10-Q 1 body10-q20030930.txt FORM 10-Q QUARTER ENDED 9/30/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-16704 ------- PROVIDENCE AND WORCESTER RAILROAD COMPANY --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) --------------------------------------------------------------------------- Rhode Island 05-0344399 ----------------------------- -------------------------- (State or other jurisdiction of I.R.S. Employer Identification No. incorporation or organization) 75 Hammond Street, Worcester, Massachusetts 01610 ----------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 755-4000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.) YES X NO ___ --- Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ___ NO X --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 31, 2003, the registrant has 4,454,016 shares of common stock, par value $.50 per share, outstanding. PROVIDENCE AND WORCESTER RAILROAD COMPANY Index Part I - Financial Information Item 1 - Financial Statements: Balance Sheets - September 30, 2003 and December 31, 2002...... 3 Statements of Income (Loss) - Three and Nine Months Ended September 30, 2003 and 2002........................................................ 4 Statements of Cash Flows - Nine months Ended September 30, 2003 and 2002........................ 5 Notes to Financial Statements .................................. 6-10 Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 11-15 Item 3 -Quantitative and Qualitative Disclosures About Market Risk... 15 Item 4 -Controls and Procedures...................................... 16 Part II - Other Information: Item 6 - Exhibits and Reports on Form 8-K .......................... 16 Signatures ............................................................... 17 EXHIBIT 31-Certifications Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.............................. 18-19 EXHIBIT 32- Certifications Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002................. 20 2 Item 1. Financial Statements ----------------------------- PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (Dollars in Thousands Except Per Share Amounts) ASSETS September 30,December 31, 2003 2002 (Unaudited) ------- ------- Current Assets: Cash and equivalents ................................ $ 1,208 $ 2,888 Accounts receivable, net of allowance for doubtful accounts of $125 in 2003 and 2002 ......... 3,570 3,304 Materials and supplies .............................. 1,420 1,634 Prepaid expenses and other .......................... 174 536 Deferred income taxes ............................... 168 126 ------- ------- Total Current Assets ............................... 6,540 8,488 Property and Equipment, net .......................... 71,234 70,057 Land Held for Development ............................ 11,958 11,955 ------- ------- Total Assets ......................................... $89,732 $90,500 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable .................................... $ 1,655 $ 3,017 Accrued expenses .................................... 1,024 964 ------- ------- Total Current Liabilities .......................... 2,679 3,981 ------- ------- Profit-Sharing Plan Contribution ..................... 100 -- ------- ------- Deferred Grant Income ................................ 8,068 7,980 ------- ------- Deferred Income Taxes ................................ 10,145 9,898 ------- ------- Commitments and Contingent Liabilities Shareholders' Equity: Preferred stock, 10% noncumulative, $50 par value; authorized, issued and outstanding 645 shares in 2003 and 2002 ........................ 32 32 Common stock, $.50 par value; authorized 15,000,000 shares; issued and outstanding 4,452,517 shares in 2003 and 4,443,380 shares in 2002 ..................................... 2,226 2,222 Additional paid-in capital .......................... 29,673 29,619 Retained earnings ................................... 36,809 36,768 ------- ------- Total Shareholders' Equity ......................... 68,740 68,641 ------- ------- Total Liabilities and Shareholders' Equity ........... $89,732 $90,500 ======= ======= The accompanying notes are an integral part of the financial statements. 3 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF INCOME (LOSS) (Unaudited) (Dollars in Thousands Except Per Share Amounts) Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------- ------- ------- ------- Revenues: Operating Revenues - Freight and Non-Freight ..................... $ 6,674 $6,313 $ 17,789 $17,553 Other Income ......................... 253 147 515 643 ------- ------ -------- ------- Total Revenues .................... 6,927 6,460 18,304 18,196 ------- ------ -------- ------- Operating Expenses: Maintenance of way and structures ......................... 865 678 2,700 2,819 Maintenance of equipment ............ 561 518 1,709 1,555 Transportation ...................... 1,614 1,705 4,902 4,818 General and administrative .......... 980 998 2,814 2,932 Depreciation ........................ 718 668 2,153 1,991 Taxes, other than income taxes .............................. 555 568 1,703 1,798 Car hire, net ....................... 218 192 618 737 Employee retirement plans ........... 157 57 270 171 Track usage fees .................... 190 248 533 1,513 ------- ------ -------- ------- Total Operating Expenses ........... 5,858 5,632 17,402 18,334 ------- ------ -------- ------- Income (Loss) before Income Taxes (Benefit) ..................... 1,069 828 902 (138) Provision for Income Taxes (Benefit) ........................... 375 285 325 (50) ------- ------ -------- ------- Net Income (Loss) .................... 694 543 577 (88) Preferred Stock Dividends ............ -- -- 3 3 ------- ------ -------- ------- Net Income (Loss) Available to Common Shareholders ................. $ 694 $ 543 $ 574 $ (91) ======= ====== ======== ======= Basic Income (Loss) Per Common Share ............................... $ .16 $ .12 $ .13 $ (.02) ======= ====== ======== ======= Diluted Income (Loss) Per Common Share ........................ $ .15 $ .12 $ .13 $ (.02) ======= ====== ======== ======= The accompanying notes are an integral part of the financial statements. 4 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands) Nine Months Ended September 30, 2003 2002 ------- ------- Cash Flows from Operating Activities: Net income (loss) .................................... $ 577 $ (88) Adjustments to reconcile net income to net cash flows from operating activities: Depreciation ........................................ 2,153 1,991 Amortization of deferred grant income ............... (165) (160) Profit-sharing plan contribution to be funded with common stock ........................... 100 -- Gains from sale of property, equipment and easements, net ..................................... (157) (239) Deferred income tax expense ......................... 205 245 Other ............................................... -- 6 Increase (decrease) in cash from: Accounts receivable ................................ (365) 269 Materials and supplies ............................. 214 76 Prepaid expenses and other ......................... 362 22 Accounts payable and accrued expenses .............. (1,359) 1,451 ------- ------- Net cash flows from operating activities ............. 1,565 3,573 ------- ------- Cash Flows from Investing Activities: Purchase of property and equipment ................... (3,294) (3,932) Proceeds from sale of property, equipment and easements ........................................... 175 315 Proceeds from deferred grant income .................. 352 285 ------- ------- Net cash flows used in investing activities .......... (2,767) (3,332) ------- ------- Cash Flows from Financing Activities: Dividends paid ....................................... (536) (535) Issuance of common shares for stock options exercised and employee stock purchases .............. 58 75 ------- ------- Net cash flows used in financing activities .......... (478) (460) ------- ------- Decrease in Cash and Equivalents ..................... (1,680) (219) Cash and Equivalents, Beginning of Period ............ 2,888 3,804 ------- ------- Cash and Equivalents, End of Period .................. $ 1,208 $ 3,585 ======= ======= Supplemental Disclosures: Cash received during the period from Income tax refunds ......................................... $ 156 $ -- ======= ======= Non-cash transactions are described in Note 2. The accompanying notes are an integral part of the financial statements. 5 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (Dollars in Thousands Except Per Share Amounts) 1. In the opinion of management, the accompanying interim financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2003 and the results of operations and cash flows for the interim periods ended September 30, 2003 and 2002. Certain prior period amounts have been reclassified to be consistent with current period presentation. Results for interim periods may not necessarily be indicative of the results to be expected for the year. These interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission. 2. Changes in Shareholders' Equity: Total Additional Share Preferred Common Paid-in Retained holders' Stock Stock Capital Earnings Equity ------- ------- ------- ------- ------- Balance, December 31,2002 $ 32 $ 2,222 $29,619 $36,768 $68,641 Issuance of 9,137 common shares for stock options exercised and employee stock purchases .............. 4 54 58 Dividends: Preferred stock, $5.00 per share ........ (3) (3) Common stock, $.12 per share .............. (533) (533) Net income for the period ................. 577 577 ------- ------- ------- ------- ------- Balance, September 30, 2003 $ 32 $ 2,226 $29,673 $36,809 $68,740 ======= ======= ======= ======= ======= During the nine months ended September 30, 2002 the Company issued 16,205 shares of its common stock with an aggregate fair market value of $151 to fund its 2001 profit-sharing plan contribution. 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 created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay") originally 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, 2009 and the CRMC permit has been extended to May 11, 2009. 6 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued) (Dollars in Thousands Except Per Share Amounts) 4. Other Income: Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2003 2002 2003 2002 ------ ------ ------ ------ Gains from sale of property, equipment and easements, net ...... $ 145 $ 38 $ 157 $ 239 Rentals .............. 107 99 350 365 Interest ............. 1 10 8 39 ------ ------ ------ ------ $ 253 $ 147 $ 515 $ 643 ====== ====== ====== ====== 5. Income (Loss) Per Share: Basic income (loss) per common share is computed using the weighted average number of common shares outstanding during each period. Diluted income (loss) per common share reflects the effect of the Company's outstanding convertible preferred stock, options and warrants except where such items would be antidilutive. A reconciliation of weighted average shares used for the basic computation and that used for the diluted computation is as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Weighted average shares for basic ............ 4,449,774 4,435,596 4,446,775 4,424,715 Dilutive effect of convertible preferred stock, options and warrants ............. 69,355 67,829 65,912 -- --------- --------- --------- --------- Weighted average shares for diluted .......... 4,519,129 4,503,425 4,512,687 4,424,715 ========= ========= ========= ========= Options and warrants to purchase 187,559 shares and 208,214 shares of common stock were outstanding for the three and nine month periods ended September 30, 2003, respectively, and options and warrants to purchase 199,010 shares and 226,576 shares of common stock were outstanding for the three and nine month periods ended September 30, 2002 respectively, but were not included in the computation of diluted earnings (loss) per share because their effect would be antidilutive. 6. Amtrak Arbitration: The Company was party to an arbitration proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases with respect to the Company's freight operations over a portion of Amtrak's Northeast Corridor in the states of Rhode Island and Connecticut. The arbitrator issued a decision in June 2002 in which he ordered the Company to pay Amtrak additional track usage fees and siding maintenance costs retroactive to July 9, 1999. The total amount owed by the Company for the period from July 9, 1999 through March 31, 2002 was approximately $1,250, of which $1,150 relates to years prior to 2002. This amount was charged to operations during the nine months ended September 30, 2002. 7 7. Commitments and Contingent Liabilities: The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits. On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Superfund Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA. In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about sixty parties named thus far by Plaintiffs, who seek to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C. section 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company has entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. The Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site. The Company will contest this suit. 8. Dividends: On October 29, 2003, the Company declared a dividend of $.04 per share on its outstanding Common Stock payable November 20, 2003 to shareholders of record November 6, 2003. 9. Stock Based Compensation: The Company accounts for stock-based compensation awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company used the fair value method to value compensation, as set forth in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based 8 Compensation", the Company's net income (loss) and net income (loss) per share would have been reported as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2003 2002 2003 2002 ------ ------ ------ ------ Net income (loss) available to common shareholders: As reported ................. $ 694 $ 543 $ 574 $ (91) Less impact of stock option expense 10 8 28 25 ------ ------ ------ ------ Pro forma ................... $ 684 $ 535 $ 546 $ (116) ====== ====== ====== ====== Basic income (loss) per share: As reported .................. $ .16 $ .12 $ .13 $ (.02) Less impact of stock option expense ............. .01 -- .01 .01 ------ ------ ------ ------ Pro forma .................... $ .15 $ .12 $ .12 $ (.03) ====== ====== ====== ====== Diluted income (loss) per share: As reported .................. $ .15 $ .12 $ .13 $ (.02) Less impact of stock option expense ............. -- -- .01 .01 ------ ------ ------ ------ Pro forma .................... $ .15 $ .12 $ .12 $ (.03) ====== ====== ====== ====== 10. Recently Issued Financial Accounting Standards: In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated costs. Under this statement, an entity must recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred or in a period in which a reasonable estimate of fair value may be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted this Statement on January 1, 2003 and there was no effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for financial statements issued on or after May 15, 2002. The Company adopted this Statement on January 1, 2003 and there was no effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs 9 Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this Statement on January 1, 2003 and there was no effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company does not currently intend to adopt the fair value based method of measuring compensation associated with stock awards and grants. As a consequence of continuing to utilize the intrinsic value method of measuring such compensation, the Company has provided additional disclosures in its quarterly financial statements which reflect the impact on net income and earnings per share on a pro forma basis as if it had applied the fair value method to stock-based employee compensation. In May 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" for certain decisions made by the FASB as part of the Derivatives Implementation Group process. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designed after June 30, 2003. The Company adopted this statement in 2003 and there was no effect on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. The Company adopted this statement in 2003 and there was no effect on the Company's financial statements. 10 PROVIDENCE AND WORCESTER RAILROAD COMPANY ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF ---------------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MDA") which are not historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions, however, that actual results could differ materially from those indicated in MDA. Critical Accounting Policies ---------------------------- The Securities and Exchange Commission ("SEC") defines critical accounting policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 1 of the Notes to Financial Statements in its Annual Report on Form 10-K. None of these significant accounting policies requires management to make difficult, subjective or complex judgments or estimates, and therefore none meets the SEC definition of "critical." Results of Operations --------------------- The following table sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues: Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- -------------- -------------- (In thousands, except percentages) Freight Revenues: Conventional carloads ........ $5,516 82.7% $5,291 83.8% $14,697 82.6% $14,704 83.8% Containers ....... 800 12.0 679 10.8 2,218 12.5 1,913 10.9 Non-Freight Operating Revenues: Transportation services ........ 228 3.4 233 3.7 542 3.0 579 3.3 Other ............ 130 1.9 110 1.7 332 1.9 357 2.0 Total........... $6,674 100.0% $6,313 100.0% $17,789 100.0% $17,553 100.0% ====== ===== ====== ===== ======= ===== ======= ===== 11 The following table sets forth a comparison of the Company's operating expenses expressed in dollars and as a percentage of operating revenues: Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- -------------- -------------- (In thousands, except percentages) Salaries, wages, payroll taxes and employee benefits $3,465 51.9% $3,454 54.7% $9,987 56.1% $9,960 56.7% Casualties and insurance ....... 244 3.7 300 4.8 788 4.4 781 4.5 Depreciation ..... 718 10.8 668 10.6 2,153 12.1 1,991 11.3 Diesel fuel ...... 276 4.1 256 4.1 833 4.7 762 4.3 Car hire, net .... 218 3.3 192 3.0 618 3.5 737 4.2 Purchased services, including legal and professional fees ............ 374 5.6 328 5.2 968 5.4 1,277 7.3 Repair and maintenance of equipment ....... 169 2.5 186 2.9 609 3.4 595 3.4 Track and signal materials ...... 700 10.5 365 5.8 1,771 9.9 1,458 8.3 Track usage fees 190 2.8 248 3.9 533 3.0 1,513 8.6 Other materials and supplies .... 213 3.2 202 3.2 792 4.5 615 3.5 Other ............ 324 4.9 318 5.0 1,149 6.5 1,097 6.3 ------ ----- ------ ----- ------- ----- ------ ----- Total .......... 6,891 103.3 6,517 103.2 20,201 113.5 20,786 118.4 Less capitalized and recovered costs ......... 1,033 15.5 885 14.0 2,799 15.7 2,452 14.0 ------ ----- ------ ----- ------- ----- ------ ----- Total ........ $5,858 87.8% $5,632 89.2% $17,402 97.8% $18,334 104.4% ====== ===== ====== ===== ======= ===== ======= ===== Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 Amtrak Arbitration: The Company was party to an arbitration proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases with respect to the Company's freight operations over a portion of Amtrak's Northeast Corridor in the states of Rhode Island and Connecticut. The arbitrator issued a decision in June 2002 in which he ordered the Company to pay Amtrak additional track usage fees and siding maintenance costs retroactive to July 9, 1999. The statement of loss for the nine months ended September 30, 2002 includes $940,000 of track usage fees and $210,000 of siding maintenance costs which relate to years prior to 2002. In prior years it was the Company's practice to net its track usage fees against conventional freight revenues. Because of the increased significance of track usage fees upon the Company's operations and in order to conform to common industry practice the Company began reporting track usage fees as an operating expense in its financial statements for the year ended December 31, 2002. Operating revenues and expenses for the nine months ended September 30, 2002 have been reclassified to conform to the current presentation. Operating Revenues: Operating revenues increased $236,000, or 1.3%, to $17.8 million in the nine months ended September 30, 2003 from $17.6 million in 2002. This increase is the net result of a $305,000 (15.9%) increase in container freight revenues partially offset by a $7,000 decrease in conventional freight revenues and a $62,000 (6.6%) decrease in non-freight operating revenues. 12 The increase in container freight revenues is the result of a 4.7% increase in traffic volume and a 10.8% increase in the average revenue received per container. Intermodal containers handled during the nine-month period increased by 2,211 to 49,717 in 2003 from 47,506 in 2002. The increase in the average revenue received per container is the result of a contractual rate increase as well as a change in the mix of containers handled. The small decrease in conventional freight revenues is the result of a 4.1% decrease in conventional carloadings largely offset by a 4.2% increase in the average revenue received per carloading. The Company's conventional carloadings decreased by 999 to 23,354 in the first nine months of 2003 from 24,353 in 2002. The decline in conventional traffic is largely attributable to a decrease in construction aggregate carloadings partially offset by an increase in carloadings of coal. The decrease in construction aggregate traffic, a lower rated commodity, has had the effect of increasing the traffic mix toward higher rated commodities, thereby resulting in an increase in the average revenue received per carloading. The decrease in non-freight operating revenues for the nine-month period is the result of modest decreases in maintenance department billings, as well as demurrage and other miscellaneous billings. Revenues of this nature typically vary from period to period depending upon the needs of freight customers and other outside parties. Other Income: Other income decreased by $128,000 to $515,000 in the first nine months of 2003 from $643,000 in 2002. This decrease results from lower gains from sales of property, equipment and easements. In addition interest earned on temporary cash investments has decreased due to lower cash balances and a decrease in interest rates. Operating Expenses: Operating expenses for the nine-month period decreased by $932,000 to $17.4 million in 2003 from $18.3 million in 2002. This decrease reflects the impact of the prior year portion of the Amtrak arbitration award upon 2002. Operating expenses for 2003 include $100,000 of profit-sharing expense, whereas there was no profit-sharing expense in 2002. Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 Operating Revenues: Operating revenues increased $361,000, or 5.7%, to $6.7 million in the third quarter of 2003 from $6.3 million in the third quarter of 2002. This increase is the combined result of a $225,000 (4.3%) increase in conventional freight revenues, a $121,000 (17.8%) increase in container freight revenues and a $15,000 (4.4%) increase in non-freight operating revenues. The increase in conventional freight revenues results from a 6.1% increase in the average revenue received per conventional carloading partially offset by a 1.7% decrease in carloadings. The Company's conventional carloadings decreased by 168 to 9,655 in the third quarter of 2003 from 9,823 in the third quarter of 2002. The decline in conventional traffic volume for the quarter is mainly attributable to a decrease in construction aggregate carloadings partially offset by an increase in carloadings of coal. This change in commodity mix is primarily responsible for the increase in the average revenue received per conventional carloading during the quarter. The increase in container freight revenues during the quarter is the result of a 1.8% increase in traffic volume and a 15.7% increase in the average revenue 13 received per container. Intermodal containers handled during the quarter increased by 316 to 17,462 in the third quarter of 2003 from 17,146 in the third quarter of 2002. The increase in the average revenue received per container is attributable to a contractual rate increase, as well as a change in the mix of containers handled. The small increase in non-freight operating revenues for the quarter results from an increase in maintenance departmental billings. Other Income: Other income increased by $106,000 to $253,000 in the third quarter of 2003 from $147,000 in the third quarter of 2002. The cause of this increase was a $107,000 increase in gains from the sale of property, equipment and easements. Income of this nature can vary significantly from period to period. Operating Expenses: Operating expenses for the third quarter increased by $226,000, or 4.0%, to $5.9 million in 2003 from $5.6 million in 2002. The third quarter of 2003 includes $100,000 of employee profit-sharing expense, whereas no profit-sharing expense was incurred in 2002. Liquidity and Capital Resources ------------------------------- During the first nine months of 2003 the Company generated $1.6 million of cash from its operations. Total cash and equivalents decreased by $1.7 million for the period. The principal utilization of cash during the period, other than for operations, was for expenditures for property and equipment, of which $2.0 million was for additions and improvements to track structure, and for the payment of dividends. In management's opinion, cash generated from operations during the remainder of 2003 will be sufficient to enable the Company to meet its operating expenses and its capital expenditure and dividend requirements. Seasonality ----------- Historically, the Company's operating revenues are lowest for the first quarter due to the absence of construction aggregate shipments during a portion of this period and to winter weather conditions. Recent Accounting Pronouncements -------------------------------- In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated costs. Under this statement, an entity must recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred or in a period in which a reasonable estimate of fair value may be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted this statement on January 1, 2003 and there was no effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback 14 transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for financial statements issued on or after May 15, 2002. The Company adopted this statement on January 1, 2003 and there was no effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this Statement on January 1, 2003 and there was no effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company does not currently intend to adopt the fair value based method of measuring compensation associated with stock awards and grants. As a consequence of continuing to utilize the intrinsic value method of measuring such compensation, the Company has provided additional disclosures in its quarterly financial statements which reflect the impact on net income and earnings per share on a pro forma basis as if it had applied the fair value method to stock-based employee compensation. In May 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" for certain decisions made by the FASB as part of the Derivatives Implementation Group process. This Statement is effective for contracts entered into or modified after June 30 2003, and for hedging relationships designed after June 30, 2003. The Company adopted this statement in 2003 and there was no effect of the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. The Company adopted this statement in 2003 and there was no effect of the Company's financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------------ Cash and Equivalents As of September 30, 2003, 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 September 30, 2003. 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. 15 Item 4. Controls and Procedures ------------------------------- As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Treasurer. Based upon that evaluation, the Chief Executive Officer and the Treasurer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There was no significant change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting. PART II - Other Information --------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (b) No reports on Form 8-K were filed during the quarter ended September 30, 2003. 16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROVIDENCE AND WORCESTER RAILROAD COMPANY By: /s/ Robert H. Eder --------------------------- Robert H. Eder, Chairman of the Board And Chief Executive Officer By: /s/ Robert J. Easton --------------------------- Robert J. Easton Treasurer and Principal Financial Officer DATED: November 14, 2003 17 EXHIBIT 31.1 Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, ROBERT H. EDER, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Providence and Worcester Railroad Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on our evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: November 14, 2003 By: /s/ Robert H. Eder --------------------------- Robert H. Eder, Chairman of the Board And Chief Executive Officer 18 EXHIBIT 31.2 Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, ROBERT J. EASTON certify that: 1. I have reviewed this quarterly report on Form 10-Q of Providence and Worcester Railroad Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on our evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: November 14, 2003 By: /s/ Robert J. Easton --------------------------- Robert J. Easton Treasurer and Principal Financial Officer 19 EXHIBIT 32 PROVIDENCE AND WORCESTER RAILROAD COMPANY CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Providence and Worcester Railroad Company (the Company) on form 10-Q for the quarterly period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert H. Eder ----------------------------- Robert H. Eder, Chairman of the Board And Chief Executive Officer November 14, 2003 In connection with the Quarterly Report of Providence and Worcester Railroad Company (the Company) on form 10-Q for the quarterly period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert J. Easton ----------------------------- Robert J. Easton, Treasurer and Chief Financial Officer November 14, 2003