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, 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
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(Exact name of registrant as specified in its charter)
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Rhode Island 05-0344399
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(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
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(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 3, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $23,342,608. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of March 3, 2000, the Registrant had 4,281,280 shares of Common Stock
outstanding.
Documents Incorporated by Reference -
- -------------------------------------
None
Exhibit Index - Page IV-1.
<PAGE>
I-1
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 1999, P&W transported approximately 30,000
carloads of freight and 60,000 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, $259.4 million or more; Class II, $20.8 million to $259.4 million; and Class
III, less than $20.8 million. As a result of mergers and consolidations, there
are now only eight 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 rail to
and from an intermodal terminal and then either delivered to their final
destinations by truck or transferred to ship for export. Over the past decade,
<PAGE>
I-2
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") jointly acquired Consolidated Rail Corporation ("Conrail") and split
its assets between them on June 1, 1999. CSX acquired and now operates Conrail's
New England facilities.
The acquisition of Conrail and the division of its assets between CSX and
Norfolk Southern resulted in service related delays and the temporary diversion
of some conventional carloads of freight to trucks during the third and fourth
quarters of 1999. Service, however, did improve during the fourth quarter of
1999 and the Company anticipates that these service related delays will be
largely eliminated in the near future. Service issues notwithstanding, the
Company believes that the acquisition of Conrail should create business
opportunities as a result of longer Class I single line service on competitive
routes, particularly between the Southeast and 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 former Naval facility at Quonset/Davisville to a more active port
and industrial park. This facility already houses a number of rail oriented
industries and an auto port. Construction of a 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 is expected to commence in 2000 at a
cost in excess of $120 million.
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
<PAGE>
I-3
Massachusetts Turnpike. This project will result in a near doubling of the
Company's transload facilities over the next two years.
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 2002, will provide the Company with increased access
to customers at the Port of New Haven.
Middletown/Hartford Line
In cooperation with the state of Connecticut, the Company continues to pursue
restoration of the rail line extending from Middletown to Hartford, Connecticut.
This 11 mile segment 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
opportunities for revenue growth.
Railroad Operations
The Company's rail freight system extends over approximately 545 miles of
track. The Company interchanges freight traffic with CSX 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 approximately 160 customers in Massachusetts, Rhode
Island, Connecticut and New York. The Company's 10 largest customers account for
roughly half of its operating revenues. In 1999, 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 13.2% of the Company's operating revenues. No other customer
accounted for 10% or more of its total operating revenues in 1999.
Markets
The Company transports a wide variety of commodities for its customers. In
1999, chemicals and plastics and construction aggregate were the two largest
commodity groups transported by the Company, constituting 41% and 17%,
<PAGE>
I-4
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:
<TABLE>
Commodity 1999 1998 1997 1996 1995
- --------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Chemicals and Plastics ............ 41% 41% 42% 43% 44%
Construction Aggregate ............ 17 17 20 18 18
Food and Agricultural ............. 14 15 15 17 17
Forest and Paper Products ......... 14 14 13 14 13
Scrap Metal and Waste ............. 6 6 5 3 3
Other ............................. 8 7 5 5 5
--- --- --- --- ---
Total ............................. 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
Sales and Marketing
P&W's sales and marketing staff of four 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
<PAGE>
I-5
agreements among the carriers. A carrier such as P&W, which actually places the
car at the customer's location and attends to the customer's daily switching
requirements, receives revenue greater than an amount based simply on mileage
hauled.
Employees
As of January 1, 2000, the Company had 156 full-time employees, 119 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),
and July 1, 2000 for the Brotherhood of Railroad Signalmen (maintenance). The
Company is currently engaged in negotiations with the Transportation
Communications Union (clerical) to amend its agreement. 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 CSX and Norfolk Southern, 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
<PAGE>
I-6
Representatives and Senate (which have jurisdiction over federal regulation of
railroads), have from time to time expressed their intention to support
legislation that would eliminate or reduce significant freedoms granted by the
Staggers Rail Act.
As a result of the planned introduction of high speed passenger service on the
Northeast Corridor, the FRA has issued an order requiring that all locomotives
operating on the Northeast Corridor between New Haven and Boston be equipped
with 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 57%,
are located in Connecticut, 103 miles, or 19%, are located in Massachusetts, 102
miles, or 19%, are located in Rhode Island and 28 miles, or 5%, are located in
New York.
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. The Company
has substantially completed an expansion of its primary locomotive and rail car
maintenance and repair facility in Worcester, MA. This approximately $1.8
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.
<PAGE>
I-7
Other Properties
The Company owns or has the right to use a total of approximately 130 acres
of real estate located along the principal railroad lines from downtown
Providence through Pawtucket, Rhode Island. Of this amount, P&W owns
approximately eight acres in Pawtucket and has a perpetual easement for railroad
purposes over the remaining 122 acres.
The Company has invested 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. 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, 1999:
<TABLE>
Description Number
- ----------- ------
<S> <C>
Locomotive ......................................................... 31
Gondola ............................................................ 77
Flat Car ........................................................... 4
Ballast Car ........................................................ 30
Passenger Equipment ................................................ 5
Caboose ............................................................ 2
---
Total ......................................................... 149
===
</TABLE>
The 31 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 late fall of
2000.
<PAGE>
I-8
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
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 included
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 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. In September 1999, Bestfoods and the insurance carrier entered into a
final settlement agreement. In December 1999 the Company received $947,000 in
final payment of its 10% share of the recovery net of litigation expenses.
In April 1999, the Rhode Island Supreme Court confirmed the Company's fee
simple absolute ownership of a 33 acre waterfront property located in East
Providence (the "South Quay"). The South Quay was developed by the Company to
capitalize on the growth of intermodal transportation, utilizing rail, water and
highway connections. The property has excellent highway access (1/2 mile from
I-195), direct rail access and is adjacent to a 12 acre parcel also owned by the
Company. In January 2000, the Rhode Island Superior Court confirmed the
Company's fee simple absolute ownership of the 12 acre parcel.
In July 1999 the Company engaged Cushman & Wakefield to provide real estate
advisory and marketing services for the South Quay and the adjacent 12 acre
parcel. In addition, the Rhode Island Department of Transportation contracted
for engineering services to complete roadway improvements for vehicular access
to the South Quay from the interstate highway system. The project is expected to
be completed by 2002. The Company believes its costs in developing the South
quay will be fully recovered from future development of the property and
associated rail freight revenues, as well as possible port charges such as
wharfage, dockage and storage.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
<PAGE>
II-1
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 ("NNM") under the symbol "PWRR". The following table sets
forth, for the periods indicated, the high and low sale prices per share for the
Common Stock as reported on the AMEX. 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> <C> <C>
1999
First Quarter ............. 12 7/8 10 1/2 $5.00 $.03
Second Quarter ............ 14 5/8 10 5/8 -0- .04
Third Quarter ............. 14 1/4 10 5/8 -0- .04
Fourth Quarter ............ 10 3/4 7 5/8 -0- .04
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
</TABLE>
As of March 3, 2000, there were approximately 731 holders of record of the
Company's Common Stock.
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.
In the second quarter of 1999, the Company declared a quarterly dividend of $.04
per share on the outstanding Common Stock which represented a 33.3% increase
over the previous declared dividend.
<PAGE>
II-2
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,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues ....... $21,871 $22,738 $ 22,083 $19,456 $ 19,778
Operating expenses ....... 21,129 20,036 18,333 17,714 17,677
------- ------- ------- ------- -------
Income from operations ... 742 2,702 3,750 1,742 2,101
Other income ............. 3,974 4,156 638 1,660 581
Interest expense ......... -- (495) (1,358) (1,371) (1,175)
------- ------- ------- ------- -------
Income before income taxes
and extraordinary item .. 4,716 6,363 3,030 2,031 1,507
Provision for income taxes 1,690 2,360 1,100 780 590
------- ------- ------- ------- -------
Net income before
extraordinary item ...... 3,026 4,003 1,930 1,251 917
Extraordinary loss from
early extinguishment of
debt, net of income tax
benefit ................. -- 219 -- -- --
------- ------- ------- ------- -------
Net income ............... 3,026 3,784 1,930 1,251 917
Preferred Stock dividend . 3 3 3 3 3
------- ------- ------- ------- -------
Net income available to
common shareholders ..... $ 3,023 $ 3,781 $1,927 $1,248 $ 914
======= ======= ======= ======= =======
Basic income per common
share (a) ............... $ .71 $ 1.13 $ 0.87 $ 0.57 $ 0.45
======= ======= ======= ======= =======
Diluted income per common
share (a) ............... $ .70 $ 1.10 $ 0.81 $ 0.54 $ 0.43
======= ======= ======= ======= =======
Weighted average
shares--basic ........... 4,260 3,352 2,209 2,178 2,043
======= ======= ======= ======= =======
Weighted average
shares--diluted ......... 4,334 3,433 2,489 2,461 2,136
======= ======= ======= ======= =======
Cash dividends declared on
Common Stock ............ $ 640 $ 402 $ 267 $ 218 $ 205
======= ======= ======= ======= =======
December 31,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Balance Sheet Data:
Total assets ............... $86,371 $84,594 $71,212 $68,491 $ 68,012
Short-term debt ............ -- -- 2,281 2,117 612
Long-term debt, less current
portion ................... -- -- 11,916 12,131 12,977
Shareholders' equity ....... 66,683 63,709 38,038 36,061 34,455
</TABLE>
(a) The income per share amounts for 1998 are stated net of a loss of $.06 per
share attributable to the extraordinary item.
<PAGE>
II-3
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 &
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 were to take 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 & 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
One of the Company's customers, Tilcon Connecticut, Inc., which ships
construction aggregate from three separate quarries on the Company's system to
asphalt production plants in Connecticut and New York, accounted for
approximately 13.2%, 13.4% and 15.1% of its operating revenues in 1999, 1998 and
1997, respectively. The Company does not believe that this customer will cease
to be a rail shipper or will significantly decrease its freight volume in the
foreseeable future. In the event that this customer should cease or
significantly reduce its rail freight operations, management believes that the
Company could restructure its operations to reduce operating costs by an amount
sufficient to offset the decrease in operating revenues.
<PAGE>
II-4
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>
Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Freight Revenues:
Conventional carloads ........ $18,006 82.3% $19,031 83.7% $19,001 86.0%
Containers ................... 2,384 10.9 2,132 9.4 1,675 7.6
Non-Freight Operating Revenues:
Transportation services ...... 560 2.6 640 2.8 632 2.9
Other ........................ 921 4.2 935 4.1 775 3.5
------- ---- ------- ----- ------- -----
Total ....................... $21,871 100.0% $22,738 100.0% $22,083 100.0%
======= ===== ======= ===== ======= =====
</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,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Chemicals and plastics ....... $ 7,363 40.9% $ 7,813 41.1% $ 8,000 42.1%
Construction aggregate ....... 3,101 17.2 3,239 17.0 3,762 19.8
Food and agricultural products 2,481 13.8 2,904 15.3 2,831 14.9
Forest and paper products .... 2,477 13.8 2,730 14.3 2,546 13.4
Scrap metal and waste ........ 1,176 6.5 1,074 5.6 969 5.1
Other ........................ 1,408 7.8 1,271 6.7 893 4.7
------- ---- ------- ----- ------- -----
Total ...................... $18,006 100.0% $19,031 100.0% $19,001 100.0%
======= ===== ======= ===== ======= =====
</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,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages, payroll taxes
and employee benefits ....... $12,328 56.4% $11,587 51.0% $11,023 49.9%
Casualties and insurance ..... 755 3.4 745 3.3 572 2.6
Depreciation and amortization 2,517 11.5 2,225 9.8 2,054 9.3
Diesel fuel .................. 798 3.6 658 2.9 708 3.2
Car hire, net ................ 546 2.5 672 2.9 598 2.7
Purchased services, including
legal and professional fees . 2,183 10.0 1,868 8.2 1,762 8.0
Repairs and maintenance of
equipment ................... 1,130 5.2 1,007 4.4 943 4.3
Track and signal materials ... 2,091 9.6 1,666 7.3 1,866 8.4
Other materials and supplies . 1,175 5.4 1,113 4.9 1,012 4.6
Other ........................ 1,672 7.6 1,572 6.9 1,325 6.0
------- ---- ------- ----- ------- -----
Total ....................... 25,195 115.2 23,113 101.6 21,863 99.0
Less capitalized and
recovered costs ............ 4,066 18.6 3,077 13.5 3,530 16.0
------- ---- ------- ----- ------- -----
Total ...................... $21,129 96.6% $20,036 88.1% $18,333 83.0%
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE>
II-5
Year ended December 31, 1999 Compared to Year Ended December 31, 1998
Operating Revenues
Operating revenues decreased $867,000, or 3.8% to $21.9 million in 1999 from
$22.7 million in 1998. This decrease was comprised of a $1.0 million (5.4%)
decrease in conventional freight revenue, and a $94,000 (6.0%) decrease in
non-freight operating revenues partially offset by a $252,000 (11.8%) increase
in net container freight 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 car-loading of 3.7%. The Company's conventional freight carloadings
decreased by 549, or 1.8%, to 29,933 in 1999 from 30,482 in 1998.
On June 1, 1999 the rail lines and operations of Consolidated Rail Corporation
("Conrail"), with which the Company has historically interchanged 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 accounted for a traffic reduction of nearly 700
carloadings which were 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. While the situation has improved, service
problems still remained as of the end of 1999. During 1999, two of the Company's
rail-freight customers continued to phase out operations which utilized the
Company's rail-freight services. Reduced traffic to these two customers
accounted for a reduction of approximately 890 carloadings during the year. It
is anticipated that these two customers will complete the phase-out of their
rail-freight served operations over the next year or two.
The Company did experience increased rail-freight traffic from several new
customers and from certain existing customers which partially offset the traffic
declines discussed above. The reduction in the average revenue received per
conventional carloading, between years, is largely attributable to a change in
the mix of freight hauled toward lower revenue commodities. Management believes
that the average freight received per carloading should increase in the future
as freight, temporarily lost to Conrail split-up related service problems,
returns to the railroads.
The increase in container freight revenue was primarily the result of increased
container traffic volume. Total intermodal containers handled increased by
6,098, or 11.3% to 59,921 containers in 1999 from 53,823 containers in 1998. The
average revenue received per intermodal container increased by approximately .5%
due to rate increases attributable to increases in certain railroad industry
cost indices. The increases in container traffic volume results from both new
customers and increased volume from existing customers.
The decrease in non-freight operating revenues is attributable to decreases in
billings for demurrage, secondary switching and other transportation related
services. Such revenues can vary from year to year depending upon traffic
volumes and customer requirements.
Operating Expenses
Operating expenses increased $1.1 million, or 5.5%, to $21.1 million in 1999
from $20.0 million in 1998. Operating expenses as a percentage of operating
revenues ("operating ratio") increased to 96.6% in 1999 from 88.1% in 1998.
While operating expenses have risen generally across the board, the most
significant increase was in the area of salaries, wages, payroll taxes and
employee benefits which increased $741,000, or 6.4%, to $12.3 million in 1999
from $11.6 million in 1998. This increase results from additional employees
hired throughout 1998, increases in the average rates of pay due to semi-annual
cost of living adjustments and pay rate increases mandated by union contracts
and from higher costs of payroll taxes and employee health and welfare benefits.
In addition the amount expended for diesel fuel increased by $140,000, or 21.3%,
between years due to the increased cost of petroleum products, and depreciation
and amortization expense increased by $292,000 or 13.1% as a result of recent
additions to property and equipment and amortization of goodwill related to the
1998 acquisition of Connecticut Central Railroad Company.
Other Income
Other income decreased by $182,000, or 4.4% to $4.0 million in 1999 from $4.2
million in 1998. The principal items of income in this category for 1999 were
$2.1 million derived from the sale of long-term fiber optics cable licenses and
<PAGE>
II-6
$947,000 related to the recovery of the portion of an environmental claim paid
by the Company in prior years.
Interest Expense
The Company had no interest expense in 1999 compared with $495,000 of interest
expense in 1998. This decrease resulted 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.
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.
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 $1.7 million, 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 in April 1998.
<PAGE>
II-7
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 the recovery of the portion of 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.
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 $2.4 million, $2.3 million and
$3.5 million of cash from operations in 1999, 1998 and 1997, respectively. The
company's total cash and cash equivalents decreased by $2.7 million in 1999,
increased by $6.8 million in 1998, and decreased by $167,000 in 1997. 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.
During 1999, 1998 and 1997 the Company generated $2.3 million, $3.0 million and
$230,000, 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 $2.1 million in 1999 and $2.3 million in
1998 generated from sales of fiber optics cable licenses. In addition, the
Company received $947,000 in 1999 and $1.0 million in 1998 from Bestfoods as
payment of the Company's 10% recovery due from Bestfoods relating to Bestfoods'
recovery from its insurance carrier for the portion of 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, for acquisitions of
equipment and to expand the Company's Worcester MA maintenance facility. The
Company intends to utilize the remaining proceeds from these offerings for
general corporate purposes including the possible acquisition of other
connecting railroads, rail lines and trackage rights, equipment additions, and
infrastructure improvements.
In June 1999, the Company's principal bank renewed the Company's $2.0 million
revolving line of credit for a two year period through June 1, 2001. Borrowings
under this line are 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 1999.
During 1999 the Company expended $3.9 million on rolling stock and other
equipment. Included were expenditures of $2.1 million for forty new gondola
railcars in January and $820,000 for three used locomotives in March.
The Company entered into a contract in 1999 for the expansion of its equipment
maintenance facilities in Worcester, Massachusetts in the amount of $1.8
million. This project was substantially completed in 1999 with approximately
$115,000 of costs remaining to complete the project in 2000.
<PAGE>
II-8
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 $2.5 million, $3.0 million and $2.5 million for track structure and
bridge improvements in 1999, 1998 and 1997, respectively. Deferred grant income
of $405,000 in 1999, $144,000 in 1998 and $935,000 in 1997 financed a portion of
these improvements. In addition, the Company received approximately $850,000 of
grant proceeds in 1999 and 1997 to purchase track materials for a track
improvement project in Massachusetts commenced in 1997, which the Company
expects to complete by 2000. The track materials were purchased during 1997 and
1999 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 2000, 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 1999, the Company paid dividends in the amount of $5.00 per share,
aggregating $3,000, on its outstanding noncumulative Preferred Stock and $0.15
per share aggregating $640,000, 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.
Recent Accounting Pronouncement
In June 1998, the FASB issued 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 7A. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------
Cash and Cash Equivalents
As of December 31, 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 at December 31, 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.
<PAGE>
II-9
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, 1999 and 1998 ...... II-11
Statements of Income for the Years Ended December 31,
1999, 1998 and 1997 ................................. II-12
Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 .................... II-13
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 .................... II-14
Notes to Financial Statements ........................ II-15
<PAGE>
II-10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Providence and
Worcester Railroad Company
We have audited the accompanying balance sheets of Providence and Worcester
Railroad Company as of December 31, 1999 and 1998, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America. 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.
/s/ Deloitte & Touche LLP
Worcester, Massachusetts
March 3, 2000
<PAGE>
II-11
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
December 31,
1999 1998
------- -------
ASSETS
Current Assets:
<S> <C> <C>
Cash and equivalents .................................. $ 4,626 $ 7,294
Accounts receivable, net of allowance for
doubtful accounts of $125 in 1999 and 1998 ........... 3,251 2,806
Materials and supplies ................................ 2,107 1,810
Prepaid expenses and other ............................ 181 568
Deferred income taxes ................................. 58 55
------- -------
Total Current Assets ................................. 10,223 12,533
Property and Equipment, net ............................ 64,156 60,050
Land Held for Development .............................. 11,851 11,845
Goodwill, net .......................................... 141 166
------- -------
Total Assets ........................................... $86,371 $84,594
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................... $ 2,347 $ 4,046
Accrued expenses ...................................... 650 709
------- -------
Total Current Liabilities ............................ 2,997 4,755
------- -------
Profit-Sharing Plan Contribution ....................... 400 425
------- -------
Deferred Grant Income .................................. 7,421 6,928
------- -------
Deferred Income Taxes .................................. 8,870 8,777
------- -------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding 647
shares in 1999 and 1998 .............................. 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,281,280 shares in 1999 and 4,228,131 shares
in 1998 .............................................. 2,141 2,114
Additional paid-in capital ............................ 28,519 27,955
Retained earnings ..................................... 35,991 33,608
------- -------
Total Shareholders' Equity ........................... 66,683 63,709
------- -------
Total Liabilities and Shareholders' Equity ............. $86,371 $84,594
======= =======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
II-12
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
Years Ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Revenues - Freight and Non-Freight $ 21,871 $ 22,738 $ 22,083
-------- -------- --------
Operating Expenses:
Maintenance of way and structures ......... 3,526 3,593 3,035
Maintenance of equipment .................. 2,269 2,063 1,874
Transportation ............................ 5,784 5,244 4,987
General and administrative ................ 4,211 4,103 3,764
Depreciation .............................. 2,409 2,192 2,054
Taxes, other than income taxes ............ 2,384 2,169 2,021
Car hire, net ............................. 546 672 598
-------- -------- --------
Total Operating Expenses ................. 21,129 20,036 18,333
-------- -------- --------
Income from Operations ...................... 742 2,702 3,750
-------- -------- --------
Other Income ................................ 3,974 4,156 638
-------- -------- --------
Interest Expense:
Capital Properties, Inc. .................. -- (99) (410)
Other ..................................... -- (396) (948)
-------- -------- --------
Total Interest Expense ................... -- (495) (1,358)
-------- -------- --------
Income before Income Taxes and Extraordinary
Item ....................................... 4,716 6,363 3,030
Provision for Income Taxes .................. 1,690 2,360 1,100
-------- -------- --------
Income before Extraordinary Item ............ 3,026 4,003 1,930
Extraordinary Loss from Early Extinguishment
of Debt, Net of Income Tax Benefit ......... -- 219 --
-------- -------- --------
Net Income .................................. 3,026 3,784 1,930
Preferred Stock Dividends ................... 3 3 3
-------- -------- --------
Net Income Available to Common Shareholders . $ 3,023 $ 3,781 $ 1,927
======== ======== ========
Basic Income Per Common Share:
Income before Extraordinary Item ........... $ .71 $ 1.19 $ .87
Extraordinary Item ......................... -- (.06) --
-------- -------- --------
Net Income ................................. $ .71 $ 1.13 $ .87
======== ======== ========
Diluted Income Per Common Share:
Income before Extraordinary Item ........... $ .70 $ 1.16 $ .81
Extraordinary Item ......................... -- (.06) --
-------- -------- --------
Net Income .................................. $ .70 $ 1.10 $ .81
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
II-13
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
Years Ended December 31, 1999, 1998, and 1997
Additional Total Share-
Preferred Common Paid-in Retained holders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 .... $ 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 22,156 common
shares to fund the Company's
1997 profit sharing plan
contribution ............... 11 326 337
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 19,181 20,056
Issuance of 200,000 common
shares for stock purchase
warrants exercised ......... 100 1,320 1,420
Issuance of 23,614 common
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
Issuance of 31,095 common
shares to fund the Company's
1998 profit sharing plan
contribution ............... 16 369 385
Issuance of 14,554 common
shares for stock options
exercised, employee stock
purchases and other ....... 7 117 124
Issuance of 7,500 additional
common shares for the
Company's 1998 acquisition
of Conn Central ............ 4 78 82
Dividends paid:
Preferred stock, $5.00 per
share ..................... (3) (3)
Common stock, $.15 per share (640) (640)
Net income for the year ..... 3,026 3,026
------- ------- ------- ------- -------
Balance, December 31, 1999 .. $ 32 $ 2,141 $28,519 $ 35,991 $66,683
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
II-14
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
Years Ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income ................................ $ 3,026 $ 3,784 $ 1,930
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization ........... 2,517 2,225 2,054
Amortization of deferred grant income ... (171) (161) (149)
Profit-sharing plan contribution to be
funded with common stock .............. 360 425 337
Gains from sale, condemnation and
disposal of property and equipment, and
easements, net ........................ (2,353) (2,561) (157)
Gain from recovery of environmental claim (947) (1,000)
Deferred income taxes ................... 90 245 260
Other, net .............................. 59 74 65
Increase (decrease) in cash and
equivalents from:
Accounts receivable ................... (225) (504) 217
Materials and supplies ................ (297) 276 (1,065)
Prepaid expenses and other ............ 387 (401) (46)
Accounts payable and accrued expenses . (93) (94) 85
-------- -------- --------
Net cash flows from operating activities .. 2,353 2,308 3,531
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment ........ (8,295) (6,751) (5,160)
Proceeds from sale and condemnation of
property and equipment, and easements .... 2,333 2,996 230
Proceeds from recovery of environmental
claim .................................... 947 1,000
Proceeds from deferred grant income ....... 518 203 1,475
-------- -------- --------
Net cash flows used by investing activities (4,497) (2,552) (3,455)
-------- -------- --------
Cash Flows from Financing Activities:
Net payments under line of credit ......... -- (1,350) (90)
Payments of long-term debt ................ -- (11,491) (699)
Dividends paid ............................ (643) (405) (270)
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 119 209 86
-------- -------- --------
Net cash flows from (used by) financing
activities ............................... (524) 7,019 (243)
-------- -------- --------
Increase (Decrease) in Cash and Equivalents (2,668) 6,775 (167)
Cash and Equivalents, Beginning of Year .... 7,294 519 686
-------- -------- --------
Cash and Equivalents, End of Year .......... $ 4,626 $ 7,294 $ 519
======== ======== ========
Supplemental Disclosures:
Cash paid during year for:
Interest ................................. $ -- $ 493 $ 1,328
======== ======== ========
Income taxes ............................. $ 1,263 $ 2,342 $ 873
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
II-15
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, and 1997
(Dollars in Thousands Except Per Share Amounts)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
-----------------------
Providence and Worcester Railroad Company (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 13.2%, 13.4% and 15.1% of the
Company's operating revenues in 1999, 1998 and 1997, 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, including land held for development, 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 asset lives, are charged to expense when incurred. Gains or
losses on sales or other dispositions are credited or charged to income.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
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.
Goodwill
--------
Goodwill is being amortized on a straight-line basis over a period of three
years.
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
<PAGE>
II-16
deferred grant income and amortized into operating revenues on a
straight-line basis over the estimated useful lives of the related
improvements ($171 in 1999, $161 in 1998 and $149 in 1997).
Grant proceeds utilized to finance public improvements, such as grade
crossings and signals, are recorded as a direct offset to the related
expense.
Although the Company cannot predict the extent and length of future grant
programs, it intends to continue filing requests for such grants when they
are available.
Revenue Recognition
-------------------
Freight revenues are recorded at the time delivery is made to the customer
or the connecting carrier.
Gain 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
------------
Deferred income taxes are recorded based on the differences between the
financial statement and tax basis of assets and liabilities and tax credit
carry forwards, using enacted rates in effect in the years in which the
differences are expected to reverse.
Income per Common 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,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income ................................ $3,026 $3,784 $1,930
Interest expense impact (net of tax) on
assumed conversion of debt to exercise
warrants ................................. -- -- 84
------ ------ ------
Net income available to common
shareholders assuming dilution ........... $3,026 $3,784 $2,014
====== ====== ======
</TABLE>
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
<PAGE>
II-17
<TABLE>
Years Ended December 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares for basic ........ 4,260,073 3,352,052 2,208,820
Dilituve effect of convertible preferred
stock, options and warrants ............. 74,382 81,104 280,450
--------- --------- ---------
Weighted average shares for diluted ...... 4,334,455 3,433,156 2,489,270
========= ========= =========
</TABLE>
Options and warrants to purchase 188,952 and 182,960 shares of common stock
were outstanding during 1999 and 1998 respectively, but were not included
in the computation of diluted earnings per common share because their
effect would be antidilutive. No such options and warrants were outstanding
during 1997.
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 the allowance for
doubtful accounts, useful lives of properties, goodwill, accrued
liabilities including health insurance claims and legal and other
contingencies, and income taxes.
Comprehensive Income
--------------------
Comprehensive Income equals net income for 1999, 1998 and 1997.
Segment Reporting
-----------------
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 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.
<PAGE>
II-18
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
December 31,
1999 1998
------- -------
<S> <C> <C>
Land and improvements ....................... $ 9,692 $ 9,124
Track structure ............................. 53,497 51,119
Buildings and other structures .............. 5,422 5,331
Construction in progress .................... 1,821 361
Equipment ................................... 23,221 21,454
------- -------
93,653 87,389
Less accumulated depreciation ............... 29,497 27,339
------- -------
Total property and equipment, net .......... $64,156 $60,050
======= =======
</TABLE>
3. Land Held for Development
Pursuant to permits issued by the United States Department of the Army Corp
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) and
direct rail access and is adjacent to a 12 acre site also owned by the
Company.
The permits for the property allow for construction of a dock along the
west face of the South Quay. The ACE permit has been extended to December
31, 2003 and the CRMC permit has been extended to May 11, 2009.
In April 1999, the Rhode Island Supreme Court issued an Opinion confirming
the Company's fee simple absolute title to the South Quay. In January 2000,
the Rhode Island Superior Court confirmed the Company's fee simple absolute
title of the 12 acre parcel adjacent to the South Quay. Also in 1999, the
Rhode Island Department of Transportation entered into a contract for
engineering services to undertake roadway improvements to provide direct
vehicular access from the interstate highway system to the South Quay. The
project is anticipated to be complete by 2002.
In July 1999, the Company engaged Cushman & Wakefield, a real estate
services company, to provide real estate advisory and marketing services
for the South Quay and the adjacent 12 acre parcel. These services include
an analysis of the "highest and best use" of the property and development
of a marketing strategy, as well as providing brokerage services for the
property. The combined 45 acre site enjoys excellent visibility and is
located approximately 2 miles from downtown Providence, Rhode Island.
Potential uses identified include development of a private port facility,
manufacturing use with direct multi-modal access (truck, port and rail),
and other commercial, industrial or residential development. The Company
intends to explore all development opportunities for the South Quay
including both rail and non-rail related uses and believes its costs will
be fully recovered from such future developments, including the lease or
sale of the property, associated rail freight revenues, particularly
intermodal double-stack container trains, and possible port charges such as
wharfage, dockage, and storage.
If able to attract user or investment commitments, the Company intends to
construct a vessel unloading area. The Company has engaged in discussions
with potential users interested in utilizing the property for offloading
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 and may use a portion
of the property as an intermodal terminal facility to provide it with such
capacity. This development will not proceed, however until the Company
<PAGE>
II-19
completes overhead clearances which are anticipated to be completed by year
end 2000.
4. Notes Payable, Bank and Long-Term Debt
The Company has a revolving line of credit with its principal bank in the
amount of $2,000 expiring June 1, 2001. 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 at any time
during 1999.
In 1998 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. Prepayment penalties of $344 were incurred on early
extinguishments 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. Other Income
<TABLE>
Other income consists of the following: Years Ended December 31,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Gain from sale, condemnation and
disposal of property and equipment
and easements, net ...................... $2,353 $2,561 $ 157
Recovery of prior year environmental
claim (See Note 7) ...................... 947 1,000 --
Rentals and license fees, under
various operating leases ................ 453 423 470
Interest ................................. 221 172 11
------ ------ ------
$3,974 $4,156 $ 638
====== ====== ======
</TABLE>
Gain from sale, condemnation and disposal of property and equipment and
easements for 1999 and 1998 includes $2,127 and $2,293 received from the
sale of long-term fiber optics cable licenses, respectively.
6. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
Years Ended December 31,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal ....................... $1,495 $1,865 $ 750
State ......................... 105 125 90
------ ------ ------
1,600 1,990 840
Deferred, Federal .............. 90 245 260
------ ------ ------
$1,690 $2,235 $1,100
====== ====== ======
</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.
<PAGE>
II-20
The following summarizes the estimated tax effect of temporary differences
that are included in the net deferred income tax provision:
<TABLE>
Years Ended December 31,
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Depreciation and amortization ............ $ 196 $ 194 $ 148
General business tax credits ............. -- 61 588
Deferred grant income .................... (123) (15) (478)
Gain from sale, condemnation and
disposal of properties and equipment .... -- (83) (17)
Accrued casualty and other claims ........ 2 88 14
Other .................................... 15 -- 5
----- ----- -----
$ 90 $ 245 $ 260
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) tax credit carryforwards. The tax effects of significant items
comprising the Company's net deferred income tax liability as of December
31, 1999 and 1998 are as follows:
<TABLE>
December 31,
1999 1998
------- -------
<S> <C> <C>
Deferred income tax liabilities-
Differences between book and tax basis of
property and equipment ........................ $11,394 $11,198
------- -------
Other .......................................... 23 --
------- -------
11,417 11,198
------- -------
Deferred income tax assets:
Rental income received in advance .............. 36 --
Deferred grant income .......................... 2,525 2,402
Accrued casualty and other claims .............. 9 11
Other .......................................... 35 63
------- -------
2,605 2,476
------- -------
Net deferred income tax liability ............... $ 8,812 $ 8,722
======= =======
</TABLE>
A reconciliation of the U.S. federal statutory rate to the
effective tax rate is as follows:
<TABLE>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<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 .......................... (2) (1) (1)
Non deductible expenses ..................... 2 2 1
State income tax, net of federal income
tax benefit ................................ 2 2 2
---- ---- ----
Effective tax rate .......................... 36% 37% 36%
==== ==== ====
</TABLE>
<PAGE>
II-21
7. Commitments and Contingencies
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). The insurance carrier's appeal of this judgement was
unsuccessful and it 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. In December 1999 the
Company received $947 in final payment of its 10% share of the recovery net
of litigation expenses.
8. 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, to acquire rail cars and to expand the
Company's Worcester, Massachusetts maintenance facility. The Company
intends to utilize the remaining proceeds from these offerings 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
became 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 Massachusetts Capital Resource Company ("MCRC") exercised its
warrants to acquire 200,000 newly issued shares of the Company's common
stock for $7.10 per share. Proceeds to the Company consisted of a $1,420
reduction in the outstanding principal balance of its 10% subordinated
long-term note payable to MCRC.
9. 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. 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 gave rise to additional goodwill in the amount of
$82. The Company is amortizing this goodwill over a period of three years.
Conn Central was a shortline railroad which had operating rights over
<PAGE>
II-22
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.
10. 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 (214,064 shares at December 31, 1999). 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, 1997 ..... 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
Granted ............................ 8,310 12.38 $ 9.53
Exercised .......................... (5,439) 7.53
Expired ............................ (3,706) 10.73
------ ------ ------
Outstanding and exercisable at
December 31, 1999 ................. 37,569 9.92
====== ====== ======
</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:
1999 1998 1997
--------- --------- ---------
Average risk-free interest rate 6.30% 4.53% 5.75%
Expected life of option grants 7.0 years 7.0 years 7.0 years
Expected volatility of underlying stock 30% 36% 29%
Expected dividend payment rate, as
a percentage of the share price
on the date of grant 1.21% .65% 1.26%
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.
<PAGE>
II-23
The following table sets forth information regarding options at December
31, 1999:
Range of Number Weighted Average
Number Exercise Currently Exercise Remaining
of Options Prices Exercisable Price Life (in years)
--------- ---------- ---------- ---------- -----------
5,033 $3.25 - 4.38 5,033 $3.75 2
15,775 5.50 - 7.88 15,775 7.34 6
9,820 8.50 - 12.75 9,820 11.27 6
6,941 18.375 6,941 18.375 8
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,
1999 1998 1997
------- ------- -------
Net income available to common shareholders:
<S> <C> <C> <C>
As reported .................... $ 3,023 $ 3,781 $ 1,927
Pro forma ...................... 3,000 3,764 1,919
Basic income per share:
As reported .................... .71 1.13 .87
Pro forma ...................... .70 1.12 .87
Diluted income per share:
As reported .................... .70 1.10 .81
Pro forma ...................... .69 1.10 .81
</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 $400 in 1999, $425 in 1998 and $337 in
1997. The Company made its 1997 and 1998 contributions and intends to make
its 1999 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 1999
and 1998 and $196 in 1997.
Employee Stock Purchase Plan
----------------------------
The Company has an Employee Stock Purchase Plan ("ESPP") under which
eligible employees may purchase registered shares of common stock at 85% of
the market price for such shares. An aggregate of 200,000 shares of common
stock are authorized for issuance under the ESPP which was established in
1997. Any shares purchased under the ESPP are subject to a two year
lock-up. ESPP purchases amounted to 8,665 shares in 1999, 5,504 shares in
1998 and 2,846 shares in 1997.
<PAGE>
II-24
11. 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 as separate classes, upon matters voted on by shareholders.
12. 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 1999 and 1998. 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, 1999
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating Revenues ................. $ 4,926 $ 5,507 $ 5,961 $ 5,477
Income (loss) from Operations ...... 136 466 206 (66)
Net Income ......................... 260 389 1,688 689
Basic Income Per Common Share ...... $ .06 $ .09 $ .39 $ .16
Diluted Income Per Common Share .... $ .06 $ .09 $ .39 $ .16
</TABLE>
<TABLE>
Year Ended December 31, 1999
-------------------------------------
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>
* * * * * * *
Item 9. Disagreements on Accounting and Financial Disclosure
- ------------------------------------------------------------
Not applicable.
<PAGE>
III-1
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 seven 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) ................... 67 Chairman of the Board and Chief
Executive Officer
Orville R. Harrold(b) ............... 67 President, Chief Operating
Officer and Director
Robert J. Easton(a) ................. 56 Treasurer and Director
P. Scott Conti ...................... 42 Vice President Engineering
Deborah E. Sedares .................. 37 Secretary and General Counsel
Richard W. Anderson (a) ............. 52 Director
Frank W. Barrett(b) ................. 60 Director
John H. Cronin(b) ................... 66 Director
J. Joseph Garrahy(b) ................ 69 Director
John J. Healy(b) .................... 64 Director
Charles M. McCollam, Jr.(b) ......... 67 Director
Merrill W. Sherman(c) ............... 51 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.
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.
<PAGE>
III-2
P. Scott Conti, Vice President Engineering. Mr. Conti has been with the
Company since 1988 and is responsible for all activities of the Maintenance of
Way and Engineering Department which maintains the Company's tracks, bridges,
buildings and grade crossings, overseeing all construction activity on or
affecting railroad property. From June 1988 to December 1997, Mr. Conti served
as Engineering Manager. In January 1998 he was promoted to Chief Engineer and in
March 1999 he was promoted to Vice President. Prior to Joining the Company, Mr.
Conti was employed by Perini Corporation.
Deborah E. Sedares, Secretary and General Counsel. Ms. Sedares joined the
Company in 1998 as Assistant General Counsel and Assistant Secretary. In 1999
she was promoted to General Counsel and Secretary. Prior to joining the company,
Ms Sedares served as in-house counsel to various governmental agencies. Most
recently, Ms. Sedares was General Counsel for the Worcester Redevelopment
Authority. She is a 1987 graduate of Suffolk University Law School and holds a
bachelors degree from Wheaton College. Ms. Sedares is admitted to practice law
in Massachusetts and Rhode Island.
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.
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.
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.
Merrill W. Sherman, Director. Ms. Sherman has been a Director of the Company
since 1999. She has been President, Director and Chief Executive Officer of Bank
Rhode Island, a community bank in the greater Providence metropolitan area since
its formation in March 1996. Prior thereto, from September 1993 to August 1995,
Ms. Sherman was a partner in the corporate and real estate departments of the
law firm Brown, Rudnick, Freed & Gesmer where she headed the firm's banking
consulting group affiliate. She retired from her position in August 1995 to
devote full-time efforts to the creation of Bank Rhode Island.
The Board of Directors has an Executive Committee, Stock Option & Compensation
Committee and Audit Committee. In accordance with the By- laws of the Company,
the Executive Committee, currently comprised of Robert H. Eder, Chairman, Robert
J. Easton and Orville R. Harrold, exercises the authority of the Board of
Directors when formal Board action is required between meetings, subject to the
limitations imposed by law, the By-laws or the Board of Directors. The Executive
Committee acts on routine matters such as authorizing the execution of
government contracts for reimbursement for Company work on highway projects
adjacent to the railroad and grade crossing rehabilitation.
<PAGE>
III-3
The Stock Option & Compensation Committee, currently comprised of John J.
Healy, Chairman, Richard W. Anderson and Charles M. McCollam, Jr. , is
responsible for establishing the amount of option shares to be granted to the
Company's employees under the Stock Option Plan and for making recommendations
to the full Board concerning executive officer compensation.
The Audit Committee is currently comprised of John H. Cronin, Chairman, Frank
W. Barrett, J. Joseph Garrahy and Merrill W. Sherman. All members of the Audit
Committee are independent non-employee directors. The Audit Committee reviews
the Company's procedures with respect to maintaining books and records, and the
adequacy and implementation of internal auditing, accounting and financial
controls. The Audit Committee reviews and makes recommendations to the Board
regarding services provided by the independent auditors of the accounts of the
Company, reviews with the independent auditors the scope and results of their
annual examination of the Company's financial statements and any recommendations
they may have, and makes recommendations to the Board with respect to the
engagement of the independent auditors.
The Board of Directors does not have a nominating committee.
The Board of Directors held five meetings, the Audit Committee held 3
meetings, the Stock Option & Compensation Committee held 4 meetings and the
Executive Committee held 9 meetings during the fiscal year ended December 31,
1999.
During the fiscal year ended December 31, 1999, each director who was not an
employee of the Company received a base fee of $500 for each attended meeting of
the Board of Directors plus $50 per attended meeting for each year of service as
a director, and each member of the Audit Committee and the Stock Option &
Compensation Committee received $300 for each attended meeting of the committee
(other than the Chairman of the Committee, who received $350).
During the month of January of each year, directors of the Company who were
serving as such on the preceding December 31 and are not full time employees of
the Company are granted options for the purchase of 100 shares of the Common
Stock of the Company, plus options for an additional ten shares for each full
year of service to the Company. The exercise price 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 ten 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, 1999, to its Chief Executive
Officer and each of its four most highly compensated executive officers who
earned more than $100,000 in salary and bonus in 1999, for services rendered in
all capacities to the Company during 1999.
<PAGE>
III-4
<TABLE>
Long-Term
Annual Compensation Compensation
------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Securities
Underlying All
Other Options to Other
Annual Purchase Compen-
Salary Compen- Common sation
Name and Principal Position Year ($)(a) Bonus($) sation($) Stock ($)(b)
- ---------------------------- ---- ------ ------ -------- ------------ ------
Robert H. Eder.............. 1999 307,403 17,500 23,653(c) 0 48,024
Chairman of the Board and 1998 286,210 0 31,216(c) 0 48,696
Chief Executive Officer 1997 288,530 0 0 0 47,453
Orville R. Harrold.......... 1999 262,181 0 0 1,087 42,726
President and Chief 1998 240,382 20,000 0 1,011 43,940
Operating Officer 1997 234,588 0 0 913 42,526
P. Scott Conti.............. 1999 99,072 0 0 147 8,068
Vice President Engineering 1998 80,425 0 0 132 6,468
1997 70,155 0 0 118 5,295
Robert J. Easton............ 1999 130,858 0 0 346 10,469
Treasurer 1998 126,038 16,000 0 310 11,412
1997 123,232 0 0 210 9,353
Deborah E. Sedares.......... 1999 104,004 0 0 0 8,320
Secretary and General 1998 19,038(d) 0 0 0 0
Counsel 1997 0 0 0 0 0
</TABLE>
(a) Includes amounts taxable to employees for personal use of Company-owned
vehicles, other than Mr. Eder who does not have personal use of a Company
owned vehicle.
(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 1999 premiums
paid for life insurance coverage in the amounts of $35,224 and $29,926,
respectively.
(c) Includes the cost of a vehicle for Mr. Eder.
(d) Date of hire, October 5, 1998. Appointed to the position of Secretary and
General Counsel effective March 12, 1999.
<PAGE>
III-5
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock options
under the Company's Non-Qualified Stock Option Plan to the Named Executive
Officers during the Company's last fiscal year. The Company does not issue stock
appreciation rights.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
% of Total
Number of Options
Securities Granted To
Underlying Employees Grant Date
Options In Fiscal Exercise Expiration Present
Name Granted(a) 1999 Price($) Date Value($)(b)
------ ---------- --------- ------ -------- -----------
Robert H. Eder(c)...... 0 0 0 0 0
Orville R. Harrold..... 1,087 15.5 12.375 01/04/09 $9.53
P. Scott Conti......... 147 2.1 12.375 01/04/09 $9.53
Robert J. Easton....... 346 4.9 12.375 01/04/09 $9.53
Deborah E. Sedares(d).. 0 0 0 0 0
</TABLE>
(a) The options were all granted on January 4, 1999 and became exercisable on
July 4, 1999.
(b) Amounts represent fair value of each option and were estimated as of the
date of grant using Black-Scholes options - pricing model with the
following weighted average assumptions: expected volatility of 30%;
expected life 7 years; and risk free interest rate of 6.3%. Dividends at
the rate of 1.21% per share were assumed for purposes of this estimate.
(c) Under the terms of the Company's Non-Qualified Stock Option Plan, Mr. Eder
is not eligible to receive a grant of stock options.
(d) Ms. Sedares was not eligible to receive options under the Company's
Non-Qualified Stock Option Plan in 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth individual exercises of stock options during
1999 and the year-end values of options to purchase Common Stock held by the
Named Executive Officers as of December 31, 1999.
<TABLE>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money at
December 31, 1999 December 31, 1999(b)
----------------- --------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized($)(a) Unexercisable Unexercisable($)
---- ----------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Robert H. Eder....... 0 0 0/0 0/0
Orville R. Harrold... 608 1,510 1,882/0 0/0
P. Scott Conti....... 441 1,773 279/0 0/0
Robert J. Easton..... 0 0 1,313/0 351/0
Deborah E. Sedares... 0 0 0/0 0/0
</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,
1999, which was $8.00.
<PAGE>
III-6
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The table set forth below reflects the only persons (including any "group" as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934)
who, to the best of the Company's knowledge, were on March 3, 2000, the
beneficial owners of more than five percent of the Company's outstanding Common
Stock, $.50 par value, or Preferred Stock, $50 par value. Each share of the
Company's outstanding Preferred Stock is convertible at any time, at the option
of the holder, into one hundred shares of Common Stock of the Company. The
footnote to the table below sets forth the percentages of the outstanding Common
Stock which would be held by the indicated owners if such owners' Preferred
Stock were converted in whole into Common Stock.
<TABLE>
Percent
Name and Address Number of Shares Owned of Class
- ---------------- ---------------------- --------
<S> <C> <C> <C>
Robert H. and Linda Eder 842,742 (Common) 19.7%(1)
2441 S.E. Bahia Way 500 (Preferred) 77.3%
Stuart, Florida 34996
Cadence Capital Management 235,100 (Common) 5.5%
One Exchange Place, 29th Floor
Boston, MA 02109
Franklin Resources, Inc. 232,200 (Common) 5.4%
777 Mariners Island Boulevard
San Mateo, CA 94404
</TABLE>
(1) Assuming no conversion of Preferred Stock. If their Preferred Stock
were converted in whole to Common Stock, Mr. and Mrs. Eder would own 20.6% of
the outstanding Common Stock.
Of the shares owned by Mr. and Mrs. Eder, 768,162 shares of Common Stock
and 500 shares of Preferred Stock were held directly by Mr. Eder, and 74,580
shares of Common Stock were held directly by Mrs. Eder. By reason of their
ownership, Mr. and Mrs. Eder may be deemed to be "control persons" with respect
to the Company.
The following table reflects as of March 3, 2000, the beneficial ownership of
the Common Stock of the Company by directors, nominees for directors and
officers of the Company.
<TABLE>
Name Number Percentage
- ---- ------ ----------
<S> <C> <C>
Richard W. Anderson(a) ......................... 200,400 4.6%
Frank W. Barrett(b).............................. 860 *
P. Scott Conti(c)................................ 1,338 *
John H. Cronin(d)................................ 1,760 *
Robert J. Easton(e) ............................. 2,992 *
Robert H. Eder(f)................................ 892,742 20.6%
J. Joseph Garrahy(g)............................. 580 *
Orville R. Harrold(h)............................ 28,202 *
John J. Healy(i)................................. 1,170 *
Charles M. McCollam, Jr.(j)...................... 1,250 *
Deborah E. Sedares............................... 290 *
Merrill W. Sherman............................... 500 *
All executive officers and directors as a group
(12 people)(k)................................ 1,132,084 26.1%
</TABLE>
* Less than one percent
(a) 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
<PAGE>
III-7
Company. Includes 100 shares of Common Stock issuable under stock options
exercisable within 60 days.
(b) Includes 360 shares of Common Stock issuable under stock options
exercisable within 60 days.
(c) Includes 279 shares of Common Stock issuable under stock options
exercisable within 60 days.
(d) Includes 430 shares of Common Stock issuable under stock options
exercisable within 60 days.
(e) Includes 118 shares of Common Stock held by Mr. Easton's wife in her name
and 1,313 shares of Common Stock issuable under stock options exercisable
within 60 days.
(f) 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.
(g) Includes 310 shares of Common Stock issuable under stock options
exercisable within 60 days.
(h) 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) 1,882 shares of
Common Stock issuable under stock options exercisable within 60 days.
(i) Includes 870 shares of Common Stock issuable under stock options
exercisable within 60 days.
(j) Includes 230 shares of Common Stock issuable under stock options
exercisable within 60 days.
(k) Includes 50,000 shares of Common Stock issuable upon conversion of
Preferred Stock and 5,774 shares of Common Stock issuable under stock
options exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The Company has entered into agreements with its executive officers and key
management personnel, including the named executive officers other than Mr.
Eder, to provide lump sum payments in the event of a "change in control" as
defined in the subject agreements. The agreements are automatically extended
from year to year unless terminated in accordance with the terms of the
agreements. The agreements also provide that if there is a "change in control"
as defined in the agreement, the terms will continue for 24 months thereafter. A
named executive officer will be entitled to a lump sum payment equal to a
multiple of his or her base salary if his or her employment is constructively
terminated without cause in anticipation of or within two years following the
"change in control" or if within two years of the "change in control event" he
or she voluntarily terminates employment due to a "material change" in the terms
and conditions of the named executive officer's employment as is defined under
the agreements. The multiplier is determined based upon years of service with
the Company. Mr. Harrold is entitled to a lump sum payment equal to two (2)
times his annual base salary. Mr. Conti and Mr. Easton are each entitled to a
lump sum payment equal to one and one- half (1-1/2) times their annual base
salary. Ms. Sedares is entitled to a lump sum payment equal to one (1) times her
annual base salary. A lump sum payment may be reduced to the extent necessary to
avoid any liability for federal excise tax levied under section 4999 of the
Internal Revenue Code.
<PAGE>
IV-1
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).
Change in Control Agreement
(23) Independent Auditors' Consent
(b) A report on Form 8-K was filed under date of December 14, 1999.
In it the Registrant reported that it had advised the general
public through a press release dated December 13, 1999 that it
had reached agreement with Bestfoods with respect to payment of
the Registrant's 10% share in the recovery obtained by Bestfoods
from its insurance carrier for remediation expenses. This
settlement resulted in a final payment to the Registrant in the
amount of $947,088.
(c) Exhibits (annexed).
Financial Statement Schedules. See item (a) (2.) above
<PAGE>
IV-2
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 29, 2000
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 29, 2000
Robert H. Eder Officer and
Chairman (Principal
Executive Officer)
/s/ Orville R. Harrold
- ----------------- President and Director March 29, 2000
Orville R. Harrold (Chief Operating
Officer)
/s/ Robert J. Easton
- ----------------- Treasurer and Director March 29, 2000
Robert J. Easton (Principal financial
officer and principal
accounting officer)
/s/ Frank W. Barrett
- ----------------- Director March 29, 2000
Frank W. Barrett
/s/ John H. Cronin
- ----------------- Director March 29, 2000
John H. Cronin
/s/ J. Joseph Garrahy
- ----------------- Director March 29, 2000
J. Joseph Garrahy
<PAGE>
IV-3
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(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:
<S> <C> <C> <C> <C> <C>
Year ended December 31, $ 125 $125
1999 ===== ====
Year ended December 31,
1998 $ 125 $ 15 $(15) $125
===== ==== ==== ====
Year ended December 31,
1997 $ 125 $ 43 $(43) $125
===== ==== ==== ====
</TABLE>
(A) Bad debts written off.
(B) Recovery of bad debts previously written off.
<PAGE>
EXHIBIT 10A
Change In Control Agreement
THIS AGREEMENT made this 28th day of April 1999 by and between Providence
and Worcester Railroad Company, a Rhode Island corporation, with its principal
office and place of business at 75 Hammond Street, Worcester, MA 01610
(hereinafter called "Employer") and (TITLE) an individual residing at (ADDRESS)
(hereinafter called "Management Employee").
WITNESSETH
WHEREAS, Management Employee has been employed by Employer as of
(HIRE_DATE); currently in the position of (POSITION); and
WHEREAS, if Employer receives any proposal from a third party concerning a
possible business combination with, or acquisition of the equity securities of
or a substantial portion of the assets of Employer, the Board of Directors of
Employer believes it is important that Employer and its Board of Directors be
able to rely upon the Management Employee to continue in his/her management
position, and that they be able to receive and rely upon his/her advice, if they
request it, as to the best interests of Employer and its shareholders, without
concern that Management Employee might be distracted by the personal risks and
uncertainties created by such a proposal; and
WHEREAS, the terms and provisions of this Agreement were duly approved by
action of Employer's Board of Directors at a meeting held on the 28th day of
April, 1999.
NOW THEREFORE, in consideration of the mutual covenants and conditions set
forth hereafter, and other good and valuable consideration, the parties hereto,
intending to be legally bound, agree as follows:
I. Change in Control Protection
----------------------------
A. Termination
-----------
In the event that Management Employee's position with Employer, its
successors or assigns is terminated other than for cause as
hereinafter defined ("Cause") as a result of the change in control of
Employer as hereinafter defined ("Change in Control Event"), within
two years of the effective date of Change in Control Event then the
Management Employee shall be entitled to the following benefits to be
determined as of the date of termination as adjusted based on the
Change in Control Event and the date of termination:
Years of Service
At Date of Severance
Termination Benefit
----------- -------
0-9 years One (1) times Annual Base Salary
10-19 Years One and one-half (1-1/2) times Annual Base Salary
20-29 Years Two (2) times Annual Base Salary
30 Years or More Two and one-half (2-1/2) times Annual Base Salary
Annual Base Salary shall mean the Management Employee's annual rate of
base pay in effect immediately prior to the effective date of the
Change in Control Event.
The Management Employee shall be entitled to a pro rata portion of the
Severance Benefit as determined in Section I.A(1) if the Management
Employee is terminated other than for Cause by the Employer at any
time within the Management Employee's Severance Benefit time period
following a Change in Control Event.
<PAGE>
Examples:
---------
Management Employee entitled to 1-1/2 times annual base rate of pay
Severance Benefit based on length of service as of date of
Termination. Termination occurs six (6) months after Change in Control
Event. Management Employee shall be entitled to .75 times his/her
Annual Base Salary as a Severance Benefit.
Management Employee entitled to 1 times annual base rate of pay;
termination occurs 12 months after Change in Control Event; Management
Employee is entitled to .50 times his/her Annual Base Salary as a
Severance Benefit.
B. Material Change
The Management Employee shall be entitled to the Severance Benefit as
determined in Section I.A(1) upon a Change in Control Event if:
1. Within two (2) years following a Change in Control Event Employer
(a) significantly reduces the Management Employee's annual salary
unless there is a general reduction in management salaries, and
(b) Management Employee resigns his/her employment for such
reason.
The Management Employee shall be entitled to a pro rata portion
of the Severance Benefit as determined in Section I.A(1) if the
Management Employee experiences a material change at any time
within the Management Employee's Severance Benefit time period
following a Change in Control Event.
C. Management Employee
1. Benefits payable hereunder in the event of a Change in Control
Event shall be payable only to a Management Employee who is a
Management Employee as of the Change in Control Event. For
purposes of this Agreement, Management Employee shall not include
any employee of the Company who is a "beneficial owner" directly
or indirectly, of securities representing a controlling
percentage of the voting power of Employer's then outstanding
preferred stock regardless of said employee's ownership of the
Common Stock , or in the event of a recapitalization or
restructuring of the Employer's capital, the result of which is
the preferred stock does not elect a majority of the members of
the board of Directors, then the beneficial owner directly or
indirectly of securities representing more than 50% of the voting
power of the Employer's stock.
II. Definition of Change in Control Event
-------------------------------------
A. For purposes of this Agreement, a "Change in Control Event" shall be
deemed to have occurred as of the first day that one or more of the
following conditions shall have occurred.
2. any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Act"),
other than the present controlling owner Robert H. Eder, ("Eder")
his heirs, executors, administrators, legal representatives, or
trustee of a trust for the benefit of the heirs of Eder, becomes
the "beneficial owner" (as defined in Rule 13-d under the Act)
directly or indirectly, of securities representing more than
fifty (50%) percent of the voting power of Employer's then
outstanding preferred stock regardless of said person's ownership
of the Common Stock , or in the event of a recapitalization or
restructuring of the Employer's capital, the result of which is
the preferred stock does not elect a majority of the members of
the board of Directors, then the beneficial owner directly or
indirectly of securities representing more than 50% of the voting
power of the Employer's stock.; or
3. the sale of all or a substantial portion of the assets of
Employer; or
4. a merger, consolidation, business combination or other
transaction in which the Employer is not the surviving entity; or
<PAGE>
5. Employer adopts and the shareholders approve, if necessary, a
plan of complete liquidation.
III. Cause
-----
Notwithstanding any other provision of this Agreement, Employer may
terminate this Agreement at any time for cause. For purposes of this
Agreement, "Cause" shall mean:
(i) a material breach by the Management Employee of the Management
Employee's obligations under this Agreement (other than as a result of
incapacity due to physical or mental illness) which is demonstrably
willful and deliberate on the Management Employee's part, which is
committed in bad faith or without reasonable belief that such breach
is in the best interest of Employer and which is not remedied in a
reasonable period of time after receipt of notice from Employer
specifying such breach; (ii) the conviction of the Management Employee
for committing an act of fraud, embezzlement, theft or other act
constituting a felony or the guilty or nolo contendere plea of the
Management Employee to such a felony; (iii) insubordination or the
willful engaging by Management Employee in gross misconduct or the
willful violation of an Employer policy which results in material and
demonstrable injury to Employer; or (iv) a material act of dishonesty
or breach of trust on the part of the Management Employee resulting or
intending to result directly or indirectly in material gain or
enrichment at the expense of Employer. Any act, or failure to act,
based upon authority given pursuant to a resolution duly adopted by
the Board of Directors or based upon the advice of counsel for
Employer shall be conclusively presumed to be done, or omitted to be
done, by the Management Employee in good faith and in the best
interests of Employer.
IV. Confidential Information
------------------------
A. The Management Employee shall hold in a fiduciary capacity for the
benefit of Employer all secret or confidential information, knowledge
or data relating to Employer or any of its affiliated companies, and
their respective businesses, which shall have been obtained by the
Management Employee during the Management Employee's employment by
Employer or any of its affiliated companies and which shall not be or
become public knowledge (other than by acts of the Management Employee
or representative of the Management Employee in violation of this
Agreement). After termination of the Management Employee's employment
with Employer, the Management Employee shall not, without the prior
written consent of the Employer or except as may otherwise be required
by law or legal process, communicate or divulge any such information,
knowledge or data to anyone other than Employer and those designated
by it.
B. All records, files, memoranda, reports, price lists, customer lists,
drawings, designs, proposals, plans, sketches, documents, computer
programs, CAD systems, CAM systems, disks, computer printouts and the
like (together with all copies thereof) relating to the business of
Employer, which Management Employee shall use or prepare or otherwise
have in his/her possession in the course of, or as a result of his/her
employment hereunder shall, as between the parties hereto, remain the
sole property of Employer. Management Employee shall use such
materials solely for the benefit of Employer and shall not divulge any
such materials other than in furtherance of Employer's interests.
Management Employee hereby agrees that he/she will return all such
materials, including copies to Employer upon demand, or upon the
cessation of his/her employment.
C. Any termination of the Management Employee's employment hereunder or
of this Agreement shall have no effect on the continuing operations of
this Section IV under this Agreement. The parties acknowledge that any
violation of Section IV can cause substantial and irreparable harm to
Employer. Therefore, Employer shall be entitled to pursue any and all
legal and equitable remedies, including but not limited to any
injunctions.
V. Dispute Resolution
------------------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled by binding arbitration, which shall be the
sole and exclusive method of resolving any questions, claims or other
matters arising under this Agreement. Such proceeding shall be
conducted by final and binding arbitration before a panel of one or
more arbitrators under the administration of the American Arbitration
Association, and in a location mutually agreed to by the Management
<PAGE>
Employee and Employer. The Federal and State courts located in the
United States of America are hereby given jurisdiction to render
judgment upon, and to enforce, each arbitration award, and the parties
hereby expressly consent and submit to the jurisdiction of such
courts. Notwithstanding the foregoing, in the event that a violation
of the Agreement would cause irreparable injury, Employer and the
Management Employee agree that in addition to the other rights and
remedies provided in this Agreement (and without waiving their rights
to have all other matters arbitrated as provided above) the other
party may immediately take judicial action to obtain injunctive
relief.
VI. Successors
----------
A. This Agreement is personal to the Management Employee and without
the prior consent of Employer shall not be assignable by the
Management Employee otherwise than by will or the laws of descent
and distribution to the extent any benefits payable hereunder are
due at the time of Management Employee's death. This Agreement
shall inure to the benefit of and be enforceable by the
Management Employee's legal representative to the extent any
benefits payable hereunder are due at the time of Management
Employee's death.
B. This Agreement shall inure to the benefit of and be binding upon
Employer and its successors and assigns.
C. Employer will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Employer to
assume expressly and agree to perform this Agreement in the same
manner and to the same extent that Employer would be required to
perform it if no such succession had taken place. As used in this
Agreement, "Employer" shall mean Employer as hereinbefore defined
and any successor to its business and/or assets as aforesaid
which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
VII. Reduced Payment in the Event of Excise Tax
------------------------------------------
Notwithstanding anything to the contrary herein, any payments to which
the Management Employee would be entitled hereunder shall be reduced to
the extent necessary to avoid any liability for the federal excise tax
levied on certain "excess parachute payments" under section 4999 of the
Internal Revenue Code.
VIII. Miscellaneous
--------------
A. This Agreement shall be governed by and construed in accordance
with the laws of the State of Rhode Island, without reference to
principles of conflict of laws. The captions of this Agreement
are not part of the provisions hereof and shall have no force or
effect. This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
B. Notice: Any notice required or given under this Agreement shall
be sufficient if in writing and sent by registered or certified
mail to his/her residence in the case of Management Employee or
to Attention Secretary, Providence and Worcester Railroad Company
in the case of Employer, at the addresses hereinabove set forth,
or to such addresses as may be designated subsequently by the
parties hereto. Any such notice shall be deemed given when so
addressed and mailed.
C. Waiver of Breach: A waiver by Employer or Management Employee of
a breach of any provision of this Agreement by the other party
shall not operate or be construed as a waiver of any subsequent
breach by the other party.
D. Employer may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first hereinabove written.
Providence and Worcester Railroad Company
By:__________________________
Title:_______________________
By:__________________________
(Print Name)
Signature:___________________
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
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 3, 2000 appearing in the Annual Report on Form 10-K of
Providence and Worcester Railroad Company for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 27, 2000
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<PERIOD-END> DEC-31-1999
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<PP&E> 105,504
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0
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