<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-62229
750,000 SHARES
[LOGO OF PROVIDENCE AND WORCESTER APPEARS HERE]
PROVIDENCE AND WORCESTER RAILROAD COMPANY
COMMON STOCK
----------------
All of the 750,000 shares of common stock, par value $.50 per share (the
"Common Stock"), of Providence and Worcester Railroad Company ("P&W" or the
"Company") offered hereby are being sold by the Company.
The Common Stock is currently traded on the American Stock Exchange (the
"AMEX") under the symbol "PWX." On October 5, 1998, the last reported sale
price of the Common Stock on the AMEX was $11.125 per share. See "Price Range
of Common Stock and Dividend Policy."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $11.125 $0.668 $10.457
- --------------------------------------------------------------------------------
Total(3)................................. $8,343,750 $501,000 $7,842,750
</TABLE>
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- -------------------------------------------------------------------------------
(1) Does not include additional compensation in the form of (a) a $100,000
non-accountable expense allowance, and (b) warrants (the "Underwriter's
Warrants") to purchase up to 75,000 shares of Common Stock. In addition,
the Company has agreed to indemnify the underwriter (the "Underwriter")
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company
estimated at $325,000, including the non-accountable expense allowance.
(3) The principal shareholder of the Company (the "Principal Shareholder") has
granted the Underwriter a 30-day option to purchase up to 112,500
additional shares of Common Stock, solely to cover over-allotments, if
any. If all such shares are purchased, the total "Price to Public" and
"Underwriting Discounts and Commissions" will be $9,595,313 and $576,150,
respectively, and the total "Proceeds to Company" will remain unchanged.
See "Underwriting."
----------------
The Common Stock is being offered by the Underwriter, subject to prior sale
when, as and if delivered to and accepted by the Underwriter and subject to
certain other conditions. The Underwriter reserves the right to reject orders
in whole or in part and to withdraw, cancel or modify this Offering without
notice. It is expected that delivery of certificates representing the shares
of Common Stock will be made on or about October 9, 1998 at the offices of
Advest, Inc. in New York, New York.
----------------
ADVEST, INC.
THE DATE OF THIS PROSPECTUS IS OCTOBER 6, 1998
<PAGE>
<TABLE>
<S> <C>
Picture of P&W serving Tilcon
Connecticut, Inc.'s trap rock
quarry at Wallingford, CT.
Picture of Doublestack container train Picture of P&W traversing Hell
destined for P&W's Worcester intermodal Gate Bridge in New York City,
facility. with the Triborough and 59th
Street bridges in the
background.
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION,
STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY
BIDS. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
MAP OF COMPANY'S SYSTEM
<PAGE>
MAP OF COMPANY'S SYSTEM (CONTINUED)
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise specified, all information in this Prospectus assumes no exercise of
the over-allotment option granted to the Underwriter. This Prospectus contains
forward-looking statements that involve risks and uncertainties. Actual events
or results may differ materially as a result of various factors, and investors
should carefully consider the information set forth under the heading "Risk
Factors."
THE COMPANY
P&W is a regional freight railroad operating in Massachusetts, Rhode Island,
Connecticut and New York. The Company is the only interstate freight carrier
serving the State of Rhode Island and possesses the exclusive and perpetual
right to conduct freight operations over the Northeast Corridor between New
Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing
independent operations in 1973, the Company, through a series of acquisitions
of connecting lines, has grown from 45 miles of track to its current system of
approximately 545 miles. P&W operates the largest double stack intermodal
terminal facilities in New England in Worcester, Massachusetts, a strategic
location for regional transportation and distribution enterprises.
The Company transports a wide variety of commodities for its customers,
including construction aggregate, iron and steel products, chemicals, lumber,
scrap metals, plastic resins, cement, processed foods and edible food stuffs,
such as frozen foods, corn syrup and animal and vegetable oils. Its customers
include The Dow Chemical Company, Exxon Corporation, Frito-Lay, Inc., General
Dynamics Corporation, Getty Petroleum Marketing Inc., International Paper
Company, Leggett & Platt, Incorporated, Mobil Oil Corporation, R.R. Donnelley &
Sons, Stone Container Corporation and Tilcon Connecticut, Inc. In 1997, P&W
transported over 31,000 carloads of freight and over 43,000 intermodal
containers, representing an increase of 14.0% and 9.3%, respectively, over 1996
volumes. Carload and container volumes have increased 5.5% and 19.1%,
respectively, in the first six months of 1998, compared to the same period in
1997. The Company also generates income through sales of properties, grants of
easements and licenses and leases of land and tracks.
P&W's connections to multiple Class I railroads, either directly or through
connections with regional and short-line carriers, provide the Company with a
competitive advantage by allowing it to offer creative pricing and routing
alternatives to its customers. In addition, the Company's commitment to
maintaining its track and equipment to high standards enables P&W to provide
fast, reliable and efficient service.
Over the past decade, consumer product companies have increasingly turned to
intermodal transportation, i.e., the shipment of containerized cargo via more
than one mode of transportation. By using a hub-and-spoke approach to shipping,
multiple double stacked containers can be moved by rail to and from an
intermodal terminal and then either delivered to their final destinations by
trucks or transferred to ships for export. Headquartered in a major population
center in New England, the Company is well situated to capitalize on this
trend.
There are a number of development projects underway in New England to
increase port capacity along its extensive coastline and to improve the
intermodal transportation and distribution infrastructure in the region. These
projects include the Commonwealth of Massachusetts' $250 million highway
reconstruction project to create a direct Worcester connection to the
Massachusetts Turnpike and improve road connections to Worcester; the State of
Connecticut's project to restore rail access to the Port of New Haven; and the
State of Rhode Island's $120 million expansion and improvement of the Quonset
Point/Davisville port and industrial park located near the entrance to
Narragansett Bay ("Quonset/Davisville"). The Quonset/Davisville project, when
completed, will create the largest on-dock double stack and tri-level auto rail
facility in New England with substantial land to support port operations and
development.
3
<PAGE>
The Company's objective is to become the dominant rail freight carrier in New
England by capitalizing on these shipping trends and regional developments
through implementation of the following strategies:
. Acquire Connecting Rail Lines and Trackage Rights. Historically, P&W has
grown through strategic acquisitions of other railroads and trackage rights
which connect to the Company's system, coupled with upgrades of acquired
rail infrastructure. For example, in April 1998, the Company acquired the
Connecticut Central Railroad Company ("Conn Central"), a short-line railroad
with operating rights over approximately 28 miles of track in central
Connecticut, including an unused 11 mile line that P&W has begun to rebuild
to gain access to the Hartford, Connecticut market. The Company believes
that industry and regional developments have created and will continue to
create opportunities for P&W to acquire additional rail properties and
trackage rights on connecting lines. Such acquisitions should enable the
Company to expand its customer base, spread fixed administrative costs over
a larger revenue base and realize other operating efficiencies. The Company
intends to aggressively pursue these acquisition opportunities.
. Expand Service in New York City/Long Island Market. Pursuant to a 1997
agreement with CSX Corporation ("CSX") concerning the line between New
Haven, Connecticut and Fresh Pond Junction (Queens), New York, the Company
has the ability to market rail service for all general merchandise and
intermodal traffic between parts of New York City and Long Island and the
rest of North America via P&W's system. The New York City and Long Island
metropolitan area is one of the country's largest markets for the
consumption of products and freight transportation services. According to
filings by public officials with the United States Surface Transportation
Board ("STB"), the region generates 142 million tons of freight per year, 98
million tons of which is reported to be appropriate for rail transport. The
Company also anticipates that increasing restrictions on landfill and other
local disposal options, as evidenced by the imminent closing of the Fresh
Kill landfill on Staten Island, will create additional opportunities for
rail transport of municipal solid waste generated in this heavily populated
area. Pursuant to a directive from the STB, CSX and the Company have begun
discussions regarding the possible expansion of P&W's service in this area
through haulage or trackage rights.
. Pursue Opportunities to Upgrade, Expand and Enhance Existing Rail
Infrastructure. Certain of the Company's growth opportunities are contingent
upon anticipated enhancements to its existing rail system. The
Quonset/Davisville project contemplates construction of an additional rail
line with double stack and tri-level auto rail car clearances on trackage on
the Northeast Corridor over which P&W possesses the exclusive and perpetual
freight service easement. To realize the benefits of this project, the
Company is in the process of making clearance improvements on its line from
its connection with the Northeast Corridor at Central Falls, Rhode Island to
Worcester. The Company is also working with the Commonwealth of
Massachusetts to implement a statewide clearance improvement project that
will include certain P&W rail lines in Worcester County. In addition, the
Company has begun to identify and improve undergrade bridge structures to
permit heavier loadings on key line segments. These improvements should
permit the Company to capitalize on increased rail traffic anticipated from
the Quonset/Davisville development, capture more international and domestic
double stack containerized cargo and handle heavier rail cars and cargo.
. Acquire and Develop Strategically Located Terminal Properties and Intermodal
Facilities. Planned improvements associated with the Massachusetts highway
reconstruction project will significantly expand the Company's facilities
for intermodal and bulk transloading in Worcester. In addition, the project
should enhance the Company's growth opportunities for intermodal transport
by increasing the convenience of its terminal facilities as a hub for
intermodal transportation to and from the region. To capitalize on such
opportunities, the Company intends to pursue the identification and
acquisition or lease of suitable properties in the Worcester area to
increase its intermodal capacity. P&W is also exploring potential expansion
opportunities for transload and intermodal yards in the I-395 Corridor in
eastern Connecticut (which runs parallel to the Company's Groton,
Connecticut to Worcester main line) and is planning an intermodal facility
at its South Quay property in East Providence, Rhode Island.
4
<PAGE>
. Increase Existing System Revenues Through Expanded Customer
Relationships. P&W's marketing and sales staff focuses on understanding and
addressing the raw material requirements and transportation needs of its
existing customers and businesses on its lines. The staff increases existing
business by maintaining close working relationships with both customers and
connecting carriers and assisting with development projects such as
increasing track capacity, locating appropriate facilities and providing new
shipment capabilities. In addition, the staff generates new business by
targeting companies on its lines that underutilize rail services and by
working with local economic development officials and realtors to attract
new industries to locations on the Company's system. The Company has
experienced a significant increase in the need for gondola rail cars. The
Company expects delivery of 40 100-ton gondolas in the fourth quarter of
1998, which should enable P&W to meet this demand and increase its operating
revenues.
. Expand Locomotive and Rail Car Maintenance and Repair Capabilities. The
Company has entered into an engineering contract for the preliminary design
of an approximate $1.6 million expansion of its Worcester maintenance
center. P&W's management believes this expansion will allow the Company to
increase efficiency and enable it to provide expanded contract maintenance
and repair services.
MARCH OFFERING
In March 1998, the Company completed an underwritten public offering of
1,000,000 shares of Common Stock (the "March Offering") and received net
proceeds of approximately $12.5 million. The Company used $10.8 million of the
net proceeds of the March Offering and $2.0 million from other sources to repay
$12.8 million of debt, accrued liabilities and prepayment penalties. As of the
date hereof, the Company has approximately $0.5 million of long-term debt and
no short-term debt. The Company has ordered 40 100-ton gondolas with an
aggregate purchase price of $2.0 million which are scheduled for delivery in
the fourth quarter of 1998. In addition, the Company has entered into an
engineering contract for the preliminary design of an approximate $1.6 million
expansion of its Worcester maintenance center. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered............... 750,000 shares
Shares of Common Stock outstanding
before this Offering.............. 3,473,044 shares
Shares of Common Stock to be
outstanding after this Offering... 4,223,044 shares
Use of proceeds.................... Repay debt and general corporate purposes,
including acquisition and rebuilding of
connecting rail lines, equipment and
locomotives as well as infrastructure
improvements. See "Use of Proceeds."
AMEX Symbol........................ PWX
</TABLE>
Except where otherwise indicated, all share and per share data in this
Prospectus (i) give no effect to the 75,000 shares issuable upon exercise of
the Underwriter's Warrants; (ii) assume no exercise of outstanding warrants and
stock options to purchase 139,781 shares of Common Stock; and (iii) give no
effect to the up to 7,500 shares issuable to the former shareholders of Conn
Central. See "Business--Business Strategy," "Management--Stock Plans" and
"Underwriting."
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data of the Company as of
and for the three years ended December 31, 1997 and the six months ended June
30, 1997 and 1998. Such data as of and for the three years ended December 31,
1997 are derived from the Company's audited financial statements. The financial
data as of and for the six months ended June 30, 1997 and 1998 are derived from
the Company's unaudited financial statements. It is management's opinion that
the financial data as of and for the six months ended June 30, 1997 and 1998
contain all adjustments, consisting solely of normal recurring adjustments,
which management considers necessary to fairly present the financial data set
forth herein. The results for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year. The
summary financial data should be read in conjunction with the Company's audited
financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues........... $ 19,778 $ 19,456 $ 22,083 $10,278 $10,892
Operating expenses (a)....... 17,677 17,714 18,333 9,180 9,727
-------- -------- -------- ------- -------
Income from operations....... 2,101 1,742 3,750 1,098 1,165
Other income................. 581 1,660 638 415 2,596
Interest expense............. (1,175) (1,371) (1,358) (681) (463)
-------- -------- -------- ------- -------
Income before income taxes
and extraordinary item...... 1,507 2,031 3,030 832 3,298
Provision for income taxes... 590 780 1,100 310 1,174
-------- -------- -------- ------- -------
Income before extraordinary
item........................ 917 1,251 1,930 522 2,124
Extraordinary loss from early
extinguishment of debt (b).. -- -- -- -- 170
-------- -------- -------- ------- -------
Net income................... $ 917 $ 1,251 $ 1,930 $ 522 $ 1,954
======== ======== ======== ======= =======
Diluted income per share
(c)......................... $ 0.43 $ 0.54 $ 0.81 $ 0.23 $ 0.66
======== ======== ======== ======= =======
Weighted average shares-
diluted..................... 2,136 2,461 2,489 2,474 2,975
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED (D)
------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $74,719 $81,691
Current portion, long-term debt....................... 188 --
Long-term debt, less current portion.................. 799 --
Shareholders' equity.................................. 54,543 62,009
</TABLE>
- --------
(a) The $547,000 increase in operating expenses in the six months ended June
30, 1998 includes a $244,000 increase in profit sharing expenses primarily
related to a substantial increase in Other Income realized in 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(b) Net of income tax benefit of $94,000.
(c) The income per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
(d) Adjusted to give pro forma effect of the Company's repayment on July 23,
1998 of $493,000 of its long-term debt and adjusted to reflect the sale by
the Company of 750,000 shares of Common Stock in this Offering and the
application of the net proceeds therefrom. See "Use of Proceeds." As
adjusted, shareholders' equity reflects an extraordinary charge, due to
early extinguishment of debt, of $52,000 (net of tax) in the aggregate
which the Company expects to record in the third and fourth quarters of
1998.
6
<PAGE>
RISK FACTORS
Investors should carefully consider the following matters in connection with
an investment in the Company's Common Stock in addition to the other
information contained in this Prospectus. This Prospectus contains "forward-
looking statements," within the meaning of the Private Securities Litigation
Reform Act of 1995, which can be identified by the use of forward-looking
terminology such as "may," "will," "would," "could," "intend," "plan,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in such
forward-looking statements.
FLUCTUATIONS IN OPERATING REVENUES
Historically, the Company's operating revenues have been tied to national
and regional economic conditions, especially those impacting the manufacturing
sector, while the Company's expenses have been relatively inelastic.
Increasingly, the Company's business is impacted by global economic events. A
downturn in general economic conditions could materially adversely affect the
Company's business and results of operations. In addition, shifts in the New
England economy between manufacturing and service sectors could materially
affect the Company's performance. The Company's operating revenues and
expenses have also fluctuated due to unpredictable events, such as adverse
weather conditions and customer plant closings. While generally the Company
has been able to replace revenues lost due to plant closings through expansion
of existing business or replacement with new customers, there can be no
assurance that it could do so in the future. The occurrence of such
unpredictable events in the future could cause further fluctuations in
operating revenues and expenses and materially adversely affect the Company's
financial performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
AVAILABILITY OF ACQUISITION AND GROWTH OPPORTUNITIES AND ASSOCIATED RISKS
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. There are a limited
number of acquisition targets in the Company's market. In addition, in making
acquisitions, the Company competes with other short-line and regional rail
operators, some of which are larger and have greater financial resources than
the Company. The growing competition for such acquisitions may cause an
increase in acquisition prices and related costs, resulting in fewer
attractive acquisition opportunities, which could materially adversely affect
the Company's growth. No assurance can be given that the Company will be able
to acquire suitable additional rail lines or that, if acquired, the Company
would be able to successfully operate such additional rail lines. In addition,
although the STB has issued an order which requires CSX to discuss with P&W
the possibility of the Company's acquiring additional trackage or haulage
rights in the New York area, there can be no assurance that the Company will
be able to acquire such additional rights or that, if acquired, the Company
would be able to successfully operate or market such lines.
Acquisitions of additional rail lines may be subject to regulatory review
and approval by the STB. The Company anticipates that it will be classified as
a Class II railroad in 1999. Acquisitions made by Class II railroads are
subject to a requirement to pay up to one year of severance for employees
affected by an acquisition, which does not apply to acquisitions by Class III
railroads, the Company's current classification. The anticipated change in the
Company's classification could increase the costs of possible future
acquisitions.
POTENTIAL DELAYS OR COMPLICATIONS WITH REGIONAL DEVELOPMENT PROJECTS
The State of Rhode Island is developing a freight rail improvement project
for the construction of an additional rail line with double stack container
and tri-level auto rail car clearances on the Northeast Corridor from P&W's
main line in Central Falls, Rhode Island to Quonset/Davisville. Part of the
Company's growth strategy is dependent upon the proposed development of
Quonset/Davisville and the related freight rail improvement project. While the
Rhode Island electorate has approved the expenditure of $72 million for the
Quonset/Davisville project, of which $50 million is to fund the freight rail
improvement project and $22 million is to be invested in the industrial park,
numerous governmental approvals are required to complete the proposed
development, and there is no assurance that State funds will be expended as
planned. Furthermore, the State of
7
<PAGE>
Rhode Island's portion of the freight rail improvement project ($50 million)
is expected to be matched by federal appropriations, and there can be no
assurance that such funds will be appropriated or that, if appropriated, the
proposed development will be completed as planned. Recent objections of
environmentalists to the scope of planned development could cause delays or
substantial modifications to the Quonset/Davisville project. Failure of the
State of Rhode Island to complete the Quonset/Davisville development
(including the freight rail improvement project), significant modifications to
the development plan or unforeseen delays in the development could materially
adversely affect the growth of the Company's business. Moreover, there is no
assurance that the development, if completed as planned, will generate
substantial additional rail traffic for the Company.
The Company's growth strategy is also dependent upon other state and federal
development projects, including, but not limited to, the Commonwealth of
Massachusetts' $250 million highway reconstruction project and the State of
Connecticut's project to restore rail access to the Port of New Haven. No
assurance can be given that such development projects will be completed as or
when planned and, if completed, will generate additional business for the
Company.
COMPETITION
For customers located directly on line, which constitute the majority of the
Company's freight business, the Company is the only rail carrier directly
serving them. However, the Company competes with other freight railroads in
the location of new rail-oriented businesses in the region. The Company also
competes with other modes of transportation, particularly long-haul trucking
companies. Any improvement in the cost or quality of these alternate modes of
transportation, for example, legislation granting material increases in truck
size or allowable weight, could increase this competition and materially
adversely affect the Company's business and results of operations. While the
Company believes the acquisition of Consolidated Rail Corporation ("Conrail")
and its division between CSX and Norfolk Southern Corporation ("Norfolk
Southern") may present expansion opportunities for the Company, the Conrail
transaction may lead to increased competition with other freight railroads,
particularly in Massachusetts, as well as efforts by Conrail's acquirers to
reduce revenues to regional and short-line carriers. See "Business--
Competition."
CUSTOMER CONCENTRATION
The Company's 10 largest customers accounted for approximately 51.6% and
50.0% of the Company's operating revenues for 1997 and the six months ended
June 30, 1998, respectively. The Company's business could be materially
adversely affected if any of these customers reduces shipments of commodities
transported by the Company. A significant customer that accounted for 4.2% of
the Company's operating revenues in 1997 announced plans to discontinue
manufacturing at its chemical plant over the next four years and to focus on
pharmaceutical research and development, which action is expected to greatly
reduce this customer's rail shipments. Although in the past the Company has
been able to replace revenues lost due to a reduction in existing customers'
rail service requirements, no assurance can be given that it could do so in
the future. See "Business--Customers."
SOUTH QUAY LITIGATION AND DEVELOPMENT
The Company has invested approximately $11.6 million in the development of
approximately 33 acres of reclaimed formerly tide flowed land in East
Providence, Rhode Island (the "South Quay"), which land is adjacent to 12
acres owned by the Company. The Company has obtained a judgment from the Rhode
Island Superior Court confirming the Company's fee simple absolute title in
the South Quay, which judgment has been appealed to the Rhode Island Supreme
Court by the State of Rhode Island and the Rhode Island Coastal Resources
Management Council (the "Coastal Council"). The Company anticipates that the
Rhode Island Supreme Court will not issue a decision in the case until 1999.
Failure of the Rhode Island Supreme Court to confirm P&W's title in the South
Quay could materially adversely affect the Company's ability to develop this
property. Moreover, regardless of the outcome, the pending litigation is
likely to delay any commercial development of the property and to result in
increased legal expenses to the Company. See "Business--Legal Proceedings."
In addition, P&W currently plans to develop the South Quay as an intermodal
facility but may not be able to attract an adequate level of investment or
user commitment to permit commercial development for such use.
8
<PAGE>
Furthermore, certain types of commercial development of the South Quay would
be subject to extensive permitting requirements by regulatory agencies,
including the Coastal Council. The Company's permits which authorize
construction of a port facility were issued by the United States Army Corps of
Engineers and the Coastal Council and expire on December 31, 2003 and February
22, 1999, respectively. The Company has requested an extension of time to
complete construction from the Coastal Council; to date, no action has been
taken on this request. If the Company is unable to attract adequate investment
or user commitments or is unable to obtain the financing, permits or permit
extension necessary to develop the property, the Company may not realize a
return on its investment and could incur a non-recurring charge to earnings
based on any reduction in the realizable value of the property. See
"Business--Business Strategy."
LABOR ISSUES
Substantially all of the Company's non-management employees are represented
by national railroad labor organizations. The Company's collective bargaining
agreements with its unions are evergreen contracts which do not expire but are
subject to amendment on or after June 1, 1998 for the United Transportation
Union, December 31, 1999 for the Transportation Communication Union and July
1, 2000 for the Brotherhood of Railroad Signalmen. The Company is currently
negotiating with the United Transportation Union, which represents the
Company's train and engine service employees (approximately 26% of the
Company's workforce), concerning proposed amendments to the collective
bargaining agreement. The Company's inability to satisfactorily conclude
negotiations with its unions could materially adversely affect the Company's
operations and financial performance. Similarly, any protracted work stoppages
against the Company's connecting railroads could materially adversely affect
the Company's business and results of operations. Historically, Congress has
intervened in such events to avoid disruptions in interstate commerce, but
there can be no assurance that it would do so in the future.
All railroad industry employees are covered by the Railroad Retirement Act
and the Railroad Unemployment Insurance Act in lieu of Social Security and
other federal and state unemployment insurance programs, and the Federal
Employers Liability Act in lieu of state workers' compensation. Significant
increases in the taxes payable pursuant to the Railroad Retirement Act would
increase the Company's costs of operations. See "Business--Employees."
RELATIONSHIPS WITH OTHER RAILROADS
The railroad industry in the United States is dominated by a small number of
large Class I carriers that have substantial market control and negotiating
leverage. A majority of the Company's carloadings is interchanged with a Class
I carrier, Conrail. A decision by Conrail, or its acquirers, CSX and Norfolk
Southern, to discontinue serving certain routes or transporting certain
commodities would materially adversely affect the Company's business. See
"Business--Industry Overview."
The Company's ability to provide rail service to its customers depends in
large part upon its ability to maintain cooperative relationships with all its
connecting carriers with respect to, among other matters, freight rates, car
supply, interchange and trackage rights. A deterioration in the operations of,
relationships with or service provided by those connecting carriers could
materially adversely affect the Company's business. The Union Pacific railroad
system has been plagued with service disruptions for some time; these
disruptions have been attributed to locomotive and crew shortages, lack of
track capacity and other inadequate infrastructure. To date, these service
disruptions have been confined to the western United States. Similar service
failures by the acquirers of Conrail on rail lines in the East could
materially adversely affect the Company's business.
RAIL INFRASTRUCTURE AND AVAILABILITY OF GOVERNMENT PROGRAMS
Certain of the Company's growth opportunities are contingent upon
anticipated improvements to P&W's existing rail infrastructure. No assurance
can be given that the Company will be able to complete such projects as
planned. Unforeseen delays or other problems which prevent completion of such
improvements could materially adversely affect the Company's business and
results of operations. In addition, the Company has worked with federal and
state agencies to improve its rail infrastructure and has been effective in
obtaining federal and state financial support for such projects. However,
there can be no assurance that such federal and state programs or funds will
be available in the future or that the Company will be eligible to participate
in such
9
<PAGE>
programs. Failure to participate in federal and state programs or to receive
federal or state funding for rail infrastructure improvements would cause the
Company to incur the full cost of rail infrastructure improvements and
significantly increase its costs of rail maintenance. See "Business--Business
Strategy."
POTENTIAL FOR INCREASED GOVERNMENTAL REGULATION AND MANDATED UPGRADE TO
PROPERTY
The Company is subject to governmental regulation by the STB, the Federal
Railroad Administration (the "FRA") and other federal, state and local
regulatory authorities with respect to certain rates and railroad operations,
as well as a variety of health, safety, labor, environmental and other
matters, all of which could potentially affect the competitive position and
profitability of the Company. Management of the Company believes that the
regulatory freedoms granted by the Staggers Rail Act of 1980 (the "Staggers
Rail Act") have been beneficial to the Company by giving it flexibility to
adjust prices and operations to respond to market forces and industry changes.
However, various interests and certain members of the United States House of
Representatives and Senate (which have jurisdiction over the federal
regulation of railroads) have from time to time expressed their intention to
support legislation that would eliminate or reduce significant freedoms
granted by the Staggers Rail Act. If enacted, these proposals, or court or
administrative rulings to the same effect under current law, could materially
adversely affect the Company's business and results of operations.
The Company anticipates that its STB classification as a Class III railroad
will change to Class II in 1999, which may require the Company to comply with
any future safety mandates on more accelerated timetables than apply to Class
III railroads.
As a result of the planned introduction of high speed passenger service on
the Northeast Corridor, the FRA has issued an order requiring that all
locomotives operating on the Northeast Corridor between New Haven, Connecticut
and Boston, Massachusetts be equipped with automatic civil speed enforcement
systems, the cost of which is anticipated to be at least $50,000 per
locomotive. The order requires Amtrak to arrange interim financing for the
Company and certain commuter operators on the Northeast Corridor but does not
address responsibility for funding the costs of required locomotive retrofits.
While federal funding has been provided in the past to implement mandated
improvements relating to the high speed project, and the Company is advocating
for such federal funding in the federal transportation appropriations process,
there can be no assurance that funding for such mandate will be provided in
the future. The introduction of new unfunded mandates for equipment retrofit
or other physical plant requirements could materially adversely affect the
Company's results of operations.
CASUALTY LOSSES
The Company has obtained insurance coverage for losses arising from personal
injury and for property damage in the event of derailments or other accidents
or occurrences. The Company believes that its insurance coverage is adequate
based on its experience. However, under catastrophic circumstances such as
accidents involving passenger trains or spillage of hazardous materials, the
Company's liability could exceed its insurance limits. The Company transports
hazardous chemicals throughout its system and conducts operations on the
Northeast Corridor on which there is heavy passenger traffic. Insurance is
available from only a limited number of insurers, and there can be no
assurance that insurance protection at the Company's current levels will
continue to be available or, if available, will be obtainable on terms
acceptable to the Company. Losses or other liabilities incurred by the Company
which are not covered by insurance or which exceed the Company's insurance
limits could materially adversely affect the Company's financial condition,
liquidity and results of operations.
CONCENTRATION OF OWNERSHIP
Immediately following this Offering, Robert H. Eder, who is the Company's
Chairman and Chief Executive Officer and the Principal Shareholder, together
with his wife, will own of record 20.0% of the outstanding Common Stock (17.3%
assuming exercise in full of the Underwriter's over-allotment option) and
77.3% of the Preferred Stock. Holders of Preferred Stock are entitled to elect
two-thirds of the Company's Board of Directors and to vote separately as a
class on all other matters voted on by shareholders. Consequently, the
Principal Shareholder will continue to be able to exercise effective control
over most corporate actions and outcomes of matters requiring a shareholder
vote, including the election of directors. See "Principal Shareholders" and
"Description of Capital Stock."
10
<PAGE>
ENVIRONMENTAL MATTERS
The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters and
the handling, storage, transportation and disposal of waste and other
materials. The Company transports hazardous materials and periodically uses
hazardous materials in its operations. While the Company believes it is in
substantial compliance with all applicable environmental laws and regulations,
any allegations or findings to the effect that the Company had violated laws
or regulations could materially adversely affect the Company's business and
results of operations. The Company operates on properties that have been used
for rail operations for over a century. There can be no assurance that
historic releases of hazardous waste or materials will not be discovered,
requiring remediation of Company properties, and that the costs of such
remediation would not be material. See "Business --Environmental Matters."
RELIANCE ON KEY PERSONNEL
The Company's success is dependent on certain management and personnel,
including Robert H. Eder, its Chairman and Chief Executive Officer, and
Orville R. Harrold, its President and Chief Operating Officer. The loss of the
services of one or both of these executives could materially adversely affect
the Company's business and results of operations. While the Company believes
that it would be able to locate suitable replacements for these executives,
there can be no assurance it would be able to do so. The Company does not have
employment agreements with these executives and does not maintain any key
person life insurance. See "Management."
ANTI-TAKEOVER MEASURES; POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER
PROVISIONS
The Company is subject to the Rhode Island Business Combination Act which,
except for certain limited exceptions, prohibits business combinations
involving certain shareholders of publicly held corporations for a period of
five years after such shareholders acquire 10% or more of the outstanding
voting stock of the corporation.
P&W was specially chartered by an act of the Rhode Island General Assembly.
The Company's charter provides that one-third of the Board is elected by the
holders of Common Stock and the remainder are elected by the holders of
Preferred Stock. This provision, although intended to help assure the
stability and continuity of the Company's governance, may have the effect of
making an acquisition of the Company more difficult. See "Description of
Capital Stock."
YEAR 2000 COMPLIANCE
The Company has substantially completed modification of its computer systems
to address the Year 2000 issue. However, the Company relies, in part, on data
generated by other railroads. While the Company believes that it will be able
to address the problems, if any, generated by such other railroads' failure to
account for the Year 2000 issue, there can be no assurance that the Company
will be able to do so without disruption to its operations or that any such
disruption would not be material. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 4,223,044 shares of Common Stock. An aggregate of 4,196,734 of
such shares will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless owned by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act. Sales of a substantial number of previously
issued shares of Common Stock in the public market following this Offering
could materially adversely affect the market price of the Common Stock. The
Company, its executive officers and directors, and principal shareholders, who
beneficially own in the aggregate approximately 1,140,831 shares of Common
Stock, have agreed that for a period of 180 days after the date of this
Prospectus, they will not, subject to certain exceptions, directly or
indirectly offer, sell, pledge or otherwise dispose of or encumber any Common
Stock without the prior written consent of Advest, Inc. Certain shareholders
have the right, subject to limitations, to require the Company to register for
sale to the public all or a portion of the Common Stock held by them. See
"Shares Eligible for Future Sale."
11
<PAGE>
THE COMPANY
P&W, a Rhode Island corporation, is a regional freight railroad operating in
Massachusetts, Rhode Island, Connecticut and New York over approximately 545
miles of track. Originally incorporated in 1844 by legislative charter, the
Company operated independently from 1847 to 1888, at which time its rail
system was leased to a predecessor of the New York, New Haven and Hartford
Railroad. It remained under lease until 1973, when it commenced independent
operations over 45 miles of trackage between Central Falls, Rhode Island and
Worcester with a branch to East Providence, Rhode Island. Since 1973, the
Company has experienced steady expansion through a series of strategic
acquisitions of rail properties and trackage rights.
In 1974, P&W purchased a line extending from Worcester to Gardner,
Massachusetts to afford the Company an additional interline connection. Also
in 1974, P&W gained the right to serve customers between Central Falls and
Providence, Rhode Island. In 1976, the Company acquired a portion of the
Groton, Connecticut to Worcester main line extending south from Worcester to
Plainfield, Connecticut, and two branch lines extending from this line. In
1980, P&W acquired the rest of the Groton to Worcester main line from
Plainfield to Groton.
The Company acquired the Warwick Railroad in 1980 and the Moshassuck Valley
Railroad in 1981. In 1982, P&W acquired all of the lines and operating rights
of Conrail in Rhode Island and Conrail's exclusive freight easement on
Amtrak's Northeast Corridor from the Massachusetts/Rhode Island border to Old
Saybrook, Connecticut. As a result of the 1982 acquisition, P&W became the
only interstate rail freight carrier in Rhode Island.
In 1991, the Company acquired the exclusive freight easement on the
Northeast Corridor from Old Saybrook to New Haven and two branch lines within
the City of New Haven, including the line servicing the Port of New Haven. In
1993, the Company acquired a portion of Conrail's Middletown Secondary line
extending from Wallingford, Connecticut to New Haven. The Company also
acquired freight service rights on segments of the Waterbury branch and the
Danbury branch, both lines owned by the State of Connecticut, as well as
trackage rights over the Maybrook Secondary line between Derby and Danbury,
Connecticut and the Northeast Corridor between New Haven and South Norwalk,
Connecticut. This transaction enabled the Company to significantly expand its
construction aggregate hauling business and led to P&W's acquisition in 1996
of the exclusive right to handle the transport of construction aggregate
between three quarries operated by Tilcon Connecticut, Inc. located in
Wallingford, Wauregan and Branford, Connecticut to Fresh Pond Junction
(Queens) New York. In April 1998, the Company acquired Conn Central, with
operating rights over 28 miles of track in central Connecticut.
From 1980 through 1987, the Company was a wholly-owned subsidiary of Capital
Properties, Inc., a publicly held corporation ("Capital Properties"). On
January 1, 1988, through a series of transactions, the shareholders of Capital
Properties received, as a distribution with respect to each share of Capital
Properties capital stock held, one share of the Company's Common Stock and one
share of the Company's Preferred Stock, and Capital Properties ceased to have
any ownership interest in the Company. Upon completion of the transactions,
the Company became an independent, publicly-held corporation. See "Certain
Transactions."
The Company's principal executive offices are located at 75 Hammond Street,
Worcester, Massachusetts 01610. The Company's telephone number is (508) 755-
4000.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby, after deducting underwriting discounts and estimated
expenses, are expected to be approximately $7.5 million.
The Company intends to use a portion of the net proceeds to repay the $0.5
million due to Massachusetts Capital Resource Company ("MCRC") on its
subordinated note (the "MCRC Note"), which bears interest at the rate of 10%
per annum and matures on December 31, 2005. At October 5, 1998, the estimated
prepayment penalty would be $40,000, assuming repayment of the MCRC Note in
full.
The Company intends to use the balance of the net proceeds for general
corporate purposes, including possible acquisitions of other railroads, rail
lines and trackage rights which connect to the Company's system and rebuilding
a line over which the Company has operating rights to gain access to the
Hartford, Connecticut market. Although from time to time the Company engages
in discussions regarding one or more potential acquisitions, the Company has
no specific agreements or commitments for any acquisition, and there can be no
assurance that the Company will be able to consummate any such acquisition in
the future.
In addition, the Company intends to use a portion of the net proceeds for
equipment and infrastructure improvements, including increases in overhead
clearances and in the load-bearing capacity of undergrade bridges. In the
event the Company obtains unrestricted trackage rights to operate between New
Haven, Connecticut and Fresh Pond Junction (Queens), New York, the Company
intends to use a portion of the net proceeds to acquire additional locomotives
for such service. Additional purchases of equipment, locomotives and track
maintenance equipment may be required as a result of the Company's acquisition
of additional properties or a significant increase in business.
Pending application thereof, the net proceeds of this Offering will be
invested in investment grade, short-term debt instruments. The Company will
not receive any proceeds from the sale of shares by the Principal Shareholder
pursuant to the over-allotment option.
13
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on the AMEX under the symbol "PWX." Prior to
March 5, 1997, the Common Stock was traded on The Nasdaq National Market
("NASDAQ") under the symbol "PWRR." The following table sets forth, for the
periods indicated, the high and low sale price per share for the Common Stock
as reported on the AMEX and NASDAQ. Also included are dividends paid per share
of Preferred Stock and Common Stock during these quarterly periods.
<TABLE>
<CAPTION>
COMMON STOCK
TRADING PRICES DIVIDENDS PAID
------------------- ----------------
HIGH LOW PREFERRED COMMON
------- ------- --------- ------
<S> <C> <C> <C> <C>
1996
First Quarter........................ $ 8 1/2 $ 6 3/4 $ -0- $-0-
Second Quarter....................... 8 1/2 7 1/2 5.00 .05
Third Quarter........................ 8 1/2 6 1/2 -0- -0-
Fourth Quarter....................... 8 6 1/2 -0- .05
1997
First Quarter........................ 10 3/8 7 1/2 5.00 -0-
Second Quarter....................... 12 1/2 9 3/4 -0- .06
Third Quarter........................ 14 1/4 10 5/8 -0- -0-
Fourth Quarter....................... 22 1/4 13 1/4 -0- .06
1998
First Quarter........................ 18 7/8 14 1/2 5.00 .03
Second Quarter....................... 17 14 1/4 -0- .03
Third Quarter........................ 17 11 1/4 -0- .03
Fourth Quarter (through October 5,
1998)............................... 11 9/16 11 1/8 -0- -0-
</TABLE>
On October 5, 1998, the last reported sale price of the Common Stock on the
AMEX was $11.125 per share. As of October 5, 1998, there were approximately
720 holders of record of the Common Stock.
The Company has paid dividends on the Common Stock (semi-annually through
1997 and then quarterly) and an annual non-cumulative 10% dividend on the
Preferred Stock since 1989. The non-cumulative Preferred Stock dividend is
fixed by the Company's Charter at the rate of $5.00 per share per year, out of
funds legally available for the payment of dividends. In 1997, the Company
raised its Common Stock dividend 20%, from $.05 a share semi-annually to $.06
a share. In January 1998, the Board of Directors modified the Company's
dividend policy to pay a $.03 per share dividend on the Common Stock
quarterly. Although the Board of Directors presently anticipates continuing
this policy, the declaration of cash dividends on the Common Stock will be at
the discretion of the Board of Directors based on the Company's earnings,
financial condition, capital requirements and other relevant factors,
including applicable law and any restrictions set forth in any credit
facilities entered into by the Company from time to time.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1998 and as adjusted to give effect to this Offering and the application of
the net proceeds therefrom. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and the financial statements of the Company and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------
ACTUAL AS ADJUSTED(A)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion, long-term
debt..................... $ 188 $ --
------- -------
Long-term debt, less
current portion(a)....... 799 --
------- -------
Shareholders' equity:
Preferred Stock, $50 par
value, 647 shares
authorized; 647 shares
issued and outstanding at
June 30, 1998............ 32 32
Common Stock, $.50 par
value, 15,000,000 shares
authorized; 3,473,044
shares issued (actual);
4,223,044 shares issued
(as adjusted)............... 1,737 2,112
Additional paid-in capi-
tal...................... 20,765 27,908
Retained earnings......... 32,009 31,957
------- -------
Total shareholders' equi-
ty....................... 54,543 62,009
------- -------
Total capitalization...... $55,530 $62,009
======= =======
</TABLE>
- --------
(a) On July 23, 1998, the Company repaid approximately $493,000 of its long-
term debt. The "As Adjusted" column gives pro forma effect to this
repayment as if it had occurred on June 30, 1998. Giving pro forma effect
to this repayment as if it occurred on June 30, 1998, the actual value of
the long-term debt, less current portion, would have been $306,000.
15
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for the five years ended December 31, 1997 and the six months ended June
30, 1997 and 1998. The financial data as of December 31, 1996 and 1997 and for
the three years ended December 31, 1997 were derived from the Company's
financial statements, which have been audited by Deloitte & Touche LLP,
independent auditors, and which are included elsewhere in this Prospectus. The
financial data as of December 31, 1993, 1994 and 1995 and for the two years
ended December 31, 1994 were derived from the Company's audited financial
statements not included herein. The financial data as of and for the six
months ended June 30, 1997 and 1998 were derived from the Company's unaudited
financial statements. It is management's opinion that the financial data as of
and for the six months ended June 30, 1997 and 1998 contain all adjustments,
consisting solely of normal recurring adjustments, which management considers
necessary to fairly present the financial data set forth herein. The results
for the six months ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year. The data should be read in
conjunction with the Company's audited financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues..... $18,657 $20,292 $19,778 $19,456 $22,083 $ 10,278 $ 10,892
Operating expenses(a).. 16,336 17,202 17,677 17,714 18,333 9,180 9,727
------- ------- ------- ------- ------- -------- --------
Income from
operations............ 2,321 3,090 2,101 1,742 3,750 1,098 1,165
Other income........... 707 1,206 581 1,660 638 415 2,596
Interest expense....... (1,353) (1,285) (1,175) (1,371) (1,358) (681) (463)
------- ------- ------- ------- ------- -------- --------
Income before income
taxes and
extraordinary item.... 1,675 3,011 1,507 2,031 3,030 832 3,298
Provision for income
taxes................. 570 1,200 590 780 1,100 310 1,174
------- ------- ------- ------- ------- -------- --------
Income before
extraordinary item.... 1,105 1,811 917 1,251 1,930 522 2,124
Extraordinary loss from
early extinguishment
of debt(b)............ -- -- -- -- -- -- 170
------- ------- ------- ------- ------- -------- --------
Net income............. 1,105 1,811 917 1,251 1,930 522 1,954
Preferred Stock
dividend.............. 32 31 3 3 3 3 3
------- ------- ------- ------- ------- -------- --------
Net income available to
common shareholders... $ 1,073 $ 1,780 $ 914 $ 1,248 $ 1,927 $ 519 $ 1,951
======= ======= ======= ======= ======= ======== ========
Basic income per share
before extraordinary
item(c)............... $ 0.76 $ 0.99 $ 0.45 $ 0.57 $ 0.87 $ 0.24 $ 0.73
======= ======= ======= ======= ======= ======== ========
Basic income per share
after extraordinary
item(c)............... $ 0.76 $ 0.99 $ 0.45 $ 0.57 $ 0.87 $ 0.24 $ 0.67
======= ======= ======= ======= ======= ======== ========
Diluted income per
share before
extraordinary
item(c)............... $ 0.54 $ 0.87 $ 0.43 $ 0.54 $ 0.81 $ 0.23 $ 0.71
======= ======= ======= ======= ======= ======== ========
Diluted income per
share after
extraordinary
item(c)............... $ 0.54 $ 0.87 $ 0.43 $ 0.54 $ 0.81 $ 0.23 $ 0.66
======= ======= ======= ======= ======= ======== ========
Weighted average
shares--basic......... 1,406 1,796 2,043 2,178 2,209 2,199 2,895
======= ======= ======= ======= ======= ======== ========
Weighted average
shares--diluted....... 2,042 2,077 2,136 2,461 2,489 2,474 2,975
======= ======= ======= ======= ======= ======== ========
Cash dividends declared
on common stock....... $ 141 $ 173 $ 205 $ 218 $ 267 $ 133 $ 171
======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
--------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................ $60,706 $61,496 $68,012 $68,491 $71,212 $74,719
Notes payable, bank......... 1,000 120 -- 1,440 1,350 --
Current portion, long-term
debt....................... 590 638 612 677 931 188
Long-term debt, less current
portion.................... 11,378 10,485 12,977 12,131 11,916 799
Shareholders' equity........ 31,113 32,914 34,455 36,061 38,038 54,543
</TABLE>
- --------
(a) The $547,000 increase in operating expenses in the six months ended June
30, 1998 includes a $244,000 increase in profit sharing expenses primarily
related to a substantial increase in Other Income realized in 1998. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(b) Net of income tax benefit of $94,000.
(c) The income per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
The Company is a regional freight railroad operating in Massachusetts, Rhode
Island, Connecticut and New York.
The Company generates operating revenues primarily from the movement of
freight in both conventional freight cars and in intermodal containers on flat
cars over its rail lines. Freight revenues are recorded at the time delivery
is made to the customer or the connecting carrier. Modest non-freight
operating revenues are derived from demurrage, switching, weighing, special
train and other transportation services as well as from services rendered to
freight customers and other outside parties by the Company's Maintenance of
Way, Communications and Signals and Maintenance of Equipment Departments.
Operating revenues also include amortization of deferred grant income.
The Company's operating expenses consist of salaries and wages and related
payroll taxes and employee benefits, depreciation, insurance and casualty
claim expense, diesel fuel, car hire, property taxes, materials and supplies,
purchased services and other expenses. Many of the Company's operating
expenses are of a relatively fixed nature and do not increase or decrease
proportionately with increases or decreases in operating revenues unless the
Company's management takes specific actions to restructure the Company's
operations.
When comparing the Company's results of operations from one year to another,
the following factors should be taken into consideration. First, the Company
has historically experienced fluctuations in operating revenues and expenses
due to unpredictable events such as one-time freight moves and customer plant
expansions and shut-downs. Second, the Company's freight volumes are
susceptible to increases and decreases due to changes in global, national and
regional economic conditions.
The Company also generates income through sales of properties, grants of
easements and licenses and leases of land and tracks. Income or loss from
sale, condemnation and disposal of property and equipment and grants of
easements is recorded at the time the transaction is consummated and
collectibility is assured. This income varies significantly from year to year.
Over the last 10 fiscal years, such income has ranged from a low of $460,000
to a high of $2.6 million with an annual average over this period of $1.3
million. For the six months ended June 30, 1998, such income was $2.6 million.
The Company has one customer, Tilcon Connecticut, Inc., which accounted for
approximately 12.1%, 12.6% and 15.1% of its operating revenues in 1995, 1996
and 1997, respectively. The Company does not believe that this customer will
cease to be a rail shipper or will significantly decrease its freight volume
in the foreseeable future. In the event that this customer should cease or
significantly reduce its rail freight operations, management believes that the
Company could restructure its operations to reduce operating costs by an
amount sufficient to offset the decrease in operating revenues.
17
<PAGE>
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>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Freight Revenues:
Conventional carloads.. $17,352 87.7% $17,050 87.6% $19,001 86.0% $ 8,748 85.1% $ 9,222 84.7%
Containers............. 1,524 7.7 1,508 7.8 1,675 7.6 750 7.3 931 8.5
Non-Freight Operating
Revenues:
Transportation
services.............. 528 2.7 455 2.3 632 2.9 322 3.1 348 3.2
Other.................. 374 1.9 443 2.3 775 3.5 458 4.5 391 3.6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total.................. $19,778 100.0% $19,456 100.0% $22,083 100.0% $10,278 100.0% $10,892 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
The following table sets forth conventional carload freight revenues by
commodity group in dollars and as a percentage of such revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Chemicals and plastics.. $ 7,548 43.5% $ 7,366 43.2% $ 8,000 42.1% $4,029 46.1% $3,905 42.3%
Construction aggregate.. 3,054 17.6 3,086 18.1 3,762 19.8 1,297 14.8 1,391 15.1
Food and agricultural
products............... 3,019 17.4 2,864 16.8 2,831 14.9 1,299 14.8 1,455 15.8
Forest and paper
products............... 2,308 13.3 2,319 13.6 2,546 13.4 1,187 13.6 1,350 14.6
Scrap metal and waste... 538 3.1 477 2.8 969 5.1 479 5.5 633 6.9
Other................... 885 5.1 938 5.5 893 4.7 457 5.2 488 5.3
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total.................. $17,352 100.0% $17,050 100.0% $19,001 100.0% $8,748 100.0% $9,222 100.0%
======= ===== ======= ===== ======= ===== ====== ===== ====== =====
</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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries, wages, payroll
taxes and employee
benefits............... $ 9,997 50.6% $10,686 54.9% $11,023 49.9% $5,309 51.6% $ 5,911 54.3%
Casualties and
insurance.............. 1,373 6.9 800 4.1 572 2.6 284 2.8 396 3.6
Depreciation............ 1,790 9.1 1,940 10.0 2,054 9.3 999 9.7 1,070 9.8
Diesel fuel............. 522 2.6 656 3.4 708 3.2 324 3.2 307 2.8
Car hire, net........... 708 3.6 605 3.1 598 2.7 318 3.1 285 2.6
Purchased services,
including legal and
professional fees...... 1,749 8.8 1,213 6.2 1,762 8.0 788 7.7 931 8.5
Repairs and maintenance
of equipment........... 714 3.6 687 3.5 943 4.3 506 4.9 496 4.6
Track and signal
materials.............. 1,877 9.5 1,257 6.4 1,866 8.4 801 7.8 477 4.4
Other materials and
supplies............... 796 4.0 848 4.4 1,012 4.6 454 4.4 553 5.1
Other................... 1,302 6.6 1,318 6.8 1,325 6.0 710 6.9 759 7.0
------- ----- ------- ----- ------- ---- ------ ----- ------- -----
Total.................. 20,828 105.3 20,010 102.8 21,863 99.0 10,493 102.1 11,185 102.7
Less capitalized and
recovered costs....... 3,151 15.9 2,296 11.8 3,530 16.0 1,313 12.8 1,458 13.4
------- ----- ------- ----- ------- ---- ------ ----- ------- -----
Total.................. $17,677 89.4% $17,714 91.0% $18,333 83.0% $9,180 89.3% $ 9,727 89.3%
======= ===== ======= ===== ======= ==== ====== ===== ======= =====
</TABLE>
18
<PAGE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Operating Revenues
Operating revenues increased $614,000, or 6.0%, to $10.9 million in the six
months ended June 30, 1998 from $10.3 million in the six months ended June 30,
1997. This increase was comprised of a $474,000 (5.4%) increase in
conventional freight revenues and a $181,000 (24.1%) increase in net container
freight revenues, partially offset by a $41,000 (5.3%) decrease in non-freight
operating revenues.
The increases in conventional and container freight revenues were primarily
the result of increases in traffic volume. The Company's conventional freight
carloadings increased by 745, or 5.5%, to 14,406 carloadings in the six months
ended June 30, 1998 from 13,661 carloadings in the prior year period. Total
intermodal containers handled increased by 3,784, or 19.1%, to 23,596
containers in the six months ended June 30, 1998 from 19,812 containers in the
prior year period. The average revenue per conventional carloading was
virtually unchanged between the six month periods. The average net revenues
received per intermodal container increased by 4.2% between the six month
periods due primarily to rate increases tied to certain railroad industry cost
indices.
The Company experienced increases in carload shipments by many of its
customers attributable primarily to improved national and regional economic
conditions as well as the Company's marketing efforts. In addition,
approximately 200 conventional carloadings (representing approximately
$140,000 of revenues) were attributable to customers of Conn Central, which
was acquired by the Company in April 1998. The increase in container volumes
was attributable to an increase in Asian imports, a shift in vessel routings
due to operational difficulties at the Panama Canal and the Company's success
in marketing its intermodal services.
The $41,000 decrease in non-freight operating revenues was attributable to
decreases in maintenance department billings, partially offset by increases in
demurrage and other transportation revenues. Such revenues can vary from
period to period depending upon customer needs.
Operating Expenses
Operating expenses increased $547,000, or 6.0%, to $9.7 million in the six
months ended June 30, 1998 from $9.2 million in the six months ended June 30,
1997. Operating expenses as a percentage of operating revenues ("operating
ratio") were 89.3% in both six month periods. Profit sharing expense, included
in General and Administrative Expense, for the six months ended June 30, 1998
was $337,000, an increase of $244,000 from the prior year period when profit
sharing expense was $93,000. The increase in profit sharing expense resulted
primarily from the substantial increase in Other Income realized in 1998. If
the increase in profit sharing expense were excluded, the operating ratio for
1998 would be 87.1%. This decrease from 1997 is indicative of the relatively
fixed nature of many of the Company's operating expenses.
Other Income
Other income increased $2.2 million to $2.6 million in the six months ended
June 30, 1998 from $415,000 in the six months ended June 30, 1997. This
increase was due to an increase in the gain from sales of properties and
easements, principally $2.0 million derived from the sale of fiber optic cable
licenses.
Interest Expense
Interest expense decreased $218,000, or 32.0%, to $463,000 in the six months
ended June 30, 1998 from $681,000 in the six months ended June 30, 1997. This
decrease was the result of the Company's repayment of all of its short-term
borrowings and a substantial portion of its long-term debt, primarily during
the second quarter of 1998, with the proceeds from the March Offering and
fiber optic cable licenses.
19
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Operating Revenues
Operating revenues increased $2.6 million, or 13.5%, to $22.1 million in
1997 from $19.5 million in 1996. This increase was comprised of a $2.0 million
(11.4%) increase in conventional freight revenues, a $167,000 (11.1%) increase
in net container freight revenues and a $509,000 (56.7%) increase in non-
freight operating revenues.
The increases in conventional and container freight revenues were primarily
the result of increases in freight traffic volume. The Company's conventional
freight carloadings increased by 3,806, or 14.0%, to 31,047 carloadings in
1997 from 27,241 in 1996. Total intermodal containers handled increased by
3,707, or 9.3%, to 43,408 containers in 1997 from 39,701 in 1996. Average
revenue per conventional carloading decreased slightly, principally due to a
shift in the relative volume of commodities handled toward construction
aggregate, which commands a comparatively lower freight rate. The average rate
received per intermodal container increased slightly due to rate increases
attributable to increases in certain railroad industry cost indices.
The Company experienced increases in shipments by many of the Company's
freight customers, attributable primarily to improved national and regional
economic conditions as well as the Company's marketing efforts. The increase
also reflected the addition of several new customers utilizing the Company's
rail services.
The $509,000 increase in non-freight operating revenues resulted primarily
from increases in Maintenance of Way Department billings and from special
train and other transportation revenues. Such revenues can vary significantly
from year to year depending upon customer needs.
Operating Expenses
Operating expenses increased $619,000, or 3.5%, to $18.3 million in 1997
from $17.7 million in 1996. Operating expenses as a percentage of operating
revenues ("operating ratio"), however, decreased to 83.0% in 1997 from 91.0%
in 1996. The small increase in operating expenses and the decrease in the
operating ratio were attributable to the relatively fixed nature of the
Company's operating expenses and the fact that capitalized costs for track and
bridge projects as well as costs recovered from government grants for public
improvements, such as surfacing and signals for grade crossings, increased
$1.2 million, or 53.7%, to $3.5 million in 1997 from $2.3 million in 1996.
Casualties and insurance expense decreased $228,000, or 28.5%, to $572,000
in 1997 from $800,000 in 1996, principally due to the absence of any
expenditures in 1997 for casualty losses in excess of amounts previously
reserved. Casualty loss expense was $171,000 in 1996.
Purchased services and track and signal materials expense increased $1.2
million, or 46.9%, to $3.6 million in 1997 from $2.5 million in 1996. This
increase was primarily attributable to the increased capital projects and cost
recovery programs carried out in 1997.
Other Income
Other income decreased $1.0 million, or 61.6%, to $638,000 in 1997 from $1.7
million in 1996, due primarily to a decrease in net gains from the sale,
condemnation and disposal of properties and easements. The 1996 amount
reflected a $1.0 million condemnation award.
Interest Expense
Interest expense was virtually unchanged between 1996 and 1997. Interest on
approximately $730,000 of debt incurred to finance the acquisition of three
locomotives during the second quarter of 1997 was essentially offset by
interest reductions resulting from principal payments on existing
indebtedness.
20
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Operating Revenues
Operating revenues decreased $322,000, or 1.6%, to $19.5 million in 1996
from $19.8 million in 1995. This decrease was comprised primarily of a
$302,000 (1.7%) decrease in conventional carload revenues. Other non-freight
operating revenues were virtually unchanged between the two years.
The decreases in conventional and container freight revenues were primarily
due to decreases in traffic volumes partially offset by higher average
revenues received per conventional carloading and per container. The Company's
conventional freight carloadings decreased 1,898, or 6.5%, to 27,241
carloadings in 1996 from 29,139 in 1995. Total intermodal containers handled
decreased 1,510, or 3.7%, to 39,701 in 1996 from 41,211 in 1995. Increases in
the average revenue received per conventional carloading were primarily due to
a change in the mix of commodities toward higher revenue items while the
increase in the average revenue received per container resulted from rate
increases tied to increases in certain railroad industry cost indices.
The decreases in both carload and container traffic volume in 1996 from 1995
were attributable to an economic slowdown which first became apparent late in
the third quarter of 1995. Adverse weather conditions in the first quarter of
1996 also contributed to the decline in traffic. During the third quarter of
1996, as a result of improving economic conditions, conventional traffic
volume began to return to 1995 levels. Conventional traffic volume for the
fourth quarter of 1996 exceeded the prior year's level by 7.0% and, as
previously noted, these higher traffic levels carried forward into 1997.
Operating Expenses
Operating expenses remained relatively stable at approximately $17.7 million
in 1995 and 1996. The operating ratio increased in 1996 to 91.0% from 89.4% in
1995.
Casualties and insurance expense decreased $573,000, or 41.7%, to $800,000
in 1996 from $1.4 million in 1995. This decrease was primarily attributable to
a decrease in the cost of casualty and environmental claims, which decreased
$557,000 to $171,000 in 1996 from $728,000 in 1995. The high level of claims
in 1995 was attributable to a large environmental claim that was settled
during that year.
Purchased services and track and signal materials expense decreased $1.1
million, or 31.9%, to $2.5 million in 1996 from $3.6 million in 1995. This
decrease was attributable to a lower level of capital projects and cost
recovery programs carried out during 1996.
Other Income
Other income increased $1.1 million, or 185.7%, to $1.7 million in 1996 from
$581,000 in 1995 due to substantially higher net gains realized from the sale,
condemnation and disposal of properties and easements. In 1996, the Company
received $1.0 million from the State of Rhode Island's condemnation of an
abandoned rail line.
Interest Expense
Interest expense increased $196,000, or 16.7%, to $1.4 million in 1996 from
$1.2 million in 1995. This increase was principally the result of interest on
the subordinated note payable to MCRC, in the principal amount of $5.0
million, which originated in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on cash generated from operations to fund
working capital and capital expenditures relating to ongoing operations, while
relying on borrowed funds to finance acquisitions and equipment needs,
primarily rolling stock. The Company generated $3.2 million, $1.5 million,
$3.5 million and $1.2 million of cash from operations in 1995, 1996, 1997 and
the six months ended June 30, 1998, respectively.
21
<PAGE>
The Company's total cash and cash equivalents increased by $1.4 million in
1995, decreased by $1.3 million and $167,000 in 1996 and 1997, respectively,
and increased by $1.2 million in the six months ended June 30, 1998. The
principal utilization of cash during the three and one-half year period was
for expenditures for property and equipment acquisitions, principal payments
on debt obligations, reduction of current liabilities and payment of
dividends.
During 1995, 1996, 1997 and the six months ended June 30, 1998, the Company
generated approximately $108,000, $1.3 million, $230,000 and $2.7 million,
respectively, from sales and disposals of properties not considered essential
for railroad operations and from licenses or grants of easements. The Company
holds various properties which could be made available for sale, lease,
license or grants of easements. Revenues from sales of properties and
easements can vary significantly from year to year.
Substantially all of the mainline track owned by the Company meets FRA Class
3 standards (permitting freight train speeds of 40 miles per hour), and the
Company intends to continue to maintain this track at this level. The Company
expended $1.7 million, $1.9 million, $2.5 million and $1.4 million for track
structure and bridge improvements in 1995, 1996, 1997 and the six months ended
June 30, 1998, respectively. Deferred grant income in the amount of $785,000
in 1995, $671,000 in 1996 and $935,000 in 1997 financed a portion of these
improvements. In addition, the Company received $588,000 of grant proceeds in
1997 to purchase track materials for a three-year track improvement project
commenced in 1997, which the Company expects to complete by 2000. The track
materials were purchased during 1997 and are included in "materials and
supplies" on the accompanying balance sheet as of December 31, 1997 and June
30, 1998. Management estimates that approximately $1.0 million of additional
improvements to the Company's track structure and bridges will be made in the
balance of 1998. Improvements to the Company's track structure are made, for
the most part, by the Company's Maintenance of Way Department personnel.
The Company acquired and renovated three used locomotives during the second
quarter of 1997 at a total cost of $730,000, financed through long-term
borrowings from a commercial lender. In the second quarter of 1998, the
Company purchased two used locomotives at a total cost of $720,000. These
expenditures are included in "purchase of property and equipment" in the
accompanying statements of cash flows. The Company has ordered 40 new 100-ton
gondolas at a cost of $50,000 each. The Company expects delivery of the
gondolas in the fourth quarter of 1998. The Company expects to finance the
purchase with available cash and borrowings under the Company's line of
credit.
The Company has entered into an engineering contract for the preliminary
design of an approximate $1.6 million expansion of its Worcester maintenance
center. The Company expects to complete the expansion by the end of 1999.
In June 1998, the Company's principal bank renewed the Company's line of
credit and increased the maximum borrowings allowed by $250,000 to $2.0
million. Borrowings under the line are unsecured and bear interest at either
the prime rate or 1.5% over either the one or three month London Interbank
Offered Rates. The Company had no advances against the line of credit during
the second quarter of 1998.
The Company received net proceeds of approximately $12.5 million from the
March Offering. Approximately $10.8 million of the net proceeds from the March
Offering were used to retire long and short-term debt, including $152,000 of
prepayment penalties. In addition, approximately $1.5 million of the funds
received in the first six months of 1998 in connection with the fiber optic
cable licenses were used to retire long-term debt, including $112,000 of
prepayment penalties.
In July 1998, the Company received $1.0 million from Bestfoods as an interim
payment of Bestfoods' obligation to pay 10% of Bestfoods' net recovery from
its insurance carrier. The Company utilized $540,000 of these funds to retire
additional long-term debt, including a prepayment penalty of $40,000. This
payment reduced the Company's total outstanding long-term debt to
approximately $0.5 million. As a result of its debt retirement, the Company's
future cash requirements for debt principal and interest payments have been
substantially
22
<PAGE>
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 interests. As of the date hereof, the Company has no short-term
borrowings.
The Company paid dividends in the amount of $5.00 per share on its
outstanding Preferred Stock in February of 1997 and 1998, and $0.12 per share
and $0.06 per share on its outstanding Common Stock in 1997 and in the six
months ended June 30, 1998, respectively. Continued payment of such dividends
is contingent upon the Company's continuing to have the necessary financial
resources available.
The Company believes that expected cash flows from operating activities and
cash flows from financing activities will be sufficient to fund the Company's
capital requirements for at least the next 12 months. To the extent that the
Company is successful in consummating acquisitions or implementing its
expansion plans, it may be necessary to finance such acquisitions or expansion
plans through the issuance of additional equity securities (including this
Offering), incurrence of indebtedness or both.
INFLATION
In recent years, inflation has not had a significant impact on the Company's
operations.
SEASONALITY
Historically, the Company's operating revenues are lowest for the first
quarter due to the absence of aggregate shipments during 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
23
<PAGE>
adequately address Year 2000 issues, the Company could experience payment
delays and service disruptions which could materially adversely affect its
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 of
related disclosures about products and services, geographic areas and major
customers. Both standards were adopted by the Company during the first quarter
of 1998 and have not had material effects on its financial position, results
of operations or footnote disclosures.
24
<PAGE>
BUSINESS
GENERAL
P&W is a regional freight railroad operating in Massachusetts, Rhode Island,
Connecticut and New York. The Company is the only interstate freight carrier
serving the State of Rhode Island and possesses the exclusive and perpetual
right to conduct freight operations over the Northeast Corridor between New
Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing
independent operations in 1973, the Company, through a series of acquisitions
of connecting lines, has grown from 45 miles of track to its current system of
approximately 545 miles. P&W operates the largest double stack intermodal
terminal facilities in New England in Worcester, a strategic location for
regional transportation and distribution enterprises.
The Company transports a wide variety of commodities for its customers,
including construction aggregate, iron and steel products, chemicals, lumber,
scrap metals, plastic resins, cement, processed foods and edible food stuffs,
such as frozen foods, corn syrup and animal and vegetable oils. Its customers
include The Dow Chemical Company, Exxon Corporation, Frito-Lay, Inc., General
Dynamics Corporation, Getty Petroleum Marketing Inc., International Paper
Company, Leggett & Platt, Incorporated, Mobil Oil Corporation, R.R. Donnelley
& Sons, Stone Container Corporation and Tilcon Connecticut, Inc. In 1997, P&W
transported over 31,000 carloads of freight and over 43,000 intermodal
containers, representing an increase of 14.0% and 9.3%, respectively, over
1996 volumes. Carload and container volumes have increased 5.5% and 19.1%,
respectively in the first six months of 1998, compared to the same period in
1997. The Company also generates income through sales of properties, grants of
easements and licenses and leases of land and tracks.
P&W's connections to multiple Class I railroads, either directly or through
connections with regional and short-line carriers, provide the Company with a
competitive advantage by allowing it to offer creative pricing and routing
alternatives to its customers. In addition, the Company's commitment to
maintaining its track and equipment to high standards enables P&W to provide
fast, reliable and efficient service.
INDUSTRY OVERVIEW
General
Railroads are divided into three classes based on operating revenues: Class
I, $255 million or more; Class II, $20.4 million to $255 million; and Class
III, less than $20.4 million. As a result of mergers and consolidations, there
are only nine Class I railroads in the country. These large systems handle 91%
of the nation's rail freight business.
The rail freight industry underwent a revitalization after the passage of
the Staggers Rail Act, which deregulated the pricing and types of services
provided by railroads. As a result, railroads were able to achieve significant
productivity gains and operating cost decreases while gaining pricing
flexibility. Rail freight service became more competitive with other
transportation modes with respect to both quality and price. The volume of
freight moved by rail has risen dramatically since 1980 and profitability has
improved significantly.
One result of the revitalization of the industry has been the growth of
regional (over 350 miles) and short-line railroads, which has been fueled by a
trend among Class I railroads to divest certain branch lines in order to focus
on their long-haul core systems. There are now more than 500 of these regional
and short-line railroads. They operate in all 50 states, account for over one-
fourth of all rail track, employ 11% of all rail workers and generate about 9%
of all rail revenue.
Generally, freight railroads handle two types of traffic: conventional
carloads and intermodal containers used in the shipment of goods via more than
one mode of transportation, e.g., by ship, rail and truck. By using a hub-and-
spoke approach to shipping, multiple containers can be moved by rails to and
from an intermodal terminal and then either delivered to their final
destinations by trucks or transferred to ships for export. Over the past
decade, commodity shippers have increasingly turned to intermodal
transportation principally as an alternative to long-haul trucking. The
development of new intermodal technology, which allows containers to be moved
by
25
<PAGE>
rail double stacked (i.e., stacked one on top of the other) in specially
designed railcars, together with increasing highway traffic congestion and the
shortage of long-haul truck drivers have contributed to this trend.
Breakup of Conrail
On July 23, 1998, the STB issued its written decision approving the
acquisition, control and division of Conrail by CSX and Norfolk Southern (the
"STB Decision"). The acquirers have assumed financial control of Conrail but
have not announced the date on which the assets are to be divided. Upon the
division of Conrail, CSX will assume all of Conrail's operations in New
England.
While the impact of the division of Conrail on future traffic patterns and
the resultant effect on P&W's railroad operations are uncertain at this time,
P&W does not anticipate any significant negative impact as a result of the
breakup, and believes that the breakup may create additional business for the
Company as a result of longer Class I single line service on competitive
routes. Furthermore, the continued implementation of the North American Free
Trade Agreement is expected to increase trade between the northeast and South
American manufacturing centers via Gulf Coast ports. The introduction of
longer single line service between the southeast and New England via CSX,
together with P&W's intermodal facility, should position the Company to
capture more international and domestic double stack containerized cargo. CSX
is expected to focus on the growth of north-south traffic between its existing
rail lines in the south and its acquired Conrail lines in the north. The
Company is working with CSX to expand intermodal traffic volume between the
southeastern United States and the Company's intermodal terminals.
REGIONAL DEVELOPMENTS
There are a number of development projects underway in New England to
increase port capacity along the extensive coastline and to improve the
intermodal transportation and distribution infrastructure in the region. These
projects present significant opportunities for the Company to increase its
business.
Quonset/Davisville
The State of Rhode Island has proposed a development plan for a 3,000 acre
industrial park, commonly known as "Quonset/Davisville," located near the
entrance of Narragansett Bay. The site, which is owned by the Rhode Island
Economic Development Corporation, contains nearly 1,000 acres of developable
property, three active piers, an on-site airport and on-site rail. The plan
contemplates creating the largest on-dock double stack container and tri-level
auto rail facility in New England with a deepwater port and related
facilities, including increased intermodal container storage and automobile
handling capacity. To facilitate the port development, the State plans a $120
million freight rail improvement project to be funded with both State and
federal funds which will provide additional track capacity and double stack
clearances on the Northeast Corridor between Quonset/Davisville and the
Company's mainline connection at Central Falls, Rhode Island. The freight rail
improvement project and first phase of the proposed development will require
numerous governmental approvals and will take approximately four years to
implement. The State's plan anticipates that, upon completion of the proposed
development, Quonset/Davisville will become a substantial port of entry and
exit for automobiles, containerized cargo and other commodities and will
generate substantial additional rail traffic to and from the industrial park.
Massachusetts Highway Improvement Program
The Commonwealth of Massachusetts is in the process of implementing a $250
million highway reconstruction project to create a direct Worcester connection
to the Massachusetts Turnpike and significantly increase traffic capacity on
the highway connecting Providence and Worcester. A population of 7.2 million
resides within a 50 miles radius of Worcester. The highway project, which is
scheduled in phases for completion over the next three years, is expected to
significantly improve access and shorten travel times to and from Worcester
for this population as well as businesses located throughout New England.
26
<PAGE>
Port of New Haven
The State of Connecticut is in the process of rebuilding the Tomlinson
Bridge in New Haven, which will provide rail access to the Port of New Haven.
In conjunction with this project, the Company is working with the City of New
Haven and area users of the rail systems to fund a design for the restoration
of local street rail service directly to port properties. Completion of this
project, which is scheduled for 2001, will provide the Company with increased
access to customers at the Port of New Haven.
BUSINESS STRATEGY
The Company intends to become the dominant rail freight carrier in New
England by acquiring connecting rail lines and trackage rights, expanding
service in the New York City/Long Island market, upgrading and expanding its
rail infrastructure, acquiring and developing strategically located terminal
properties, expanding relationships with existing customers, and expanding its
contract maintenance and repair capabilities. In particular, the Company's
business strategy involves the following:
. Acquire Connecting Rail Lines and Trackage Rights. Historically, P&W has
grown through strategic acquisitions of other railroads and trackage
rights which connect to the Company's system, coupled with upgrades of
acquired rail infrastructure. For example, in April 1998, the Company
acquired Conn Central, a short-line railroad with operating rights over
approximately 28 miles of track in central Connecticut, including an
unused 11 mile line that P&W has begun to rebuild to gain access to the
Hartford, Connecticut market. The Company believes that industry and
regional developments have created and will continue to create
opportunities for P&W to acquire additional rail properties and trackage
rights on connecting lines. Such acquisitions should enable the Company
to expand its customer base, spread fixed administrative costs over a
larger revenue base and realize other operating efficiencies. The Company
intends to aggressively pursue these acquisition opportunities.
. Expand Service in New York City/Long Island Market. Pursuant to a 1997
agreement with CSX concerning the line between New Haven, Connecticut and
Fresh Pond Junction (Queens), New York, the Company has the ability to
market rail service for all general merchandise and intermodal traffic
between parts of New York City and Long Island and the rest of North
America via P&W's system. This agreement marked the first opportunity for
P&W to service Long Island and New York City with general merchandise and
intermodal traffic. The New York City and Long Island metropolitan area
is one of the country's largest markets for the consumption of products
and freight transportation services. According to filings by public
officials with the STB, the region generates 142 million tons of freight
per year, 98 million tons of which is reported to be appropriate for rail
transport. The Company anticipates that increasing restrictions on
landfill and other local disposal options, as evidenced by the imminent
closing of the Fresh Kill landfill on Staten Island, will create
additional opportunities for transport of municipal solid waste generated
in this heavily populated area. Pursuant to a directive in the STB
Decision, CSX and the Company have begun discussions regarding the
possible expansion of P&W's service in this area through haulage or
trackage rights.
. Pursue Opportunities to Upgrade, Expand and Enhance Existing Rail
Infrastructure. Certain of the Company's growth opportunities are
contingent upon anticipated enhancements to its existing rail system. The
Quonset/Davisville development project contemplates construction of an
additional rail line with double stack container and tri-level auto rail
car clearances on trackage on the Northeast Corridor over which P&W
possesses the exclusive and perpetual right to conduct freight
operations. To realize the benefits of this project, P&W is in the
process of making clearance improvements on its line from its connection
with the Northeast Corridor at Central Falls, Rhode Island to Worcester.
The Company is also working with the Commonwealth of Massachusetts to
implement a statewide clearance improvement project that will include
certain P&W rail lines in Worcester County. In response to the trend
among shippers to purchase heavier load rail cars, the Company has begun
to identify and improve undergrade bridge structures to permit heavier
loadings on key line segments. These improvements should permit the
Company to capitalize on the increased rail traffic anticipated from the
Quonset/Davisville development,
27
<PAGE>
capture more international and domestic double stack containerized cargo,
and handle heavier rail cars and cargo.
. Acquire and Develop Strategically Located Terminal Properties and
Intermodal Facilities. Headquartered at a major population center of New
England, the Company is well situated to capitalize on the trend of
shipping goods throughout the region by rail in intermodal containers.
P&W currently provides rail service to two intermodal yards in the City
of Worcester totaling approximately 30 acres. Planned improvements
expected to occur over the next three years associated with the
Massachusetts highway reconstruction project will significantly expand
the Company's facilities for intermodal and bulk transloading in
Worcester. In addition, the project should enhance the Company's growth
opportunities by increasing the convenience of its terminal facilities as
a hub for intermodal transportation to and from the region. To capitalize
on such opportunities, the Company intends to pursue the identification
and acquisition or lease of suitable properties in the Worcester area to
increase its intermodal capacity. P&W is also exploring potential
expansion opportunities for transload and intermodal yards in the I-395
Corridor in eastern Connecticut (which runs parallel to the Company's
Groton to Worcester main line) and is planning an intermodal facility at
the South Quay.
. Increase Existing System Revenues Through Expanded Customer
Relationships. The Company's marketing and sales staff focuses on
understanding and addressing the raw material requirements and
transportation needs of its existing customers and businesses on its
lines. The staff increases existing business by maintaining close working
relationships with both customers and connecting carriers and assisting
with development projects such as increasing track capacity, locating
appropriate facilities and providing new shipment capabilities. In
addition, the staff generates new business by targeting companies on its
lines that underutilize rail service and by working with local economic
development officials and realtors to attract new industries to locations
on the Company's system. Unlike single connection small carriers, P&W is
able to offer its customers creative pricing and routing alternatives,
and expects the division of the Conrail system to increase the
opportunities for such offerings. Completion of the Port of New Haven
project should also provide the Company with increased opportunities for
business with the Port's tenants. The Company expects delivery of 40 100-
ton gondola rail cars in the fourth quarter of 1998 which should enable
the Company to derive greater freight revenues on the shipment of scrap
metals, hazardous bulk waste and coiled wire as well as car hire income
(i.e., payments made to the Company by other carriers for time the
Company's cars are on such carrier's line).
. Expand Locomotive and Rail Car Maintenance and Repair
Capabilities. Unlike many other regional and short-line railroads, the
Company maintains multiple maintenance and engine house facilities and
its physical plant is in good condition. The Company has entered into an
engineering contract for the preliminary design of an approximate $1.6
million expansion of its Worcester maintenance center. The planned
facility improvements, together with an increase in maintenance
personnel, should also enable the Company to provide expanded contract
maintenance and repair services. The Company has provided locomotive and
rail car repair services to Conrail, Amtrak, Massachusetts Bay
Transportation Authority and certain of its freight customers.
RAILROAD OPERATIONS
The Company's rail freight system extends over approximately 545 miles of
track. The Company interchanges freight traffic with Conrail at Worcester,
Massachusetts and at New Haven, Connecticut; with the Springfield Terminal
Railway Company (formerly Boston and Maine Railroad) at Gardner,
Massachusetts; with the New England Central Railroad (formerly Central Vermont
Railway) at New London, Connecticut; and with the New York and Atlantic
Railroad (formerly Long Island Railroad) at Fresh Pond Junction (Queens), New
York on Long Island. Through its connections, P&W links 86 communities on its
lines. It operates four classification yards (i.e., areas containing tracks
used to group freight cars destined for a particular industry or interchange),
located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield
and New Haven, Connecticut.
28
<PAGE>
By agreement with a private operator, the Company operates two approved
customs intermodal yards in Worcester. A customs intermodal yard is an area
containing tracks used for the loading and unloading of containers. These
yards are U.S. Customs bonded, and international traffic must be inspected and
approved by U.S. Customs officials. The intermodal facility serves primarily
as a terminal for movement of container traffic from the Far East destined for
points in New England. Several major container ship lines utilize double stack
train service through this terminal. P&W works closely with the terminal
operator to develop and maintain strong relationships with steamship lines
involved in international intermodal transportation.
Customers
The Company serves over 150 customers in Massachusetts, Rhode Island,
Connecticut and New York. The Company's 10 largest customers accounted for
approximately 51.6% and 50.0% of operating revenues in 1997 and the six months
ended June 30, 1998, respectively. In 1997, Tilcon Connecticut, Inc., which
ships construction aggregate from three separate quarries on P&W's system to
asphalt production plants in Connecticut and New York, accounted for
approximately 15.1% of the Company's operating revenues. No other customer
accounted for 10% or more of its total operating revenues in 1997.
In recent years, P&W has benefited from the expansion of existing customers'
facilities as well as from the location of new customers on its railroad. For
example, during 1997, two of the Company's manufacturing customers increased
production at facilities on P&W's lines by approximately 35% and 25%,
respectively, which resulted in increased rail service to these companies. In
the past two years, the development of Quonset/Davisville and growth of
certain customers' operations at this industrial park has resulted in a 29%
increase in the Company's rail traffic to and from the park.
Certain other P&W customers have recently made or announced developments
that the Company anticipates will provide increased revenues. For example, in
May 1998, a major office supply retailer opened a regional, rail-served
distribution facility in Killingly, Connecticut and is now receiving rail
service from the Company.
Markets
The Company transports a wide variety of commodities for its customers. In
1997, chemicals and plastics and construction aggregate were the two largest
commodity groups transported by the Company, constituting 42% and 20%,
respectively, of conventional carload freight revenues. Chemical and plastics
was the largest commodity group transported by the Company in the first six
months of 1998, constituting 42% of the Company's conventional carload freight
revenues. Due to the seasonality of shipments of construction aggregate, which
are historically lower in the first quarter, construction aggregate, food and
agricultural products, and forest and paper products each represented
approximately 15% of such revenues for such six month period. The following
table summarizes the Company's conventional carload freight revenues by
commodity group as a percentage of such revenues:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
---------------
COMMODITY 1993 1994 1995 1996 1997 1997 1998
--------- ---- ---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Chemicals and Plastics......... 46% 46% 44% 43% 42% 46% 42%
Construction Aggregate......... 11 15 18 18 20 15 15
Food and Agricultural
Products...................... 16 16 17 17 15 15 16
Forest and Paper Products...... 15 14 13 14 13 14 15
Scrap Metal and Waste.......... 4 3 3 3 5 5 7
Other.......................... 8 6 5 5 5 5 5
--- --- --- --- --- ------ ------
Total........................ 100% 100% 100% 100% 100% 100% 100%
=== === === === === ====== ======
</TABLE>
Sales and Marketing
P&W's sales and marketing staff of four people has over 55 years of combined
experience in pricing and marketing railroad services. The sales and marketing
staff focuses on understanding and addressing the raw
29
<PAGE>
material requirements and transportation needs of its existing customers and
businesses on its lines. The staff increases existing business by maintaining
close working relationships with both customers and connecting carriers. The
sales and marketing staff strives to generate new business for the Company
through (i) targeting companies already on P&W's rail lines but not currently
using rail services, (ii) working with state and local development officials,
developers and real estate brokers to encourage the development of industry on
the Company's rail lines, (iii) identifying and targeting the non-rail
transportation of goods into and out of the region in which the Company
operates and (iv) providing new shipment capabilities such as liquid bulk
transloading. Unlike many other regional and short-line railroads, the Company
is able to offer its customers creative pricing and routing alternatives
because of its multiple connections to other carriers.
Safety
An important component of the Company's operating strategy is conducting
safe railroad operations for the benefit and protection of employees,
customers and the communities served by its rail lines. Since commencing
active operations in 1973, the Company has committed significant resources to
track maintenance to minimize the risk of derailments. As a result, the
Company believes its rail system is in good condition.
Employee safety is also an important part of the Company's operating policy.
P&W has dramatically reduced the frequency and severity of employee injuries
through a comprehensive safety program which includes extensive training,
personal protection equipment and incentives. Employees attend annual classes
and take annual exams regarding operating and safety rules and practices. The
Company's safety program also includes a hot line which is used to report
safety issues directly to the safety director, a safety suggestion program
which includes financial incentives and a peer recognition program for
colleagues to discuss safety rules and good work habits. Since it began its
safety program in 1981, the Company has made dramatic improvements to its
safety records both in terms of the frequency and severity of injuries while
significantly increasing its operations and expanding its workforce.
Reportable injuries have declined to below 10 incidents per year for the past
five years, as compared to over 100 reportable injuries in 1981. The Company
has won three E.H. Harriman industry safety awards in the last five years.
Rail Traffic
Rail traffic is classified as on-line or overhead traffic. On-line traffic
is traffic that originates or terminates with shippers located on a railroad.
Overhead traffic passes from one connecting carrier to another and neither
originates nor terminates with shippers located on a railroad. Presently, P&W
is solely an on-line carrier but expects to provide overhead service in the
future for rail traffic to and from Fresh Pond Junction (Queens), New York.
Rail freight rates can be in various forms. Generally, customers are given a
"through" rate, a single figure encompassing the rail transportation of a
commodity from point of origin to point of destination, regardless of the
number of carriers which handle the car. Rates are developed by the carriers
based on the commodity, volume, distance and competitive market
considerations. The entire freight bill is paid either to the originating
carrier ("prepaid") or to the destination carrier ("collect") and divided
between all carriers which handle the move. The basis for the division varies
and can be based on factors (or revenue requirements) independently
established by each carrier which comprise the through rate, or on a
percentage basis established by division agreements among the carriers. A
carrier such as P&W, which actually places the car at the customer's location
and attends to the customer's daily switching requirements, receives revenue
greater than an amount based simply on mileage hauled.
Employees
As of June 30, 1998, the Company had 152 full-time employees, 118 of which
were represented by three national railroad labor organizations. The Company's
employees have been represented by unions since the Company commenced
independent operations in 1973.
30
<PAGE>
The Company's initial agreement with the United Transportation Union
covering the trainmen was unusual in the railroad industry since it provided
the Company with discretion in determining crew sizes, eliminated craft
distinctions and provided a guaranteed annual wage for a maximum number of
hours worked. The Company's collective bargaining agreements have been in
effect since February 1973 for trainmen, since May 1974 for clerical
employees, dispatchers and police and since June 1974 for maintenance
employees. These contracts do not expire but are subject to re-negotiation
after the agreed-upon moratoriums. The moratorium periods are typically three
to five years in length. The labor agreements may next be amended on or after
June 1, 1998 for the United Transportation Union (trainmen), December 31, 1999
for the Transportation Communication Union (clerical) and July 1, 2000 for the
Brotherhood of Railroad Signalmen (maintenance). The Company is currently
negotiating with the United Transportation Union regarding possible amendments
to its collective bargaining agreement with the Company. The Company considers
its employee and labor relations to be good.
COMPETITION
The Company is the only rail carrier serving businesses located on-line.
However, the Company competes with other carriers in the location of new rail-
oriented businesses in the region. The Company also competes with other modes
of transportation, particularly long-haul trucking companies, for the
transportation of commodities. Any improvement in the cost or quality of these
alternate modes of transportation, for example, legislation granting material
increases in truck size or allowable weight, could increase competition and
may materially adversely affect the Company's business and results of
operations. As a means of competing, P&W strives to offer greater convenience
and better service than competing carriers and at costs lower than some
competing non-rail carriers. The Company also competes by participating in
efforts to attract new industry to the areas which it serves. As a result of
its 1997 agreement with CSX, the Company will be able to compete for general
merchandise traffic destined for parts of New York City and Long Island.
Certain rail competitors, including Conrail and CSX, are larger or better
capitalized than the Company. While P&W believes the acquisition and division
of Conrail will lead to expansion opportunities, the Conrail transaction may
lead to increased competition with other freight railroads, particularly in
Massachusetts, and efforts by CSX and Norfolk Southern to reduce revenue to
connecting regional and short-line carriers.
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. In making acquisitions,
P&W competes with other short-line and regional rail operators, some of which
are larger and have greater financial resources than the Company.
PROPERTIES
Track
P&W's rail system extends over approximately 545 miles of track, of which it
owns approximately 170 miles. The Company has the right to use the remaining
375 miles pursuant to perpetual easements and long-term trackage rights
agreements. Under certain of these agreements, the Company pays fees based on
usage.
Of the approximately 545 miles of track on which the Company operates, 341
miles, or 63%, are in FRA Class 3 condition or better, which permits speeds of
40 miles per hour for freight trains. An additional 66 miles of track, or 12%,
of the Company's trackage are in FRA Class 2 condition, which permits speeds
up to 25 miles per hour. The remaining 138 miles, or 25%, are in FRA Class 1
or FRA Excepted condition, which permits maximum speeds of 10 miles per hour.
Of the 138 miles of FRA Class 1 or FRA Excepted track, 35 miles are owned and
maintained by other railroads; of the remaining 103 miles, the Company
operates on only 51 miles and the balance of 52 miles is not currently in use.
The following chart shows the percentage value of the Company's trackage by
FRA classification.
31
<PAGE>
[PIE CHART OF COMPANY'S SYSTEM BY TRACK CONDITION]
Part of the Company's operating strategy is to maintain and improve the
classification of its trackage in order to allow the Company to operate at
maximum freight train speeds to consistently provide its customers with fast,
reliable and efficient rail service. P&W believes that regular track
maintenance is important to the long-term prosperity of the Company. The
Company is responsible for maintaining 237 of the 545 miles of track included
within its operating system. Of the remaining 308 miles of track, 186 miles
are maintained by Amtrak and 122 miles are maintained by other railroads or
are currently not in use. Substantially all of the mainline track owned by the
Company is maintained in FRA Class 3 condition.
Of the approximately 545 miles of the Company's system, 312 miles, or 57%,
are located in Connecticut, 103 miles, or 19%, are located in Massachusetts,
102 miles, or 19%, are located in Rhode Island and 28 miles, or 5%, are
located in New York.
[PIE CHART OF COMPANY'S SYSTEM BY STATE]
Rail Facilities
P&W owns land and a building with approximately 69,500 square feet of floor
space in Worcester, Massachusetts. The building houses the Company's executive
and administrative offices and some of the Company's storage space.
Approximately 2,100 square feet are leased to an outside tenant.
32
<PAGE>
The Company owns and operates three principal classification yards located
in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield,
Connecticut and also operates a classification yard in New Haven, Connecticut.
In addition, the Company has maintenance facilities in Plainfield and
Worcester. P&W has entered into an engineering contract for the preliminary
design of an approximate $1.6 million expansion of the Worcester maintenance
facility. The planned expansion should increase the efficiency of routine
maintenance and repairs and the Company's ability to provide contract
maintenance. P&W believes that its executive and administrative office
facilities, classification yards and maintenance facilities are adequate to
support its current level of operations. See "--Business Strategy."
Other Properties
The Company owns or has the right to use a total of approximately 130 acres
of real estate located along the principal railroad lines from downtown
Providence through Pawtucket, Rhode Island. Of this amount, P&W owns
approximately eight acres in Pawtucket and has a perpetual easement for
railroad purposes over the remaining 122 acres.
The Company has invested approximately $11.6 million in the development of
the South Quay, which is adjacent to 12 acres of land owned by the Company.
This investment has resulted in the creation of approximately 33 acres of
waterfront land that are the subject of a title dispute pending before the
Rhode Island Supreme Court. See "--Legal Proceedings."
P&W actively manages its real estate assets in order to maximize revenues.
The income from property management is derived from sales and leasing of
properties and tracks and grants of easements to government agencies, utility
companies and other parties for the installation of overhead or underground
cables, pipelines and transmission wires as well as recreational uses such as
bike paths. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of June 30, 1998:
<TABLE>
<CAPTION>
DESCRIPTION NUMBER
----------- ------
<S> <C>
Locomotive............................................................ 28
Gondola............................................................... 37
Flat Car.............................................................. 5
Hopper Car............................................................ 15
Passenger Equipment................................................... 8
Caboose............................................................... 3
Other Maintenance Cars................................................ 40
---
Total............................................................... 136
===
</TABLE>
Of the 28 diesel-electric locomotives, 27 are used on a daily basis, are
maintained to a high standard, comply with all FRA and Association of American
Railroads rules and regulations and are adequate for the needs of the
Company's freight operations. The 37 100-ton capacity gondolas, five flat cars
and 15 hopper cars are considered modern rail cars and can be used by P&W
customers and interchanged with other railroads. Other rail freight customers
use their own freight cars or obtain such equipment from other sources. The
Company expects delivery of 40 100-ton capacity gondolas in the fourth quarter
of 1998 which will enable P&W to respond to customer demand. From time to
time, the Company has leased hopper cars to adjoining railroads. The passenger
equipment and cabooses are not utilized in P&W's rail freight operations but
are used on an occasional basis for Company functions, excursions and charter
trips.
33
<PAGE>
Equipment
P&W has a state-of-the-art digital touch control dispatching system at its
Worcester operations center permitting two-way radio contact with every train
crew and maintenance vehicle on its lines. The system also enables each train
crew to maintain radio contact with other crew members. The Company maintains
a computer facility in Worcester with back-up computer facilities in Worcester
and Plainfield, Connecticut to assure the Company's ability to operate in the
event of disruption of service in Worcester. The Company also has state-of-
the-art automatic train defect detectors at strategic locations which inspect
passing trains and audibly communicate the results to train crews and
dispatchers in order to protect against equipment failure en route.
The Company maintains a modern fleet of track maintenance equipment and
aggressively pursues available opportunities to work with federal and state
agencies for the rehabilitation of bridges, grade crossings and track. The
Company's locomotives are equipped with the cab signal technology necessary
for operations on the Northeast Corridor and will be equipped with automatic
civil speed enforcement systems ("ACSES"), which will be required upon the
introduction of high speed passenger service on the Northeast Corridor
scheduled for late 1999.
GOVERNMENTAL REGULATION
The Company is subject to governmental regulation by the STB, the FRA and
other federal, state and local regulatory authorities with respect to certain
rates and railroad operations, as well as a variety of health, safety, labor,
environmental and other matters, all of which could potentially affect the
competitive position and profitability of the Company. Additionally, the
Company is subject to STB regulation and may be required to obtain STB
approval prior to its acquisition of any new railroad properties. Management
of the Company believes that the regulatory freedoms granted by the Staggers
Rail Act have been beneficial to the Company by giving it flexibility to
adjust prices and operations to respond to market forces and industry changes.
However, various interests and certain members of the United States House of
Representatives and Senate (which have jurisdiction over federal regulation of
railroads) have from time to time expressed their intention to support
legislation that would eliminate or reduce significant freedoms granted by the
Staggers Rail Act.
As a result of the planned introduction of high speed passenger service on
the Northeast Corridor, the FRA has issued an order requiring that all
locomotives operating on the Northeast Corridor between New Haven and Boston
be equipped with ACSES, the cost of which is anticipated to be at least
$50,000 per locomotive. The order does not address whether the federally
funded high speed project or the Company will bear the costs of required
locomotive retrofits but Amtrak has been ordered to provide interim financing.
In the Senate Transportation Appropriations Bill for fiscal year 1999, $1.0
million is appropriated for the installation of ACSES on locomotives of small
operators on the Northeast Corridor that do not have funding from other
federal sources. If enacted, this appropriation may result in federal funds
paid to Amtrak for the cost of equipping P&W's trains with ACSES.
ENVIRONMENTAL MATTERS
The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters and
the handling, storage, transportation and disposal of waste and other
materials. The Company handles, stores, transports and disposes of petroleum
and other hazardous substances and wastes. The Company also transports
hazardous substances for third parties and arranges for the disposal of
hazardous wastes generated by the Company. The Company believes that it is in
material compliance with applicable environmental laws and regulations.
LEGAL PROCEEDINGS
In 1995, the Company entered into a Settlement Agreement with Bestfoods,
pursuant to which Bestfoods (formerly known as CPC International, Inc.)
released the Company from any claims arising out of the contamination of
certain property formerly owned by a subsidiary of Bestfoods. In February
1998, Allstate Insurance Company ("Allstate") filed suit in the Rhode Island
Superior Court against the Company and
34
<PAGE>
Bestfoods alleging rights of subrogation and setoff. The Company believes that
since Bestfoods has released the Company from all liability, Allstate has no
right of subrogation and its claim against the Company is without merit.
Moreover, under the Settlement Agreement, Bestfoods is obligated to defend,
indemnify and hold harmless the Company for any claims which arise from such
contamination, including claims of the insurance carrier. In accordance with
the Settlement Agreement, Bestfoods has assumed the Company's defense against
Allstate's lawsuit.
The Company has invested approximately $11.6 million in the development of
the South Quay, which is comprised of approximately 33 acres of reclaimed
formerly tide flowed land adjacent to 12 acres owned by the Company. On April
25, 1996, the Company filed an action in Rhode Island Superior Court seeking
to confirm the Company's fee simple absolute title in the South Quay. The
State of Rhode Island and the Coastal Council objected to the Company's
petition. Acting on motions for summary judgment filed by both sides, the
Superior Court ruled that the Company is the owner of the South Quay in fee
simple absolute. The State and Coastal Council have appealed this decision to
the Rhode Island Supreme Court. The Company intends to vigorously defend the
appeal and advocate that the Rhode Island Supreme Court should affirm the
Superior Court decision. The New England Legal Foundation and East Providence
Chamber of Commerce have each filed an amicus curiae brief in favor of the
Company's position. A decision from the Rhode Island Supreme Court is expected
in 1999. A finding that the Company possesses only a 50 year license should
not prevent the utilization of the South Quay as an intermodal facility.
In connection with the division of Conrail, the Company instituted a lawsuit
against Conrail in the United States District Court in the District of
Columbia on November 12, 1997 in which the Company contends that, pursuant to
a 1982 Order of the United States Special Court established pursuant to the
Regional Rail Reorganization Act of 1973, the Company is entitled to acquire
New Haven Station and that Conrail is not permitted to convey it to CSX. New
Haven Station includes all of Conrail's rail properties in New Haven and
related facilities (including a classification yard) necessary for the
operations of P&W. On January 22, 1998, the District Court dismissed the
Company's claim without prejudice, finding that its claim was not ripe for
adjudication prior to the STB's decision on the breakup of Conrail. In the STB
Decision, the STB preempted the application of the 1982 Order by finding CSX's
operation of New Haven Station to be a necessary and integral part of the
acquisition and division of Conrail. The Company has refiled its claim seeking
injunction relief in the District Court based on that court's exclusive
jurisdiction over the interpretation and application of the 1982 Order.
Conrail, CSX and the STB have filed motions to dismiss which together with the
Company's motion for a preliminary injunction are scheduled for a hearing on
October 16, 1998. The Company has also appealed the STB Decision to the United
States Court of Appeals.
35
<PAGE>
MANAGEMENT
The Company's Charter and Bylaws provide that the members of the Board of
Directors (the "Board") shall be elected separately by the Company's two
classes of stock. Holders of Common Stock elect one-third of the Board of
Directors and the holders of Preferred Stock elect the remainder of the Board.
Directors are elected to serve until the next annual meeting and until their
successors have been duly elected by the shareholders. Officers are elected by
and serve at the discretion of the Board of Directors.
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers, their ages and their positions
held with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert H. Eder(a)....... 66 Chairman of the Board and Chief Executive Officer
Orville R. Harrold(b)... 66 President, Chief Operating Officer and Director
Robert J. Easton(b)..... 55 Treasurer and Director
Heidi J. Eddins......... 42 Vice President, Secretary and General Counsel
Frank W. Barrett(b)..... 58 Director
Phillip D. Brown(b)..... 54 Director
John P. Burnham(c)...... 58 Director
John H. Cronin(b)....... 64 Director
J. Joseph Garrahy(b).... 67 Director
John J. Healy(b)........ 62 Director
William J. LeDoux(a).... 67 Director
Charles M. McCollam,
Jr.(a)................. 65 Director
</TABLE>
--------
(a) Elected by holders of Common Stock.
(b) Elected by holders of Preferred Stock.
(c) Elected by Board of Directors to fill vacancy.
The following is a brief summary of the background of each director,
executive officer and key employee.
DIRECTORS AND EXECUTIVE OFFICERS
Robert H. Eder, Chairman of the Board and Chief Executive Officer. Mr. Eder
became President of the Company in 1966 and led the Company through its
efforts to become an independent operating company. He has been Chairman of
the Board since 1980. He is a graduate of Harvard College and Harvard Law
School. He (with his wife) is also majority owner and Chairman of an
affiliated company, Capital Properties, a real estate holding company. Mr.
Eder is admitted to practice law in Rhode Island and New York.
Orville R. Harrold, President, Chief Operating Officer and Director. Mr.
Harrold has been with the Company since the commencement of independent
operations in February 1973. Over the past 25 years, he has held the positions
of Chief Engineer and General Manager, becoming President in 1980. Mr. Harrold
has a bachelors degree in mechanical engineering from the Pratt Institute,
Brooklyn, New York and has been employed in the railroad industry in various
capacities since 1960.
Heidi J. Eddins, Vice President, Secretary and General Counsel. Mrs. Eddins
joined the Company in 1983 as Assistant General Counsel, becoming General
Counsel and Assistant Secretary in 1984, Secretary in 1988 and Vice President
in 1997. Prior to joining the Company, she was in private practice at the law
firm of Updike, Kelly and Spellacy in Hartford, Connecticut. She is a 1981
graduate of the University of Connecticut Law School and holds a bachelors
degree from Boston College. Mrs. Eddins is admitted to practice law in
Connecticut, Massachusetts and Rhode Island.
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<PAGE>
Robert J. Easton, Treasurer and Director. Mr. Easton has been with the
Company since 1986, initially as Controller. He was promoted to the position
of Treasurer and Controller in 1988. Prior to joining the Company, Mr. Easton
had 21 years of experience in public accounting. He is a Certified Public
Accountant with a bachelors degree in accounting from the University of
Rochester.
Frank W. Barrett, Director. Mr. Barrett has been a Director of the Company
since 1995. He has been Executive Vice President at Springfield Institution
for Savings since December 1993. From 1990 until that time, Mr. Barrett was
the Senior Vice President, Credit Administration, of First New Hampshire Bank.
John P. Burnham, Director. Mr. Burnham has been a Director since April 1998
when he was elected by the Board to fill a vacancy created by an increase in
the size of the Board in connection with the acquisition of Conn Central. From
1987 to April 1998, he was a shareholder of Conn Central and served as its
Chairman. He is a numismatic and financial consultant. From 1967 to 1996, Mr.
Burnham was the curator of the numismatic (rare coin) collection at Yale
University.
Phillip D. Brown, Director. Mr. Brown has been a Director of the Company
since 1995. Since August 1993, he has been President and Chief Executive
Officer of Unibank for Savings, a regional bank in central Massachusetts. From
1990 until that time, Mr. Brown was the President of Citizens Bank of
Massachusetts.
John H. Cronin, Director. Mr. Cronin has been a Director of the Company
since 1986. Since 1971 until his retirement in 1996, Mr. Cronin was owner and
President of Ideal Products, Inc., a wholesale entertainment supply company.
J. Joseph Garrahy, Director. Mr. Garrahy has been a Director of the Company
since 1992. He is a former four term Governor of Rhode Island and, since 1990,
has been an independent business consultant in the State of Rhode Island.
John J. Healy, Director. Mr. Healy has been a Director of the Company since
1991. He has been President of Worcester Affiliated Mfg. L.L.C., an
independent business consulting firm involved in efforts to revitalize
manufacturing in Massachusetts, since January 1997. From January 1992 to
January 1997, Mr. Healy was President and Chief Executive Officer of HMA
Behavioral Health, Inc., a behavioral health care management service provider.
William J. LeDoux, Director. Mr. LeDoux has been a Director of the Company
since 1990. He has been engaged in the private practice of law in the City of
Worcester since 1963.
Charles M. McCollam, Jr., Director. Mr. McCollam has been a Director of the
Company since 1996. Since 1970, he has owned and operated a number of
insurance businesses in the State of Connecticut and was the Chief of Staff to
a former governor of Connecticut.
OTHER KEY EMPLOYEES
Robert E. Baumuller, Chief Mechanical Officer. Mr. Baumuller has been with
P&W since 1981 when he joined the Company as Assistant Chief Mechanical
Officer. He was promoted to Chief Mechanical Officer in 1989. Mr. Baumuller is
responsible for maintenance and repair of all of the Company's running
equipment, including its locomotive fleet, all track maintenance equipment,
inspection, maintenance and repair of the Company's rail cars as well as rail
cars received in interline service and maintenance of the Company's passenger
equipment. Mr. Baumuller is also responsible for the identification and
evaluation of locomotive and rail car purchases. Mr. Baumuller has been in the
railroad industry since 1963 and worked in various positions related to
equipment maintenance for the Vermont Railway, Inc. and the New York City
Transit Authority.
P. Scott Conti, Chief Engineer. Mr. Conti has been with the Company since
1988 and is responsible for all activities of the Maintenance of Way and
Engineering Department which maintains the Company's tracks,
37
<PAGE>
bridges, buildings and grade crossings. Mr. Conti is responsible for
overseeing all construction activity on or affecting railroad property and
works closely with municipal and state agencies. From June 1988 to December
1997, Mr. Conti served as Engineering Manager and, in January 1998, he was
promoted to Chief Engineer. Prior to joining the Company, Mr. Conti was
employed by Perini Corporation in various project engineering management
positions, including as project manager for a major track rehabilitation
project in New York City.
David F. Fitzgerald, Superintendent of Transportation. Mr. Fitzgerald has
been with the Company since December 1973, beginning in train and engine
service. He was later promoted to the position of Trainmaster for the
Company's Connecticut operations, Assistant General Trainmaster and General
Trainmaster before being appointed to his current position of Superintendent
of Transportation in 1981. Mr. Fitzgerald manages daily train operations and
the customer service center, including customer service agents and train
dispatchers.
Frank K. Rogers, Director of Marketing and Sales. Mr. Rogers joined the
Company as Director of Marketing and Sales in 1994. From 1993 through 1994, he
was Director of Marketing for California Northern Railroad Company. From 1987
to 1992, Mr. Rogers was Marketing Manager and Assistant General Manager of
Eureka Southern Railroad Company. He holds a bachelors degree in business
administration with a transportation emphasis from Northeastern University.
BOARD COMMITTEES
The Board of Directors has established an Executive Committee, an Audit
Committee and a Stock Option and Compensation Committee.
Messrs. Eder, Harrold and Easton serve as members of the Executive
Committee. The members of the Audit Committee are John H. Cronin, Chairman, J.
Joseph Garrahy and Phillip D. Brown. William J. LeDoux, Chairman, John J.
Healy and Frank W. Barrett serve as members of the Stock Option and
Compensation Committee.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company receives an attendance
fee for each meeting of the Board equal to $500 plus the product of $50
multiplied by the number of years of service as a director. Each member of the
Audit Committee and the Stock Option and Compensation Committee receives $300
for each attended meeting of the committee and the Chairman of each committee
receives an additional $50 attendance fee.
During the month of January of each year, each non-employee director who
served on the Board on the preceding December 31 is granted options for the
purchase of 100 shares of Common Stock, plus options for an additional 10
shares of Common Stock for each full year of service. The exercise price for
such options is the last sale price of the Common Stock on the last business
day of the preceding year, and the term of each option is 10 years (subject to
earlier termination if the grantee ceases to serve as a director), provided
however that no option is exercisable within six months following the date of
grant.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued to each
person who served as the Company's chief executive officer and each of the
other four most highly compensated executive officers of the Company
(together, the "Named Executive Officers") during the three year period ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ------------------
SECURITIES
UNDERLYING OPTIONS
OTHER ANNUAL TO PURCHASE ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(A) COMPENSATION COMMON STOCK COMPENSATION(B)
- --------------------------- ---- --------- ------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Robert H. Eder........... 1997 $288,530 0 0 $47,453
Chairman of the Board 1996 289,216 0 0 47,617
and Chief Executive 1995 272,513 0 0 48,117
Officer
Orville R. Harrold....... 1997 234,588 0 913 42,526
President and Chief 1996 231,787 0 932 40,508
Operating Officer 1995 222,421 0 888 40,510
Ronald P. Chrzanowski.... 1997 133,241 $28,193(d) 451 12,000
Chief Engineer until 1996 129,059 0 451 9,066
12/31/97 (Vice 1995 123,003 0 448 7,396
President and
Director until
11/13/97)(c)
Heidi J. Eddins.......... 1997 138,920 0 311 10,702
Vice President, Secretary 1996 133,997 0 313 9,381
and General Counsel 1995 127,444 0 301 7,713
Robert J. Easton......... 1997 123,232 0 210 9,353
Treasurer 1996 120,191 0 210 8,430
1995 113,706 0 203 6,880
</TABLE>
- --------
(a) Includes amounts taxable to employees for personal use of Company-owned
vehicles.
(b) Includes amounts paid directly to the retirement accounts of management
staff under the Company's simplified employee pension plan, and, in the
case of Robert H. Eder and Orville R. Harrold, includes for 1997 premiums
paid for life insurance coverage in the amounts of $35,453 and $30,526,
respectively.
(c) Mr. Chrzanowski left the Company to join its former parent company,
Capital Properties, as President and a Director.
(d) Includes value of a vehicle transferred to Mr. Chrzanowski ($18,193) and
$10,000 paid to him to cover additional income taxes attributable to the
transfer of the vehicle.
STOCK PLANS
In July 1989, the shareholders adopted the Company's Non-Qualified Stock
Option Plan (the "Stock Option Plan") that provides for the granting to
employees, officers and directors (excluding Mr. Eder) of options to purchase
up to the greater of 50,000 shares or 5% of the number of shares of Common
Stock outstanding (which equated to 173,652 shares at September 24, 1998). To
date, options to purchase 77,398 shares of the Common Stock have been granted
under the Stock Option Plan.
Pursuant to the Company's Employee Stock Purchase Plan, eligible employees
(which excludes Mr. Eder) may purchase registered shares of Common Stock at
85% of the market price for such shares. An aggregate of 200,000 shares of
Common Stock are authorized for issuance under the Employee Stock Purchase
Plan. Any shares purchased under the Employee Stock Purchase Plan are subject
to a two year lock-up. To date, 4,860 shares have been purchased under the
Employee Stock Purchase Plan.
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<PAGE>
The Company's Profit Sharing Plan provides for the issuance of Common Stock
to an account for the benefit of eligible employees covered by collective
bargaining agreements. To date, 147,148 shares have been issued under the
Profit Sharing Plan.
The Company's Safety Incentive Plan provides for the issuance of up to
15,000 shares of Common Stock to eligible management employees as an incentive
for the satisfaction of certain safety standards. To date, 1,450 shares have
been issued pursuant to the Safety Incentive Plan.
The Company's Non-Qualified Stock Option Plan, Employee Stock Purchase Plan,
Safety Incentive Plan and Profit Sharing Plan are collectively referred to as
the "Stock Plans."
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options under the Stock Option Plan to the Named Executive Officers during the
Company's last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES EXERCISE EXPIRATION GRANT DATE
NAME GRANTED(A) IN FISCAL 1997 PRICE DATE PRESENT VALUE(B)
---- ---------- --------------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Orville R. Harrold...... 913 13% $7.875 01/02/07 $2,702
Ronald P. Chrzanowski... 451 6 7.875 01/02/07 1,335
Heidi J. Eddins......... 311 4 7.875 01/02/07 921
Robert J. Easton........ 210 3 7.875 01/02/07 622
</TABLE>
- --------
(a) The options were all granted on January 2, 1997 and became exercisable on
July 2, 1997.
(b) Amounts represent the fair value of each option granted and were estimated
as of the date of the grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: expected volatility of
29%; expected life of 7 years; risk-free interest rate of 5.75%; and
expected dividend payment rate, as a percentage of the share price on the
date of grant, of 1.26%.
OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table contains information with respect to stock options held
by the Named Executive Officers as of December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY AT
DECEMBER 31, 1997 DECEMBER 31, 1997(B)
SHARES --------------------- --------------------
ACQUIRED ON VALUE EXERCISABLE / EXERCISABLE /
NAME EXERCISE REALIZED(A) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- --------------------- --------------------
<S> <C> <C> <C> <C>
Orville R. Harrold...... 1,214 $5,494 1,567/0 $14,808/0
Ronald P. Chrzanowski... 451 2,594 417/0 4,118/0
Heidi J. Eddins......... 632 3,770 784/0 8,147/0
Robert J. Easton........ 210 1,469 830/0 8,876/0
</TABLE>
- --------
(a) Based on the last sale price of the Common Stock on the date of exercise
minus the exercise price.
(b) Based on the difference between the exercise price of each grant and the
closing price of the Company's Common Stock on the AMEX on December 31,
1997, which was $18 3/8.
40
<PAGE>
CERTAIN TRANSACTIONS
On January 1, 1988, in accordance with a plan of distribution, shares of the
Company were distributed to the shareholders of Capital Properties on a pro
rata basis. Mr. Eder and his wife own 52.3% of the outstanding common stock of
Capital Properties. As part of the plan, the Company issued to Capital
Properties a promissory note in the amount of $9,377,000 payable over a period
of 20 years with interest at 12% per year, prepayable at any time without
penalty. In March 1998, the Company used a portion of the proceeds of the
March Offering to repay the Capital Properties note in full.
In 1995, the Company also entered into an agreement with Capital Properties
releasing a portion of the collateral securing the note in exchange for the
right to have the Company convey the Wilkesbarre Pier in East Providence,
Rhode Island for the sum of one dollar to the purchaser of Capital Properties'
petroleum terminal facilities in East Providence, Rhode Island. Effective
January 1, 1998, a wholly-owned subsidiary of Capital Properties which
acquired the petroleum terminal facilities, exercised the purchase right and
acquired the Wilkesbarre Pier. The Company retained the right to use the pier
for certain purposes.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of October 5, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock immediately prior to this Offering; (ii)
each of the Company's directors and Named Executive Officers; and (iii) all
directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
SHARES OWNED OWNERSHIP AFTER
BEFORE OFFERING OFFERING
------------------ ---------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
NAME ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Robert H. Eder(a).................... 892,742 25.3% 892,742(n) 20.9%(n)
Orville R. Harrold(b)................ 23,779 * 23,779 *
Robert J. Easton(c).................. 2,460 * 2,460 *
Heidi J. Eddins(d)................... 4,340 * 4,340 *
Frank W. Barrett(e).................. 730 * 730 *
Phillip D. Brown(f).................. 330 * 330 *
John P. Burnham...................... 10,500 * 10,500 *
John H. Cronin(g).................... 1,540 * 1,540 *
J. Joseph Garrahy(h)................. 1,150 * 1,150 *
John J. Healy(i)..................... 1,000 * 1,000 *
William J. LeDoux(j)................. 1,650 * 1,650 *
Charles M. McCollam, Jr.(k).......... 610 * 610 *
Massachusetts Capital Resource
Company(l).......................... 200,000 5.8 200,000 4.7
All executive officers and directors
as a group (12 people)(m)........... 940,831 26.7% 940,831(o) 22.0%(o)
</TABLE>
- --------
* Less than one percent
(a) Mr. Eder's business address is 75 Hammond Street, Worcester, Massachusetts
01610. Includes 74,580 shares of Common Stock owned by Mr. Eder's wife and
assumes the conversion of the 500 shares of Preferred Stock owned by Mr.
Eder.
(b) Includes (i) 1,700 shares of Common Stock held by Mr. Harrold's wife, (ii)
2,600 shares of Common Stock held by a custodian in an individual
retirement account for the benefit of Mr. Harrold and (iii) 1,750 shares
of Common Stock under stock options exercisable within 60 days.
(c) Includes 118 shares of Common Stock held by Mr. Easton's wife in her name
and 1,140 shares of Common Stock issuable under stock options exercisable
within 60 days.
(d) Includes 900 shares of Common Stock held by Ms. Eddins' minor children
under the Uniform Gift to Minors Act and 1,139 shares of Common Stock
issuable under stock options exercisable within 60 days.
(e) Includes 230 shares of Common Stock issuable under stock options
exercisable within 60 days.
(f) Includes 230 shares of Common Stock issuable under stock options
exercisable within 60 days.
(g) Includes 210 shares of Common Stock issuable under stock options
exercisable within 60 days.
(h) Includes 150 shares of Common Stock issuable under stock options
exercisable within 60 days.
(i) Includes 700 shares of Common Stock issuable under stock options
exercisable within 60 days.
(j) Includes 1,050 shares of Common Stock issuable under stock options
exercisable within 60 days.
(k) Includes 110 shares of Common Stock issuable under stock options
exercisable within 60 days.
(l) MCRC's address is 420 Boylston Street, Boston, Massachusetts 02116.
(m) Includes 50,000 shares of Common Stock issuable upon conversion of
Preferred Stock and 6,709 shares of Common Stock issuable under stock
options exercisable within 60 days.
(n) Assumes no exercise of the Underwriter's over-allotment option. If the
over-allotment option is exercised in full, Ownership After Offering will
be 780,242 shares and 18.3%.
(o) Assumes no exercise of the Underwriter's over-allotment option. If the
over-allotment option is exercised in full, Ownership After Offering will
be 828,331 shares and 19.4%.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The following summary description of the Company's capital stock is believed
to reflect all material provisions of the Company's Charter, as amended, but
is not necessarily complete. Reference is made to the Company's Charter, as
amended, which is filed with the Commission as an exhibit to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue up to 15,000,000 shares of Common Stock,
$.50 par value per share. As of the date hereof, 3,473,044 shares of Common
Stock are issued and outstanding and held by approximately 720 shareholders of
record. Upon the completion of this Offering, there will be 4,223,044 shares
of Common Stock issued and outstanding.
The holders of Common Stock are entitled to one vote for each share in the
election of one-third of the Board of Directors proposed to be elected at any
meeting of shareholders, voting separately as a class. The holders of Common
Stock and the holders of the Preferred Stock are entitled to one vote per
share, voting as separate classes and not together, upon all other matters
voted on by shareholders. The holders of Common Stock have no preemptive or
other subscription rights. The holders of Common Stock are entitled to such
dividends as may be declared from time to time thereon by the Board from funds
available therefor. See "Price Range of Common Stock and Dividend Policy."
Upon a dissolution or liquidation of the Company, holders of Common Stock and
Preferred Stock are entitled to receive on a 1-to-100 pro rata basis all
assets of the Company available for distribution after payments are made to
the Company's creditors.
PREFERRED STOCK
The Company is authorized to issue up to 647 shares of Preferred Stock, $50
par value per share. As of the date of this Prospectus, 647 shares of
Preferred Stock are issued and outstanding and held by seven shareholders of
record.
The holders of Preferred Stock are entitled to one vote for each share in
the election of two-thirds of the Board of Directors proposed to be elected at
any meeting of shareholders, voting separately as a class. The holders of
Preferred Stock and the holders of Common Stock are entitled to one vote per
share, voting as separate classes and not together, upon all other matters
voted on by shareholders.
Non-cumulative annual dividends on the Preferred Stock are payable at the
rate of $5.00 per share. Each share of Preferred Stock is convertible at any
time, at the holder's option, into 100 shares of Common Stock. The holders of
Preferred Stock have no preemptive or other subscription rights.
Upon a dissolution or liquidation of the Company, holders of Common Stock
and Preferred Stock are entitled to receive on a 1-to-100 pro rata basis all
assets of the Company available for distribution after payments are made to
the Company's creditors.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CHARTER AND STATE LAW
The Company is chartered by special act of the Rhode Island General
Assembly. The Company's Charter and Rhode Island state law contain provisions
that may make the acquisition of control of the Company by means of a tender
offer, open market purchases, proxy fight or otherwise more difficult.
Additional Common Stock
The Company is authorized to issue up to 15,000,000 shares of Common Stock.
The Company believes that the availability of additional Common Stock will
provide it with increased flexibility in structuring possible financing
acquisitions and in meeting other corporate needs which may arise.
43
<PAGE>
Rhode Island Anti-takeover Statute
The Rhode Island Business Combination Act prohibits business combinations
involving a shareholder of a publicly held corporation for a period of five
years after such shareholder acquires 10% or more of the outstanding voting
stock of the corporation, unless the board of directors approves the
transaction by which such shareholder acquires 10% or more of the outstanding
voting stock. The Business Combination Act also permits business combinations
involving such a shareholder which occur more than five years after such
shareholder acquires 10% or more of the outstanding voting stock when (i) the
board of directors or disinterested shareholders holding two-thirds of the
outstanding voting common stock of a publicly held corporation approve the
underlying transaction or (ii) the aggregate value of the cash and non-cash
consideration to be received by the shareholders satisfies statutory financial
formulas. The Business Combination Act applies to all publicly held Rhode
Island corporations doing business in the state which do not elect to be
exempted from its effect, and the Company has not so elected to be exempt.
DIRECTORS' LIABILITY
As authorized by Rhode Island Law, the Company's Charter provides that no
director of the Company will be personally liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director
except liability: (a) for any breach of the director's duty of loyalty to the
Company or its shareholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases and (d) for any transaction for which the director derives an
improper personal benefit. The effect of this provision is to eliminate the
rights of the Company and its shareholders (through shareholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (a) through (d) above. This provision does not
limit or eliminate the rights of the Company or any shareholder to seek non-
monetary relief such as an injunction or rescission in the event of a breach
of a director's duty of care. In addition, the Charter provides that if the
Rhode Island Law is amended to authorize the further elimination or limitation
of the liability of a director, then the liability of the directors shall be
eliminated or limited to the fullest extent permitted by the Rhode Island Law,
as so amended.
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust, c/o Boston EquiServe, limited partnership, P.O.
Box 8040, Boston, Massachusetts 02266-8040, (781) 575-3400, is the Company's
transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, the Company will have 4,223,044 shares
of Common Stock outstanding. Of these shares, 4,196,734 shares will be freely
tradable without restrictions or further registration under the Securities
Act, except for any shares purchased or acquired by "affiliates" of the
Company (as that term is defined under the rules and regulations of the
Securities Act), which shares will be subject to the resale limitations of
Rule 144 under the Securities Act.
The remaining 26,310 outstanding shares of Common Stock owned by certain
shareholders of the Company are "restricted securities," as that term is
defined in Rule 144, that may not be sold in the absence of registration under
the Securities Act unless an exemption from registration is available,
including the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares of Common
Stock from the Company or an affiliate of the Company, a person (or persons
whose shares are aggregated) may sell, within any three-month period, a number
of shares that does not
44
<PAGE>
exceed the greater of (i) 1% of the then outstanding shares of Common Stock of
the Company (42,230 shares immediately after this Offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which a notice of sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are subject to certain other restrictions relating to the manner of sale,
notice and the availability of current public information about the Company.
If a period of two years has elapsed since the later of the date of the
acquisition of restricted shares of Common Stock from the Company or from any
affiliate of the Company, a person (or persons whose shares are aggregated)
who is not at any time during the 90 days preceding a sale an "affiliate" is
entitled to sell such shares under Rule 144 without regard to the volume and
other limitations of Rule 144 described above.
Notwithstanding the limitations on sale described above, otherwise
restricted securities may be sold at any time through an effective
registration statement pursuant to the Securities Act. As of October 5, 1998,
options to purchase a total of 39,781 shares of Common Stock were outstanding.
An additional 304,944 shares of Common Stock (342,444 shares upon consummation
of this Offering) will be available for future stock option grants and other
awards under the Company's Stock Plans. The Company has filed Registration
Statements covering a portion of the shares of Common Stock reserved for
issuance under the Stock Option Plan and the Employee Stock Purchase Plan. As
of October 5, 1998, 254,903 registered shares of Common Stock were available
for future stock option grants and other awards under the Stock Option Plan
and Employee Stock Purchase Plan. The Company intends to register an
additional 87,500 shares of Common Stock which became or will become issuable
under the Company's Stock Plan as a result of the March Offering and this
Offering. See "Management--Stock Plans." In addition, the former shareholders
of Conn Central are entitled to receive 7,500 additional unregistered shares
of Common Stock in April 1999 if certain financial targets are met.
In connection with the March Offering, the Company sold Advest, Inc. and
Schneider Securities, Inc. warrants to purchase up to 100,000 shares of Common
Stock at an exercise price of $22.09 per share. These warrants become
exercisable on March 17, 1999, expire on March 17, 2003 and grant to the
holders thereof certain demand and "piggyback" rights of registration of the
securities issuable upon the exercise thereof. In connection with this
Offering, the Company agreed to sell Advest, Inc. additional warrants to
purchase up to 75,000 shares of Common Stock. See "Underwriting."
Under the terms of the Secured Subordinated Note and Warrant Purchase
Agreement by and between the Company and MCRC, MCRC has the right to require
the Company to register all or a portion of MCRC's 200,000 shares of Common
Stock (subject to certain limitations) at any time for sale to the public. The
Company will pay all out-of-pocket expenses of any such registrations, other
than MCRC's pro rata share of any underwriting discounts and commissions, and
will indemnify MCRC against certain liabilities, including liabilities under
the federal securities laws, in connection therewith. Under the terms of the
Settlement Agreement by and between the Company and Bestfoods dated December
12, 1995, Bestfoods has the right to require the Company to register all or a
portion of the 83,155 shares of Common Stock held by Bestfoods (subject to
certain limitations) at any time for sale to the public. The Company will pay
all out-of-pocket expenses of any such registrations, other than fees and
expenses of Bestfoods' counsel and Bestfoods' pro rata share of any
registration fees, underwriting discounts and commissions, except if the
registration is exclusively a secondary offering, in which case Bestfoods will
bear its proportionate share of the expenses of the registration and offering.
The Company will indemnify Bestfoods against certain liabilities, including
liabilities under the federal securities law, in connection with any such
registrations.
The Company, its executive officers and directors and principal shareholders
have agreed that for a period of 180 days after the date of this Prospectus,
subject to certain exceptions, they will not, without the prior written
consent of Advest, Inc., directly or indirectly offer, sell, announce an
intention to sell, solicit any offer to buy, contract to sell, encumber,
distribute, pledge, grant any option for the sale of or otherwise dispose of
or, with respect to the Company, file with the Commission a registration
statement under the Securities Act relating to, or, with respect to the
shareholders, exercise any registration rights with respect to, any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
any shares of Common Stock. See "Underwriting."
45
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Company, the Principal
Shareholder and Advest, Inc. (the "Underwriter"), the Underwriter has agreed
to purchase, and the Company has agreed to sell to the Underwriter, 750,000
shares of Common Stock.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to approval of certain matters by its counsel and to various other
conditions precedent. The Underwriter is committed to purchase and pay for all
of the shares of Common Stock offered hereby, if any are purchased.
The Underwriter has advised the Company that it proposes to offer the shares
of the Common Stock to the public at the offering price set forth on the cover
page of this Prospectus and to certain selected dealers at such price less a
concession not in excess of $0.40 per share. The Underwriter may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share to
certain other dealers. After the public offering of the shares, the public
offering price, concession and reallowance to dealers may be changed by the
Underwriter. The Common Stock is offered subject to receipt and acceptance by
the Underwriter, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of $100,000.
The Principal Shareholder has granted to the Underwriter an option,
exercisable during the 30-day period beginning on the date of this Prospectus,
to purchase up to 112,500 additional shares of Common Stock (the "Option
Shares"), solely to cover over-allotments, if any, at the public offering
price less the underwriting discounts set forth on the cover page of this
Prospectus.
The Company, its executive officers and directors, and principal
shareholders have agreed that for a period of 180 days after the date of this
Prospectus, subject to certain exceptions, they will not directly or
indirectly offer, sell, announce an intention to sell, solicit any offer to
buy, contract to sell, encumber, distribute, pledge, grant any option for the
sale of or otherwise dispose of, or, with respect to the Company, file with
the Commission a registration statement under the Securities Act relating to,
or, with respect to the shareholders, exercise any registration rights with
respect to, any shares of Common Stock or securities convertible into or
exchangeable or exercisable for any shares of Common Stock without the prior
written consent of the Underwriter.
Subject to certain limitations, the Company and the Principal Shareholder
have agreed to indemnify the Underwriter against, and to contribute to losses
arising out of, certain liabilities, including liabilities under the
Securities Act.
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, warrants (the "Underwriter's
Warrants"), which confer the right to purchase up to 75,000 shares of Common
Stock. The Underwriter's Warrants are initially exercisable at the price of
$17.24 per share of Common Stock (155% of the public offering price) (the
"Exercise Price") for a period of four years commencing one year from the
effective date of the Registration Statement of which this Prospectus is a
part. The Underwriter's Warrants are restricted from sale, transfer,
assignment or hypothecation for a period of one year from such effective date,
except to members of the selling group or their respective officers or
partners. The shares of Common Stock issuable upon exercise of the
Underwriter's Warrants are identical to those offered hereby. The
Underwriter's Warrants contain provisions providing for adjustment of the
Exercise Price and the number and type of securities issuable upon the
exercise thereof upon the occurrence of certain events. The Underwriter's
Warrants grant to the holders thereof certain demand and "piggyback" rights of
registration of the securities issuable upon the exercise thereof.
46
<PAGE>
The Underwriter has advised the Company that, pursuant to Regulation M
promulgated under the Securities Exchange Act of 1934, as amended, certain
persons participating in this Offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriter for the purpose of fixing or maintaining
the price of the Common Stock. A "syndicate covering transaction" is the bid
for or the purchase of the Common Stock on behalf of the Underwriter to reduce
a short position incurred by the Underwriter in connection with this Offering.
A "penalty bid" is an arrangement permitting the Underwriter to reclaim the
selling concession otherwise accruing to a selling group member in connection
with this Offering if the Common Stock originally sold by such selling group
member is purchased by the Underwriter in a syndicate covering transaction and
has therefore not been effectively placed by such selling group member. These
transactions may be effected on the AMEX or otherwise and, if commenced, may
be discontinued at any time.
The foregoing is a brief summary of certain provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the Underwriting Agreement is on file with the
Commission as an exhibit to the Registration Statement of which this
Prospectus is a part.
LEGAL MATTERS
Certain legal matters relating to this Offering will be passed upon for the
Company by Hinckley, Allen & Snyder, Providence, Rhode Island. Certain legal
matters relating to this Offering are being passed upon for the Underwriter by
Morgan, Lewis & Bockius LLP, New York, New York.
EXPERTS
The financial statements as of December 31, 1996 and 1997 and for the years
ended December 31, 1995, 1996 and 1997 included in this Prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
47
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the securities offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and this Offering. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and,
in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference. Copies of
the Registration Statement may be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Registration
Statement and exhibits thereto may also be obtained on the World Wide Web site
maintained by the Commission at http://www.sec.gov. Such information
concerning the Company can also be inspected at the offices of the AMEX at 86
Trinity Place, New York, New York 10006.
48
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets as of December 31, 1996 and 1997, and June 30, 1998 (unau-
dited).................................................................. F-3
Statements of Income for the Years Ended December 31, 1995, 1996 and 1997
and the Six Months Ended June 30, 1997 and 1998 (unaudited)............. F-4
Statements of Shareholders' Equity for the Years Ended December 31, 1995,
1996 and 1997 and the Six Months Ended June 30, 1998 (unaudited)........ F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and the Six Months Ended June 30, 1997 and 1998 (unaudited)........ F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Providence and Worcester Railroad Company:
We have audited the accompanying balance sheets of Providence and Worcester
Railroad Company as of December 31, 1996 and 1997, and the related statements
of income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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, such financial statements present fairly, in all material
respects, the financial position of Providence and Worcester Railroad Company
as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Worcester, Massachusetts
January 30, 1998
F-2
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
JUNE 30
1996 1997 1998
------- ------- ---------
UNAUDITED
<S> <C> <C> <C>
Current Assets:
Cash and equivalents................................ $ 686 $ 519 $ 1,748
Accounts receivable, net of allowance for doubtful
accounts of $125 in 1996, 1997 and 1998 (Notes 3, 4
and 11)............................................ 2,537 2,345 2,302
Materials and supplies.............................. 1,021 2,086 2,042
Prepaid expenses and other.......................... 121 167 124
Deferred income taxes (Note 7)...................... 400 204 123
------- ------- -------
Total Current Assets............................... 4,765 5,321 6,339
Property and Equipment, net (Notes 2 and 4).......... 63,726 65,891 68,173
Goodwill (Note 11)................................... -- -- 207
------- ------- -------
Total Assets......................................... $68,491 $71,212 $74,719
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable, bank (Notes 3 and 11)................ $ 1,440 $ 1,350 $ --
Current portion of long-term debt (Notes 4 and 11).. 677 931 188
Accounts payable.................................... 2,861 2,083 2,110
Accrued expenses (Note 5)........................... 907 901 600
Income taxes........................................ -- 30 635
------- ------- -------
Total Current Liabilities.......................... 5,885 5,295 3,533
------- ------- -------
Long-Term Debt, Less Current Portion (Notes 4 and
11)................................................. 12,131 11,916 799
------- ------- -------
Profit-Sharing Plan Contribution (Note 9)............ 226 337 337
------- ------- -------
Deferred Grant Income (Note 1)....................... 5,571 6,945 6,867
------- ------- -------
Deferred Income Taxes (Note 7)....................... 8,617 8,681 8,640
------- ------- -------
Commitments and Contingent Liabilities (Note 8)......
Shareholders' Equity (Notes 8, 9, 10 and 11):
Preferred stock, 10% noncumulative, $50 par value;
authorized 6,817 shares in 1996 and 1997 and 647
shares in 1998; issued and outstanding 653 shares
in 1996 and 1997 and 647 shares in 1998............ 33 33 32
Common stock, $.50 par value; authorized 3,023,436
shares in 1996 and 1997 and 15,000,000 shares in
1998; issued and outstanding 2,188,244 shares in
1996, 2,221,933 shares in 1997 and 3,472,829 shares
in 1998............................................ 1,094 1,111 1,737
Additional paid-in capital.......................... 6,365 6,665 20,765
Retained earnings................................... 28,569 30,229 32,009
------- ------- -------
Total Shareholders' Equity......................... 36,061 38,038 54,543
------- ------- -------
Total Liabilities and Shareholders' Equity........... $68,491 $71,212 $74,719
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Operating Revenues -- Freight and
Non-Freight..................... $19,778 $19,456 $22,083 $10,278 $ 10,892
------- ------- ------- ------- --------
Operating Expenses:
Maintenance of way and
structures..................... 2,469 2,815 3,035 1,629 1,541
Maintenance of equipment........ 1,538 1,555 1,874 940 1,023
Transportation.................. 5,106 4,917 4,987 2,377 2,604
General and administrative...... 4,095 3,859 3,764 1,798 2,064
Depreciation.................... 1,790 1,940 2,054 999 1,070
Taxes, other than income taxes.. 1,971 2,023 2,021 1,119 1,140
Car hire, net................... 708 605 598 318 285
------- ------- ------- ------- --------
Total Operating Expenses....... 17,677 17,714 18,333 9,180 9,727
------- ------- ------- ------- --------
Income from Operations........... 2,101 1,742 3,750 1,098 1,165
------- ------- ------- ------- --------
Other Income (Note 6)............ 581 1,660 638 415 2,596
------- ------- ------- ------- --------
Interest Expense (Notes 3 and 4):
Capital Properties, Inc......... (668) (437) (410) (208) (99)
Other........................... (507) (934) (948) (473) (364)
------- ------- ------- ------- --------
Total Interest Expense......... (1,175) (1,371) (1,358) (681) (463)
------- ------- ------- ------- --------
Income before Income Taxes and
Extraordinary Item.............. 1,507 2,031 3,030 832 3,298
Provision for Income Taxes (Note
7).............................. 590 780 1,100 310 1,174
------- ------- ------- ------- --------
Income before Extraordinary
Item............................ 917 1,251 1,930 522 2,124
Extraordinary Loss from Early
Extinguishment of Debt, Net of
Income Tax Benefit of $94 (Note
11)............................. -- -- -- -- 170
Net Income....................... $ 917 $ 1,251 $ 1,930 522 1,954
Preferred Stock Dividends........ 3 3 3 3 3
------- ------- ------- ------- --------
Net Income Available to Common
Shareholders.................... $ 914 $ 1,248 $ 1,927 $ 519 $ 1,951
======= ======= ======= ======= ========
Basic Income Per Common Share:
Income before extraordinary
item........................... $ .45 $ .57 $ .87 $ .24 $ .73
Extraordinary item.............. -- -- -- -- (.06)
Net income...................... $ .45 $ .57 $ .87 $ .24 $ .67
======= ======= ======= ======= ========
Diluted Income Per Common Share:
Income before extraordinary
item........................... $ .43 $ .54 $ .81 $ .23 $ .71
Extraordinary item.............. -- -- -- -- (.05)
Net income...................... $ .43 $ .54 $ .81 $ .23 $ .66
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND
1997
AND SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------------
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
--------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995.... $ 33 $ 1,005 $ 5,046 $ 26,830 $ 32,914
Issuance of 55,000 common
shares in payment of an
environmental claim....... 28 363 391
Issuance of 40,606 common
shares to fund the
Company's 1994 profit
sharing plan
contribution.............. 20 315 335
Issuance of 4,374 common
shares for stock options
exercised................. 2 24 26
Issuance of common stock
warrants (Note 4)......... 80 80
Dividends paid:
Preferred stock, $5.00 per
share..................... (3) (3)
Common stock, $.10 per
share..................... (205) (205)
Net income for the year.... 917 917
---- ------- ------- -------- --------
Balance, December 31, 1995.. 33 1,055 5,828 27,539 34,455
Issuance of 53,155 common
shares in payment of an
environmental claim....... 27 352 379
Issuance of 20,925 common
shares to fund the
Company's 1995 profit
sharing plan contribution
(Note 9)..................... 10 157 167
Issuance of 4,123 common
shares for stock options
exercised and other....... 2 28 30
Dividends paid:
Preferred stock, $5.00 per
share..................... (3) (3)
Common stock, $.10 per
share..................... (218) (218)
Net income for the year.... 1,251 1,251
---- ------- ------- -------- --------
Balance, December 31, 1996.. 33 1,094 6,365 28,569 36,061
Issuance of 22,550 common
shares to fund the
Company's 1996 profit
sharing plan contribution
(Note 9).................. 11 215 226
Issuance of 11,139 common
shares for stock options
exercised, employee stock
purchases and other....... 6 85 91
Dividends paid:
Preferred stock, $5.00 per
share..................... (3) (3)
Common stock, $.12 per
share..................... (267) (267)
Net income for the year.... 1,930 1,930
---- ------- ------- -------- --------
Balance, December 31, 1997.. 33 1,111 6,665 30,229 38,038
Issuance of 4,526 common
shares for stock options
exercised, employee stock
purchases and other
(unaudited)............... 2 45 47
Issuance of 1,000,000
common shares for an
underwritten public stock
offering (net of expenses)
(unaudited)............... 500 12,038 12,538
Issuance of 200,000 common
shares for stock purchase
warrants exercised
(unaudited)............... 100 1,320 1,420
Issuance of 22,156 common
shares to fund the
Company's 1997 profit
sharing plan contribution
(unaudited)............... 11 326 337
Issuance of 23,614 common
shares for the acquisition
of Conn Central
(unaudited)............... 12 371 383
Conversion of 6 preferred
shares into 600 common
shares (unaudited)........ (1) 1
Dividends (unaudited):
Preferred stock, $5.00 per
share..................... (3) (3)
Common stock, $.06 per
share..................... (171) (171)
Net income for the period
(unaudited)................ 1,954 1,954
---- ------- ------- -------- --------
Balance June 30, 1998
(unaudited)................ $ 32 $ 1,737 $20,765 $ 32,009 $ 54,543
==== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
UNAUDITED
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income................... $ 917 $ 1,251 $ 1,930 $ 522 $ 1,954
Adjustments to reconcile net
income to net cash flows
from operating activities:
Depreciation................ 1,790 1,940 2,054 999 1,070
Amortization of deferred
grant income............... (121) (136) (149) (72) (78)
Gains from sale,
condemnation and disposal
of property and equipment.. (64) (1,103) (157) (150) (2,330)
Deferred income taxes....... 220 600 260 135 40
Other, net.................. 19 26 65 -- --
Increase (decrease) in cash
from:
Accounts receivable........ (636) 68 217 159 (148)
Materials and supplies..... (68) (290) (1,065) (377) 44
Prepaid expenses and
other..................... (12) 18 (46) 31 43
Accounts payable and
accrued expenses.......... 1,132 (914) 422 631 641
-------- -------- -------- ------- --------
Net cash flows from operating
activities.................. 3,177 1,460 3,531 1,878 1,236
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment................... (4,490) (5,465) (5,160) (2,573) (3,614)
Proceeds from sale and
condemnation of property and
equipment................... 108 1,319 230 184 2,729
Proceeds from deferred grant
income...................... 378 901 1,475 329 192
-------- -------- -------- ------- --------
Net cash flows used by
investing activities........ (4,004) (3,245) (3,455) (2,060) (693)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (payments)
under line of credit........ (120) 1,440 (90) (85) (1,350)
Payments of long-term debt... (4,254) (789) (699) (353) (10,491)
Dividends paid............... (208) (221) (270) (136) (174)
Proceeds from long-term
debt........................ 6,800 -- 730 654 --
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... 26 29 86 32 163
-------- -------- -------- ------- --------
Net cash flows from (used by)
financing activities........ 2,244 459 (243) 112 686
-------- -------- -------- ------- --------
Increase (Decrease) in Cash
and Equivalents............. 1,417 (1,326) (167) (70) 1,229
Cash and Equivalents,
Beginning of Period......... 595 2,012 686 686 519
-------- -------- -------- ------- --------
Cash and Equivalents, End of
Period...................... $ 2,012 $ 686 $ 519 $ 616 $ 1,748
======== ======== ======== ======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during period for:
Interest.................... $ 1,269 $ 1,333 $ 1,328 $ 672 $ 449
======== ======== ======== ======= ========
Income taxes................ $ 543 $ 60 $ 873 $ 78 $ 442
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is an interstate freight carrier conducting railroad operations
in Massachusetts, Rhode Island, Connecticut and New York.
One customer accounted for approximately 12.1%, 12.6% and 15.1% of the
Company's operating revenues in 1995, 1996 and 1997, respectively.
INTERIM RESULTS (UNAUDITED)
The unaudited financial statements for the six months ended June 30, 1997
and 1998 reflect all adjustments, all of which are of a normal recurring
nature, necessary in the opinion of management for a fair presentation of the
results for such interim periods and are not necessarily indicative of full-
year results.
CASH AND EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the balance sheets and statements of cash flows. Cash
equivalents are stated at cost, which approximates fair market value.
MATERIALS AND SUPPLIES
Materials and supplies, which consist of items for the improvement and
maintenance of track structure and equipment, are stated at cost, determined
on a first-in, first-out basis, and are charged to expense or added to the
cost of property and equipment when used.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost (including self-
construction costs). Acquired railroad property is recorded at the purchased
cost. Major renewals or betterments are capitalized while routine maintenance
and repairs, which do not improve or extend asset lives, are charged to
expense when incurred. Gains or losses on sales or other dispositions are
credited or charged to income. Depreciation is provided using the straight-
line method over the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
DEPRECIABLE PROPERTIES ESTIMATED USEFUL LIVES
---------------------- ----------------------
<S> <C>
Track structure....................................... 20 to 67 years
Buildings and other structures........................ 33 to 45 years
Equipment............................................. 4 to 25 years
</TABLE>
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed of." This standard requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company continually evaluates whether
later events and circumstances have occurred that indicate assets may not be
recoverable. When factors indicate that assets should be evaluated for
possible impairment, the Company uses an estimate of the related undiscounted
future cash flows over the remaining lives of the assets in measuring whether
the assets are recoverable.
DEFERRED GRANT INCOME
The Company has availed itself of various federal and state programs
administered by the States of Connecticut and Rhode Island and by the
Commonwealth of Massachusetts for reimbursement of expenditures
F-7
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
for capital improvements. In order to receive reimbursement, the Company must
submit requests for the projects, including cost estimates. The Company
receives from 70% to 100% of the costs of such projects, which have included
bridges, track structure and public improvements. To the extent that such
grant proceeds are used for capital improvements to bridges and track
structure, they are recorded as deferred grant income and amortized into
operating revenues on a straight-line basis over the estimated useful lives of
the related improvements ($121 in 1995, $136 in 1996, and $149 in 1997).
Grant proceeds utilized to finance public improvements, such as grade
crossings and signals, are recorded as a direct offset to the related expense.
Although the Company cannot predict the extent and length of future grant
programs, it intends to continue filing requests for such grants when they are
available.
REVENUE RECOGNITION
Freight revenues are recorded at the time delivery is made to the customer
or the connecting carrier.
Income or loss from sale, condemnation and disposal of property and
equipment and easements is recorded at the time the transaction is consummated
and collectibility is assured.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." This standard requires the Company to compute deferred income
taxes based on the differences between the financial statement and tax basis
of assets and liabilities using enacted rates in effect in the years in which
the differences are expected to reverse.
INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
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 ("APB") Opinion No. 15, "Earnings per Share," and its interpretations.
The Company adopted SFAS No. 128 in 1997 and restated its earnings per share
for 1995 and 1996. Previously reported income per common share for years prior
to 1997 did not differ materially from that computed using SFAS 128.
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 (using the treasury stock method), 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>
YEARS ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Net income available to common shareholders............. $914 $1,248 $1,927
Interest expense impact (net of tax) on assumed
conversion of debt to exercise warrants................ 0 84 84
---- ------ ------
Net income available to common shareholders assuming
dilution............................................... $914 $1,332 $2,014
==== ====== ======
</TABLE>
F-8
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares-basic................ 2,042,569 2,178,382 2,208,820
Dilutive effect of convertible preferred
stock, options and warrants................. 93,184 282,295 280,450
--------- --------- ---------
Weighted average shares-diluted.............. 2,135,753 2,460,677 2,489,270
========= ========= =========
</TABLE>
EMPLOYEE STOCK OPTION PLAN
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees."
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
The Company's principal estimates include reserves for accounts receivable,
useful lives of properties, accrued liabilities, including health insurance
claims and legal and environmental contingencies, and deferred income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments"
requires disclosure of the fair value of certain financial instruments.
The following methods and assumptions are used to estimate the fair value of
each class of financial instrument held or owed by the Company:
Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.
Long-term debt: The fair value of the Company's long-term debt is based
on secondary market indicators. Since the Company's debt is not quoted,
estimates are based on each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates fair
value.
ADOPTION OF 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 the first quarter
of 1998 and did not have material effects on its financial position, results
of operations or footnote disclosures.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
F-9
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Land and improvements....................................... $ 9,020 $ 9,128
South Quay property......................................... 11,339 11,464
Track structure............................................. 45,833 48,241
Buildings and other structures.............................. 5,955 5,318
Equipment................................................... 15,991 17,196
------- -------
88,138 91,347
Less accumulated depreciation............................... 24,412 25,456
------- -------
Total property and equipment, net......................... $63,726 $65,891
======= =======
</TABLE>
Land and improvements include property held for resale having a net book
value of approximately $400.
SOUTH QUAY PROPERTY
Pursuant to permits issued by the United States Department of the Army Corps
of Engineers and the Rhode Island Coastal Resources Management Council, the
Company has developed 33 acres of waterfront land in East Providence, Rhode
Island (the "South Quay") designed to capitalize on the growth of intermodal
transportation, utilizing rail, water and highway connections. The property
has highway access ( 1/2 mile from I-195), direct rail access and is adjacent
to a 12 acre site also owned by the Company.
The permits for the property allow for the construction of a dock along the
west face of the South Quay. Unless extended, the existing permits expire in
1998. The Company intends to apply for extensions of its existing permits to
enable the Company to construct a vessel unloading area if it is able to
attract user or investment commitments. The Company has also recently engaged
in discussions with potential users interested in utilizing the property for
off loading bulk products such as salt and construction aggregate. In
addition, the Company has explored the development of the facility for off
loading container vessels and barges.
The Company will need additional terminal capacity to achieve expected
growth in its intermodal container business. The Company currently intends to
use a portion of the property as an intermodal terminal facility to provide it
with such capacity. This development will not occur until the Company
completes the overhead clearance project required for the State of Rhode
Island's freight rail improvement project.
The Company intends to explore all development opportunities for the South
Quay and believes its costs will be fully recovered from future leases of the
property, associated rail freight revenues, particularly intermodal double
stack container trains, and possible port charges such as wharfage, dockage
and storage.
The Company, relying on Rhode Island Supreme Court decisions concerning
title to formerly tide flowed property, filed a lawsuit in 1996 in Rhode
Island Superior Court seeking to confirm the Company's fee simple absolute
title to the South Quay. Acting on motions for summary judgment from the
Company and the State of Rhode Island and Coastal Resources Management Council
("Coastal Council"), the Superior Court ruled that the Company is the fee
simple absolute owner of the South Quay. The State and Coastal Council have
appealed the decision to the Rhode Island Supreme Court contending that the
Company possesses only a 50 year exclusive license to develop and occupy the
South Quay, which license must be renewed at the end of the term. A decision
from the Rhode Island Supreme Court is expected in 1999. A finding that the
Company possesses only a 50 year license should not prevent the utilization of
the South Quay as an intermodal facility.
See Note 11--Events Subsequent to Date of Independent Auditors' Report
(Unaudited).
F-10
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
3. NOTES PAYABLE, BANK
The Company has a revolving line of credit with its principal bank in the
amount of $1,750 expiring June 1, 1998. Borrowings outstanding under this line
of credit are due on demand, bear interest at the bank's prime rate plus one-
half of one percent (9% at December 31, 1997) and are secured by the Company's
accounts receivable. In addition, the Company pays a commitment fee of one-
half of one percent per year on the unused portion of the line of credit.
Loans in the amount of $1,440 and $1,350 were outstanding under this line of
credit at December 31, 1996 and 1997, respectively.
See Note 11--Events Subsequent to Date of Independent Auditors' Report
(Unaudited).
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
10% note payable to Capital Properties, Inc. (which, with
the Company, has a common controlling shareholder), certain
real estate pledged as collateral, presently payable in
monthly installments of principal and interest of $53 to
2007....................................................... $ 4,211 $ 3,993
8.69% note payable to a commercial lender, certain equipment
and track structure along with a second lien on accounts
receivable pledged as collateral, payable in monthly
installments of principal and interest of $62 to 2003...... 3,669 3,229
7.9% note payable to a commercial lender, three locomotives
pledged as collateral, payable in monthly installments of
principal and interest of $15 to 2002 (i).................. 689
10% subordinated note payable to Massachusetts Capital
Resource Company ("MCRC"), effective interest rate of
10.3%, Massachusetts track structure pledged as collateral,
payable in quarterly installments of interest only through
September 1998 and interest and principal payments
increasing from $63 to $188 commencing in December 1998
with a final principal payment of $1,250 due December 31,
2005 (ii).................................................. 4,928 4,936
------- -------
Total long-term debt...................................... 12,808 12,847
Less current portion...................................... 677 931
------- -------
Long-term debt, less current portion...................... $12,131 $11,916
======= =======
</TABLE>
--------
(i) In July 1997, the Company completed the acquisition and renovation of
three used locomotives at a total cost of $730 financed through long-term
borrowings from a commercial lender. The interest rate, which is
variable, is set at 2.35% over the 30 day Commercial Paper rate
(approximately 7.9% as of December 31, 1997). The Company has the option
of converting to a fixed rate of interest set at 2.1% over the then
current weekly average rate of three year U.S. Treasury Constant
Maturities. The amount of the monthly payments will be adjusted annually
in August to reflect the effects of the variable interest rates in effect
during the previous year.
(ii) In December 1995, the Company concluded an agreement with MCRC whereby
the Company received $5,000 in exchange for a subordinated note
payable in the amount of $4,920 and warrants to purchase 200,000
shares of the Company's common stock at an exercise price of $7.10 per
share. The warrants
F-11
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
are exercisable through December 31, 2005. MCRC must apply $1,420 of the
amount due on its subordinate note toward the exercise of the warrants
upon the Company's consummation of a public offering of its common stock
at a purchase price of not less than $14.20 per share which results in
gross proceeds to the Company of not less than $10,000. The value
assigned to the warrants of $80 was derived from a valuation made by
MCRC on the date of issue. The value assigned to the warrants is being
amortized over the life of the debt. The agreement contains various
covenants which, among other things, limit the payment of dividends to
25% of the Company's net income and require the Company to maintain
certain ratios of leverage and interest coverage.
The following is a summary of the maturities of long-term debt as of December
31, 1997:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................... $ 931
1999............................................................... 1,179
2000............................................................... 1,328
2001............................................................... 1,611
2002............................................................... 1,030
Thereafter......................................................... 6,768
-------
$12,847
=======
</TABLE>
See Note 11--Events Subsequent to Date of Independent Auditors' Report
(Unaudited).
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Casualty and environmental claims............................. $ 320 $ 279
Other......................................................... 587 652
------ ------
$ 907 $ 931
====== ======
</TABLE>
Casualty loss and environmental claims expense, included in transportation
expense, amounted to $728 in 1995 and $171 in 1996. The Company did not incur
any casualty loss and environmental claims expense in 1997.
6. OTHER INCOME
Other income consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
----------------- --------
<S> <C> <C> <C>
Gain from sale, condemnation and disposal of
property and equipment and easements, net...... $ 64 $ 1,103 $ 157
Rentals and license fees, under various
operating leases............................... 494 494 470
Interest........................................ 23 63 11
------- --------- -------
$ 581 $ 1,660 $ 638
======= ========= =======
</TABLE>
See Note 11--Events Subsequent to Date of Independent Auditors' Report
(Unaudited)
F-12
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
-------------------------
<S> <C> <C> <C>
Current:
Federal......................................... $ 320 $ 150 $ 750
State........................................... 50 30 90
------- ------- ---------
370 180 840
Deferred, Federal and State....................... 220 600 260
------- ------- ---------
$ 590 $ 780 $ 1,100
======= ======= =========
</TABLE>
The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax
provision:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Depreciation................................. $ 85 $ 87 $ 148
General business tax credits................. 400 238 588
Deferred grant income........................ (91) (271) (478)
Gain from sale, condemnation and disposal of
properties and equipment.................... (14) 319 (17)
Accrued casualty and environmental claims.... (169) 218 14
Other........................................ 9 9 5
-------- -------- --------
$ 220 $ 600 $ 260
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) tax credit carryforwards. The tax effects of significant items comprising
the Company's net deferred income tax liability as of December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Deferred income tax liabilities --
Differences between book and tax basis of properties...... $10,956 $11,087
------- -------
Deferred income tax assets:
Tax credit carryforwards.................................. 649 61
Deferred grant income..................................... 1,909 2,387
Accrued casualty losses................................... 113 99
Other..................................................... 68 63
------- -------
2,739 2,610
------- -------
Net deferred income tax liability......................... $ 8,217 $ 8,477
======= =======
</TABLE>
F-13
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate..................... 34% 34% 34%
Depreciation of properties acquired from
bankrupt railroads having a tax basis in
excess cost............................... (1) (1) (1)
Non-deductible expenses.................... 4 4 1
State income tax, net of federal income tax
benefit................................... 2 1 2
-------- -------- --------
Effective tax rate......................... 39% 38% 36%
======== ======== ========
</TABLE>
8. 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.
The Company was notified by CPC International, Inc. (now "Bestfoods") and
the United States Environmental Protection Agency that the Company was alleged
to be a potentially responsible party for some or all of the costs of
remediation of a Superfund site, reportedly due to the impact of a 1974
incident involving a rail car. In December 1995, the Company concluded an
agreement with Bestfoods ("Agreement") in which the Company agreed to pay $990
in settlement of all claims against it relating to this incident. The Company
issued 55,000 shares of its common stock, having a value of $391, to Bestfoods
in December 1995 in partial payment of this claim. An additional 53,155
shares, having a value of $379, were issued in January 1996. The Company has
the option of paying the remaining liability of $220 in cash or by the
issuance of approximately 31,000 shares of unregistered, restricted common
stock of the Company. This remaining liability must be paid by the earlier of
June 30, 1999, or the closing of a public offering of at least 565,000 shares
of common stock. The Agreement further provides that, in the event Bestfoods
recovers insurance proceeds for its costs, the Company is entitled to receive
10% of the net recovery after deduction of litigation expenses. Bestfoods is
actively engaged in litigation with an insurer seeking such a recovery.
Bestfood's insurance carrier (which to date has denied coverage to Bestfoods)
has notified the Company that it intends to bring suit against the Company to
enforce its alleged rights of subrogation. The Company believes that since
Bestfoods has released the Company from any liability, its carrier has no
right of subrogation and its claim is without merit. Moreover, under the
Agreement, Bestfoods is obligated to defend, indemnify and hold harmless the
Company for any claims which arise from such contamination, including claims
of the insurance carrier.
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.
In October 1997, the Company's Board of Directors approved an agreement to
purchase 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. If certain financial and other conditions are met, Conn Central's
shareholders will receive an additional 7,500 shares of the Company's common
stock one year from the date of the closing. The transaction is expected to be
completed in the second quarter of 1998 following approval or exemption by the
United States Surface Transportation Board. Conn Central is a shortline
railroad headquartered in Middletown, Connecticut which has operating rights
over approximately 28 miles in central Connecticut and connects to the
Company's Middletown Secondary line. After completion of the acquisition, Conn
Central will be merged into the Company.
See Note 11--Events Subsequent to Date of Independent Auditors' Report
(Unaudited).
F-14
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The Company has a non-qualified stock option plan ("SOP") covering all
management personnel having a minimum of one year of service with the Company
and who are not holders of a majority of either its outstanding common stock
or its outstanding preferred stock. In addition, the Company's outside
directors are eligible to participate in the SOP. The SOP covers 50,000 common
shares or 5% of the shares of common stock outstanding, whichever is greater
(111,097 shares at December 31, 1997). Options granted under the SOP, which
are fully vested when granted, are exercisable over a ten year period at the
market price for the Company's common stock as of the date the options are
granted.
Changes in stock options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
-------------------
NUMBER EXERCISE FAIR
OF SHARES PRICE VALUE
--------- --------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1995............... 30,357 $ 6.03
Granted...................................... 7,808 7.00 $ 2.29
Exercised.................................... (4,374) 5.89
------
Outstanding and exercisable at December 31,
1995........................................ 33,791 6.27
Granted...................................... 7,790 6.88 $ 2.21
Exercised.................................... (3,823) 5.99
Expired...................................... (2,604) 6.17
------
Outstanding and exercisable at December 31,
1996........................................ 35,154 6.44
Granted...................................... 7,970 7.88 $2.96
Exercised.................................... (7,593) 6.63
Expired...................................... (1,513) 5.98
------
Outstanding and exercisable at December 31,
1997........................................ 34,018 $6.76
======
</TABLE>
The fair value of options on their grant date was measured using the Black-
Scholes options pricing model. Key assumptions used to apply this pricing
model are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Average risk-free
interest rate.......... 5.9% 6.4% 5.75%
Expected life of option
grants................. 7.0 years 7.0 years 7.0 years
Expected volatility of
underlying stock....... 22% 22% 29%
Expected dividend
payment rate, as a
percentage of the share
price on the date of
grant.................. 1.43% 1.45% 1.26%
</TABLE>
It should be noted that the option pricing model used was designed to value
readily tradable stock options with relatively short useful lives. The options
granted to employees are not tradable and have contractual lives of up to ten
years. However, management believes that the assumptions used to value the
options and the model applied yield a reasonable estimate of the fair value of
the grants made under the circumstances.
F-15
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The following table sets forth information regarding options at December 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
----------------------------
RANGE OF NUMBER
NUMBER EXERCISE CURRENTLY EXERCISE REMAINING
OF OPTIONS PRICES EXERCISABLE PRICE LIFE (IN YEARS)
---------- ----------- ----------- -------- ---------------
<S> <C> <C> <C> <C>
6,430 $3.25--4.38 6,430 $3.78 4.1
22,046 5.50--7.88 22,046 7.19 7.0
5,542 8.50 5,542 8.50 2.0
</TABLE>
The Company has elected to remain with the accounting prescribed by APB 25,
instead of adopting SFAS No. 123, "Accounting for Stock-Based Compensation".
Therefore, no compensation cost has been recognized for the SOP. Had
compensation cost for the Company's SOP been determined on the fair value of
the grant dates for awards under the SOP consistent with the method of SFAS
123, the Company's net income and income per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
--------------- --------
<S> <C> <C> <C>
Net income:
As reported....................................... $ 917 $ 1,251 $ 1,930
Pro forma......................................... 914 1,245 1,921
Basic income per share:
As reported....................................... .45 .57 .87
Pro forma......................................... .45 .57 .87
Diluted income per share:
As reported....................................... .43 .54 .81
Pro forma......................................... .43 .54 .80
</TABLE>
DEFINED CONTRIBUTION RETIREMENT PLANS
The Company has a deferred profit-sharing plan ("Plan") which covers all of
its employees who are members of its collective bargaining units.
Contributions to the Plan are required in years in which the Company has
income from "railroad operations" as defined in the Plan. Contributions are to
be equal to at least 10% but not more than 15% of the greater of income before
income taxes or income from railroad operations subject to a maximum
contribution of $3.5 per eligible employee. Contributions to the Plan may be
made in cash or in shares of the Company's common stock. Contributions accrued
under this Plan amounted to $167 in 1995, $226 in 1996 and $337 in 1997. The
Company made its 1995 and 1996 contributions and intends to make its 1997
contribution in newly issued shares of its common stock.
The Company also has a Simplified Employee Pension Plan ("SEPP") which
covers substantially all employees who are not members of one of its
collective bargaining units. Contributions to the SEPP are discretionary and
are determined annually as a percentage of each covered employee's
compensation. Contributions accrued under the SEPP amounted to $159 in 1995,
$189 in 1996 and $196 in 1997.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("ESPP") under which
eligible employees may purchase registered shares of common stock at 85% of
the market price for such shares. An aggregate of 200,000 shares of common
stock are authorized for issuance under the ESPP. Any shares purchased under
the ESPP are subject to a two year lock-up. As of December 31, 1997, 2,846
shares have been purchased under the ESPP.
F-16
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
10. PREFERRED STOCK
Each share of the Company's $50 par value preferred stock is convertible
into 100 shares of common stock at the option of the shareholder. The
noncumulative annual stock dividend is fixed by the Company's Charter at the
rate of $5.00 per share, out of funds legally available for the payment of
dividends.
The holders of preferred stock are entitled to one vote for each share in
the election of two-thirds of the Board of Directors. The holders of preferred
stock and holders of common stock are entitled to one vote per share, voting
in separate classes, upon matters voted on by shareholders.
11. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED)
In March 1998, 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 $1,420 reduction in the outstanding principal balance
of its 10% subordinated long-term note payable to MCRC.
In March 1998, the Company completed an underwritten public offering for
1,000,000 shares of Common Stock at $14.25 per share (the "March Offering").
Net proceeds of the March Offering were approximately $12,538.
In connection with the March Offering, the Company sold to the underwriters
warrants to purchase up to 100,000 shares of Common Stock at an exercise price
of $22.09 per share. These warrants become exercisable on March 17, 1999,
expire on March 17, 2003 and grant to the holders thereof certain demand and
"piggyback" rights of registration of the securities issuable upon exercise.
The Company utilized a substantial portion of the proceeds from the March
Offering and from other income generated in 1998 from the sale of fiber optics
licenses ($2,043) to retire all of its short term borrowings ($1,575) and to
prepay $10,228 of its outstanding long-term debt. Prepayment penalties of $264
were incurred on early extinguishment of a portion of the debt, which
penalties (net of tax benefit) have been reported as an extraordinary item on
the accompanying statement of income. As of June 30, 1998, the Company's
remaining long-term debt consists of a 10% subordinated note payable to MCRC
in the total amount of $987. The Company intends to utilize the balance of the
March Offering proceeds to acquire rail cars and expand its Worcester
maintenance facility.
On April 21, 1998 the Company acquired all of the outstanding common stock
of 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 intends to amortize
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.
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. Loans outstanding under the renewed line are unsecured and bear
interest at either the prime rate or 1.5% over either the one or three month
London Interbank Offered Rates. There were no loans outstanding under the line
at June 30, 1998.
F-17
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
In April 1998, the Company paid its remaining liability to Bestfoods under
the 1995 settlement agreement relating to Bestfoods' environmental claim. (See
Note 8). In July 1998, Bestfoods paid $1,000 to the Company as an interim
payment of Bestfoods' obligation to pay the Company 10% of Bestfoods' net
recovery from its insurance carrier, pending final resolution of amounts to be
paid to Bestfoods by the insurance carrier. The Company utilized a portion of
these funds to prepay an additional $500 of its subordinated long-term note
payable to MCRC thereby reducing the unpaid principal balance of this note to
approximately $500. The Company incurred a prepayment penalty of $40 on this
prepayment.
On January 28, 1998 the Company declared a dividend of $5.00 per share on
its preferred stock and $.03 per share on its outstanding Common Stock payable
February 25, 1998 to shareholders of record on February 11, 1998. On April 29,
1998, the Company declared a dividend of $.03 per share on its outstanding
common stock payable May 28, 1998 to shareholders of record on May 14, 1998.
On July 29, 1998, the Company declared a dividend of $.03 per share on its
outstanding Common Stock payable August 27, 1998 to shareholders of record on
August 13, 1998.
In September 1998, the Company received a five year permit extension
expiring December 31, 2003 from the United States Army Corps of Engineers for
construction of the South Quay. See Note 2. The Company has applied for a
similar extension from the Coastal Council.
F-18
<PAGE>
Picture of Three B-23-7 locomotives acquired by P&W in July 1997.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION
OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 12
Use of Proceeds.......................................................... 13
Price Range of Common Stock and Dividend Policy.......................... 14
Capitalization........................................................... 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 25
Management............................................................... 36
Certain Transactions..................................................... 41
Principal Shareholders................................................... 42
Description of Capital Stock............................................. 43
Shares Eligible for Future Sale.......................................... 44
Underwriting............................................................. 46
Legal Matters............................................................ 47
Experts.................................................................. 47
Available Information.................................................... 48
Index to Financial Statements............................................ F-1
</TABLE>
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750,000 SHARES
LOGO
PROVIDENCE
AND
WORCESTER
RAILROAD COMPANY
COMMON STOCK
---------------
PROSPECTUS
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ADVEST, INC.
OCTOBER 6, 1998
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