UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _______________ to
---------------
Commission file number 0-16704
PROVIDENCE AND WORCESTER RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0344399
----------------------------- --------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(508) 755-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
----------------------------- --------------------------
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
----------------------------------------------------------------
(Title of Class)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
As of March 5, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $33,665,812. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of March 5, 1999, the Registrant had 4,230,140 shares of Common Stock
outstanding.
Documents Incorporated by Reference -
None
Exhibit Index - Page IV-1.
<PAGE>
PART I
Item 1. Business
Providence and Worcester Railroad 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. Donnelly &
Sons and Tilcon Connecticut, Inc. In 1998, P&W transported nearly 30,500
carloads of freight and over 53,800 intermodal containers. 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, $256.4 million or more; Class II, $20.5 million to $256.4 million; and Class
III, less than $20.5 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,
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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 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.
Break Up of Conrail
Pursuant to the approval of the United States Surface Transportation Board
("STB"), CSX Corporation ("CSX") and Norfolk Southern Railroad ("Norfolk
Southern") have jointly acquired Consolidated Rail Corporation ("Conrail") and
are now poised to split its assets reportedly on or about June 1, 1999. CSX will
acquire and operate Conrail's New England facilities.
The impact of the division of Conrail on the Company's operations and
business is uncertain at this time. The acquisition should create additional
business opportunities as a result of longer Class I single line service on
competitive routes, particularly between the southeast and northeast. The
transaction, however, may lead to increased competition between the Company and
other freight railroads in New England.
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. In August 1997, the Company entered into an agreement with CSX that
enables the Company to market rail service between its system and New York City.
Moreover, in rendering its decision authorizing CSX's and Norfolk Southern's
acquisition of Conrail, the STB required CSX to discuss with the Company the
possibility of additional rail service between New Haven, CT and Fresh Pond
Junction (Queens), NY as a step to provide competitive rail service to and from
New York City. Although the STB has declined to compel formal discussions
between CSX and the Company, it continues to encourage the Company and CSX to
develop mutually beneficial business on this route. The Company intends to
aggressively pursue such opportunities.
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 the redevelopment of a 1,000 acre
portion of the 3,000 acre former Naval construction battalion facility at
Quonset/Davisville. The State plans to transform this waterfront site to a more
active port and industrial park. This facility already houses a number of rail
oriented industries and an auto port. To facilitate the redevelopment, the State
has executed a contract to begin construction in the spring of 1999 of a $120
million freight rail improvement project to provide additional track capacity
and double stack clearance on the Northeast Corridor between Quonset/Davisville
and the connection of the Corridor to the Company's main line at Central Falls,
R.I.
Massachusetts Highway Improvement Program
Work has begun on a significant expansion of the Company's bulk transload and
intermodal yards in Worcester in conjunction with the Massachusetts Highway
Department's $250 million project creating a direct Worcester connection to the
Massachusetts Turnpike. This project will result in a near doubling of the
Company's transload facilities over the next two years.
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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 late 2000, will provide the Company with increased access
to customers at the Port of New Haven.
Middletown/Hartford Line
The Company is pursuing the restoration of the rail line extending from
Middletown to Hartford, CT in partnership with the Connecticut Department of
Transportation. This 11 mile segment over which the Company has freight service
rights has been out of service for many years. With a planned industrial park
along this line and a new connection to other carriers in Hartford, the Company
believes restoration of this line will present revenue growth opportunities.
This line also adjoins the planned relocation site of the New England Patriot's
stadium.
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 on Long Island. Through its connections,
P&W links more than 80 communities on its lines. It operates four classification
yards (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.
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 account for roughly
half of its operating revenues. In 1998, 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 13.4%
of the Company's operating revenues. No other customer accounted for 10% or more
of its total operating revenues in 1998.
Markets
The Company transports a wide variety of commodities for its customers. In
1998, chemicals and plastics and construction aggregate were the two largest
commodity groups transported by the Company, constituting 41% and 11%,
respectively, of conventional carload freight revenues. The following table
summarizes the Company's conventional carload freight revenues by commodity
group as a percentage of such revenues:
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<TABLE>
Commodity 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Chemicals and Plastics 41% 42% 43% 44% 46%
Construction Aggregate 17 20 18 18 15
Food and Agricultural 15 15 17 17 16
Forest and Paper Products 14 13 14 13 14
Scrap Metal and Waste 6 5 3 3 3
Other 7 5 5 5 6
---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
Sales and Marketing
P&W's sales and marketing staff of three people has nearly 50 years of
combined experience in pricing and marketing railroad services. The sales and
marketing staff focuses on understanding and addressing the raw material
requirements and transportation needs of its existing customers and businesses
on its lines. The staff grows 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 and (iii) identifying and targeting the non-rail
transportation of goods into and out of the region in which the Company
operates. 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 and believes its rail system is in good
condition.
Safety of the Company's operations is of paramount importance for the benefit
and protection of the Company's employees, customers and the communities served
by its rail lines. The Company and its employees have made dramatic improvements
in preventing injuries while at the same time increasing operations and
expanding the work force. Reportable injuries have been below ten incidents per
year for the past 6 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 certain rail traffic to and from Long Island.
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.
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<PAGE>
Employees
As of January 1, 1999, the Company had 154 full-time employees, 120 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.
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 at July 1, 2004 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
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.
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.
Governmental Regulation
The Company is subject to governmental regulation by the United States Surface
Transportation Board ("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. 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.
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<PAGE>
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 automatic civil speed enforcement systems, the cost of which is anticipated
to be at least $45,000 per locomotive. The proposed order does not address
whether the federally funded high speed project or the Company will bear the
costs of required locomotive retrofits.
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.
Item 2. 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.
Virtually all of the main lines on which the Company operates are in FRA
class 3 condition (allowing 40 m.p.h. speeds) or better. The Company intends to
maintain these lines in such excellent condition.
Of the approximately 545 miles of the Company's system, 313 miles, or 55%,
are located in Connecticut, 103 miles, or 20%, are located in Massachusetts, 102
miles, or 20%, are located in Rhode Island and 28 miles, or 5%, are located in
New York.
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.
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. Work has
begun on an expansion of the Company's primary locomotive and rail car
maintenance and repair facility in Worcester, MA. This approximately $1.7
million expansion will increase capacity and productivity and enable the Company
to accept contract work for other railroads and customers. In addition, the
Company has upgraded its Plainfield, CT equipment maintenance facility to
include a modern paint shop. P&W believes that its executive and administrative
office facilities, classification yards and maintenance facilities are adequate
to support its current level of operations.
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.
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The Company has nearly $12 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 "Item 3 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.
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of December 31, 1998:
<TABLE>
<S> <C>
Description Number
Locomotive 28
Gondola 77
Flat Car 4
Ballast Car 36
Passenger Equipment 5
Caboose 2
---
Total 152
===
</TABLE>
The 28 diesel electric locomotives 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 gondolas and flat cars are considered modern rail cars and are
used by certain P&W customers. Other rail freight customers use their own
freight cars or obtain such equipment from other sources. The ballast cars are
used in track maintenance. From time to time, the Company has leased ballast
cars to other 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.
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 which will be required upon the introduction of high
speed passenger service on the Northeast Corridor scheduled for the spring of
1999.
Item 3. Legal Proceedings
In 1995 the Company entered into a settlement agreement with Bestfoods
(formerly CPC International, Inc.) resolving an environmental claim against the
Company, arising out of a 1974 rail car incident. Pursuant to the settlement
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<PAGE>
agreement, the Company paid Bestfoods $990,000 in common stock of the Company
and cash. The Company and Bestfoods agreed that in the event Bestfoods recovered
proceeds from its insurance carrier for the costs of remediation of the involved
site, the Company would be entitled to 10% of Bestfoods' net recovery after
deduction of litigation expenses. In 1997, Bestfoods obtained a judgement in its
favor from its insurance carrier for over $18 million (which amount includes
approximately $5 million of prejudgment interest) as well as an order that
obligates the insurance carrier to reimburse Bestfoods for future remediation
expenses. The insurance carrier's appeal of this judgement was unsuccessful and
it has now paid the $18 million judgement to Bestfoods. In July 1998, Bestfoods
paid $1 million to the Company as an interim payment of the Company's 10%
recovery pending final resolution of amounts to be paid to Bestfoods by its
insurance carrier. Negotiations continue between Bestfoods and the insurance
carrier concerning the payment of future expenses, the potential recovery of
litigation expenses and the resolution of a lawsuit filed by the insurance
carrier against Bestfoods and the Company (for which Bestfoods is both defending
and indemnifying the Company). The insurance policy has limits of $25 million.
The Company has invested approximately $12 million in the development of the
South Quay, approximately 33 acres of reclaimed formerly tide flowed land which
is 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
Rhode Island Coastal Resources Management Council ("CRMC") 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 CRMC have appealed this decision to the Rhode
Island Supreme Court contending that the Company possesses only a 50 year
exclusive license to develop and occupy the property which will need to 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on the American Stock Exchange ("AMEX") under the
trading 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>
Common Stock
Trading Prices Dividends Paid
High Low Preferred Common
<S> <C> <C> <C> <C>
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. 13 3/8 10 1/4 -0- .03
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
</TABLE>
As of March 5, 1999, there were approximately 723 holders of record of the
Company's Common Stock.
In 1997, the Company raised its Common Stock dividend 20%, from $.05 a share
semi-annually to $.06 a share. At a meeting of the Board of directors held
January 28, 1998, the Board modified the company's dividend policy to pay
dividends on the Common Stock quarterly. 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 and restrictions.
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Item 6. Selected Financial Data
The selected financial data set forth below has been derived from audited
financial statements. 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" and the other
information included elsewhere in
this annual report.
<TABLE>
Years Ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues $22,738 $22,083 $19,456 $19,778 $20,292
Operating expenses 20,036 18,333 17,714 17,677 17,202
------ ------ ------ ------ ------
Income from operations 2,702 3,750 1,742 2,101 3,090
Other income 4,156 638 1,660 581 1,206
Interest expense (495) (1,358) (1,371) (1,175) (1,285)
------ ------ ------ ------ ------
Income before income taxes
and extraordinary item 6,363 3,030 2,031 1,507 3,011
Provision for income taxes 2,360 1,100 780 590 1,200
------ ------ ------ ------ ------
Net income before
extraordinary item 4,003 1,930 1,251 917 1,811
Extraordinary loss from
early extinguishment of
debt, net of income tax
benefit 219 -- -- -- --
------ ------ ------ ------ ------
Net income 3,784 1,930 1,251 917 1,811
Preferred Stock dividend 3 3 3 3 31
------ ------ ------ ------ ------
Net income available to
common shareholders $3,781 $1,927 $1,248 $ 914 $1,780
====== ====== ====== ====== ======
Basic income per common
share (a) $1.13 $0.87 $0.57 $0.45 $0.99
====== ====== ====== ====== ======
Diluted income per common
share (a) $1.10 $0.81 $0.54 $0.43 $0.87
====== ====== ====== ====== ======
Weighted average
shares--basic 3,352 2,209 2,178 2,043 1,796
====== ====== ====== ====== ======
Weighted average
shares--diluted 3,433 2,489 2,461 2,136 2,077
====== ====== ====== ====== ======
Cash dividends declared on
Common Stock $ 402 $ 267 $ 218 $ 205 $ 173
====== ====== ====== ====== ======
December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Balance Sheet Data:
Total assets $84,594 $71,212 $68,491 $68,012 $61,496
Short-term debt -- 2,281 2,117 612 758
Long-term debt, less current
portion -- 11,916 12,131 12,977 10,485
Shareholders' equity 63,709 38,038 36,061 34,455 32,914
</TABLE>
(a) The income per share amounts for 1998 are stated net of a loss of $.06 per
share attributable to the extraordinary item.
II-2
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in connection with the Company's audited
financial statements and notes thereto included elsewhere in this annual report.
This annual report 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.
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 and amortization, 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 international, national and
regional economic conditions. Third, the volume of capitalized track or
recollectable projects performed by the Company's Maintenance of Way and
Communications and Signals Departments can vary significantly from year to year
thereby impacting total operating expenses.
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
The Company has one customer, Tilcon Connecticut, Inc., which accounted for
approximately 13.4%, 15.1% and 12.6% of its operating revenues in 1998, 1997 and
1996, 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.
Results of Operations
The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
II-3
<PAGE>
<TABLE>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------ ------------ ------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Freight Revenues:
Conventional carloads $19,031 83.7% $19,001 86.0% $17,050 87.6%
Containers 2,132 9.4 1,675 7.6 1,508 7.8
Non-Freight Operating Revenues:
Transportation services 640 2.8 632 2.9 455 2.3
Other 935 4.1 775 3.5 443 2.3
Total $22,738 100.0% $22,083 100.0% $19,456 100.0%
</TABLE>
The following table sets forth conventional carload freight revenues by
commodity group in dollars and as a percentage of such revenues:
<TABLE>
Years Ended December 31,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except percentages)
Chemicals and plastics $7,813 41.1% $8,000 42.1% $7,366 43.2%
Construction aggregate 3,239 17.0 3,762 19.8 3,086 18.1
Food and agricultural products
2,904 15.3 2,831 14.9 2,864 16.8
Forest and paper products 2,730 14.3 2,546 13.4 2,319 13.6
Scrap metal and waste 1,074 5.6 969 5.1 477 2.8
Other 1,271 6.7 893 4.7 938 5.5
Total $19,031 100.0% $19,001 100.0% $17,050 100.0%
</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>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------ ------------ ------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages, payroll taxes
and employee benefits $11,587 51.0% $11,023 49.9% $10,686 54.9%
Casualties and insurance 745 3.3 572 2.6 800 4.1
Depreciation and amortization
2,225 9.8 2,054 9.3 1,940 10.0
Diesel fuel 658 2.9 708 3.2 656 3.4
Car hire, net 672 2.9 598 2.7 605 3.1
Purchased services, including
legal and professional fees
1,868 8.2 1,762 8.0 1,213 6.2
Repairs and maintenance of
equipment 1,007 4.4 943 4.3 687 3.5
Track and signal materials 1,666 7.3 1,866 8.4 1,257 6.4
Other materials and supplies 1,113 4.9 1,012 4.6 848 4.4
Other 1,572 6.9 1,325 6.0 1,318 6.8
Total 23,113 101.6 21,863 99.0 20,010 102.8
Less capitalized and
recovered costs 3,077 13.5 3,530 16.0 2,296 11.8
Total $20,036 88.1% $18,333 83.0% $17,714 91.0%
</TABLE>
Year ended December 31, 1998 Compared to Year Ended December 31, 1997
Operating Revenues
Operating revenues increased $655,000, or 3.0% to $22.7 million in 1998 from
$22.1 million in 1997. This increase was comprised of a $457,000 (27.3%)
increase in net container freight revenues, a $168,000 (11.9%) increase in
non-freight operating revenues and a $30,000 (.2%) increase in conventional
freight revenues.
The increase in container freight revenues was primarily the result of an
increase in traffic volume. Total intermodal containers handled increased by
10,415, or 24.0%, to 53,823 containers in 1998 from 43,408 containers in 1997.
The average rate received per intermodal container increased slightly due to
rate increases attributable to increases in certain railroad industry cost
indices.
II-4
<PAGE>
Conventional freight revenues remained relatively unchanged between years
despite the fact that the Company's conventional freight carloadings decreased
by 565, or 1.8%, to 30,482 carloadings in 1998 from 31,047 carloadings in 1997.
The average revenue received per conventional carloading increased by a
comparable percentage, however, due to a shift in the relative volume of
commodities handled toward higher revenue commodities. The Company's
conventional freight volume was adversely affected during the latter part of
1998 by the global recession, which resulted in reduced shipments of scrap metal
and U.S. made steel. In addition, delayed award of highway construction projects
caused a decline in shipments of construction aggregate used in the production
of asphalt. Scrap metal and construction aggregates command a comparatively
lower freight rate than many of the other commodities handled by the Company.
Decreases in these commodities were partially offset by increases in volumes of
inbound raw materials to many of the Company's manufacturing customers. Such
traffic volumes increased by approximately 7.5% in 1998 and reflect a
revitalization of the Southern New England Manufacturing base as well as the
Company's successful marketing efforts.
The $168,000 increase in non-freight operating revenues resulted primarily from
increases in Maintenance of Way Department billings. Such revenues can vary from
year to year depending upon the needs of rail customers and other outside
parties.
Operating Expenses
Operating expenses increased $1,703,000, or 9.3%, to $20.0 million in 1998 from
$18.3 million in 1997. Operating expenses as a percentage of operating revenues
("operating ratio") increased to 88.1% in 1998 from 83.0% in 1997. The increase
in operating expenses is primarily attributable to a number of factors among
which are the following:
o The number of employees on the Company's payroll increased during 1998 from
147 to 154.
o Profit sharing expense for 1998 increased by $88,000 to $425,000 from
$337,000 in 1997. The increase is attributable to the substantial increase
in other non operating income generated in 1998.
o Total capitalized track expense and recovered costs for 1998 totaled $3.1
million, a $453,000 decrease from 1997,when such costs amounted to $3.5
million.
o Casualties and insurance expense increased by $173,000 to $745,000 in 1998
from $572,000 in 1997. Casualty loss expense in 1998 accounted for $111,000
of this increase since no casualty loss expense was incurred in 1997.
o Depreciation and amortization expense increased by $171,000 to $2.2 million
in 1998 from $2.1 million in 1997. This increase is attributable to
significant additions to property and equipment during 1997 and 1998 and to
amortization of goodwill related to the acquisition of Connecticut Central
Railroad Company ("Conn Central") in
April 1998.
o Net car hire expense increased by $74,000 from $598,000 in 1997 to $672,000
in 1998. This increase is attributable to the increase in inbound freight
shipments experienced during the year but has been more than offset by
demurrage revenues received from inbound freight customers.
Other Income
Other income increased $3.5 million to $4.2 million in 1998 from $638,000 in
1997. This increase is due primarily to an increase in gains from the sales of
property and easements, principally $2.3 million derived from the sale of fiber
optics cable licenses. In addition the Company received $1.0 million in 1998 as
an interim payment relating to an environmental claim paid by the Company in
prior years.
Interest Expense
Interest expense decreased $863,000 to $495,000 in 1998 from $1.4 million in
1997. This decrease is the result of the Company paying off all of its long and
short-term debt during 1998, using some of the proceeds of its public stock
offerings and other income. Prepayment penalties of $344,000 were incurred on
the early extinguishment of a portion of the Company's long-term debt, which
penalties, net of a $125,000 income tax benefit have been reported as an
extraordinary item in 1998.
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
II-5
<PAGE>
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 aggregates, which
command 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.
Liquidity and Capital Resources
The Company has historically 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 $2.3 million, $3.5 million and
$1.5 million of cash from operations in 1998, 1997 and 1996, respectively. The
company's total cash and cash equivalents increased by $6.8 million in 1998, but
decreased by $167,000 and $1.3 million in 1997 and 1996 respectively. The
principal utilization of cash during the three year period was for expenditures
for property and equipment acquisitions, principal payments on long-term debt
obligations, reduction of current liabilities and payment of dividends.
II-6
<PAGE>
During 1998, 1997 and 1996 the company generated $3.0 million, $230,000 and $1.3
million, respectively from the sales and disposals of properties not considered
essential for railroad operations and from the granting of easements and
licenses. Included in these amounts are $2.3 million generated from sales of
fiber optics cable licenses in 1998 and a $1.0 million condemnation award
received in 1996. In addition the Company received $1.0 million from Bestfoods
in 1998 as an interim payment of the Company's 10% recovery due from Bestfoods
relating to Bestfoods recovery from its insurance carrier for an environmental
claim paid by the Company in previous years. The Company holds various
properties which could be made available for sale, lease or grants of easements
and licenses. Revenues from sales of properties, easements and licenses can vary
significantly from year to year.
The company completed secondary public offerings of 1,000,000 newly issued
shares of its common stock in March 1998 and 750,000 shares in October 1998. Net
proceeds from these offerings totaled $20.1 million. These funds, along with
proceeds from sales of properties, easements and licenses, were utilized to
retire all of the Company's long and short-term borrowings and for acquisitions
of equipment. The Company intends to utilize the remaining proceeds from these
offerings of approximately $5.0 million to expand its Worcester MA maintenance
facility and for general corporate purposes including the possible acquisition
of other connecting railroads, rail lines and trackage rights, equipment
additions, and infrastructure improvements.
The Company acquired all of the outstanding common stock of Conn Central on
April 21, 1998. While the Company is not able to predict the total impact of
this acquisition upon future operations, 953 carloadings and freight revenues of
$484,000 were generated from former Conn Central rail freight customers during
the period from April 21 through December 31, 1998. In addition, the Company
intends to pursue growth opportunities on the acquired lines.
In June 1998, the Company's principal bank renewed the Company's revolving line
of credit and increased the maximum borrowings allowed by $250,000 to $2.0
million. In addition, borrowings under the line are now unsecured and bear
interest at either the prime rate or one and one half per cent over either the
one or three month London Interbank Offered Rates. The Company does not pay any
commitment fee on this line. The Company had no advances against the line of
credit during the second, third or fourth quarters of 1998.
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 $3.0 million, $2.5 million and $1.9 million for track structure and
bridge improvements in 1998, 1997 and 1996 respectively. Deferred grant income
of $144,000 in 1998, $935,000 in 1997 and $671,000 in 1996 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 sheets. Management estimates that
approximately $2.5 million of improvements to the Company's track structure and
bridges will be made in 1999, provided that sufficient funds, including grant
proceeds, are available. Improvements to the Company's track structure are made,
for the most part, by the Company's Maintenance of Way Department personnel.
In 1998, the Company paid dividends in the amount of $5.00 per share aggregating
$3,000 on its outstanding Preferred Stock and $0.12 per share aggregating
$402,000 on its outstanding Common Stock. 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, 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 construction 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
II-7
<PAGE>
Company's software programs. The Company utilizes Electronic Data Interchange
and Interline Settlement Systems through Railinc in Washington, D.C. for the
interchange of rail cars and revenue allocations with other railroads. The
Company has compatible back up mainframe systems at both its Worcester, MA and
Plainfield, CT 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, preparation 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 mid 1999. The Company believes that any modifications to its programs
resulting from Railinc changes will be minimal and that such changes can be
readily made.
The Company's contingency plan in the event other parties should be unable to
provide Year 2000 compliant electronic data is to revert to paper documentation
from these parties. However, to the extent that customers, connecting carriers
or other entities with which the Company has material relationships do not
adequately address Year 2000 issues, the Company could experience payment delays
and service disruptions which could materially adversely affect its operations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SAFS 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
looses) 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 1998 and did not have material
effects on its financial position, results of operations or footnote
disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Management is currently assessing the impact of SFAS No.
133 on the financial statements of the Company. The Company will adopt this
accounting standard on January 1, 2000, as required.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Cash and Cash Equivalents
As of December 31, 1998, the Company is exposed to market risks which primarily
include changes in U.S. interest rates.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's revolving line of credit agreement provides for
borrowings which bear interest at variable rates based on either prime rate or
one and one half percent over either the one or three month London Interbank
Offered Rates. The Company had no borrowings outstanding pursuant to the
revolving line of credit agreement at December 31, 1998. The Company believes
that the effect, if any, of reasonably possible near-term changes in interest
rates on the Company's financial position, results of operations, and cash flows
should not be material.
II-8
<PAGE>
Item 8. Financial Statements and Supplementary Data
PROVIDENCE AND WORCESTER RAILROAD COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report II-10
Balance Sheets as of December 31, 1998 and 1997 II-11
Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 II-12
Statements of Shareholders' Equity for the Years
Ended December 31,1998, 1997 and 1996 II-13
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997and 1996 II-14
Notes to Financial Statements II-15
II-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Providence and Worcester Railroad Company
Worcester, Massachusetts
We have audited the accompanying balance sheets of Providence and Worcester
Railroad Company as of December 31, 1998 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, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Deloitte & Touche LLP
Worcester, Massachusetts
March 5, 1999
II-10
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD
COMPANY BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
ASSETS December 31,
1998 1997
------- -------
<S> <C> <C>
Current Assets:
Cash and equivalents $7,294 $ 519
Accounts receivable, net of allowance for
doubtful accounts of $125 in 1998 and 1997 2,806 2,345
Materials and supplies 1,810 2,086
Prepaid expenses and other 568 167
Deferred income taxes 55 204
------- -------
Total Current Assets 12,533 5,321
Property and Equipment, net 71,895 65,891
Goodwill, net 166 --
------- -------
Total Assets $84,594 $71,212
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable, bank $ -- $1,350
Current portion of long-term debt -- 931
Accounts payable 4,046 2,083
Accrued expenses 709 931
------- -------
Total Current Liabilities 4,755 5,295
------- -------
Long-Term Debt, Less Current Portion -- 11,916
------- -------
Profit-Sharing Plan Contribution 425 337
------- -------
Deferred Grant Income 6,928 6,945
------- -------
Deferred Income Taxes 8,777 8,681
------- -------
Commitments and Contingent Liabilities
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding 647
shares in 1998 and 653 shares in 1997 32 33
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,228,131 shares in 1998 and 2,221,933 shares
in 1997 2,114 1,111
Additional paid-in capital 27,955 6,665
Retained earnings 33,608 30,229
------- -------
Total Shareholders' Equity 63,709 38,038
------- -------
Total Liabilities and Shareholders' Equity $84,594 $71,212
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
II-11
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Operating Revenues - Freight and Non-Freight $22,738 $22,083 $19,456
------ ------ ------
Operating Expenses:
Maintenance of way and structures 3,593 3,035 2,815
Maintenance of equipment 2,063 1,874 1,555
Transportation 5,244 4,987 4,917
General and administrative 4,103 3,764 3,859
Depreciation 2,192 2,054 1,940
Taxes, other than income taxes 2,169 2,021 2,023
Car hire, net 672 598 605
------ ------ ------
Total Operating Expenses 20,036 18,333 17,714
------ ------ ------
Income from Operations 2,702 3,750 1,742
------ ------ ------
Other Income 4,156 638 1,660
------ ------ ------
Interest Expense:
Capital Properties, Inc. (99) (410) (437)
Other (396) (948) (934)
------ ------ ------
Total Interest Expense (495) (1,358) 1,371)
------ ------ ------
Income before Income Taxes and Extraordinary
Item 6,363 3,030 2,031
Provision for Income Taxes 2,360 1,100 780
------ ------ ------
Income before Extraordinary Item 4,003 1,930 1,251
Extraordinary Loss from Early Extinguishment
of Debt, Net of Income Tax Benefit 219 -- --
------ ------ ------
Net Income 3,784 1,930 1,251
Preferred Stock Dividends 3 3 3
------ ------ ------
Net Income Available to Common Shareholders $3,781 $1,927 $1,248
====== ====== ======
Basic Income Per Common Share:
Income before Extraordinary Item $1.19 $ .87 $ .57
Extraordinary Item (.06) -- --
------ ------ ------
Net Income $1.13 $ .87 $ .57
====== ====== ======
Diluted Income Per Common Share:
Income before Extraordinary Item $1.16 $ .81 $ .54
Extraordinary Item (.06) -- --
------ ------ ------
Net Income $1.10 $ .81 $ .54
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements
II-12
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
For the Years Ended December 31, 1998,1997, and 1996
Additional Total
Preferred Common Paid-in Retained Shareholders'
Stock Stock Capital Earnings Equity
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 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 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 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 9,828 common
shares for stock options
exercised, employee stock
purchases and other 5 91 96
Issuance of 1,750,000 common
shares for underwritten
public stock offerings (net
of expenses of $2,538) 875 9,181 20,056
Issuance of 200,000 common
shares for stock purchase
warrants exercised 100 1,320 1,420
Issuance of 22,156 common
shares to fund the Company's
1997 profit sharing plan
contribution 11 326 337
Issuance of 23,614 shares for
the acquisition of Conn
Central 11 372 383
Conversion of 6 preferred
shares into 600 common
shares (1) 1
Dividends:
Preferred stock, $5.00 per
share (3) (3)
Common stock, $.12 per share (402) (402)
Net income for the year 3,784 3,784
------ ------ ------- ------- -------
Balance, December 31, 1998 $32 $2,114 $27,955 $33,608 $ 63,709
====== ====== ======= ======= =======
The accompanying notes are an integral part of the financial statements
</TABLE>
II-13
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $3,784 $1,930 $1,251
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 2,225 2,054 1,940
Amortization of deferred grant income (161) (149) (136)
Profit-sharing plan contribution to be
funded with common stock 425 337 226
Gains from sale, condemnation and
disposal of property and equipment (2,561) (157) (1,103)
Gain from recovery of environmental claim (1,000)
Deferred income taxes 245 260 600
Other, net 74 65 26
Increase (decrease) in cash from:
Accounts receivable (504) 217 68
Materials and supplies 276 (1,065) (290)
Prepaid expenses and other (401) (46) 18
Accounts payable and accrued expenses (94) 85 (1,140)
------ ------ ------
Net cash flows from operating activities 2,308 3,531 1,460
------ ------ ------
Cash Flows from Investing Activities:
Purchase of property and equipment (6,751) (5,160) (5,465)
Proceeds from sale and condemnation of
property and equipment 2,996 230 1,319
Proceeds from recovery of environmental
claim 1,000
Proceeds from deferred grant income 203 1,475 901
------ ------ ------
Net cash flows used by investing activities (2,552) (3,455) (3,245)
------ ------ ------
Cash Flows from Financing Activities:
Net borrowings (payments) under line of
credit (1,350) (90) 1,440
Payments of long-term debt (11,491) (699) (789)
Dividends paid (405) (270) (221)
Proceeds from long-term debt 730
Net proceeds from public offerings of
common stock 20,056
Issuance of common shares for stock options
exercised, employee stock purchases and
cash acquired in acquisition of subsidiary 209 86 29
------ ------ ------
Net cash flows from (used by) financing
activities 7,019 (243) 459
------ ------ ------
Increase (Decrease) in Cash and Equivalents 6,775 (167) (1,326)
Cash and Equivalents, Beginning of Year 519 686 2,012
------ ------ ------
Cash and Equivalents, End of Year $7,294 $ 519 $ 686
====== ====== ======
Supplemental Disclosures:
Cash paid during year for:
Interest $ 493 $1,328 $1,333
====== ====== ======
Income taxes $2,342 $ 873 $ 60
====== ====== ======
The accompanying notes are an integral part of the financial statements
</TABLE>
II-14
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
(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. Through its
connecting carriers, it services customers
located throughout North America.
One customer accounted for approximately 13.4%, 15.1% and 12.6% of the
Company's operating revenues in 1998, 1997 and 1996, respectively.
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 is 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 assets 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:
Depreciable Properties Estimated Useful Lives
---------------------- ----------------------
Track structure 20 to 67 years
Buildings and other structures 33 to 45 years
Equipment 4 to 25 years
The Company continually evaluates long-lived assets and certain
identifiable intangibles held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset 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, Massachusetts and Rhode Island
for reimbursement of expenditures 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 ($161 in 1998, $149 in 1997, and $136 in 1996).
Grant proceeds utilized to finance public improvements, such as grade
crossings and signals, are recorded as a direct offset to the related
expense.
II-15
<PAGE>
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 collectability 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
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>
Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income $3,784 $1,930 $1,251
Interest expense impact (net of tax) on
assumed conversion of debt to exercise
warrants -- 84 84
------ ------ ------
Net income available to common
shareholders assuming dilution $3,784 $2,014 $1,335
====== ====== ======
</TABLE>
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Weighted average shares for basic 3,352,052 2,208,820 2,178,382
Dilituve effect of convertible preferred
stock, options and warrants 81,104 280,450 282,295
--------- --------- ---------
Weighted average shares for diluted 3,433,156 2,489,270 2,460,677
========= ========= =========
</TABLE>
Employee Stock Option Plan
The Company accounts for stock-based awards to employees using the
intrinsic value method.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles 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.
II-16
<PAGE>
Fair Value of 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 at December 31, 1997.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
which requires businesses to disclose comprehensive income and its
components in their general-purpose financial statements. The Company has
no comprehensive income.
Segment Reporting
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which requires
disclosure of certain financial and descriptive information about a
company's operating segments. The Company organizes itself as one segment
reporting to the chief operating decision maker. Products and services
consist primarily of interstate freight rail services. These include the
movement of freight in both conventional freight cars and in intermodal
containers on flat cars over the Company's rail lines, as well as
non-freight transportation services such as switching, weighing and special
trains and services rendered to freight customers and other outside parties
by the Company's Maintenance of Way, Communications and Signals and
Maintenance of Equipment Departments.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", effective
for fiscal years beginning after June 15, 1999. The new standard requires
that all companies record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting.
Management is currently assessing the impact of SFAS No. 133 on the
financial statements of the Company. The Company will adopt this accounting
standard on January 1, 2000, as required.
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
December 31,
1998 1997
------- -------
<S> <C> <C>
Land and improvements $9,124 $9,128
South Quay property 11,845 11,464
Track structure 51,119 48,241
Buildings and other structures 5,692 5,318
Equipment 21,454 17,196
------- -------
99,234 91,347
Less accumulated depreciation (27,339) (25,456)
------- -------
Total property and equipment, net $71,895 $65,891
======= =======
</TABLE>
II-17
<PAGE>
South Quay Property
Pursuant to permits issued by the United States Department of the Army
Corps of Engineers ("ACE") and the Rhode Island Coastal Resources
Management Council ("CRMC"), the Company has created 33 acres of waterfront
land in East Providence, Rhode Island ("South Quay") designed to capitalize
on the growth of intermodal transportation, utilizing rail, water and
highway connections. The property has good 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. The ACE permit has been extended to December
31, 2003 and the Company has a request pending for extension of the CRMC
permit which expired in 1998. The Company intends to construct a vessel
unloading area if it is able to attract user or investment commitments. The
Company has engaged in discussions with potential users interested in
utilizing the property for off loading bulk products such as salt and
construction aggregate. The Company has also explored the development of
the facility for offloading 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 CRMC, the Superior Court ruled
that the Company is the fee simple absolute owner of the South Quay. The
state and CRMC have appealed the matter to the Rhode Island Supreme Court
contending that the Company possesses only a 50 year exclusive license to
develop and occupy the property which will need to 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.
3. Notes Payable, Bank
The Company has a revolving line of credit with its principal bank in the
amount of $2,000 expiring June 1, 1999. Borrowings outstanding under this
line of credit are unsecured, due on demand and bear interest at either the
bank's prime rate or one and one half percent over either the one or three
month London Interbank Offered Rates. The Company pays no commitment fee on
this line. There were no loans outstanding under the line as of December
31, 1998.
II-18
<PAGE>
4. Long-Term Debt and Extraordinary Loss on Early Extinguishment of Debt
<TABLE>
Long-term debt consists of the following: December 31,
1998 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 $ -- $3,993
8.69% note payable to a commercial lender;
certain equipment, track structure and
accounts receivable pledged as collateral -- 3,229
7.9% note payable to a commercial lender,
three locomotives pledged as collateral -- 689
10% subordinated note payable to
Massachusetts Capital Resource Company
("MCRC"), effective interest rate of 10.3%,
Massachusetts track structure pledged as
collateral -- 4,936
------- -------
Total long-term debt -- 12,847
Less current portion -- 931
------- -------
Long-term debt, less current portion $ -- $11,916
====== =======
</TABLE>
The Company utilized a substantial portion of the proceeds from its common
stock offerings and other income to pre-pay all of its outstanding
long-term debt which resulted in the release of all collateral liens.
Prepayment penalties of $344 were incurred on early extinguishment of a
significant portion of this debt, which penalties net of a $125 income tax
benefit have been reported as an extraordinary item on the accompanying
statement of income for 1998.
5. Accrued Expenses
<TABLE>
Accrued expenses consist of the following: December 31,
1998 1997
------- -------
<S> <C> <C>
Casualty and environmental claims $ 30 $ 279
All other 679 652
------- -------
$ 709 $ 931
====== ======
</TABLE>
Casualty loss and environmental claims expense, included in transportation
expense, amounted to $111 in 1998 and $171 in 1996. The Company did not
incur any casualty loss and environmental claims expense in 1997.
6. Other Income
<TABLE>
Other income consists of the following: Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Gain from sale, condemnation and
disposal of property and equipment
and easements, net $2,561 $ 157 $1,103
Recovery of prior year
environmental claim (See Note 8) 1,000 -- --
Rentals and license fees, under
various operating leases 423 470 494
Interest 172 11 63
------ ------ ------
$4,156 $ 638 $1,660
====== ====== ======
</TABLE>
Gain from sale, condemnation and disposal of property and equipment and
easements for 1998 includes $2,293 received from the sale of long term
fiber optics cable licenses.
II-19
<PAGE>
7. Provision for Income Taxes
<TABLE>
The provision for income taxes consists of the following:
Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $1,865 $ 750 $ 150
State 125 90 30
------ ------ ------
1,990 840 180
Deferred, Federal 245 260 600
------ ------ ------
$2,235 $1,100 $ 780
====== ====== ======
</TABLE>
The 1998 provision for income taxes is net of a $125 current income tax
benefit related to the extraordinary loss from early extinguishment of
debt.
The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax
provision:
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Depreciation and amortization $ 194 $ 148 $ 87
General business tax credits 61 588 238
Deferred grant income (15) (478) (271)
Gain from sale, condemnation and
disposal of properties and equipment (83) (17) 319
Accrued casualty and environmental
claims 88 14 218
Other -- 5 9
------ ------ ------
$ 245 $ 260 $ 600
====== ====== ======
</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, 1998 and 1997 are as follows:
<TABLE>
December 31,
1998 1997
------- -------
Deferred income tax liabilities-
Differences between book and tax basis of
<S> <C> <C>
properties $11,198 $11,087
------- -------
Deferred income tax assets:
Tax credit carryforwards -- 61
Deferred grant income 2,402 2,387
Accrued casualty losses 11 99
Other 63 63
------- -------
2,476 2,610
------- -------
Net deferred income tax liability $8,722 $8,477
====== ======
</TABLE>
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
Depreciation of properties acquired from
bankrupt railroads having a tax basis
in excess of cost (1) (1) (1)
Non-deductible expenses 2 1 4
State income tax, net of federal income
tax benefit 2 2 1
------ ------ ------
Effective tax rate 37% 36% 38%
====== ====== ======
</TABLE>
II-20
<PAGE>
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.
In 1995 the Company entered into a settlement agreement with Bestfoods
(formerly CPC International, Inc.) resolving an environmental claim against
the Company, arising out of a 1974 rail car incident. Pursuant to the
settlement agreement, the Company paid Bestfoods $990 in common stock of
the company and cash. The Company and Bestfoods agreed that in the event
Bestfoods recovered proceeds from its insurance carrier for the costs of
remediation of the involved site, the Company would be entitled to 10% of
Bestfoods' net recovery after deduction of litigation expenses. In 1997,
Bestfoods obtained a judgement in its favor from its insurance carrier for
over $18,000 (which amount includes approximately $5,000 of prejudgment
interest) as well as an order that obligates the insurance carrier to
reimburse Bestfoods for future remediation expenses. The insurance
carrier's appeal of this judgement was unsuccessful and it has now paid the
$18,000 judgement to Bestfoods. In July 1998, Bestfoods paid $1,000 to the
Company as an interim payment of the Company's 10% recovery pending final
resolution of amounts to be paid to Bestfoods by its insurance carrier.
Negotiations continue between Bestfoods and the insurance carrier
concerning the payment of future expenses, the potential recovery of
litigation expenses and the resolution of a lawsuit filed by the insurance
carrier against Bestfoods and the Company (for which Bestfoods is both
defending and indemnifying the Company). The insurance policy has limits of
$25,000.
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.
9. Issuance of Common Stock:
In March 1998 the Company completed an underwritten secondary public
offering of common stock and issued 1,000,000 shares of common stock at
$14.25 per share. In October 1998 the Company completed another secondary
public offering of common stock and issued 750,000 shares of Common Stock
at $11.125 per share. Net proceeds from these offerings amounted to
$20,056. A substantial portion of these funds were utilized to retire the
Company's long and short-term debt and for the acquisition of rail cars.
The Company intends to utilize the remaining proceeds from these offerings
to expand its Worcester, MA maintenance facility and for general corporate
purposes including possible acquisitions of other connecting railroads,
rail lines and trackage rights; equipment additions and infrastructure
improvements.
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. In connection with the October Offering the
Company sold to the underwriter warrants to purchase up to 75,000 shares of
common stock at an exercise price of $17.24 per share. These warrants
become exercisable in 1999, one year from the effective dates of the
respective Offerings, and expire four years thereafter. They grant to the
holders thereof certain demand and "piggyback" rights of registration of
the securities issuable upon exercise. These warrants have not been
included in the calculation of diluted income per common share since their
effect is antidilutive.
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.
10. Acquisition of Connecticut Central Railroad Company:
On April 21, 1998 the Company acquired all of the outstanding common stock
of Connecticut Central Railroad Company ("Conn Central") for 20,000 shares
of newly issued common stock of the Company. The Company issued an
additional 3,614 shares of its common stock to retire $50 of debt owed by
Conn Central to two of its former shareholders. The total fair market value
of the shares issued was $383, which exceeded the fair market value of the
net assets acquired by $199, which amount, net of amortization, is reported
as goodwill on the accompanying balance sheet. The Company is amortizing
this goodwill over a period of three years. Conn Central's former
II-21
<PAGE>
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. Pro forma information
would not be materially different from historical information.
11. 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 (211,407 shares at December 31, 1998). 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>
Weighted Average
---------------
Number Exercise Fair
of shares Price Value
--------- --------- -------
<S> <C> <C> <C>
Outstanding at January 1, 1996 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
Granted 8,040 18.38 $7.98
Exercised (3,574) 7.15
Expired (80) 18.38
-------
Outstanding and exercisable at
December 31, 1998 38,404 9.13
======
</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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Average risk-free interest rate 4.53% 5.75% 6.4%
Expected life of option grants 7.0 years 7.0 years 7.0 years
Expected volatility of underlying stock 36% 29% 22%
Expected dividend payment rate, as
a percentage of the share price
on the date of grant .65% 1.26% 1.45%
</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.
II-22
<PAGE>
The following table sets forth information regarding options at December
31, 1998:
<TABLE>
Range of Number Weighted Average
Number Exercise Currently Exercise Remaining
of Options Prices Exercisable Price Life (in years)
--------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C> <C>
5,791 $3.25 - 4.38 5,791 $3.75 3
20,406 5.50 - 7.88 20,406 7.18 6
4,247 8.50 - 12.75 4,247 8.50 1
7,960 18.375 7,960 18.375 9
</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 available to common
shareholders and income per share would have been as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
------ ------ ------
Net income available to common shareholders:
<S> <C> <C> <C>
As reported $3,781 $1,927 $1,248
Pro forma 3,764 1,919 1,243
Basic income per share:
As reported 1.13 .87 .57
Pro forma 1.12 .87 .57
Diluted income per share:
As reported 1.10 .81 .54
Pro forma 1.10 .81 .54
</TABLE>
The income per share figures for 1998 are net of a $.06 per share loss
attributable to an extraordinary item.
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 $425 in 1998, $337 in 1997 and $226 in
1996. The Company made its 1996 and 1997 contributions and intends to make
its 1998 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 $197 in
1998, $196 in 1997 and $189 in 1996.
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 which was established in
1997. Any shares purchased under the ESPP are subject to a two year
lock-up. ESPP purchases amounted to 5,504 shares in 1998 and 2,846 in 1997.
II-23
<PAGE>
12. Preferred Stock
The Company's $50 par value preferred stock is convertible into 100 shares
of common stock at the option of the shareholder. The noncumulative stock
dividend is fixed by the Company's Charter at an annual 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.
13. Selected Quarterly Financial Data (Unaudited)
Historically the Company has experienced lower operating revenues in the
first quarter of the year. The following table sets forth selected
financial data for each quarter of 1998 and 1997. The information for each
of these quarters is unaudited but includes all normal recurring
adjustments that the Company considers necessary for a fair presentation.
These results, however are not necessarily indicative of results for any
future period.
<TABLE>
Year Ended December 31, 1998
---------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating Revenues $4,983 $5,909 $6,393 $5,453
Income from Operations 378 787 1,500 37
Income before Extraordinary
Item 136 1,988 1,666 213
Net Income 136 1,818 1,642 188
Basic Income Per Common Share:
Income before Extraordinary
Item $ .06 $ .58 $ .48 $ .05
Net Income .06 .53 .47 .05
Diluted Income Per Common Share:
Income before Extraordinary
Item $ .06 $ .56 $ .47 $ .05
Net Income .06 .51 .46 .04
</TABLE>
<TABLE>
Year Ended December 31, 1997
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating Revenues $4,682 $5,596 $5,947 $5,858
Income from Operations 275 823 1,721 931
Net Income 63 459 959 449
Basic Income Per Common Share $ .03 $ .21 $ .43 $ .20
Diluted Income Per Common
Share $ .03 $ .19 $ .41 $ .19
</TABLE>
* * * * * * *
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
II-24
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
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. There are currently three directors
elected by the holders of the Common Stock and nine directors elected by the
holders of the Preferred Stock. 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:
Name Age Position
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
Richard W. Anderson (c) 51 Director
Frank W. Barrett(b) 59 Director
Phillip D. Brown(b) 55 Director
John P. Burnham (c) 58 Director
John H. Cronin(b) 65 Director
J. Joseph Garrahy(b) 68 Director
John J. Healy(b) 63 Director
William J. LeDoux(a) 67 Director
Charles M. McCollam, Jr.(a) 66 Director
(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 and
executive officer.
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, Inc., a real estate holding company of which he is also a Director.
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. Mrs. Eddins resigned her position with the
Company effective March 1999.
III-1
<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.
Richard W. Anderson, Director. Mr. Anderson has been a Director of the
Company since 1998. He is Senior Vice President of Massachusetts Capital
Resource Company ("MCRC"), a private investment firm funded by major
Massachusetts based life insurance companies providing higher risk growth
capital to Massachusetts businesses. He began working at MCRC in 1981 as Vice
President. He was promoted to Senior Vice President in 1985.
Frank W. Barrett, Director. Mr. Barrett has been a Director of the Company
since 1995. From 1993 to 1998 he was Executive Vice President at Springfield
Institution for Savings ("SIS"). Effective January 1, 1999 he became Executive
Vice President and Chief Lending Officer of Family Bank. Family Bank is a
Massachusetts subsidiary of Peoples Heritage Financial Group and the acquirer of
SIS. He is also a director of Dairy Mart Convenience Store, Inc.
Phillip D. Brown, Director. Mr. Brown has been a Director of the Company
since 1995. He has been President and Chief Executive Officer of Unibank for
Savings, a regional bank in central Massachusetts since August 1993. From 1990
until that time, Mr. Brown was the President of Citizens Bank of Massachusetts.
Mr. Brown resigned as a Director of the Company in January 1999.
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 Connecticut Central
Railroad Company ("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.
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. Mr.
Garrahy is also a director of Grove Real Estate Investment Trust.
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. Prior thereto, 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. He owns and operates a number of insurance businesses in the
State of Connecticut, as well as McCollam Associates, a consulting firm. He was
the Chief of Staff to a former governor of Connecticut.
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 currently John H. Cronin,
Chairman, J. Joseph Garrahy and Frank W. Barrett. William J. LeDoux, Chairman,
John J. Healy and Charles M. McCollam, Jr. currently 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
III-2
<PAGE>
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.
Item 11. Executive Compensation
The following table summarizes the compensation paid or accrued by the Company
during the three year period ended December 31, 1998, to its Chief Executive
Officer and each of its four most highly compensated executive officers who
earned more than $100,000 in salary and bonus in 1998, for services rendered in
all capacities to the Company during 1998.
<TABLE>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying
Other Options All Other
Name and Principal Year Salary(a) Annual to Purchase Compensation(b)
Position Compensation Common Stock
<S> <C> <C> <C> <C> <C>
Robert H. Eder 1998 $292,286 $25,140(c) 0 $48,696
Chairman of the 1997 288,530 0 0 47,453
Board and
Chief Executive 1996 289,216 0 0 47,617
Officer
Orville R. Harrold 1998 240,382 20,000(d) 1,011 43,940
President and Chief 1997 234,588 0 913 42,526
Operating Officer 1996 231,787 0 932 40,508
Heidi J. Eddins (e) 1998 152,472 20,000(d) 355 12,800
Vice President, 1997 138,920 0 311 10,702
Secretary
and General 1996 133,997 0 313 9,381
Counsel
Robert J. Easton 1998 126,038 16,000(d) 310 11,412
Treasurer 1997 123,232 0 210 9,353
1996 120,191 0 210 8,430
</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 1998 premiums paid for
life insurance coverage in the amounts of $35,896 and $31,140, respectively.
(c)Includes the cost of a vehicle purchased for Mr. Eder.
(d) Bonuses
(e) Mrs. Eddins resigned effective March 12, 1999 to accept a position with
another company.
III-3
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock options
under the Company's Non-Qualified Stock Option Plan to the Named Executive
Officers during the Company's last fiscal year. The Company does not issue stock
appreciation rights.
<TABLE>
Number of
Securities % of Total
Underlying Options
Options Granted Exercise Expiration
Name Granted(a) To
Employees Price Date
In Fiscal
1998
<S> <C> <C> <C> <C>
Orville R. Harrold 1,011 14.4% $18.375 01/02/08
Heidi J. Eddins 355 5% $18.375 01/02/08
Robert J. Easton 310 4.4% $18.375 01/02/08
</TABLE>
(a) The options were all granted on January 2, 1998 and became exercisable on
July 2, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth individual exercises of stock options during
1998 and the year-end values of options to purchase common stock held by the
Named Executive Officers as of December 31, 1998.
<TABLE>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at at
December 31, December 31,
1998 1998(b)
----------- -------------
Shares
Acquired Value Exercisable / Exercisable /
Name on Realized(a) Unexercisable Unexercisable
Exercise
<S> <C> <C> <C> <C>
Orville R. Harrold 1,175 $ 7,380 1,403/0 $1,519/0
Heidi J. Eddins 200 $ 863 939/0 $2,457/0
Robert J. Easton 173 $ 606 967/0 $3,226/0
</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, 1998,
which was $12.375.
III-4
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of March 5, 1999, by each person who is known
by the Company to beneficially own more than 5% of the outstanding shares of
Common Stock, each of the Company's executives officers and directors; and all
directors and executive officers of the Company as a group:
<TABLE>
Name Number Percentage
<S> <C> <C>
Robert H. Eder(a) 892,742 20.9%
Orville R. Harrold(b) 24,095 *
Robert J. Easton(c) 2,513 *
Heidi J. Eddins(d) 4,449 *
Richard W. Anderson(e) 200,100 4.7%
Frank W. Barrett(f) 840 *
John P. Burnham 10,500 *
John H. Cronin(h) 1,540 *
J. Joseph Garrahy(i) 1,150 *
John J. Healy(j) 1,000 *
William J. LeDoux(k) 1,650 *
Charles M. McCollam, Jr.(l) 1,010 *
Kennedy Capital Management, Inc.(m) 217,700 5.1%
All executive officers and
directors as a group 1,142,652 26.7%
(13 people)(n)
</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) 1,273 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 967 shares of Common Stock issuable under stock options exercisable
within 60 days.
(d)Includes 900 shares of Common Stock held by Mrs. Eddins' minor children
under the Uniform Gift to Minors Act and 939 shares of Common Stock
issuable under stock options exercisable within 60 days.
(e)Includes 200,000 shares of common stock held by Massachusetts Capital
Resource Company of which Mr. Anderson disclaims beneficial ownership. Mr.
Anderson is Senior Vice President of Massachusetts Capital Resource
Company.
(f)Includes 340 shares of Common Stock issuable under stock options
exercisable within 60 days.
(g)Includes 573 shares of Common Stock issuable under stock options
exercisable within 60 days.
(h)Includes 210 shares of Common Stock issuable under stock options
exercisable within 60 days.
(i)Includes 150 shares of Common Stock issuable under stock options
exercisable within 60 days.
(j)Includes 700 shares of Common Stock issuable under stock options
exercisable within 60 days.
(k)Includes 1,050 shares of Common Stock issuable under stock options
exercisable within 60 days.
(l)Includes 110 shares of Common Stock issuable under stock options
exercisable within 60 days.
(m)Kennedy Capital Management, Inc.'s address is 10829 Olive
Boulevard, St. Louis, MO 63141-7739.
(n)Includes 50,000 shares of Common Stock issuable upon conversion of
Preferred Stock and 5,859 shares of Common Stock issuable under stock
options exercisable within 60 days.
III-5
<PAGE>
Item 13. Certain Relationships and Related Transactions
On January 1, 1988, in accordance with a plan of distribution, shares of the
Company were distributed to the stockholders of Capital Properties, Inc.
("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 twenty years with interest at 12% per year,
prepayable at any time without penalty. The Capital Properties note was secured
by a first mortgage on the Company's operating right-of-way in Worcester County,
Massachusetts. During 1995, the Company and Capital Properties negotiated an
agreement reducing the interest rate to 10% and providing for the Company's
prepayment of $1,800,000 on its note. Prior to negotiating the agreement, the
Company made additional voluntary prepayments totaling $300,000, $55,000 and
$200,000 during 1994, 1995 and 1996, respectively. The Company repaid the
balance of the Capital Properties note (approximately $3.9 million) with the
proceeds of an offering and sale of 1,000,000 shares of its common stock in
March 1998 (March offering).
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.
In 1998, the Company retired its outstanding debt obligations to Massachusetts
Capital Resource Company ("MCRC"). MCRC, a private investment fund, provided the
Company with $5.0 million in financing in December 1995 for which the Company
issued a subordinated note (the "MCRC Note"), bearing interest at the rate of
10% per annum, payable in quarterly installments with a maturity date of
December 31, 2005. In connection with the financing, the Company also issued to
MCRC warrants for the purchase of up to 200,000 shares of Common Stock at an
exercise price of $7.10 per share (the "MCRC Warrants"). Upon the completion of
the March Offering, pursuant to the terms of the MCRC Note and the MCRC
Warrants, MCRC applied $1.4 million of the amount due under the MCRC Note toward
the exercise of the MCRC Warrants, leaving a remaining principal balance of $3.6
million on the MCRC Note. Payments were made on April 21, May 19, June 15, July
23 and October 23, 1998 to retire this obligation. Director Richard W. Anderson
is Senior Vice President of MCRC. While the Company was indebted to MCRC, MCRC
had the right to have an observer at the Company's Board of Directors' meetings.
Mr. Anderson was so designated by MCRC and served in that capacity until
retirement of the MCRC Note in 1998.
III-6
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a)(1) All financial statements:
An index of financial statements is included in Item 8, page II-10 of
this annual report
(2) Financial Statement schedules:
Schedule II Valuation and Qualifying Accounts Page IV-3
All other schedules are omitted because they are not applicable
or not required, or because the required information is shown either
in the financial statements or the notes thereto.
(3) Listing of Exhibits.
(10A) Material Contracts (incorporated by reference to Exhibit 10 to
the registration statement of the Registrant on Form 10, to the
Non-Qualified Stock Option Plan and Employee Stock Purchase Plan of
the Registrant on Forms S-8 and to the registration statements of the
Registrant on Form S-1).
(23) Independent Auditors' Consent
(b) The Company did not file any reports on Form 8-K during the year
ended December 31, 1998.
(c) Exhibits (annexed).
Financial Statement Schedules. See item (a) (2.) above
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
/s/ Robert H. Eder
By Robert H. Eder
Chief Executive Officer
Dated: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Robert H. Eder
Chief Executive March 30, 1999
Robert H. Eder Officer and Chairman
(Principal Executive Officer)
/s/ Orville R. Harrold
President and March 30, 1999
Orville R. Harrold Director
(Chief Operating Officer)
/s/ Robert J. Easton
Treasurer and March 30, 1999
Robert J. Easton Director
(Principal financial
officer and principal
accounting officer)
/s/ Frank W. Barrett
Director March 30, 1999
Frank W. Barrett
/s/ John H. Cronin
Director March 30, 1999
John H. Cronin
/s/ J. Joseph Garrahy
Director March 30, 1999
J. Joseph Garrahy
IV-2
<PAGE>
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSAND DOLLARS)
<TABLE>
Column A Column B Column C Additions Column D Column E
(1) (2)
Balance Charged to Charged to Balance
at costs and other at end
Description beginning expenses accounts Deductions of
of period describe(B) (A) period
Allowance for doubtful
accounts:
Year ended December 31,
1998
<S> <C> <C> <C> <C>
$ 125 $ 15 $(15) $125
===== ==== ==== ====
Year ended December 31,
1997 $ 125 $ 43 $(43) $125
===== ==== ==== ====
Year ended December 31,
1996 $ 125 $ 7 $ (7) $125
===== ==== ==== ====
</TABLE>
(A) Bad debts written off.
(B) Recovery of bad debts previously written off.
IV-3
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S REPORT
We consent to the incorporation by reference in Registration Statement Nos.
333-65937 and 333-65949 of Providence and Worcester Railroad Company on Form S-8
of our report dated March 5, 1999 appearing in this Annual Report on Form 10-K
of Providence and Worcester Railroad Company
for the year ended December 31, 1998.
Deloitte & Touche LLP
Worcester, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,294
<SECURITIES> 0
<RECEIVABLES> 2,931
<ALLOWANCES> 125
<INVENTORY> 1,810
<CURRENT-ASSETS> 12,533
<PP&E> 99,234
<DEPRECIATION> 27,339
<TOTAL-ASSETS> 84,594
<CURRENT-LIABILITIES> 4,755
<BONDS> 0
0
32
<COMMON> 2,114
<OTHER-SE> 61,563
<TOTAL-LIABILITY-AND-EQUITY> 84,594
<SALES> 0
<TOTAL-REVENUES> 26,894
<CGS> 0
<TOTAL-COSTS> 20,036
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 495
<INCOME-PRETAX> 6,363
<INCOME-TAX> 2,360
<INCOME-CONTINUING> 4,003
<DISCONTINUED> 0
<EXTRAORDINARY> 219
<CHANGES> 0
<NET-INCOME> 3,784
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.10
</TABLE>
