UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16704
PROVIDENCE AND WORCESTER RAILROAD COMPANY
-----------------------------------------
(Exact name of registrant as specified in its charter)
------------------------------------------------------
Rhode Island 05-0344399
----------------------------- --------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
----------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 755-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.)
YES X NO ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 1999, the registrant has 4,277,820 shares of common stock, par
value $.50 per share, outstanding.
1
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
Index
Part I - Financial Information
Item 1 -Financial Statements:
Balance Sheets - September 30, 1999 and December
31, 1998 ..................................................... 3
Statements of Income -
Three and Nine Months Ended
September 30, 1999 and 1998 .................................. 4
Statements of Cash Flows -
Nine months Ended
September 30, 1999 and 1998 .................................. 5
Notes to Financial
Statements ................................................... 6-8
Item 2 -Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 9-13
Item 3 -Quantitative and Qualitative Disclosures About Market Risk.. 13
Part II - Other Information:
Item 6 -Exhibits and Reports on Form 8-K ......................... 14
Signatures .............................................................. 15
2
<PAGE>
Item 1. Financial Statements
- -----------------------------
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS (Unaudited)
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
ASSETS
SEPTEMBER 30,DECEMBER 31,
1999 1998
------- -------
<S> <C> <C>
Current Assets:
Cash and equivalents ................................ $ 5,072 $ 7,294
Accounts receivable, net of allowance for
doubtful accounts of $125 in 1999 and 1998 ......... 3,592 2,806
Materials and supplies .............................. 2,191 1,810
Prepaid expenses and other .......................... 129 568
Deferred income taxes ............................... 67 55
------- -------
Total Current Assets ............................... 11,051 12,533
Property and Equipment, net .......................... 74,485 71,895
Goodwill, net ........................................ 180 166
------- -------
Total Assets ......................................... $85,716 $84,594
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 2,303 $ 4,046
Accrued expenses .................................... 594 709
Income taxes payable ................................ 282 --
------- -------
Total Current Liabilities .......................... 3,179 4,755
------- -------
Profit-Sharing Plan Contribution ..................... 400 425
------- -------
Deferred Grant Income ................................ 7,177 6,928
------- -------
Deferred Income Taxes ................................ 8,819 8,777
------- -------
Commitments and Contingent Liabilities ...............
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding
647 shares ......................................... 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,277,820 shares in 1999 and 4,228,131
shares in 1998 ..................................... 2,139 2,114
Additional paid-in capital .......................... 28,496 27,955
Retained earnings ................................... 35,474 33,608
------- -------
Total Shareholders' Equity ......................... 66,141 63,709
------- -------
Total Liabilities and Shareholders' Equity ........... $85,716 $84,594
======= =======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
3
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues - Freight
and Non-Freight ................. $ 5,961 $ 6,393 $16,394 $17,285
-------- -------- -------- --------
Operating Expenses:
Maintenance of way and
structures ..................... 1,116 766 2,640 2,307
Maintenance of equipment ........ 532 534 1,632 1,557
Transportation .................. 1,549 1,280 4,238 3,884
General and administrative ...... 1,206 1,009 3,099 3,073
Depreciation .................... 618 550 1,782 1,620
Taxes, other than income
taxes .......................... 573 551 1,772 1,691
Car hire, net ................... 161 203 423 488
-------- -------- -------- --------
Total Operating Expenses ....... 5,755 4,893 15,586 14,620
-------- -------- -------- --------
Income from Operations ........... 206 1,500 808 2,665
Other Income ..................... 2,417 1,259 2,839 3,855
Interest Expense ................. -- (22) -- (485)
-------- -------- -------- --------
Income before Income Taxes and
Extraordinary Item .............. 2,623 2,737 3,647 6,035
Provision for Income Taxes ....... 935 1,071 1,310 2,245
-------- -------- -------- --------
Income before Extraordinary
Item ............................ 1,688 1,666 2,337 3,790
Extraordinary Loss from Early
Extinguishment of Debt in 1998,
Net of Income Tax Benefit ....... -- 24 -- 194
-------- -------- -------- --------
Net Income ....................... 1,688 1,642 2,337 3,596
Preferred Stock Dividends ........ -- -- 3 3
-------- -------- -------- --------
Net Income Available to Common
Shareholders .................... $ 1,688 $ 1,642 $ 2,334 $ 3,593
======== ======== ======== ========
Basic Income Per Common Share:
Income before extraordinary
item ........................... $ .39 $ .48 $ .55 $ 1.22
Extraordinary item .............. -- (.01) -- (.06)
-------- -------- -------- --------
Net income ...................... $ .39 $ .47 $ .55 $ 1.16
======== ======== ======== ========
Diluted Income Per Common
Share:
Income before extraordinary
item ........................... $ .39 $ .47 $ .54 $ 1.19
Extraordinary item .............. -- (.01) -- (.06)
-------- -------- -------- --------
Net income ...................... $ .39 $ .46 $ .54 $ 1.13
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
4
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
<TABLE>
Nine Months Ended September 30
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ......................................... $ 2,337 $ 3,596
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization ..................... 1,850 1,637
Amortization of deferred grant income ............. (124) (117)
Profit-sharing plan contribution to be
funded with common stock ......................... 360 425
Gain from sales of properties and easements, net.. (2,333) (2,459)
Gain from recovery of environmental claim ......... -- (1,000)
Deferred income taxes ............................. 30 123
Increase (decrease) in cash from:
Accounts receivable .............................. (945) (548)
Materials and supplies ........................... (381) (94)
Prepaid expenses and other ....................... 439 (153)
Accounts payable and accrued expenses ............ 113 701
-------- --------
Net cash flows from operating activities ........... 1,346 2,111
-------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment ................. (6,056) (5,157)
Proceeds from sales of properties and easement ..... 2,347 2,859
Proceeds from recovery of environmental claim ...... -- 1,000
Proceeds from deferred grant income ................ 518 348
-------- --------
Net cash flows used by investing activities ........ (3,191) (950)
-------- --------
Cash Flows from Financing Activities:
Net payments under line of credit .................. -- (1,350)
Payments of long-term debt ......................... -- (10,991)
Dividends paid ..................................... (471) (278)
Net proceeds from public offering of
1,000,000 shares of common stock .................. -- 12,538
Issuance of common shares for stock options
exercised, employee stock purchases and
acquisition of subsidiary in 1998 ................. 94 183
-------- --------
Net cash flows from (used by) financing
activities ........................................ (377) 102
-------- --------
Increase (Decrease) in Cash and Equivalents ........ (2,222) 1,263
Cash and Equivalents, Beginning of Period .......... 7,294 519
-------- --------
Cash and Equivalents, End of Period ................ $ 5,072 $ 1,782
-------- --------
Supplemental Disclosures:
Cash paid during the period for:
Interest .......................................... $ -- $ 489
======== ========
Income taxes ...................................... $ 660 $ 1,262
======== ========
</TABLE>
Non-cash transactions are described in Note 2.
The accompanying notes are an integral part of the
financial statements.
5
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in Thousands Except Per Share Amounts)
1. In the opinion of management, the accompanying interim financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial position as of September 30, 1999
and the results of operations and cash flows for the interim periods ended
September 30, 1999 and 1998. Results for interim periods may not
necessarily be indicative of the results to be expected for the year. These
interim financial statements should be read in conjunction with the
Company's 1998 Annual Report on Form 10-K for the year ended December 31,
1998 filed with the Securities and Exchange Commission.
2. Changes in Shareholders' Equity:
<TABLE>
Additional Total
Preferred Common Paid-in RetainedShareholders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1998 ................. $ 32 $ 2,114 $27,955 $33,608 $63,709
Issuance of 11,094
common shares for
stock options
exercised, employee
stock purchases and
other ................ 5 94 99
Issuance of 31,095
common shares to
fund the Company's
1998 profit sharing
plan contribution .... 16 369 385
Issuance of 7,500
additional common
shares for the
Company's 1998
acquisition of Conn
Central .............. 4 78 82
Dividends:
Preferred stock,
$5.00 per share ...... (3) (3)
Common stock, $.11
per share ............ (468) (468)
Net income for the
period ............... 2,337 2,337
------- ------- ------- ------- -------
Balance, September 30,
1999 ................. $ 32 $ 2,139 $28,496 $35,474 $66,141
======= ======= ======= ======= =======
</TABLE>
During the nine months ended September 30, 1998 the Company issued 22,156
shares of its common stock with an aggregate fair market value of $337 to
fund its 1997 profit sharing plan contribution and issued 23,614 shares of
its common stock with an aggregate fair market value of $383 for the
acquisition of Conn Central (see Note 8).
3. South Quay Property:
In April 1999 the Rhode Island Supreme Court issued an opinion confirming
the Company's fee simple absolute title to the 33 acres of waterfront land
("South Quay") located in East Providence, Rhode Island. This confirmation
of the Company's fee simple absolute title permits the Company to explore
all development opportunities for the South Quay, including rail and non-
rail related uses. This property was created by the Company on formerly
tide-flowed land to capitalize on the growth of intermodal transportation
utilizing the property's rail, water and highway connections. The South
Quay property has good highway access (1/2 mile from I-195), direct rail
access, is adjacent to a 12 acre site also owned by the Company and is
located 1 1/2 miles from downtown Providence, Rhode Island. In June 1999
the Company filed an action in Superior Court in the State of Rhode Island
to confirm its fee simple absolute title to the 12 acre site.
6
<PAGE>
4. Other Income:
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Gain from sales of
properties and
easements, net .............. $2,263 $ 129 $2,333 $2,459
Recovery of prior year
environmental claim
(Note 7) .................... -- 1,000 -- 1,000
Rentals ...................... 99 105 350 315
Interest ..................... 55 25 156 81
------ ------ ------ ------
$2,417 $1,259 $2,839 $3,855
====== ====== ====== ======
</TABLE>
Gain from sales of properties and easements for 1999 includes $2,107 and
for 1998 includes $2,168 received from the sale of fiber optics cable
licenses.
5. Income Per Share:
Basic income per common share is computed using the weighted average number
of common shares outstanding during each period. Diluted income per common
share reflects the effect of the Company's outstanding convertible
preferred stock, options and warrants except where such items would be
antidilutive.
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares-
basic ................. 4,274,679 3,473,023 4,254,033 3,089,542
Dilutive effect of
convertible preferred
stock, options and
warrants .............. 75,679 81,714 75,477 83,003
--------- --------- --------- ---------
Weighted average shares-
diluted ............... 4,350,358 3,554,737 4,329,510 3,172,545
========= ========= ========= =========
</TABLE>
Options and warrants to purchase 190,554 shares of common stock were
outstanding for the three and nine month periods ended September 30, 1999,
and options and warrants to purchase 108,040 shares of common stock were
outstanding for the three and nine month periods ended September 30, 1998
but were not included in the computation of diluted earnings per share
because their effect would be antidilutive.
6. Dividends:
On October 27, 1999, the Company declared a dividend of $.04 per share on
its outstanding common stock payable November 25, 1999 to shareholders of
record November 11, 1999.
7. 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
7
<PAGE>
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 prejudgement
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. In
September 1999, Bestfoods and the insurance carrier entered into a final
settlement agreement concerning the payment of future expenses, the
recovery of litigation expenses and the resolution of the lawsuit filed by
the insurance carrier against Bestfoods and the Company (for which
Bestfoods both defended and indemnified the Company). Bestfoods is
preparing for review by the Company a final accounting of the net recovery
to Bestfoods (less litigation expenses) to determine the final payment to
the Company of its 10% share of the net recovery.
In 1999, the Company entered into a contract in the amount of $1,773 for
the expansion of its equipment maintenance facilities in Worcester,
Massachusetts, $831 of which has been completed and billed through
September 30, 1999. The Company expects that this project will be
substantially completed by the end of the year.
8. Acquisition of Connecticut Central Railroad Company:
In April 1998, the Company acquired all of the outstanding common stock of
Connecticut Central Railroad Company ("Conn Central") for 20,000 newly
issued shares of 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. Conn Central's operations
were merged into those of the Company at the time of acquisition. In April
1999, the Company issued an additional 7,500 shares of its common stock to
the former shareholders of Conn Central since certain financial and other
considerations as specified in the purchase and sale agreement were met.
Issuance of these shares gives rise to additional goodwill in the amount of
$82. This goodwill is being amortized over the remaining life of the
goodwill recorded in connection with the April 1998 acquisition.
8
<PAGE>
PROVIDENCE AND WORCESTER RAILROAD COMPANY
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MDA") which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements represent the Company's present
expectations or beliefs concerning future events. The Company cautions, however,
that actual results could differ materially from those indicated in MDA.
Results of Operations
- ---------------------
The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
<TABLE>
Three Months Ended September 30 Nine Months Ended September 30
--------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------- --------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Freight Revenues:
Conventional
carloads ...... $4,939 82.9% $5,381 84.2% $13,499 82.3% $14,631 84.6%
Containers ..... 706 11.8 620 9.7 1,752 10.7 1,551 9.0
Non-Freight
Operating
Revenues:
Transportation
services ...... 133 2.2 180 2.8 371 2.3 500 2.9
Other .......... 183 3.1 212 3.3 772 4.7 603 3.5
------ ----- ------ ----- ------- ----- ------- -----
Total ........ $5,961 100.0% $6,393 100.0% $16,394 100.0% $17,285 100.0%
====== ===== ====== ===== ======= ===== ======= =====
</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>
Three Months Ended September 30 Nine Months Ended September 30
---------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------ -------------- --------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries, wages,
payroll taxes
and employee
benefits ....... $ 3,296 55.3% $2,863 44.8% $9,315 56.8% $ 8,774 50.8%
Casualties and
insurance ...... 259 4.3 137 2.1 589 3.6 533 3.1
Depreciation and
amortization ... 644 10.8 567 8.8 1,850 11.3 1,637 9.5
Diesel fuel ..... 228 3.8 179 2.8 535 3.2 486 2.8
Car hire, net ... 161 2.7 203 3.2 423 2.6 488 2.8
Purchased
services,
including legal
and professional
fees ........... 703 11.8 549 8.6 1,739 10.6 1,480 8.6
Repair and
maintenance of
equipment ...... 263 4.4 287 4.5 795 4.8 783 4.5
Track and signal
materials ...... 550 9.2 303 4.7 1,423 8.7 780 4.5
Other materials
and supplies ... 320 5.4 312 4.9 884 5.4 865 5.0
Other ........... 344 5.8 396 6.2 1,093 6.7 1,155 6.7
------- ----- ------ ----- ------- ----- ------- -----
Total .......... 6,768 113.5 5,796 90.6 18,646 113.7 16,981 98.3
Less capitalized
and recovered
costs ......... 1,013 17.0 903 14.1 3,060 18.6 2,361 13.7
------- ----- ------ ----- ------- ----- ------- -----
Total ........ $ 5,755 96.5% $4,893 76.5% $15,586 95.1% $14,620 84.6%
======= ===== ====== ===== ======= ===== ======= =====
</TABLE>
9
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months
Ended September 30, 1998
Operating Revenues:
Operating revenues decreased $891,000, or 5.2%, to $16.4 million in the nine
months ended September 30, 1999 from $17.3 million in 1998. This decrease is the
net result of a $1.1 million (7.7%) decrease in conventional freight revenues
partially offset by a $201,000 (13.0%) increase in net container freight
revenues and a $40,000 (3.6%) increase in non-freight operating revenues.
The decrease in conventional freight revenues is attributable to a decrease in
traffic volume and to a decrease in the average revenue received per
conventional carloading of 2.9%. The Company's conventional freight carloadings
decreased by 1,173, or 5.0%, to 22,298 in the first three quarters of 1999 from
23,471 carloadings in 1998.
On June 1, 1999 the rail lines and operations of Consolidated Rail Corporation
("Conrail"), with which the Company interchanges the majority of its rail
freight traffic, were split between CSX Corporation and Norfolk Southern
Railroad. The Company estimates that delays and other service problems
attributable to this split-up has accounted for a traffic reduction for the
Company of nearly 550 carloadings and more than $400,000 of lost freight
revenues, since virtually all of this traffic was diverted to truck. The Company
believes that most of this traffic will be returned to rail once the service
problems related to the Conrail split-up have been overcome and is hopeful that
such problems will be largely eliminated in the relatively near future.
In addition two of the Company's rail-freight customers have continued to phase
out operations which utilized the Company's rail-freight services. Reduced
traffic to these two customers accounted for a reduction of nearly 700
carloadings and $620,000 of freight revenue for the first nine months of 1999 as
compared with 1998. It is anticipated these two customers will complete the
phase-out of their rail-freight served operations over the next year or two.
In addition the Company has experienced a decline in the volume of construction
aggregate traffic handled (approximately 1,000 carloadings and $284,000 of
freight revenues) during the first nine months of 1999 from 1998. Bad weather
experienced during March 1999 resulted in a "late start" to the construction
aggregate shipping season in 1999 compared with 1998. In addition, shipments of
this commodity did not rise to 1998 levels until the third quarter of 1999. The
Company is optimistic that shipments of this commodity will continue their rise
to prior year levels.
The Company did experience increased rail-freight traffic and revenue volume
from several new customers and from certain existing customers which partially
offset the revenue declines previously discussed.
The increase in container freight revenue is primarily the result of an increase
in container traffic volume. Total intermodal containers handled increased by
5,059, or 12.9%, to 44,346 containers in the first nine months of 1999 from
39,287 containers in 1998. This increase has resulted from new customers as well
as increased volume from existing customers.
The increase in non-freight operating revenues for the nine month period is due
primarily to increased maintenance department billings partially offset by a
decrease in demurrage revenues. Such revenues can vary from period to period
depending upon customer requirements.
Operating Expenses:
Operating expenses increased $966,000, or 6.6%, to $15.6 million in the nine
months ended September 30, 1999 from $14.6 million in 1998. Operating expenses
as a percentage of operating revenues ("operating ratio") increased to 95.1% in
1999 from 84.6% in 1998. While operating expenses have risen generally across
the board, the most significant increase has been in the area of salaries,
wages, payroll taxes and employee benefits which increased $541,000, or 6.2%, to
10
<PAGE>
$9.3 million in 1999 from $8.8 million in 1998. This increase results from
hiring additional employees, increases in the average rate of pay due to
semi-annual cost of living adjustments and pay rate increases mandated by union
contracts and from higher costs of employee health and welfare benefits. In
addition capitalized costs for track structure additions decreased to $1.4
million in the first nine months of 1998 from $2.1 million in 1998 thereby
increasing the portion of track maintenance costs expensed during the nine month
period. The Company's operating expenses are of a relatively fixed nature and do
not increase or decrease proportionately with changes in operating revenues.
Other Income:
Other income decreased $1.1 million to $2.8 million in the nine months ended
September 30, 1999 from $3.9 million in 1998. The difference is principally the
result of a $1.0 million interim payment received in 1998 which related to an
environmental claim paid by the Company in prior years.
Interest Expense:
The Company had no interest expense in the first nine months of 1999 compared
with $485,000 of interest expense in 1998. This decrease results from the
Company utilizing a portion of the net proceeds of its 1998 public stock
offerings and other income to retire all of its long and short-term debt.
Three Months Ended September 30, 1999 Compared to Three Months
Ended September 30, 1998
Operating Revenues:
Operating revenues decreased $432,000, or 6.8%, to $6.0 million in the third
quarter of 1999 from $6.4 million in the third quarter of 1998. This decrease is
the net result of a $442,000 (8.2%) decrease in conventional freight revenues
and a $76,000 (19.4%) decrease in non-freight operating revenues partially
offset by an $86,000 (13.9%) increase in net container freight revenues.
The decrease in conventional freight revenues for the quarter is attributable to
a 9.1% decrease in the average revenue received per conventional carloading
partially offset by a small increase in conventional traffic volume. The
Company's carloadings of conventional freight increased by 89, or 1.0%, to 9,081
carloadings in the third quarter of 1999 from 8,992 carloadings in the third
quarter of 1998. Operating problems relating to the split-up of Conrail on June
1, 1999, as previously discussed, are estimated to have resulted in a loss of
more than 330 carloadings and $260,000 of freight revenues for the quarter.
Reduction in traffic to two customers which are phasing out their rail-served
operations accounted for a further reduction of 310 carloadings and $283,000 of
freight revenue for the quarter. These losses were partially offset by increases
in rail freight traffic from new and existing customers, although such traffic
was generally at lower revenues per carloading than the traffic which was lost.
The decrease in non-freight operating revenues for the third quarter of 1999 is
principally due to a decrease in demurrage revenue and in maintenance department
billings. Such revenues can vary from period to period depending upon customer
requirements.
The increase in container freight revenue is primarily the result of an increase
in container traffic volume. Total intermodal containers handled increased by
2,135, or 13.6%, to 17,826 containers in the third quarter of 1999 from 15,691
containers in the third quarter of 1998. These increases result from new
customers as well as increased volume from existing customers.
11
<PAGE>
Operating Expenses:
Operating expenses increased $862,000, or 17.6%, to $5.8 million in the third
quarter of 1999 from $4.9 million in the third quarter of 1998. Operating
expenses as a percentage of operating revenues ("operating ratio") increased to
96.5% in the third quarter of 1999 from 76.5% in the third quarter of 1998. As
detailed on the preceding table operating expenses have generally increased
across the board. These include increased personnel costs and a decrease in
costs capitalized in track construction projects, as previously discussed. As
has been previously noted, the Company's operating expenses are relatively fixed
in nature and therefore do not increase or decrease proportionately with
variations in operating revenues.
Other Income:
Other income increased $1.1 million to $2.4 million in the third quarter of 1999
from $1.3 million in 1998. The increase results from gains from sales of fiber
optics licenses and permanent easements. The amount of income realized by the
Company from sales of properties and easements varies significantly from period
to period.
Interest Expense:
The company had no interest expense in the third quarter of 1999 compared with
$22,000 in the third quarter of 1998, as a result of the retirement of all its
long and short-term debt in 1998.
Liquidity and Capital Resources
- -------------------------------
During the first nine months of 1999 the Company expended approximately $3.8
million on rolling stock and other equipment. Included were expenditures of
approximately $2.1 million for forty gondola railcars in January and
approximately $820,000 for three used locomotives in March. The funds for these
acquisitions were derived, primarily, from the Company's 1998 public stock
offerings.
The Company has entered into a contract for the expansion of its equipment
maintenance facilities in Worcester, Massachusetts in the amount of $1.8
million. Approximately $550,000 has been expended on this project through
September 30, 1999. The Company anticipates that this project will be
substantially complete by the end of the year. Proceeds from the Company's 1998
public stock offerings are being utilized to fund this construction project.
In management's opinion cash generated from operations during the remainder of
1999 will be sufficient to enable the Company to meet its operating expenses and
capital expenditure requirements.
Seasonality
- -----------
Historically, the Company's operating revenues are lowest for the first quarter
due to the absence of aggregate shipments during a portion of this period and to
winter weather conditions.
Year 2000 Compliance
- --------------------
The Company operates a mainframe computer with a PC network and employs three
in-house programmers who write and maintain a substantial portion of the
Company's software programs. The Company utilizes Electronic Data Interchange
and Interline Settlement Systems through Railinc 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 has 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.
12
<PAGE>
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. Railinc with whom the majority of these
railroads interface electronically, began utilizing its newly upgraded Year 2000
compliant software for electronic data interchange on July 12, 1999. The Company
has modified all of its related programs and is now fully compatible with the
upgraded Railinc systems.
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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", subsequently amended in June 1999 and
effective for fiscal years beginning after June 15, 2000. 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, 2001,
as required.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------
Cash and Cash Equivalents
As of September 30, 1999, 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 as of September 30, 1999. 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.
13
<PAGE>
PART II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(b)No reports on Form 8-K were filed during the quarter ended September
30, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROVIDENCE AND WORCESTER
RAILROAD COMPANY
By: /s/ Orville R. Harrold
------------------------------
Orville R. Harrold, President
By: /s/ Robert J. Easton
-----------------------------
Robert J. Easton
Treasurer and Principal
Financial Officer
DATED: November 10, 1999
15
<PAGE>
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