-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FxRPhnGtsuWSZABPcIZqgQtUiKBnlo7BfHWryL8b2d2lIjOm2XQLB7mhkwip9Ewb kn32jFcDH4lXjK3MrCR+Cg== 0000831968-97-000009.txt : 19970401 0000831968-97-000009.hdr.sgml : 19970401 ACCESSION NUMBER: 0000831968-97-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDENCE & WORCESTER RAILROAD CO/RI/ CENTRAL INDEX KEY: 0000831968 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 050344399 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12761 FILM NUMBER: 97569435 BUSINESS ADDRESS: STREET 1: 75 HAMMOND ST CITY: WORCESTER STATE: MA ZIP: 01610 BUSINESS PHONE: 5087554000 MAIL ADDRESS: STREET 1: PROVIDENCE & WORCESTER RAILROAD CO STREET 2: 75 HAMMOND STREET CITY: WORCESTER STATE: MA ZIP: 01610 10-K 1 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, 1996 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 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered Not Applicable Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common stock, $.50 par value (Title of Class) 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 As of March 1, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $10,168,025. (For this purpose, all directors of the Registrant are considered affiliates.) As of March 1, 1997, the Registrant had 2,189,799 shares of Common Stock outstanding. Documents Incorporated by Reference - Portions of the proxy statement for the 1997 annual meeting of shareholders are incorporated by reference into Part III. Portions of the annual report of Providence and Worcester Railroad Company to shareholders for the year ended December 31, 1996 are incorporated by reference into Parts I, II, and IV. Exhibit Index - Page IV-1. PART I Item 1. Business See pages 4 through 8 of Registrant's 1996 Annual Report to Shareholders for the "President's Report" which includes a discussion of various aspects of the Registrant's business, which pages are incorporated by reference herein. General Development: The Registrant was organized under the laws of Rhode Island in 1969 and is the successor by merger to the freight railroad business which had been actively conducted by Registrant's predecessors in Rhode Island and Massachusetts since 1973 and was thereafter expanded to Eastern Connecticut. In October 1996 the Registrant commenced service to Queens, New York hauling trap rock and similar products. From 1983 through 1987, the Registrant was a wholly-owned subsidiary of Capital Properties, Inc., a Rhode Island corporation ("CPI"). On January 1, 1988, through a series of transactions, the shareholders of CPI received, as a distribution with respect to each share of CPI capital stock held, one share of the Registrant's common stock and one share of the Registrant's preferred stock, and the status of CPI as the parent corporation of the Registrant was terminated. As a result, the Registrant became, upon completion of the transactions, an independent, publicly-held corporation. No regularly scheduled passenger service is provided by the Registrant. It operates over approximately 516 miles of trackage, of which it owns approximately 170 miles. The Registrant interchanges freight traffic with Consolidated Rail Corporation (Conrail) at Worcester, Massachusetts and at New Haven, Connecticut; with the Springfield Terminal Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts; and with the New England Central Railroad (formerly Central Vermont Railway) at New London, Connecticut. Effective October 3, 1996, the Company also handles all sand and stone movements between its system and the Long Island Rail Road at Fresh Pond Junction in Queens, New York. Through its connections, Registrant links approximately 79 communities on its lines, excluding those communities through which the Registrant passes but does not have the right to service customers. There are three principal 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, Connecticut. The Registrant operates, by agreement with a private operator, two approved customs container yards in Worcester, Massachusetts. A customs container yard is an area containing tracks used for I - 1 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 Registrant has been working closely with the container terminal operator to develop strong relationships with container lines involved in international intermodal traffic (traffic which moves via several modes of transportation; i.e. railroad, truck, ship and/or airplane). Container traffic, especially double stack (the method by which containers are moved, via rail, stacked one on top of the other in specially designed rail cars), is expected to be a significant growth market for the transport of goods into New England. Registrant is compensated for rail freight transportation services for traffic handled jointly with other railroads by a share of the aggregate freight revenues. On local traffic handled solely by the Registrant, charges are retained entirely by Registrant and are in amounts specified in tariffs or contracts The Registrant competes with Conrail, Springfield Terminal Railway Company and New England Central Railroad for rail freight traffic of customers who lack sidings of their own and utilize public delivery areas. The Registrant is also subject to competition for substantially all of its traffic from common, contract and proprietary motor carriers, although Registrant is attempting to compete with such carriers through the rail to truck distribution service offered through its arrangement with a public warehouse operator. Many of these competitors, including Conrail, are larger or better capitalized than the Registrant. The Registrant attempts to compete by offering greater convenience and better service than competing carriers and at costs lower than some competing non-rail carriers. The Registrant also competes by participating in efforts to attract new industry to the area which it serves. No single customer of Registrant during 1996, except Tilcon Connecticut, Inc., accounted for as much as 10% of its total freight revenue for the year. Tilcon Connecticut, Inc. accounted for approximately 13% of the Registrant's freight revenue. In addition, the Registrant's business is dependent upon the continued operation of Conrail, Springfield Terminal Railway Company, and New England Central Railway, with whom in the aggregate it interchanges substantially all of its freight traffic. The Registrant does not believe that it is likely that Tilcon Connecticut, Inc. will cease to be a rail shipper or will significantly decrease its freight volume in the foreseeable future. The nature of Tilcon's business operations, such as the quarrying of trap rock and production of asphalt, does not readily lend itself to alternative modes of transportation. In the unlikely event that this customer should cease or significantly reduce it's rail freight operations Registrant believes that it could restructure it's operations so as to reduce operating costs by an amount sufficient to offset the decrease in operating revenue. I - 2 The following table sets forth the volume of conventional freight cars and containers handled by Registrant during the past three years. Conventional Year Carloads Containers 1996 27,241 39,701 1995 29,139 41,211 1994 28,404 45,405
Reasons for the variations in traffic volume between years are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Net container freight revenue amounted to approximately 8% of total operating revenue in each of the three years. Miscellaneous The Registrant's executive and administrative offices as well as it's transportation operations center are located in Worcester Massachusetts at the hub of it's rail system. All of the day to day management of Registrant's rail freight operations as well as it's executive, administrative, financial, sales and marketing, engineering and maintenance activities are conducted from this centralized location. Substantially all of Registrant's main line track meets Federal Railroad Administration Class 3 standards permitting freight train speeds of forty miles per hour and Registrant intends to continue to maintain it at this level. The Registrant maintains the track on it's various branch lines to whatever level is necessary to properly service the rail freight customers located on those lines. In many instances such branch lines are maintained to less than Class 3 standards permitting maximum freight train speeds as low as 10 miles per hour. The track on these lines will be upgraded only if anticipated future rail traffic volumes warrant such upgrading. The Registrant is engaged in a clearance improvement program on its main line, in connection with clearance improvement programs initiated by the Commonwealth of Massachusetts and the State of Rhode Island. The programs, when completed, should provide high clearance access for double stack container and tri-level auto rail cars to identified terminal/port facilities. Other clearance improvements on the Registrant's rail system will be evaluated upon the identification of additional terminal facilities. During the last three years, no moneys were expended by the Registrant on material research activities. I - 3 Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, does not have a material effect upon the capital expenditures, earnings or competitive position of Registrant. The Registrant's business is seasonal to the extent that it is affected by summer vacation shutdowns of shippers on its lines, normal seasonal patterns of its customers, and by occasionally adverse weather conditions during the winter months. On December 31, 1996, the Registrant employed a total of 140 persons. Item 2. Properties. See pages 4 through 8 of Registrant's 1996 Annual Report to Shareholders for the "President's Report" which includes a discussion of various matters relating to the Registrant's properties, which pages are incorporated by reference herein. Physical Facilities The Registrant owns land and a building in Worcester, Massachusetts adjacent to one of its principal classification yards. A portion of the building has been renovated and this renovated portion houses the Registrant's executive and administrative offices as well as some space leased to outside tenants. The Registrant's executive and administrative offices occupy approximately 21,000 square feet of space out of a total space of approximately 69,500 square feet in the building. In addition the registrant is leasing approximately 2,100 square feet of space to an outside tenant. The Registrant has no current plans to renovate any additional portions of this building. The Registrant's three principal classification yards are located in Worcester, Massachusetts (approximately 125 acres), Valley Falls, Rhode Island (approximately 6.5 acres) and Plainfield, Connecticut (approximately 10 acres). The Worcester yard contains an engine house, a maintenance center and the communications center and freight office. The Valley Falls yard contains an engine house for heated overnight storage of locomotives. The Registrant also has a centralized maintenance of way equipment repair depot in Plainfield, Connecticut. The Registrant's operating real property located in Worcester County, Massachusetts, has been mortgaged to CPI to secure the payment by the Registrant of a 20-year, 10% promissory note with an outstanding principal balance of $4,211,000 as of December 31, 1996. The Registrant believes that it's executive and administrative office facilities, classification yards, maintenance facilities, etc. are fully adequate to support its current level of operations. In addition such facilities could be expanded to handle any likely increase in rail freight operations as might be expected in the future. I - 4 Other Real Property: The Registrant and Amtrak own approximately 130 acres of real estate located along the principal railroad lines from downtown Providence (from approximately 2/3 of a mile west of Union Station) through Pawtucket, Rhode Island. Of this amount, Registrant owns approximately 8 acres in Pawtucket and has a perpetual easement for railroad purposes over the remaining 122 acres. The Registrant has other parcels of real property at other points along its lines which could be made available for other than operating purposes. At this time, management of Registrant has no specific program for development of such properties. Historically, the Registrant has sold parcels not integral to its operations and will continue to entertain offers to sell other similar parcels. The Registrant owns the Wilkesbarre Pier in the Port of Providence at East Providence, Rhode Island, and has direct access to this deep-water pier by rail. At present, the pier has berthing space for only one vessel and is used primarily for the off-loading of petroleum products. As discussed more fully in the President's Report, the Registrant, since 1979, has been engaged in the engineering, design and construction of a rail/ship terminal ("South Quay") located immediately south of and abutting the Wilkesbarre Pier. The work remaining at the South Quay terminal includes dock construction and infrastructure improvements such as paving, lighting, and utility installation. The nature and cost of these improvements are directly dependent on the size and use of the facility. These parameters will be established by future users. With respect to the dock, if construction is not accomplished by the end of 1998, the Registrant will require extensions of the existing permits from the Rhode Island Coastal Resource Management Council ("CRMC") and the U.S. Army Corps of Engineers ("COE"). The CRMC has jurisdiction over construction activity within 200 feet of a coastal feature and the COE has concurrent jurisdiction over dock construction in the waterway. The Registrant expects to begin discussions with the agencies in the last quarter of 1997 or first quarter of 1998. In the event permit extensions are not granted, the Registrant will seek new permits for each new phase of construction. The type of permits required for particular phases of further construction depend on the nature and location of the work. I - 5 Rolling Stock The following schedule sets forth the Registrant's rolling stock as at December 31, 1996, all of which is owned by the Registrant: Description Number Locomotive 20 Gondola 37 Flat Car 4 Ballast Car 36 Passenger Equipment 5 Caboose 2 Total 104
The 20 locomotives are used on a daily basis, are maintained to high standard, comply with all Federal Railroad Administration and Association of American Railroads rules and regulations and are adequate for the needs of the Registrant's freight operations. The Registrant intends to expand its locomotive fleet by the acquisition of 3 locomotives in 1997. The 37 gondolas and 4 flat cars are used by certain of the Registrant's customers. Other rail freight customers utilize their own freight cars or obtain such equipment from other sources. The 36 ballast cars are used to maintain the surface of the Registrant's track structure as well as the track shoulders by depositing ballast (crushed rock). The Registrant has leased, from time to time, its ballast cars to other adjoining railroads also for the purpose of adding ballast to support track structure. The passenger equipment and cabooses are not utilized in the Registrant's rail freight operation. The Registrant has equipment permitting two-way radio contact with every train crew and maintenance vehicle in its system thereby permitting each train crew to maintain radio contact with other crew members. In addition the Registrant's Operations Center, located in Worcester, Massachusetts, maintains constant radio contact with all trains, maintenance vehicles and any other vehicles located anywhere on it's rail system. I - 6 Item 3. Legal Proceedings. The Registrant owns a site which is contaminated with petroleum products. It is currently productive as a part of the Registrant's double-stack intermodal yard. The site is not the subject of any agency proceedings. Environmental specialists have indicated that natural biodegradation of the contamination is occurring. The Registrant is in the process of developing a plan for the site which will address remediation requirements. It is anticipated that only minor remediation, if any, will be required. The exact costs of remediation are not known at this time, but it is expected that the costs will not be material to the operations, financial position or liquidity of the Registrant. Other Litigation: The business in which the Registrant is engaged ordinarily results in actions for negligence and other claims, and in the opinion of management, the legal proceedings to which it is a party in addition to those set forth above are normal for such business. Item 4. Submission of Matters to a Vote of Security Holders Not applicable: I - 7 PART II Item 5. Market for Railroad's Common Stock and Related Security Holder Matters. See page 32 of Registrant's 1996 Annual Report to Shareholders, which page is incorporated by reference herein. Item 6. Selected Financial Data. See page 10 of Registrant's 1996 Annual Report to Shareholders, which page is incorporated by reference herein. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. See pages 11 through 14 of Registrant's 1996 Annual Report to Shareholders, which pages are incorporated by reference herein. Item 8. Financial Statements and Supplementary Data. Information in response to this item is contained in the Registrant's 1996 Annual Report to Shareholders which is incorporated herein by reference. Item 9. Disagreements on Accounting and Financial Disclosure Not applicable. II-1 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant. For information with respect to the directors of the Registrant, see pages 2 and 3 of the Registrant's definitive proxy statement for the 1997 annual meeting of its shareholders, which pages are incorporated by reference, herein. The following are the executive officers of the Registrant: NAME AGE OFFICE HELD ELECTION TO OFFICE Robert H. Eder 64 Chairman 1980 Orville R. Harrold 64 President 1980 Ronald P. Chrzanowski 54 Vice President 1983 Heidi J. Eddins 40 Secretary 1988 Robert J. Easton 53 Treasurer 1988 All officers hold their respective offices until their successors are duly elected and qualified. For further information with respect to Messrs. Eder, Harrold, Chrzanowski and Easton, see pages 2 and 3 of the Registrant's definitive proxy statement for the 1997 annual meeting. Ms. Eddins has served as General Counsel to the Registrant since 1984. Item 11. Executive Compensation. See pages 4 and 5 of the Registrant's definitive proxy statement for the 1997 annual meeting of its shareholders, which pages are incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management. See pages 6 and 7 of the Registrant's definitive proxy statement for the 1997 annual meeting of its shareholders, which pages are incorporated by reference herein. If all of Robert H. and Linda Eder's shares of Preferred Stock were converted into Common Stock they would own 1,046,492 shares of the Registrant's outstanding Common Stock. Item 13. Certain Relationships and Related Transactions. Not Applicable. III-1 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report at page IV-3. (3) Listing of Exhibits. (10A) Material Contracts (incorporated by reference to Exhibit 10 to the registration statement of the Registrant on Form 10 and to the Non-Qualified Stock Option Plan of the Registrant on Form S-8). (13) Annual report to shareholders for the year ended December 31, 1996. (23) Independent Auditors' Consent (b) Not applicable. (c) Exhibits (annexed). (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report at Page IV-3. IV-1 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/ Orville R. Harrold By Orville R. Harrold, President Dated: March 28, 1997 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/ Orville R. Harrold Orville R. Harrold, President and Director March 28,1997 (Principal executive Officer) /s/ Ronald P. Chrzanowski Ronald P. Chrzanowski Vice President and Director March 28,1997 /s/ Robert J. Easton Robert J. Easton Treasurer and Director March 28,1997 (Principal financial officer and principal accounting officer) /s/ Phillip D. Brown Phillip D. Brown Director March 28,1997 /s/ John H. Cronin John H. Cronin Director March 28,1997 /s/ J. Joseph Garrahy J. Joseph Garrahy Director March 28,1997 IV-2 ANNUAL REPORT ON FORM 10-K ITEM 14 (a) (1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1996 PROVIDENCE AND WORCESTER RAILROAD COMPANY WORCESTER, MASSACHUSETTS IV-3 FORM 10-K--ITEMS 14 (a) (1) and (2), and 14 (d) PROVIDENCE AND WORCESTER RAILROAD COMPANY LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Providence and Worcester Railroad Company, included in the annual report of Registrant to its shareholders for the year ended December 31, 1996 and independent auditors' report are incorporated by reference in Item 8: Independent auditors' report. Balance sheets - December 31, 1996 and 1995. Statements of income - years ended December 31, 1996, 1995 and 1994. Statements of shareholders' equity - years ended December 31, 1996, 1995 and 1994. Statements of cash flows - years ended December 31, 1996, 1995, and 1994. Notes to financial statements - years ended December 31, 1996, 1995 and 1994. The following financial statement schedules of Providence and Worcester Railroad Company and independent auditors' reports are included in Item 14(d): Page Independent auditors' report IV-5 II Valuation and qualifying accounts IV-6 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. IV-4 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Providence and Worcester Railroad Company: We have audited the financial statements of Providence and Worcester Railroad Company as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated March 7, 1997; such financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Providence and Worcester Railroad Company, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. 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 Boston, Massachusetts March 7, 1997 IV-5 PROVIDENCE AND WORCESTER RAILROAD COMPANY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN THOUSAND DOLLARS) ______________________________________________________________________________ Column A Column B Column C Column D Column E Additions (1) (2) Balance a Charged to Charged to Balance beginning costs and other accounts at end Description of period expenses describe Deductions of period _______________________________________________________________________________ _______________________________________________________________________________ Allowance for doubtful accounts: Year ended December 31, 1996 $125 $7 (A) ($7) $125 Year ended December 31, 1995 $125 $125 Year ended December 31, 1994 $125 $41 (A) ($41) $125
(A) Bad debts written off. IV - 6 PROVIDENCE AND WORCESTER RAILROAD COMPANY ANNUAL REPORT 1996 COVER PAGE PROVIDENCE AND WORCESTER RAILROAD COMPANY EMPLOYEE INJURIES 1994 - 1996 GRAPH INJURIES PER 200,000 PEOPLE HOURS Providence and Worcester Railroad Company has reduced injuries dramatically in the past 3 years as show by the above chart. This accomplishment has earned the company and its employees a prestigious E. H. Harriman Safety Award. These awards are given to railroads who achieve the lowest injury frequency per 200,000 people hours. Awards are given to 3 classes of railroads based on size, measured in total number of people hours. The company's employees finished 2nd in Class C (4,000,000 people hours or less but with a minimum of 250,000 people hours.) There were 20 other railroads competing in this class. The company will receive the Silver Medal in the competition. - 1 - A BRIEF DESCRIPTION OF THE COMPANY'S BUSINESS The Company is an interstate freight carrier conducting railroad operations in Massachusetts, Rhode Island, Connecticut and New York. The railroad first began operations in 1847 between the cities of Providence, Rhode Island and Worcester, Massachusetts and operated independently until 1888, at which time it was leased to others. In February 1973, the Company resumed control of the railroad and its 45 miles of track. In the ensuing 24 years, the Company has expanded its service territories through various transactions. The Company presently operates over approximately 516 miles of trackage of which it owns approximately 170 miles. No regularly scheduled passenger service is provided by the Company. The Company interchanges freight traffic with Consolidated Rail Corporation (Conrail) at Worcester, Massachusetts; with Springfield Terminal Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts; and with New England Central Railroad (formerly Central Vermont Railway) at New London, Connecticut. Effective October 3, 1996, the Company also handles all sand and stone movements between its system and the Long Island Rail Road at Fresh Pond Junction in Queens, New York. Through its connections, the Company links approximately 79 communities on its lines, excluding those communities through which the Company passes but does not have the right to service customers. The main freight classification yard is located in Worcester, Massachusetts and encompasses approximately 125 acres. Worcester is also the location of the Company's locomotive and car maintenance facility and the Company's corporate headquarters building. There are smaller classification yards in Cumberland, Rhode Island, and Plainfield, Connecticut. Plainfield also houses an equipment maintenance facility. The Company services by agreement with a private operator, two approved custom bonded container yards in Worcester, Massachusetts. In 1996, the Company handled 27,241 carloads of freight and 39,701 containers. - 2 - PROVIDENCE AND WORCESTER RAILROAD COMPANY CONVENTIONAL CARLOADS INTERMODAL (CONTAINERS) GRAPH GRAPH TOTAL REVENUES OPERATING REVENUES GRAPH GRAPH EARNINGS PER SHARE NET INCOME GRAPH GRAPH - 3 - PRESIDENT'S REPORT On Friday, October 4, 1996, at approximately 8:00 p.m., the Providence and Worcester Railroad Company operated its first train out of Cedar Hill Yard in New Haven, Connecticut to Fresh Pond Junction on the Long Island Rail Road in Queens, New York. The train consisted of three 2,000 horsepower diesel-electric locomotives and 58 open top hopper cars loaded with 5,750 tons of trap rock destined for Long Island. This was the Company's first service into New York State, with the train crossing the noted Hell Gate Railroad Bridge (see back cover) from the Borough of the Bronx to the Borough of Queens, at 2:30 a.m., and arriving at Fresh Pond Junction at approximately 3:30 a.m. on Saturday morning. The Company made 17 such trips to Fresh Pond in 1996 hauling 402 loaded cars. The Company now operates in four states, Massachusetts, Rhode Island, Connecticut and New York and provides freight service within an area of approximately 516 miles. The Company's performance in 1996 exceeded that of 1995. Income before taxes increased 34.8% in 1996 and earnings increased from $.44 a share to $.56 a share (see figure 5, page 3). Operating revenue for 1996 was down 2% from 1995 (see figure 4, page 3) due to a decrease in conventional carloads of 6% (see figure 1, page 3) and 4% (see figure 2, page 3) in intermodal containers. Non-operating income rose approximately $1.1 million, including the proceeds of the eminent domain taking of the Washington Secondary Branch by the State of Rhode Island in December of 1996. Once again, the Company's employees had an excellent safety record in 1996 with only two reportable injuries in 1996 as compared to five in 1995 and nine in 1994. This represents a 60% decrease, 1996 versus 1995, and a 78% decrease, 1996 versus 1994. Four departments went without a reportable injury in 1996: Transportation, Clerical, Maintenance of Equipment, and Communications and Signals. These employees are to be commended for this tremendous achievement. The graph on page 1 shows the decrease in the number of injuries per 200,000 people hours worked in 1996, 1995 and 1994. The Company and its employees will receive a prestigious Harriman Award for this excellent safety record. At this time, I would like to discuss in more detail events of 1996 and several significant developments that are expected to have an impact on our operations and financial results in the years ahead. I. Rhode Island Freight Rail Improvement Project. The State of Rhode Island is developing a Freight Rail Improvement Project ("FRIP") on that portion of the National Railroad Passenger Corporation's ("Amtrak") Northeast Corridor ("NEC") between its connection with the Company's main line in Central Falls, Rhode Island and the Quonset Point/Davisville port and industrial park ("QP/D"). QP/D contains over 900 acres of developable property, three active piers, an on-site airport and on-site rail. Its total land area of 3,000 acres represents a significant portion of Rhode Island's prime industrial land and currently houses eleven companies which actively use the - 4 - Company's rail services. The State has prepared a development plan for QP/D that includes expanded use of the port facilities and growth of the industrial park. The FRIP will increase the capacity of the NEC by adding or rehabilitating a third track for approximately 18 miles and will increase overhead clearances to allow for the movement of double stack container cars and other high clearance rail cars such as tri-level automobile cars. In November, the Rhode Island electorate approved the issuance of state general obligations bonds totaling $72 million for the QP/D project; $50 million of this amount is earmarked for the FRIP, with $22 million identified for infrastructure improvements within the QP/D facilities. The state investment is expected to be matched with federal appropriations; to date, Congress has appropriated $13 million for the FRIP. The State is preparing a Final Environmental Impact Statement ("FEIS"). The FRIP will take approximately 3 to 4 years to construct following issuance of a Record of Decision from the Federal Highway Administration which is overseeing the development of the FEIS. When coupled with the Company's clearance improvement program, the FRIP should assist the development of QP/D as a more active port and industrial facility and enable the Company to participate in this traffic growth. II. Expansion of System As mentioned above, on October 3, 1996, the Company received approval from the United States Surface Transportation Board ("STB") for the acquisition of the rights to haul sand and stone between the Company's lines and the Long Island Rail Road at Fresh Pond Junction in Queens, New York. Previously, these commodities originating at quarries serviced by the Company and destined for Long Island were required to be interchanged with Consolidated Rail Corporation ("Conrail") at New Haven, Connecticut. The Company provides rail service from three aggregate quarries to three asphalt production plants and to other users of aggregate such as railroads for ballast. III. Clearance Program In conjunction with the FRIP and to facilitate growth in its intermodal business, the Company continued in 1996 to make clearance improvements under structures over its main line between Worcester, Massachusetts and Cumberland (Valley Falls), Rhode Island. On February 26, 1996, Governor William F. Weld signed into law a bill entitled "An Act Relative to the Revitalization and Development of the Commonwealth's Seaports". This Act establishes the Massachusetts Double Stack Network, consisting of the Boston and Albany Line of Conrail from the New York border to the presently existing intermodal facility at Beacon Park Yard in the City of Boston, Massachusetts, the main line of the Boston - 5 - and Maine Corporation from the Vermont border to the existing intermodal facility at Fort Devens in the town of Ayer, Massachusetts, and all lines of the Company in Worcester County, and authorizes clearance improvements on these lines. With the exception of two line segments which may be fully funded by the Commonwealth (Worcester to Boston on the Conrail line and Gardner to Ayer on the B&M line), the Act requires the costs of clearance improvements to be borne 50% by the affected railroad and 50% by the State. For the Company's lines in Worcester County, the Commonwealth's contribution is a maximum of $5.5 million. For the two line segments which may be fully funded by the Commonwealth, the Commonwealth will assess a reimbursement charge on certain containers moving over such lines above designated levels. The Company is endeavoring to complete the required master agreement to establish the terms and conditions for accomplishing the clearance improvements with the Commonwealth's financial participation and intends to utilize the program to maximum advantage. The Company successfully completed 4 clearance projects in 1996 and early 1997 and expects to have all clearance projects on its main line in Rhode Island accomplished by the end of 1997. IV. Status of Conrail Last year the Company advised that it had been selected by Conrail to negotiate for the acquisition of certain Conrail properties in Connecticut and Massachusetts. The parties, however, were unable to come to a mutually acceptable agreement and the negotiations were terminated. Conrail subsequently sold all of its properties and interests in properties north of North Haven, Connecticut to another party. Conrail retained ownership of and continues to operate in Cedar Hill Yard in New Haven, North Haven and Hamden, Connecticut, and on a portion of Amtrak's Hartford line and provides freight service (except sand and stone) on the NEC from New Haven to the Connecticut/New York border. Pursuant to an April 13, 1982 order of the United States Special Court, In the Matter of Expedited Supplemental Transactions Pursuant to Section 305(f) of the Regional Rail Reorganization Act of 1973, the Company possesses the right to acquire all of Conrail's properties in New Haven, Connecticut and that portion of Cedar Hill yard reasonably necessary to conduct operations of the Company if Conrail discontinues service or withdraws from the market. Conrail has indicated its intentions to convey the Massachusetts properties to another buyer, but to date that transaction has not occurred. It is anticipated that ownership and control of Conrail will change. CSX Corporation ("CSX") and Conrail first announced a proposed merger on October 15, 1996. Shortly after the merger announcement, on October 23, 1996, Norfolk Southern Corporation made an independent offer for all of Conrail's stock. According to published reports, the three carriers - Conrail, CSX and Norfolk Southern - are engaged in discussions to attempt a mutually acceptable resolution. Absent an agreement, it is expected that both CSX and Norfolk Southern will make applications to the STB to acquire or merge with Conrail. - 6 - The Company does business with all three carriers and enjoys a good working relationship with each. The Company does not intend to advocate a position as to which of the entities seeking to acquire Conrail should prevail. A significant majority of the Company's interline freight is interchanged with Conrail. The company will be monitoring the discussions and the STB proceedings. Of significant interest to the Company will be the resolution of issues concerning competitive access to Northeast shippers and ports. The Company firmly believes that competitive access to the New England region by at least two Class 1 carriers would benefit the areas shippers and ports. V. Development of Deep Water Pier In April 1975, the Rhode Island Coastal Resources Management Council ("CRMC") issued a permit allowing the Company to fill and reclaim tide-flowed land immediately south of and abutting the Company's Wilkesbarre Pier for the purpose of developing a rail/ship terminal ("South Quay"). In 1979, following issuance of a permit from the United States Department of the Army Corps of Engineers ("COE"), the Company commenced the engineering and design of a berm for the containment basin in which dredged material would be deposited to create the land area. The construction of the berm, including a specially designed facing, was completed in 1984. Due to escalating construction costs, the unavailability of any public assistance which had been originally contemplated, general economic conditions, and the Company's acquisition of all of Conrail's lines in Rhode Island and southeastern Connecticut (which lines were in need of significant rehabilitation), the Company was unable to complete the construction of the South Quay within the time allowed under its permits. The Company applied for and was granted extensions of time from CRMC and COE to complete the project. The permits now expire in 1998. The Company and the City of East Providence entered into an agreement in 1989 which established a procedure for future taxation of the property; and the City, with the Company's concurrence, adopted zoning ordinances which regulate the operation of the port facility. The Company has completed the dredging of a ship berth approximately 135 feet in width by 900 feet in length with a depth of approximately -40 feet mean low water and has substantially completed the process of filling the containment basin to create approximately 33 acres of waterfront land. Erosion protection has also been constructed. In 1995, the Rhode Island Supreme Court issued a decision in Greater Providence Chamber of Commerce, et al v. State of Rhode Island clarifying the quality of title to formerly tide- flowed properties filled with the acquiescence or approval of the State. In that case, the Supreme Court set forth a two-part test which, if satisfied, permits a littoral owner to acquire fee simple absolute title to filled lands. In reliance on this decision, the Company filed an action in Rhode Island Superior Court seeking to confirm the Company's fee simple absolute title - 7 - in the South Quay. The State and the Coastal Resources Management Council objected to the Company's petition. Acting on motions for summary judgment filed by both sides, the Superior Court, in a written decision dated January 31, 1997, ruled that the Company is the owner of the South Quay property in fee simple absolute. The State has appealed this decision to the Rhode Island Supreme Court. The Company will defend the Superior Court decision vigorously. The construction of a dock and infrastructure such as utilities, lighting and paving are required to complete the project. The required investment is directly dependent on the size and use of the facility. These parameters should be established by the users of the facility. The Company is continuing its efforts, working with maritime consultants, to identify investment and finance partners, and strategic market opportunities. VI. Application for Listing on the American Stock Exchange On March 5, 1997, the common stock of the Company began trading on the American Stock Exchange ("Exchange") under the ticker symbol "PWX". The Exchange is an auction market system enabling direct dealing between investors. This system should reduce volatility in the securities listed on the Exchange. The Exchange also provides services to its listed companies to enhance visibility and communications with the investment community. The Company paid the following dividends in 1996: On May 23, 1996, a 10% noncumulative annual preferred dividend of $5.00 per share to holders of preferred stock; on May 23, 1996 and November 29, 1996, semi-annual dividends of $.05 per share to holders of common stock. On behalf of the management and employees of the Company, I wish to express my appreciation and gratitude to you our shareholders, for your continued confidence in and support of the Company. Sincerely yours, /S/ Orville R. Harrold Orville R. Harrold President March 12, 1997 - 8 - DIRECTORS AND OFFICERS OF PROVIDENCE AND WORCESTER RAILROAD COMPANY Robert H. Eder, Director and Chairman of Providence and Worcester Chairman Railroad Company, Worcester, Massachusetts Orville R. Harrold, Director President of Providence and Worcester and President Railroad Company Worcester, Massachusetts Ronald P. Chrzanowski, Vice President of Providence and Worcester Director and Railroad Company Vice President Worcester, Massachusetts Heidi J. Eddins, Secretary Secretary and General Counsel of Providence and General and Worcester Railroad Company Counsel Worcester, Massachusetts Robert J. Easton, Director Treasurer of Providence and Worcester and Treasurer Railroad Company Worcester, Massachusetts Frank W. Barrett, Director Executive Vice President of Springfield Institution for Savings Springfield, Massachusetts Phillip D. Brown, Director President and CEO of Unibank for Savings Whitinsville, Massachusetts John H. Cronin, Director Retired President of Ideal Products, Inc. Worcester, Massachusetts J. Joseph Garrahy, Director President of J. Joseph Garrahy & Associates, Inc. Providence, Rhode Island John J. Healy, Director President of Worcester Affiliated Mfg. L.L.C. Worcester, Massachusetts William J. LeDoux, Director Attorney Worcester, Massachusetts Charles M. McCollam, Jr., President of Bertha M. McCollam, Inc. Director President of McCollam Associates Bethel, Connecticut TRANSFER AGENT INDEPENDENT AUDITORS Fleet National Bank Deloitte & Touche LLP Stock Transfer Department One Chestnut Place - Suite 1010 Post Office Box 1440 Ten Chestnut Street Hartford, CT 06143 Worcester, MA 01608 - 9 - PROVIDENCE AND WORCESTER RAILROAD COMPANY SELECTED FINANCIAL DATA 1996 1995 1994 1993 1992 ___________ ___________ ___________ ___________ ___________ Operating $19,456,000 $19,778,000 $20,292,000 $18,657,000 $16,508,000 revenues =========== =========== =========== =========== =========== Other income $1,660,000 $ 581,000 $1,206,000 $ 707,000 $ 460,000 =========== =========== =========== =========== =========== Income before income taxes $2,031,000 $1,507,000 $3,011,000 $1,675,000 $695,000 =========== =========== =========== =========== =========== Net income $1,251,000 $ 917,000 $1,811,000 $1,105,000 $465,000 =========== =========== =========== =========== =========== Earnings per common and common equivalent share $ .56 $ .44 $ .88 $ .54 $ .23 =========== =========== =========== =========== =========== Total assets $68,491,000 $68,012,000 $61,496,000 $60,706,000 $58,700,000 =========== =========== =========== =========== =========== Long-term debt $12,131,000 $12,977,000 $10,485,000 $11,378,000 $11,305,000 =========== =========== =========== =========== =========== Cash dividends per share: New preferred $ 5.00 $ 5.00 $ N/A $ N/A $ N/A =========== =========== =========== =========== =========== Old preferred $ N/A $ N/A $ .05 $ .05 $ .05 =========== =========== =========== =========== =========== Common $ .10 $ .10 $ .10 $ .10 $ .10 =========== =========== =========== =========== ===========
- 10 - PROVIDENCE AND WORCESTER RAILROAD COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources As detailed in the statements of cash flows in the accompanying financial statements, the Company generated $1,460,000 of cash from operations in 1996 compared with $3,177,000 in 1995. On an overall basis the Company's total cash and equivalents decreased by $1,326,000 in 1996, compared with an increase of $1,417,000 in 1995. The principal utilization of cash during both years were expenditures for property and equipment acquisitions, principal payments on long-term debt obligations, and payments of dividends. In addition, during 1996 the Company reduced its current liabilities by $1,050,000. During 1996 and 1995 the Company generated $1,319,000 and $108,000 respectively from the sales and disposals of properties not considered essential for railroad operations and easements, including $1,000,000 received from the State of Rhode Island from its eminent domain taking of the Company's Washington Secondary Branch in December 1996. The Company has no established policy regarding the sale or other disposition of properties not considered essential for railroad operations. However, there remain certain properties which could be made available for sale, the proceeds of which could be used to further reduce the Company's long- term debt, acquire or make improvements to properties and equipment, reduce current borrowings or provide additional funds for current operations. Such properties include a branch line over which the former Interstate Commerce Commission has granted the Company permission to abandon rail freight service having a net book value of approximately $400,000. Revenue from sales of properties and easements can vary significantly from year to year. In 1996 the Company expended $1,860,000 for track structure and bridge improvements to its plant and equipment. Deferred grant income financed $671,000 of these capital projects. Management estimates that a similar amount of improvements to its track structure and bridges will be made in 1997, 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. Substantially all of the Company's mainline track meets Federal Railroad Administration Class 3 standards (permitting freight train speeds of forty miles per hour) and the Company intends to continue to maintain it at this level. In addition, in 1996 the Company expended $659,000 for land and building improvements and $1,860,000 for equipment, principally additions to its locomotive fleet and track maintenance machinery. As discussed more fully in Note 2 to the accompanying financial statements, the Company, since 1979, has been engaged in the engineering, design and construction of a deep-water pier and rail/ship port facility. Costs incurred in connection with this project, exclusive of land acquisition costs, amounted to $11,339,000 through December 31, 1996. The Company expended $1,215,000 on this project in 1996 to obtain and deposit fill material and to complete the rip-rapping of the south end of the berm. As of December 31, 1996 this phase of the project has been substantially completed. Management remains committed to the completion of this project and intends to continue to explore development opportunities with outside parties for the purpose of obtaining the financial and other assistance necessary to complete this project. - 11 - The Company possesses an exclusive freight service easement over that portion of the Northeast corridor ("NEC") extending from the Massachusetts/Rhode Island line to New Haven, Connecticut, as well as overhead rights between New Haven and Queens, New York. National Railroad Passenger Corporation ("Amtrak") is in the process of designing and implementing a plan to electrify the portion of the NEC from Boston, Massachusetts to New Haven to permit high speed passenger trains to operate on the line. In conjunction with this project the State of Rhode Island is developing a Freight Rail Improvement Project ("FRIP") on that portion of the NEC between its connection with the Company's main line in Central Falls, Rhode Island (north of Providence) and the Quonset Point/Davisville port and industrial park ("QP/D"). QP/D, which is located south of Providence, contains over 900 acres of developable property, three active piers, an on-site airport and on-site rail; its total land area of 3,000 acres represents a significant portion of Rhode Island's prime industrial land and currently houses eleven companies which actively use the Company's rail services. The State has prepared a development plan for QP/D that includes expanded use of the port facilities and growth of the industrial park. The FRIP will increase the capacity of the NEC by adding or rehabilitating a third track, dedicated to freight service, for approximately eighteen miles and will increase overhead clearances to allow for the movement of double stack container and other high clearance rail cars. In November 1996 the Rhode Island electorate approved the issuance of $72 million of state general obligation bonds for the QP/D Project, $50 million of which is to fund the State's portion of the FRIP. The State investment is expected to be matched by Federal appropriations. When coupled with the Company's ongoing project of expanding bridge clearances along its right of way, the FRIP should assist the development of QP/D as a more active port and industrial facility and enable the Company to experience significant growth in its rail traffic. This project is not expected to have a significant impact upon the Company's operations for several years. In 1996, the Company's principal bank renewed its short term revolving credit line of $1,500,000 (see Note 3 to the accompanying financial statements). Loans are drawn against this line and payments of principal are made from time to time depending upon current cash balances and requirements. Loans in the amount of $1,440,000 were outstanding under this line of credit at December 31, 1996. As disclosed in Note 4 to the accompanying financial statements, the Company obtained $5,000,000 from Massachusetts Capital Resources Company ("MCRC") in December 1995 in exchange for a 10% subordinated note payable in the amount of $4,920,000 and warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $7.10 per share, which warrants were valued at $80,000. A portion of the proceeds were utilized to repay the outstanding principal balance on a $1,800,000 term note. The remainder of the proceeds have been utilized for additions to property and equipment and for working capital purposes. As disclosed more fully in Note 8 to the accompanying financial statements, the Company reached an agreement with CPC International, Inc. ("CPC") in December 1995 in which the Company agreed to pay CPC $990,000 in settlement of an environmental claim by CPC against the Company relating to a Superfund site. The Company may, at its option, pay all or any portion of this settlement through the issuance of unregistered, restricted shares of its common stock. The Company issued 108,155 shares of its common stock, having an aggregate fair market value of $780,000, to CPC in December 1995 and January 1996. The remaining liability to CPC of $220,000 (plus interest at an annual rate of 8 3/4% for any portion paid in cash) must be paid no later than June 30, 1999. - 12 - In 1996 the Company paid dividends in the amount of $5.00 per share on its outstanding new preferred stock and $.10 per share on its outstanding common stock. The Company intends to continue the dividend policy established in 1989. Payment of such dividends is contingent upon the Company's continuing to have the necessary financial resources available. At December 31, 1996, for income tax reporting purposes, the Company has available prior years' investment tax credit and other general business credit carryforwards of $407,000 expiring between 1997 and 2000 and an AMT credit carryforward of $242,000. Results of Operations The Company's operating revenue exceeded operating expenses by $1,742,000 in 1996 compared with $2,101,000 in 1995 and $3,090,000 in 1994. The decrease in operating profits for 1996 from 1995 is almost entirely attributable to a decrease in operating revenues. Operating expense between years increased by just $37,000. The decline in 1995 from 1994 is about equally attributable to decreases in operating revenues and increases in operating expenses. The principal reasons for these changes in operating revenues and expenses are explained in the following paragraphs. Operating revenues for 1996 decreased by 2% from 1995. The decrease is the net result of a 6% decrease in conventional traffic volume partially offset by a 4% increase in the average revenue received per conventional carloading. Net revenue from container traffic decreased by just 1% between years from $1,524,000 in 1995 to $1,508,000 in 1996. Container traffic volume decreased by 4% between years but this decrease was largely offset by a 3% increase in the average net revenue received per container. Operating revenues for 1995 decreased by 3% from 1994. This decrease is almost entirely the result of a 27% decrease in net revenue from container traffic which declined from $2,077,000 in 1994 to $1,524,000 in 1995. A decline in container traffic volume accounted for approximately 9% of this decrease with a decrease in the average net revenue received per container accounting for the balance. Conventional traffic volume increased by 3% in 1995 from 1994, but this increase in volume was largely offset by a 3% decrease in the average revenue received per conventional carloading. The decrease in conventional traffic volume in 1996 from 1995 is attributable to an economic slowdown which first became apparent late in the third quarter of 1995. Adverse weather conditions experienced during the first quarter of 1996 added to the decline in traffic. During the third quarter of 1996, as a result of improving economic conditions, conventional traffic volume came back to 1995 levels. Conventional traffic volume for the fourth quarter of 1996 exceeded 1995's levels by 7% and it appears that these higher traffic levels are carrying forward into 1997. A change in the mix of commodities hauled toward higher revenue items, as well as handling certain construction aggregate traffic internally which previously had been interchanged with another railroad, substantially account for the increase in the average revenue received per carloading. The decrease in container traffic volume in 1996 from 1995 is attributable to the same economic factors which affected conventional traffic. The relatively small increase in conventional traffic volume in 1995 from 1994 is explained by the fact that, while the volume of construction aggregate traffic increased significantly between years, this increase was substantially offset by decreases in other commodities. These decreases were primarily incurred during the fourth quarter of 1995 and can be attributed to temporary reductions in the traffic volume of specific commodities such as plastics and paper. This change in the mix of commodities, between years, toward lower revenue construction aggregates has given rise to the decrease in the average revenue per carload. - 13 - One of the Company's major containership line customers withdrew from the Company's intermodal terminal facility in Worcester, Massachusetts, effective July 1, 1994 and moved to the facility of another New England railroad. Loss of this customer substantially accounts for the decrease in container traffic volume in 1995 from 1994. The decrease in the net revenue per container in 1995 from 1994 is attributable to rate adjustments necessitated by competitive factors within the industry. The Company's intermodal terminal facility serves primarily as a terminal for "mini-landbridge" movements of container traffic from the Far East destined for points in Southeastern New England. Several major containership lines utilize regularly scheduled double stack train service through this terminal. The Company has one customer which accounted for approximately 13% of its operating revenues in 1996 and 12% in 1995. Management does not believe that it is likely that this customer will cease to be a rail shipper or will significantly decrease its freight volume in the foreseeable future. In the unlikely event that this customer should cease or significantly reduce its rail freight operations, management believes that it could restructure its operations so as to reduce operating costs by an amount sufficient to offset the decrease in operating revenue. The Company's principal operating expenses are labor and related costs, depreciation and insurance and casualty claim expense, which collectively amounted to 76% of operating expenses in 1996, 75% in 1995 and 72% in 1994. The majority of the Company's employees are covered by union contracts which provide for semi-annual cost-of-living adjustments. Many of the Company's operating costs are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless management takes concrete steps to restructure its operations. Total operating expenses increased by less than 1% in 1996 from 1995 and by 3% in 1995 from 1994. Transportation expense includes the costs of casualty and environmental claims, which claims increased from $460,000 in 1994 to $728,000 in 1995 and then decreased to $171,000 in 1996. The casualty and environmental claims expense recognized in 1994 and 1995 is largely attributable to the environmental claim settlement with CPC previously discussed. The 186% increase in other income in 1996 from 1995 and the 52% decrease in 1995 from 1994 result, for the most part, from changes in the net gains realized from the sale, condemnation and disposal of properties and easements. The amount of revenue realized from the sale, condemnation and disposal of easements and non-essential properties can vary significantly from year to year and management is not able to estimate the revenue which might be realized in future years from such transactions. Interest expense increased by 17% in 1996 over 1995. The increase is principally the result of interest on the subordinated note payable to MCRC, which originated in December 1995 as previously discussed. Interest expense in 1995 decreased by 9% from 1994. This decrease results from lower levels of long-term borrowings and lower rates in effect on both long and short-term borrowing during the year. 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. - 14 - To the Shareholders and Board of Directors of Providence and Worcester Railroad Company: We have audited the accompanying balance sheets of Providence and Worcester Railroad Company as of December 31, 1996 and 1995, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Providence and Worcester Railroad Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Boston, Massachusetts March 7, 1997 - 15 - PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 __________ __________ Current assets: Cash and equivalents $ 686,000 $ 2,012,000 Accounts receivable, net of allowance for doubtful accounts of $125,000 (Notes 3 and 4) 2,537,000 2,834,000 Materials and supplies 1,021,000 731,000 Prepaid expenses and other 121,000 139,000 Deferred income taxes (Note 7) 400,000 767,000 __________ __________ Total current assets 4,765,000 6,483,000 __________ __________ Properties (Notes 2 and 4): Land and improvements 9,020,000 8,614,000 Deep-water pier project 11,339,000 10,419,000 Track structure 45,833,000 44,390,000 Buildings and other structures 5,955,000 5,853,000 Equipment 15,991,000 15,156,000 __________ __________ 88,138,000 84,432,000 Less accumulated depreciation 24,412,000 22,903,000 __________ __________ Total properties, net 63,726,000 61,529,000 __________ __________ $ 68,491,000 $ 68,012,000 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, bank (Note 3) $ 1,440,000 $ - Current portion of long-term debt (Note 4) 677,000 612,000 Accounts payable 2,861,000 4,907,000 Accrued expenses (Note 5) 1,133,000 1,642,000 __________ __________ Total current liabilities 6,111,000 7,161,000 __________ __________ Long-term debt, less current portion (Note 4) 12,131,000 12,977,000 __________ __________ Deferred grant income (Note 1) 5,571,000 5,035,000 __________ __________ Deferred income taxes (Note 7) 8,617,000 8,384,000 __________ __________ Contingencies (Note 8) Shareholders' equity (Notes 8, 9 and 10): Preferred stock, 10% noncumulative, $50 par; authorized, issued and outstanding 653 shares 33,000 33,000 Common stock, $.50 par; authorized 3,023,436 shares; issued and outstanding 2,188,244 shares in 1996 and 2,110,041 shares in 1995 1,094,000 1,055,000 Capital in excess of par 6,365,000 5,828,000 Retained earnings 28,569,000 27,539,000 __________ __________ Total shareholders' equity 36,061,000 34,455,000 __________ __________ $ 68,491,000 $ 68,012,000 ========== ========== See notes to financial statements.
- 16 - STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ___________ ___________ ____________ Revenues: Operating revenues, freight and other $19,456,000 $19,778,000 $ 20,292,000 Other income (Note 6) 1,660,000 581,000 1,206,000 ___________ ___________ ____________ Total revenues 21,116,000 20,359,000 21,498,000 ___________ ___________ ____________ Expenses: Operating: Maintenance of way and structures 3,885,000 3,499,000 3,706,000 Maintenance of equipment 2,425,000 2,298,000 2,237,000 Transportation (Note 5) 4,917,000 5,106,000 4,646,000 General 3,859,000 4,095,000 4,162,000 Taxes, other than income 2,023,000 1,971,000 1,850,000 Car hire, net 605,000 708,000 601,000 ___________ ___________ ____________ 17,714,000 17,677,000 17,202,000 Interest (Notes 3 and 4): Capital Properties, Inc. 437,000 668,000 836,000 Other 934,000 507,000 449,000 ___________ ___________ ____________ 1,371,000 1,175,000 1,285,000 ___________ ___________ ____________ Total expenses 19,085,000 18,852,000 18,487,000 Income before income taxes 2,031,000 1,507,000 3,011,000 ___________ ___________ ____________ Income taxes (Note 7) 780,000 590,000 1,200,000 Net income $ 1,251,000 $ 917,000 $ 1,811,000 =========== =========== ============ Earnings per common and common equivalent share $ .56 $ .44 $ .88 =========== =========== ============ Weighted average common and common equivalent shares outstanding 2,243,682 2,107,869 2,069,548 =========== =========== ============ See notes to financial statements.
- 17 - PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Capital in Preferred Common excess Retained Stock Stock of par Earnings _________ _________ __________ ___________ Balance, January 1, 1994 $ 309,000 $ 716,000 $4,865,000 $25,223,000 Repurchase of 361 old preferred shares (3,000) Conversion of 470,284 old preferred shares into common shares (235,000) 235,000 Conversion of 827 new preferred shares into common shares (41,000) 41,000 Issuance of 1,968 common shares for stock options exercised 1,000 9,000 Issuance of 22,558 common shares to fund the Company's 1993 profit sharing plan contribution 12,000 175,000 Dividends: Old preferred stock, $.05 per share (31,000) Common stock, $.10 per share (173,000) Net income for the year 1,811,000 ________ _________ _________ ___________ Balance, December 31, 1994 33,000 1,005,000 5,046,000 26,830,000 Issuance of 40,606 common shares to fund the Company's 1994 profit sharing plan contribution (Note 11) 20,000 315,000 Issuance of 55,000 common shares in payment of an environmental claim 28,000 363,000 Issuance of 4,374 common shares for stock options exercised 2,000 24,000 Issuance of common stock warrants (Note 4) 80,000 Dividends: New preferred stock, $5.00 per share (3,000) Common stock, $.10 per share (205,000) Net income for the year 917,000 ________ _________ _________ ___________ Balance, December 31, 1995 33,000 1,055,000 5,828,000 27,539,000 Issuance of 53,155 common shares in payment of an environmental claim 27,000 352,000 Issuance of 20,925 common shares to fund the Company's 1995 profit sharing plan contribution (Note 11) 10,000 157,000 Issuance of 4,123 common shares for stock options exercised and other 2,000 28,000 Dividends: New preferred stock, $5.00 per share (3,000) Common stock, $.10 per share (218,000) Net income for the year 1,251,000 _________ __________ __________ ___________ Balance, December 31, 1996 $ 33,000 $1,094,000 $6,365,000 $28,569,000 ========= ========== ========== =========== See notes to financial statements.
- 18 - STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 and 1994 INCREASE (DECREASE) IN CASH 1996 1995 1994 __________ __________ __________ Cash flows from operating activities: Net income $ 1,251,000 $ 917,000 $ 1,811,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,940,000 1,790,000 1,666,000 Amortization of deferred grant income (136,000) (121,000) (104,000) Gains from sale, condemnation and disposal of properties and easements (1,103,000) (64,000) (737,000) Deferred income taxes 600,000 220,000 415,000 Other, net 26,000 19,000 13,000 Changes in assets and liabilities: Accounts receivable 68,000 (636,000) 625,000 Materials and supplies (290,000) (68,000) 58,000 Prepaid expenses and other 18,000 (12,000) 100,000 Accounts payable (951,000) 537,000 (1,425,000) Accrued expenses 37,000 595,000 840,000 __________ __________ __________ Net cash provided by operating activities 1,460,000 3,177,000 3,262,000 __________ __________ __________ Cash flows from investing activities: Purchase of properties (5,465,000) (4,490,000) (3,200,000) Proceeds from: Sale, condemnation and disposal of properties and easements 1,319,000 108,000 972,000 Deferred grant income 901,000 378,000 909,000 __________ __________ __________ Net cash used in investing activities (3,245,000) (4,004,000) (1,319,000) __________ __________ __________ Cash flows from financing activities: Net borrowings under lines of credit 1,440,000 (120,000) (880,000) Repurchase of old preferred shares (3,000) Payments of: Long-term debt (789,000) (4,254,000) (845,000) Dividends (221,000) (208,000) (204,000) Proceeds from: Long-term debt and warrants 6,800,000 Issuance of common shares for stock options exercised 29,000 26,000 10,000 __________ __________ __________ Net cash provided by (used in) financing activities 459,000 2,244,000 (1,922,000) __________ __________ __________ Increase (decrease) in cash and equivalents (1,326,000) 1,417,000 21,000 Cash and equivalents, beginning of year 2,012,000 595,000 574,000 __________ _________ __________ Cash and equivalents, end of year $ 686,000 $ 2,012,000 $ 595,000 ========== ========== ========== Supplemental disclosures: Cash paid for: Interest $ 1,333,000 $ 1,269,000 $ 1,290,000 ========== ========== ========== Income taxes $ 60,000 $ 543,000 $ 729,000 ========== ========== ========== See notes to financial statements.
- 19 - PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 1. Description of Business and Summary of Significant Accounting Policies: Description of business: The Company is an interstate freight carrier conducting railroad operations in Massachusetts, Rhode Island, Connecticut and New York. Through its connecting carriers, it services customers located throughout North America. One customer accounted for approximately 13%, 12% and 10% of the Company's operating revenues in 1996, 1995 and 1994, 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. Materials and supplies: Materials and supplies are stated at cost, determined on a first- in, first-out basis, and are charged to expense or added to the cost of properties when used. Properties and deferred grant income: Properties are stated at cost (including self-construction costs). Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets as follows: Depreciable Propertie Estimated Useful Lives Track Structure 20 to 67 years Buildings and Other Structures 33 to 45 years Equipment 4 to 25 years On sale or retirement, the asset cost and related accumulated depreciation are removed from the accounts, and any related gain or loss is included in income. Land and improvements includes property held for resale having a net book value of approximately $400,000. The Company has availed itself of various federal and state programs administered by the states of Connecticut, Massachusetts and Rhode Island for reimbursement of expenses for capital improvements. In order to receive reimbursement, the Company must submit requests for the projects, including cost estimates. The Company receives from 70% to 100% of the costs of such projects, which have included bridges, track structure and public improvements. To the extent that such grant proceeds are used for capital improvements to bridges and track structure, they are recorded as deferred grant income and amortized into operating revenues on a straight-line basis over the estimated useful lives of the related improvements. - 20 - Grant proceeds utilized to finance public improvements, such as grade crossings and signals, are recorded as a direct offset to the related expense. Although the Company cannot predict the extent and length of future grant programs, it intends to continue filing requests for such grants when they are available. Revenue recognition: Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier. Income or loss from sale, condemnation and disposal of properties and easements is recorded at the time the sale, condemnation or disposal is consummated. Income taxes: The Company accounts for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". This Statement requires the Company to compute deferred income taxes based on the differences between the financial statement and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse. Earnings per common and common equivalent share: Earnings per common and common equivalent share were computed by dividing net income by the weighted average of common and preferred shares outstanding. The Company considers its $50 par "new preferred stock", each share of which is convertible into 100 shares of common stock at the option of the shareholders, to be common equivalent shares for purposes of computing earnings per share. Unexercised stock options and warrants have not been considered in the calculation of earnings per share since their effect is not material. Use of estimates: The preparation of the Company's financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates. The Company's principal estimates include reserves for accounts receivable, useful lives of properties, accrued liabilities including health insurance claims and legal and environmental contingencies, and deferred income taxes. - 21 - 1. Description of Business and Summary of Significant Accounting Policies (continued): Fair value of financial instruments: SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" requires disclosure of the fair value of certain financial instruments. The carrying amounts of cash and equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature. The carrying amounts of the Company's debt instruments approximate fair value. Adoption of new accounting pronouncements: Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long- Lived Assets to be Disposed Of". SFAS No. 121 requires that long- lived assets held and used by an entity be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. It also requires that long-lived assets to be disposed of be reported at the lower of the carrying amount or fair value less the cost to sell. The adoption of SFAS No. 121 did not have a material effect on the Company's financial position or results of operations for 1996. Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". The Company has continued to account for its stock-based transactions to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Pro forma disclosures as required by SFAS No. 123 are presented in Note 9. 2. Deep-water pier project: In 1975, the Rhode Island Coastal Resources Management Council (CRMC) issued a permit allowing the Company to fill and reclaim tide-flowed land in the Port of Providence immediately south of and abutting the Company's Wilkesbarre Pier for the purpose of developing a major rail/ship terminal (South Quay). That permit, issued for a ten-year period, became effective in June 1976 following the dismissal of an appeal over its issuance. The Company was also required to obtain a permit from the United States Department of the Army Corps of Engineers (COE). That permit was obtained in August 1978. The Company was not able to commence construction until 1979, after the Company satisfied concerns of the United States Department of the Interior--Fish and Wildlife Service. In 1979, the Company commenced the engineering and design of a berm for the containment basin in which dredged material would be deposited to create the land area. The construction of the berm, including a specially designed facing, was completed in 1984. Due to escalating construction costs, the unavailability of any public assistance which had been originally contemplated, general economic conditions of the early 1980's, and the Company's acquisition of all of Consolidated Rail Corporation's lines in Rhode Island and eastern Connecticut (which lines were in need of significant rehabilitation), the Company was unable to complete the construction of the South Quay within the time allowed under its permits. The Company applied for and was - 22 - granted extensions of time from CRMC and COE to complete the project. Both the CRMC and COE permits expire in 1998. In 1988 and early 1989, the Company filled in the southeast and southwest corners of the Quay to provide sufficient radii for future track construction and to prepare the site for dredging. The Company expended additional funds in 1990 to conduct soil borings and other engineering and design studies. In 1991, the Company entered into contracts to complete earthwork necessary to prepare the site for dredging and to dredge a ship berth. The earthwork contract was completed in 1991 and the dredging work was completed in 1992. Since completion of the dredging project, the Company has been engaged in the process of obtaining and depositing fill material in the basin and has substantially completed this process as of December 31, 1996. Total costs of $11,339,000, exclusive of land acquisition costs, have been incurred on the South Quay through that date. Depreciation of the capitalized project costs will not commence until the project is completed. The Company has engaged a maritime consulting firm, with international port expertise, to assist it in identifying strategic market opportunities for the port facility and to develop financing strategies for the completion of the facility. The Company's management remains committed to the completion of the project and intends to continue to explore development opportunities with outside parties for the purpose of obtaining the necessary financial and other assistance to complete this project. Management believes that upon completion of this project its costs will be fully recoverable from future lease and port related charges and from associated railroad freight revenues. 3. Notes payable, bank: The Company has a revolving line of credit with its principal bank in the amount of $1,500,000 expiring June 1, 1997. Borrowings outstanding under this line of credit are due on demand, bear interest at the bank's prime rate plus one-half of one percent (8 3/4% at December 31, 1996) and are secured by the Company's accounts receivable. In addition, the Company pays a commitment fee of one-half of one percent per year on the unused portion of the line of credit. Loans in the amount of $1,440,000 were outstanding under this line of credit at December 31, 1996. There were no loans outstanding at December 31, 1995. - 23 - 4. Long-term debt: 1996 1995 __________ __________ 10%, payable to Capital Properties, Inc. (which, with the Company, has a common controlling shareholder), certain real estate pledged as collateral, presently payable in monthly installments of principal and interest of $53,000 to 2007 (i) $4,211,000 $4,597,000 8.69%, payable to a commercial lender, certain equipment and track structure along with a second lien on accounts receivable pledged as collateral, payable in monthly installments of principal and interest of $62,000 to 2003 3,669,000 4,072,000 10% subordinated notes payable to Massachusetts Capital Resources Company ("MCRC"), effective interest rate of 10.3%, Massachusetts track structure pledged as collateral, payable in quarterly installments of interest only through September 1998 and interest and principal payments increasing from $63,000 to $187,500 commencing in December 1998 with a final principal payment of $1,250,000 due December 31, 2005 (ii). 4,928,000 4,920,000 __________ __________ Total long-term debt 12,808,000 13,589,000 Less current portion............... 677,000 612,000 __________ __________ Long-term debt, less current portion $12,131,000 $12,977,000 ========== ==========
(i) The Company made additional principal payments of $200,000 on this indebtedness in 1996 and $1,855,000 in 1995. The interest rate on this indebtedness was reduced from 12% to 10% in August 1995. (ii) In December 1995 the Company concluded an agreement with MCRC whereby the Company received $5,000,000 in exchange for a subordinated note payable in the amount of $4,920,000 and warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $7.10 per share. The warrants are exercisable through December 31, 2005. The cost assigned to the warrants of $80,000 was derived from a valuation made by MCRC on the date of their issuance. The cost assigned to the warrants is being amortized over the life of the warrants using the straight-line method. The agreement contains various covenants which, among other things, limit the payment of dividends to 25% of the Company's net income and require the Company to maintain certain ratios of leverage and interest coverage. - 24 - The following is a schedule by year of principal payments: Year ending December 31: 1997 $ 677,000 1998 785,000 1999 1,041,000 2000 1,179,000 2001 1,450,000 Thereafter 7,676,000 __________ $12,808,000 ==========
5. Accrued expenses: 1996 1995 __________ __________ Casualty and environmental claims $ 320,000 $ 936,000 Defined contribution retirement plans 415,000 326,000 Other 398,000 380,000 __________ __________ $1,133,000 $1,642,000 ========== ==========
Casualty loss and environmental claims expense, included in transportation expense, amounted to $171,000 in 1996, $728,000 in 1995, and $460,000 in 1994. 6. Other income: 1996 1995 1994 __________ __________ __________ Gains from sale, condemnation and disposal of properties and easements, net $1,103,000 $ 64,000 $ 737,000 Rentals and license fees, under various operating leases 494,000 494,000 461,000 Interest 63,000 23,000 8,000 __________ __________ __________ $1,660,000 $ 581,000 $1,206,000 ========== ========== ==========
- 25 - 7. Income taxes: The provision for income taxes consists of the following: 1996 1995 1994 __________ __________ __________ Current: Federal................ $ 150,000 $ 320,000 $ 675,000 State 30,000 50,000 110,000 __________ __________ __________ 180,000 370,000 785,000 Deferred 600,000 220,000 415,000 __________ __________ __________ $ 780,000 $ 590,000 $1,200,000 ========== ========== ==========
Components of the deferred provision for income taxes are as follows: 1996 1995 1994 __________ __________ __________ Depreciation $ 87,000 $ 85,000 $ 20,000 General business tax credits 238,000 400,000 855,000 Deferred grant income (271,000) (91,000) (225,000) Gain on sale, condemnation and disposal of properties 319,000 (14,000) (34,000) Accrued casualty and environmental claims 218,000 (169,000) (162,000) Other 9,000 9,000 (39,000) __________ __________ __________ $ 600,000 $ 220,000 $ 415,000 ========== ========== ==========
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred income tax liability as of December 31, 1996 and 1995 are as follows: - 26 - 1996 1995 __________ __________ Deferred income tax liabilities- Differences between book and tax basis of properties $10,956,000 $10,544,000 ___________ ___________ Deferred income tax assets: Tax credit carryforwards 649,000 883,000 Deferred grant income 1,909,000 1,638,000 Accrued casualty losses............. 113,000 331,000 Other 68,000 75,000 __________ __________ 2,739,000 2,927,000 __________ __________ Net deferred income tax liability $8,217,000 $7,617,000 ========== ==========
As of December 31, 1996, the Company has available for federal income tax reporting purposes investment tax credit and other general business credit carryforwards of $407,000 which expire during the years 1997 through 2000, and AMT credit carryforwards of $242,000. For financial reporting purposes, all of these credits have been recorded as deferred tax assets. A reconciliation of the income tax provision as computed by applying the statutory federal income tax rate of 34% to income before income taxes is as follows: 1996 1995 1994 __________ __________ __________ Statutory tax rate expense $ 691,000 $ 512,000 $1,024,000 Increase (decrease) in taxes resulting from: Depreciation of properties acquired from bankrupt railroads having a tax basis in excess of acquired cost (22,000) (22,000) (22,000) Statutory exclusions 87,000 62,000 107,000 State income tax, net of federal income tax benefit 22,000 33,000 73,000 Other 2,000 5,000 18,000 __________ __________ __________ $ 780,000 $ 590,000 $1,200,000 ========== ========== ==========
- 27 - 8. Contingencies: A number of lawsuits relating to casualty losses are pending against the Company, many of which are covered by insurance subject to a deductible. The Company has provided for its estimate of exposure to such claims and in management's opinion additional liability, if any, will not be material to the operations, financial position or liquidity of the Company. The Company owns a site which is contaminated with petroleum products. It is currently productive as a part of the Company's double-stack intermodal yard. The site is not the subject of any agency proceedings. Environmental specialists have indicated that natural biodegradation of the contamination is occurring. It is not anticipated that the costs of remediation, if any, would be material to the operations, financial position or liquidity of the Company. The Company was notified by CPC International, Inc. ("CPC") and the United States Environmental Protection Agency that the Company was alleged to be a potentially responsible party for some or all of the costs of remediation of a Superfund site, reportedly due to the impact of a 1974 incident involving a rail car. In December 1995 the Company concluded an agreement with CPC ("Agreement") in which the Company agreed to pay $990,000 in settlement of all claims against it relating to this incident. Payment of this claim can be all or partially made through issuance of unregistered, restricted common stock of the Company. The Company issued 55,000 shares of its Common Stock, having a value of $391,000 to CPC in December 1995 in partial payment of this claim. An additional 53,155 shares, having a value of $379,000 were issued in January 1996. The remaining liability of $220,000 (plus interest at an annual rate of 8 3/4% for any portion paid in cash) must be paid no later than June 30, 1999. The agreement further provides that, in the event CPC recovers insurance proceeds for the costs, the Company is entitled to receive 10% of the net recovery after deduction of litigation expenses. CPC is actively engaged in litigation with an insurer seeking such a recovery. 9. Stock option plan: The Company has a non-qualified stock option plan 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 plan. The plan covers 50,000 common shares or 5% of the shares of common stock outstanding, whichever is greater (109,412 shares at December 31, 1996). Options issued under the plan, which are fully vested when issued, 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. - 28 - During the three year period ended December 31, 1996, options for shares of common stock granted, exercised and expired were as follows: Weighted Average __________ Number Exercise Fair of shares Price Value __________ _________ _______ Outstanding at January 1, 1994 24,635 $5.49 Granted 7,690 7.50 Exercised (1,968) 5.18 __________ Outstanding at December 31, 1994 30,357 6.03 Granted 7,808 7.00 $2.29 Exercised (4,374) 5.89 __________ Outstanding at December 31, 1995 33,791 6.27 Granted 7,790 6.88 2.21 Exercised (3,823) 5.99 Expired (2,604) 6.17 __________ Outstanding at December 31, 1996 35,154 6.44 ==========
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: 1996 1997 __________ _________ Average risk-free interest rate 6.4% 5.9% Expected life of option grants 7.0 years 7.0 years Expected volatility of underlying stock 22% 22% Expected dividend payment rate, as a percentage of the stock price on the date of grant 1.45% 1.43%
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. - 29 - 9. Stock option plan (continued): The following table sets forth information regarding options at December 31, 1996: Range of Number Weighted Average ________________________ Number Exercise Currently Exercise Remaining of Options Prices Exercisable Price Life (in years) ________ ________ ________ ________ ___________ 8,183 $3.25 - $4.38 8,183 $3.76 5 20,590 5.50 - 7.50 20,590 6.87 7 6,381 8.50 6,381 8.50 3
As described in Note 1, the Company uses the provisions of APB 25, commonly referred to as the intrinsic value method, to measure compensation expense associated with grants of stock options to employees. Had the Company used the fair value method to measure compensation, reported net income and earnings per share would not have been materially different. 10. Preferred stock recapitalization: On June 25, 1994, holders in the aggregate of majorities of the Company's outstanding common stock and preferred stock approved a plan of recapitalization of Providence and Worcester Railroad Company ("the plan") and amendments to the Company's charter, provided for in the plan, which became effective on July 6, 1994. The plan and charter amendments were previously approved by the Company's Board of Directors. Pursuant to the plan and the charter amendments provided for therein, the Company's preferred stock, $.50 par value (the "Old Preferred Stock") was converted into an equal number of shares of the Company's common stock, $.50 par value, provided, that (i) at the election of a holder of 100 or more shares of Old Preferred Stock filed with the Company's exchange agent prior to September 5, 1994, such shares could be converted into shares of a newly authorized class of preferred stock, $50 par value (the "New Preferred Stock") at the rate of one share of New Preferred Stock for each 100 shares of Old Preferred Stock held, and at the further election of the holder, any remaining shares of Old Preferred Stock could be paid for in cash by the Company at the rate of $7.75 per share, and (ii) a holder of less than 100 shares of Old Preferred Stock could receive payment in cash therefor at the rate of $7.75 per share by election filed with the exchange agent prior to September 5, 1994. Holders of 361 shares of Old Preferred Stock elected to have the Company repurchase those shares at a total cost of $3,000. Holders of 148,000 shares of Old Preferred Stock elected to convert those shares into 1,480 shares of New Preferred Stock. Subsequently, holders of 827 shares of New Preferred Stock elected to convert those shares into common stock at the rate of 100 common shares for each preferred share. - 30 - 11. Defined contribution retirement plans: The Company has a deferred profit-sharing plan ("the 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 $3,500 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 $226,000 in 1996, $167,000 in 1995, and $335,000 in 1994. The Company made its 1994 and 1995 contributions and intends to make its 1996 contribution in newly issued shares of its common stock. The Company also has a Simplified Employee Pension Plan which covers substantially all employees who are not members of one of its collective bargaining units. Contributions to this plan are discretionary and are determined annually as a percentage of each covered employee's compensation. Contributions accrued under this plan amounted to $189,000 in 1996, $159,000 in 1995, and $144,000 in 1994. - 31 - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's stock was first held by the public on January 1, 1988. Effective March 5, 1997, the common stock of the Company began trading on the American Stock Exchange (the "Exchange") under the trading symbol "PWX". Each share of the Company's preferred stock is convertible into 100 shares of common stock. The following table shows the high and low prices for the Company's common stock during the quarterly periods indicated1. Also included are dividends paid per share of preferred and common stock during these quarterly periods. Trading Prices Dividends Paid High Low Preferred Common 1996 1st Quarter..... 8 1/2 6 3/4 $-0- $-0- 2nd Quarter..... 8 1/2 7 1/2 5.00 .05 3rd Quarter..... 8 1/2 6 1/2 -0- -0- 4th Quarter..... 8 6 1/2 -0- .05 1995 1st Quarter..... 9 7 $-0- $-0- 2nd Quarter..... 9 8 1/4 5.00 .05 3rd Quarter..... 9 7 5/8 -0- -0- 4th Quarter..... 8 1/8 6 5/8 -0- .05
At February 28, 1997, there were 676 holders of record of the Company's common stock. 1Information obtained from National Association of Securities Dealers on whose National Market System the common stock was previously listed until March 5, 1997. - 32 - EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorportation by refernece in Registration Statements No. 33-26944, No. 333-02975, and No. 333-21617 of Providence and Worcester Railroad Company on Forms S-8 of our reports dated March 7, 1997, appearing in and incorporated by reference in this Annual Report on Form 10-k of Providence and Worcester Railroad Company for the year ended December 31, 1996. /s/ Deloitte & Touche LLP Boston, Massachusetts March 27, 1997 EX-27 2
5 12-MOS DEC-31-1996 DEC-31-1996 686 0 2662 125 1021 4765 88138 24412 68491 6111 12131 0 33 1094 34934 68491 0 21116 0 17714 0 0 1371 2031 780 1251 0 0 0 1251 .56 .56
-----END PRIVACY-ENHANCED MESSAGE-----