executive officers are occasionally involved in
formulating and making presentations to customers and potential customers.
Suppliers
- ---------
The Company is able to acquire the equipment, parts and other materials
it needs in the operation of its business from several suppliers. The
Company does not believe that the loss of any supplier would have a material
adverse effect on its business, as there are alternative suppliers available.
Competition
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The Company's regional rail system is relatively small in an industry
dominated by carriers with far greater resources and facilities. In the
Company's area of operation, it competes with Conrail, particularly with
respect to bulk and intermodal traffic, and with both long-haul and short-
haul trucking companies which may be able to offer more extensive
facilities and resources than the Company. Deregulation of the railroad
industry has intensified competition and will likely continue to do so,
placing pressure on pricing and routing schedules of the Company. The
Company believes that it is able to compete for railroad business on the
basis of its quality of customer service, pricing, scheduling and
concentration on its principal rail corridors. There can be no assurance,
however, that the Company will be able to maintain its present competitive
position.
The Company relies on, and its ability to compete is dependent upon,
its rail connections with CP and Conrail for a substantial portion of its
rail traffic. Changes in the operations of either of these carriers could
have a material adverse impact on the Company.
With respect to its real estate activities, the Company competes with
other railroads, developers and real estate businesses for purchasers,
tenants and users of its real property. For example, other railroads seek
some of the same customers for fiber optics cable installation, and real
estate developers and other railroads seek the same type of industrial user
as is sought by the Company. Such competitors may have greater financial
resources, more experience in real estate development or a greater ability
to offer incentives than does the Company. No assurance can be given that
the Company's efforts to develop, lease or sell its real estate resources
will be successful.
Regulation
- ----------
The Company is subject to regulation by the Surface Transportation
Board, the Federal Railroad Administration, and certain state and local
authorities, including state Departments of Transportation, in connection
with some aspects of its railroad operations. Such regulation affects
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<PAGE>
rates, safety rules, maintenance of track, other facilities, and
rights-of-way, and may affect the Company's revenues and expenses.
Environmental Matters
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The Company transports hazardous materials on behalf of certain of its
customers, and uses certain hazardous materials in the normal course of the
repair and maintenance of its locomotives, rail cars and other equipment.
The operation of a railroad includes the risk of derailments which could
result in the release or spillage of diesel fuel and hazardous materials
from locomotives and rail cars to property of the Company and adjoining
properties. The Company is not aware of any such spills or releases which
have not been remediated in compliance with applicable statutes and
regulations.
The Company, as the owner of real estate, may be responsible under
certain circumstances for remediation of environmental conditions on its
property, whether or not such conditions arose from the Company's
operations. The Company has, with one exception, no knowledge of the
existence of any such conditions, but cannot assure that such will not
arise or occur in the future. During 1993, The New York, Susquehanna and
Western Railway Corporation, a railroad operating subsidiary, received
notice from the Environmental Protection Agency (EPA) that it is a
potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act (Superfund) and may be required
to share in the cost to clean up a certain site identified by the EPA.
The information presently available to the Company indicates that the
estimated liability is less than ten thousand dollars and, therefore,
will not have a material effect on the consolidated financial condition or
results of operation.
Employees
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At December 31, 1996, the Company employed 172 people, of whom 93 were
operating personnel, 8 were supervisors, 44 were office and sales
personnel, and 27 were executive officers and managerial personnel. 30 of
the Company's operating personnel are subject to a collective bargaining
agreement with the Brotherhood of Locomotive Engineers (BLE) which sets
their general level of compensation and working conditions through December
31, 1996. The Company is currently negotiating with the BLE regarding
these matters for periods after December 31, 1996. In 1995, the Company
reached a collective bargaining agreement with the Brotherhood of
Maintenance of Way Employes ("BMWE") covering 30 employees of the Company's
Track Department which sets the general level of compensation and working
conditions through December 31, 2000. The Company considers its employee
relations to be good.
At December 31, 1996, TP&W employed 93 people of whom 72 were
operating personnel, 10 were supervisors and officers, and 11 were sales
and office personnel. 48 of TP&W operating personnel are subject to
collective bargaining agreement with the United Transportation Union which
sets their general level of compensation and working conditions through
December 31, 1999. 16 of TP&W operating personnel are subject to a
collective bargaining agreement with the BMWE, which is currently in the
process proscribed by the Railway Labor Act for renegotiation.
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<PAGE>
Item 2. PROPERTIES
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The Company's executive offices are located in approximately 4,500
square feet of space at 1 Railroad Avenue, Cooperstown, New York, a
property owned by the Company. The Company also owns the Edgewater
Executive Offices in Cooperstown. This structure, containing 10,000 square
feet of space, presently is used for offices, conferences, and facilities
for overnight accommodations for Company guests.
The Company owns 82.6 miles of track and right-of-way in New Jersey
and Orange County, New York and jointly owns with the County of Sussex,
New Jersey, an additional 8.8 miles of track and right-of-way. Together
these tracks and rights-of-way run from Jersey City, New Jersey to Warwick,
New York and are referred to as the Southern Division.
The Company has trackage and other operating rights to run over track
owned by Conrail from Warwick, NY to Binghamton, NY and, alternatively,
from Passaic Junction, NJ to Binghamton, NY. Although unlikely, these
trackage rights may be terminated if their use is abandoned by its owners
upon compliance with certain statutory procedures which may require
approval of the Surface Transportation Board.
The Company operates over 186.2 miles of track and right-of-way
running from Binghamton, NY to Syracuse, NY (the Syracuse Branch ) and
Chenango Forks, NY to Utica, NY (the Utica Branch ) pursuant to
lease-purchase arrangements with six County Industrial Development Agencies.
These leases, which expire in April, 1997, result in real estate tax
savings. The Company has requested that these leases be extended for a
period of five years. At the date of this filing, all six County
Industrial Development Agencies have agreed to such extension.
The Southern Division and Syracuse Branch consist mainly of Class II
track in accordance with FRA standards, allowing operation at speeds of up
to 40 mph. Generally all other trackage owned or leased by the Company,
with the exception of industrial spurs and sidings, are designated Class
III tracks allowing speeds of up to 25 mph.
The Company owns 21.7 miles of right-of-way between Richfield Springs,
NY and Richfield Junction, NY, of which 2.3 miles contains operating track.
The track on the balance of this right-of-way was disposed of in 1996, and
the Company intends to dispose of the non-operating portion of this
right-of-way in 1997.
The Company owns 15.9 miles of track and right-of-way between
Cooperstown, NY and Cooperstown Junction, NY, which has no current rail
operations. The Company has contracted to sell this track and right-of-way
for $500,000. This sale is expected to close in 1997.
The properties of the Company are subject to various easements,
occupations, licenses, leases and rights-of-way. The trackage and other
operating rights pursuant to which the Company is authorized to carry
freight over track belonging to others are subject to contractual
agreements which may be subject to termination or restriction, either of
which may have a significant adverse effect on the railroad operations of
the Company.
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<PAGE>
Substantially all the Company's properties are subject to lien, or
mortgage, in connection with obligations of the Company to Manufacturers
and Traders Trust Company, New Jersey Economic Development Authority, and
Federal Railroad Administration.
The Company owns 14 locomotives of various manufacture, age and size,
three of which were acquired new in 1995, and leases an additional 9
locomotives. The Company believes it has an adequate fleet of locomotives
for its current needs. The Company owns fewer than 50 railcars of various
types and manufacture, and depends on connecting rail lines and customers
to provide cars for outbound loadings.
TP&W owns approximately 261.2 miles of railroad and has operating
rights over approximately 30 miles of track owned by other railroads as
part of its integrated railroad system between Fort Madison, Iowa and
Logansport, Illinois. TP&W owns 22 locomotives of various age, manufacture
and size, and believes it has an adequate fleet of locomotives for its
current needs. Substantially all the assets of TP&W are subject to lien
or mortgage in connection with obligations of TP&W to Creditanstalt
Corporate Finance, Inc.
Item 3. LEGAL PROCEEDINGS
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There are no material pending legal proceedings other than ordinary
routine litigation, incidental to the Company's business, to which the
Company or any of its subsidiaries is a party or of which any of its or
their property is the subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
Executive Officers and Key Employees of the Registrant
- ------------------------------------------------------
Each of the following officers of the Company has been elected by the
Board of Directors and serves at the discretion of the Board.
Position with Officer
Name Age the Registrant Since
- --------------------- --- ------------------------------- -------
Walter G. Rich 51 President, Chief Executive 1968
Officer & Director
C. David Soule 46 Executive Vice President 1981
& Director
William B. Blatter 62 Senior Vice President & 1988
Chief Financial Officer
Nathan R. Fenno 38 Vice President-Law, General 1988
Counsel & Secretary
Frank Quattrocchi 47 Vice President & Treasurer 1993
William H. Matteson 46 Vice President-Administration 1991
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<PAGE>
Mr. Rich has been a member of the Board of Directors of the Company
since 1968, and has been President and Chief Executive Officer since 1971.
Mr. Rich is also a director of Norwich Aero Products, Inc., New York State
Business Development Corporation, Security Mutual Life Insurance Company of
New York, and New York State Electric and Gas Company. Mr. Rich was
appointed in 1993 to the New York State Public Transportation Safety Board.
Mr. Soule has been Executive Vice President of the Company since June,
1983. He was elected to the Board of Directors in June, 1984.
Mr. Blatter joined the Company as Vice President-Finance and Chief
Financial Officer in April, 1988, and was named Senior Vice President and
Chief Financial Officer in June, 1990.
Mr. Fenno joined the Company as Attorney in July, 1987. Mr. Fenno was
appointed General Counsel and Corporate Secretary in July, 1988, and Vice
President-Law in September, 1991.
Mr. Quattrocchi joined the NYS&W in June, 1983. Mr. Quattrocchi was
promoted to Vice President & Treasurer of the Company in April, 1993.
Mr. Matteson joined the Company in October, 1987. Mr. Matteson was
promoted to Vice President-Administration in Jan. 1991.
The following are other key employees of the Registrant's operating
subsidiaries:
Mr. Joseph G. Senchyshyn became Vice President-Operations of NYS&W on
September 3, 1985.
Mr. Robert A. Kurdock was appointed Vice President of NYS&W in June of
1985. He has been employed by the Company since September, 1980, serving
in increasingly responsible positions.
Mr. Richard J. Hensel became Vice President-Engineering of NYS&W in
April, 1987.
Mr. Paul Garber joined the NYS&W in 1989, and was appointed Vice
President-Marketing & Sales in October, 1990.
Mr. David Boyd, who previously was employed by TP&W for over five
years, joined NYS&W as Vice President-Mechanical and Chief Mechanical
Officer in June, 1996.
Mr. Gordon Fuller joined NYS&W as an Executive Vice President in
January, 1996 and will be active in the areas of railroad sales and
marketing, governmental relations, industrial development and similar
executive level functions. He previously was President of Toledo, Peoria &
Western Railway Corporation for over five years.
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<PAGE>
PART II
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Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- -------------------------------------------------------------
Market Information
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The Company's common stock trades in the over-the-counter market and
is quoted on the Nasdaq National Market. The symbol for the common stock
is "DOCP". The following table sets forth the quarterly high and low sale
prices of the Company's common stock as reported by Nasdaq for the two
years ending December 31, 1996.
1996 High Low
---------------- ------- -------
First Quarter $11.00 $9.25
Second Quarter $11.00 $8.75
Third Quarter $ 9.25 $7.50
Fourth Quarter $11.00 $7.50
1995 High Low
---------------- ------- -------
First Quarter $11.00 $9.75
Second Quarter $10.25 $9.25
Third Quarter $10.50 $9.50
Fourth Quarter $10.00 $9.00
Holders of Record
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As of December 31, 1996, the approximate number of record holders of
the Company's common stock was 1,504.
Dividends
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During 1996, the Company paid a 5% stock dividend payable to
stockholders of record February 17, 1996. The dividend was paid on March
20, 1996 and 82,297 shares were issued accordingly.
The Company has declared a 5% stock dividend payable to stockholders
of record February 28, 1997, to be paid on March 31, 1997. As a result of
this dividend, 86,703 shares will be issued.
The Company's loan with Manufacturers and Traders Trust Company
provides that the Company may not declare any 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 Agreement
between the Company and its subsidiary NYS&W, and the Federal government
through the FRA 505 Redeemable Preference Share Program 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
five years prior to the agreement.
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<TABLE>
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
(Thousands except per share amounts)
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<CAPTION>
Year Ended December 31,
------------------------------------------------
RESULTS OF OPERATIONS: 1996 1995 1994 1993 1992
- ----------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 32,282 $ 34,524 $ 27,463 $ 22,610 $ 22,922
Directed Service Revenues (1) - - - - 149
Loss from Operations (789) (1,562) (2,459) (2,979) (2,093)
Other (Expense) Income, Net (1,078) 4,055 (889) 1,098 166
-------- -------- -------- -------- --------
(Loss) Income Before Income
Taxes, Extraordinary Item
and Equity Interest in
Income of Affiliate (1,867) 2,493 (3,348) (1,881) (1,927)
Provision for Income Tax
Benefit (Expense) 610 (878) 1,128 603 605
Extraordinary Item,
net of tax (2) - - (228) - 765
Equity Interest in Income
of Affiliate 92 - - - -
-------- -------- -------- -------- --------
Net (Loss) Income $ (1,165) $ 1,615 $ (2,448) $ (1,278) $ (557)
======== ======== ======== ======== ========
Primary Earnings
(Loss) per Share:
Income (Loss) before
Extraordinary Item $ (0.64) $ 0.95 $ (1.31) $ (0.75) $ (0.78)
Extraordinary Item - - (0.13) - 0.45
-------- -------- -------- -------- --------
Net Income (Loss) per Share $ (0.64) $ 0.95 $ (1.44) $ (0.75) $ (0.33)
======== ======== ======== ======== ========
Fully Diluted Earnings
(Loss) per Share:
Income (Loss) before
Extraordinary Item $ (0.64) $ 0.86 $ (1.31) $ (0.75) $ (0.78)
Extraordinary Item - - (0.13) - 0.45
-------- -------- -------- -------- --------
Net Income (Loss) per Share $ (0.64) $ 0.86 $ (1.44) $ (0.75) $ (0.33)
======== ======== ======== ======== ========
Cash Dividends Per Share - - - - $ 0.08
FINANCIAL POSITION:
- -----------------------------
Total Assets $ 78,323 $ 74,778 $ 68,877 $ 65,619 $ 63,530
Long-Term Debt 12,383 12,802 10,066 11,167 13,092
Property, Plant & Equipment 97,724 92,401 84,185 79,680 73,101
Stockholders' Equity (3) $ 34,594 $ 32,446 $ 29,511 $ 29,493 $ 28,844
</TABLE>
[FN]
(1) Revenue from the Company's temporary operations over lines of the
Delaware & Hudson Railway.
(2) See Management's Discussion and Analysis for discussion of the 1994
extraordinary item. The 1992 extraordinary item relates to a debt
forgiveness transaction in connection with the termination of a land
lease.
(3) All data in the accompanying financial statements and related notes
have been restated to give effect to a 5% stock dividend declared
on February 19, 1997.
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<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS (Dollars in thousands)
- --------------------------------------------
Recent Acquisition
- ------------------
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 Company performs administrative services for the
TP&W which have had a positive impact on general and administrative
expenses. The investment is accounted for under the provisions of
APB 18, The Equity Method of Accounting for Investments in Common
Stock. See also Note 12 to the financial statements - Investment
in Affiliate.
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 Archer Daniels Midland, Central Illinois Power, Witco, Lonza and
Caterpillar. The Company believes that the TP&W's geographic
location and connections with over 20 rail carriers, including
seven Class I railroads, present numerous opportunities for growth
and the acquisition provides the Company with an opportunity to
diversify its rail holdings.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations relates to the continuing
operations of the Company.
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<PAGE>
1996 COMPARED TO 1995
- ---------------------
Operating Revenues
- ------------------
1996 railway operating revenues, which include intermodal, carload
and all other rail operating revenues, were $30,213 compared with
$32,484 in 1995.
Two major customers accounted for approximately 69% and 72% of the
Company's 1996 and 1995 operating revenues, respectively. During
1996 and 1995, the Company generated approximately $15.8 million
and $17.2 million in revenues, respectively from CSX Intermodal,
Inc. During the same periods the Company generated approximately
$6.3 million and $7.5 million in revenues from Hanjin Shipping
Lines. The loss of either customer or a material reduction in
either of their operations would have a material adverse effect on
the Company's results of operations.
Intermodal revenues for the year ending December 31, 1996 decreased
$2,615 compared to that period in 1995. Intermodal revenues from
CSX Intermodal, Inc. decreased $1,396 due principally to weak
international volumes and declined business from General Motors as
a result of changes in shipping patterns due to currency exchange
rate fluctuations. Intermodal revenues derived from shipments on
behalf of Hanjin Shipping Lines to the Resources facility declined
$1,219, due primarily to market redistributions.
The Company relies on, and its ability to compete is dependent
upon, its rail connections with CP and with Conrail for a
substantial portion of its rail traffic. Changes in the operations
of either of these carriers could have a material adverse impact on
the Company. 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 the
time of this filing, (March 28, 1997) press reports indicate that
the rail lines of Conrail will be divided between CSX and Norfolk
Southern, although details are not yet known. 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
possible restructuring of the eastern U.S. railroad system at this
time arising from the proposed sale of Conrail, or the impact such
restructuring, if it occurs, will have on the Company in the
future.
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<PAGE>
1996 carload revenues improved $399 compared to 1995, due mainly to
movements of contaminated soil in the third and fourth quarters of
1996, partially offset by declines in shipments for plastics,
paper, lumber, building materials and motor vehicles.
Real property revenues declined $165 in 1996 as compared to 1995,
due mainly to unearned rent revenues recognized as earned when
certain property was sold by a Company subsidiary in the second
quarter of 1995.
Other operating revenues in the aggregate increased $194 from 1995
to 1996. This increase is primarily attributable to higher
construction related revenues.
Operating Expenses
- ------------------
Maintenance of way expenses in 1996 were $365 lower than in 1995,
due mainly to a decline of $220 in trackage rights expenses
resulting from lower traffic counts and a benefit recognized as the
result of a Conrail audit. Also contributing to reduced
maintenance of way expenses were the effects of cost-cutting
initiatives and the payment of a Company wide bonus in 1995, offset
in part by expenses relating to severe winter weather in January of
1996.
Maintenance of equipment costs were $109 higher during 1996 than in
1995 due to increased expenditures relating to the maintenance of
the Company's locomotive fleet.
Transportation expenses declined $3,125 in 1996 compared to 1995
due principally to lower traffic volumes, the effects of a new
haulage agreement and cost-cutting measures. During the second
quarter of 1996, the Company renegotiated a haulage agreement with
CP that has created new marketing initiatives and resulted in
overall lower haulage related expenses, offset principally by
incremental increases in fuel, locomotive lease costs and car hire.
Car hire expenses in 1996 increased by $355 from 1995 primarily due
to the aforesaid changes in the haulage agreement, offset in part
by a reduction in intermodal movements.
Additions to the Company's fixed asset base accounted for the
increase in depreciation and amortization expense of $418 from 1995
to 1996.
General and administrative and other expenses were $390 lower in
1996 than in 1995 due in part to the positive effects of the
- 13 -
<PAGE>
Company's Administrative Services Agreement with TP&W entered into
on January 31, 1996. Also contributing to the overall reduction in
costs were the Company's ongoing cost reduction measures and the
impact of a Company wide bonus paid in 1995. These benefits were
partially offset by higher marketing expenses in 1996 resulting
from increased efforts in this area.
As a result of the foregoing, operating expenses decreased $3,015
in 1996 as compared to 1995. The operating loss for the twelve
month period ended December 31, 1996 of $789 is an improvement of
$773 compared to the 1995 period. The operating ratio for 1996 was
102.4% compared to 104.5% in 1995.
Other Income (Expense)
- ----------------------
Interest expense, which is net of capitalized interest and interest
income, increased $183 in 1996 compared to 1995 due principally to
interest rate and average outstanding debt differentials.
Gain on sales of property, equipment and other for the year ended
December 31, 1996 declined approximately $5 million, compared to
the same period in 1995, due principally to the sale in 1995 of an
8.8 mile railroad line located in Union County, New Jersey to the
State of New Jersey for $6.4 million resulting in a gain of $5.2
million.
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. The Company
recorded a $610 tax benefit in 1996 compared to a tax expense of
$878 for 1995. See Note 7 to the financial statements for further
discussion concerning income taxes.
Equity Interest in Income of Affiliate
- --------------------------------------
The TP&W had net income of $230 for the eleven months ended
December 31, 1996. Accordingly, the Company recognized $92 from its
equity interest in the income of the TP&W.
- 14 -
<PAGE>
1995 COMPARED TO 1994
- ---------------------
Operating Revenues
- ------------------
1995 railway operating revenues, which include intermodal, carload
and all other rail operating revenues, were $32,484 or $7,503
greater than in 1994.
Two customers comprised approximately 72% and 64% of the Company's
operating revenues, respectively for 1995 and 1994. During those
years, the Company earned approximately $17.2 million and $9.8
million, respectively from CSX Intermodal, Inc. During the same
periods, the Company earned approximately $7.5 million and $7.7
million from Hanjin Shipping Lines.
Intermodal revenues increased $7,230 in 1995 compared to 1994.
Intermodal revenues from CSX Intermodal, Inc. ("CSXI") increased
$7,438 due to two new intermodal services that began in the second
and third quarters of 1994. Both services transport containerized
traffic to CSXI's Little Ferry Terminal in New Jersey. Intermodal
revenues derived from shipments on behalf of Hanjin Shipping Lines
to the Resources facility declined $208, due mainly to market re-
distribution factors and a general softness in international
business in the fourth quarter of 1995.
1995 carload revenues improved by $162 compared to 1994, due
principally to volume improvements in newsprint and printing paper,
contaminated soil, liquid food-grade commodities and automobiles.
Other railway operating revenues improved by $112 in 1995 compared
to 1994, due mostly to improved auto terminal and passenger
revenues, offset by declines in demurrage and other incidental
revenues.
Real property revenues for 1995 were $165 greater than 1994, due
mostly to unearned rent revenues recognized as earned when property
was sold by a Company subsidiary in the second quarter.
Other operating revenues in 1995 declined $607 compared to 1994,
due mostly to declines in construction activity.
Operating Expenses
- ------------------
Maintenance of way and structures expenses for 1995 were $663
greater than in 1994 due primarily to a bonus paid in 1995 and
higher trackage rights expenses associated with the increased
intermodal traffic.
- 15 -
<PAGE>
Maintenance of equipment expenses were $520 higher during 1995 as
compared to 1994 due in large part to increased locomotive
maintenance expenses.
Transportation expenses increased in 1995 compared to 1994 by
$3,733, due principally to the increase in the Company's intermodal
business.
Car hire expenses for 1995 were $261 greater than in 1994, due
mostly to the increase in intermodal traffic.
Depreciation and amortization expense for 1995 exceeded 1994 by
$301.
General, administrative and other expenses for 1995 were $673
greater than 1994, due in large part to a Company wide bonus paid
in 1995.
As a result of the foregoing, operating expenses increased $6,164
in 1995 compared to 1994. For the twelve month period ended
December 31, 1995, the Company's operating loss declined by $897
compared to the 1994 period. The operating ratio for 1995 was
104.5% compared to 109.0% for 1994.
Other Income (Expense)
- ----------------------
Interest expense net, comprised of interest expense (net of
capitalized interest) and interest income, for 1995 increased $50
compared to 1994.
Gain on sale of property, equipment and other for 1995 increased
$4,994 compared to 1994, due principally to the sale in 1995 of an
8.8 mile railroad line located in Union County, New Jersey to the
State of New Jersey for $6.4 million resulting in a gain of $5.2
million.
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. The Company's
provision for income taxes on income (loss) before extraordinary
item resulted in a $878 tax expense in 1995 compared to a tax
benefit of $1,128 for 1994. See Note 7 to financial statements for
further discussion concerning income taxes.
- 16 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (In thousands, except share amounts)
- --------------------------------------------------------------------
Liquidity refers to the ability of an organization to generate
adequate amounts of cash, principally from operating results or
through borrowing power to meet its short-term and long-term cash
requirements. At December 31, 1996 the Company had a working
capital deficit of $6,022 and cash and cash equivalents of $1,179
compared to a working capital deficit of $5,284 and cash and cash
equivalents of $1,213 at December 31, 1995.
Total long-term liabilities at December 31, 1996 were $26,855, an
increase of $75 compared to the previous year. Long-term debt
exclusive of current maturities, as a percentage of equity at
December 31, 1996 was 35.8% compared to 39.5% at December 31, 1995.
Total capitalization which consists of long-term debt, convertible
subordinated notes and equity was $50,561 at December 31, 1996, an
increase of $1,733 from December 31, 1995.
In 1995, the Company entered into an equipment line of credit with
Key Bank of New York, whereby it may borrow up to $500. The
interest rate is the lender's base rate plus three quarters
percent. At December 31, 1996, the base rate was 8.25%. The line
expires on April 30, 1997.
Property, plant and equipment additions for 1996 were $5,584 of
which $3,138 was funded by grants from the New York and New Jersey
Departments of Transportation. The balance of $2,446 was provided
by cash from operations, proceeds from additional debt and sales of
real property.
Late in 1995, the Company entered into a contract to sell certain
parcels of railroad property of a non-operating subsidiary. The
selling price is expected to be $500 and the carrying amount is
estimated at $110. This transaction is expected to close during
the first half of 1997 and the proceeds will be used for working
capital purposes.
The Company's spending program for 1997, including commitments, is
projected at approximately $15 million, of which $6 million will be
for railway projects, $8 million for acquisitions of land for
terminals and rehabilitations of facilities and the remainder for
improvements to and purchases of locomotives and other equipment.
See also Note 11 to the financial statements. The expenditures are
expected to be funded from grants from participating state
governments which are expected to continue beyond 1997, cash from
operations, debt financing and proceeds from sales of non-operating
property.
- 17 -
<PAGE>
During 1996, the Company paid a 5% stock dividend payable to
stockholders of record February 17, 1996. The dividend was paid on
March 20, 1996, resulting in the issuance of an additional 82,297
shares. Subsequent to year end, the Company declared a 5% stock
dividend payable to stockholders of record February 28, 1997. The
dividend will be paid on March 31, 1997 and 86,703 shares will be
issued accordingly.
SEASONALITY AND EFFECTS OF INFLATION
- ------------------------------------
The Company's container revenues are affected by seasonal demands
for consumer goods, generally resulting in higher intermodal
revenues in the third quarter. The effects of inflation have not
had a material effect on the Company's operating expenses in the
aggregate.
The Company enters into a diesel fuel supply agreement to hedge its
exposures to price fluctuations on approximately 35% of its
anticipated fuel requirements during an eight month period
beginning in the fall, for its freight transportation business.
The nature of the hedging transaction does not result in any
significant risk to the Company.
Generally accepted accounting principles require the use of
historical costs in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of
property and equipment. The Company is a capital-intensive company
and has approximately $97.7 million invested in such assets. The
replacement costs of these assets, as well as the related
depreciation expense, would be substantially greater than the
amounts reported on the basis of historical costs.
ENVIRONMENTAL MATTERS
- ---------------------
During 1993, the New York, Susquehanna and Western Railway
Corporation, a Company railroad operating subsidiary, received
notice from the Environmental Protection Agency (EPA) that it is a
potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act (Superfund) and may be
required to share in the cost to clean up a certain site identified
by the EPA. The information presently available to the Company
indicates that the estimated liability is less than ten thousand
dollars and therefore, will not have a material affect on the
consolidated financial condition or results of operations.
- 18 -
<PAGE>
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 the time of this filing,
(March 28, 1997) press reports indicate that the rail lines of
Conrail will be divided between CSX and Norfolk Southern, although
details are not yet known. 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 possible
restructuring of the eastern U.S. railroad system at this time
arising from the proposed sale of Conrail, or the impact such
restructuring, if it occurs, will have on the Company in the
future.
- 19 -
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The Financial Statements and Supplementary Data begin on next page.
- 20 -
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
Board of Directors and Stockholders
Delaware Otsego Corporation
- -----------------------------------
We have audited the accompanying consolidated balance sheets of Delaware
Otsego Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Delaware
Otsego Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
the generally accepted accounting principles.
/s/ Ernst & Young LLP
Syracuse, New York
February 28, 1997, except for Note 13
as to which the date is March 24, 1997
- 21 -
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------
<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
-------- --------
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 -
-------- --------
TOTAL OTHER ASSETS 3,537 1,523
-------- --------
TOTAL ASSETS $ 78,323 $ 74,778
======== ========
</TABLE>
[FN]
See notes to consolidated financial statements
- 22 -
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
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
-------- --------
COMMITMENTS - Notes 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>
[FN]
See notes to consolidated financial statements.
- 23 -
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------
<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) 4,055 (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.
- 24 -
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(THOUSANDS)
- ------------------------------------------------------------------------------
<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.
- 25 -
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
(THOUSANDS)
- ---------------------------------------------------------------------------
<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) - -
--------- --------- ---------
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 1,213 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.
- 26 -
<PAGE>
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
- ---------------------------- financial statements include the
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
- -------------------------------------------- and accounts payable
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
railroads of The Association of American Railroads, of which the
Company is a member. At year end, in
- 27 -
<PAGE>
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.
- 28 -
<PAGE>
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
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
situations. 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 million 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 shares assumed to be
- 29 -
<PAGE>
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 from 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:
THOUSANDS
1996 1995
-------- --------
Land $ 1,731 $ 1,658
Buildings and bridges 6,673 6,527
Machinery, equipment and roadway 88,330 83,604
Leasehold improvements 990 612
-------- --------
97,724 92,401
Less: allowance for depreciation
and amortization (33,790) (29,414)
-------- --------
PROPERTY, PLANT and EQUIPMENT, NET $ 63,934 $ 62,987
========= ========
- 30 -
<PAGE>
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 at 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
- 31 -
<PAGE>
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
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
======== ========
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
- 32 -
<PAGE>
NOTE 4 - LONG-TERM DEBT (continued)
- -----------------------------------
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
- --------------------------------------------
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.
- 33 -
<PAGE>
NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
- --------------------------------------------------------------------------
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):
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
======== ======== ========
A reconciliation of the statutory U.S. federal income tax rate to
the effective income tax rate follows:
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%
====== ====== ======
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
payable.
- 34 -
<PAGE>
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
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31 are as follows:
Thousands
1996 1995
------- -------
Deferred tax liabilities:
Book basis in excess of tax basis of
property, plant & 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
======= =======
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.
- 35 -
<PAGE>
NOTE 8 - LEASES (continued)
- ---------------------------
Future minimum lease payments for noncancelable operating leases as
of December 31, 1996, are as follows (in thousands):
Year ending December 31,
1997 $ 656
1998 654
1999 681
2000 680
2001 676
Thereafter 1,021
------
TOTAL MINIMUM OPERATING LEASE PAYMENTS $4,368
======
NOTE 9 - STOCK OPTIONS, WARRANTS and PREFERRED STOCK
- ----------------------------------------------------
The Stockholders of the Company have approved stock option plans
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.
- 36 -
<PAGE>
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
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-
- 37 -
<PAGE>
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,
- 38 -
<PAGE>
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
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, net 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 CCF towards the loan.
- 39 -
<PAGE>
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.
- 40 -
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ---------------------------------------------------------------------------
None.
PART III
--------
The information required in Item 10 (Directors and Executive
Officers of the Registrant), Item 11 (Executive Compensation), Item 12
(Security Ownership of Certain Beneficial Owners and Management), and Item
13 (Certain Relationships and Related Transactions) except for the
information set forth at the end of Part I with respect to Executive Officers
of the Company, is incorporated herein by reference to the Company's Proxy
Statement to be filed within 120 days of December 31, 1996.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) (1) Financial Statements
The following financial statements of Delaware Otsego Corporation
are included in Part II, Item 8:
Page
----
Report of Independent Auditors 21
Consolidated Balance Sheets at December 31, 1996 and 1995 22
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 24
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995, and 1994 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994 26
Notes to Consolidated Financial Statements 27
Schedules called for under Regulation S-X are not submitted because
they are not applicable or not required or because the required information
is not material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the fourth quarter.
- 41 -
<PAGE>
(c) Exhibits
Filed herewith (-) or
incorporated by reference to
-----------------------------
3.1 Restated Certificate of Incorporation Exhibit 3.1 to Registrant's
of the Delaware Otsego Corporation Annual Report on Form 10-K
dated June 1, 1991 dated December 31, 1991
3.2 Certificate of Amendment of Certificate Exhibit 3.2 to Registrant's
of Incorporation of Delaware Otsego Form 10-Q dated June 30, 1996
Corporation dated June 3, 1996
3.3 By-Laws of DOC dated April 5, 1988 Exhibit 3.8 to Registrant's
Annual Report on Form 10-K
dated December 31, 1988
10.1 Employment Agreement between DOC Exhibit 10.1 to Registrant's
and Walter Rich dated June 3, 1995 Quarterly Report on Form 10-Q
dated June 30, 1995
10.2 Direct Loan Agreement between New Exhibit 10(g) to Registration
Jersey Economic Development Authority Statement on Form S-1,
and NYS&W dated August 6, 1982 No. 2-94319
10.3 Agreement between Conrail and NYS&W Exhibit 10(p) to Registration
dated March 30, 1982 relating to Statement on Form S-1,
trackage rights over line of Conrail No. 2-94319
from Binghamton, New York to Warwick,
New York via Campbell Hall and Maybrook,
New York
10.4 Financing Agreement between NYS&W and Exhibit 19.11 to Form 10-Q
FRA dated September 30, 1985 dated November 13, 1986
10.5 Agreement Amending Financing Agreement Exhibit 19.12 to Form 10-Q
between FRA and NYS&W dated dated November 13, 1986
July 30, 1986
10.6 Amendment to Direct Loan Agreement Exhibit 19.18 to Form 10-Q
between New Jersey Economic Development dated November 13, 1986
Authority and NYS&W dated July 15, 1986
10.7 Amendment to Direct Loan Agreement Exhibit 19.19 to Form 10-Q
between New Jersey Economic Development dated November 13, 1986
Authority and NYS&W dated September 2,
1986
- 42 -
<PAGE>
10.8 Amended and Restated Credit Agreement Exhibit 10.8 to Form 10-Q
between Manufacturers and Traders Trust dated November 11, 1994
Company and DOC dated May 27, 1994
10.9 Agreement between NYS&W and Exhibit 10.9 to Registrant's
Brotherhood of Locomotive Engineers Annual Report on Form 10-K
dated March 30, 1994 dated March 27, 1995
10.10 Agreement between NYS&W and Exhibit 10.10 to Registrant's
Brotherhood of Maintenance of Way Annual Report on Form 10-K
Employes dated October 13, 1995 dated March 24, 1996
10.11 Modification to Direct Loan Agreement Exhibit 10(hh) to Registration
and Direct Loan Promissory Note dated Statement on Form S-1,
as of August 6, 1982 between the New No. 2-94319
Jersey Economic Development Authority
and NYS&W dated July 17, 1984
10.22 Delaware Otsego Corporation Exhibit B to Definitive Proxy
1987 Stock Option Plan Statement Dated October 7, 1987
10.23 Delaware Otsego Corporation Exhibit B to Definitive Proxy
1993 Stock Option Plan Statement Dated May 5, 1993
10.27 Form of Delaware Otsego Corporation Exhibit 1 to Registrant's
6.5% Convertible Subordinated Note Form 8-K dated October 19,
Due on September 1, 2003 1993
10.28 Guarantee Commitment between the Exhibit 10.28 to Registrant's
Federal Railroad Administration and Annual Report on Form 10-K
DOC dated September 29, 1994 dated March 27, 1995
10.29 Warrant Agreement between DOC and Exhibit 10.29 to Registrant's
Creditanstalt Corporate Finance, Inc. Annual Report on Form 10-K
dated January 31, 1996 dated March 24, 1996
10.30 Deficiency Guarantee among DOC and Exhibit 10.30 to Registrant's
others and Creditanstalt Corporate Annual Report on Form 10-K
Finance Inc. dated January 31, 1996 dated March 24, 1996
10.31 Cash Collateral Agreement among DOC Exhibit 10.31 to Registrant's
and others and Creditanstalt Corporate Annual Report on Form 10-K
Finance, Inc. dated January 31, 1996 dated March 24, 1996
- 43 -
<PAGE>
11 Computation of Earnings Per Share -
21 Subsidiaries of Registrant -
23 Consent of Ernst & Young LLP -
- 44 -
<PAGE>
SIGNATURES
- ---------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Delaware Otsego Corporation has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DELAWARE OTSEGO CORPORATION
- ---------------------------
Registrant
By: s/ WALTER G. RICH
-------------------------------------
Walter G. Rich, Director
President and Chief Executive Officer
Date: March 22, 1997
By: s/ WILLIAM B. BLATTER
-------------------------------------
William B. Blatter, Senior Vice
President and Chief Financial Officer
Date: March 22, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
s/ MALCOLM C. HUGHES s/ NILES F. CURTIS
---------------------------- ------------------------------
Malcolm C. Hughes, Director Niles F. Curtis, Director
March 22, 1997 March 22, 1997
s/ HARVEY POLLY s/ DAVID B. COMMON
---------------------------- ------------------------------
Harvey Polly, Director David B. Common, Director
March 22, 1997 March 22, 1997
s/ ALBERT B. AFTOORA s/ ROBERT L. MARCALUS
---------------------------- ------------------------------
Albert B. Aftoora, Director Robert L. Marcalus, Director
March 22, 1997 March 22, 1997
s/ CHARLES S. BRENNER s/ GERALD D. GROFF
---------------------------- ------------------------------
Charles S. Brenner, Director Gerald D. Groff, Director
March 22, 1997 March 22, 1997
- 45 -
<PAGE>
EXHIBIT INDEX
- ---------------------------------------------------------------------------
Page
----
11 Computation of Earnings Per Share 47
21 Subsidiaries of Registrant 48
23 Consent of Ernst & Young LLP 49
- 46 -
<TABLE>
DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------
<CAPTION>
1996 (1) 1995 (1) 1994 (1)
-------- -------- --------
<S> <C> <C> <C>
PRIMARY
Weighted Average Shares Outstanding 1,820 1,694 1,694
======== ======== ========
Net (Loss) Income before Extraordinary Item $ (1,165) $ 1,615 $ (2,220)
Extraordinary Item - - (228)
-------- -------- --------
Net (Loss) Income $ (1,165) $ 1,615 $ (2,448)
======== ======== ========
PRIMARY EARNINGS (LOSS) PER SHARE
Net (Loss) Income before Extraordinary Item $ (0.64) $ 0.95 $ (1.31)
Extraordinary Item - - (0.13)
-------- -------- --------
Net (Loss) Income $ (0.64) $ 0.95 $ (1.44)
======== ======== ========
FULLY DILUTED
Weighted Average Shares Outstanding 1,820 1,694 1,694
Assumed Conversion of 6.5%
Convertible Subordinated Notes * 354 *
-------- -------- --------
1,820 2,048 1,694
======== ======== ========
Net (Loss) Income before extraordinary item $ (1,165) $ 1,615 $ (2,220)
Add: 6.5% Convertible Subordinated Note
Interest, net of tax * 151 *
-------- -------- --------
$ (1,165) $ 1,766 $ (2,220)
Extraordinary Item - - (228)
-------- -------- --------
$ (1,165) $ 1,766 $ (2,448)
======== ======== ========
FULLY DILUTED EARNINGS (LOSS) PER SHARE
Net (Loss) Income before Extraordinary Item $ (0.64) $ 0.86 $ (1.31)
Extraordinary Item - - (0.13)
-------- -------- --------
Net (Loss) Income $ (0.64) $ 0.86 $ (1.44)
======== ======== ========
</TABLE>
[FN]
* Conversion of Convertible Subordinated Notes not assumed due to
anti-dilutive effect.
(1) Stock Options and warrants are not considered in the calculations as
their effect is anti-dilutive or not material.
- 47 -
EXHIBIT 21
- ----------------------------------------------------------------------------
SUBSIDIARIES OF REGISTRANT
--------------------------
STATE OF
NAME OF SUBSIDIARY INCORPORATION
- -------------------------------------------------------------- -------------
Cooperstown and Charlotte Valley Railway Corporation New York
Central New York Railroad Corporation New York
Syracuse, Binghamton and New York Railroad Corporation New York
Lackawaxen and Stourbridge Railroad Corporation Pennsylvania
Delaware Otsego Equipment Corporation New York
Fonfulco, Inc. New York
The New York, Susquehanna and Western Railway Corporation New Jersey
Susquehanna Properties, Inc. New York
Staten Island Railway Corporation New York
Delta Warehousing Corporation New Jersey
Rahway Valley Company, Lessee New Jersey
Rahway Valley Railroad Company New Jersey
Susquehanna Bulk Systems, Inc. New Jersey
- 48 -
Consent of Independent Auditors
- -------------------------------
We consent to the incorporation by reference in the Registration Statement
(Form S-8 and Form S-3 No. 33-34587) pertaining to the 1987 Stock Option
Plan of Delaware Otsego Corporation of our report dated February 28, 1997
(except Note 13, as to which the date is March 24, 1997) with respect to
the consolidated financial statements of Delaware Otsego Corporation and
subsidiaries included in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
/s/ Ernst & Young LLP
Syracuse, New York
March 24, 1997
- 49 -
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