UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16704
PROVIDENCE AND WORCESTER RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0344399
----------------------------- --------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
----------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 755-4000
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 1998, the registrant has 4,225,019 shares of common stock, par
value $.50 per share, outstanding.
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
Index
Part I - Financial Information
Item 1 - Financial Statements:
Balance Sheets - September 30, 1998 and December
31, 1997 3
Statements of Income -
Three and Nine Months Ended
September 30, 1998 and 1997 4
Statements of Cash Flows -
Nine months Ended
September 30, 1998 and 1997 5
Notes to Financial Statements 6-9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Part II - Other Information:
Item 2(d) Changes in Securities and Use of Proceeds 15
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
Item 1. Financial Statements
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS (Unaudited)
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Current Assets:
Cash and equivalents $ 1,782 $ 519
Accounts receivable, net of allowance for
doubtful accounts of $125 in 1998 and 1997 2,871 2,345
Materials and supplies 2,180 2,086
Prepaid expenses and other 320 167
Deferred income taxes 92 204
-------- --------
Total Current Assets 7,245 5,321
Property and Equipment, net 69,192 65,891
Goodwill, net (Note 6) 190
-------- --------
Total Assets $76,627 $71,212
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Notes 2,
4 and 11) $ 250 $ 931
Notes payable, bank (Note 3) 1,350
Accounts payable 2,458 2,083
Accrued expenses 536 901
Income taxes payable 767 30
--------- ---------
Total Current Liabilities 4,011 5,295
--------- ---------
Long-Term Debt, Less Current Portion
(Notes 2, 4 and 11) 244 11,916
--------- ---------
Profit-Sharing Plan Contribution 425 337
--------- ---------
Deferred Grant Income 7,154 6,945
--------- ---------
Deferred Income Taxes 8,692 8,681
--------- ---------
Commitments and Contingent Liabilities
(Note 9)
Shareholders' Equity (Notes 2 and 6):
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding
647 shares in 1998 and 653 shares in 1997 32 33
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
3,474,912 shares in 1998 and 2,221,933
shares in 1997 1,738 1,111
Additional paid-in capital 20,784 6,665
Retained earnings 33,547 30,229
--------- ---------
Total Shareholders' Equity 56,101 38,038
--------- ---------
Total Liabilities and Shareholders' Equity $76,627 $71,212
======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months EndedNine Months Ended
September 30 September 30
1998 1997 1998 1997
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Operating Revenues - Freight
and Non-Freight $6,393 $5,947 $17,285 $16,225
--------- --------- ------- --------
Operating Expenses:
Maintenance of way and
structures 766 233 2,307 1,862
Maintenance of equipment 534 495 1,557 1,435
Transportation 1,280 1,329 3,884 3,706
General and administrative 1,009 966 3,073 2,764
Depreciation 550 519 1,620 1,518
Taxes, other than income
taxes 551 535 1,691 1,654
Car hire, net 203 149 488 467
--------- -------- -------- --------
Total Operating Expenses 4,893 4,226 14,620 13,406
--------- -------- -------- --------
Income from Operations 1,500 1,721 2,665 2,819
Other Income (Note 5) 1,259 108 3,855 523
Interest Expense (22) (340) (485) (1,021)
--------- -------- -------- --------
Income before Income taxes and
extraordinary item 2,737 1,489 6,035 2,321
Provision for Income Taxes 1,071 530 2,245 840
--------- -------- -------- --------
Income before extraordinary
item 1,666 959 3,790 1,481
Extraordinary loss from early
extinguishment of debt, net
of income tax benefit
(Note 4) 24 194
Net income 1,642 959 3,596 1,481
Preferred Stock Dividends 3 3
--------- --------- -------- --------
Net Income Available to Common
Shareholders $1,642 $ 959 $3,593 $ 1,478
======== ======== ======== ========
Basic Income Per Common Share
(Note 7):
Income before extraordinary
item $ .48 $ .43 $ 1.22 $ .67
Extraordinary item .01 (.06)
======== ======== ======== ========
Net income $ .47 $ .43 $ 1.16 $ .67
======== ======== ======== ========
Diluted Income Per Common
Share (Note 7):
Income before extraordinary
item $ .47 $ .41 $ 1.19 $ .66
Extraordinary item (.01) (.06)
======== ======== ======== ========
Net income $ .46 $ .41 $ 1.13 $ .66
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,596 $ 1,481
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 1,637 1,518
Amortization of deferred grant income (117) (108)
Gains from sale, condemnation and disposal
of properties and equipment (2,459) (150)
Gain from recovery of environmental claim (1,000)
Deferred income taxes 123 300
Increase (decrease) in cash from:
Accounts receivable (548) (408)
Materials and supplies (94) (810)
Prepaid expenses and other (153) (15)
Accounts payable and accrued expenses 1,126 1,583
--------- ---------
Net cash flows from operating activities 2,111 3,391
--------- ---------
Cash flows from Investing Activities:
Purchase of property and equipment (5,157) (4,230)
Proceeds from sale and condemnation of
property and equipment 2,859 210
Proceeds from recovery of environmental claim 1,000
Proceeds from deferred grant income 348 679
--------- ---------
Net cash flows used by investing activities (950) (3,341)
--------- ---------
Cash Flows from Financing Activities:
Net payments under line of credit (1,350) (345)
Payments of long-term debt (10,991) (492)
Dividends paid (278) (136)
Proceeds from long-term debt 730
Net proceeds from public offering of
1,000,000 shares of common stock 12,538
Issuance of common shares for stock options
exercised, employee stock purchases and
acquisition of subsidiary 183 60
--------- ---------
Net cash flows from (used by) financing
activities 102 (183)
--------- ---------
Increase (Decrease) in Cash and Equivalents 1,263 (133)
Cash and Equivalents, Beginning of Period 519 686
--------- ---------
Cash and Equivalents, End of Period $ 1,782 $ 553
--------- ---------
Supplemental disclosures:
Cash paid during the period for:
Interest $ 489 $ 1,051
======== ========
Income taxes $ 1,262 $ 228
======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in Thousands Except Per Share Amounts)
1. In the opinion of management, the accompanying interim
financial statements contain all adjustments (consisting
solely of normal recurring adjustments) necessary to present
fairly the financial position as of September 30, 1998 and
the results of operations and cash flows for the interim
periods ended September 30, 1998 and 1997. Results for
interim periods may not be necessarily indicative of the
results to be expected for the year. These interim
financial statements should be read in conjunction with the
Company's 1997 Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange
Commission.
2. Changes in Shareholders' Equity:
<TABLE>
<CAPTION>
Additional Total
Preferred Common Paid-in Retained Shareholders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance December 31,
1997 $ 33 $1,111 $6,665 $30,229 $38,038
Issuance of 6,609
common shares for
stock options
exercised, employee
stock purchases and
other 3 64 67
Issuance of 1,000,000
common shares for an
underwritten public
stock offering (net
of expenses) 500 12,038 12,538
Issuance of 200,000
common shares for
stock purchase
warrants exercised 100 1,320 1,420
Issuance of 22,156
common shares to
fund the Company's
1997 profit sharing
plan contribution 11 326 337
Issuance of 23,614
shares for the
acquisition of Conn
Central 12 371 383
Conversion of 6
preferred shares
into 600 common
shares (1) 1
Dividends:
Preferred stock,
$5.00 per share (3) (3)
Common stock, $.09
per share (275) (275)
Net income for the
period 3,596 3,596
------- ------- ------- ------- -------
Balance September 30
1998 $ 32 $1,738 $20,784 $33,547 $56,101
====== ====== ====== ====== ======
</TABLE>
In February 1998 the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten secondary public
offering of common stock (the "offering"). In March 1998, the Company
completed the offering and issued 1,000,000 shares of common stock at
$14.25 per share. Net proceeds of the offering were approximately $12,500.
A substantial portion of these funds was utilized to retire short and
long-term debt as discussed in Note 4. The Company intends to utilize the
balance of the offering proceeds to acquire rail cars and expand its
Worcester maintenance facility.
In March 1998 Massachusetts Capital Resource Company ("MCRC") exercised its
warrants to acquire 200,000 newly issued shares of the Company's common
stock for $7.10 per share. Proceeds to the Company consisted of a $1.4
million reduction in the outstanding principal balance of its 10%
subordinated long-term note payable to MCRC.
3. Notes Payable, Bank:
In June 1998 the Company's principal bank renewed the Company's revolving
line of credit and increased the maximum borrowings under the line from
$1,750 to $2,000. In addition, loans outstanding under the renewed line are
unsecured and bear interest at either the prime rate or one and one half
percent over either the one or three month London Interbank Offered Rates.
There were no loans outstanding under the line at September 30, 1998.
4. Long-Term Debt:
The Company utilized a substantial portion of the proceeds from its common
stock offering (Note 2) and from the sale of fiber optics licenses (Note 5)
to retire all of its short term borrowings ($1,575) and to prepay $10,778
of its outstanding long-term debt. Prepayment penalties of $304 were
incurred on early extinguishment of a substantial portion of the debt,
which penalties have been reported net of tax as an extraordinary item on
the accompanying statement of income. As of September 30, 1998 the
Company's remaining long-term debt consists of a 10% subordinated note
payable to MCRC in the total amount of $494 (Note 11).
<TABLE>
<CAPTION>
5. Other Income:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Gain from sales of
properties and
easements, net $ 129 $ -0- $2,459 $ 150
Recovery of prior year
environmental claim
(Note 9) 1,000 1,000
Rentals 105 105 315 365
Interest 25 3 81 8
-------- -------- ------- ----------
$1,259 $ 108 $3,855 $ 523
======== ======== ======== ========
</TABLE>
Gain from sales of properties and easements for 1998 includes $2,168
received from the sale of fiber optics cable licenses.
6. Acquisition of Connecticut Central Railroad Company:
On April 21, 1998 the Company acquired all of the outstanding common stock
of Connecticut Central Railroad Company ("Conn Central") for 20,000 shares
of newly issued common stock of the Company. The Company issued an
additional 3,614 shares of its common stock to retire $50 of debt owed by
Conn Central to two of its former shareholders. The total fair market value
of the shares issued was $383, which exceeded the fair market value of the
net assets acquired by $207, which amount is reported as goodwill on the
accompanying balance sheet. The Company is amortizing this goodwill over a
period of three years, beginning in the third quarter of 1998. Conn
Central's former shareholders will receive an additional 7,500 shares of
the Company's common stock in April 1999 if certain financial and other
conditions are met. Issuance of such shares will give rise to additional
goodwill. Conn Central was a shortline railroad which had operating rights
over approximately 28 miles of track in central Connecticut connecting to
the Company's Middletown Secondary line. Conn Central's operations were
merged into those of the Company at the time of acquisition.
7. Income Per Share:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share," which establishes standards for computing and presenting earnings
per share and applies to entities with publicly held common stock or
potential common stock. Prior to 1997, the Company computed income per
common share using the methods outlined in Accounting Principles Board
Opinion No. 15, "Earnings per Share," and its interpretations. The Company
adopted SFAS No. 128 in 1997 and restated its earnings per share.
Previously reported income per common share for the three and nine months
ended September 30, 1997 did not differ materially from that computed using
SFAS 128.
<PAGE>
Basic income per common share is computed using the weighted average number
of common shares outstanding during each year. Diluted income per common
share reflects the effect of the Company's outstanding convertible
preferred stock, options and warrants except where such items would be
antidilutive.
A reconciliation of net income available to common shareholders for the
computation of diluted income per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -----------------
<S> <C> <C> <C> <C>
Net income available to
common shareholders $1,642 $ 959 $3,593 $ 1,478
Interest expense impact
(net of tax) on assumed
conversion of debt to
exercise warrants 22 67
-------- -------- -------- ---------
Net income available to
common shareholders
assuming dilution $1,642 $ 981 $3,593 $ 1,545
======== ======== ======== ========
</TABLE>
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------------
1998 1997 1998 1997
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Weighted average shares-
basic 3,473,023 2,217,339 3,089,542 2,205,025
Dilutive effect of
convertible preferred
stock, options and
warrants 81,714 165,775 83,003 146,625
-------- -------- -------- ---------
Weighted average shares-
diluted 3,554,737 2,383,114 3,172,545 2,351,650
========= ========= ========= =========
</TABLE>
8. Dividends:
On October 28, 1998, the Company declared a dividend of $.03 per share on
its outstanding common stock payable November 27, 1998 to shareholders of
record November 12, 1998.
9. Commitments and Contingent Liabilities
The Company is a defendant in certain lawsuits relating to casualty losses,
many of which are covered by insurance subject to a deductible. The Company
believes that adequate provision has been made in the financial statements
for any expected liabilities which may result from disposition of such
lawsuits.
While it is possible that some of the foregoing matters may be settled at a
cost greater than that provided for, it is the opinion of management based
upon the advice of counsel that the ultimate liability, if any, will not be
material to the Company's financial statements.
<PAGE>
In 1995 the Company entered into a settlement agreement with Bestfoods
(formerly CPC International, Inc.) resolving an environmental claim against
the Company, arising out of a 1974 rail car incident. Pursuant to the
settlement agreement, the Company paid Bestfoods $990 in common stock of
the company and cash. The Company and Bestfoods agreed that in the event
Bestfoods recovered proceeds from its insurance carrier for the costs of
remediation of the involved site, the Company would be entitled to 10% of
Bestfoods' net recovery after deduction of litigation expenses. In 1997,
Bestfoods obtained a judgement in its favor from its insurance carrier for
over $18 million (which amount includes approximately $5 million of
prejudgment interest) as well as an order that obligates the insurance
carrier to reimburse Bestfoods for future remediation expenses. The
insurance carrier's appeal of this judgment was unsuccessful and it has now
paid the $18 million judgement to Bestfoods. In July 1998, Bestfoods paid
$1 million to the Company as an interim payment of the Company's 10%
recovery pending final resolution of amounts to be paid to Bestfoods by its
insurance carrier. Negotiations continue between Bestfoods and the
insurance carrier concerning the payment of future expenses, the potential
recovery of litigation expenses and the resolution of a lawsuit filed by
the insurance carrier against Bestfoods and the Company (for which
Bestfoods is both defending and indemnifying the Company). The insurance
policy has limits of $25 million.
10. New Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. Both standards were adopted by the Company
during 1998 and have not had material effects on its financial position,
results of operations or footnote disclosures.
11. Subsequent events:
In August 1998 the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten secondary public
offering of common stock. In October 1998 the Company completed this
offering and issued 750,000 Shares of common stock at $11.125 per share.
Net proceeds of this offering were approximately $7,500. In October 1998
the Company utilized $540 of these funds to prepay the remaining
outstanding principal balance of its subordinated long-term note payable to
MCRC, including a prepayment penalty of $40 (Note 4). The Company intends
to utilize the remainder of the offering proceeds for general corporate
purposes including possible acquisitions of other connecting railroads,
rail lines and trackage rights; equipment additions and infrastructure
improvements.
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MDA") which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements represent the Company's present
expectations or beliefs concerning future events. The Company cautions, however,
that actual results could differ materially from those indicated in MDA.
Results of Operations
The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- ---------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Freight Revenues:
Conventional
carloads $5,340 83.5% $ 5,128 86.2% $14,562 84.2% $13,876 85.5%
Containers 620 9.7 485 8.2 1,551 9.0 1,235 7.6
Non-Freight
Operating
Revenues:
Transportation
services 221 3.5 197 3.3 569 3.3 519 3.2
Other 212 3.3 137 2.3 603 3.5 595 3.7
----- ---- ----- ---- ----- ---- ----- ----
Total $6,393 100.0%$ 5,947 100.0% $17,285 100.0% $16,225 100.0%
===== ===== ===== ===== ====== ===== ====== =====
</TABLE>
The following table sets forth a comparison of the Company's operating expenses
expressed in dollars and as a percentage of operating revenues:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
---------------------------- ------------------------------
1998 1997 1998 1997
------------ ----------- -------------- -------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries, wages,
payroll taxes
and employee
benefits $2,863 44.8% $ 2,875 48.3% $8,774 50.8% $ 8,184 50.4%
Casualties and
insurance 137 2.1 177 3.0 533 3.1 461 2.8
Depreciation and
amortization 567 8.8 519 8.7 1,637 9.5 1,518 9.4
Diesel fuel 179 2.8 188 3.2 486 2.8 512 3.2
Car hire, net 203 3.2 149 2.5 488 2.8 467 2.9
Purchased
services,
including legal
and professional
fees 549 8.6 404 6.8 1,480 8.6 1,192 7.4
Repair and
maintenance of
equipment 287 4.5 245 4.1 783 4.5 751 4.6
Track and signal
materials 303 4.7 406 6.8 780 4.5 1,207 7.4
Other materials
and supplies 312 4.9 297 5.0 865 5.0 751 4.6
Other 396 6.2 338 5.7 1,155 6.7 1,048 6.5
----- ---- ----- ---- ----- ---- ----- ----
Total 5,796 90.6 5,598 94.1 16,981 98.3 16,091 99.2
Less capitalized
and recovered
costs 903 14.1 1,372 23.0 2,361 13.7 2,685 16.6
----- ---- ----- ---- ----- ---- ----- ----
Total $4,893 76.5% $ 4,226 71.1%$14,620 84.6% $13,406 82.6%
===== ==== ===== ==== ===== ==== ===== ====
</TABLE>
<PAGE>
Nine Months Ended September 30,1998 Compared to Nine Months Ended
September 30,1997
Operating Revenues:
Operating revenues increased $1,060,000, or 6.5%, to $17.3 million in the nine
months ended September 30, 1998 from $16.2 million in 1997. This increase was
comprised of a $686,000 (4.9%) increase in conventional freight revenues, a
$316,000 (25.6%) increase in net container freight revenues and a $58,000 (5.2%)
increase in non-freight operating revenues.
The increase in conventional freight revenues was primarily attributable to an
increase in the average revenue received per conventional carloading of 4.8%.
The volume of conventional freight carloadings increased by just .2% between
nine month periods. The Company experienced increases in conventional carload
shipments by many of its freight customers due to the continued strong economy
as well as the Company's marketing efforts. In addition approximately 500
conventional carloadings were attributed to customers of Connecticut Central
Railroad Company ("Conn Central") which was acquired by the Company in April
1998. These volume increases were largely offset, however, by decreases in the
volume of carloadings of construction aggregates and scrap metal which were
handled during the period. The decrease in the demand for construction
aggregates was largely attributable to a slowdown in federal funding for highway
construction projects, whereas the reduction in the volume of scrap metal was
primarily due to an increase in imports of steel from foreign countries due to
the weakness of certain foreign currencies in relation to the U.S. dollar. Since
these two commodities typically produce lower revenues per carloading than most
other commodities hauled by the Company, the reduction in their volumes
substantially accounts for the increase in average revenue received per
carloading.
The increase in container freight revenue results from a 21.9% increase in the
volume of containers handled and a 3.0% increase in the average net revenue
received per intermodal container. The increase in intermodal container volumes
is attributable to an increase in Asian imports, a shift in vessel routings due
to operational difficulties in the Panama Canal and the Company's success in
marketing its intermodal services. The increase in average net revenue received
per container was primarily due to changes in certain railroad industry cost
indices.
The $58,000 increase in non-freight operating revenues was principally the
result of increases in demurrage and other transportation related revenues. Such
revenues can vary from period to period depending upon customer needs.
Operating Expenses:
Operating expenses increased $1.2 million, or 9.1%, to $14.6 million in the nine
months ended September 30, 1998 from $13.4 million in 1997. Operating expenses
as a percentage of operating revenues ("operating ratio") was 84.6% in 1998
compared with 82.6% in 1997. A portion of the increase in operating expenses is
attributable to the fact that a larger portion of Maintenance of Way payroll and
overhead costs were capitalized in connection with capital improvements to the
Company's track structure and bridges or were reimbursed through government
grants for grade crossing improvements in 1997 than in 1998. Total capitalized
track expenses and recovered costs for the nine month period ended September 30,
1998 amounted to $2.4 million, a $324,000 decrease from 1997 when such recovered
costs amounted to $2.7 million. In addition, profit sharing expense, included in
General and Administrative Expense, for 1998 was $425,000, a $167,000 increase
from 1997 when profit sharing expense amounted to $258,000. The increase in
profit sharing expense results from the substantial increase in other income
realized in 1998. Since the Company has recorded the maximum amount of profit
sharing expense payable for 1998 it should have a decreasing impact upon the
Company's operating ratio during the remainder of the year.
<PAGE>
Other Income:
Other income increased $3.3 million to $3.9 million in 1998 from $523,000 in
1997. This increase is due primarily to an increase in the gain from the sales
of property and easements, principally $2.2 million derived from the sale of
fiber optics cable licenses. In addition the Company received $1.0 million in
1998 as an interim payment relating to an environmental claim paid by the
Company in prior years.
Interest Expense:
Interest expense decreased $536,000 to $485,000 in the nine months ended
September 30,1998 from $1.0 million in 1997. This decrease is the result of the
Company paying off all of its short-term debt and substantially all of its
long-term debt during 1998.
Three Months Ended September 30,1998 Compared to Three Months
Ended September 30,1997
Operating Revenues:
Operating revenues increased $446,000, or 7.5%, to $6.4 million in the third
quarter of 1998 from $5.9 million in the third quarter of 1997. This increase
was comprised of a $212,000 (4.1%) increase in conventional freight revenues, a
$135,000 (27.8%) increase in net container freight revenues and a $99,000
(29.6%) increase in non-freight operating revenues.
The increase in conventional freight revenues for the quarter was the net result
of a 12.8% increase in the average revenue received per conventional carloading
partially offset by a 7.7% decrease in conventional traffic volume. While the
Company experienced increases in conventional carload shipments by certain of it
customers, including approximately 300 carloadings for Conn Central freight
customers, these increases were more than offset by decreases in the traffic
volumes of construction aggregates and scrap metal for reasons previously
discussed. The fact that these two commodities typically produce lower revenues
per carloading than most other commodities hauled by the Company accounts for
the increase in the average revenue per carloading experienced for the quarter.
The increase in container freight revenues results from a 26.4% increase in the
volume of Containers handled and a 1.2% increase in the average net revenue
received per intermodal container attributable to reasons previously discussed.
The $99,000 increase in non-freight operating revenues results from increases in
demurrage and other transportation related revenues, as well as increases in
Maintenance of Way Department billings. Such revenues can vary from period to
period depending upon customer needs.
Operating Expenses:
Operating expenses increased $667,000, or 15.8%, to $4.9 million in the third
quarter of 1998 from $4.2 million in the third quarter of 1997. The operating
ratio increased to 76.5% in the third quarter of 1998 from 71.1% in 1997. A
significant portion of the increase in operating expenses between quarters is
attributable to the fact that a larger portion of Maintenance of Way payroll and
overhead costs was capitalized in connection with capital improvements to the
Company's track structure and bridges or was reimbursed through government
grants for grade crossing improvements in the third quarter of 1997 than in
1998. Total capitalized track expenses and recovered costs for the third quarter
of 1998 amounted to $903,000, a $469,000 decrease from the third quarter of 1997
when such recovered costs amounted to $1.4 million. Capitalized track expenses
and cost recoveries can vary significantly between periods.
<PAGE>
Other Income:
Other income increased $1.2 million to $1.3 million in the third quarter of 1998
from $108,000 in the third quarter of 1997. An interim payment relating to a
prior year environmental claim accounted for $1.0 million of this increase.
Interest Expense:
Interest expense decreased $318,000 to $22,000 in the third quarter of 1998 from
$340,000 in 1997. This decrease is the result of the Company paying off all of
its short term debt and substantially all of its long term debt, primarily
during the second quarter of 1998.
Liquidity and Capital Resources
The Company completed a secondary public offering of 1,000,000 newly issued
shares of its common stock in March 1998 and received net proceeds of
approximately $12.5 million. Approximately $10.8 million of the proceeds were
utilized to retire long and short-term debt, including $152,000 of prepayment
penalties. The Company intends to utilize the remainder of the offering proceeds
for additions to its property and equipment.
The Company generated $2.9 million during the nine months ended September 30,
1998 of proceeds from the sales of property and easements, principally sales of
fiber optics cable licenses. Approximately $1.5 million of these funds were
utilized to retire additional long-term debt principal, including $112,000 of
prepayment penalties. As a result of its debt retirement, the Company's future
cash requirements for debt principal and interest payments have been
substantially reduced. As a further result of debt retirement, the Company's
assets, including receivables, real estate, track, locomotives and rolling
stock, and maintenance equipment are no longer encumbered by any liens,
mortgages or security interest.
In July 1998 the Company received $1.0 million from Bestfoods as an interim
payment of the Company's 10% recovery due from Bestfoods relating to Bestfoods'
recovery from its insurance carrier. The Company utilized $540,000 of these
funds to retire additional long-term debt principal, including a prepayment
penalty of $40,000.
The Company acquired all of the outstanding common stock of Connecticut Central
Railroad Company ("Conn Central") on April 21, 1998. While management is not
able to predict the total impact of this acquisition upon future operations,
approximately 500 carloadings and freight revenues of approximately $365,000
were generated from former Conn. Central rail freight customers during the
period from April 21 through September 30, 1998. In addition, management intends
to pursue growth opportunities on the acquired lines.
In June 1998 the Company's principal bank renewed the Company's revolving line
of credit and increased the maximum borrowings allowed to $2.0 million. In
addition borrowings under the line are now unsecured and bear interest at either
the prime rate or one and one half per cent over either the one or three month
London Interbank Offered Rates. As a result of this the Company's short term
borrowing capacity has been increased by $250,000. The Company had no advances
against the line of credit during the second or third quarters of 1998.
In October 1998 the Company completed an additional secondary public offering of
750,000 newly issued shares of its common stock and received net proceeds of
approximately $7.5 million. The Company utilized $540,000 of these funds to
retire all of its remaining long-term debt principal, including a prepayment
penalty of $40,000. After this payment the Company has no remaining long-term
debt outstanding. The Company intends to utilize the remainder of the offering
proceeds for general corporate purposes including possible acquisitions of other
railroads, rail lines and trackage rights; equipment additions and
infrastructure improvements.
In management's opinion cash generated from operations during the remainder of
1998 will be sufficient to enable the Company to meet its operating expenses and
capital expenditures.
<PAGE>
Seasonality
Historically, the Company's operating revenues are lowest for the first quarter
due to the absence of aggregate shipments during a portion of this period and to
winter weather conditions.
Year 2000 Compliance
The Company operates a mainframe computer with a PC network and employs three
in-house programmers who write and maintain a substantial portion of the
Company's software programs. The Company utilizes Electronic Data Interchange
and Interline Settlement Systems through Railinc for the interchange of rail
cars and revenue allocations with other railroads. The Company has compatible
back up mainframe systems at both its Worcester, Massachusetts and Plainfield,
Connecticut facilities.
The Company has completed an analysis of its information technology and other
operating systems to determine which may be impacted by "Year 2000" issues.
Based on this analysis, preparations for the Year 2000 have been underway for
six years and changes to the Company's information technology are substantially
complete. The Company's other non-information technology systems have also been
evaluated and no Year 2000 issues have been identified.
Modifications to the Company's information technology programs have been
performed by internal staff with the associated costs incorporated into the
Company's annual operating budgets and, therefore, such costs are not separately
identifiable. No material additional costs are anticipated at this time.
Due to the short periodic cycle of rail car movements, the exchange of data
covers time periods where Year 2000 compliance is not a major factor and should
not adversely affect the Company's ability to operate. The Company relies on
waybills and car supply and revenue data generated by other railroads in the
interchange of rail cars. The failure of these railroads to supply accurate data
could disrupt the Company's operations. However, Railinc with whom the majority
of these railroads interface electronically, has informed the Company that it is
currently addressing the Year 2000 issue and expects to be Year 2000 compliant
by early 1999. The Company believes that any modifications to its programs
resulting from Railinc changes will be minimal and that such changes can be
readily made.
The Company's contingency plan in the event other parties should be unable to
provide Year 2000 compliant electronic data is to revert to paper documentation
from these parties. However, to the extent that customers, connecting carriers
or other entities with which the Company has material relationships do not
adequately address Year 2000 issues, the Company could experience payment delays
and service disruptions which could materially adversely affect its operations.
<PAGE>
PART II - Other Information
Item 2.Changes in Securities and Use of Proceeds
(d)Use of Proceeds - The Company sold 1,000,000 shares of the Company's
common stock, par value $.50 per share, on March 24, 1998, pursuant
to a Registration Statement on Form S-1 (File No. 333-46433), which
was declared effective by the Securities and Exchange Commission on
March 19, 1998. The Managing underwriter of the offering was Advest,
Inc. The aggregate gross proceeds of the offering were $14,250,000.
The Company's total expenses in connection with the offering were
$1,712,000, of which $998,000 was for underwriting discounts and
commissions and $714,000 was for other expenses paid to persons other
than directors or officers of the Company, persons owning more than
10 percent of any class of equity securities of the Company, or
affiliates of the Company. The Company's net proceeds from the
offering were $12,538,000. From March 24, 1998 through September 30,
1998 the Company used $8,980,000 of the net proceeds to prepay the
outstanding principal balance on a substantial portion of its
long-term debt, including $152,000 of prepayment penalties, and
$1,839,000 to retire short-term obligations, including all of its
outstanding notes payable to Fleet Bank. Included in the long-term
debt retired by the Company was its 10% note payable to Capital
Properties, Inc. in the amount of $3,935,000 upon which no prepayment
penalty was incurred. Capital Properties, Inc. has a common
controlling shareholder with the Company. As of September 30, 1998
the Company had approximately $1,719,000 of proceeds remaining from
the offering, substantially all of which were invested in short-term,
interest-bearing, investment-grade securities, including money market
instruments.
Item 6.Exhibits and Reports on Form 8-K
(b)No reports on Form 8-K were filed during the quarter ended September
30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROVIDENCE AND WORCESTER
RAILROAD COMPANY
By: /s/ Orville R. Harrold
------------------------------
Orville R. Harrold, President
By: /s/ Robert J. Easton
------------------------------
Robert J. Easton
Treasurer and Principal
Financial Officer
DATED: November 12, 1998
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