-----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, FQLRRq27Xe/B5V6R/qke1vg0WOopWtqnpVbc6HvXFmxjt5DWvV/N3XPfh0Vd7Tnu pDv3oPVRwpMDloHcNPEEEw== 0000927016-98-000829.txt : 19980304 0000927016-98-000829.hdr.sgml : 19980304 ACCESSION NUMBER: 0000927016-98-000829 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980303 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-46433 FILM NUMBER: 98556278 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 S-1/A 1 AMENDMENT #1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1998 REGISTRATION STATEMENT NO. 333-46433 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- PROVIDENCE AND WORCESTER RAILROAD COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) RHODE ISLAND 4011 05-03444399 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 75 HAMMOND STREET WORCESTER, MA 01610 (508) 755-4000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- HEIDI J. EDDINS, ESQ., VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL PROVIDENCE AND WORCESTER RAILROAD COMPANY 75 HAMMOND STREET WORCESTER, MA 01610 (508) 755-4000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: MARGARET D. FARRELL, ESQ. CHRISTOPHER T. JENSEN, ESQ. HINCKLEY, ALLEN & SNYDER MORGAN, LEWIS & BOCKIUS LLP 1500 FLEET CENTER 101 PARK AVENUE PROVIDENCE, RI 02903 NEW YORK, NY 10178 (401) 274-2000 (212) 309-6000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED MARCH 3, 1998 1,025,000 SHARES LOGO PROVIDENCE AND WORCESTER RAILROAD COMPANY COMMON STOCK ----------- Of the 1,025,000 shares of common stock, par value $.50 per share (the "Common Stock"), of Providence and Worcester Railroad Company ("P&W" or the "Company") offered hereby, 1,000,000 shares are being sold by the Company and 25,000 shares are being sold by a shareholder of the Company (the "Selling Shareholder"). See "Principal and Selling Shareholders." The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholder. The Common Stock is currently traded on the American Stock Exchange (the "AMEX") under the symbol "PWX." On February 27, 1998, the last reported sale price of the Common Stock on the AMEX was $17.375 per share. See "Price Range of Common Stock and Dividend Policy." ----------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER - -------------------------------------------------------------------------------- Per Share...................... $ $ $ $ - -------------------------------------------------------------------------------- Total(3)....................... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Does not include additional compensation in the form of (a) a 2% non- accountable expense allowance on the Common Stock sold by the Company in the amount of $ , and (b) warrants (the "Underwriters' Warrants") to purchase up to 100,000 shares of Common Stock. In addition, the Company has agreed to indemnify the underwriters (the "Underwriters") against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of this Offering payable by the Company estimated at $650,000, including the non-accountable expense allowance. (3) The principal shareholder of the Company (the "Principal Shareholder") has granted the Underwriters a 30-day option to purchase up to 153,750 additional shares of Common Stock, solely to cover over-allotments, if any. If all such shares are purchased, the total "Price to Public" and "Underwriting Discounts and Commissions" will be $ and $ , respectively, the total "Proceeds to Company" will remain unchanged and the total "Proceeds to Selling Shareholder," including the Principal Shareholder, will be $ . See "Underwriting." ----------- The Common Stock is being offered severally by the Underwriters named herein, subject to prior sale when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to reject orders in whole or in part and to withdraw, cancel or modify this Offering without notice. It is expected that delivery of certificates representing the shares of Common Stock will be made on or about , 1998 at the offices of Advest, Inc. in New York, New York. ----------- ADVEST, INC. THE DATE OF THIS PROSPECTUS IS , 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [PHOTOGRAPH] 2. P&W serving Tilcon Connecticut, Inc.'s trap rock quarry at Wallingford, CT. [PHOTOGRAPH] [PHOTOGRAPH] 1. Doublestack container train destined 3. P&W traversing Hell Gate for P&W's Worcester intermodal facility. Bridge in New York City, with the Triborough and 59th Street bridges in the background. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." [MAP OF THE COMPANY'S RAIL FREIGHT SYSTEM] [MAP OF THE COMPANY'S RAIL FREIGHT SYSTEM] PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise specified, all information in this Prospectus assumes no exercise of the over-allotment option granted to the Underwriters. This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual events or results may differ materially as a result of various factors, and investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY P&W is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The Company is the only interstate freight carrier serving the State of Rhode Island and possesses the exclusive and perpetual right to conduct freight operations over the Northeast Corridor between New Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing independent operations in 1973, the Company, through a series of acquisitions of connecting lines, has grown from 45 miles of track to its current system of approximately 515 miles. P&W operates the largest double stack intermodal terminal facilities in New England in Worcester, Massachusetts, a strategic location for regional transportation and distribution enterprises. The Company transports a wide variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, processed foods and edible food stuffs, such as frozen foods, corn syrup and animal and vegetable oils. Its customers include The Dow Chemical Company, Exxon Corporation, Frito-Lay, Inc., General Dynamics Corporation, Getty Petroleum Marketing Inc., International Paper Company, Leggett & Platt, Incorporated, Mobil Oil Corporation, R.R. Donnelley & Sons and Tilcon Connecticut, Inc. In 1997, P&W transported over 31,000 carloads of freight and over 43,000 intermodal containers, representing an increase of 14.0% and 9.3%, respectively, over 1996 volumes. The Company also generates income through sales of properties, grants of easements and licenses and leases of land and tracks. P&W's connections to multiple Class I railroads, either directly or through connections with regional and short-line carriers, provide the Company with a competitive advantage by allowing it to offer creative pricing and routing alternatives to its customers. In addition, the Company's commitment to maintaining its track and equipment to high standards enables P&W to provide fast, reliable and efficient service. Over the past decade, consumer product companies have increasingly turned to intermodal transportation, i.e., the shipment of containerized cargo via more than one mode of transportation. By using a hub-and-spoke approach to shipping, multiple double stacked containers can be moved by rail to and from an intermodal terminal and then either delivered to their final destinations by trucks or transferred to ships for export. Headquartered in a major population center in New England, the Company is well situated to capitalize on this trend. There are a number of development projects underway in New England to increase port capacity along its extensive coastline and to improve the intermodal transportation and distribution infrastructure in the region. These projects include the Commonwealth of Massachusetts' $250 million highway reconstruction project to create a direct Worcester connection to the Massachusetts Turnpike and improve road connections to Worcester; the State of Connecticut's project to restore rail access to the Port of New Haven; and the State of Rhode Island's $120 million expansion and improvement of the Quonset Point/Davisville port and industrial park located near the entrance to Narragansett Bay ("Quonset/Davisville"). The Quonset/Davisville project, when completed, will create the largest on-dock double stack and tri-level auto rail facility in New England with substantial land to support port operations and development. 3 The Company's objective is to become the dominant rail freight carrier in New England by capitalizing on these shipping trends and regional developments through implementation of the following strategies: . Pursue Opportunities to Upgrade, Expand and Enhance Existing Rail Infrastructure. Certain of the Company's growth opportunities are contingent upon anticipated enhancements to its existing rail system. The Quonset/Davisville project contemplates construction of an additional rail line with double stack and tri-level auto rail car clearances on trackage on the Northeast Corridor over which P&W possesses the exclusive and perpetual freight service easement. To realize the benefits of this project, the Company is in the process of making clearance improvements on its line from its connection with the Northeast Corridor at Central Falls, Rhode Island to Worcester. The Company is also working with the Commonwealth of Massachusetts to implement a statewide clearance improvement project that will include certain P&W rail lines in Worcester County. In addition, the Company has begun to identify and improve undergrade bridge structures to permit heavier loadings on key line segments. These improvements should permit the Company to capitalize on increased rail traffic anticipated from the Quonset/Davisville development, capture more international and domestic double stack containerized cargo and handle heavier rail cars and cargo. . Acquire and Develop Strategically Located Terminal Properties and Intermodal Facilities. Planned improvements associated with the Massachusetts highway reconstruction project will significantly expand the Company's facilities for intermodal and bulk transloading in Worcester. In addition, the project should enhance the Company's growth opportunities for intermodal transport by increasing the convenience of its terminal facilities as a hub for intermodal transportation to and from the region. To capitalize on such opportunities, the Company intends to pursue the identification and acquisition or lease of suitable properties in the Worcester area to increase its intermodal capacity. P&W is also exploring potential expansion opportunities for transload and intermodal yards in the I-395 Corridor in eastern Connecticut and is planning an intermodal facility at its South Quay property in East Providence, Rhode Island. . Increase Existing System Revenues Through Expanded Customer Relationships. P&W's marketing and sales staff focuses on understanding and addressing the raw material requirements and transportation needs of its existing customers and businesses on its lines. The staff grows existing business by maintaining close working relationships with both customers and connecting carriers. In addition, the staff generates new business by targeting companies on its lines that underutilize rail services and by working with local economic development officials and realtors to attract new industries to locations on the Company's system. . Acquire Additional Rail Cars. The Company has experienced a significant increase in the need for gondola rail cars due to an upturn in shipments of scrap metal. The purchase of 40 100-ton gondolas with a portion of the proceeds of this Offering should enable the Company to meet this demand and increase its operating revenues. . Acquire Connecting Rail Lines and Trackage Rights. In October 1997, the Company signed an agreement to purchase the Connecticut Central Railroad Company, a short-line railroad with operating rights over approximately 28 miles of track in central Connecticut. P&W intends to continue to expand its business through the selective acquisition of rail properties and trackage rights on connecting lines. . Expand Locomotive and Rail Car Maintenance and Repair Capabilities. The Company intends to use a portion of the proceeds of this Offering to expand its Worcester maintenance center to increase efficiency and enable it to provide expanded contract maintenance and repair services. 4 THE OFFERING Common Stock Offered by: The Company....................... 1,000,000 shares The Selling Shareholder........... 25,000 shares ---------------- Total shares offered............. 1,025,000 shares Shares of Common Stock outstanding before this Offering.............. 2,222,830 shares Shares of Common Stock to be outstanding after this Offering (1)...................... 3,422,830 shares Use of proceeds.................... To purchase rail cars, repay debt, finance maintenance facility expansion and for general corporate purposes. See "Use of Proceeds." AMEX Symbol........................ PWX
Except where otherwise indicated, all share and per share data in this Prospectus (i) give no effect to the 100,000 shares issuable upon exercise of the Underwriters' Warrants; (ii) assume no exercise of outstanding stock options to purchase 41,161 shares of Common Stock; and (iii) give no effect to the up to 27,500 shares issuable upon the purchase of the Connecticut Central Railroad Company. See "Business -- Business Strategy," "Management -- Stock Plans" and "Underwriting." - -------- (1) Includes the issuance of 200,000 shares of Common Stock upon exercise of warrants held by Massachusetts Capital Resource Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 5 SUMMARY FINANCIAL DATA The summary financial data should be read in conjunction with the Company's audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Operating revenues.............. $ 19,778 $ 19,456 $ 22,083 Operating expenses.............. 17,677 17,714 18,333 ------------- ------------- ------------- Income from operations.......... 2,101 1,742 3,750 Other income.................... 581 1,660 638 Interest expense................ (1,175) (1,371) (1,358) ------------- ------------- ------------- Income before income taxes...... 1,507 2,031 3,030 Provision for income taxes...... 590 780 1,100 ------------- ------------- ------------- Net income...................... $ 917 $ 1,251 $ 1,930 ============= ============= ============= Diluted income per share(a)..... $ 0.43 $ 0.54 $ 0.81 ============= ============= ============= Weighted average shares-- diluted........................ 2,136 2,461 2,489 ============= ============= =============
AT DECEMBER 31, 1997 ----------------------- ACTUAL AS ADJUSTED (B) ------- --------------- (IN THOUSANDS) BALANCE SHEET DATA: Total assets.......................................... $71,212 $74,812 Short-term debt....................................... 2,281 772 Long-term debt, less current portion.................. 11,916 562 Shareholders' equity.................................. 38,038 54,721
- -------- (a) The income per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." See Note 1 to the Company's audited financial statements included elsewhere in this Prospectus. (b) Adjusted to reflect the sale by the Company of 1,000,000 shares of Common Stock in this Offering (at an assumed offering price of $17.375 per share) and the application of the net proceeds therefrom to prepay certain indebtedness (including prepayment penalties) as described in "Use of Proceeds." As adjusted shareholders' equity reflects an extraordinary charge, due to the early extinguishment of debt, of $246,000 (net of tax) which the Company expects to record in the second quarter of 1998 when the debt is paid. 6 RISK FACTORS Investors should carefully consider the following matters in connection with an investment in the Company's Common Stock in addition to the other information contained in this Prospectus. This Prospectus contains "forward- looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may," "will," "would," "could," "intend," "plan," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. FLUCTUATIONS IN OPERATING REVENUES Historically, the Company's operating revenues have been tied to national and regional economic conditions, especially those impacting the manufacturing sector, while the Company's expenses have been relatively inelastic. A downturn in general economic conditions could materially adversely affect the Company's business and results of operations. In addition, shifts in the New England economy between manufacturing and service sectors could materially affect the Company's performance. The Company's operating revenues and expenses have also fluctuated due to unpredictable events, such as adverse weather conditions and customer plant closings. While generally the Company has been able to replace revenues lost due to plant closings through expansion of existing business or replacement with new customers, there can be no assurance that it could do so in the future. The occurrence of such unpredictable events in the future could cause further fluctuations in operating revenues and expenses and materially adversely affect the Company's financial performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." CUSTOMER CONCENTRATION In 1997, the Company's 10 largest customers accounted for approximately 51.5% of the Company's operating revenues. The Company's business could be materially adversely affected if any of these customers reduces shipments of commodities transported by the Company. A significant customer that in 1997 accounted for 4.2% of the Company's operating revenues recently announced plans to convert its manufacturing plant to a research and development facility over the next four years, which is expected to reduce this customer's rail shipments. Although in the past the Company has been able to replace revenues lost due to a reduction in existing customers' rail service requirements, no assurance can be given that it could do so in the future. See "Business -- Customers." POTENTIAL DELAYS OR COMPLICATIONS WITH REGIONAL DEVELOPMENT PROJECTS The State of Rhode Island is developing a freight rail improvement project for the construction of an additional rail line with double stack container and tri-level auto rail car clearances on the Northeast Corridor from P&W's main line in Central Falls, Rhode Island to Quonset/Davisville. Part of the Company's growth strategy is dependent upon the proposed development of Quonset/Davisville and the related freight rail improvement project. While the Rhode Island electorate has approved the expenditure of $72 million for the Quonset/Davisville project, of which $50 million is to fund the freight rail improvement project and $22 million is to be invested in the industrial park, numerous governmental approvals are required to complete the proposed development, and there is no assurance that State funds will be expended as planned. Furthermore, the State of Rhode Island's portion of the freight rail improvement project ($50 million) is expected to be matched by federal appropriations, and there can be no assurance that such funds will be appropriated or that, if appropriated, the proposed development will be completed as planned. Failure of the State of Rhode Island to complete the Quonset/Davisville development (including the freight rail improvement project) or unforeseen delays in the development could materially adversely affect the growth of the Company's business. Moreover, there is no assurance that the development, if completed as planned, will generate substantial additional rail traffic for the Company. The Company's growth strategy is also dependent upon other state and federal development projects, including, but not limited to, the Commonwealth of Massachusetts' $250 million highway reconstruction project 7 and the State of Connecticut's project to restore rail access to the Port of New Haven. No assurance can be given that such development projects will be completed as or when planned and, if completed, will generate additional business for the Company. COMPETITION For customers located directly on line, which constitute the majority of the Company's freight business, the Company is the only rail carrier directly serving them. However, the Company competes with other freight railroads in the location of new rail-oriented businesses in the region. The Company also competes with other modes of transportation, particularly long-haul trucking companies. Any improvement in the cost or quality of these alternate modes of transportation, for example, legislation granting material increases in truck size or allowable weight, could increase this competition and materially adversely affect the Company's business and results of operations. The Company believes the acquisition of Consolidated Rail Corporation ("Conrail") and its subsequent division between CSX Corporation ("CSX") and Norfolk Southern Railroad ("Norfolk Southern"), approval of which is pending before the United States Surface Transportation Board (the "STB"), may present expansion opportunities for the Company. However, the Conrail transaction may lead to increased competition with other freight railroads, particularly in Massachusetts, as well as efforts by Conrail's acquirers to reduce revenues to regional and short-line carriers. See "Business -- Competition." AVAILABILITY OF ACQUISITION OPPORTUNITIES AND ASSOCIATED RISKS The Company believes that its ability to grow depends, in part, upon its ability to acquire additional connecting rail lines. In making acquisitions, the Company competes with other short-line and regional rail operators, some of which are larger and have greater financial resources than the Company. The growing competition for such acquisitions may cause an increase in acquisition prices and related costs, resulting in fewer attractive acquisition opportunities, which could materially adversely affect the Company's growth. The Company's ability to acquire additional rail properties and related assets may also depend upon its ability to obtain financing on satisfactory terms. Furthermore, acquisitions of additional rail lines may be subject to regulatory review and approval by the STB. No assurance can be given that the Company will be able to acquire suitable additional rail lines or that, if acquired, the Company would be able to successfully operate such additional rail lines. In addition, the Company anticipates that it will be classified as a Class II railroad in 1999. Acquisitions made by Class II railroads are subject to a requirement to pay up to one year of severance for employees affected by an acquisition, which does not apply to acquisitions by Class III railroads, the Company's current classification. The anticipated change in the Company's classification could increase the costs of possible future acquisitions. SOUTH QUAY LITIGATION AND DEVELOPMENT The Company has invested approximately $11 million in the development of approximately 33 acres of reclaimed formerly tide flowed land in East Providence, Rhode Island (the "South Quay"), which land is adjacent to 12 acres owned by the Company. The Company has obtained a judgment from the Rhode Island Superior Court confirming the Company's fee simple absolute title in the South Quay, which judgment has been appealed to the Rhode Island Supreme Court by the State of Rhode Island and the Rhode Island Coastal Resources Management Council (the "Coastal Council"). The Company anticipates that the Rhode Island Supreme Court will not issue a decision in the case until 1999. Failure of the Rhode Island Supreme Court to confirm P&W's title in the South Quay could materially adversely affect the Company's ability to develop this property. Moreover, regardless of the outcome, the pending litigation is likely to delay any commercial development of the property and to result in increased legal expenses to the Company. See "Business -- Legal Proceedings." In addition, P&W currently plans to develop the South Quay as an intermodal facility but may not be able to attract an adequate level of investment or user commitment to permit commercial development for such use. Furthermore, certain types of commercial development of the South Quay would be subject to extensive 8 permitting requirements by regulatory agencies, including the Coastal Council. If the Company is unable to attract adequate investment or user commitments or is unable to obtain the financing or permits necessary to develop the property, the Company may not realize a return on its investment and could incur a non-recurring charge to earnings based on any reduction in the realizable value of the property. See "Business -- Business Strategy." LABOR ISSUES Substantially all of the Company's non-management employees are represented by national railroad labor organizations. The Company's collective bargaining agreements with its unions are evergreen contracts which do not expire but may be amended on or after June 1, 1998 for the United Transportation Union, December 31, 1999 for the Transportation Communication Union and July 1, 2000 for the Brotherhood of Railroad Signalmen. The Company's inability to satisfactorily conclude negotiations with the unions could materially adversely affect the Company's operations and financial performance. Similarly, any protracted work stoppages against the Company's connecting railroads could materially adversely affect the Company's business and results of operations. Historically, Congress has intervened in such events to avoid disruptions in interstate commerce, but there can be no assurance that it would do so in the future. All railroad industry employees are covered by the Railroad Retirement Act and the Railroad Unemployment Insurance Act in lieu of Social Security and other federal and state unemployment insurance programs, and the Federal Employers Liability Act in lieu of state workers' compensation. Significant increases in the taxes payable pursuant to the Railroad Retirement Act would increase the Company's costs of operations. See "Business -- Employees." RELATIONSHIPS WITH OTHER RAILROADS The railroad industry in the United States is dominated by a small number of large Class I carriers that have substantial market control and negotiating leverage. A majority of the Company's carloadings is interchanged with a Class I carrier, Conrail. A decision by Conrail, or its proposed acquirers, CSX and Norfolk Southern, to discontinue transporting certain commodities or to use alternate modes of transportation, such as motor carriers, would materially adversely affect the Company's business. See "Business -- Industry Overview." The Company's ability to provide rail service to its customers depends in large part upon its ability to maintain cooperative relationships with all its connecting carriers with respect to, among other matters, freight rates, car supply, interchange and trackage rights. A deterioration in the operations of, relationships with or service provided by those connecting carriers could materially adversely affect the Company's business. AVAILABILITY OF GOVERNMENT PROGRAMS In the past, the Company has worked with federal and state agencies to improve its rail infrastructure and has been effective in obtaining federal and state financial support for such projects. However, there can be no assurance that such federal and state programs or funds will be available in the future or that the Company will be eligible to participate in such programs. Failure to participate in federal and state programs or to receive federal or state funding for rail infrastructure improvements would cause the Company to incur the full cost of rail infrastructure improvements and significantly increase its costs of rail maintenance. See "Business --Business Strategy." POTENTIAL FOR INCREASED GOVERNMENTAL REGULATION AND MANDATED UPGRADE TO PROPERTY The Company is subject to governmental regulation by the STB, the Federal Railroad Administration (the "FRA") and other federal, state and local regulatory authorities with respect to certain rates and railroad operations, as well as a variety of health, safety, labor, environmental and other matters, all of which could potentially affect the competitive position and profitability of the Company. Management of the Company believes that the regulatory freedoms granted by the Staggers Rail Act of 1980 (the "Staggers Rail Act") have been beneficial to the Company by giving it flexibility to adjust prices and operations to respond to market forces and industry changes. However, various interests, and certain members of the United States House of 9 Representatives and Senate (which have jurisdiction over the federal regulation of railroads), have from time to time expressed their intention to support legislation that would eliminate or reduce significant freedoms granted by the Staggers Rail Act. If enacted, these proposals, or court or administrative rulings to the same effect under current law, could materially adversely affect the Company's business and results of operations. The Company anticipates that its STB classification as a Class III railroad will change to Class II in 1999, which may require the Company to comply with any future safety mandates on more accelerated timetables than apply to Class III railroads. As a result of the planned introduction of high speed passenger service on the Northeast Corridor, the FRA has issued a proposed order requiring that all locomotives operating on the Northeast Corridor between New Haven, Connecticut and Boston, Massachusetts be equipped with automatic civil speed enforcement systems, the cost of which is anticipated to be at least $45,000 per locomotive. The proposed order does not address whether the federally funded high speed project or the Company would bear the costs of required locomotive retrofits. While federal funding has been provided in the past to implement mandated improvements relating to the high speed project, there can be no assurance that funding for such mandates will be provided in the future. The introduction of new unfunded mandates for equipment retrofit or other physical plant requirements could materially adversely affect the Company's results of operations. CASUALTY LOSSES The Company has obtained insurance coverage for losses arising from personal injury and for property damage in the event of derailments or other accidents or occurrences. The Company believes that its insurance coverage is adequate based on its experience. However, under catastrophic circumstances such as accidents involving passenger trains or spillage of hazardous materials, the Company's liability could exceed its insurance limits. The Company transports hazardous chemicals throughout its system and conducts operations on the Northeast Corridor on which there is heavy passenger traffic. Insurance is available from only a limited number of insurers, and there can be no assurance that insurance protection at the Company's current levels will continue to be available or, if available, will be obtainable on terms acceptable to the Company. Losses or other liabilities incurred by the Company which are not covered by insurance or which exceed the Company's insurance limits could materially adversely affect the Company's financial condition, liquidity and results of operations. CONCENTRATION OF OWNERSHIP Immediately following this Offering, Robert H. Eder, the Company's Chairman and Chief Executive Officer and the Principal Shareholder, together with his wife, will own of record 29.1% of the outstanding Common Stock (24.6% assuming exercise in full of the Underwriters' over-allotment option) and 77% of the Preferred Stock. Holders of Preferred Stock are entitled to elect two-thirds of the Company's Board of Directors and to vote separately as a class on all other matters voted on by shareholders. Consequently, the Principal Shareholder will continue to be able to exercise effective control over most corporate actions and outcomes of matters requiring a shareholder vote, including the election of directors. See "Principal and Selling Shareholders" and "Description of Capital Stock." ENVIRONMENTAL MATTERS The Company's railroad operations and real estate ownership are subject to extensive federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company transports hazardous materials and periodically uses hazardous materials in its operations. While the Company believes it is in substantial compliance with all applicable environmental laws and regulations, any allegations or findings to the effect that the Company had violated laws or regulations could materially adversely affect the Company's business and results of operations. The Company operates on properties that have been used for rail operations for over a century. There can be no assurance that historic releases of hazardous waste or materials will not be 10 discovered, requiring remediation of Company properties and that the costs of such remediation would not be material. See "Business -- Environmental Matters." RELIANCE ON KEY PERSONNEL The Company's success is dependent on certain management and personnel, including Robert H. Eder, its Chairman and Chief Executive Officer, and Orville R. Harrold, its President and Chief Operating Officer. The loss of the services of one or both of these executives could materially adversely affect the Company's business and results of operations. While the Company believes that it would be able to locate suitable replacements for these executives, there can be no assurance it would be able to do so. The Company does not have employment agreements with these executives and does not maintain any key person life insurance. See "Management." ANTI-TAKEOVER MEASURES; POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS The Company is subject to the Rhode Island Business Combination Act which, except for certain limited exceptions, prohibits business combinations involving certain shareholders of publicly held corporations for a period of five years after such shareholders acquire 10% or more of the outstanding voting stock of the corporation. P&W was specially chartered by an act of the Rhode Island General Assembly. The Company's charter provides that one-third of the Board is elected by the holders of Common Stock and the remainder are elected by the holders of Preferred Stock. This provision, although intended to help assure the stability and continuity of the Company's governance, may have the effect of making an acquisition of the Company more difficult. See "Description of Capital Stock." YEAR 2000 COMPLIANCE The Company has substantially completed modification of its computer systems to address the Year 2000 issue. However, the Company relies, in part, on data generated by other railroads. While the Company believes that it will be able to address the problems, if any, generated by such other railroads' failure to account for the Year 2000 issue, there can be no assurance that the Company will be able to do so without disruption to its operations or that any such disruption would not be material. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding an aggregate of 3,422,830 shares of Common Stock. An aggregate of 3,219,984 of such shares will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless owned by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. Sales of a substantial number of previously issued shares of Common Stock in the public market following this Offering could materially adversely affect the market price of the Common Stock. The Company, its executive officers and directors and certain principal shareholders, who after this Offering will own in the aggregate approximately 1,310,000 shares of Common Stock, have agreed that for a period of 180 days (90 days in the case of the Selling Shareholder) after the date of this Prospectus, they will not, subject to certain exceptions, directly or indirectly offer, sell, announce an intention to sell, contract to sell or otherwise dispose of any Common Stock without the prior written consent of Advest, Inc. Certain shareholders have the right, subject to limitations, to require the Company to register for sale to the public all or a portion of the Common Stock held by them. See "Shares Eligible for Future Sale." 11 THE COMPANY P&W, a Rhode Island corporation, is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York over approximately 515 miles of track. Originally incorporated in 1844 by legislative charter, the Company operated independently from 1847 to 1888, at which time its rail system was leased to a predecessor of the New York, New Haven and Hartford Railroad. It remained under lease until 1973, when it commenced independent operations over 45 miles of trackage between Central Falls, Rhode Island and Worcester with a branch to East Providence, Rhode Island. Since 1973, the Company has experienced steady expansion through a series of strategic acquisitions of rail properties and trackage rights. In 1974, P&W purchased a line extending from Worcester to Gardner, Massachusetts to afford the Company an additional interline connection. Also in 1974, P&W gained the right to serve customers between Central Falls and Providence, Rhode Island. In 1976, the Company acquired a portion of the Groton, Connecticut to Worcester main line extending south from Worcester to Plainfield, Connecticut, and two branch lines extending from this line. In 1980, P&W acquired the rest of the Groton to Worcester main line from Plainfield to Groton. The Company acquired the Warwick Railroad in 1980 and the Moshassuck Valley Railroad in 1981. In 1982, P&W acquired all of the lines and operating rights of Conrail in Rhode Island and Conrail's exclusive freight easement on Amtrak's Northeast Corridor from the Massachusetts/Rhode Island border to Old Saybrook, Connecticut. As a result of the 1982 acquisition, P&W became the only interstate rail freight carrier in Rhode Island. In 1991, the Company acquired the exclusive freight easement on the Northeast Corridor from Old Saybrook to New Haven and two branch lines within the City of New Haven, including the line servicing the Port of New Haven. In 1993, the Company acquired a portion of Conrail's Middletown Secondary line extending from Wallingford, Connecticut to New Haven. The Company also acquired freight service rights on segments of the Waterbury branch and the Danbury branch, both lines owned by the State of Connecticut, as well as trackage rights over the Maybrook Secondary line between Derby and Danbury, Connecticut and the Northeast Corridor between New Haven and South Norwalk, Connecticut. This transaction enabled the Company to significantly expand its construction aggregate hauling business and led to P&W's acquisition in 1996 of the exclusive right to handle the transport of construction aggregate between three quarries operated by Tilcon Connecticut, Inc. located in Wallingford, Wauregan and Branford, Connecticut to Fresh Pond Junction on Long Island, New York. From 1980 through 1987, the Company was a wholly-owned subsidiary of Capital Properties, Inc., a publicly held corporation ("Capital Properties"). On January 1, 1988, through a series of transactions, the shareholders of Capital Properties received, as a distribution with respect to each share of Capital Properties capital stock held, one share of the Common Stock and one share of the Company's Preferred Stock, and Capital Properties ceased to have any ownership interest in the Company. Upon completion of the transactions, the Company became an independent, publicly-held corporation. See "Use of Proceeds" and "Certain Transactions." The Company's principal executive offices are located at 75 Hammond Street, Worcester, Massachusetts 01610. The Company's telephone number is (508) 755- 4000. 12 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Common Stock offered hereby at an assumed offering price of $17.375 per share, after deducting underwriting discounts and estimated expenses, are expected to be approximately $15.5 million. Of such proceeds, approximately $2.0 million will be used to purchase gondola rail cars and approximately $1.6 million will be used to expand the Company's Worcester maintenance facility. See "Business-- Business Strategy." The remainder of the proceeds will be used to repay up to approximately $11.7 million in indebtedness and for capital expenditures, working capital and general corporate purposes. The foregoing represents estimates, and the actual amount and timing of such use of proceeds will depend upon numerous factors. Pending application of the proceeds, the net proceeds of this Offering will be invested in investment grade, short-term debt instruments. The Company will not receive any proceeds from the sale of shares by the Selling Shareholder or by the Principal Shareholder pursuant to the over-allotment option. The Company intends to retire its outstanding debt obligations to Capital Properties, CIT Group, Inc. ("CIT") and Massachusetts Capital Resource Company ("MCRC"). The Company's indebtedness to Capital Properties arose out of the separation of the Company from Capital Properties, its former parent. See "Certain Transactions." At March 2, 1998, the total principal due on the note to Capital Properties was approximately $4.0 million. The note bears interest at the rate of 10% per annum and matures on December 31, 2007. There is no prepayment penalty. The Company's indebtedness to CIT arises out of equipment financing and has a current principal balance of approximately $3.2 million. This debt bears interest at a rate of 8.69% per annum and is payable in monthly installments until June 2003. At March 2, 1998, the estimated prepayment penalty was approximately $32,000. MCRC, a private investment fund, provided P&W with $5.0 million in financing in December 1995, for which the Company issued a subordinated note (the "MCRC Note"), which bears interest at the rate of 10% per annum and is payable in quarterly installments with a maturity date of December 31, 2005. In connection with the financing, the Company also issued to MCRC warrants for the purchase of up to 200,000 shares of Common Stock at an exercise price of $7.10 per share (the "MCRC Warrants"). Upon the completion of this Offering at an assumed offering price of $17.375, pursuant to the terms of the MCRC Note and the MCRC Warrants, MCRC must apply $1.4 million of the amount due under the MCRC Note toward the exercise of the MCRC Warrants. P&W intends to repay the remaining balance due on the MCRC Note, in the principal amount of $3.6 million, with the proceeds of this Offering. At March 2, 1998, the estimated prepayment penalty was $288,000, assuming the exercise of the MCRC Warrants. The Company owes Bestfoods (formerly named CPC International, Inc.) $220,000 plus interest at the rate of 8.75% per annum (approximately $262,000 in total) under a 1995 Settlement Agreement relating to an environmental claim, which will be due and payable upon closing of this Offering. 13 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is quoted on the AMEX under the symbol "PWX." Prior to March 5, 1997, the Common Stock was traded on The Nasdaq National Market ("NASDAQ") under the symbol "PWRR." The following table sets forth, for the periods indicated, the high and low sale price per share for the Common Stock as reported on the AMEX and NASDAQ. Also included are dividends paid per share of Preferred Stock and Common Stock during these quarterly periods.
COMMON STOCK TRADING PRICES DIVIDENDS PAID --------------- ---------------- HIGH LOW PREFERRED COMMON ------- ------- --------- ------ 1996 First Quarter................................ $ 8 1/2 $ 6 3/4 $ -0- $ -0- Second Quarter............................... 8 1/2 7 1/2 5.00 .05 Third Quarter................................ 8 1/2 6 1/2 -0- -0- Fourth Quarter............................... 8 6 1/2 -0- .05 1997 First Quarter................................ 10 3/8 7 1/2 5.00 -0- Second Quarter............................... 12 1/2 9 3/4 -0- .06 Third Quarter................................ 14 1/4 10 5/8 -0- -0- Fourth Quarter............................... 22 1/4 13 1/4 -0- .06 1998 First Quarter (through February 27, 1998).... 18 7/8 15 5/8 5.00 .03
On February 27, 1998, the last reported sale price of the Common Stock on the AMEX was $17.375 per share. As of February 27, 1998, there were approximately 700 holders of record of the Common Stock. The Company has paid semi-annual dividends on the Common Stock and an annual non-cumulative 10% dividend on the Preferred Stock since 1989. The non- cumulative Preferred Stock dividend is fixed by the Company's Charter at the rate of $5.00 per share per year, out of funds legally available for the payment of dividends. In 1997, the Company raised its Common Stock dividend 20%, from $.05 a share semi-annually to $.06 a share. At a meeting of the Board of Directors held January 28, 1998, the Board modified the Company's dividend policy to pay a $.03 per share dividend on the Common Stock quarterly. Although the Board of Directors presently anticipates continuing this policy, the declaration of cash dividends on the Common Stock will be at the discretion of the Board of Directors based on the Company's earnings, financial condition, capital requirements and other relevant factors, including applicable law and any restrictions set forth in credit facilities entered into by the Company. Currently, the terms of the MCRC Note (which the Company intends to repay with the proceeds of this Offering) limit dividend payments to 25% of the Company's net income. 14 CAPITALIZATION The following table sets forth the capitalization of the Company at December 31, 1997 and as adjusted to give effect to this Offering at an assumed offering price of $17.375 per share and the application of the net proceeds therefrom; and to reflect the exercise of the MCRC Warrants through the cancellation of $1.4 million of the MCRC Note. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources" and the Company's audited financial statements of the Company and notes thereto included elsewhere in this Prospectus.
AT DECEMBER 31, 1997 ----------------------- ACTUAL AS ADJUSTED ---------- ------------ (IN THOUSANDS) Short-term debt........................................ $ 2,281 $ 772 ---------- ---------- Long-term debt, less current portion................... 11,916 562 ---------- ---------- Shareholders' equity: Preferred Stock, $50 par value, 6,817 shares authorized (653 as adjusted)(a); 653 shares issued and outstand- ing at December 31, 1997.............................. 33 33 Common Stock, $.50 par value, 3,023,436 shares autho- rized (15,000,000 as adjusted) (a); 2,221,933 shares issued and outstanding at December 31, 1997 and 3,421,933 as adjusted ................................ 1,111 1,711 Additional paid-in capital............................. 6,665 22,994 Retained earnings...................................... 30,229 29,983 ---------- ---------- Total shareholders' equity............................. 38,038 54,721 ---------- ---------- Total capitalization................................... $ 52,235 $ 56,055 ========== ==========
- -------- (a) The Company's shareholders have approved an amendment to the Company's Charter to decrease the Company's authorized Preferred Stock to 653 shares and to increase the Company's authorized Common Stock to 15,000,000 shares, which amendment will become effective prior to completion of this Offering. 15 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of income for each of the three years in the period ended December 31, 1997, and with respect to the balance sheets at December 31, 1996 and 1997, are derived from the financial statements that have been audited by Deloitte & Touche LLP, independent auditors, and which are included elsewhere in this Prospectus. The statement of income data for the years ended December 31, 1993 and 1994, and the balance sheet data at December 31, 1993, 1994 and 1995 are derived from audited financial statements not included herein. The data should be read in conjunction with the Company's audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other information included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Operating revenues......... $ 18,657 $ 20,292 $ 19,778 $ 19,456 $ 22,083 Operating expenses......... 16,336 17,202 17,677 17,714 18,333 -------- -------- -------- -------- -------- Income from operations..... 2,321 3,090 2,101 1,742 3,750 Other income............... 707 1,206 581 1,660 638 Interest expense........... (1,353) (1,285) (1,175) (1,371) (1,358) -------- -------- -------- -------- -------- Income before income taxes..................... 1,675 3,011 1,507 2,031 3,030 Provision for income taxes..................... 570 1,200 590 780 1,100 -------- -------- -------- -------- -------- Net income................. 1,105 1,811 917 1,251 1,930 Preferred Stock dividend... 32 31 3 3 3 -------- -------- -------- -------- -------- Net income available to common shareholders....... $ 1,073 $ 1,780 $ 914 $ 1,248 $ 1,927 ======== ======== ======== ======== ======== Basic income per share..... $ 0.76 $ 0.99 $ 0.45 $ 0.57 $ 0.87 ======== ======== ======== ======== ======== Diluted income per share... $ 0.54 $ 0.87 $ 0.43 $ 0.54 $ 0.81 ======== ======== ======== ======== ======== Weighted average shares-- basic(a).................. 1,406 1,796 2,043 2,178 2,209 ======== ======== ======== ======== ======== Weighted average shares-- diluted(a)................ 2,042 2,077 2,136 2,461 2,489 ======== ======== ======== ======== ======== Cash dividends declared on Common Stock.............. $ 141 $ 173 $ 205 $ 218 $ 267 ======== ======== ======== ======== ======== AT DECEMBER 31, ------------------------------------------------ 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Total assets............... $ 60,706 $ 61,496 $ 68,012 $ 68,491 $ 71,212 Short-term debt............ 1,590 758 612 2,117 2,281 Long-term debt, less current portion........... 11,378 10,485 12,977 12,131 11,916 Shareholders' equity....... 31,113 32,914 34,455 36,061 38,038
- -------- (a) The income per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." See Note 1 to the Company's audited financial statements included elsewhere in this Prospectus. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in connection with the Company's audited financial statements and notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." OVERVIEW The Company is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The Company generates operating revenues primarily from the movement of freight in both conventional freight cars and in intermodal containers on flat cars over its rail lines. Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier. Modest non-freight operating revenues are derived from demurrage, switching, weighing, special train and other transportation services as well as from services rendered to freight customers and other outside parties by the Company's Maintenance of Way, Communications and Signals and Maintenance of Equipment Departments. Operating revenues also include amortization of deferred grant income. The Company's operating expenses consist of salaries and wages and related payroll taxes and employee benefits, depreciation, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services and other expenses. Many of the Company's operating expenses are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company's management takes specific actions to restructure the Company's operations. When comparing the Company's results of operations from one year to another, the following factors should be taken into consideration. First, the Company has historically experienced fluctuations in operating revenues and expenses due to unpredictable events such as one-time freight moves and customer plant expansions and shut-downs. Second, the Company's freight volumes are susceptible to increases and decreases due to changes in national and regional economic conditions. The Company also generates income through sales of properties, grants of easements and licenses and leases of land and tracks. Income or loss from sale, condemnation and disposal of property and equipment and grants of easements is recorded at the time the transaction is consummated and collectibility is assured. This income varies significantly from year to year. Over the last ten years, such income has ranged from a low of $460,000 to a high of $2.6 million with an annual average over this period of $1.3 million. The Company has one customer, Tilcon Connecticut, Inc., which accounted for approximately 12.1%, 12.6% and 15.1% of its operating revenues in 1995, 1996 and 1997, respectively. The Company does not believe that this customer will cease to be a rail shipper or will significantly decrease its freight volume in the foreseeable future. In the event that this customer should cease or significantly reduce its rail freight operations, management believes that the Company could restructure its operations to reduce operating costs by an amount sufficient to offset the decrease in operating revenues. 17 RESULTS OF OPERATIONS The following table sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues:
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PERCENTAGES) Freight Revenues: Conventional carloads........... $17,352 87.7% $17,050 87.6% $19,001 86.0% Containers...................... 1,524 7.7 1,508 7.8 1,675 7.6 Non-Freight Operating Revenues: Transportation services......... 528 2.7 455 2.3 632 2.9 Other........................... 374 1.9 443 2.3 775 3.5 ------- ----- ------- ----- ------- ----- Total......................... $19,778 100.0% $19,456 100.0% $22,083 100.0% ======= ===== ======= ===== ======= =====
The following table sets forth conventional carload freight revenues by commodity group in dollars and as a percentage of such revenues:
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PERCENTAGES) Chemicals and plastics............ $ 7,548 43.5% $ 7,366 43.2% $ 8,000 42.1% Construction aggregate............ 3,054 17.6 3,086 18.1 3,762 19.8 Food and agricultural products.... 3,019 17.4 2,864 16.8 2,831 14.9 Forest and paper products......... 2,308 13.3 2,319 13.6 2,546 13.4 Scrap metal and waste............. 538 3.1 477 2.8 969 5.1 Other............................. 885 5.1 938 5.5 893 4.7 ------- ----- ------- ----- ------- ----- Total......................... $17,352 100.0% $17,050 100.0% $19,001 100.0% ======= ===== ======= ===== ======= =====
The following table sets forth a comparison of the Company's operating expenses expressed in dollars and as a percentage of operating revenues:
YEARS ENDED DECEMBER 31, ------------------------------------------ 1995 1996 1997 ------------- ------------- ------------ (IN THOUSANDS, EXCEPT PERCENTAGES) Salaries, wages, payroll taxes and employee benefits................ $ 9,997 50.6% $10,686 54.9% $11,023 49.9% Casualties and insurance.......... 1,373 6.9 800 4.1 572 2.6 Depreciation...................... 1,790 9.1 1,940 10.0 2,054 9.3 Diesel fuel....................... 522 2.6 656 3.4 708 3.2 Car hire, net..................... 708 3.6 605 3.1 598 2.7 Purchased services, including legal and professional fees...... 1,749 8.8 1,213 6.2 1,762 8.0 Repairs and maintenance of equipment........................ 714 3.6 687 3.5 943 4.3 Track and signal materials........ 1,877 9.5 1,257 6.4 1,866 8.4 Other materials and supplies...... 796 4.0 848 4.4 1,012 4.6 Other............................. 1,302 6.6 1,318 6.8 1,325 6.0 ------- ----- ------- ----- ------- ---- Total............................ 20,828 105.3 20,010 102.8 21,863 99.0 Less capitalized and recovered costs........................... 3,151 15.9 2,296 11.8 3,530 16.0 ------- ----- ------- ----- ------- ---- Total......................... $17,677 89.4% $17,714 91.0% $18,333 83.0% ======= ===== ======= ===== ======= ====
18 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Operating Revenues Operating revenues increased $2.6 million, or 13.5%, to $22.1 million in 1997 from $19.5 million in 1996. This increase was comprised of a $2.0 million (11.4%) increase in conventional freight revenues, a $167,000 (11.1%) increase in net container freight revenues and a $509,000 (56.7%) increase in non- freight operating revenues. The increases in conventional and container freight revenues were primarily the result of increases in freight traffic volume. The Company's conventional freight carloadings increased by 3,806, or 14.0%, to 31,047 carloadings in 1997 from 27,241 in 1996. Total intermodal containers handled increased by 3,707, or 9.3%, to 43,408 containers in 1997 from 39,701 in 1996. Average revenue per conventional carloading decreased slightly, principally due to a shift in the relative volume of commodities handled toward construction aggregate, which commands a comparatively lower freight rate. The average rate received per intermodal container increased slightly due to rate increases attributable to increases in certain railroad industry cost indices. The Company experienced increases in shipments by many of the Company's freight customers, attributable primarily to improved national and regional economic conditions as well as the Company's marketing efforts. The increase also reflected the addition of several new customers utilizing the Company's rail services. The $509,000 increase in non-freight operating revenues resulted primarily from increases in Maintenance of Way Department billings and from special train and other transportation revenues. Such revenues can vary significantly from year to year depending upon customer needs. Operating Expenses Operating expenses increased $619,000, or 3.5%, to $18.3 million in 1997 from $17.7 million in 1996. Operating expenses as a percentage of operating revenues ("operating ratio"), however, decreased to 83.0% in 1997 from 91.0% in 1996. The small increase in operating expenses and the decrease in the operating ratio were attributable to the relatively fixed nature of the Company's operating expenses and the fact that capitalized costs for track and bridge projects as well as costs recovered from government grants for public improvements, such as surfacing and signals for grade crossings, increased $1.2 million, or 53.7%, to $3.5 million in 1997 from $2.3 million in 1996. Casualties and insurance expense decreased $228,000, or 28.5%, to $572,000 in 1997 from $800,000 in 1996, principally due to the absence of any expenditures in 1997 for casualty losses in excess of amounts previously reserved. Casualty loss expense was $171,000 in 1996. Purchased services and track and signal materials expense increased $1.2 million, or 46.9%, to $3.6 million in 1997 from $2.5 million in 1996. This increase was primarily attributable to the increased capital projects and cost recovery programs carried out in 1997. Other Income Other income decreased $1.0 million, or 61.6%, to $638,000 in 1997 from $1.7 million in 1996, due primarily to a decrease in net gains from the sale, condemnation and disposal of properties and easements. The 1996 amount reflected a $1.0 million condemnation award. Interest Expense Interest expense was virtually unchanged between 1996 and 1997. Interest on approximately $730,000 of debt incurred to finance the acquisition of three locomotives during the second quarter of 1997 was essentially offset by interest reductions resulting from principal payments on existing indebtedness. 19 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Operating Revenues Operating revenues decreased $322,000, or 1.6%, to $19.5 million in 1996 from $19.8 million in 1995. This decrease was comprised primarily of a $302,000 (1.7%) decrease in conventional carload revenues. Other non-freight operating revenues were virtually unchanged between the two years. The decreases in conventional and container freight revenues were primarily due to decreases in traffic volumes partially offset by higher average revenues received per conventional carloading and per container. The Company's conventional freight carloadings decreased 1,898, or 6.5%, to 27,241 carloadings in 1996 from 29,139 in 1995. Total intermodal containers handled decreased 1,510, or 3.7%, to 39,701 in 1996 from 41,211 in 1995. Increases in the average revenue received per conventional carloading were primarily due to a change in the mix of commodities toward higher revenue items while the increase in the average revenue received per container resulted from rate increases tied to increases in certain railroad industry cost indices. The decreases in both carload and container traffic volume in 1996 from 1995 were attributable to an economic slowdown which first became apparent late in the third quarter of 1995. Adverse weather conditions in the first quarter of 1996 also contributed to the decline in traffic. During the third quarter of 1996, as a result of improving economic conditions, conventional traffic volume began to return to 1995 levels. Conventional traffic volume for the fourth quarter of 1996 exceeded the prior year's level by 7.0% and, as previously noted, these higher traffic levels carried forward into 1997. Operating Expenses Operating expenses remained relatively stable at approximately $17.7 million in 1995 and 1996. The operating ratio increased in 1996 to 91.0% from 89.4% in 1995. Casualties and insurance expense decreased $573,000, or 41.7%, to $800,000 in 1996 from $1.4 million in 1995. This decrease was primarily attributable to a decrease in the cost of casualty and environmental claims, which decreased $557,000 to $171,000 in 1996 from $728,000 in 1995. The high level of claims in 1995 was attributable to a large environmental claim that was settled during that year. Purchased services and track and signal materials expense decreased $1.1 million, or 31.9%, to $2.5 million in 1996 from $3.6 million in 1995. This decrease was attributable to a lower level of capital projects and cost recovery programs carried out during 1996. Other Income Other income increased $1.1 million, or 185.7%, to $1.7 million in 1996 from $581,000 in 1995 due to substantially higher net gains realized from the sale, condemnation and disposal of properties and easements. In 1996, the Company received $1.0 million from the State of Rhode Island's condemnation of an abandoned rail line. Interest Expense Interest expense increased $196,000, or 16.7%, to $1.4 million in 1996 from $1.2 million in 1995. This increase was principally the result of interest on the subordinated note payable to MCRC, in the principal amount of $5.0 million, which originated in December 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has relied primarily on cash generated from operations to fund working capital and capital expenditures relating to ongoing operations, while relying on borrowed funds to finance acquisitions and equipment needs, primarily rolling stock. The Company generated $3.2 million, $1.5 million and $3.5 million of cash from operations in 1995, 1996 and 1997, respectively. The Company's total cash and cash 20 equivalents increased by $1.4 million in 1995, but decreased by $1.3 million and $167,000 in 1996 and 1997, respectively. The principal utilization of cash during the three-year period was for expenditures for property and equipment acquisitions, principal payments on long-term debt obligations, reduction of current liabilities and payment of dividends. During 1995, 1996 and 1997, the Company generated approximately $108,000, $1.3 million and $230,000, respectively, from the sales and disposals of properties not considered essential for railroad operations and from easements, including the $1.0 million condemnation award received in 1996. The Company holds various properties which could be made available for sale, lease, license or grants of easements. Revenues from sales of properties and easements can vary significantly from year to year. Substantially all of the mainline track owned by the Company meets FRA Class 3 standards (permitting freight train speeds of 40 miles per hour), and the Company intends to continue to maintain this track at this level. The Company expended $1.7 million, $1.9 million and $2.5 million for track structure and bridge improvements in 1995, 1996 and 1997, respectively. Deferred grant income in the amount of $785,000 in 1995, $671,000 in 1996 and $935,000 in 1997 financed a portion of these improvements. In addition, the Company received $588,000 of grant proceeds in 1997 to purchase track materials for a three-year track improvement project commenced in 1997, which the Company expects to complete by 2000. The track materials were purchased during 1997 and are included in "materials and supplies" on the accompanying balance sheet as of December 31, 1997. Management estimates that approximately $2.0 million of improvements to the Company's track structure and bridges will be made in 1998, 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. The Company acquired and renovated three used locomotives during the second quarter of 1997 at a total cost of $730,000, financed through long-term borrowings from a commercial lender. Expenditures incurred on this project are included as expenditures for equipment additions in the accompanying statements of cash flows. The Company's principal bank renewed the Company's revolving line of credit in June 1997 and increased the maximum borrowings allowed from $1.5 million to $1.8 million. Loans in the amount of $1.4 million were outstanding under this line of credit as of December 31, 1997. The average interest rate for 1997 was 9.3%. The Company obtained $5.0 million from MCRC in December 1995 in exchange for a 10% subordinated note and warrants to purchase 200,000 shares of the Company's Common Stock at an exercise price of $7.10 per share. A portion of the proceeds was utilized to repay the outstanding principal balance on a $1.8 million term note. The remaining proceeds have been used for additions to property and equipment and for working capital purposes. MCRC must apply $1.4 million of the amount due on the MCRC note toward the exercise of the MCRC warrants upon the Company's consummation of a public offering of its Common Stock at a purchase price of not less than $14.20 per share which results in gross proceeds to the Company of not less than $10 million. At December 31, 1997, the Company had long-term senior debt and subordinated debt outstanding totaling $12.8 million, of which $931,000 is due within one year. Comparable figures at December 31, 1996 were $12.8 million and $677,000, respectively. The Company concluded an agreement in October 1997 to acquire all of the outstanding stock of Connecticut Central Railroad Company ("Conn Central") in exchange for shares of Common Stock. The Company expects to complete this acquisition during the second quarter of 1998. Management is not able to predict the total impact of this acquisition upon future operations but estimates that rail freight revenues from existing customers of Conn Central will total approximately $500,000 per year at the current level of operations. In addition, management intends to pursue additional growth opportunities that may be available on these lines. In 1997, the Company paid dividends in the amount of $5.00 per share on its outstanding Preferred Stock and $0.12 per share on its outstanding Common Stock. Continued payment of such dividends is contingent upon the Company's continuing to have the necessary financial resources available and is limited by the MCRC agreement to 25% of the Company's net income. 21 The Company believes that expected cash flows from operating activities and cash flows from financing activities will be sufficient to fund the Company's capital requirements for at least the next 12 months. To the extent that the Company is successful in consummating acquisitions or implementing its expansion plans, it may be necessary to finance such acquisitions or expansion plans through the issuance of additional equity securities, incurrence of indebtedness or both. INFLATION In recent years, inflation has not had a significant impact on the Company's operations. SEASONALITY Historically, the Company's operating revenues are lowest for the first quarter due to the absence of aggregate shipments during this period and to winter weather conditions. YEAR 2000 COMPLIANCE The Company operates a mainframe computer with a PC network and employs three in-house programmers who write and maintain a substantial portion of the Company's software programs. The Company utilizes Electronic Data Interchange and Interline Settlement Systems through Railinc in Washington, D.C. for the interchange of rail cars and revenue allocations with other railroads. The Company has compatible back up mainframe systems at both its Worcester, Massachusetts and Plainfield, Connecticut facilities. Preparations for the year 2000 have been underway for six years and changes to the Company's programs are substantially complete. Due to the short periodic cycle of rail car movements, the exchange of data covers time periods where "Year 2000" compliance is not a major factor and should not adversely affect the Company's business. The Company does rely on waybills and car supply and revenue data generated by other railroads in the interchange of rail cars. The failure of these railroads to supply accurate data could disrupt the Company's operations. Railinc has informed the Company that it is currently addressing the Year 2000 issue and the Company believes that its programs can be readily modified to accommodate any resulting changes which may be required. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards of related disclosures about products and services, geographic areas and major customers. Both standards will be adopted by the Company during the first quarter of 1998 and are not expected to have material effects on its financial position and results of operations. 22 BUSINESS GENERAL P&W is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The Company is the only interstate freight carrier serving the State of Rhode Island and possesses the exclusive and perpetual right to conduct freight operations over the Northeast Corridor between New Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing independent operations in 1973, the Company, through a series of acquisitions of connecting lines, has grown from 45 miles of track to its current system of approximately 515 miles. P&W operates the largest double stack intermodal terminal facilities in New England in Worcester, a strategic location for regional transportation and distribution enterprises. The Company transports a wide variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, processed foods and edible food stuffs, such as frozen foods, corn syrup and animal and vegetable oils. Its customers include The Dow Chemical Company, Exxon Corporation, Frito-Lay, Inc., General Dynamics Corporation, Getty Petroleum Marketing Inc., International Paper Company, Leggett & Platt, Incorporated, Mobil Oil Corporation, R.R. Donnelley & Sons and Tilcon Connecticut, Inc. In 1997, P&W transported over 31,000 carloads of freight and over 43,000 intermodal containers, representing an increase of 14.0% and 9.3%, respectively, over 1996 volumes. The Company also generates income through sales of properties, grants of easements and licenses and leases of land and tracks. P&W's connections to multiple Class I railroads, either directly or through connections with regional and short-line carriers, provide the Company with a competitive advantage by allowing it to offer creative pricing and routing alternatives to its customers. In addition, the Company's commitment to maintaining its track and equipment to high standards enables P&W to provide fast, reliable and efficient service. INDUSTRY OVERVIEW General Railroads are divided into three classes based on operating revenues: Class I, $255 million or more; Class II, $20.4 million to $255 million; and Class III, less than $20.4 million. As a result of mergers and consolidations, there are only nine Class I railroads in the country. These large systems handle 91% of the nation's rail freight business. The rail freight industry underwent a revitalization after the passage of the Staggers Rail Act, which deregulated the pricing and types of services provided by railroads. As a result, railroads were able to achieve significant productivity gains and operating cost decreases while gaining pricing flexibility. Rail freight service became more competitive with other transportation modes with respect to both quality and price. The volume of freight moved by rail has risen dramatically since 1980 and profitability has improved significantly. One result of the revitalization of the industry has been the growth of regional (over 350 miles) and short-line railroads, which has been fueled by a trend among Class I railroads to divest certain branch lines in order to focus on their long-haul core systems. There are now more than 500 of these regional and short-line railroads. They operate in all 50 states, account for over one- fourth of all rail track, employ 11% of all rail workers and generate about 9% of all rail revenue. Generally, freight railroads handle two types of traffic: conventional carloads and intermodal containers used in the shipment of goods via more than one mode of transportation, e.g., by ship, rail and truck. By using a hub-and- spoke approach to shipping, multiple containers can be moved by rails to and from an intermodal terminal and then either delivered to their final destinations by trucks or transferred to ships for export. Over the past decade, commodity shippers have increasingly turned to intermodal transportation principally as an alternative to long-haul trucking. The development of new intermodal technology, which allows containers to be moved by 23 rail double stacked (i.e., stacked one on top of the other) in specially designed railcars, together with increasing highway traffic congestion and the shortage of long-haul truck drivers have contributed to this trend. Breakup of Conrail In October 1996, CSX and Conrail announced plans to merge. In response to the merger announcement, Norfolk Southern announced a competing tender offer to acquire Conrail. Subsequently, CSX and Norfolk Southern agreed to divide Conrail and filed for approval of the transaction with the STB in June 1997. Based upon management's review of publicly available information currently included in the filing regarding the breakup of Conrail, CSX will acquire all of Conrail's properties and operating rights in New England. While the impact of the proposed merger on future traffic patterns and the resultant effect on P&W's railroad operations are uncertain at this time, P&W does not anticipate any significant negative impact as a result of the merger, and believes that the merger may create additional business for the Company as a result of longer Class I single line service on competitive routes. Furthermore, the continued implementation of the North American Free Trade Agreement is expected to increase trade between the northeast and South American manufacturing centers via Gulf Coast ports. The introduction of longer single line service between the southeast and New England via CSX, together with P&W's intermodal facility, should position the Company to capture more international and domestic double stack containerized cargo. REGIONAL DEVELOPMENTS There are a number of development projects underway in New England to increase port capacity along the extensive coastline and to improve the intermodal transportation and distribution infrastructure in the region. These projects present significant opportunities for the Company to increase its business. Quonset/Davisville The State of Rhode Island has proposed a development plan for a 3,000 acre industrial park, commonly known as "Quonset/Davisville," located near the entrance of Narragansett Bay. The site, which is owned by the Rhode Island Economic Development Corporation, contains nearly 1,000 acres of developable property, three active piers, an on-site airport and on-site rail. The plan contemplates creating the largest on-dock double stack container and tri-level auto rail facility in New England with a deepwater port and related facilities, including increased intermodal container storage and automobile handling capacity. To facilitate the port development, the State plans a $120 million freight rail improvement project to be funded with both State and federal funds which will provide additional track capacity and double stack clearances on the Northeast Corridor between Quonset/Davisville and the Company's mainline connection at Central Falls, Rhode Island. The freight rail improvement project and first phase of the proposed development will require numerous governmental approvals and will take approximately four years to implement. The State's plan anticipates that, upon completion of the proposed development, Quonset/Davisville will become a substantial port of entry for automobiles, containerized cargo and other commodities and will generate substantial additional rail traffic to and from the industrial park. Massachusetts Highway Improvement Program The Commonwealth of Massachusetts is in the process of implementing a $250 million highway reconstruction project to create a direct Worcester connection to the Massachusetts Turnpike and significantly increase traffic capacity on the highway connecting Providence and Worcester. A population of 7.2 million resides within a 50 miles radius of Worcester. The highway project, which is scheduled in phases for completion over the next three years, is expected to significantly improve access and shorten travel times to and from Worcester for this population as well as businesses located throughout New England. Port of New Haven The State of Connecticut is in the process of rebuilding the Tomlinson Bridge in New Haven, which will provide rail access to the Port of New Haven. In conjunction with this project, the Company is working with the 24 City of New Haven and area users of the rail systems to fund a design for the restoration of local street rail service directly to port properties. Completion of this project, which is scheduled for late 2000, will provide the Company with increased access to customers at the Port of New Haven. BUSINESS STRATEGY By aggressively pursuing opportunities to upgrade, expand and enhance its existing rail infrastructure, acquiring and developing strategically located terminal properties, expanding relationships with existing customers, acquiring additional rail cars, acquiring connecting rail lines and expanding its contract maintenance and repair capabilities, the Company intends to become the dominant rail freight carrier in New England. In particular, the Company's business strategy involves the following: . Pursue Opportunities to Upgrade, Expand and Enhance Existing Rail Infrastructure. Certain of the Company's growth opportunities are contingent upon anticipated enhancements to its existing rail system. The Quonset/Davisville development plan contemplates construction of an additional rail line with double stack container and tri-level auto rail car clearances on trackage on the Northeast Corridor over which P&W possesses the exclusive and perpetual right to conduct freight operations. To realize the benefits of this project, P&W is in the process of making clearance improvements on its line from its connection with the Northeast Corridor at Central Falls, Rhode Island to Worcester. The Company is also working with the Commonwealth of Massachusetts to implement a statewide clearance improvement project that will include certain P&W rail lines in Worcester County. In response to the trend among shippers to purchase heavier load rail cars, the Company has begun to identify and improve undergrade bridge structures to permit heavier loadings on key line segments. These improvements should permit the Company to capitalize on the increased rail traffic anticipated from the Quonset/Davisville development, capture more international and domestic double stack containerized cargo, and handle heavier rail cars and cargo. . Acquire and Develop Strategically Located Terminal Properties and Intermodal Facilities. Headquartered at a major population center of New England, the Company is well situated to capitalize on the trend of shipping goods throughout the region by rail in intermodal containers. P&W currently provides rail service to two intermodal yards in the City of Worcester totaling approximately 30 acres. Planned improvements expected to occur over the next three years associated with the Massachusetts highway reconstruction project will significantly expand the Company's facilities for intermodal and bulk transloading in Worcester. In addition, the project should enhance the Company's growth opportunities by increasing the convenience of its terminal facilities as a hub for intermodal transportation to and from the region. To capitalize on such opportunities, the Company intends to pursue the identification and acquisition or lease of suitable properties in the Worcester area to increase its intermodal capacity. P&W is also exploring potential expansion opportunities for transload and intermodal yards in the I-395 Corridor in eastern Connecticut (which runs parallel to the Company's Norwich branch) and is planning an intermodal facility at the South Quay. In addition, the Company commenced legal proceedings to enforce its right to acquire New Haven Station which it believes is triggered by Conrail's pending sale of these properties to CSX. If the Company is successful in acquiring Conrail's New Haven Station, it could present a significant growth opportunity. See "Legal Proceedings." . Increase Existing System Revenues Through Expanded Customer Relationships. The Company's marketing and sales staff focuses on understanding and addressing the raw material requirements and transportation needs of its existing customers and businesses on its lines. The staff grows existing business by maintaining close working relationships with both customers and connecting carriers. In addition, the staff generates new business by targeting companies on its lines that underutilize rail service and by working with local economic development officials and realtors to attract new industries to locations on the Company's system. Unlike single connection small carriers, P&W is able to offer its customers creative pricing and routing alternatives, and expects the division of the Conrail system to increase the opportunities for such offerings. P&W also expects its recently executed agreement with CSX for the movement of increased rail traffic between New Haven and Fresh Pond Junction on Long 25 Island to enable it to generate additional business. Completion of the Port of New Haven project should also provide the Company with increased opportunities for business with the Port's tenants. . Acquire Additional Rail Cars. The Company intends to use a portion of the proceeds of this Offering to acquire 40 100-ton gondola rail cars at a cost of approximately $50,000 each, for use in the movement of scrap metals, hazardous and non-hazardous bulk waste and coiled wire. Because P&W serves as primarily a terminating carrier (i.e., the Company delivers raw materials to shippers on its line), in the past it has been able to rely on its connecting carriers for car supply originating at the suppliers' locations. Currently, due to the generally good economy and a significant upturn in business at a metals recycling facility on the Company's system, the Company has been unable to meet demand for gondolas. The availability of additional gondolas should enable the Company to derive greater freight revenues as well as car hire income (payments made to the Company by other carriers for time the Company's cars are on such carrier's line). . Acquire Connecting Rail Lines and Trackage Rights. In October 1997, P&W signed an agreement to purchase the Connecticut Central Railroad Company, a short-line railroad headquartered in Middletown, Connecticut with operating rights over approximately 28 miles of track in central Connecticut. The Company believes this line is strategically located for new business development and for a possible connection with other rail lines operating in and around Hartford, Connecticut. P&W intends to continue to expand its business though the selective acquisition of rail properties and trackage rights on connecting lines. . Expand Locomotive and Rail Car Maintenance and Repair Capabilities. Unlike many other regional and short-line railroads, the Company maintains multiple maintenance and engine house facilities and its physical plant is in good condition. The Company intends to use a portion of the proceeds of this Offering to expand its Worcester maintenance facility to increase the efficiency of routine maintenance and repairs. These facility improvements, together with an increase in maintenance personnel, should also enable the Company to provide expanded contract maintenance and repair services. The Company has provided locomotive and rail car repair services to Conrail, Amtrak, Massachusetts Bay Transportation Authority and certain of its freight customers. RAILROAD OPERATIONS The Company's rail freight system extends over approximately 515 miles of track. The Company interchanges freight traffic with Conrail at Worcester, Massachusetts and at New Haven, Connecticut; with the Springfield Terminal Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts; with the New England Central Railroad (formerly Central Vermont Railway) at New London, Connecticut; and with the New York and Atlantic Railroad (formerly Long Island Railroad) at Fresh Pond Junction on Long Island. Through its connections, P&W links 79 communities on its lines. It operates four classification yards (areas containing tracks used to group freight cars destined for a particular industry or interchange), located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield and New Haven, Connecticut. By agreement with a private operator, the Company operates two approved customs intermodal yards in Worcester. A customs intermodal yard is an area containing tracks used for the loading and unloading of containers. These yards are U.S. Customs bonded, and international traffic must be inspected and approved by U.S. Customs officials. The intermodal facility serves primarily as a terminal for movement of container traffic from the Far East destined for points in New England. Several major container ship lines utilize double stack train service through this terminal. P&W works closely with the terminal operator to develop and maintain strong relationships with steamship lines involved in international intermodal transportation. Customers The Company serves over 150 customers in Massachusetts, Rhode Island, Connecticut and New York. The Company's 10 largest customers accounted for approximately 51.5% of operating revenues in 1997. In 1997, Tilcon Connecticut, Inc., which ships construction aggregate from three separate quarries on P&W's system to asphalt production plants in Connecticut and New York, accounted for approximately 15.1% of the Company's operating revenues. No other customer accounted for 10% or more of its total operating revenues in 1997. 26 In recent years, P&W has benefited from the expansion of existing customers' facilities as well as the location of new customers on its railroad. For example, during 1997, two of the Company's manufacturing customers increased production at facilities on P&W's lines by approximately 35% and 25%, respectively, which resulted in increased rail service to these companies. In the past two years, the development of Quonset/Davisville and growth of certain customers' operations at this industrial park has resulted in a 29% increase in the Company's rail traffic to and from the park. Certain other P&W customers have recently made or announced developments that the Company anticipates will provide increased revenues. For example, a food distributor in Worcester was recently awarded a contract to distribute frozen french fries to fast food restaurants in the New England region. In addition, a major office supply retailer has recently concluded construction of a regional, rail-served distribution facility in Killingly, Connecticut and is now receiving rail service from the Company. Markets The Company transports a wide variety of commodities for its customers. In 1997, chemicals and plastics and construction aggregate were the two largest commodity groups transported by the Company, constituting 42% and 20%, respectively, of conventional carload freight revenues. The following table summarizes the Company's conventional carload freight revenues by commodity group as a percentage of such revenues:
COMMODITY 1993 1994 1995 1996 1997 --------- ---- ---- ---- ---- ---- Chemicals and Plastics............................ 46% 46% 44% 43% 42% Construction Aggregate............................ 11 15 18 18 20 Food and Agricultural Products.................... 16 16 17 17 15 Forest and Paper Products......................... 15 14 13 14 13 Scrap Metal and Waste............................. 4 3 3 3 5 Other............................................. 8 6 5 5 5 --- --- --- --- --- Total........................................... 100% 100% 100% 100% 100% === === === === ===
Sales and Marketing P&W's sales and marketing staff of three people has over 45 years of combined experience in pricing and marketing railroad services. The sales and marketing staff focuses on understanding and addressing the raw material requirements and transportation needs of its existing customers and businesses on its lines. The staff grows existing business by maintaining close working relationships with both customers and connecting carriers. The sales and marketing staff strives to generate new business for the Company through (i) targeting companies already on P&W's rail lines but not currently using rail services, (ii) working with state and local development officials, developers and real estate brokers to encourage the development of industry on the Company's rail lines and (iii) identifying and targeting the non-rail transportation of goods into and out of the region in which the Company operates. Unlike many other regional and short-line railroads, the Company is able to offer its customers creative pricing and routing alternatives because of its multiple connections to other carriers. Safety An important component of the Company's operating strategy is conducting safe railroad operations for the benefit and protection of employees, customers and the communities served by its rail lines. Since commencing active operations in 1973, the Company has committed significant resources to track maintenance to minimize the risk of derailments and believes its rail system is in good condition. Employee safety is also an important part of the Company's operating policy. P&W has dramatically reduced the frequency and severity of employee injuries through a comprehensive safety program which includes extensive training, personal protection equipment and incentives. Employees attend annual classes and take annual exams regarding operating and safety rules and practices. The Company's safety program also includes a hot line which is used to report safety issues directly to the safety director, a safety suggestion program which includes financial 27 incentives and a peer recognition program for colleagues to discuss safety rules and good work habits. Since it began its safety program in 1981, the Company has made dramatic improvements to its safety records both in terms of the frequency and severity of injuries while significantly increasing its operations and expanding its workforce. Reportable injuries have declined to below 10 incidents per year for the past five years, as compared to over 100 reportable injuries in 1981. The Company has won three E.H. Harriman industry safety awards in the last five years. Rail Traffic Rail traffic is classified as on-line or overhead traffic. On-line traffic is traffic that originates or terminates with shippers located on a railroad. Overhead traffic passes from one connecting carrier to another and neither originates nor terminates with shippers located on a railroad. Presently, P&W is solely an on-line carrier but expects to provide overhead service in the future for certain rail traffic to and from Long Island. Rail freight rates can be in various forms. Generally, customers are given a "through" rate, a single figure encompassing the rail transportation of a commodity from point of origin to point of destination, regardless of the number of carriers which handle the car. Rates are developed by the carriers based on the commodity, volume, distance and competitive market considerations. The entire freight bill is paid either to the originating carrier ("prepaid") or to the destination carrier ("collect") and divided between all carriers which handle the move. The basis for the division varies and can be based on factors (or revenue requirements) independently established by each carrier which comprise the through rate, or on a percentage basis established by division agreements among the carriers. A carrier such as P&W, which actually places the car at the customer's location and attends to the customer's daily switching requirements, receives revenue greater than an amount based simply on mileage hauled. Employees As of January 1, 1998, the Company had 147 full-time employees, 112 of which were represented by three national railroad labor organizations. The Company's employees have been represented by unions since the Company commenced independent operations in 1973. The Company's initial agreement with the United Transportation Union covering the trainmen was unusual in the railroad industry since it provided the Company with discretion in determining crew sizes, eliminated craft distinctions and provided a guaranteed annual wage for a maximum number of hours worked. The Company's collective bargaining agreements have been in effect since February 1973 for trainmen, since May 1974 for clerical employees, dispatchers and police and since June 1974 for maintenance employees. These contracts do not expire but are subject to re-negotiation after the agreed-upon moratoriums. The moratorium periods are typically three to five years in length. The labor agreements may next be amended at June 1, 1998 for the United Transportation Union (trainmen), December 31, 1999 for the Transportation Communication Union (clerical) and July 1, 2000 for the Brotherhood of Railroad Signalmen (maintenance). The Company considers its employee and labor relations to be good. COMPETITION The Company is the only rail carrier serving businesses located on-line. However, the Company competes with other carriers in the location of new rail- oriented businesses in the region. The Company also competes with other modes of transportation, particularly long-haul trucking companies, for the transportation of commodities. Any improvement in the cost or quality of these alternate modes of transportation, for example, legislation granting material increases in truck size or allowable weight, could increase competition and may materially adversely affect the Company's business and results of operations. As a means of competing, P&W strives to offer greater convenience and better service than competing carriers and at costs lower than some competing non-rail carriers. The Company also competes by participating in efforts to attract new industry to the areas which it serves. Certain rail competitors, including Conrail and CSX, are larger or better capitalized than the Company. While P&W believes the acquisition and division of Conrail will lead to expansion opportunities, the Conrail 28 transaction may lead to increased competition with other freight railroads, particularly in Massachusetts, and efforts by CSX and Norfolk Southern to reduce revenue to connecting regional and short-line carriers. The Company believes that its ability to grow depends, in part, upon its ability to acquire additional connecting rail lines. In making acquisitions, P&W competes with other short-line and regional rail operators, some of which are larger and have greater financial resources than the Company. PROPERTIES Track P&W's rail system extends over approximately 515 miles of track, of which it owns approximately 170 miles. The Company has the right to use the remaining 345 miles pursuant to perpetual easements and long-term trackage rights agreements. Under certain of these agreements, the Company pays fees based on usage. Of the approximately 515 miles of track on which the Company operates, 341 miles, or 66%, are in FRA Class 3 condition or better, which permits speeds of 40 miles per hour for freight trains. An additional 59 miles of track, or 12%, of the Company's trackage are in FRA Class 2 condition, which permits speeds up to 25 miles per hour. The remaining 116 miles, or 22%, are in FRA Class 1 or FRA Excepted condition, which permits maximum speeds of 10 miles per hour. Of the 116 miles of FRA Class 1 or FRA Excepted track, 35 miles, or 30%, are owned and maintained by other railroads; of the remaining 81 miles of FRA Class 1 or FRA Excepted track, the Company operates on only 35 miles, or 30%, and the balance of 46 miles, or 40%, is not currently in use. The following chart shows the percentage value of the Company's trackage by FRA classification. TRACK CONDTION Class 2 12% Class 1 or excepted [PIE CHART APPEARS HERE] 22% Class 3 or Higher 66% Part of the Company's operating strategy is to maintain and improve the classification of its trackage in order to allow the Company to operate at maximum freight train speeds to consistently provide its customers with fast, reliable and efficient rail service. P&W believes that regular track maintenance is important to the long-term prosperity of the Company. The Company is responsible for maintaining 207 of the 515 miles of track included within its operating system. Of the remaining 308 miles of track, 186 miles are maintained by Amtrak and 122 miles are maintained by other railroads or are currently not in use. Substantially all of the mainline track owned by the Company is maintained in FRA Class 3 condition. 29 Of the approximately 515 miles of the Company's system, 283 miles, or 55%, are located in Connecticut, 103 miles, or 20%, are located in Massachusetts, 102 miles, or 20%, are located in Rhode Island and 28 miles, or 5%, are located in New York. New York 5% Massachusetts 20% [PIE CHART APPEARS HERE] Rhode Island 20% Connecticut 55% Rail Facilities P&W owns land and a building with approximately 69,500 square feet of floor space in Worcester, Massachusetts. The building houses the Company's executive and administrative offices and some of the Company's storage space. Approximately 2,100 square feet are leased to an outside tenant. The Company owns and operates three principal classification yards located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield, Connecticut and also operates a classification yard in New Haven, Connecticut. In addition, the Company has maintenance facilities in Plainfield and Worcester. P&W plans to expand the Worcester facility in order to increase the efficiency of routine maintenance and repairs and increase the Company's ability to provide contract maintenance. P&W believes that its executive and administrative office facilities, classification yards and maintenance facilities are adequate to support its current level of operations. See "Use of Proceeds" and "--Business Strategy." Other Properties The Company owns or has the right to use a total of approximately 130 acres of real estate located along the principal railroad lines from downtown Providence through Pawtucket, Rhode Island. Of this amount, P&W owns approximately eight acres in Pawtucket and has a perpetual easement for railroad purposes over the remaining 122 acres. The Company has invested approximately $11 million in the development of the South Quay, which is adjacent to 12 acres of land owned by the Company. This investment has resulted in the creation of approximately 33 acres of waterfront land that are the subject of a title dispute pending before the Rhode Island Supreme Court. See "-- Legal Proceedings." P&W actively manages its real estate assets in order to maximize revenues. The income from property management is derived from sales and leasing of properties and tracks and grants of easements to government agencies, utility companies and other parties for the installation of overhead or underground cables, pipelines and transmission wires as well as recreational uses such as bike paths. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 30 Rolling Stock The following schedule sets forth the rolling stock owned by the Company as of December 31, 1997:
DESCRIPTION NUMBER ----------- ------ Locomotive............................................................ 24 Gondola............................................................... 37 Flat Car.............................................................. 4 Ballast Car........................................................... 36 Passenger Equipment................................................... 5 Caboose............................................................... 2 --- Total............................................................... 108 ===
The 24 diesel electric locomotives are used on a daily basis, are maintained to a high standard, comply with all FRA and Association of American Railroads rules and regulations and are adequate for the needs of the Company's freight operations. The 37 100-ton capacity gondolas and four flat cars are considered modern rail cars and are used by certain P&W customers. Other rail freight customers use their own freight cars or obtain such equipment from other sources. The 36 ballast cars are used in track maintenance. From time to time, the Company has leased ballast cars to other adjoining railroads. The passenger equipment and cabooses are not utilized in P&W's rail freight operations but are used on an occasional basis for Company functions, excursions and charter trips. Equipment P&W has a state-of-the-art digital touch control dispatching system at its Worcester operations center permitting two-way radio contact with every train crew and maintenance vehicle on its lines. The system also enables each train crew to maintain radio contact with other crew members. The Company maintains a computer facility in Worcester with back-up computer facilities in Worcester and Plainfield, Connecticut to assure the Company's ability to operate in the event of disruption of service in Worcester. The Company also has state-of- the-art automatic train defect detectors at strategic locations which inspect passing trains and audibly communicate the results to train crews and dispatchers in order to protect against equipment failure en route. The Company maintains a modern fleet of track maintenance equipment and aggressively pursues available opportunities to work with federal and state agencies for the rehabilitation of bridges, grade crossings and track. The Company's locomotives are equipped with the cab signal technology necessary for operations on the Northeast Corridor and will be equipped with automatic civil speed enforcement systems which will be required upon the introduction of high speed passenger service on the Northeast Corridor scheduled for late 1999. GOVERNMENTAL REGULATION The Company is subject to governmental regulation by the STB, the FRA and other federal, state and local regulatory authorities with respect to certain rates and railroad operations, as well as a variety of health, safety, labor, environmental and other matters, all of which could potentially affect the competitive position and profitability of the Company. Additionally, the Company is subject to STB regulation and may be required to obtain STB approval prior to its acquisition of any new railroad properties. Management of the Company believes that the regulatory freedoms granted by the Staggers Rail Act have been beneficial to the Company by giving it flexibility to adjust prices and operations to respond to market forces and industry changes. However, various interests, and certain members of the United States House of Representatives and Senate (which have jurisdiction over federal regulation of railroads), have from time to time expressed their intention to support legislation that would eliminate or reduce significant freedoms granted by the Staggers Rail Act. As a result of the planned introduction of high speed passenger service on the Northeast Corridor, the FRA has issued an order requiring that all locomotives operating on the Northeast Corridor between New Haven and Boston be equipped with automatic civil speed enforcement systems, the cost of which is anticipated to be at least $45,000 per locomotive. The proposed order does not address whether the federally funded high speed project or the Company will bear the costs of required locomotive retrofits. 31 ENVIRONMENTAL MATTERS The Company's railroad operations and real estate ownership are subject to extensive federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company handles, stores, transports and disposes of petroleum and other hazardous substances and wastes. The Company also transports hazardous substances for third parties and arranges for the disposal of hazardous wastes generated by the Company. The Company believes that it is in material compliance with applicable environmental laws and regulations. LEGAL PROCEEDINGS In 1995, the Company entered into a Settlement Agreement with the Selling Shareholder, Bestfoods, pursuant to which Bestfoods (formerly known as CPC International, Inc.) released the Company from any claims arising out of the contamination of certain property formerly owned by a subsidiary of Bestfoods. Bestfoods' insurance carrier (which to date has denied coverage to Bestfoods) has notified the Company that it intends to bring suit against the Company to enforce its alleged rights of subrogation. The Company believes that since Bestfoods has released the Company from any liability, its carrier has no right of subrogation and its claim is without merit. Moreover, under the Settlement Agreement, Bestfoods is obligated to defend, indemnify and hold harmless the Company for any claims which arise from such contamination, including claims of the insurance carrier. The Company has invested approximately $11 million in the development of the South Quay, approximately 33 acres of reclaimed formerly tide flowed land which is adjacent to 12 acres owned by the Company. On April 25, 1996, the Company filed an action in Rhode Island Superior Court seeking to confirm the Company's fee simple absolute title in the South Quay. The State of Rhode Island and the Coastal Council objected to the Company's petition. Acting on motions for summary judgment filed by both sides, the Superior Court ruled that the Company is the owner of the South Quay in fee simple absolute. The State and Coastal Council have appealed this decision to the Rhode Island Supreme Court. The Company intends to vigorously defend the appeal and advocate that the Rhode Island Supreme Court should affirm the Superior Court decision. A decision from the Rhode Island Supreme Court is expected in 1999. A finding that the Company possesses only a 50 year license should not prevent the utilization of the South Quay as an intermodal facility. In connection with the division of Conrail, the Company instituted a lawsuit against Conrail in the United States District Court in the District of Columbia on November 12, 1997 in which the Company contends that, pursuant to a 1982 Order of the United States Special Court established pursuant to the Regional Rail Reorganization Act of 1973, the Company is entitled to acquire New Haven Station and that Conrail is not permitted to convey it to CSX. New Haven Station includes all of Conrail's rail properties in New Haven and related facilities (including a classification yard) necessary for the operations of P&W. Conrail disagrees with the Company's position. On January 22, 1998, the District Court dismissed the Company's claim without prejudice, finding that its claim was not ripe for adjudication prior to the STB's decision on the breakup of Conrail. The Company plans to reinstitute the claim when it is ripe for adjudication. 32 MANAGEMENT The Company's Charter and Bylaws provide that the members of the Board of Directors (the "Board") shall be elected separately by the Company's two classes of stock. Holders of Common Stock elect one-third of the Board of Directors and the holders of Preferred Stock elect the remainder of the Board. Directors are elected to serve until the next annual meeting and until their successors have been duly elected by the shareholders. There are currently three directors elected by the holders of the Common Stock and seven directors elected by the holders of the Preferred Stock. Officers are elected by and serve at the discretion of the Board of Directors. DIRECTORS AND EXECUTIVE OFFICERS The current directors and executive officers, their ages and their positions held with the Company are as follows:
NAME AGE POSITION ---- --- -------- Robert H. Eder(a)....... 65 Chairman of the Board and Chief Executive Officer Orville R. Harrold(b)... 65 President, Chief Operating Officer and Director Robert J. Easton(b)..... 54 Treasurer and Director Heidi J. Eddins......... 41 Vice President, Secretary and General Counsel Frank W. Barrett(b)..... 58 Director Phillip D. Brown(b)..... 54 Director John H. Cronin(b)....... 64 Director J. Joseph Garrahy(b).... 67 Director John J. Healy(b)........ 61 Director William J. LeDoux(a).... 66 Director Charles M. McCollam, Jr.(a)................. 65 Director
-------- (a) Elected by holders of Common Stock. (b) Elected by holders of Preferred Stock. The following is a brief summary of the background of each director, executive officer and key employee. DIRECTORS AND EXECUTIVE OFFICERS Robert H. Eder, Chairman of the Board and Chief Executive Officer. Mr. Eder became President of the Company in 1966 and led the Company through its efforts to become an independent operating company. He has been Chairman of the Board since 1980. He is a graduate of Harvard College and Harvard Law School. He (with his wife) is also majority owner and Chairman of an affiliated company, Capital Properties, a real estate holding company. Mr. Eder is admitted to practice law in Rhode Island and New York. Orville R. Harrold, President, Chief Operating Officer and Director. Mr. Harrold has been with the Company since the commencement of independent operations in February 1973. Over the past 25 years, he has held the positions of Chief Engineer and General Manager, becoming President in 1980. Mr. Harrold has a bachelors degree in mechanical engineering from the Pratt Institute, Brooklyn, New York and has been employed in the railroad industry in various capacities since 1960. Heidi J. Eddins, Vice President, Secretary and General Counsel. Mrs. Eddins joined the Company in 1983 as Assistant General Counsel, becoming General Counsel and Assistant Secretary in 1984, Secretary in 1988 and Vice President in 1997. Prior to joining the Company, she was in private practice at the law firm of Updike, Kelly and Spellacy in Hartford, Connecticut. She is a 1981 graduate of the University of Connecticut Law School and holds a bachelors degree from Boston College. Mrs. Eddins is admitted to practice law in Connecticut, Massachusetts and Rhode Island. 33 Robert J. Easton, Treasurer and Director. Mr. Easton has been with the Company since 1986, initially as Controller. He was promoted to the position of Treasurer and Controller in 1988. Prior to joining the Company, Mr. Easton had 21 years of experience in public accounting. He is a Certified Public Accountant with a bachelors degree in accounting from the University of Rochester. Frank W. Barrett, Director. Mr. Barrett has been a Director of the Company since 1995. He has been Executive Vice President at Springfield Institution for Savings since December 1993. From 1990 until that time, Mr. Barrett was the Senior Vice President, Credit Administration, of First New Hampshire Bank. Phillip D. Brown, Director. Mr. Brown has been a Director of the Company since 1995. He has been President and Chief Executive Officer of Unibank for Savings, a regional bank in central Massachusetts since August 1993. From 1990 until that time, Mr. Brown was the President of Citizens Bank of Massachusetts. John H. Cronin, Director. Mr. Cronin has been a Director of the Company since 1986. Since 1971 until his retirement in 1996, Mr. Cronin was owner and President of Ideal Products, Inc., a wholesale entertainment supply company. J. Joseph Garrahy, Director. Mr. Garrahy has been a Director of the Company since 1992. He is a former four term Governor of Rhode Island and, since 1990, has been an independent business consultant in the State of Rhode Island. John J. Healy, Director. Mr. Healy has been a Director of the Company since 1991. He has been President of Worcester Affiliated Mfg. L.L.C., an independent business consulting firm involved in efforts to revitalize manufacturing in Massachusetts, since January 1997. Prior thereto, Mr. Healy was President and Chief Executive Officer of HMA Behavioral Health, Inc., a behavioral health care management service provider. William J. LeDoux, Director. Mr. LeDoux has been a Director of the Company since 1990. He has been engaged in the private practice of law in the City of Worcester since 1963. Charles M. McCollam, Jr., Director. Mr. McCollam has been a Director of the Company since 1996. He owns and operates a number of insurance businesses in the State of Connecticut and was the Chief of Staff to a former governor of Connecticut. OTHER KEY EMPLOYEES Robert E. Baumuller, Chief Mechanical Officer. Mr. Baumuller has been with P&W since 1981 when he joined the Company as Assistant Chief Mechanical Officer. He was promoted to Chief Mechanical Officer in 1989. Mr. Baumuller is responsible for maintenance and repair of all of the Company's running equipment, including its locomotive fleet of 24 units, all track maintenance equipment, inspection, maintenance and repair of the Company's rail cars as well as rail cars received in interline service and maintenance of the Company's passenger equipment. Mr. Baumuller is also responsible for the identification and evaluation of locomotive and rail car purchases. Mr. Baumuller has been in the railroad industry since 1963 and worked in various positions related to equipment maintenance for the Vermont Railway, Inc. and the New York City Transit Authority. P. Scott Conti, Chief Engineer. Mr. Conti has been with the Company since 1988 and is responsible for all activities of the Maintenance of Way and Engineering Department which maintains the Company's tracks, bridges, buildings and grade crossings. Mr. Conti is responsible for overseeing all construction activity on or affecting railroad property and works closely with municipal and state agencies. From June 1988 to December 1997, Mr. Conti served as Engineering Manager and, in January 1998, he was promoted to Chief Engineer. Prior to joining the Company, Mr. Conti was employed by Perini Corporation in various project engineering management positions, including as project manager for a major track rehabilitation project in New York City. 34 David F. Fitzgerald, Superintendent of Transportation. Mr. Fitzgerald has been with the Company since December 1973, beginning in train and engine service. He was later promoted to the position of Trainmaster for the Company's Connecticut operations, Assistant General Trainmaster and General Trainmaster before being appointed to his current position of Superintendent of Transportation in 1981. Mr. Fitzgerald manages daily train operations and the customer service center, including customer service agents and train dispatchers. Frank K. Rogers, Director of Marketing and Sales. Mr. Rogers joined the Company as Director of Marketing and Sales in 1994. From 1993 through 1994, he was Director of Marketing for California Northern Railroad Company. From 1987 to 1992, Mr. Rogers was Marketing Manager and Assistant General Manager of Eureka Southern Railroad Company. He holds a bachelors degree in business administration with a transportation emphasis from Northeastern University. BOARD COMMITTEES The Board of Directors has established an Executive Committee, an Audit Committee and a Stock Option and Compensation Committee. Messrs. Eder, Harrold and Easton serve as members of the Executive Committee. The members of the Audit Committee are John H. Cronin, Chairman, J. Joseph Garrahy and Phillip D. Brown. William J. LeDoux, Chairman, John J. Healy and Frank W. Barrett serve as members of the Stock Option and Compensation Committee. DIRECTOR COMPENSATION Each director who is not an employee of the Company receives an attendance fee for each meeting of the Board equal to $500 plus the product of $50 multiplied by the number of years of service as a director. Each member of the Audit Committee and the Stock Option and Compensation Committee receives $300 for each attended meeting of the committee and the Chairman of each committee receives an additional $50 attendance fee. During the month of January of each year, each non-employee director who served on the Board on the preceding December 31 is granted options for the purchase of 100 shares of Common Stock, plus options for an additional 10 shares of Common Stock for each full year of service. The exercise price for such options is the last sale price of the Common Stock on the last business day of the preceding year, and the term of each option is 10 years (subject to earlier termination if the grantee ceases to serve as a director), provided however that no option is exercisable within six months following the date of grant. 35 EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued to each person who served as the Company's chief executive officer and each of the other four most highly compensated executive officers of the Company (together, the "Named Executive Officers") during the three year period ended December 31, 1997. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ---------------------- ------------------ SECURITIES UNDERLYING OPTIONS OTHER ANNUAL TO PURCHASE ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY(A) COMPENSATION COMMON STOCK COMPENSATION(B) - --------------------------- ---- --------- ------------ ------------------ --------------- Robert H. Eder........... 1997 $288,530 0 0 $47,453 Chairman of the Board and 1996 289,216 0 0 47,617 Chief Executive Officer 1995 272,513 0 0 48,117 Orville R. Harrold....... 1997 234,588 0 913 42,526 President and Chief 1996 231,787 0 932 40,508 Operating Officer 1995 222,421 0 888 40,510 Ronald P. Chrzanowski.... 1997 133,241 $28,193(d) 451 12,000 Chief Engineer until 12/31/97 1996 129,059 0 451 9,066 (Vice President and 1995 123,003 0 448 7,396 Director until 11/13/97)(c) Heidi J. Eddins.......... 1997 138,920 0 311 10,702 Vice President, Secretary 1996 133,997 0 313 9,381 and General Counsel 1995 127,444 0 301 7,713 Robert J. Easton......... 1997 123,232 0 210 9,353 Treasurer 1996 120,191 0 210 8,430 1995 113,706 0 203 6,880
- -------- (a) Includes amounts taxable to employees for personal use of Company-owned vehicles. (b) Includes amounts paid directly to the retirement accounts of management staff under the Company's simplified employee pension plan, and, in the case of Robert H. Eder and Orville R. Harrold, includes for 1997 premiums paid for life insurance coverage in the amounts of $35,453 and $30,526, respectively. (c) Mr. Chrzanowski left the Company to join its former parent company, Capital Properties, as President and a Director. (d) Includes value of a vehicle transferred to Mr. Chrzanowski ($18,193) and $10,000 paid to him to cover additional income taxes attributable to the transfer of the vehicle. STOCK PLANS In July 1989, the shareholders adopted the Company's Non-Qualified Stock Option Plan (the "Stock Option Plan") that provides for the granting to employees, officers and directors (excluding Mr. Eder) of options to purchase up to the greater of 50,000 shares or 5% of the number of shares of Common Stock outstanding (which equated to 111,097 shares at December 31, 1997). To date, options to purchase 77,398 shares of the Common Stock have been granted under the Stock Option Plan. Pursuant to the Company's Employee Stock Purchase Plan, eligible employees (which excludes Mr. Eder) may purchase registered shares of Common Stock at 85% of the market price for such shares. An aggregate of 200,000 shares of Common Stock are authorized for issuance under the Employee Stock Purchase Plan. Any shares purchased under the Employee Stock Purchase Plan are subject to a two year lock-up. To date, 2,846 shares have been purchased under the Employee Stock Purchase Plan. 36 The Company's Profit Sharing Plan provides for the issuance of Common Stock to an account for the benefit of eligible employees covered by collective bargaining agreements. To date, 124,992 shares have been issued under the Profit Sharing Plan. The Company's Safety Incentive Plan provides for the issuance of up to 15,000 shares of Common Stock to eligible management employees as an incentive for the satisfaction of certain safety standards. To date, 1,000 shares have been issued pursuant to the Safety Incentive Plan. The Company's Non-Qualified Stock Option Plan, Employee Stock Purchase Plan, Safety Incentive Plan and Profit Sharing Plan are collectively referred to as the "Stock Plans." OPTION GRANTS IN LAST FISCAL YEAR The following table contains information concerning the grant of stock options under the Stock Option Plan to the Named Executive Officers during the Company's last fiscal year.
NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS GRANTED OPTIONS TO EMPLOYEES EXERCISE EXPIRATION GRANT DATE NAME GRANTED(A) IN FISCAL 1997 PRICE DATE PRESENT VALUE(B) ---- ---------- --------------- -------- ---------- ---------------- Orville R. Harrold...... 913 11% $7.875 01/02/07 $2,702 Ronald P. Chrzanowski... 451 5 7.875 01/02/07 1,335 Heidi J. Eddins......... 311 4 7.875 01/02/07 921 Robert J. Easton........ 210 3 7.875 01/02/07 622
- -------- (a) The options were all granted on January 2, 1997 and became exercisable on July 2, 1997. (b) Amounts represent the fair value of each option granted and were estimated as of the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 29%; expected life of 7 years; risk-free interest rate of 5.75%; and expected dividend payment rate, as a percentage of the share price on the date of grant, of 1.26%. OPTION EXERCISES AND FISCAL YEAR END VALUES The following table contains information with respect to stock options held by the Named Executive Officers as of December 31, 1997. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY AT DECEMBER 31, 1997 DECEMBER 31, 1997(B) SHARES --------------------- -------------------- ACQUIRED ON VALUE EXERCISABLE / EXERCISABLE / NAME EXERCISE REALIZED(A) UNEXERCISABLE UNEXERCISABLE ---- ----------- ----------- --------------------- -------------------- Orville R. Harrold...... 1,214 $5,494 1,567/0 $14,808/0 Ronald P. Chrzanowski... 451 2,594 417/0 4,118/0 Heidi J. Eddins......... 632 3,770 784/0 8,147/0 Robert J. Easton........ 210 1,469 830/0 8,876/0
- -------- (a) Based on the last sale price of the Common Stock on the date of exercise minus the exercise price. (b) Based on the difference between the exercise price of each grant and the closing price of the Company's Common Stock on the AMEX on December 31, 1997, which was $18 3/8. 37 CERTAIN TRANSACTIONS On January 1, 1988, in accordance with a plan of distribution, shares of the Company were distributed to the shareholders of Capital Properties on a pro rata basis. Mr. Eder and his wife own 52.3% of the outstanding common stock of Capital Properties. As part of the plan, the Company issued to Capital Properties a promissory note in the amount of $9,377,000 payable over a period of 20 years with interest at 12% per year, prepayable at any time without penalty. The Capital Properties note is secured by a first mortgage on the Company's operating right-of-way in Worcester County, Massachusetts. During 1995, the Company and Capital Properties negotiated an agreement reducing the interest rate to 10% and providing for the Company's prepayment of $1,800,000 on its note. Payments by the Company together with the interest rate adjustment result in a current monthly payment of principal and interest over the remaining twelve-year term of the note in the amount of $53,000. Fifty percent (50%) of any additional prepayments will reduce the required monthly payments. Prior to negotiating the agreement, the Company made additional voluntary prepayments totaling $300,000, $55,000 and $200,000 during 1994, 1995 and 1996, respectively. The Company intends to repay the balance of the Capital Properties note (approximately $4.0 million at March 2, 1998) with the proceeds of this Offering. See "Use of Proceeds." In 1995, the Company also entered into an agreement with Capital Properties releasing a portion of the collateral securing the note in exchange for the right to have the Company convey the Wilkesbarre Pier in East Providence, Rhode Island for the sum of one dollar to the purchaser of Capital Properties' petroleum terminal facilities in East Providence, Rhode Island. Effective January 1, 1998, a wholly-owned subsidiary of Capital Properties which acquired the petroleum terminal facilities, exercised the purchase right and acquired the Wilkesbarre Pier. The Company retained the right to use the pier for certain purposes. 38 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock as of February 9, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, by (i) each person who is known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock immediately prior to this Offering; (ii) the Selling Shareholder; (iii) each of the Company's directors; and (iv) all directors and executive officers of the Company as a group:
SHARES OWNED BEFORE OFFERING OWNERSHIP AFTER OFFERING -------------------- -------------------------------- NAME NUMBER PERCENTAGE SHARES OFFERED NUMBER PERCENTAGE - ---- --------- ---------- -------------- -------------- -------------- Robert H. Eder(a)....... 1,046,492 46.0% 0 (k) 1,046,492(k) 30.1%(k) Orville R. Harrold(b)... 22,710 * 0 22,710 * Robert J. Easton(c)..... 2,111 * 0 2,111 * Heidi J. Eddins(d)...... 3,927 * 0 3,927 * Frank W. Barrett(e)..... 610 * 0 610 * Phillip D. Brown(f)..... 210 * 0 210 * John H. Cronin.......... 1,430 * 0 1,430 * J. Joseph Garrahy....... 1,000 * 0 1,000 * John J. Healy(g)........ 840 * 0 840 * William J. LeDoux(h).... 1,480 * 0 1,480 * Charles M. McCollam, Jr. ................... 500 * 0 500 * Massachusetts Capital Resource Company(i).... 200,000 8.3% 0 200,000 5.8% Bestfoods............... 108,155 4.9% 25,000 83,155 2.4% All executive officers and directors as a group (11 people)(j)... 1,081,310 47.5% 0 (l) 1,081,310(l) 31.1%(l)
- -------- * Less than one percent (a) Mr. Eder's business address is 75 Hammond Street, Worcester, Massachusetts 01610. Includes 74,580 shares of Common Stock owned by Mr. Eder's wife and assumes the conversion of the 500 shares of Preferred Stock owned by Mr. Eder. (b) Includes (i) 1,700 shares of Common Stock held by Mr. Harrold's wife, (ii) 2,600 shares of Common Stock held by a custodian in an individual retirement account for the benefit of Mr. Harrold and (iii) 1,467 shares of Common Stock under stock options exercisable within 60 days. (c) Includes 118 shares of Common Stock held by Mr. Easton's wife in her name and 830 shares of Common Stock issuable under stock options exercisable within 60 days. (d) Includes 900 shares of Common Stock held by Ms. Eddins' minor children under the Uniform Gift to Minors Act and 784 shares of Common Stock issuable under stock options exercisable within 60 days. (e) Includes 110 shares of Common Stock issuable under stock options exercisable within 60 days. (f) Includes 110 shares of Common Stock issuable under stock options exercisable within 60 days. (g) Includes 540 shares of Common Stock issuable under stock options exercisable within 60 days. (h) Includes 880 shares of Common Stock issuable under stock options exercisable within 60 days. (i) MCRC's address is 420 Boylston Street, Boston, Massachusetts 02116. Includes the 200,000 shares of Common Stock issuable upon the exercise of the MCRC Warrant. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (j) Includes 50,000 shares of Common Stock issuable upon conversion of Preferred Stock and 4,721 shares of Common Stock issuable under stock options exercisable within 60 days. (k) Assumes no exercise of the Underwriters' over-allotment option. If the over-allotment option is exercised in full, the Shares Offered, Ownership After Offering--Number and Ownership After Offering--Percentage will be 153,750, 892,742 and 25.7%, respectively. (l) Assumes no exercise of the Underwriters' over-allotment option. If the over-allotment option is exercised in full, the Shares Offered, Ownership After Offering--Number and Ownership After Offering--Percentage will be 153,750, 927,560 and 26.7%, respectively. 39 DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The following summary description of the Company's capital stock is believed to reflect all material provisions of the Company's Charter, as amended, but is not necessarily complete. Reference is made to the Company's Charter, as amended, which is filed with the Commission as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company is authorized to issue up to 3,023,436 shares of Common Stock, $.50 par value per share. As of the date hereof, 2,222,830 shares of Common Stock are issued and outstanding and held by 700 shareholders of record. Upon the completion of this Offering, there will be 3,422,830 shares of Common Stock issued and outstanding. The Company's shareholders have approved an amendment to the Company's Charter which will increase the Company's authorized Common Stock to 15,000,000 shares, which amendment will become effective prior to the completion of this Offering. The holders of Common Stock are entitled to one vote for each share in the election of one-third of the Board of Directors proposed to be elected at any meeting of shareholders, voting separately as a class. The holders of Common Stock and the holders of the Preferred Stock are entitled to one vote per share, voting as separate classes and not together, upon all other matters voted on by shareholders. The holders of Common Stock have no preemptive or other subscription rights. The holders of Common Stock are entitled to such dividends as may be declared from time to time thereon by the Board from funds available therefor. See "Price Range of Common Stock and Dividend Policy." Upon a dissolution or liquidation of the Company, holders of Common Stock and Preferred Stock are entitled to receive on a 1-to-100 pro rata basis all assets of the Company available for distribution after payments are made to the Company's creditors. PREFERRED STOCK The amendment to the Company's Charter approved by the Company's shareholders will reduce the number of shares of Preferred Stock, $50 par value per share, which the Company is authorized to issue from 6,817 to 653 shares. As of the date of this Prospectus, 653 shares of Preferred Stock are issued and outstanding and held by eight shareholders of record. The holders of Preferred Stock are entitled to one vote for each share in the election of two-thirds of the Board of Directors proposed to be elected at any meeting of shareholders, voting separately as a class. The holders of Preferred Stock and the holders of Common Stock are entitled to one vote per share, voting as a separate classes and not together, upon all other matters voted on by shareholders. Non-cumulative annual dividends on the Preferred Stock are payable at the rate of $5.00 per share. Each share of Preferred Stock is convertible at any time, at the holder's option, into 100 shares of Common Stock. The holders of Preferred Stock have no preemptive or other subscription rights. Upon a dissolution or liquidation of the Company, holders of Common Stock and Preferred Stock are entitled to receive on a 1-to-100 pro rata basis all assets of the Company available for distribution after payments are made to the Company's creditors. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CHARTER AND STATE LAW The Company is chartered by special act of the Rhode Island General Assembly. The Company's Charter and Rhode Island state law contain provisions that may make the acquisition of control of the Company by means of a tender offer, open market purchases, proxy fight or otherwise more difficult. 40 Additional Common Stock Upon filing of the amendment to the Company's Charter the Company's Board of Directors will be authorized to issue up to 15,000,000 shares of Common Stock. The Company believes that the availability of additional Common Stock will provide it with increased flexibility in structuring possible financing acquisitions and in meeting other corporate needs which may arise. Rhode Island Anti-takeover Statute The Rhode Island Business Combination Act prohibits business combinations involving a shareholder of a publicly held corporation for a period of five years after such shareholder acquires 10% or more of the outstanding voting stock of the corporation, unless the board of directors approves the transaction by which such shareholder acquires 10% or more of the outstanding voting stock. The Business Combination Act also permits business combinations involving such a shareholder which occur more than five years after such shareholder acquires 10% or more of the outstanding voting stock when (i) the board of directors or disinterested shareholders holding two-thirds of the outstanding voting common stock of a publicly held corporation approve the underlying transaction or (ii) the aggregate value of the cash and non-cash consideration to be received by the shareholders satisfies statutory financial formulas. The Business Combination Act applies to all publicly held Rhode Island corporations doing business in the state which do not elect to be exempted from its effect, and the Company has not so elected to be exempt. DIRECTORS' LIABILITY As authorized by Rhode Island Law, the Company's Charter provides that no director of the Company will be personally liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director except liability: (a) for any breach of the director's duty of loyalty to the Company or its shareholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) in respect of certain unlawful dividend payments or stock redemptions or repurchases and (d) for any transaction for which the director derives an improper personal benefit. The effect of this provision is to eliminate the rights of the Company and its shareholders (through shareholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (a) through (d) above. This provision does not limit or eliminate the rights of the Company or any shareholder to seek non- monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. In addition, the Charter provides that if the Rhode Island Law is amended to authorize the further elimination or limitation of the liability of a director, then the liability of the directors shall be eliminated or limited to the fullest extent permitted by the Rhode Island Law, as so amended. TRANSFER AGENT AND REGISTRAR State Street Bank and Trust, c/o Boston EquiServe, limited partnership, P.O. Box 8040, Boston, Massachusetts 02266-8040, (781) 575-3400, is the Company's transfer agent and registrar for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of this Offering, the Company will have 3,422,820 shares of Common Stock outstanding. Of these shares, 3,219,974 shares will be freely tradable without restrictions or further registration under the Securities Act, except for any shares purchased or acquired by "affiliates" of the Company (as that term is defined under the rules and regulations of the Securities Act), which shares will be subject to the resale limitations of Rule 144 under the Securities Act. The remaining 202,846 outstanding shares of Common Stock owned by certain shareholders of the Company are "restricted securities," as that term is defined in Rule 144, that may not be sold in the absence of 41 registration under the Securities Act unless an exemption from registration is available, including the exemption provided by Rule 144. In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares of Common Stock from the Company or an affiliate of the Company, a person (or persons whose shares are aggregated) may sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company (34,228 shares immediately after this Offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which a notice of sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are subject to certain other restrictions relating to the manner of sale, notice and the availability of current public information about the Company. If a period of two years has elapsed since the later of the date of the acquisition of restricted shares of Common Stock from the Company or from any affiliate of the Company, a person (or persons whose shares are aggregated) who is not at any time during the 90 days preceding a sale an "affiliate" is entitled to sell such shares under Rule 144 without regard to the volume and other limitations of Rule 144 described above. Notwithstanding the limitations on sale described above, otherwise restricted securities may be sold at any time through an effective registration statement pursuant to the Securities Act. As of February 9, 1998, options to purchase a total of 41,161 shares of Common Stock were outstanding. An additional 462,269 shares of Common Stock will be available for future stock option grants and other awards under the Company's Stock Plans. The Company has filed Registration Statements covering the shares of Common Stock reserved for issuance under the Stock Option Plan and the Employee Stock Purchase Plan. As of February 9, 1998, 222,227 registered shares of Common Stock were available for future stock option grants and other awards under the Stock Option Plan and Employee Stock Purchase Plan. See "Management -- Stock Plans." Under the terms of the Secured Subordinated Note and Warrant Purchase Agreement by and between the Company and MCRC, MCRC has the right to require the Company to register all or a portion of 200,000 shares of Common Stock issuable under the MCRC Warrants (subject to certain limitations) at any time for sale to the public. The Company will pay all out-of-pocket expenses of any such registrations, other than MCRC's pro rata share of any underwriting discounts and commissions, and will indemnify MCRC against certain liabilities, including liabilities under the federal securities laws, in connection therewith. Under the terms of the Settlement Agreement by and between the Company and the Selling Shareholder dated December 12, 1995, the Selling Shareholder has the right to require the Company to register all or a portion of the 83,155 shares of Common Stock held by the Selling Shareholder (subject to certain limitations) at any time for sale to the public. The Company will pay all out-of-pocket expenses of any such registrations, other than fees and expenses of the Selling Shareholder's counsel and the Selling Shareholder's pro rata share of any registration fees, underwriting discounts and commissions, except if the registration is exclusively a secondary offering, in which case the Selling Shareholder will bear its proportionate share of the expenses of the registration and offering. The Company will indemnify the Selling Shareholder against certain liabilities, including liabilities under the federal securities law, in connection with any such registrations. The Company, its executive officers and directors and MCRC have agreed that for a period of 180 days (90 days in the case of the Selling Shareholder) after the date of this Prospectus, subject to certain exceptions, they will not, without the prior written consent of Advest, Inc., offer, sell, solicit any offer to buy, contract to sell, encumber, distribute, pledge, grant any option for the sale of or otherwise dispose of or, with respect to the Company, file with the Commission a registration statement under the Securities Act relating to, or, with respect to the shareholders, exercise any registration rights with respect to, any shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock. See "Underwriting." 42 UNDERWRITING Under the terms and subject to the conditions set forth in the underwriting agreement (the "Underwriting Agreement") among the Company, the Selling Shareholder, the Principal Shareholder and the underwriters named below (the "Underwriters"), for whom Advest, Inc. is acting as the representative (the "Representative"), each of the Underwriters has severally agreed to purchase, and the Company and the Selling Shareholder have agreed to sell to each of the Underwriters, the respective number of shares of Common Stock set forth opposite the name of each of the Underwriters below:
NUMBER UNDERWRITER OF SHARES ----------- --------- Advest, Inc. ................................................... Schneider Securities, Inc. ..................................... --------- Total......................................................... 1,025,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to approval of certain matters by their counsel and to various other conditions precedent. The Underwriters are committed to purchase and pay for all of the shares of Common Stock offered hereby, if any are purchased. The Underwriters have advised the Company and the Selling Shareholder that they propose to offer the shares of the Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain selected dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering of the shares, the public offering price, concession and reallowance to dealers may be changed by the Underwriters. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. The Company has agreed to pay to Advest, Inc., the Representative, and Schneider Securities, Inc., one of the proposed Underwriters, a non- accountable expense allowance equal to two percent of the aggregate public offering price of the Common Stock sold by the Company, of which $50,000 has already been paid. The Principal Shareholder has granted to the Underwriters an option, exercisable during the 30-day period beginning on the date of this Prospectus, to purchase up to 153,750 additional shares of Common Stock (the "Option Shares"), solely to cover over-allotments, if any, at the public offering price less the underwriting discounts set forth on the cover page of this Prospectus. To the extent that this option to purchase is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of Option Shares as the number set forth next to such Underwriter's name in the preceding table bears to the sum of the total number of shares of Common Stock in such table. The Company, its executive officers and directors, and certain principal shareholders have agreed that for a period of 180 days (90 days in the case of the Selling Shareholder) after the date of this Prospectus, subject to certain exceptions, they will not directly or indirectly offer, sell, announce an intention to sell, solicit any offer to buy, contract to sell, encumber, distribute, pledge, grant any option for the sale of or otherwise dispose of, or, with respect to the Company, file with the Commission a registration statement under the Securities Act relating to, or, with respect to the shareholders, exercise any registration rights with respect to, any shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock without the prior written consent of Advest, Inc. 43 Subject to certain limitations, the Company, the Selling Shareholder and the Principal Shareholder have agreed to indemnify the Underwriters against, and to contribute to losses arising out of, certain liabilities, including liabilities under the Securities Act. The Company has granted to Advest, Inc., subject to certain exceptions, a right of first refusal to provide investment banking services, including with respect to financings, mergers and acquisitions and financial advisory and fairness opinions, to the Company for a period of three (3) years from the date of this Prospectus. In connection with this Offering, the Company has agreed to sell to Advest, Inc. and Schneider Securities, Inc., for nominal consideration, warrants (the "Underwriters' Warrants"), which confer the right to purchase up to 100,000 shares of Common Stock. The Underwriters' Warrants are initially exercisable at the price of $ per share of Common Stock (155% of the public offering price) (the "Exercise Price") for a period of four years commencing one year from the effective date of the Registration Statement of which this Prospectus is a part. The Underwriters' Warrants are restricted from sale, transfer, assignment or hypothecation for a period of one year from such effective date, except to members of the selling group or their respective officers or partners. The shares of Common Stock issuable upon exercise of the Underwriters' Warrants are identical to those offered hereby. The Underwriters' Warrants contain provisions providing for adjustment of the Exercise Price and the number and type of securities issuable upon the exercise thereof upon the occurrence of certain events. The Underwriters' Warrants grant to the holders thereof certain demand and "piggyback" rights of registration of the securities issuable upon the exercise thereof. The Underwriters have advised the Company that, pursuant to Regulation M promulgated under the Securities Exchange Act of 1934, as amended, certain persons participating in this Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this Offering. A "penalty bid" is an arrangement permitting the Underwriters to reclaim the selling concession otherwise accruing to a selling group member in connection with this Offering if the Common Stock originally sold by such selling group member is purchased by the Underwriters in a syndicate covering transaction and has therefore not been effectively placed by such selling group member. These transactions may be effected on the AMEX or otherwise and, if commenced, may be discontinued at any time. The foregoing is a brief summary of certain provisions of the Underwriting Agreement and does not purport to be a complete statement of its terms and conditions. A copy of the Underwriting Agreement is on file with the Commission as an exhibit to the Registration Statement of which this Prospectus is a part. LEGAL MATTERS Certain legal matters relating to this Offering will be passed upon for the Company by Hinckley, Allen & Snyder, Providence, Rhode Island. Certain legal matters relating to this Offering are being passed upon for the Underwriters by Morgan, Lewis & Bockius LLP, New York, New York. EXPERTS The financial statements included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 44 AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto, and reference is hereby made to the Registration Statement and to the exhibits relating thereto for further information with respect to the Company and this Offering. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. Copies of the Registration Statement may be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Registration Statement and exhibits thereto may also be obtained on the World Wide Web site maintained by the Commission at http://www.sec.gov. Such information concerning the Company can also be inspected at the offices of the AMEX at 86 Trinity Place, New York, New York 10006. 45 PROVIDENCE AND WORCESTER RAILROAD COMPANY INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report............................................. F-2 Balance Sheets as of December 31, 1996 and 1997.......................... F-3 Statements of Income for the Years Ended December 31, 1995, 1996 and 1997.................................................................... F-4 Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997........................................................... F-5 Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997.................................................................... F-6 Notes to Financial Statements............................................ F-7
F-1 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Providence and Worcester Railroad Company: We have audited the accompanying balance sheets of Providence and Worcester Railroad Company as of December 31, 1996 and 1997, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Worcester, Massachusetts January 30, 1998 F-2 PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ASSETS
DECEMBER 31, --------------- 1996 1997 ------- ------- Current Assets: Cash and equivalents.......................................... $ 686 $ 519 Accounts receivable, net of allowance for doubtful accounts of $125 in 1996 and 1997 (Notes 3 and 4)........................ 2,537 2,345 Materials and supplies........................................ 1,021 2,086 Prepaid expenses and other.................................... 121 167 Deferred income taxes (Note 7)................................ 400 204 ------- ------- Total Current Assets......................................... 4,765 5,321 Property and Equipment, net (Notes 2 and 4).................... 63,726 65,891 ------- ------- Total Assets................................................... $68,491 $71,212 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable, bank (Note 3).................................. $ 1,440 $ 1,350 Current portion of long-term debt (Note 4).................... 677 931 Accounts payable.............................................. 2,861 2,083 Accrued expenses (Note 5)..................................... 907 931 ------- ------- Total Current Liabilities.................................... 5,885 5,295 ------- ------- Long-Term Debt, Less Current Portion (Note 4).................. 12,131 11,916 ------- ------- Profit-Sharing Plan Contribution (Note 9)...................... 226 337 ------- ------- Deferred Grant Income (Note 1)................................. 5,571 6,945 ------- ------- Deferred Income Taxes (Note 7)................................. 8,617 8,681 ------- ------- Commitments and Contingent Liabilities (Note 8)................ Shareholders' Equity (Notes 8, 9 and 10): Preferred stock, 10% noncumulative, $50 par value; authorized 6,817 shares; issued and outstanding 653 shares.............. 33 33 Common stock, $.50 par value; authorized 3,023,436 shares; issued and outstanding 2,188,244 shares in 1996 and 2,221,933 shares in 1997............................................... 1,094 1,111 Additional paid-in capital.................................... 6,365 6,665 Retained earnings............................................. 28,569 30,229 ------- ------- Total Shareholders' Equity................................... 36,061 38,038 ------- ------- Total Liabilities and Shareholders' Equity..................... $68,491 $71,212 ======= =======
The accompanying notes are an integral part of the financial statements. F-3 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 -------- -------- -------- Operating Revenues -- Freight and Non-Freight.... $ 19,778 $ 19,456 $ 22,083 -------- -------- -------- Operating Expenses: Maintenance of way and structures............... 2,469 2,815 3,035 Maintenance of equipment........................ 1,538 1,555 1,874 Transportation.................................. 5,106 4,917 4,987 General and administrative...................... 4,095 3,859 3,764 Depreciation.................................... 1,790 1,940 2,054 Taxes, other than income taxes.................. 1,971 2,023 2,021 Car hire, net................................... 708 605 598 -------- -------- -------- Total Operating Expenses....................... 17,677 17,714 18,333 -------- -------- -------- Income from Operations........................... 2,101 1,742 3,750 -------- -------- -------- Other Income (Note 6)............................ 581 1,660 638 -------- -------- -------- Interest Expense (Notes 3 and 4): Capital Properties, Inc......................... (668) (437) (410) Other........................................... (507) (934) (948) -------- -------- -------- Total Interest Expense......................... (1,175) (1,371) (1,358) -------- -------- -------- Income before Income Taxes....................... 1,507 2,031 3,030 Provision for Income Taxes (Note 7).............. 590 780 1,100 -------- -------- -------- Net Income....................................... $ 917 $ 1,251 $ 1,930 Preferred Stock Dividends........................ 3 3 3 -------- -------- -------- Net Income Available to Common Shareholders...... $ 914 $ 1,248 $ 1,927 ======== ======== ======== Basic Income Per Share........................... $ .45 $ .57 $ .87 ======== ======== ======== Diluted Income Per Share......................... $ .43 $ .54 $ .81 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-4 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 ---------------------------------------------------- ADDITIONAL TOTAL PREFERRED COMMON PAID-IN RETAINED SHAREHOLDERS' STOCK STOCK CAPITAL EARNINGS EQUITY --------- ------- ---------- -------- ------------- Balance, January 1, 1995.... $ 33 $ 1,005 $ 5,046 $ 26,830 $ 32,914 Issuance of 55,000 common shares in payment of an environmental claim....... 28 363 391 Issuance of 40,606 common shares to fund the Company's 1994 profit sharing plan contribution.............. 20 315 335 Issuance of 4,374 common shares for stock options exercised................. 2 24 26 Issuance of common stock warrants (Note 4)......... 80 80 Dividends paid: Preferred stock, $5.00 per share.................... (3) (3) Common stock, $.10 per share.................... (205) (205) Net income for the year.... 917 917 ---- ------- ------- -------- -------- Balance, December 31, 1995.. 33 1,055 5,828 27,539 34,455 Issuance of 53,155 common shares in payment of an environmental claim....... 27 352 379 Issuance of 20,925 common shares to fund the Company's 1995 profit sharing plan contribution (Note 9)..................... 10 157 167 Issuance of 4,123 common shares for stock options exercised and other....... 2 28 30 Dividends paid: Preferred stock, $5.00 per share.................... (3) (3) Common stock, $.10 per share.................... (218) (218) Net income for the year.... 1,251 1,251 ---- ------- ------- -------- -------- Balance, December 31, 1996.. 33 1,094 6,365 28,569 36,061 Issuance of 22,550 common shares to fund the Company's 1996 profit sharing plan contribution (Note 9).................. 11 215 226 Issuance of 11,139 common shares for stock options exercised, employee stock purchases and other....... 6 85 91 Dividends paid: Preferred stock, $5.00 per share.................... (3) (3) Common stock, $.12 per share.................... (267) (267) Net income for the year.... 1,930 1,930 ---- ------- ------- -------- -------- Balance, December 31, 1997.. $ 33 $ 1,111 $ 6,665 $ 30,229 $ 38,038 ==== ======= ======= ======== ========
The accompanying notes are an integral part of the financial statements. F-5 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................... $ 917 $ 1,251 $ 1,930 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation................................... 1,790 1,940 2,054 Amortization of deferred grant income.......... (121) (136) (149) Gains from sale, condemnation and disposal of property and equipment........................ (64) (1,103) (157) Deferred income taxes.......................... 220 600 260 Other, net..................................... 19 26 65 Increase (decrease) in cash from: Accounts receivable........................... (636) 68 217 Materials and supplies........................ (68) (290) (1,065) Prepaid expenses and other.................... (12) 18 (46) Accounts payable and accrued expenses......... 1,132 (914) 422 -------- -------- -------- Net cash flows from operating activities........ 3,177 1,460 3,531 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.............. (4,490) (5,465) (5,160) Proceeds from sale and condemnation of property and equipment.................................. 108 1,319 230 Proceeds from deferred grant income............. 378 901 1,475 -------- -------- -------- Net cash flows used by investing activities..... (4,004) (3,245) (3,455) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under line of credit.. (120) 1,440 (90) Payments of long-term debt...................... (4,254) (789) (699) Dividends paid.................................. (208) (221) (270) Proceeds from long-term debt.................... 6,800 730 Issuance of common shares for stock options exercised and employee stock purchases......... 26 29 86 -------- -------- -------- Net cash flows from (used by) financing activities..................................... 2,244 459 (243) -------- -------- -------- Increase (Decrease) in Cash and Equivalents..... 1,417 (1,326) (167) Cash and Equivalents, Beginning of Year......... 595 2,012 686 -------- -------- -------- Cash and Equivalents, End of Year............... $ 2,012 $ 686 $ 519 ======== ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid during year for: Interest....................................... $ 1,269 $ 1,333 $ 1,328 ======== ======== ======== Income taxes................................... $ 543 $ 60 $ 873 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-6 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company is an interstate freight carrier conducting railroad operations in Massachusetts, Rhode Island, Connecticut and New York. One customer accounted for approximately 12.1%, 12.6% and 15.1% of the Company's operating revenues in 1995, 1996 and 1997, respectively. CASH AND EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents for purposes of classification in the balance sheets and statements of cash flows. Cash equivalents are stated at cost, which approximates fair market value. MATERIALS AND SUPPLIES Materials and supplies, which consist of items for the improvement and maintenance of track structure and equipment, are stated at cost, determined on a first-in, first-out basis, and are charged to expense or added to the cost of property and equipment when used. PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost (including self- construction costs). Acquired railroad property is recorded at the purchased cost. Major renewals or betterments are capitalized while routine maintenance and repairs, which do not improve or extend asset lives, are charged to expense when incurred. Gains or losses on sales or other dispositions are credited or charged to income. Depreciation is provided using the straight- line method over the estimated useful lives of the assets as follows:
DEPRECIABLE PROPERTIES ESTIMATED USEFUL LIVES ---------------------- ---------------------- Track structure....................................... 20 to 67 years Buildings and other structures........................ 33 to 45 years Equipment............................................. 4 to 25 years
In 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of." This standard requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continually evaluates whether later events and circumstances have occurred that indicate assets may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in measuring whether the assets are recoverable. DEFERRED GRANT INCOME The Company has availed itself of various federal and state programs administered by the States of Connecticut and Rhode Island and by the Commonwealth of Massachusetts for reimbursement of expenditures for capital improvements. In order to receive reimbursement, the Company must submit requests for the projects, F-7 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 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 ($121 in 1995, $136 in 1996, and $149 in 1997). Grant proceeds utilized to finance public improvements, such as grade crossings and signals, are recorded as a direct offset to the related expense. Although the Company cannot predict the extent and length of future grant programs, it intends to continue filing requests for such grants when they are available. REVENUE RECOGNITION Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier. Income or loss from sale, condemnation and disposal of property and equipment and easements is recorded at the time the transaction is consummated and collectibility is assured. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." This standard requires the Company to compute deferred income taxes based on the differences between the financial statement and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse. INCOME PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128 "Earnings per Share," which establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. Prior to 1997, the Company computed income per common share using the methods outlined in Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share," and its interpretations. The Company adopted SFAS No. 128 in 1997 and restated its earnings per share for 1995 and 1996. Previously reported income per common share for years prior to 1997 did not differ materially from that computed using SFAS 128. Basic income per common share is computed using the weighted average number of common shares outstanding during each year. Diluted income per common share reflects the effect of the Company's outstanding convertible preferred stock, options and warrants (using the treasury stock method), except where such items would be antidilutive. A reconciliation of net income available to common shareholders for the computation of diluted income per share is as follows:
YEARS ENDED DECEMBER 31, ------------------ 1995 1996 1997 ---- ------ ------ Net income available to common shareholders............. $914 $1,248 $1,930 Interest expense impact (net of tax) on assumed conversion of debt to exercise warrants................ 0 84 84 ---- ------ ------ Net income available to common shareholders assuming dilution............................................... $914 $1,332 $2,014 ==== ====== ======
F-8 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) A reconciliation of weighted average shares used for the basic computation and that used for the diluted computation is as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 --------- --------- --------- Weighted average shares-basic................ 2,042,569 2,178,382 2,208,820 Dilutive effect of convertible preferred stock, options and warrants................. 93,184 282,295 280,450 --------- --------- --------- Weighted average shares-diluted.............. 2,135,753 2,460,677 2,489,270 ========= ========= =========
EMPLOYEE STOCK OPTION PLAN The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Company's principal estimates include reserves for accounts receivable, useful lives of properties, accrued liabilities, including health insurance claims and legal and environmental contingencies, and deferred income taxes. 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 following methods and assumptions are used to estimate the fair value of each class of financial instrument held or owed by the Company: Current assets and current liabilities: The carrying value approximates fair value due to the short maturity of these items. Long-term debt: The fair value of the Company's long-term debt is based on secondary market indicators. Since the Company's debt is not quoted, estimates are based on each obligation's characteristics, including remaining maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying amount approximates fair value. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Both standards will be adopted by the Company during the first quarter of 1998 and are not expected to have material effects on its financial position and results of operations. RECLASSIFICATIONS Certain prior year amounts have been reclassified to be consistent with the current year presentation. F-9 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, --------------- 1996 1997 ------- ------- Land and improvements....................................... $ 9,020 $ 9,128 South Quay property......................................... 11,339 11,464 Track structure............................................. 45,833 48,241 Buildings and other structures.............................. 5,955 5,318 Equipment................................................... 15,991 17,196 ------- ------- 88,138 91,347 Less accumulated depreciation............................... 24,412 25,456 ------- ------- Total property and equipment, net......................... $63,726 $65,891 ======= =======
Land and improvements include property held for resale having a net book value of approximately $400. SOUTH QUAY PROPERTY Pursuant to permits issued by the United States Department of the Army Corps of Engineers and the Rhode Island Coastal Resources Management Council, the Company has developed 33 acres of waterfront land in East Providence, Rhode Island (the "South Quay") designed to capitalize on the growth of intermodal transportation, utilizing rail, water and highway connections. The property has highway access ( 1/2 mile from I-195), direct rail access and is adjacent to a 12 acre site also owned by the Company. The permits for the property allow for the construction of a dock along the west face of the South Quay. Unless extended, the existing permits expire in 1998. The Company intends to apply for extensions of its existing permits to enable the Company to construct a vessel unloading area if it is able to attract user or investment commitments. The Company has also recently engaged in discussions with potential users interested in utilizing the property for off loading bulk products such as salt and construction aggregate. In addition, the Company has explored the development of the facility for off loading container vessels and barges. The Company will need additional terminal capacity to achieve expected growth in its intermodal container business. The Company currently intends to use a portion of the property as an intermodal terminal facility to provide it with such capacity. This development will not occur until the Company completes the overhead clearance project required for the State of Rhode Island's freight rail improvement project. The Company intends to explore all development opportunities for the South Quay and believes its costs will be fully recovered from future leases of the property, associated rail freight revenues, particularly intermodal double stack container trains, and possible port charges such as wharfage, dockage and storage. The Company, relying on Rhode Island Supreme Court decisions concerning title to formerly tide flowed property, filed a lawsuit in 1996 in Rhode Island Superior Court seeking to confirm the Company's fee simple absolute title to the South Quay. Acting on motions for summary judgment from the Company and the State of Rhode Island and Coastal Resources Management Council ("Coastal Council"), the Superior Court ruled that the Company is the fee simple absolute owner of the South Quay. The State and Coastal Council have appealed the decision to the Rhode Island Supreme Court contending that the Company possesses only a 50 year exclusive license to develop and occupy the South Quay, which license must be renewed at the end of the term. A decision from the Rhode Island Supreme Court is expected in 1999. A finding that the Company possesses only a 50 year license should not prevent the utilization of the South Quay as an intermodal facility. F-10 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 3. NOTES PAYABLE, BANK The Company has a revolving line of credit with its principal bank in the amount of $1,750 expiring June 1, 1998. 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 (9% at December 31, 1997) 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 and $1,350 were outstanding under this line of credit at December 31, 1996 and 1997, respectively. 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------- 1996 1997 ------- ------- 10% note 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 to 2007....................................................... $ 4,211 $ 3,993 8.69% note 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 to 2003...... 3,669 3,229 7.9% note payable to a commercial lender, three locomotives pledged as collateral, payable in monthly installments of principal and interest of $15 to 2002 (i).................. 689 10% subordinated note payable to Massachusetts Capital Resource 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 to $188 commencing in December 1998 with a final principal payment of $1,250 due December 31, 2005 (ii).................................................. 4,928 4,936 ------- ------- Total long-term debt...................................... 12,808 12,847 Less current portion...................................... 677 931 ------- ------- Long-term debt, less current portion...................... $12,131 $11,916 ======= =======
-------- (i) In July 1997, the Company completed the acquisition and renovation of three used locomotives at a total cost of $730 financed through long- term borrowings from a commercial lender. The interest rate, which is variable, is set at 2.35% over the 30 day Commercial Paper rate (approximately 7.9% as of December 31, 1997). The Company has the option of converting to a fixed rate of interest set at 2.1% over the then current weekly average rate of three year U.S. Treasury Constant Maturities. The amount of the monthly payments will be adjusted annually in August to reflect the effects of the variable interest rates in effect during the previous year. (ii) In December 1995, the Company concluded an agreement with MCRC whereby the Company received $5,000 in exchange for a subordinated note payable in the amount of $4,920 and warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $7.10 per share. The warrants F-11 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) are exercisable through December 31, 2005. MCRC must apply $1,420 of the amount due on its subordinate note toward the exercise of the warrants upon the Company's consummation of a public offering of its common stock at a purchase price of not less than $14.20 per share which results in gross proceeds to the Company of not less than $10,000. The value assigned to the warrants of $80 was derived from a valuation made by MCRC on the date of issue. The value assigned to the warrants is being amortized over the life of the debt. 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. The following is a summary of the maturities of long-term debt as of December 31, 1997: Year ending December 31: 1998............................................................... $ 931 1999............................................................... 1,179 2000............................................................... 1,328 2001............................................................... 1,611 2002............................................................... 1,030 Thereafter......................................................... 6,768 ------- $12,847 =======
5. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ------------- 1996 1997 ------ ------ Casualty and environmental claims............................. $ 320 $ 279 Other......................................................... 587 652 ------ ------ $ 907 $ 931 ====== ======
Casualty loss and environmental claims expense, included in transportation expense, amounted to $728 in 1995 and $171 in 1996. The Company did not incur any casualty loss and environmental claims expense in 1997. 6. OTHER INCOME Other income consists of the following:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ----------------- -------- Gain from sale, condemnation and disposal of property and equipment and easements, net...... $ 64 $ 1,103 $ 157 Rentals and license fees, under various operating leases............................... 494 494 470 Interest........................................ 23 63 11 ------- --------- ------- $ 581 $ 1,660 $ 638 ======= ========= =======
F-12 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 7. INCOME TAXES The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------------------------- Current: Federal......................................... $ 320 $ 150 $ 750 State........................................... 50 30 90 ------- ------- --------- 370 180 840 Deferred, Federal and State....................... 220 600 260 ------- ------- --------- $ 590 $ 780 $ 1,100 ======= ======= =========
The following summarizes the estimated tax effect of significant cumulative temporary differences that are included in the net deferred income tax provision:
YEARS ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 -------- -------- -------- Depreciation................................. $ 85 $ 87 $ 148 General business tax credits................. 400 238 588 Deferred grant income........................ (91) (271) (478) Gain from sale, condemnation and disposal of properties and equipment.................... (14) 319 (17) Accrued casualty and environmental claims.... (169) 218 14 Other........................................ 9 9 5 -------- -------- -------- $ 220 $ 600 $ 260 ======== ======== ========
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 1997 are as follows:
DECEMBER 31, --------------- 1996 1997 ------- ------- Deferred income tax liabilities -- Differences between book and tax basis of properties...... $10,956 $11,087 ------- ------- Deferred income tax assets: Tax credit carryforwards.................................. 649 61 Deferred grant income..................................... 1,909 2,387 Accrued casualty losses................................... 113 99 Other..................................................... 68 63 ------- ------- 2,739 2,610 ------- ------- Net deferred income tax liability......................... $ 8,217 $ 8,477 ======= =======
F-13 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1995 1996 1997 -------- -------- -------- Federal statutory rate..................... 34% 34% 34% Depreciation of properties acquired from bankrupt railroads having a tax basis in excess cost............................... (1) (1) (1) Non-deductible expenses.................... 4 4 1 State income tax, net of federal income tax benefit................................... 2 1 2 -------- -------- -------- Effective tax rate......................... 39% 38% 36% ======== ======== ========
8. COMMITMENTS AND CONTINGENT LIABILITIES The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits. The Company was notified by CPC International, Inc. (now "Bestfoods") 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 Bestfoods ("Agreement") in which the Company agreed to pay $990 in settlement of all claims against it relating to this incident. The Company issued 55,000 shares of its common stock, having a value of $391, to Bestfoods in December 1995 in partial payment of this claim. An additional 53,155 shares, having a value of $379, were issued in January 1996. The Company has the option of paying the remaining liability of $220 in cash or by the issuance of approximately 31,000 shares of unregistered, restricted common stock of the Company. This remaining liability must be paid by the earlier of June 30, 1999, or the closing of a public offering of at least 565,000 shares of common stock. The Agreement further provides that, in the event Bestfoods recovers insurance proceeds for its costs, the Company is entitled to receive 10% of the net recovery after deduction of litigation expenses. Bestfoods is actively engaged in litigation with an insurer seeking such a recovery. Bestfood's insurance carrier (which to date has denied coverage to Bestfoods) has notified the Company that it intends to bring suit against the Company to enforce its alleged rights of subrogation. The Company believes that since Bestfoods has released the Company from any liability, its carrier has no right of subrogation and its claim is without merit. Moreover, under the Agreement, Bestfoods is obligated to defend, indemnify and hold harmless the Company for any claims which arise from such contamination, including claims of the insurance carrier. While it is possible that some of the foregoing matters may be settled at a cost greater than that provided for, it is the opinion of management based upon the advice of counsel that the ultimate liability, if any, will not be material to the Company's financial statements. In October 1997, the Company's Board of Directors approved an agreement to purchase all of the outstanding common stock of Connecticut Central Railroad Company ("Conn Central") for 20,000 shares of newly issued common stock of the Company. If certain financial and other conditions are met, Conn Central's shareholders will receive an additional 7,500 shares of the Company's common stock one year from the date of the closing. The transaction is expected to be completed in the second quarter of 1998 following approval or exemption by the United States Surface Transportation Board. Conn Central is a shortline railroad headquartered in Middletown, Connecticut which has operating rights over approximately 28 miles in central Connecticut and connects to the Company's Middletown Secondary line. After completion of the acquisition, Conn Central will be merged into the Company. F-14 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 9. EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN The Company has a non-qualified stock option plan ("SOP") covering all management personnel having a minimum of one year of service with the Company and who are not holders of a majority of either its outstanding common stock or its outstanding preferred stock. In addition, the Company's outside directors are eligible to participate in the SOP. The SOP covers 50,000 common shares or 5% of the shares of common stock outstanding, whichever is greater (111,097 shares at December 31, 1997). Options granted under the SOP, which are fully vested when granted, are exercisable over a ten year period at the market price for the Company's common stock as of the date the options are granted. Changes in stock options outstanding are as follows:
WEIGHTED AVERAGE ------------------- NUMBER EXERCISE FAIR OF SHARES PRICE VALUE --------- --------- -------- Outstanding at January 1, 1995............... 30,357 $ 6.03 Granted...................................... 7,808 7.00 $ 2.29 Exercised.................................... (4,374) 5.89 ------ Outstanding and exercisable 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 and exercisable at December 31, 1996........................................ 35,154 6.44 Granted...................................... 7,970 7.88 $2.96 Exercised.................................... (7,593) 6.63 Expired...................................... (1,513) 5.98 ------ Outstanding and exercisable at December 31, 1997........................................ 34,018 $6.76 ======
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:
YEARS ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 -------- -------- -------- Average risk-free interest rate.......... 5.9% 6.4% 5.75% Expected life of option grants................. 7.0 years 7.0 years 7.0 years Expected volatility of underlying stock....... 22% 22% 29% Expected dividend payment rate, as a percentage of the share price on the date of grant.................. 1.43% 1.45% 1.26%
It should be noted that the option pricing model used was designed to value readily tradable stock options with relatively short useful lives. The options granted to employees are not tradable and have contractual lives of up to ten years. However, management believes that the assumptions used to value the options and the model applied yield a reasonable estimate of the fair value of the grants made under the circumstances. F-15 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The following table sets forth information regarding options at December 31, 1997:
WEIGHTED AVERAGE ---------------------------- RANGE OF NUMBER NUMBER EXERCISE CURRENTLY EXERCISE REMAINING OF OPTIONS PRICES EXERCISABLE PRICE LIFE (IN YEARS) ---------- ----------- ----------- -------- --------------- 6,430 $3.25--4.38 6,430 $3.78 4.1 22,046 5.50--7.88 22,046 7.19 7.0 5,542 8.50 5,542 8.50 2.0
The Company has elected to remain with the accounting prescribed by APB 25, instead of adopting SFAS No. 123, "Accounting for Stock-Based Compensation". Therefore, no compensation cost has been recognized for the SOP. Had compensation cost for the Company's SOP been determined on the fair value of the grant dates for awards under the SOP consistent with the method of SFAS 123, the Company's net income and income per share would have been as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 1997 --------------- -------- Net income: As reported....................................... $ 917 $ 1,251 $ 1,930 Pro forma......................................... 914 1,245 1,921 Basic income per share: As reported....................................... .45 .57 .87 Pro forma......................................... .45 .57 .87 Diluted income per share: As reported....................................... .43 .54 .81 Pro forma......................................... .43 .54 .80
DEFINED CONTRIBUTION RETIREMENT PLANS The Company has a deferred profit-sharing plan ("Plan") which covers all of its employees who are members of its collective bargaining units. Contributions to the Plan are required in years in which the Company has income from "railroad operations" as defined in the Plan. Contributions are to be equal to at least 10% but not more than 15% of the greater of income before income taxes or income from railroad operations subject to a maximum contribution of $3.5 per eligible employee. Contributions to the Plan may be made in cash or in shares of the Company's common stock. Contributions accrued under this Plan amounted to $167 in 1995, $226 in 1996 and $337 in 1997. The Company made its 1995 and 1996 contributions and intends to make its 1997 contribution in newly issued shares of its common stock. The Company also has a Simplified Employee Pension Plan ("SEPP") which covers substantially all employees who are not members of one of its collective bargaining units. Contributions to the SEPP are discretionary and are determined annually as a percentage of each covered employee's compensation. Contributions accrued under the SEPP amounted to $159 in 1995, $189 in 1996 and $196 in 1997. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan ("ESPP") under which eligible employees may purchase registered shares of common stock at 85% of the market price for such shares. An aggregate of 200,000 shares of common stock are authorized for issuance under the ESPP. Any shares purchased under the ESPP are subject to a two year lock-up. As of December 31, 1997, 2,846 shares have been purchased under the ESPP. F-16 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 10. PREFERRED STOCK Each share of the Company's $50 par value preferred stock is convertible into 100 shares of common stock at the option of the shareholder. The noncumulative annual stock dividend is fixed by the Company's Charter at the rate of $5.00 per share, out of funds legally available for the payment of dividends. The holders of preferred stock are entitled to one vote for each share in the election of two-thirds of the Board of Directors. The holders of preferred stock and holders of common stock are entitled to one vote per share, voting in separate classes, upon matters voted on by shareholders. F-17 [PHOTOGRAPH] 1. Three B-23-7 locomotives acquired by P&W in July 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 The Company.............................................................. 12 Use of Proceeds.......................................................... 13 Price Range of Common Stock and Dividend Policy.......................... 14 Capitalization........................................................... 15 Selected Financial Data.................................................. 16 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 17 Business................................................................. 23 Management............................................................... 33 Certain Transactions..................................................... 38 Principal and Selling Shareholders....................................... 39 Description of Capital Stock............................................. 40 Shares Eligible for Future Sale.......................................... 41 Underwriting............................................................. 43 Legal Matters............................................................ 44 Experts.................................................................. 44 Available Information.................................................... 45 Index to Financial Statements............................................ F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,025,000 SHARES LOGO PROVIDENCE AND WORCESTER RAILROAD COMPANY COMMON STOCK --------------- PROSPECTUS --------------- ADVEST, INC. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the issuance and distribution of the securities being registered. All the amounts shown are estimated, except the Securities and Exchange Commission Registration Fee, the NASD Filing Fee and the AMEX Listing Fee. Securities and Exchange Commission Registration Fee............... $ 6,753 NASD Filing Fee................................................... 2,789 AMEX Listing Fee.................................................. 17,500 Blue Sky Fees and Expenses (includes fees and expenses of coun- sel)............................................................. 7,500 Transfer Agent and Registrar Fees................................. 3,000 Accounting Fees and Expenses...................................... 75,000 Legal Fees and Expenses........................................... 130,000 Non-accountable Expense Allowance................................. 347,500 Printing, Engraving and Delivery Expenses......................... 50,000 Miscellaneous..................................................... 9,958 -------- Total........................................................... $650,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article SIXTH of the Company's Charter provides that a director shall not be liable to the Registrant or its shareholders for breach of fiduciary duty as a director, other than liability for (a) breach of the director's duty of loyalty to the Company or its shareholders, (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) unlawful payment of a dividend or unlawful stock purchase or redemption, or (d) any transaction from which the director derived an improper personal benefit. Section 4.1 of the Rhode Island Business Corporation Act authorizes indemnification of directors and officers of Rhode Island corporations. Article XI of the Company's By-laws (i) authorizes the indemnification of directors and officers (the "Indemnified Person") under specified circumstances to the fullest extent authorized, (ii) provides for the advancement of expenses to the Indemnified Persons for defending any proceedings related to the specified circumstances and (iii) gives the Indemnified Persons the right to bring suit against the Company to enforce the foregoing rights to indemnification and advancement of expenses. The Underwriting Agreement filed as Exhibit 1 to this Registration Statement provides for indemnification of the Company, its directors and officers and certain other persons against certain liabilities, including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The table below sets forth all sales of the Registrant's securities within the past three years which were not registered under the Securities Act in reliance on the exemption provided by Section 4(2) thereof. No underwriting discounts or commissions were paid in connection with any such sales.
DATE OF TITLE AND AMOUNT NAME OR CLASS OF CONSIDERATION PAID TO OR TRANSACTION OF SECURITIES PERSONS TO WHOM SOLD RECEIVED BY REGISTRANT ----------- ---------------- -------------------- ------------------------ December 1995 Common Stock Massachusetts Capital $80,000 Purchase Warrant Resource Company for 200,000 shares of Common Stock at an exercise price of $7.10 per share
II-1
DATE OF TITLE AND AMOUNT NAME OR CLASS OF CONSIDERATION PAID TO OR TRANSACTION OF SECURITIES PERSONS TO WHOM SOLD RECEIVED BY REGISTRANT ----------- ---------------- -------------------- ------------------------ December 1995 55,000 shares of Bestfoods (formerly Partial consideration Common Stock named CPC International, pursuant to 1995 Inc.) Settlement Agreement between the Company and Bestfoods (the "Settlement Agreement"), valued at $391,000. 1995 40,606 shares of Employees $335,000 pursuant to the Common Stock terms of the Company's Profit Sharing Plan January 1996 53,155 shares of Bestfoods Partial consideration Common Stock pursuant to the Settlement Agreement, valued at $379,000 1996 20,925 shares of Employees $167,000 pursuant to the Common Stock terms of the Company's Profit-Sharing Plan 1996 300 shares of Employees $2,175 pursuant to the Common Stock terms of the Company's Safety Incentive Plan 1997 22,550 shares of Employees $226,000 pursuant to the Common Stock terms of the Company's Profit-Sharing Plan 1997 700 shares of Employees $5,950 pursuant to the Common Stock terms of the Company's Safety Incentive Plan
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. a.Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 1.2 Form of Underwriters' Warrants. 3.1* Form of Restated Charter. 3.2 By-laws, as amended (filed as Exhibit 4.2 to Form S-8 Registration Statement No. 333-02975 and by this reference incorporated herein). 5 Opinion of Hinckley, Allen & Snyder. 10.1 Secured Subordinated Note and Warrant Purchase Agreement dated as of December 19, 1995 by and between the Company and Massachusetts Cap- ital Resource Company, including Form of Secured Subordinated Notes and Form of Common Stock Purchase Warrants. 10.2 Settlement Agreement and Release dated as of December 12, 1995, by and between the Company and CPC International, Inc. (now "Bestfoods"). 10.3 Providence and Worcester Railroad Company Non-Qualified Stock Option Plan. 23.1 Consent of Hinckley, Allen & Snyder (included in Exhibit 5). 23.2 Consent of Deloitte & Touche LLP. 24* Power of Attorney. 27 Financial Data Schedule.
-------- *Previously filed with this Registration Statement. b.Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts II-2 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes as follows: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance on Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it is declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF WORCESTER, COMMONWEALTH OF MASSACHUSETTS, ON MARCH 2, 1998. Providence and Worcester Railroad Company /s/ Robert H. Eder By: _________________________________ ROBERT H. EDER CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE OR DATES INDICATED. SIGNATURE TITLE DATE /s/ Robert H. Eder Chief Executive March 2, 1998 - ------------------------------------- Officer and ROBERT H. EDER Chairman (Principal Executive Officer) * President, Chief March 2, 1998 - ------------------------------------- Operating Officer ORVILLE R. HARROLD and Director /s/ Robert J. Easton Treasurer, March 2, 1998 - ------------------------------------- Controller and ROBERT J. EASTON Director (Principal Financial and Accounting Officer) * Director March 2, 1998 - ------------------------------------- FRANK W. BARRETT * Director March 2, 1998 - ------------------------------------- PHILIP D. BROWN * Director March 2, 1998 - ------------------------------------- JOHN H. CRONIN * Director March 2, 1998 - ------------------------------------- J. JOSEPH GARRAHY
II-4 SIGNATURE TITLE DATE * Director March 2, 1998 - ------------------------------------- JOHN J. HEALY * Director March 2, 1998 - ------------------------------------- WILLIAM J. LEDOUX * Director March 2, 1998 - ------------------------------------- CHARLES M. MCCOLLAM, JR. /s/ Heidi J. Eddins *Attorney-in-Fact - ------------------------------------- HEIDI J. EDDINS,
II-5 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 1997, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated January 30, 1998. Our audits also included the financial statement schedule of Providence and Worcester Railroad Company, listed in Item 16(b) of this Registration Statement. 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. Deloitte & Touche LLP Worcester, Massachusetts January 30, 1998 S-1 SCHEDULE II PROVIDENCE AND WORCESTER RAILROAD COMPANY VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 (IN THOUSAND DOLLARS) - --------------------------------------------------------------------------------
COLUMN COLUMN A COLUMN B COLUMN C ADDITIONS COLUMN D E -------- --------- -------------------- ------------- ------- (1) BALANCE CHARGED (2) CHARGED BALANCE AT TO COSTS TO OTHER AT END BEGINNING AND ACCOUNTS OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE(B) DEDUCTIONS(A) PERIOD - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Allowance for doubtful accounts: Year ended December 31, 1995.................... $125 $125 ==== ==== Year ended December 31, 1996.................... $125 $ 7 $ (7) $125 ==== === ==== ==== Year ended December 31, 1997.................... $125 $43 $(43) $125 ==== === ==== ====
- -------- (A)Bad debts written off. (B) Recovery of bad debts previously written off. S-2 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 --Form of Underwriting Agreement 1.2 --Form of Underwriters' Warrants 3.1* --Form of Restated Charter 3.2 --By-laws, as amended (filed as Exhibit 4.2 to Form S-8 Registration Statement No. 333-02975 and by this reference incorporated herein) 5 --Opinion of Hinckley, Allen & Snyder 10.1 --Secured Subordinated Note and Warrant Purchase Agreement dated as of December 19, 1995 by and between the Company and Massachusetts Capital Resource Company, including Form of Secured Subordinated Notes and Form of Common Stock Purchase Warrants 10.2 --Settlement Agreement and Release dated as of December 12, 1995, by and between the Company and CPC International, Inc. (now "Bestfoods") 10.3 --Providence and Worcester Railroad Company Non-Qualified Stock Option Plan 23.1 --Consent of Hinckley, Allen & Snyder (included in Exhibit 5) 23.2 --Consent of Deloitte & Touche LLP 24* --Power of Attorney 27 --Financial Data Schedule
- -------- * Previously filed with this Registration Statement. b. Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 1,025,000 SHARES PROVIDENCE AND WORCESTER RAILROAD COMPANY COMMON STOCK UNDERWRITING AGREEMENT ---------------------- March __, 1998 ADVEST, INC. As Representative (the "Representative") of the several Underwriters named in Schedule I hereto c/o Advest, Inc. One Rockefeller Plaza, 20th Floor New York, New York 10020 Ladies and Gentlemen: Providence and Worcester Railroad Company, a Rhode Island corporation (the "Company"), and a certain shareholder of the Company named in Schedule II hereto (the "Selling Shareholder"), propose to sell to the several Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 1,025,000 shares (the "Firm Stock") of the Company's Common Stock, par value $.50 per share (the "Common Stock"). Of the 1,025,000 shares of the Firm Stock, 1,000,000 are being sold by the Company and 25,000 by the Selling Shareholder. In addition, in order to cover over-allotments in the sale of the Firm Stock, Robert H. Eder, the principal shareholder of the Company (the "Principal Shareholder"), proposes to grant to the Underwriters an option to purchase up to an additional 153,750 shares of the Common Stock on the terms and for the purposes set forth in Section 3 (the "Option Stock"). The Firm Stock and the Option Stock, if purchased, are hereinafter referred to collectively as the "Stock." This is to confirm the agreement concerning the purchase of the Stock from the Company, the Selling Shareholder and the Principal Shareholder by the Underwriters. 1. Representations, Warranties and Agreements of the Company. The Company represents, warrants and agrees to and with the Underwriters and the Selling Shareholder that: (a) A registration statement on Form S-1 and Amendment No. 1 with respect to the Stock has (i) been prepared by the Company in conformity with the requirements of the United States Securities Act of 1933 (the "Securities Act") and the rules and regulations (the "Rule and Regulations") of the United States Securities and Exchange Commission (the "Commission") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act. Copies of such registration statement and the amendment thereto have been delivered by the Company to you as the Representative of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means each prospectus included in such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Representative pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at the Effective Time and thereafter amended by post-effective amendment, including all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 6 hereof and deemed to be a part of the registration statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means such final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. To the Company's knowledge, the Commission has not issued any order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus. (b) When any Preliminary Prospectus was filed with the Commission, it contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Securities Act and the Rules and Regulations. The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein or furnished by or on behalf of and 2 relating to the Selling Shareholder or the Principal Shareholder specifically for use therein. (c) The Company and its subsidiary (as defined in Section 17) have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification except where the failure to so qualify would not have a material adverse effect on the consolidated financial position, shareholders' equity, results of operations, business or prospects of the Company and its subsidiary, taken as a whole, and have all power and authority, and all material licenses, permits, clearances, easements, certifications, registrations, approvals, consents and franchises, necessary to own or lease and operate their respective properties and assets and to conduct their businesses as described in the Registration Statement and Prospectus subject in each case to such qualifications as may be set forth in the Prospectus; and the sole subsidiary of the Company is not a "significant subsidiary," as such term is defined in Rule 405 of the Rules and Regulations. (d) The Company and its subsidiary have sufficient interest in their real and personal property to permit the operation of a freight railroad as described in the Prospectus. (e) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus, and none of such shares have been issued in violation of any preemptive rights; all of the issued shares of capital stock of the subsidiary of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the subsidiary of the Company are outstanding. (f) The offers and sales of the outstanding shares of the Company's capital stock, whether described in the Registration Statement or otherwise, were made in conformity in all material respects with applicable federal and state securities laws. (g) The shares of the Stock have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and non- assessable and the issuance thereof will 3 not be subject to any preemptive rights, rights of first refusal or similar rights; and the Stock will conform to the description thereof contained in the Prospectus. (h) The Company has reserved and kept available for the exercise of the Warrants (as defined in Section 3(c) hereof) such number of authorized but unissued shares of Common Stock as are sufficient to permit the exercise in full of the Warrants. The Warrant Shares (as defined in Section 3(c) hereof), when issued and sold pursuant to the Warrants, will be duly and validly issued, fully paid and nonassessable and none of them will be issued in violation of any preemptive or other similar right binding on the Company. (i) The Company has full power and authority to enter into, deliver and perform this Agreement and the Warrants (as defined in Section 3(c) hereof) and to issue and sell the Stock, the Warrants and the Warrant Shares (as defined in Section 3(c) hereof); and this Agreement and the Warrants have been duly authorized, executed and delivered by the Company. (j) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or its subsidiary is a party or by which the Company or its subsidiary is bound or to which any of the property or assets of the Company or its subsidiary is subject, nor will such actions result in any violation of the provisions of the charter or by-laws or similar governing instruments of the Company or its subsidiary or any statute or any order, rule or regulation of any court or governmental agency or body, domestic or foreign, having jurisdiction over the Company or its subsidiary or any of their properties or assets; and except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and applicable state securities laws and the rules of the American Stock Exchange, Inc. (the "AMEX") and the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. (k) The execution, delivery and performance of the Warrants (as defined in Section 3(c) hereof) by the Company and the consummation of the transactions contemplated thereby will not conflict with or result in a breach or violation of any 4 of the terms or provisions of, or constitute a default under, any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or its subsidiary is a party or by which the Company or its subsidiary is bound or to which any of the property or assets of the Company or its subsidiary is subject, nor will such actions result in any violation of the provisions of the charter or by-laws or similar governing instruments of the Company or its subsidiary or any statute or any order, rule or regulation of any court or governmental agency or body, domestic or foreign, having jurisdiction over the Company or its subsidiary or any of their properties or assets; and except for the registration of the Warrants and the Warrant Shares (as defined in Section 3(c) hereof) under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act, and applicable state securities laws and the rules of the AMEX and the NASD, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of the Warrants by the Company and the consummation of the transactions contemplated thereby. (l) There are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to include such securities in the securities registered pursuant to the Registration Statement; and there are no options or warrants for the purchase of, other outstanding rights to purchase, agreements or obligations to issue or agreements or other rights to convert or exchange any obligation or security into, capital stock of the Company or securities convertible into or exchangeable for capital stock of the Company, except as described in the Prospectus. (m) Except as described in the Registration Statement, the Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock options plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (n) Neither the Company nor its subsidiary has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, there has not been any change in the capital stock or long-term debt of the Company or its subsidiary (other than scheduled 5 principal payments) or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, business, prospects, obligations, financial position, shareholders' equity or results of operations of the Company and its subsidiary, otherwise than as set forth or contemplated in the Prospectus. (o) The financial statements (including the related notes and supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved; the financial information included in the Prospectus under the caption "Prospectus Summary" and "Selected Financial Data" (including any as adjusted financial information) and "Management's Discussion and Analysis of Financial Condition and Results of Operations" accurately presents the information shown therein and has been prepared on a basis consistent with that of the audited financial statements of the Company included in the Registration Statement; and the other historical and pro forma, financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with the books and records of the Company. (p) Deloitte & Touche LLP, which have certified certain financial statements of the Company, whose report appears in the Prospectus and which have delivered the initial letter referred to in Section 9(g) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations. (q) All real property owned by the Company and its subsidiary is free and clear of all liens, encumbrances and defects, except such as are described in the Prospectus or such as do not materially affect the value of such property for railroad operations and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiary; all real property and buildings held under lease or trackage rights agreement by the Company and its subsidiary are held by them under valid, subsisting and enforceable leases or trackage rights agreements, as the case may be, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiary. (r) Except as described in the Prospectus, the Company and its subsidiary carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their 6 respective properties and as is customary for companies engaged in similar businesses in similar industries. (s) Except as described in the Prospectus, the Company and its subsidiary own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights and licenses necessary for the conduct of their respective businesses and have no reason to believe that the conduct of their respective businesses will conflict with, and have not received any notice of any claim of conflict with, any such rights of others. (t) There are no legal or governmental claims, actions or proceedings pending or, to the knowledge of the Company, threatened against the Company or its subsidiary to which the Company or its subsidiary is a party or of which any property or assets of the Company or its subsidiary is the subject that are required to be described in the Registration Statement or the Prospectus but are not described as required. (u) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of or references to statutes, regulations, contracts, agreements or other documents, are accurate in all material respects and present or summarize fairly, in all material respects, the information required to be disclosed under the Securities Act or the Rules and Regulations, and there are no statutes, regulations, contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations. (v) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, shareholders, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus which is not so described. (w) No labor dispute or disturbance by the employees of the Company or its subsidiary exists or, to the knowledge of the Company, is imminent which might be expected to have a material adverse effect on the consolidated financial position, shareholders' equity, results of operations, business or prospects of the Company and its subsidiary, taken as a whole; and the Company has no knowledge of any existing or threatened labor disturbance by the employees of any of the principal suppliers, contractors or customers of the Company or its subsidiary that would materially adversely affect the consolidated financial position, shareholders' 7 equity, results of operations, business or prospects of the Company and its subsidiary, taken as a whole. (x) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (y) The Company and its subsidiary have filed all federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and have paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company or its subsidiary which has had (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company or its subsidiary, might have) a material adverse effect on the consolidated financial position, shareholders' equity, results of operations, business or prospects of the Company and its subsidiary, taken as a whole. (z) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities (except pursuant to the exercise of warrants and options outstanding on the date of the Prospectus or pursuant to employee benefit plans described in the Prospectus), (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock (other than regular dividends declared on January 28, 1998). (aa) The Company and its subsidiary each (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's 8 authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (bb) Neither the Company nor its subsidiary (i) is in violation of its charter or by-laws or similar governing instruments, (ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) is in violation in any material respect of any law, ordinance, governmental rule, regulation, order, permit or court decree to which it or its property or assets may be subject, including with respect to any known release of hazardous wastes or other hazardous materials. (cc) Neither the Company nor its subsidiary, nor, to the Company's knowledge, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or its subsidiary, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (dd) Neither the Company nor its subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. (ee) There are no engagements or arrangements between the Company and an investment bank or third party pursuant to which such investment bank or third party has been granted any rights to underwrite securities of the Company or would be entitled to receive a fee in the event of a private placement of securities, public offering of securities or merger or acquisition involving the Company, except for any rights to underwrite contemplated by this Agreement, any arrangements for which fees are reflected in Item 13 of Part II of the Registration Statement and any arrangement described in the Prospectus under the caption "Underwriting." 2.A Representations, Warranties and Agreements of the Selling Shareholder. The Selling Shareholder represents, warrants and agrees to and with the Company, the Underwriters and the Principal Shareholder that: 9 (a) The Selling Shareholder has, and immediately prior to the First Delivery Date (as defined in Section 5 hereof) the Selling Shareholder will have, good and valid title to the shares of Stock to be sold by the Selling Shareholder hereunder on such date, free and clear of all liens, encumbrances, equities or claims; and upon delivery of such shares and payment therefor pursuant hereto, good and valid title to such shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters. (b) The Selling Shareholder has full right, power and authority to enter into this Agreement and to sell, transfer and deliver the Stock to be sold by the Selling Shareholder hereunder, and this Agreement has been duly authorized, executed and delivered by the Selling Shareholder and constitutes the legal, valid and binding obligation of the Selling Shareholder enforceable in accordance with its terms; the execution, delivery and performance of this Agreement by the Selling Shareholder and the consummation by the Selling Shareholder of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Selling Shareholder is a party or by which the Selling Shareholder is bound or to which any of the property or assets of the Selling Shareholder is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Selling Shareholder or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Selling Shareholder or the property or assets of the Selling Shareholder; and, except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act, applicable state securities laws and the rules of the AMEX or the NASD in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Selling Shareholder and the consummation by the Selling Shareholder of the transactions contemplated hereby. (c) The Registration Statement and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus, when they become effective or are filed with the Commission, as the case may be, do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an untrue statement of a material fact regarding the Selling Shareholder; provided that no 10 representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company or the Selling Shareholder through the Representative by or on behalf of any Underwriter specifically for inclusion therein. (d) The Selling Shareholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the shares of the Stock. 2.B Representations, Warranties and Agreements of the Principal Shareholder. The Principal Shareholder represents, warrants and agrees: (a) The Principal Shareholder has, and immediately prior to the Second Delivery Date (as defined in Section 5 hereof), the Principal Shareholder will have, good and valid title to the shares of the Option Stock to be sold by the Principal Shareholder hereunder on such date (if the Underwriters exercise the option granted under Section 3(b) hereof), free and clear of all liens, encumbrances, equities or claims; and upon delivery of such shares and payment therefor pursuant hereto, good and valid title to such shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters. (b) The Principal Shareholder has full right, power and authority to enter into this Agreement and to sell, transfer and deliver the Option Stock to be sold by the Principal Shareholder hereunder, and this Agreement has been duly executed and delivered by the Principal Shareholder. (c) The execution, delivery and performance of this Agreement by the Principal Shareholder and the consummation by the Principal Shareholder of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Principal Shareholder is a party or by which the Principal Shareholder is bound or to which any of the property or assets of the Principal 11 Shareholder is subject, nor will such actions result in any violation of the provisions of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Principal Shareholder or the property or assets of the Principal Shareholder; and, except for the registration of the Option Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act, applicable state securities laws and the rules of the AMEX or the NASD in connection with the purchase and distribution of the Option Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement, by the Principal Shareholder and the consummation by the Principal Shareholder of the transactions contemplated hereby. (d) The Registration Statement and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus, when they become effective or are filed with the Commission, as the case may be, do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an untrue statement of a material fact regarding the Principal Shareholder or omit to state a material fact required to be stated therein or necessary to make the statements therein regarding the Principal Shareholder not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company or the Principal Shareholder through the Representative by or on behalf of any Underwriter specifically for inclusion therein or by or on behalf of and relating to the Selling Shareholder specifically for use therein. (e) The Principal Shareholder has examined the Registration Statement and the Prospectus (as amended or supplemented) and has no knowledge that the Registration Statement, as of the effective date, or the Prospectus (or any amendment or supplement thereto), as of the applicable filing date, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (f) The Principal Shareholder has not taken and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the shares of the Stock. 12 3. Purchase of the Stock and the Warrants by the Underwriters. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to sell 1,000,000 shares of the Firm Stock and the Selling Shareholder hereby agrees to sell the number of shares of the Firm Stock set opposite its name in Schedule II hereto to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set opposite that Underwriter's name in Schedule I hereto. Each Underwriter shall be obligated to purchase from the Company and from the Selling Shareholder that number of shares of the Firm Stock which represents the same proportion of the number of shares of the Firm Stock to be sold by the Company and by the Selling Shareholder as the number of shares of the Firm Stock set forth opposite the name of such Underwriter in Schedule I represents of the total number of shares of the Firm Stock to be purchased by all of the Underwriters pursuant to this Agreement. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representative may determine. (b) The Principal Shareholder grants to the Underwriters an option to purchase up to 153,750 shares of Option Stock. Such option is granted solely for the purpose of covering over-allotments in the sale of Firm Stock and is exercisable as provided in Section 5 hereof. Shares of Option Stock shall be purchased severally for the account of the Underwriters in proportion to the number of shares of Firm Stock set opposite the name of such Underwriters in Schedule I hereto. The respective purchase obligations of each Underwriter with respect to the Option Stock shall be adjusted by the Representative so that no Underwriter shall be obligated to purchase Option Stock other than in 100 share amounts. The price of both the Firm Stock and any Option Stock shall be $_____ per share. (c) On the First Delivery Date (as hereinafter defined), the Company agrees to sell to Advest, Inc. (for its own account and not as Representative of the several Underwriters) and Schneider Securities, Inc., for an aggregate price of $100.00, warrants (the "Warrants") to purchase up to 100,000 shares of the Common Stock (i.e., 10% of the number of shares of Firm Stock sold by the ---- Company) (the "Warrant Shares") at an exercise price per Warrant Share equal to 155% of the public offering price listed on the cover page of the Prospectus. The Warrants will be exercisable at any time during a period of four (4) years commencing on the first anniversary of the effective date of the Registration Statement up to the fifth anniversary thereof. The Warrants will be restricted from sale, transfer, assignment or hypothecation for a period of one year from the effective date of the Registration Statement, except to members of the selling group and their respective officers and partners. Each Warrant shall be substantially identical to the form of Warrant filed as an exhibit to the Registration Statement. 13 4. Offering of Stock by the Underwriters. Upon authorization by the Representative of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions set forth in the Prospectus. 5. Delivery of and Payment for the Stock. Delivery of and payment for the Firm Stock shall be made at the office of Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, NY 10178, at 10:00 A.M., New York City time, on the [third] [fourth] full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representative and the Company, except that physical delivery of such certificates shall be made at the office of the Depository Trust Company, 55 North Water Street, New York, New York 10041. This date and time are sometimes referred to as the "First Delivery Date." On the First Delivery Date, the Company and the Selling Shareholder shall deliver or cause to be delivered certificates representing the Firm Stock to the Representative for the account of each Underwriter against payment to the Company and the Selling Shareholder of the purchase price by wire transfer of immediately available funds to such accounts as the Company and the Selling Shareholder, as the case may be, shall designate in writing, at least 48 hours in advance of such Delivery Date. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in such names and in such denominations as the Representative shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Stock, the Company and the Selling Shareholder shall make the certificates representing the Firm Stock available for inspection by the Representative at the office of the Depository Trust Company, 55 North Water Street, New York, New York 10041 (or at such other location specified by you in writing at least 48 hours prior to such Delivery Date), not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. At any time on or before the thirtieth day after the date of this Agreement (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the AMEX is open for trading) the option granted in Section 3 may be exercised by written notice being given to the Principal Shareholder by the Representative. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Representative, when the shares of Option Stock are to be delivered; provided, however, that this date and time shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. In the event the Underwriters elect to purchase all or a portion of the Option Stock, the Company and the Principal Shareholder agree to furnish or cause to be furnished to the Underwriters all of the certificates, letters and opinions, and to satisfy all of the other conditions set forth in Section 9 hereof (excluding paragraphs (e) and (k) thereof) at each Delivery Date (as hereinafter defined). (The date and time the shares of Option Stock are delivered are sometimes referred to as the "Second Delivery Date" and the First Delivery Date and the Second Delivery Date are sometimes each referred to as a "Delivery Date.") Delivery of and payment for the Option Stock shall be made at the place specified in the first sentence of the first paragraph of this Section 5 (or at such other place as shall be 14 determined by agreement between the Representative and the Principal Shareholder) at 10:00 A.M., New York City time, on the Second Delivery Date. On the Second Delivery Date, the Principal Shareholder shall deliver or cause to be delivered the certificates representing the Option Stock to the Representative for the account of each Underwriter against payment to the Principal Shareholder of the purchase price by wire transfer of immediately available funds to such account as the Principal Shareholder shall designate in writing at least 48 hours in advance of such Delivery Date. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall be registered in such names and in such denominations as the Representative shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Stock, the Principal Shareholder shall make the certificates representing the Option Stock available for inspection by the Representative at the office of the Depository Trust Company, 55 North Water Street, New York, New York 10041 (or at such other location specified by you in writing at least 48 hours prior to such Delivery Date), not later than 2:00 P.M., New York City time, on the business day prior to the Second Delivery Date. 6. Further Agreements of the Company. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representative and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representative, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended or supplemented Prospectus has been filed and to furnish the Representative with copies thereof; to advise the Representative, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to the Representative and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; 15 (c) To deliver promptly to the Representative such number of the following documents as the Representative shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement) and (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus and, if the delivery of a Prospectus is required at any time after the Effective Time in connection with the offering or sale of the Stock or any other securities relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act or the Exchange Act, to notify the Representative and, upon its request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representative may from time to time reasonably request of an amended or supplemented Prospectus that will correct such statement or omission or effect such compliance; (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Representative, be required by the Securities Act or requested by the Commission; (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to the Representative and counsel for the Underwriters and obtain the consent of the Representative to the filing; (f) As soon as practicable after the Effective Date, to make generally available to the Company's security holders and to deliver to the Representative an earnings statement of the Company and its subsidiary (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158); (g) For a period of five years following the Effective Date, to furnish to the Representative copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Common Stock may be listed pursuant to requirements of or agreements with 16 such exchange or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder; (h) Promptly from time to time to take such action as the Representative may reasonably request to qualify the Stock for offering and sale under the securities laws of such jurisdictions as the Representative may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Stock; provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (i) For a period of 180 days from the date of the Prospectus, not to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise transfer or dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the Stock and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants, rights or agreements), or sell or grant options, rights or warrants with respect to any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the grant of options or issuance of Common Stock pursuant to option, stock purchase and employee benefit plans existing on the date hereof), or (2) enter into any swap or other derivatives transaction or agreement that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, in each case without the prior written consent of Advest, Inc.; and to cause each officer and director, the Selling Shareholder and any other shareholder of the Company who beneficially owns (as such term is defined in Rule 13d-1 under the Exchange Act) 5% or more of the Common Stock to furnish to the Representative prior to the First Delivery Date, a letter or letters, in form and substance satisfactory to counsel for the Underwriters, pursuant to which each such person shall agree to the following: For a period of 180 days (90 days, in the case of the Selling Shareholder) from the date of the Prospectus (the "Lock-Up Period") (A) (i) not to sell, offer to sell, solicit an offer to buy, contract to sell, encumber, distribute, pledge, grant any option for the sale of, or otherwise transfer or dispose of, directly or indirectly, in one or a series of transactions, any shares of Common Stock or any options or warrants to purchase any shares of Common Stock without the prior written consent of Advest, Inc.; (ii) not to announce or disclose any intention to do anything after the expiration of the Lock-Up Period which the person is prohibited, as provided in (i), from doing 17 during the Lock-Up Period; and (iii) to waive during the Lock-up Period any right it may have to cause the Company to register pursuant to the Securities Act shares of Common Stock and agree not to exercise any registration rights during such Lock-up Period; and (B) not to engage in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a disposition of any shares of Common Stock or any options or warrants to purchase any shares of Common Stock during the Lock-Up Period even if such shares would be disposed of by someone other than the person; (j) To apply the net proceeds from the sale of the Stock being sold by the Company as set forth in the Prospectus; (k) Prior to the Effective Date, to apply for the listing of the Stock on the AMEX and to use its best efforts to complete that listing, subject only to official notice of issuance, prior to the First Delivery Date; (l) To take such steps as shall be necessary to ensure that neither the Company nor its subsidiary shall become an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder; (m) Prior to the termination of the underwriting syndicate contemplated by this Agreement, neither the Company nor any of its officers, directors or affiliates will (i) take, directly or indirectly, any action designed to cause or to result in, or that might reasonably be expected to cause or result in, the stabilization or manipulation of the price of any security of the Company or (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of, the Stock; (n) To pay Advest, Inc. and Schneider Securities, Inc. a non- accountable expense allowance equal to 2.0% of the aggregate public offering price of the shares of the Stock sold by the Company to the Underwriters hereunder, less $25,000 previously paid to Schneider Securities, Inc. and $25,000 previously paid to Advest, Inc. upon the initial filing of the Registration Statement; and (o) For a period of three (3) years from the date of the Prospectus, Advest, Inc. shall have the right of first refusal to provide investment banking services ("Investment Banking Services"), including with respect to financings, mergers and acquisitions, financial advisory and fairness opinions, to the Company. Specifically excluded from Advest, Inc.'s right of first refusal are public or private offerings of the Company's shares in exchange for properties, assets or stock of other individuals or corporations. The Company agrees to consult with Advest, Inc. with regard to any such Investment Banking Services prior to consulting any other prospective investment banker(s) and will offer Advest, Inc. the opportunity to provide any such Investment Banking Services on terms not less favorable to the Company than it can secure elsewhere. Advest, Inc. shall have thirty (30) days in which to accept such offer. However, the Company shall not be required to consult with Advest, Inc. concerning any borrowings from banks and institutional lenders or concerning financing under any equipment leasing or similar arrangements. 7. A. Further Agreement of the Selling Shareholder. The Selling Shareholder agrees: (a) For a period of 90 days from the date of the Prospectus, not to, directly or indirectly, (1) offer for sale, sell, pledge or otherwise transfer or dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock or securities convertible into or exchangeable for Common Stock (other than the Stock) or (2) enter into any swap or other 18 derivatives transaction or agreement that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such shares of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise, in each case without the prior written consent of Advest, Inc. (b) That the Stock to be sold by the Selling Shareholder hereunder is subject to the interest of the Underwriters and that the obligations of the Selling Shareholder hereunder shall not be terminated by any act of the Selling Shareholder, by operation of law, or, in the case of a trust, by the death or incapacity of any executor or trustee or the termination of such trust, or the occurrence of any other event. (c) To deliver to the Representative prior to the First Delivery Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Shareholder is a non-United States person) or Form W-9 (if the Selling Shareholder is a United States person.) 7.B. Further Agreements of the Principal Shareholder. The Principal Shareholder agrees to deliver to the Representative prior to the Second Delivery Date a properly completed and executed United States Treasury Department Form W- 9. 8. Expenses. The Company will pay all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including, without limitation, all costs and expenses incident to (i) the preparation, printing and delivery expenses (including postage, air freight charges and charges for counting and packaging) associated with the Registration Statement, the Preliminary Prospectus and the Prospectus and any amendments or supplements thereto, this Agreement, the Agreement among Underwriters, the Underwriters' Questionnaire submitted to each of the underwriters by the Representatives in connection herewith, the power of attorney executed by each of the Underwriters in favor of Advest, Inc. in connection herewith, the Dealer Agreement and related documents (collectively, the "Underwriting Documents") and the preliminary Blue Sky memorandum relating to the offering prepared by Morgan, Lewis & Bockius LLP, counsel to the Underwriters (collectively with any supplement thereto, the "Preliminary Blue Sky Memorandum"); (ii) the fees, disbursements and expenses of the Company's counsel (including local and special counsel) and accountants in connection with the registration of the Stock under the Securities Act and all other expenses in connection with the preparation and filing of the Registration Statement (including all amendments thereto), any Preliminary Prospectus, the Prospectus and any amendments and supplements thereto, the Underwriting Documents and the Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing documents to the Underwriters; (iv) the filing fees of the Commission and the NASD relating to the Stock; (v) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Stock, including transfer agent's and registrar's fees; (vi) the qualification of the Stock for offering and sale under state securities and 19 blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters relating thereto, and in connection with the review of the transactions contemplated hereby by the NASD (such counsel's fees; including fees in connection with the preparation of the Preliminary Blue Sky Memorandum not to exceed $5,000); (vii) any listing of the Stock on the AMEX; (viii) any expenses for travel, lodging and meals incurred by the Company and any of its officers, directors and employees in connection with any meetings with prospective investors in the Stock; and (ix) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement; provided that, except as provided in this Section 8 and in Section 13 the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, and the expenses of advertising any offering of the Stock made by the Underwriters, and the Selling Shareholder shall pay the fees and expenses of its counsel and any registration fees payable in connection with its sale of Stock to the Underwriters. 9. Conditions of Underwriters' Obligations. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company, the Selling Shareholder and the Principal Shareholder contained herein, to the performance by the Company, the Selling Shareholder and the Principal Shareholder of their respective obligations hereunder, and to each of the following additional terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Morgan, Lewis & Bockius LLP, counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company, the Principal Shareholder and the Selling Shareholder shall have furnished to such counsel all 20 documents and information that they may reasonably request to enable them to pass upon such matters. (d) Hinckley, Allen & Snyder shall have furnished to the Representative and the Selling Shareholder its written opinion, as counsel to the Company and the Principal Shareholder, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representative, to the effect that: (i) The Company and its subsidiary have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly licensed or qualified to do business and are in good standing as foreign corporations in each jurisdiction set forth on a schedule to such counsel's opinion and have all power and authority necessary to own or hold their respective properties and assets and to conduct their businesses as described in the Registration Statement and Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company (including the shares of Stock being delivered on such Delivery Date) have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus, and none of the shares of Stock being delivered on such Delivery Date have been issued in violation of any preemptive rights; all of the issued shares of capital stock of the subsidiary of the Company have been duly and validly authorized and issued and are fully paid, non-assessable and are owned directly by the Company, free and clear of any perfected security interest or, to the knowledge of such counsel, any other lien, encumbrance, equity or claim; (iii) The Warrant Shares have been duly authorized and reserved by the Company; the Warrant Shares, when issued and sold pursuant to the Warrants, will be duly and validly issued, outstanding, fully-paid and nonassessable and none of them will have been issued in violation of any preemptive or, to such counsel's knowledge, other similar right binding on the Company; (iv) There are no preemptive or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of the Stock pursuant to the Company's charter or by-laws or any agreement or other instrument known to such counsel; 21 (v) To the knowledge of such counsel, the Principal Shareholder has, and immediately prior to the Delivery Date, the Principal Shareholder will have full legal right, power and authority to sell assign, transfer and deliver valid title to the shares of Option Stock to be sold by the Principal Shareholder hereunder on such date, and upon delivery of such shares and payment therefor pursuant hereto, the Underwriters will acquire good and valid title to such shares, free and clear of all liens, encumbrances, equities or claims, assuming they purchase such shares without knowledge of any "Adverse Claim" (as such term is defined in Article 8-302 of the Uniform Commercial Code of the State of New York); and there are no transfer or similar taxes payable under the laws of the State of Rhode Island or the Commonwealth of Massachusetts in connection with the sale and delivery of shares of Stock by the Principal Shareholder to the Underwriters; (vi) To the best of such counsel's knowledge and other than as set forth or contemplated in the Prospectus, there are no legal or governmental proceedings pending to which the Company or its subsidiary is a party or of which any property or assets of the Company or its subsidiary is the subject which, if determined adversely to the Company or its subsidiary, would have a material adverse effect on the consolidated financial position, shareholders' equity, results of operations, business or prospects of the Company and its subsidiary; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (vii) The Registration Statement was declared effective under the Securities Act as of the date and time specified in such opinion, the Prospectus was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the Rules and Regulations specified in such opinion on the date specified therein and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose is pending or threatened by the Commission; (viii) The Registration Statement and the Prospectus and any further amendments or supplements thereto made by the Company prior to such Delivery Date (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations; and, to the best of such counsel's knowledge, the Company has filed all forms, reports and documents required to be filed with the Commission under the Exchange Act; 22 (ix) The statements in the Registration Statement and Prospectus, insofar as they are descriptions of or references to statutes, regulations, contracts, agreements or other legal documents, are accurate in all material respects and present or summarize fairly, in all material respects, the information required to be disclosed under the Securities Act or the Rules and Regulations, and there are no statutes, regulations, contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations; (x) The statements (a) in the Prospectus under the captions "Description of Capital Stock," "Business-Legal Proceedings," and "Business - Governmental Regulation" and (b) in the Registration Statement in Item 14, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (xi) The Company has full power and authority to enter into, deliver and perform this Agreement and the Warrants and to issue and sell the Stock, the Warrants and the Warrant Shares; this Agreement and the Warrants have been duly authorized, executed and delivered by the Company; the Principal Shareholder has full right, power and authority to enter into this Agreement; and this Agreement has been duly executed and delivered by the Principal Shareholder; (xii) The issue and sale of the shares of Stock and the Warrants being delivered on such Delivery Date by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions contemplated hereby or thereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or its subsidiary is a party or by which the Company or its subsidiary is bound or to which any of the property or assets of the Company or its subsidiary is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or its subsidiary or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body 23 having jurisdiction over the Company or its subsidiary or any of their properties or assets; and, except for the registration of the Stock, the Warrants and the Warrant Shares under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act, applicable state securities laws, and the rules of the AMEX and the NASD, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement and the Warrants by the Company and the consummation of the transactions contemplated hereby or thereby; (xiii) The execution, delivery and performance of this Agreement by the Principal Shareholder and the consummation by the Principal Shareholder of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Principal Shareholder is a party or by which the Principal Shareholder is bound or to which any of the property or assets of the Principal Shareholder is subject, nor will such actions result in any violation of any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Principal Shareholder or the property or assets of the Principal Shareholder; and, except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act, applicable state securities laws and the rules of the AMEX and the NASD in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Principal Shareholder and the consummation by the Principal Shareholder of the transactions contemplated hereby; (xiv) To the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to include such securities owned by such person in the securities registered pursuant to the Registration Statement; 24 (xv) The Company is not an investment company within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder; and (xvi) To the best of such counsel's knowledge, the Company and its subsidiary have sufficient interest in their real and personal property to permit the operation of a freight railroad as described in the Prospectus. In rendering such opinion, such counsel may (i) state that its opinion is limited to matters governed by the Federal laws of the United States of America, the laws of the State of Rhode Island, the laws of the Commonwealth of Massachusetts, the laws of the State of Connecticut and the General Corporation Law of the State of Delaware; and (ii) rely (to the extent such counsel deems proper and specifies in its opinion), as to matters involving the application of railroad regulatory matters and the laws of the State of Connecticut upon the opinion of other counsel of good standing (which may include general counsel for the Company), provided that such other counsel is satisfactory to counsel for the Underwriters and furnishes a copy of its opinion to the Representative and counsel shall state that it believes that both the Underwriters and it are justified in relying upon such opinions. Such counsel shall also have furnished to the Representative a written statement, addressed to the Underwriters and dated such Delivery Date, in form and substance satisfactory to the Representative, to the effect that (x) such counsel has acted as counsel to the Company in connection with the preparation of the Registration Statement, and (y) based on the foregoing, no facts have come to the attention of such counsel which lead it to believe that the Registration Statement, as of the Effective Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements, the notes and schedules thereto and other financial, statistical or market data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). The opinion of counsel for the Company shall include a statement to the effect that it may be relied upon by counsel for the Underwriters in their opinion delivered to the Underwriters. For purposes of rendering such opinion with respect to the Principal Shareholder, Hinckley, Allen & Snyder (and such other counsel as may be required to render an opinion pursuant hereto) may rely as to factual matters on the representations and warranties of the Principal Shareholder set forth herein as if said representations and warranties set forth herein had been set forth in a separate certificate directed to said counsel at and as of each closing hereunder. 25 (e) The counsel for the Selling Shareholder shall have furnished to the Representative its written opinion, as counsel to the Selling Shareholder addressed to the Underwriters and dated the such Delivery Date, in form and substance reasonably satisfactory to the Representative, to the effect that: (i) The Selling Shareholder has full right, power and authority to enter into this Agreement; the execution, delivery and performance of this Agreement by the Selling Shareholder and the consummation by the Selling Shareholder of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any statute, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Selling Shareholder is a party or by which the Selling Shareholder is bound or to which any of the property or assets of the Selling Shareholder is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Selling Shareholder or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Selling Shareholder or the property or assets of the Selling Shareholder; and, except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act, applicable state securities laws and the rules of the AMEX and the NASD in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Selling Shareholder and the consummation by the Selling Shareholder of the transactions contemplated hereby; (ii) This Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Shareholder; (iii) To the knowledge of such counsel, the Selling Stockholder has, and immediately prior to the First Delivery Date, the Selling Shareholder will have full legal right, power and authority to sell, assign, transfer and deliver valid title to the shares of the Stock to be sold by the Selling Shareholder hereunder on such date; and (iv) Upon delivery of the shares of Stock to be sold by the Selling Shareholder under this Agreement and payment therefor pursuant hereto, 26 the Underwriters will acquire good and valid title to such shares, free and clear of all liens, encumbrances, equities or claims, assuming they purchase such shares without knowledge of any "Adverse Claim" (as such term is defined in Article 8-302 of the Uniform Commercial Code of the State of New York) and there are no transfer or similar taxes payable in connection with the sale and delivery of the shares of Stock by the Selling Stockholder to the Underwriters, except as specified in such opinion. In rendering such opinion, such counsel may (i) state that its opinion is limited to matters governed by the Federal laws of the United States of America, the laws of the State of Rhode Island and the General Corporation Law of the State of Delaware, (ii) rely (to the extent such counsel deems proper and specifies in its opinion) upon the opinion of the general counsel for the Selling Shareholder, provided, that such other counsel is satisfactory to counsel for the Underwriters and furnishes a copy of its opinion to the Representative and counsel shall state that it believes that both the Underwriters and it are justified in relying upon such opinion and (iii) in rendering the opinion in Section 9(e)(iii) above, rely upon a certificate of the Selling Shareholder (or the representations and warranties of the Selling Shareholder set forth herein as if said representations and warranties set forth herein had been set forth in a separate certificate directed to said counsel at and as of the closing hereunder) in respect of matters of fact as to ownership of and liens, encumbrances, equities or claims on the shares of Stock sold by the Selling Shareholder, provided that such counsel shall furnish copies thereof to the Representative and state that it believes that both the Underwriters and it are justified in relying upon such certificate. The opinion of counsel for the Selling Shareholder shall include a statement to the effect that it may be relied upon by counsel for the Underwriters in their opinion delivered to the Underwriters. (f) The Representative shall have received from Morgan, Lewis & Bockius LLP, counsel for the Underwriters, an opinion, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and other related matters as the Representative may reasonably require, and the Company shall have furnished to such counsel such documents as it may reasonably request for the purpose of enabling it to pass upon such matters. 27 (g) At the time of execution of this Agreement, the Representative shall have received from Deloitte & Touche LLP, a letter, in form and substance satisfactory to the Representative, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (h) With respect to the letter of Deloitte & Touche LLP referred to in the preceding paragraph and delivered to the Representative concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Representative a letter (the "bring-down letter") of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (i) The Company shall have furnished to the Representative a certificate of the Company, dated such Delivery Date, signed by its Chairman of the Board and its President stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Delivery Date; the Company has complied with all its agreements contained herein; and the conditions set forth in Section 9 have been fulfilled; and (ii) As of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and since the Effective 28 Date, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus. (j) The Principal Shareholder shall have furnished to the Representative a certificate dated such Delivery Date stating that the representations, warranties and agreements of the Principal Shareholder contained herein are true and correct as of such Delivery Date and that the Principal Shareholder has complied with all agreements contained herein to be performed by the Principal Shareholder at or prior to such Delivery Date. (k) The Selling Shareholder shall have furnished to the Representative on the First Delivery Date a certificate, dated the First Delivery Date, signed by, or on behalf of, the Selling Shareholder stating that the representations, warranties and agreements of the Selling Shareholder contained herein are true and correct as of the First Delivery Date and that the Selling Shareholder has complied with all agreements contained herein to be performed by the Selling Shareholder at or prior to the First Delivery Date. (l) (i) Neither the Company nor its subsidiary shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus and (ii) since such date, there shall not have been any change in the capital stock or long-term debt of the Company or its subsidiary or any change, or any development involving a prospective change, in or affecting the consolidated financial position, shareholders' equity, results of operations, business or prospects of the Company and its subsidiary, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representative, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (m) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the AMEX or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there 29 shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial condition (or the effect of international conditions on the/ financial markets in the United States shall be such) as to make it, in the judgment of a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (n) The AMEX has approved the Stock for listing, subject only to official notice of issuance. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 10. Indemnification and Contribution. (a) The Company, shall indemnify and hold harmless each Underwriter, its officers, directors and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (B) in any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) specifically for the purpose of qualifying any or all of the Stock under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a "Blue Sky Application"), or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each Underwriter and each such officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, officer, employee or controlling person in connection with investigating, defending or preparing to defend against, or appearing as a third-party witness in connection with, any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, or in any 30 Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein or concerning the Selling Shareholder furnished to the Company by or on behalf of the Selling Shareholder specifically for inclusion therein. The Company will not, without the prior written consent of the Representative of the Underwriters, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding (or related cause of action or portion thereof) in respect of which indemnification may be sought hereunder (whether or not any Underwriter is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Underwriter from all liability arising out of such claim, action, suit or proceeding (or related cause of action or portion thereof). The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any officer, director, employee or controlling person of that Underwriter. (b) The Selling Shareholder shall indemnify and hold harmless each Underwriter, its officers, directors and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact relating to the Selling Shareholder contained in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (ii) the omission or alleged omission to state in any Preliminary Prospectus, Registration Statement or the Prospectus, or in any amendment or supplement thereto, any material fact relating to the Selling Shareholder required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning the Selling Shareholder furnished to the Company by or on behalf of the Selling Shareholder specifically for inclusion therein, and shall reimburse each Underwriter, its officers and employees and each such controlling person for any legal or other expenses reasonably incurred by that Underwriter, its officers and employees or controlling person in connection with investigating, defending or preparing to defend against, or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Selling Shareholder shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any such amendment or supplement in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein; and provided, further, however, that the indemnity of the Selling Shareholder under this Section 10(b) shall only be effective to the extent of the value (based on the initial public offering price per share) of any such Stock sold by it pursuant to this Agreement. The foregoing indemnity agreement is in addition to any liability which the Selling Shareholder may otherwise have to any Underwriter or any officer, director, employee or controlling person of that Underwriter. (c) The Principal Shareholder shall indemnify and hold harmless each Underwriter, its officers, directors and employees, and each person, if any, who controls any 31 Underwriter within the meaning of the Securities Act or the Exchange Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact of which the Principal Shareholder has knowledge contained in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (ii) the omission or alleged omission to state in any Preliminary Prospectus, Registration Statement or the Prospectus, or in any amendment or supplement thereto, any material fact of which the Principal Shareholder has knowledge required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each Underwriter, its officers and employees and each such controlling person for any legal or other expenses reasonably incurred by that Underwriter, its officers and employees or controlling person in connection with investigating, defending or preparing to defend against, or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Principal Shareholder shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any such amendment or supplement in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representative by or on behalf of any Underwriter specifically for inclusion therein; and provided, further, however, that the direct indemnity of the Principal Shareholder under this Section 10(c) shall only be effective if he sells Stock pursuant to this Agreement and then only to the extent of the value (based on the initial public offering price per share) of any such Stock sold by him pursuant to this Agreement. The foregoing indemnity agreement is in addition to any liability which the Principal Shareholder may otherwise have to any Underwriter or any officer, director, employee or controlling person of that Underwriter. (d) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers and employees, each of its directors (including any person who, with his or her consent, is named in the Registration Statement as about to become a director of the Company), and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, the Selling Shareholder and the Principal Shareholder from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements 32 therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representative by or on behalf of that Underwriter specifically for inclusion therein, and shall reimburse the Company, any such director, officer or controlling person, the Selling Shareholder and the Principal Shareholder for any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, the Selling Shareholder or the Principal Shareholder in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, employee or controlling person. (e) Promptly after receipt by an indemnified party under this Section 10 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 10, notify the indemnifying party in writing of the claim or the commencement thereof; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 10 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 10. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 10 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representative shall have the right to employ counsel to represent jointly the Representative and those other Underwriters and their respective officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company, the Principal Shareholder or the Selling Shareholder under this Section 10 if, in the reasonable judgment of the Representative, it is advisable for the Representative and those Underwriters, officers, employees and controlling persons to be jointly represented by separate counsel, provided, further, however that the fees and expenses of such separate counsel shall be paid by the Company, the Principal Shareholder or the Selling Shareholder only if the representative shall have been advised by its counsel that representation of the underwriters and such indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct due to actual or potential differing interests between them (in which case the indemnifying party shall not have the right to assume to defense of such action, suit or proceeding on behalf of such underwriters, officers, employees and controlling persons). Furthermore, it is understood that the indemnifying parties shall, in connection with any one such action, suit or 33 proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such underwriters, officers, employees and controlling persons not having actual or potential differing interests with the indemnifying party or among themselves, which firm shall be designated in writing by Advest, Inc. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (f) If the indemnification provided for in this Section 10 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 10(a), 10(b), 10(c) or 10(d) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, the Principal Shareholder and the Selling Shareholder on the one hand and the Underwriters on the other hand from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Principal Shareholder and the Selling Shareholder, on the one hand, and the Underwriters, on the other hand, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Principal Shareholder and the Selling Shareholder on the one hand, and the Underwriters, on the other hand, with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company, the Principal Shareholder and the Selling Shareholder, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, on the other hand, bear to the total gross proceeds from the offering of the shares of the Stock under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Principal Shareholder, the Selling Shareholder or the 34 Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Principal Shareholder, the Selling Shareholder and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 10(f) shall be deemed to include, for purposes of this Section 10(f), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 10(f), (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Stock underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission and (ii) the Selling Shareholder shall not be required to contribute any amount in excess of the value (based on the initial public offering price) of any Stock sold by it pursuant to this Agreement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 10(f) are several in proportion to their respective underwriting obligations and not joint. (g) Any losses, claims, damages, liabilities or expenses (including legal) for which an indemnified party is entitled to indemnification or contribution under this Section 10 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. (h) The Underwriters severally confirm and the Company acknowledges that the statements with respect to the public offering of the Stock by the Underwriters set forth in the last paragraph of the cover page of, the legend concerning stabilization on the inside front cover page of and the third, fourth, fifth, sixth, ninth and tenth paragraphs appearing under the caption "Underwriting" in, the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. 11. Defaulting Underwriters. (a) If any Underwriter defaults in its obligation to purchase Stock on either Delivery Date, the Company may in its discretion arrange for the Company or another party or other parties to purchase such Stock on the terms contained herein within thirty-six (36) hours after such default by any Underwriter. In the event that, within the respective prescribed period, the Company notifies the Representative that it has so arranged for the purchase of such Stock, the Company shall have the right to postpone a Delivery Date for a period of not more than seven (7) days in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Representative 35 agrees to file promptly any amendments to the Registration Statement or the Prospectus that in its opinion may thereby be made necessary. The cost of preparing, printing and filing any such amendments shall be paid for by the Underwriters. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Stock. Any action taken under this Section 11 shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. (b) If, after giving effect to any arrangements for the purchase of the Stock of a defaulting Underwriter or Underwriters by you as provided in Section 11(a), if any, the aggregate number of such Stock which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate number of Stock to be purchased at such Delivery Date, then the Representative shall have the right to require each non-defaulting Underwriter to purchase the number of shares of Stock which such Underwriter agreed to purchase hereunder at such Delivery Date and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of shares of Stock which such Underwriter agreed to purchase hereunder) of the shares of Stock of such defaulting Underwriter or Underwriters for which such arrangements have not been made. 12. Termination. The obligations of the Underwriters hereunder may be terminated by the Representative by notice given to and received by the Company and the Selling Shareholder prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Section 9(l) or 9(m), shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement. 13. Reimbursement of Underwriters' Expenses. If the Company, the Selling Shareholder or the Principal Shareholder shall fail to tender the Firm Stock or the Option Stock, as the case may be, for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company, the Selling Shareholder, or the Principal Shareholder to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company, the Selling Shareholder, or the Principal Shareholder is not fulfilled (other than Section 9(m) hereof), the Company, or the Selling Shareholder, if the failure, refusal or inability to perform is on the part of the Selling Shareholder, or the Principal Shareholder if the failure, refusal or inability to perform is on the part of the Principal Shareholder, will reimburse the Underwriters for all out- of-pocket expenses (including fees and expenses of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Firm Stock or the Option Stock, as the case may be, and upon demand the Company, the Selling Shareholder or the Principal Shareholder, as the case may be, shall pay the full amount thereof to the Representative; provided, however, that if the Underwriters elect to purchase the Stock from the Company despite the failure, refusal or inability on the part of the Selling Shareholder or the Principal Shareholder, as the case may be, to perform any agreement on its part to be performed, the Selling Shareholder or the Principal Shareholder, as the case may be, shall only reimburse the Underwriters and the Company for the incremental costs incurred by reason of such failure, refusal or inability. If this Agreement is terminated pursuant to Section 11 by reason of the default of one or more Underwriters, the Company, the Selling Shareholder, and the Principal Shareholder shall not be obligated to reimburse any Underwriter on account of those expenses. 14. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: 36 (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Advest, Inc., One Rockefeller Plaza, 20th Floor, New York, New York 10020, Attention: Brett A. Chamberlain (Fax: 212-584-4292) (with a copy to Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, NY 10178, Attention: Christopher T. Jensen, Esq., Fax: 212-309-6273); (b) if to the Company or the Principal Shareholder, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Heidi J. Eddins (Fax: 508-795-0748) (with a copy to Hinckley, Allen & Snyder, 1500 Fleet Center, Providence, RI 02903- 2393, Attention: Margaret D. Farrell, Esq., Fax: 401-277-9600); (c) if to the Selling Shareholder, shall be delivered or sent by mail, telex or facsimile transmission to the Selling Shareholder at the address set forth on Schedule II hereto; provided, however, that any notice to an Underwriter pursuant to Section 10(e) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representative, which address will be supplied to any other party hereto by the Representative upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company, the Selling Shareholder and the Principal Shareholder shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Advest, Inc., as Representative. 15. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, the Principal Shareholder, the Selling Shareholder and their respective personal representatives and successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company, the Principal Shareholder and the Selling Shareholder contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act and any successor to any Underwriter and (B) the indemnity agreement of the Underwriters contained in Section 10(d) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 15, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 37 16. Survival; Effective Date. (a) The respective indemnities, representations, warranties and agreements of the Company, the Principal Shareholder, the Selling Shareholder and the Underwriters contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. In addition, the respective agreements, covenants, indemnities and other statements set forth in Sections 8, 10 and 13 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. (b) This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Stock may commence, when notification of the effectiveness of the Registration Statement or such post-effective amendment has been received by the Company and the Underwriters. Until such time as this Agreement shall become effective, it may be terminated by the Company, by notifying the Representative or by the Representative, by notifying the Company. 17. Definition of the Terms "Business Day" and "Subsidiary." For purposes of this Agreement, (a) "business day" means any day on which the New York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of New York without giving effect to any provisions regarding conflicts of laws. 19. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 20. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 38 If the foregoing correctly sets forth the agreement among the Company, the Principal Shareholder, the Selling Shareholder and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, PROVIDENCE AND WORCESTER RAILROAD COMPANY By ____________________________________________ Name: Title: ____________________________________________ Robert H. Eder, the Principal Shareholder The Selling Shareholder named in Schedule II to this Agreement By ____________________________________________ Name: Title: Accepted as of the date first written above: Advest, Inc. For itself and as Representative of the several Underwriters named in Schedule I hereto By ADVEST, Inc. By _______________________________ Name: Title: 39 SCHEDULE I Number of Number of Underwriters Shares ------------ --------- Advest, Inc. . . . . . . . . . . . . . . . Total 40 SCHEDULE II Number of Shares Name and address of the Selling Shareholder of Firm Stock - ------------------------------------------- ------------------- Total............................................. ========= 41 EX-1.2 3 FORM OF UNDERWRITERS WARRANTS EXHIBIT 1.2 THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. VOID AFTER 5:00 P.M., NEW YORK TIME, ON MARCH ____, 2003, OR IF NOT A BUSINESS DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT FOLLOWING BUSINESS DAY. WARRANT TO PURCHASE 50,000 SHARES OF COMMON STOCK NO. 1 WARRANT TO PURCHASE COMMON STOCK OF PROVIDENCE AND WORCESTER RAILROAD COMPANY TRANSFER RESTRICTED -- SEE SECTION 5.02 This certifies that, for good and valuable consideration, [Advest, Inc.] [Schneider Securities, Inc.], and its registered, permitted assigns (collectively, the "Warrant Holder"), is entitled to purchase from Providence and Worcester Railroad Company, a Rhode Island corporation (the "Company"), subject to the terms and conditions hereof, at any time on or after 9:00 A.M., New York time, on March ____, 1999 , and before 5:00 P.M., New York time, on March ____, 2003 (or, if such day is not a Business Day, at or before 5:00 P.M., New York time, on the next following Business Day), the number of fully paid and non-assessable shares of Common Stock stated above at the Exercise Price. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as provided in Article III hereof. ARTICLE I Definitions ----------- As used in this Warrant, the following capitalized terms shall have the following respective meanings: (a) Additional Demand Registration: See Section 6.02(c). ------------------------------ (b) Business Day: A day other than a Saturday, Sunday, or other day ------------ on which banks in the State of New York are authorized by law to remain closed. (c) Common Stock: Common stock, $.50 par value per share, of the ------------ Company. (d) Common Stock Equivalents: Securities that are convertible into or ------------------------ exercisable for shares of Common Stock. (e) Demand Registration: See Section 6.02. ------------------- (f) Exchange Act: Securities Exchange Act of 1934, as amended. ------------ (g) Exercise Price: $[insert exercise price: 155% of public offering -------------- price of shares of Common Stock] per Warrant Share, as such price may be adjusted from time to time pursuant to Article III hereof. (h) Expiration Date: 5:00 P.M., New York time, on March ____, 2003, --------------- or if such day is not a Business Day, the next succeeding day which is a Business Day. (i) Majority Holders: At any time as to which a Demand Registration ---------------- or an Additional Demand Registration is requested, the Holders who hold or have the right to acquire or hold, as the case may be, not less than 50% of the combined total of Warrant Shares issuable and Warrant Shares outstanding at the time such Demand Registration is requested. (j) Holders: Security Holders and Warrant Holders, collectively. ------- (k) NASD: National Association of Securities Dealers, Inc. ---- (l) NASDAQ: NASD Automatic Quotation System. ------ (m) Person: An individual, partnership, joint venture, corporation, ------ trust, unincorporated organization, or government or any department or agency thereof. (n) Piggyback Registration: See Section 6.01. ---------------------- (o) Prospectus: Any prospectus included in any Registration Statement ---------- that registers Registrable Securities in connection with a public offering covered by such Registration Statement and all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. (p) Public Offerings: A public offering of any of the Company's ---------------- equity or debt securities pursuant to a registration statement under the Securities Act. 2 (q) Registration Expenses: Any and all expenses incurred in --------------------- connection with any registration or action incident to performance of or compliance by the Company with Article VI, including, without limitation, (i) all SEC, national securities exchange, and NASD registration and filing fees; (ii) all listing fees and all transfer agent fees; (iii) all fees and expenses of complying with state securities or blue sky laws (including the fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities); (iv) all printing, mailing, messenger, and delivery expenses; and (v) all fees and disbursements of counsel for the Company and of its accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, but excluding underwriting discounts and commissions, brokerage fees, and transfer taxes, if any, and fees of counsel or accountants retained by the holders of Registrable Securities to advise them in their capacity as holders of Registrable Securities. (r) Registrable Securities: Any Warrant Shares issued to [Advest, ---------------------- Inc.] [Schneider Securities, Inc.] or its designees or transferees as permitted under Section 5.02 and other securities that may be or are issued by the Company upon exercise of this Warrant, including those which may thereafter be issued by the Company in respect of any such securities by means of any stock splits, stock dividends, recapitalizations, reclassifications, or the like, and as adjusted pursuant to Article III hereof. (s) Registration Statement: Any registration statement of the Company ---------------------- filed or to be filed with the SEC that covers any of the Registrable Securities pursuant to the provisions of this Warrant, including all amendments (including post-effective amendments) and supplements thereto, all exhibits thereto and all material incorporated therein by reference. (t) SEC: The Securities and Exchange Commission or any other federal --- agency at the time administering the Securities Act or the Exchange Act. (u) Securities Act: Securities Act of 1933, as amended. -------------- (v) Security Holder: A holder of Registrable Securities. --------------- (w) Transfer: See Section 5.02. -------- (x) Warrants: This Warrant, all other warrants issued on the date -------- hereof, and all other warrants that may be issued in its or their place (together evidencing the right to purchase an aggregate of 100,000 shares of Common Stock). (y) Warrant Holder: The person(s) or entity(ies) to whom this Warrant -------------- is originally issued, or any successor in interest thereto, or any assignee or transferee thereof, in whose name this Warrant is registered upon the books to be maintained by the Company for that purpose. 3 (z) Warrant Shares: Common Stock, Common Stock Equivalents, -------------- and other securities purchased or purchasable upon exercise of the Warrants. ARTICLE II Duration and Exercise of Warrant -------------------------------- Section 2.01: Duration of Warrant. Subject to the limitations specified ------------ ------------------- in Section 2.02(a)(ii) regarding a Cashless Exercise, the Warrant Holder may exercise this Warrant at any time and from time to time after 9:00 A.M., New York time, on March ____, 1999, and before 5:00 P.M., New York time, on the Expiration Date. If this Warrant is not exercised on or prior to the Expiration Date, it shall become void, and all rights hereunder shall thereupon cease. Section 2.02.: Exercise of Warrant. ------------- ------------------- (a) The Warrant Holder may exercise this Warrant, in whole or in part, as follows: (i) By presentation and surrender of this Warrant to the Company at its principal executive offices or at the office of its stock transfer agent, if any, with the Subscription Form annexed hereto duly executed and accompanied by payment of the full Exercise Price for each Warrant Share to be purchased; or (ii) By presentation and surrender of this Warrant to the Company at its principal executive offices with a Cashless Exercise Form annexed hereto duly executed (a "Cashless Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall exchange its warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares by a fraction, the numerator of which shall be the amount by which the then current market price per share of Common Stock exceeds the Exercise Price, and the denominator of which shall be the then current market price per share of Common Stock. For purposes of any computation under this Section 2.02(a)(ii), the then current market price per share of Common Stock at any date shall be deemed to be the last sale price of the Common Stock on the Business Day prior to the date of the Cashless Exercise or, in case no such reported sale take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price of the Common Stock as determined by the Board of Directors. 4 (b) Upon receipt of this Warrant, in the case of Section 2.02(a)(i), with the Subscription Form duly executed and accompanied by payment of the aggregate Exercise Price for the Warrant Shares for which this Warrant is then being exercised, or, in the case of Section 2.02(a)(ii), with the Cashless Exercise Form duly executed, the Company shall cause to be issued certificates for the total number of whole shares of Common Stock for which this Warrant is being exercised (adjusted to reflect the effect of the anti-dilution provisions contained in Article III hereof, if any, and as provided in Section 2.04 hereof) in such denominations as are requested for delivery to the Warrant Holder, and the Company shall thereupon deliver such certificates to the Warrant Holder. The Warrant Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Warrant Holder. If at the time this Warrant is exercised, a Registration Statement is not in effect to register under the Securities Act the Warrant Shares issuable upon exercise of this Warrant, the Company may require the Warrant Holder to make such representations, and may place such legends on certificates representing the Warrant Shares, as may be reasonably required in the opinion of counsel to the Company to permit the Warrant Shares to be issued without such registration. (c) In case the Warrant Holder shall exercise this Warrant with respect to less than all of the Warrant Shares that may be purchased under this Warrant, the Company shall execute a new warrant in the form of this Warrant for the balance of such Warrant Shares and deliver such new warrant to the Warrant Holder. (d) The Company shall pay any and all stock transfer and similar taxes which may be payable in respect of the issue of this Warrant or in respect of the issue of any Warrant Shares. Section 2.03: Reservation of Shares. The Company hereby agrees that at ------------- --------------------- all times there shall be reserved for issuance and delivery upon exercise of this Warrant such number of shares of Common Stock or other shares of capital stock of the Company from time to time issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid, and nonassessable, free and clear of all liens, security interests, charges, and other encumbrances or restrictions on sale and free and clear of all preemptive rights (except the restrictions imposed by the legend appearing at the top of Page 1 of this Warrant). Section 2.04: Fractional Shares. The Company shall not be required to ------------- ----------------- issue any fraction of a share of its capital stock in connection with the exercise of this Warrant, and in any case where the Warrant Holder would, except for the provisions of this Section 2.04, be entitled under the terms of this Warrant to receive a fraction of a share upon the exercise of this Warrant, the Company shall, upon the exercise of this Warrant and tender of the Exercise Price (as adjusted to cover the balance of the share), issue the larger number of whole shares purchasable upon exercise of this Warrant. The Company shall not be required to make any cash or other adjustment in respect of such fraction of a share to which the Warrant Holder would otherwise be entitled. 5 Section 2.05: Listing. Prior to the issuance of any shares of Common ------------- ------- Stock upon exercise of this Warrant, the Company shall secure the listing of such shares of Common Stock upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other shares of Common Stock shall so be listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. ARTICLE III Adjustment of Shares of Common Stock Purchasable and of Exercise Price --------------------------------- The Exercise Price and the number and kind of Warrant Shares shall be subject to adjustment from time to time upon the happening of certain events as provided in this Article III. Section 3.01: Mechanical Adjustments. (a) If at any time prior to the ------------- ---------------------- exercise of this Warrant in full, the Company shall (i) declare a dividend or make a distribution on the Common Stock payable in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class); (ii) subdivide, reclassify, or recapitalize outstanding Common Stock into a greater number of shares; (iii) combine, reclassify, or recapitalize its outstanding Common Stock into a smaller number of shares; or (iv) issue any shares of its capital stock by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or a merger in which the Company is the continuing corporation) the Exercise Price in effect at the time of the record date of such dividend, distribution, subdivision, combination, reclassification, or recapitalization shall be adjusted so that the Warrant Holder shall be entitled to receive the aggregate number and kind of shares which, if this Warrant had been exercised in full immediately prior to such event, the Warrant Holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, distribution, subdivision, combination, reclassification, or recapitalization. Any adjustment required by this Section 3.01(a) shall be made successively immediately after the record date, in the case of a dividend or distribution, or the effective date, in the case of a subdivision, combination, reclassification, or recapitalization to allow the purchase of such aggregate number and kind of shares. (b) In case the Company shall distribute to all holders of Common Stock (including any such distribution to be made in connection with a consolidation or merger in which the Company is to be the continuing corporation) of evidences of its indebtedness, any other securities of the Company, or any cash, property, or other assets (excluding a (i) combination, reclassification, or recapitalization referred to in Section 3.01(a), (ii) cash dividends or cash distributions paid out of 6 net profits legally available therefor and in the ordinary course of business, and (iii) subscription rights, options, or warrants for Common Stock or Common Stock Equivalents (any such nonexcluded event being herein called a "Special Dividend"), (A) the Exercise Price shall be decreased immediately after the distribution of such Special Dividend to a price determined by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be the then current market price of the Common Stock (as defined in Section 3.01(e)) on the date of such distribution less the fair market value (as determined by the Company's Board of Directors) of the evidences of indebtedness, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Common Stock or of such subscription rights, options, or warrants applicable to one share of Common Stock and the denominator of which shall be such then current market price per share of Common Stock (as so determined) and (B) the number of shares of Common Stock subject to purchase upon exercise of this Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock subject to purchase immediately before such Special Dividend by a fraction, the numerator of which shall be the Exercise Price in effect immediately before such Special Dividend and the denominator of which shall be the Exercise Price in effect immediately after such Special Dividend. Any adjustment required by this Section 3.01(b) shall be made successively whenever any such distribution is made and shall become effective on the date of the distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (c) If at any time prior to the exercise of this Warrant in full, the Company shall make a distribution to all holders of the Common Stock of stock of a subsidiary or securities convertible into or exercisable for such stock, then in lieu of an adjustment in the Exercise Price or the number of Warrant Shares purchasable upon the exercise of this Warrant, each Warrant Holder, upon the exercise hereof at any time after such distribution, shall be entitled to receive from the Company, such subsidiary or both, as the Company shall determine, the stock or other securities to which such Warrant Holder would have been entitled if such Warrant Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in this Article III, and the Company shall reserve, for the life of the Warrant, such securities of such subsidiary or other corporation; provided, however, that no adjustment in respect of dividends or interest on such stock or other securities shall be made during the term of this Warrant or upon its exercise. (d) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to one or more of paragraphs (a) and (b) of this Section 3.01, the Warrant Shares shall simultaneously be adjusted by multiplying the number of Warrant Shares initially issuable upon exercise of each Warrant by the Exercise Price in effect on the date of such adjustment and dividing the product so obtained by the Exercise Price, as adjusted. (e) For the purpose of any computation under this Section 3.01, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for 20 consecutive trading days commencing 30 trading days before such date. The closing price for each day shall be the last sale price regular way or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices regular way, in either case on the 7 principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors of the Company. (f) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least twenty-five cents ($.25) in such price; provided, however, that any -------- ------- adjustments which by reason of this Section 3.01(f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3.01 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Notwithstanding anything in this Section 3.01 to the contrary, the Exercise Price shall not be reduced to less than the then existing par value of the Common Stock as a result of any adjustment made hereunder. (g) In the event that at any time, as a result of any adjustment made pursuant to Section 3.01(a), the Warrant Holder thereafter shall become entitled to receive any shares of the Company other than Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 3.01(a). Section 3.02: Notice of Adjustment. Whenever the number of Warrant Shares ------------ -------------------- or the Exercise Price is adjusted as herein provided, the Company shall prepare and deliver forthwith to the Warrant Holder a certificate signed by its President, and by any Vice President, Treasurer, or Secretary, setting forth the adjusted number of shares purchasable upon the exercise of this Warrant and the Exercise Price of such shares after such adjustment, a brief statement of the facts requiring such adjustment, and the computation by which adjustment was made. Section 3.03: No Adjustment for Dividends. Except as provided in Section ------------ --------------------------- 3.01 of this Warrant Agreement, no adjustment in respect of any cash dividends paid by the Company shall be made during the term of this Warrant or upon the exercise of this Warrant. Section 3.04: Preservation of Purchase Rights in Certain Transactions. In ------------ ------------------------------------------------------- case of any reclassification, capital reorganization, or other change of outstanding shares of Common Stock (other than a subdivision or a combination of the outstanding Common Stock and other than a change in the par value of the Common Stock or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which the Company is the continuing corporation and said merger does not result in any reclassification, capital reorganization, or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant)) or in case of any sale, lease, transfer, or conveyance to another corporation of the property and assets of the Company as an entirety or substantially as an entirety, the Company shall, as a condition precedent to such transaction, cause such successor or purchasing 8 corporation, as the case may be, to execute with the Warrant Holder an agreement granting the Warrant Holder the right thereafter, upon payment of the Exercise Price in effect immediately prior to such action, to receive upon exercise of this Warrant the kind and amount of shares and other securities and property which he would have owned or have been entitled to receive after the happening of such reclassification, change, consolidation, merger, sale, or conveyance had this Warrant been exercised immediately prior to such action. Such agreement shall provide for adjustments in respect of such shares of stock and other securities and property, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article III. In the event that in connection with any such reclassification, capital reorganization, change, consolidation, merger, sale, or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution, or payment, in whole or in part, for, or of, a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Article III. The provisions of this Section 3.04 shall similarly apply to successive reclassification, capital reorganizations, consolidations, mergers, sales, or conveyances. Section 3.05: Form of Warrant After Adjustments. The form of this Warrant ------------ --------------------------------- need not be changed because of any adjustments in the Exercise Price or the number or kind of the Warrant Shares, and Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in this Warrant, as initially issued. Section 3.06: Treatment of Warrant Holder. Prior to due presentment for ------------ --------------------------- registration of transfer of this Warrant, the Company may deem and treat the Warrant Holder as the absolute owner of this Warrant (notwithstanding any notation of ownership or other writing hereon) for all purposes and shall not be affected by any notice to the contrary. ARTICLE IV Other Provisions Relating to Rights of Warrant Holder --------------------------- Section 4.01: No Rights as Shareholders; Notice to Warrant Holders. ------------ ---------------------------------------------------- Nothing contained in this Warrant shall be construed as conferring upon the Warrant Holder or his or its transferees the right to vote or to receive dividends or to consent to or receive notice as a shareholder in respect of any meeting of shareholders for the election of directors of the Company or any other matter or any other rights whatsoever as shareholders of the Company. The Company shall give notice to the Warrant Holder by registered mail if at any time prior to the expiration or exercise in full of the Warrants any of the following events shall occur: (a) the Company shall authorize the payment of any dividend upon shares of Common Stock payable in any securities or authorize the making of any distribution (other than a cash dividend subject to the parenthetical set forth in Section 3.01(b)) to all holders of Common Stock; 9 (b) the Company shall authorize the issuance to all holders of Common Stock of any additional shares of Common Stock or Common Stock Equivalents or of rights, options, or warrants to subscribe for or purchase Common Stock or Common Stock Equivalents or of any other subscription rights, options, or warrants; (c) a dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale or conveyance of the property of the Company as an entirety or substantially as an entirety); or (d) a capital reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in the par value of the Common Stock) or any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and that does not result in any reclassification or change of Common Stock outstanding) or in the case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety. Such giving of notice shall be initiated at least 10 Business Days prior to the date fixed as a record date or effective date or the date of closing of the Company's stock transfer books for the determination of the shareholders entitled to such dividend, distribution, or subscription rights or for the determination of the shareholders entitled to vote on such proposed merger, consolidation, sale, conveyance, dissolution, liquidation, or winding up. Such notice shall specify such record date or the date of closing the stock transfer books, as the case may be. Failure to provide such notice shall not affect the validity of any action taken in connection with such dividend, distribution, or subscription rights, or proposed merger, consolidation, sale, conveyance, dissolution, liquidation, or winding up. Section 4.02: Lost, Stolen, Mutilated, or Destroyed Warrants. If this ------------ ---------------------------------------------- Warrant is lost, stolen, mutilated, or destroyed, the Company may, on such terms as to indemnity or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as and in substitution for this Warrant. ARTICLE V Split-Up, Combination, Exchange, and Transfer of Warrants ---------------------------------- Section 5.01: Split-Up, Combination, Exchange, and Transfer of Warrants. ------------ --------------------------------------------------------- Subject to the provisions of Section 5.02 hereof, this Warrant may be split up, combined, or exchanged for another Warrant or Warrants containing the same terms to purchase a like aggregate number of Warrant Shares. If the Warrant Holder desires to split up, combine, or exchange Warrants, he or it shall make such request in writing delivered to the Company and shall surrender to the Company any Warrants 10 to be so split up, combined, or exchanged. Upon any such surrender for a split up, combination, or exchange, the Company shall execute and deliver to the person entitled thereto a Warrant or Warrants, as the case may be, as so requested. The Company shall not be required to effect any split up, combination, or exchange which will result in the issuance of a Warrant entitling the Warrant Holder to purchase upon exercise a fraction of a share of Common Stock or a fractional Warrant. The Company may require such Warrant Holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split up, combination, or exchange of Warrants. Section 5.02: Restrictions on Transfer. Neither this Warrant nor the ------------ ------------------------ Warrant Shares may be disposed of or encumbered (any such action, a "Transfer"), except (i) to Advest, Inc., any successor to the business of such company, or any officer of such company, (ii) to Schneider Securities, Inc., any successor to the business of such company, or any officer of such company, or (iii) to any underwriter in connection with a Public Offering of the Common Stock, provided (as to (iii)) that this Warrant is exercised upon such Transfer and the shares of Common Stock issued upon such exercise are sold by such underwriter as part of such Public Offering and, as to (i), (ii), and (iii), only in accordance with and subject to the provisions of the Securities Act and the rules and regulations promulgated thereunder; and provided, further, however, that this -------- ------- ------- Warrant is restricted from sale, transfer, assignment or hypothecation until March __, 1999, except to members of the selling group in the Company's public offering commenced on March __, 1998 and their respective officers and partners. If at the time of a Transfer, a Registration Statement is not in effect to register this Warrant or the Warrant Shares, the Company may require the Warrant Holder to make such representations and may place such legends on certificates representing this Warrant, as may be reasonably required in the opinion of counsel to the Company to permit a Transfer without such registration. ARTICLE VI Registration Under the Securities Act ------------------------------------- Section 6.01: Piggyback Registration. ------------ ---------------------- (a) Right to Include Registrable Securities. If at any time or --------------------------------------- from time to time after March ___, 1999 and prior to March ___, 2005, the Company proposes to register any of its securities for public sale under the Securities Act, whether or not for its own account (other than by a registration statement on Form S-4, Form S-8, or other form which does not include substantially the same information as would be required in a form for the general registration of securities or would not be available for the Registrable Securities) (a "Piggyback Registration"), it shall as expeditiously as possible give written notice to all Holders of its intention to do so and of such Holders' rights under this Section 6.01, unless, in the opinion of counsel to the Company reasonably acceptable to any such Holder of Warrants or Warrant Shares who wishes to have Warrant Shares included in such registration statement, registration under the Securities Act is not required pursuant to Rule 144(k) thereunder for the transfer of such Warrants and/or Warrant Shares in the manner proposed by such Holders. Such rights are referred to hereinafter as "Piggyback Registration Rights." Upon the written request of any such Holder made within 20 days after receipt of any such 11 notice (which request shall specify the Registrable Securities intended to be disposed of by such Holder), the Company shall include in the Registration Statement the Registrable Securities which the Company has been so requested to register by the Holders thereof and the Company shall keep such registration statement in effect and maintain compliance with each federal and state law or regulation for the period necessary for such Holder to effect the proposed sale or other disposition (but in no event for a period greater than 120 days), provided that the Company shall not be obligated to honor any request to register Warrant Shares that represent in the aggregate fewer than 25% of the aggregate number of Warrant Shares. (b) Withdrawal of Piggyback Registration by Company. If, at any time ----------------------------------------------- after giving written notice of its intention to register any securities in a Piggyback Registration but prior to the effective date of the related Registration Statement, the Company shall determine for any reason not to register such securities, the Company shall give written notice of such determination to each Holder and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such Piggyback Registration. All best efforts obligations of the Company pursuant to Section 6.03 shall cease if the Company determines to terminate prior to such effective date any registration where Registrable Securities are being registered pursuant to this Section 6.01. (c) Piggyback Registration of Underwritten Public Offerings. If a ------------------------------------------------------- Piggyback Registration involves an offering by or through underwriters, then, (i) all Holders requesting to have their Registrable Securities included in the Company's Registration Statement must sell their Registrable Securities to the underwriters selected by the Company on the same terms and conditions as apply to other selling shareholders and (ii) any Holder requesting to have his or its Registrable Securities included in such Registration Statement may elect in writing, not later than five Business Days prior to the filing of the Registration Statement filed in connection with such registration, not to have his or its Registrable Securities so included in connection with such registration. (d) Payment of Registration Expenses for Piggyback Registration. The ----------------------------------------------------------- Company shall pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to a Piggyback Registration Right contained in this Section 6.01. (e) Priority in Piggyback Registration. If a Piggyback Registration ---------------------------------- involves an offering by or through underwriters, the Company shall not be required to include Registrable Shares therein if and to the extent the underwriter managing the offering reasonably believes in good faith and advises each Holder requesting to have Registrable Securities included in the Company's Registration Statement that such inclusion would materially adversely affect such offering; provided that (i) if other selling shareholders who are employees, officers or directors of the Company have requested registration of securities in the proposed offering, the Company will reduce or eliminate such other selling shareholders' securities before any reduction or elimination of Registrable Securities; (ii) any such reduction or elimination (after taking into account the effect of clause (i)) shall be pro rata to all other holders of -------- the securities of the Company exercising "Piggyback Registration Rights" similar to those set forth herein in proportion to the respective number of shares 12 they have requested to be registered, and (iii) in such event, such Holders may delay any offering by them of all Registrable Shares requested to be included (or that portion of such Registrable Shares eliminated for such period, not to exceed 60 days, as the managing underwriter shall request) and the Company shall file such supplements and post-effective amendments and take such other action necessary under federal and state law or regulation as may be necessary to permit such Holders to make their proposed offering for a period of 90 days following such period of delay. (f) The Company shall be obligated pursuant to this Section 6.01 to include in the Piggyback Registration, Warrant Shares that have not yet been purchased by a Holder of Warrants so long as such Holder of Warrants submits to the Company an irrevocable undertaking reasonably satisfactory to the Company that such Holder intends to exercise Warrants representing the number of Warrant Shares to be included in such Piggyback Registration prior to the consummation of the offering covered by such Piggyback Registration. In addition, such Holder of Warrants is permitted to pay the Company the Exercise Price for such Warrant Shares upon the consummation of the offering covered by such Piggyback Registration. Section 6.02: Demand Registration. ------------ -------------------- (a) Request for Registration. If, on no more than two ------------------------ occasions (such occasions the "Demand Registration" and "Additional Demand Registration" defined in Sections 6.02(a) and 6.02(b), respectively) subsequent to March ___, 1999 and prior to March ___, 2003, a Majority of Holders requests that the Company file a registration statement on Form S-3 under the Securities Act (or any successor provision), the Company as soon as practicable shall use its best efforts to file a registration statement with respect to all Warrant Shares that it has been so requested to include and obtain the effectiveness thereof, and to take all other action necessary under any federal or state law or regulation to permit the Warrant Shares that are then held and/or that may be acquired upon the exercise of the Warrants specified in the notices of the Holders thereof to be sold or otherwise disposed of, and the Company shall maintain such compliance with each such federal and state law and regulation for the period necessary for such Holders to effect the proposed sale or other disposition (but in no event for more than 120 days); provided, however, the -------- ------- Company shall be entitled to defer such registration for a period of up to 60 days if and to the extent that its Board of Directors shall determine that such registration would interfere with a pending corporate transaction, provided, -------- further, that the Company shall have no obligation to comply with the foregoing - ------- provisions of this Section 6.02(a) if in the opinion of counsel to the Company reasonably acceptable to the Holder or Holders from whom such written requests has been received, registration under the Securities Act is not required pursuant to Rule 144(k) thereunder for the transfer of the Warrant Shares proposed to be offered in the manner proposed by such person or persons or that a post-effective amendment to an existing registration statement would be legally sufficient for such transfer (in which latter event the Company shall promptly file such post-effective amendment and use its best efforts to cause such amendment to become effective under the Securities Act). The Company shall also promptly give written notice to the Holders of any other Warrants or Warrant Shares who or that have not made a request to the Company pursuant to the provisions of this Section 6.02(a) of its intention to effect any required registration or qualification and shall use its 13 best efforts to effect as expeditiously as possible such registration or qualification of all other such Warrant Shares that are then held or that may be acquired upon the exercise of the Warrants, the Holders of which have requested such registration or qualification, within 15 days after such notice has been given by the Company, as provided in the preceding sentence. (b) Demand Registration; Payment of Registration Expenses for Demand ---------------------------------------------------------------- Registration. The Company shall pay all Registration Expenses (excluding fees - ------------ and expenses of the Holders' counsel and any underwriting or selling commissions), in connection with one Demand Registration pursuant to Section 6.02(a), provided such expenses do not exceed $25,000. Notwithstanding the provisions of Section 6.02(a), the Company shall be required to effect a registration or qualification in which it bears the Registration Expenses on one occasion only. (c) Additional Demand Registration; Payment of Registration Expenses ---------------------------------------------------------------- for Additional Demand Registration. If a Majority of Holders request the - ---------------------------------- Company to effect an Additional Demand Registration pursuant to this Section 6.02(c), in addition to a Demand Registration pursuant to Section 6.02(b), the Holders who or that have made the request shall pay all Registration Expenses in connection with such Additional Demand Registration. Notwithstanding the provisions of Section 6.02(b), the Company shall be required to effect such registration or qualification, in which the Holders bear the Registration Expenses, on one occasion only. (d) Selection of Underwriters. If the Demand Registration or ------------------------- Additional Demand Registration is requested to be in the form of an underwritten offering, the managing underwriter shall be Advest, Inc. and the co-manager (if any) and the independent pricer required under the rules of the NASD (if any) shall be selected and obtained by the Holders of a majority of the Warrant Shares to be registered. Such selection shall be subject to the Company's consent, which consent shall not be unreasonably withheld. All fees and expenses (other than Registration Expenses otherwise required to be paid) of any managing underwriter, any co-manager or any independent underwriter or other independent pricer required under the rules of the NASD shall be paid for by such underwriters or by the Holders whose shares are being registered. If Advest, Inc. should decline to serve as managing underwriter, the Holders of a majority of the Warrant Shares to be registered may select and obtain one or more managing underwriters. Such selection shall be subject to the Company's consent, which consent shall not be unreasonably withheld. (e) The Company shall be obligated pursuant to this Section 6.02 to include in the registration statement Warrant Shares that have not yet been purchased by a Holder of Warrants so long as such Holder of Warrants submits to the Company an irrevocable undertaking reasonably satisfactory to the Company that such Holder intends to exercise Warrants representing the number of Warrant Shares to be included in such registration statement prior to the consummation of the public offering with respect to such Warrant Shares. In addition, such Holder of Warrants is permitted to pay the Company the Exercise Price for such Warrant Shares upon the consummation of the public offering with respect to such Warrant Shares. 14 Section 6.03: Registration Procedures. If and whenever the Company is ------------ ----------------------- required to use its best efforts to take action pursuant to any federal or state law or regulation to permit the sale or other disposition of any Warrant Shares that are then held or that may be acquired upon exercise of the Warrants, in order to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Article VI, the Company shall, as expeditiously as practicable: (a) furnish to each selling Holder and the underwriters, if any, without charge, as many copies of the Registration Statement, the Prospectus or the Prospectuses (including each preliminary prospectus), and any amendment or supplement thereto as they may reasonably request; (b) enter into such agreements (including an underwriting agreement) and take all such other actions reasonably required in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, if the registration is in connection with an underwritten offering (i) make such representations and warranties to the underwriters in such form, substance, and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions in form, scope, and substance shall be reasonably satisfactory to the underwriters) addressed to the underwriters and the Holders covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such underwriters; (iii) obtain "cold comfort" letters and updates thereof from the Company's accountants addressed to the underwriters, such letters to be in customary form and to cover matters of the type customarily covered in "cold comfort" letters to underwriters and the Holders in connection with underwritten offerings; (iv) set forth in full, in any underwriting agreement entered into, the indemnification provisions and procedures of Section 6.04 hereof with respect to all parties to be indemnified pursuant to said Section; and (v) deliver such documents and certificates as may be reasonably requested by the underwriters to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company; the above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (c) make available for inspection by one or more representatives of the selling Holders, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by such Holders or underwriter all financial and other records, pertinent corporate documents, and properties of the Company and cause the Company's officers, directors, and employees to supply all information reasonably requested by any such representatives in connection with such registration; and (d) otherwise use its best efforts to comply with all applicable federal and state regulations; and take such other action as may be reasonably necessary or advisable to enable each such Holder and each such underwriter to consummate the sale or disposition in such jurisdiction or jurisdiction, in which any such Holder or underwriter shall have requested that the Registrable Securities be sold. 15 Except as otherwise provided in this Warrant Agreement, the Company shall have sole control in connection with the preparation, filing, withdrawal, amendment, or supplementing of each Registration Statement, the selection of underwriters, and the distribution of any preliminary prospectus included in the Registration Statement, and may include within the coverage thereof additional shares of Common Stock or other securities for its own account or for the account of one or more of its other security holders. Each seller of Registrable Securities as to which any registration is being effected shall furnish to the Company such information regarding the distribution of such securities and such other information as may otherwise be required by the Securities Act to be included in such Registration Statement. Section 6.04: Indemnification. ------------ --------------- (a) Indemnification by Company. In connection with each -------------------------- Registration Statement relating to disposition of Registrable Securities, the Company shall indemnify and hold harmless each Holder and each underwriter of Registrable Securities and each Person, if any, who controls such Holder or underwriter (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) against any and all losses, claims, damages, and liabilities, joint or several (including any reasonable investigation, legal, and other expenses incurred in connection with, and any amount paid in settlement of any action, suit, or proceeding or any claim asserted), to which they, or any of them, may become subject under the Securities Act, the Exchange Act, or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages, or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary prospectus, or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that such indemnity shall not inure to the benefit of any - -------- ------- Holder or underwriter (or any Person controlling such Holder or underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) on account of any losses, claims, damages, or liabilities arising from the sale of Registrable Securities if such untrue statement or omission or alleged untrue statement or omission was made in such Registration Statement, Prospectus or preliminary prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Company by the Holder or underwriter specifically for use therein. The Company shall also indemnify selling brokers, dealer managers, and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders of Registrable Securities, if requested. This indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) Indemnification by Holder. In connection with each ------------------------- Registration Statement, each Holder shall indemnify, to the same extent as the indemnification provided by the Company 16 in Section 6.04(a), the Company, its directors, and each officer who signs the Registration Statement and each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act) but only insofar as such losses, claims, damages, and liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in the Registration Statement, the Prospectus or preliminary prospectus, or any amendment thereof or supplement thereto, in reliance upon and in conformity with information furnished in writing by such Holder to the Company specifically for use therein. In no event shall the liability of any selling Holder of Registrable Securities hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers, and similar securities industry professionals participating in the distribution, to the same extent as provided above, with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus, Registration Statement or preliminary prospectus, or any amendment thereof or supplement thereto. (c) Conduct of Indemnification Procedure. Any party that proposes to ------------------------------------ assert the right to be indemnified hereunder will, promptly after receipt of notice of commencement of any action, suit, or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit, or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 6.04(a) or 6.04(b) shall be available to any party who shall fail to give notice as provided in this Section 6.04(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the omission so to notify such indemnifying party of any such action, suit, or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit, or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have been advised by its counsel that representation of the indemnified party and such indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct due to actual or potential differing interests between them (in which case the indemnifying parties shall not have the right to direct the 17 defense of such action on behalf of the indemnified party), or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying parties. Furthermore, it is understood that the indemnifying parties shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such indemnified parties not having actual or potential differing interests with the indemnifying party or among themselves. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding, or claim effected without its written consent. (d) Contribution. In connection with each Registration ------------ Statement relating to the disposition of Registrable Securities, if the indemnification provided for in Section 6.04(a) is unavailable to an indemnified party thereunder in respect of any losses, claims, damages, or liabilities referred to therein, then the Company shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, or liabilities. The amount to be contributed by the Company hereunder shall be an amount which is in the same proportionate relationship to the total amount of such losses, claims, damages, or liabilities as the total net proceeds from the offering (before deducting expenses) of the Registrable Securities bears to the total price to the public (including underwriters' discounts) for the offering of the Registrable Securities covered by such registration. (e) Specific Performance. The Company and the Holder -------------------- acknowledge that remedies at law for the enforcement of this Section 6.04 may be inadequate and intend that this Section 6.04 shall be specifically enforceable. ARTICLE VII Other Matters ------------- Section 7.01: Amendments and Waivers. The provisions of this Warrant, ------------ ---------------------- including the provisions of this sentence, may not be amended, modified, or supplemented, and waiver or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of at least a Majority of Holders. Holders shall be bound by any consent authorized by this Section 7.01 whether or not certificates representing Registrable Securities held by such Holders have been marked to indicate such consent. Section 7.02: Counterparts. This Warrant may be executed in any number of ------------ ------------ counterparts and by the parties hereto in separate counterparts, each of which so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 18 Section 7.03: Governing Law. This Warrant shall be governed by and ------------ ------------- construed in accordance with the laws of the State of New York. Section 7.04: Severability. In the event that any one or more of the ------------ ------------ provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal, or unenforceable, the validity, legality, and enforceability of any such provisions in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. Section 7.05: Attorneys' Fees. In any action or proceeding brought to ------------ --------------- enforce any provisions of this Warrant, or where any provisions hereof or thereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees and disbursements in addition to its costs and expenses and any other available remedy. Section 7.06: Computations of Consent. Whenever the consent or approval ------------ ----------------------- of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its affiliates (other than the Warrant Holder or subsequent Holders if they are deemed to be such affiliates solely by reason of their holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. Section 7.07: Notice. Any notices or certificates by the Company to the ------------ ------ Warrant Holder and by the Warrant Holder to the Company shall be deemed delivered if in writing and delivered in person or by registered mail (return receipt requested) to the Holder addressed to him in care of Advest, Inc., 90 State House Square, Hartford, Connecticut 06103 or, if the Warrant Holder has designated, by notice in writing to the Company, any other address, to such other address, and if to the Company, addressed to it at Providence and Worcester Railroad Company, 75 Hammond Street, Worcester, Massachusetts 01610. The Company may change its address by written notice to the Warrant Holder and the Warrant Holder may change his or its address by written notice to the Company. 19 IN WITNESS WHEREOF, this Warrant has been duly executed by the Company as of the ___ day of , 1998. PROVIDENCE AND WORCESTER RAILROAD COMPANY By:____________________________ Name: Title: 20 ASSIGNMENT (To be executed only upon assignment of Warrant Certificate) For value received, _________________________ hereby sells, assigns, and transfers unto _______________________ the within Warrant Certificate, together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company with respect to the number of Warrants set forth below, with full power of substitution in the premises: Name(s) of Assignees (s) Address No. of Warrants ------------- ------- --------------- And if said number of Warrants shall not be all the Warrants represented by the Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the Warrants represented by said Warrant Certificate Dated: ___________________, ______ -------------------------- Note: The above signature should correspond exactly with the name on the face of this Warrant Certificate. 21 SUBSCRIPTION FORM (TO BE EXECUTED UPON EXERCISE OF WARRANT PURSUANT TO SECTION 2.02(A)(I)) The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder shares of Common Stock, as provided for therein, and tenders herewith payment of the purchase price in full in the form of cash or a certified or official bank check in the amount of $ . Please issue a certificate or certificates for such Common Stock in the name of: Name ______________________________________ (Please Print Name, Address, and Social Security Number) Signature_______________________________________ NOTE: The above signature should respond exactly with the name on the first page of this Warrant Certificate or with the name of the assignee appearing in the assignment form below. And if said number of shares shall not be all the shares purchasable under the within Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder rounded up to the next higher number of shares. 22 CASHLESS EXERCISE FORM (TO BE EXECUTED UPON EXERCISE OF WARRANT PURSUANT TO SECTION 2.02(A)(II)) The undersigned hereby irrevocably elects to exchange its Warrant for such shares of Common Stock pursuant to the Cashless Exercise provisions of the within Warrant Certificate, as provided for in Section 2.02 (a)(ii) of such Warrant Certificate. Please issue a certificate or certificates for such Common Stock in the name of: Name_________________________________________ (Please Print Name, Address, and Social Security Number) Signature________________________ NOTE: The above signature should correspond exactly with the name on the first page of this Warrant Certificate or with the name of the assignee appearing in the assignment form below. And if said number of shares shall not be all the shares exchangeable or purchasable under the within Warrant Certificate, a new Warrant Certificate is to be issued in the name of the undersigned for the balance remaining of the shares purchasable rounded up to the next higher number of shares. 23 EX-5 4 OPINION OF HINCKLEY ALLEN & SNYDER EXHIBIT 5 HINCKLEY, ALLEN & SNYDER 1500 Fleet Center Providence, RI 02903 March 2, 1998 Providence and Worcester Railroad Company 75 Hammond Street Worcester, MA 01610 Re: Registration Statement on Form S-1; Registration No. 333-46433 Gentlemen: In our capacity as counsel to Providence and Worcester Railroad Company, a Rhode Island corporation (the "Company"), we have been asked to render this opinion in connection with a Registration Statement on Form S-1, originally filed by the Company on February 17, 1998 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Registration Statement"), covering (i) up to 1,000,000 shares of Common Stock, par value of $.50 per share of the Company (the "Common Stock") being offered for the account of the Company (the "Company's Shares"), (ii) up to 25,000 shares of Common Stock being offered for the account of the selling shareholder (the "Shareholder's Shares"), and (iii) up to 153,750 additional shares of Common Stock being offered for the account of the principal shareholder (the "Principal Shareholder") solely to cover over-allotments, if any (the "Over-Allotment Shares"). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Registration Statement. In connection with this opinion, we have examined the Company's Charter, as amended to date, the Amendment to the Company's Charter increasing the authorized Common Stock to 15,000,000 shares (the "Amendment") and the Company's Restated Charter (the "Restated Charter") incorporating the Amendment to be filed prior to the effectiveness of the Registration Statement, the By-Laws of the Company, as amended and restated, the Registration Statement, including exhibits thereto, corporate proceedings of the Company relating to issuance of the Shares, and such other instruments and documents as we have deemed relevant under the circumstances. In addition, we have examined and relied upon such other certificates, documents and materials and have made such other inquiries of fact or law as we have deemed necessary or appropriate in connection with this opinion. In making the aforesaid examination, we have assumed the genuineness of all signatures and the conformity to original documents of all copies furnished to us as originals or photostatic copies. We have also assumed that the corporate records furnished to us by the Company include all corporate proceedings regarding the issuance of the Shares taken by the Company to date, and that the filing of the Amendment and the Restated Charter, required to give effect to an increase in the authorized Common Stock prior to the Offering and which will not take place until immediately before the Offering, has occurred. Based upon and subject to the foregoing, we are of the opinion that: 1. The Company's Shares have been duly and validly authorized and, when issued and delivered by the Company against payment therefor pursuant to the terms and conditions of the Underwriting Agreement filed as exhibit to the Registration Statement, will be duly and validly issued, fully paid and non- assessable shares of Common Stock. 2. The Shareholder's Shares, and any Over-Allotment Shares which may be sold by the Principal Shareholder, have been duly and validly authorized and issued and are fully paid and non-assessable. We hereby consent to the use of our opinion as herein set forth as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus forming a part of the Registration Statement. This opinion is rendered to you in connection with the Offering and, except as consented to in the preceding sentence, may not be relied upon or furnished to any other person in any context. In giving such consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, Hinckley, Allen & Snyder EX-10.1 5 SECURED SUBORDINATED NOTE & WARRANT AGREEMENT EXHIBIT 10.1 PROVIDENCE AND WORCESTER RAILROAD COMPANY Secured Subordinated Note and Warrant Purchase Agreement Dated as of December 19, 1995 PROVIDENCE AND WORCESTER RAILROAD COMPANY Secured Subordinated Note and Warrant Purchase Agreement -------------------------------------------------------- Dated as of December 19, 1995 INDEX -----
Page ---- ARTICLE I............................................................... 1 PURCHASE, SALE AND TERMS OF NOTES AND WARRANTS.......................... 1 1.01. The Notes................................................ 1 1.02. The Warrants............................................. 1 1.03. Purchase and Sale of Notes and Warrants.................. 1 (a) The Closing.................................... 1 (b) Allocation of Purchase Price................... 2 (c) Use of Proceeds................................ 2 1.04. Payments and Endorsements................................ 2 1.05. Redemptions.............................................. 2 (a) Required Redemptions........................... 2 (b) Optional Redemptions With Premium.............. 3 (c) Notice of Redemptions; Pro Rata Redemptions.... 4 1.06. Payment on Non-Business Days............................. 4 1.07. Registration, etc........................................ 4 1.08. Transfer and Exchange of Notes........................... 5 1.09. Replacement of Notes..................................... 5 1.10. Subordination............................................ 5 (a) Payment of Senior Debt......................... 5 (b) No Payment on Notes Under Certain Conditions... 6 (c) Payments Held in Trust......................... 6 (d) Subrogation.................................... 6 (e) Scope of Section............................... 7 (f) Survival of Rights............................. 7 (g) Amendment or Waiver............................ 7 (h) Senior Debt Defined............................ 7 1.11. Representations by the Purchaser......................... 8 1.12. Disclosure of Information by the Purchaser............... 8 ARTICLE II.............................................................. 8 CONDITIONS TO PURCHASER'S OBLIGATION.................................... 8 2.01. Representations and Warranties........................... 8 2.02. Documentation at Closing................................. 9
i
Page ---- ARTICLE III........................................................................... 10 REPRESENTATIONS AND WARRANTIES........................................................ 10 3.01. Organization and Standing of the Company............................... 10 3.02. Corporate Action....................................................... 10 3.03. Governmental Approvals................................................. 10 3.04. Litigation............................................................. 10 3.05. Compliance with Other Instruments...................................... 11 3.06. Federal Reserve Regulations............................................ 11 3.07. Title to Assets, Patents............................................... 11 3.08. Financial Information.................................................. 12 3.09. Taxes.................................................................. 12 3.10. ERISA.................................................................. 12 3.11. Transactions with Affiliates........................................... 12 3.12. Assumptions or Guaranties of Indebtedness of Other Persons............. 13 3.13. Investments in Other Persons........................................... 13 3.14. Equal Employment Opportunity........................................... 13 3.15. Status of Notes and Warrants as Qualified Investments.................. 13 3.16. Securities Act......................................................... 14 3.17. Disclosure............................................................. 14 3.18. No Brokers or Finders.................................................. 14 3.19. Other Agreements of Officers........................................... 14 3.20. Capitalization; Status of Capital Stock................................ 14 3.21. Labor Relations........................................................ 15 3.22. Insurance.............................................................. 15 3.23. Books and Records...................................................... 15 3.24. Foreign Corrupt Practices Act.......................................... 15 3.25. Registration Rights.................................................... 16 ARTICLE IV............................................................................ 16 COVENANTS OF THE COMPANY.............................................................. 16 4.01. Affirmative Covenants of the Company Other Than Reporting Requirements. 16 (a) Punctual Payment............................................. 16 (b) Payment of Taxes and Trade Debt.............................. 16 (c) Maintenance of Insurance..................................... 16 (d) Preservation of Corporate Existence.......................... 16 (e) Compliance with Laws......................................... 17 (f) Visitation Rights............................................ 17 (g) Keeping of Records and Books of Account...................... 17 (h) Maintenance of Properties, etc............................... 17 (i) Compliance with ERISA........................................ 17 (j) Maintenance of Debt to Equity Ratio.......................... 17 (k) Maintenance of Interest Coverage............................. 17 (l) Foreign Corrupt Practices Act................................ 18
(ii)
Page ---- (m) Equal Employment Opportunity................................. 18 (n) Status of Notes and Warrants as Qualified Investments........ 18 (o) Attendance at Board Meetings................................. 18 (p) Compensation................................................. 18 (q) Compliance with Security Agreement........................... 18 4.02. Negative Covenants of the Company...................................... 18 (a) Liens........................................................ 19 (b) Indebtedness................................................. 20 (c) Lease Obligations............................................ 20 (d) Assumptions or Guaranties of Indebtedness of Other Persons... 20 (e) Mergers, Sale of Assets, etc................................. 20 (f) Investments in Other Persons................................. 21 (g) Distributions................................................ 22 (h) Dealings with Affiliates..................................... 22 (i) Maintenance of Ownership of Subsidiaries..................... 22 (j) Change in Nature of Business................................. 23 4.03. Reporting Requirements................................................. 23 4.04. Termination of Certain Covenants....................................... 24 ARTICLE V............................................................................. 24 REGISTRATION RIGHTS................................................................... 24 5.01. "Piggy Back" Registration.............................................. 24 5.02. Required Registration.................................................. 25 5.03. Registration on Form S-3............................................... 26 5.04. Effectiveness.......................................................... 26 5.05. Indemnification of Holder of Registrable Shares........................ 26 5.06. Indemnification of Company............................................. 27 5.07. Exchange Act Registration.............................................. 28 5.08. Damages................................................................ 28 5.09. Further Obligations of the Company..................................... 28 5.09. Expenses............................................................... 29 5.10. Certain Exceptions to Registration..................................... 30 ARTICLE VI............................................................................ 30 EVENTS OF DEFAULT..................................................................... 30 6.01. Events of Default...................................................... 30 6.02. Annulment of Defaults.................................................. 32 ARTICLE VII........................................................................... 32 DEFINITIONS AND ACCOUNTING TERMS...................................................... 32 7.01. Certain Defined Terms.................................................. 32 7.02. Accounting Terms....................................................... 35
(iii)
Page ---- ARTICLE VIII............................................................ 35 MISCELLANEOUS........................................................... 35 8.01. No Waiver; Cumulative Remedies........................... 35 8.03. Addresses for Notices, etc............................... 36 8.04. Costs, Expenses and Taxes................................ 36 8.05. Binding Effect; Assignment............................... 37 8.06. Survival of Representations and Warranties............... 37 8.08. Severability............................................. 37 8.09. Governing Law............................................ 37 8.10. Headings................................................. 37 8.11. Sealed Instrument........................................ 37 8.12. Counterparts............................................. 37
EXHIBIT 1.01 Form of Secured Subordinated Notes 1.02 Form of Common Stock Purchase Warrants 2.02(a) Form of Security Agreement 2.02(c) Matters to be Covered by Opinion Letter 3.04 Schedule of Material Litigation 3.05 Schedule of Certain Indebtedness 3.07 Schedule of Mortgages, Pledges, etc. 3.11 Schedule of Transactions with Affiliates 3.15 Certificate Regarding "Qualified Investments" 3.20 Schedule of Capital Stock, Options and Other Rights (iv) PROVIDENCE AND WORCESTER RAILROAD COMPANY 75 Hammond Street Worcester, Massachusetts 01610 As of December 19, 1995 Massachusetts Capital Resource Company 420 Boylston Street Boston, Massachusetts 02116 Re: Secured Subordinated Notes due 2005 and Common Stock Purchase Warrants Gentlemen: Providence and Worcester Railroad Company, a Rhode Island corporation (the "Company"), hereby agrees with Massachusetts Capital Resource Company (the "Purchaser") as follows: ARTICLE I PURCHASE, SALE AND TERMS OF NOTES AND WARRANTS 1.01. The Notes. The Company has authorized the issuance and sale to the --------- Purchaser of the Company's Secured Subordinated Notes, due December 31, 2005, in the original principal amount of $5,000,000. The Secured Subordinated Notes shall be substantially in the form set forth in Exhibit 1.01 hereto and are ------------ herein referred to individually as a "Note" and collectively as the "Notes", which terms shall also include any notes delivered in exchange or replacement therefor. 1.02. The Warrants. The Company has also authorized the issuance and sale ------------ to the Purchaser of the Company's Common Stock Purchase Warrants for the purchase (subject to adjustment as provided therein) of 200,000 shares of the Company's Common Stock. The Common Stock Purchase Warrants shall be substantially in the form set forth in Exhibit 1.02 hereto and are herein ------------ referred to individually as a "Warrant" and collectively as the "Warrants", which terms shall also include any warrants delivered in exchange or replacement therefor. 1.03. Purchase and Sale of Notes and Warrants --------------------------------------- (a) The Closing. The Company agrees to issue and sell to the ----------- Purchaser, and, subject to and in reliance upon the representations, warranties, terms and conditions of this Agreement, the Purchaser agrees to purchase, the Notes and the Warrants for an aggregate purchase price of $5,000,000. Such purchase and sale shall take place at a closing (the "Closing") to be held at the office of Messrs. Testa, Hurwitz & Thibeault, High Street Tower, 125 High Street, Boston, Massachusetts, on December 19, 1995 at 2:00 P.M., or on such other date and at such time as may be mutually agreed upon. At the Closing the Company will initially issue one Note, payable to the order of the Purchaser, in the principal amount of $5,000,000 and one Warrant, registered in the name of the Purchaser, to purchase (subject to adjustment as provided therein) 200,000 shares of the Company's Common Stock, against receipt by the Company of a wire transfer in the amount of $5,000,000, in payment of the full purchase price for the Notes and Warrants. (b) Allocation of Purchase Price. The Company and the ---------------------------- Purchaser, having adverse interests and as a result of arm's length bargaining, agree that (i) neither the Purchaser nor any of its partners has rendered or has agreed to render any services to the Company in connection with this Agreement or the issuance of the Notes and Warrants; (ii) the Warrants are not being issued as compensation; and (iii) for the purpose, and within the meaning, of Section 1273(c)(2) of the Internal Revenue Code of 1986, as amended, the issue price of the Notes is $4,920,000. The Company and the Purchaser acknowledge that this allocation is based on the relative fair market values of the Notes and Warrants. The Company and the Purchaser recognize that this Agreement determines the original issue discount to be taken into account by the Company and the Purchaser for federal income tax purposes on the Notes and they agree to adhere to this Agreement for such purposes. (c) Use of Proceeds. The Company agrees to use the full --------------- proceeds from the sale of the Notes and Warrants principally for the expansion and renovation of the Company's track structure, payment of certain Indebtedness to Fleet Bank of Massachusetts, N.A. and for working capital and capital improvements and agrees that full proceeds from the sale of the Notes and Warrants will be utilized for purposes which increase or maintain equal opportunity employment in the Commonwealth of Massachusetts. 1.04. Payments and Endorsements. Payments of principal, interest and ------------------------- premium, if any, on the Notes, shall be made directly by check duly mailed or delivered to the Purchaser at its address referred to in Section 8.03 hereof, without any presentment or notation of payment, except that prior to any transfer of any Note, the holder of record shall endorse on such Note a record of the date to which interest has been paid and all payments made on account of principal of such Note. 1.05. Redemptions. ----------- (a) Required Redemptions. On each date set forth below, the -------- ----------- Company will redeem, without premium, the principal amount of the Notes set forth opposite such date, or such lesser amount as may be then outstanding, together with all accrued and unpaid interest then due on the amount so redeemed. On the stated or accelerated maturity of the Notes, the Company will pay the principal amount of the Notes then outstanding together with all accrued and unpaid interest then due thereon. No optional redemption of less than all of the Notes shall affect the obligation of the Company to make the redemptions required by this subsection. -2-
Principal Amount Redemption Date to be Redeemed - --------------------- ---------------- December 31, 1998 $ 62,500 March 31, 1999 62,500 June 30, 1999 62,500 September 30, 1999 62,500 December 31, 1999 62,500 March 31, 2000 62,500 June 30, 2000 62,500 September 30, 2000 62,500 December 31, 2000 125,000 March 31, 2001 125,000 June 30, 2001 125,000 September 30, 2001 125,000 December 31, 2001 125,000 March 31, 2002 125,000 June 30, 2002 125,000 September 30, 2002 125,000 December 31, 2002 187,500 March 31, 2003 187,500 June 30, 2003 187,500 September 30, 2003 187,500 December 31, 2003 187,500 March 31, 2004 187,500 June 30, 2004 187,500 September 30, 2004 187,500 December 31, 2004 187,500 March 31, 2005 187,500 June 30, 2005 187,500 September 30, 2005 187,500 December 31, 2005 1,250,000 ---------- TOTAL $5,000,000 ----------
(b) Optional Redemptions With Premium. In addition to the redemption of --------------------------------- the Notes required under subsection 1.05(a), the Company may at any time on or after January 1, 1996, (no optional redemption being permitted prior to said date) redeem the Notes in whole or in part (in integral multiples of $10,000) together with interest due on the amount so redeemed through the date of redemption, and a premium equal to the percentage of the principal amount of -3- the Notes redeemed under this subsection applicable to the twelve month period in which such redemption is made, as follows: 12-month period ending Premium --------------- ------- December 31, 1996 10% December 31, 1997 9% December 31, 1998 8% December 31, 1999 7% December 31, 2000 6% December 31, 2001 5% December 31, 2002 4% December 31, 2003 3% December 31, 2004 2% December 31, 2005 0% (c) Notice of Redemptions; Pro Rata Redemptions. Notice of any ------------------------------------------- optional redemptions pursuant to subsection 1.05(b) shall be given to all registered holders of the Notes at least ten (10) business days prior to the date of such redemption. Each redemption of Notes pursuant to subsections 1.05(a) or (b) shall be made so that the Notes then held by each holder shall be redeemed in a principal amount which shall bear the same ratio to the total principal amount of Notes being redeemed as the principal amount of Notes then held by such holder bears to the aggregate principal amount of the Notes then outstanding. 1.06. Payment on Non-Business Days. Whenever any payment to be made shall ---------------------------- be due on a Saturday, Sunday or a public holiday under the laws of the Commonwealth of Massachusetts, such payment may be made on the next succeeding business day, and such extension of time shall in such case be included in the computation of payment of interest due. 1.07. Registration, etc. The Company shall maintain at its principal ----------------- office a register of the Notes and shall record therein the names and addresses of the registered holders of the Notes, the address to which notices are to be sent and the address to which payments are to be made as designated by the registered holder if other than the address of the holder, and the particulars of all transfers, exchanges and replacements of Notes. No transfer of a Note shall be valid unless made on such register for the registered holder or his executors or administrators or his or their duly appointed attorney, upon surrender therefor for exchange as hereinafter provided, accompanied by an instrument in writing, in form and execution reasonably satisfactory to the Company. Each Note issued hereunder, whether originally or upon transfer, exchange or replacement of a Note or Notes, shall be registered on the date of execution thereof by the Company and shall be dated the date to which interest has been paid on such Notes or Note. The registered holder of a Note shall be that Person in whose name the Note has been so registered by the Company. A registered holder shall be deemed the owner of a Note for all purposes of this Agreement and, subject to the provisions hereof, shall be entitled to the principal, premium, if any, and interest evidenced by such Note free from all equities or rights of setoff or counterclaim -4- between the Company and the transferor of such registered holder or any previous registered holder of such Note. 1.08. Transfer and Exchange of Notes. Subject to compliance with federal ------------------------------ and applicable state securities laws, the registered holder of any Note or Notes may, prior to maturity or prepayment thereof, surrender such Note or Notes at the principal office of the Company for transfer or exchange. Within a reasonable time after notice to the Company from a registered holder of its intention to make such exchange and without expense (other than transfer taxes, if any) to such registered holder, the Company shall issue in exchange therefor another Note or Notes, in such denominations as requested by the registered holder, for the same aggregate principal amount as the unpaid principal amount of the Note or Notes so surrendered and having the same maturity and rate of interest, containing the same provisions and subject to the same terms and conditions as the Note or Notes so surrendered. Each new Note shall be made payable to such Person or Persons, or registered assigns, as the registered holder of such surrendered Note or Notes may designate, and such transfer or exchange shall be made in such a manner that no gain or loss of principal or interest shall result therefrom. 1.09. Replacement of Notes. Upon receipt of evidence satisfactory to the -------------------- Company of the loss, theft, destruction or mutilation of any Note and, if requested in the case of any such loss, theft or destruction, upon delivery of an indemnity bond or other agreement or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Note, the Company will issue a new Note, of like tenor and amount and dated the date to which interest has been paid, in lieu of such lost, stolen, destroyed or mutilated Note; provided, however, if any Note of which -------- ------- Massachusetts Capital Resource Company or any of its partners is the registered holder is lost, stolen or destroyed, the affidavit of the President, Treasurer or any Assistant Treasurer of the registered holder setting forth the circumstances with respect to such loss, theft or destruction shall be accepted as satisfactory evidence thereof, and no indemnification bond or other security shall be required as a condition to the execution and delivery by the Company of a new Note in replacement of such lost, stolen or destroyed Note other than the registered holder's written agreement to indemnify the Company. 1.10. Subordination. The Company, for itself, its successors and assigns, ------------- covenants and agrees, and the Purchaser and each successor holder of the Notes by his or its acceptance thereof, likewise covenants and agrees, that notwithstanding any other provision of this Agreement or the Notes, the payment of the principal of and interest and all other amounts on each and all of the Notes shall be subordinated in right of payment, to the extent and in the manner hereinafter set forth, to the prior indefeasible payment in full of all Senior Debt (as hereinafter defined) at any time outstanding. The provisions of this Section 1.10 shall constitute a continuing representation to all Persons who, in reliance upon such provisions, become the holders of or continue to hold Senior Debt, and such provisions are made for the benefit of the holders of Senior Debt, and such holders are hereby made obligees hereunder the same as if their names were written herein as such, and they or any of them may proceed to enforce such provisions against the Company or against the holder of any Note without the necessity of joining the Company as a party. (a) Payment of Senior Debt. In the event of any insolvency or ---------------------- bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in -5- connection therewith, relative to the Company or to its property, or, in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency or bankruptcy, then and in any such event all Senior Debt shall be indefeasibly paid in full before any payment or distribution of any character, whether in cash, securities or other property, shall be made on account of the Notes; and any such payment or distribution, except securities which are subordinated and junior in right of payment to the payment of all Senior Debt then outstanding in terms of substantially the same tenor as this Section 1.10, which would, but for the provisions hereof, be payable or deliverable in respect of the Notes shall be paid or delivered directly to the holders of Senior Debt (or their duly authorized representatives), in the proportions in which they hold the same, until all Senior Debt shall have been indefeasibly paid in full, and every holder of the Notes by becoming a holder thereof shall have designated and appointed the holder or holders of Senior Debt (and their duly authorized representatives) as his or its agents and attorney-in-fact to demand, sue for, collect and receive such Senior Debt holder's ratable share of all such payments and distributions and to file any necessary proof of claim therefor and to take all such other action in the name of the holders of the Notes or otherwise, as such Senior Debt holders (or their authorized representatives) may determine to be necessary or appropriate for the enforcement of this Section 1.10. The Purchaser and each successor holder of the Notes by its or his acceptance thereof agrees to execute, at the request of the Company, a separate agreement with any holder of Senior Debt on the terms set forth in this Section 1.10, and to take all such other action as such holder or such holder's representative may request in order to enable such holder to enforce all claims upon or in respect of such holder's ratable share of the Notes. (b) No Payment on Notes Under Certain Conditions. In the event that -------------------------------------------- any default occurs in the payment of the principal of or interest on any Senior Debt (whether as a result of the acceleration thereof by the holders of such Senior Debt or otherwise) and during the continuance of such default for a period up to ninety (90) days and thereafter if judicial proceedings shall have been instituted with respect to such defaulted payment, or (if a shorter period) until such payment has been made or such default has been cured or waived in writing by such holder of Senior Debt then and during the continuance of such event no payment of principal or interest or any other amount on the Notes shall be made by the Company or accepted by any holder of the Notes who has received notice from the Company or from a holder of Senior Debt of such events. (c) Payments Held in Trust. In case any payment or distribution ---------------------- shall be paid or delivered to any holder of the Notes before all Senior Debt shall have been indefeasibly paid in full, despite or in violation or contravention of the terms of this subordination, such payment or distribution shall be held in trust for and paid and delivered ratably to the holders of Senior Debt (or their duly authorized representatives), until all Senior Debt shall have been indefeasibly paid in full. (d) Subrogation. Subject to the indefeasible payment in full of all ----------- Senior Debt and until the Notes shall be paid in full, the holders of the Notes shall be subrogated to the rights of the holders of Senior Debt (to the extent of payments or distributions previously made to such holders of Senior Debt pursuant to the provisions of subsections (a) and (c) of this Section 1.10) to receive payments or distributions of assets of the Company applicable to the Senior Debt. No -6- such payments or distributions applicable to the Senior Debt shall, as between the Company and its creditors, other than the holders of Senior Debt and the holders of the Notes, be deemed to be a payment by the Company to or on account of the Notes; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Debt to which the holders of the Notes would be entitled except for the provisions of this Section 1.10 shall, as between the Company and its creditors, other than the holders of Senior Debt and the holders of the Notes, be deemed to be a payment by the Company to or on account of the Senior Debt. (e) Scope of Section. The provisions of this Section 1.10 are ---------------- intended solely for the purpose of defining the relative rights of the holders of the Notes, on the one hand, and the holders of the Senior Debt, on the other hand. Nothing contained in this Section 1.10 or elsewhere in this Agreement or the Notes is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Debt, and the holders of the Notes, the obligation of the Company, which is unconditional and absolute, to pay to the holders of the Notes the principal of and interest on the Notes as and when the same shall become due and payable in accordance with the terms thereof, or to affect the relative rights of the holders of the Notes and creditors of the Company other than the holders of the Senior Debt, nor shall anything herein or therein prevent the holder of any Note from accepting any payment with respect to such Note or exercising all remedies otherwise permitted by applicable law upon default under such Note, subject to the rights, if any, under this Section 1.10 of the holders of Senior Debt in respect of cash, property or securities of the Company received by the holders of the Notes. (f) Survival of Rights. The right of any present or future holder of ------------------ Senior Debt to enforce subordination of the Notes pursuant to the provisions of this Section 1.10 shall not at any time be prejudiced or impaired by any act or failure to act on the part of the Company or any such holder of Senior Debt, including, without limitation, any forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security of or in respect of any Senior Debt or by noncompliance by the Company with the terms of such subordination regardless of any knowledge thereof such holder may have or otherwise be charged with. (g) Amendment or Waiver. The provisions of this Section 1.10 may not ------------------- be amended or waived in any manner which is detrimental to any Senior Debt without the consent of the holders of all then existing Senior Debt. (h) Senior Debt Defined. The term "Senior Debt" shall mean (i) all ------------------- Indebtedness of the Company for money borrowed from banks or other institutional lenders, including any extension or renewals thereof, whether outstanding on the date hereof or thereafter created or incurred, which is not by its terms subordinate and junior to or on a parity with the Notes and which is permitted hereby at the time it is created or incurred, and (ii) all guaranties by the Company which are not by their terms subordinate and junior to or on a parity with the Notes and which are permitted hereby at the time they are made, of Indebtedness of any Subsidiary if such Indebtedness would have been Senior Debt pursuant to the provisions of clause (i) of this sentence had it been Indebtedness of the Company. In making any loans which are (or the guaranties of which are) intended to be Senior Debt, the lenders or purchasers shall be entitled to rely as to the fact that such Indebtedness or guaranty is permitted hereby upon a certificate by the Company's chief financial officer purporting to show such Indebtedness or guaranty will not result -7- in the Company's failure to comply with the provisions of Article IV hereof as of the date of the loan or guarantee. 1.11. Representations by the Purchaser. The Purchaser represents -------------------------------- that it is its present intention to acquire the Notes and Warrants for its own account and that the Notes and Warrants are being and will be acquired for the purpose of investment and not with a view to distribution or resale thereof; subject, nevertheless, to the condition that the disposition of the property of - ------- ------------ the Purchaser shall at all times be within its control. The acquisition by the Purchaser of the Notes and Warrants shall constitute a confirmation of this representation. Further, the Purchaser understands and agrees that: (i) the Notes, Warrants and shares of Common Stock issued upon exercise of the Warrants will bear a legend to insure compliance with the registration provisions of the Securities Act and (ii) it will not use any non-public information which it obtains pursuant to this Agreement, including as a result of its rights under subsection 4.01(o), to trade in any public securities of the Company in violation of the Securities Act or Exchange Act. 1.12. Disclosure of Information by the Purchaser. The Company ------------------------------------------ understands that the Purchaser is a special purpose limited partnership organized under Chapter 109 of the General Laws of the Commonwealth of Massachusetts and Chapter 816 of the Acts and Resolves of 1977 of the Commonwealth of Massachusetts (the "Capital Resource Company Act"), and as such, in accordance with such provisions, the Purchaser, in order to obtain certain benefits for itself and its partners, is required to file certain reports and otherwise disclose information relating to the business, financial affairs, and future prospects of the Company and its affiliates (as defined in the aforesaid legislation) with the Clerk of the Senate and the Clerk of the House of Representatives of the General Court of the Commonwealth of Massachusetts, the Secretary of Manpower Affairs, the Commissioner of Insurance and the Department of Revenue of the Commonwealth of Massachusetts, and that such reports and other information may constitute "public records" within the purview of Section 7 of Chapter 4 of the General Laws of the Commonwealth of Massachusetts. In addition, information relating to the business, financial affairs and future prospects of the Company and its affiliates must be disclosed to others in order to obtain independent confirmation that financing on substantially similar terms to financing provided pursuant to this Agreement was not elsewhere available to the Company. The Company hereby authorizes the Purchaser to disclose all such information relating to the business, financial affairs and future prospects of the Company and its affiliates as has been or may in the future be presented to the Purchaser to all such persons as the Purchaser in good faith deems necessary or appropriate in order to fulfill its obligations under the Capital Resource Company Act. ARTICLE II CONDITIONS TO PURCHASER'S OBLIGATION The obligation of the Purchaser to purchase and pay for the Notes and Warrants at the Closing is subject to the following conditions: 2.01. Representations and Warranties. Each of the representations and ------------------------------ warranties of the Company set forth in Article III hereof shall be true on the date of the Closing. -8- 2.02. Documentation at Closing. The Purchaser shall have received prior ------------------------ to or at the Closing all of the following, each in form and substance satisfactory to the Purchaser and its special counsel: (a) A Security Agreement, in the form attached as Exhibit 2.02(a), --------------- (the "Security Agreement") granting the Purchaser a first lien on all of the Company's track structure on its rail lines located in Massachusetts, excluding its rail yards, and all related financing statements and other similar instruments and documents, shall have been executed and delivered to the Purchaser by a duly authorized officer of the Company. (b) A certified copy of all charter documents of the Company; a certified copy of the resolutions of the Board of Directors and, to the extent required, the stockholders of the Company evidencing approval of this Agreement, the Security Agreement, the Notes, the Warrants, and other matters contemplated hereby; a certified copy of the By-laws of the Company; and certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, with respect to this Agreement, the Security Agreement, the Notes and the Warrants. (c) A favorable opinion of the general counsel for the Company as to matters set forth in Exhibit 2.02(c), and as to such other matters as the --------------- Purchaser, or its special counsel, may reasonably request. (d) A certificate of the Secretary or an Assistant Secretary of the Company which shall certify the names of the officers of the Company, authorized to sign this Agreement, the Security Agreement, the Notes, the Warrants and the other documents or certificates to be delivered pursuant to this Agreement and the Security Agreement by the Company, or any of its officers, together with the true signatures of such officers. The Purchaser may conclusively rely on such certificates until it shall receive a further certificate of the Secretary or an Assistant Secretary of the Company cancelling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (e) A certificate from a duly authorized officer of the Company stating that the representations and warranties of the Company contained in Article III hereof and otherwise made by the Company in writing in connection with the transactions contemplated hereby are true and correct and that no condition or event has occurred or is continuing or will result from execution and delivery of this Agreement, the Security Agreement, the Notes or the Warrants which constitute an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. (f) A certificate, in the form attached as Exhibit 3.15 hereto, shall ------------ have been executed and delivered by a duly authorized officer of the Company. (g) Payment for the costs, expenses, taxes and filing fees identified in Section 8.04 as to which the Purchaser gives the Company notice prior to the Closing. -9- ARTICLE III REPRESENTATIONS AND WARRANTIES The Company represents and warrants as follows: 3.01. Organization and Standing of the Company. The Company is a duly ---------------------------------------- organized and validly existing corporation in good standing under the laws of the jurisdiction in which it was organized and has all requisite corporate power and authority for the ownership and operation of its properties and for the carrying on of its business as now conducted and as now proposed to be conducted. The Company is duly licensed or qualified and in good standing as a foreign corporation authorized to do business in all jurisdictions wherein the character of the property owned or leased, or the nature of the activities conducted, by it makes such licensing or qualification necessary. The Company's only Subsidiary is Clinton Properties, Inc. ("Clinton"). Clinton is duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its organization and is duly qualified to do business in good standing in each jurisdiction in which the failure to qualify to do business would have a material adverse effect upon the financial condition, business or properties of the Company and Clinton taken as a whole. All of the outstanding shares of stock of, or other interest in, Clinton have been validly issued, are fully paid and nonassessable, were offered and sold in compliance with all applicable federal and state securities laws and are owned by the Company. The only business and property of Clinton is the ownership of rights to install telecommunication facilities, utilities and pipelines on certain of the Company's railroad lines. 3.02. Corporate Action. The Company has all necessary corporate power and ---------------- has taken all corporate action required to make all the provisions of this Agreement, the Security Agreement, the Notes, the Warrants and any other agreements and instruments executed in connection herewith and therewith the valid and enforceable obligations they purport to be. Sufficient shares of authorized but unissued Common Stock of the Company have been reserved by appropriate corporate action in connection with the prospective exercise of the Warrants. Neither the issuance of the Notes or Warrants, nor the issuance of shares of Common Stock upon the exercise of the Warrants, is subject to preemptive or other similar statutory or contractual rights and will not conflict with any provisions of any agreement or instrument to which the Company is a party or by which it is bound. 3.03. Governmental Approvals. No authorization, consent, approval, ---------------------- license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the offer, issuance, sale, execution or delivery by the Company of, or for the performance by it of its obligations under, this Agreement, the Security Agreement, the Notes or the Warrants, other than filings necessary to perfect the security interest granted to the Purchaser pursuant to the Security Agreement. 3.04. Litigation. Except as is set forth in Exhibit 3.04, there is no ---------- ------------ litigation or governmental proceeding or investigation pending or, to the best of the knowledge of the Company, threatened against the Company affecting any of its properties or assets, or against any -10- officer, key employee or principal stockholder of the Company where such litigation, proceeding or investigation, either individually or in the aggregate, if adversely determined, would have a material adverse effect on the Company or in any of its properties or assets, or which might call into question the validity of this Agreement, the Security Agreement, the Notes, the Warrants or any action taken or to be taken pursuant hereto or thereto., nor, to the best of the knowledge of the Company, has there occurred any event or does there exist any condition on the basis of which any such litigation, proceeding or investigation might properly be instituted. Neither the Company, nor, to the best of the knowledge of the Company, any officer or key employee of the Company, or principal stockholder of the Company, is in default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other government agency affecting the Company. 3.05. Compliance with Other Instruments. The Company is in --------------------------------- compliance in all respects with the terms and provisions of this Agreement and of its charter and by-laws and in all material respects with the terms and provisions of the mortgages, indentures, leases, agreements and other instruments and of all judgments, decrees, governmental orders, statutes, rules and regulations by which it is bound or to which its properties or assets are subject. There is no term or provision in any of the foregoing documents and instruments which materially adversely affects the business, assets or financial condition of the Company. Neither the execution and delivery of this Agreement, the Security Agreement, the Notes or the Warrants, nor the consummation of any transactions contemplated hereby or thereby has constituted or resulted in or will constitute or result in a default or violation of any term or provision in any of the foregoing documents or instruments. A schedule of Indebtedness of the Company for money borrowed is attached as Exhibit 3.05. ------------ 3.06. Federal Reserve Regulations. The Company is not engaged in the --------------------------- business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G of the Board of Governors of the Federal Reserve System), and no part of the proceeds of the Notes or Warrants will be used to purchase or carry any margin security or to extend credit to others for the purpose of purchasing or carrying any margin security or in any other manner which would involve a violation of any of the regulations of the Board of Governors of the Federal Reserve System. 3.07. Title to Assets, Patents. Except as is set forth in Exhibit 3.07, ------------------------ ------------ the Company has good and clear record and marketable title to such of its fixed assets as are real property, and good and merchantable title to all of its other assets, now carried on its books including those reflected in the most recent balance sheet of the Company which forms a part of Exhibit 3.08 attached ------------ hereto, or acquired since the date of such balance sheet (except personal property disposed of since said date in the ordinary course of business) free of any mortgages, pledges, charges, liens, security interests or other monetary claims, other than those permitted by subsection 4.02(a). The Company enjoys peaceful and undisturbed possession under all leases under which it is operating, and all said leases are valid and subsisting and in full force and effect. The Company owns or has a valid right to use the patents, patent rights, licenses, permits, trade secrets, trademarks, trademark rights, trade names or trade name rights or franchises, copyrights, inventions and intellectual property rights being used to conduct its business as now operated and as now proposed to be operated; and the conduct of its business as now operated and as now -11- proposed to be operated does not and will not conflict with valid patents, patent rights, licenses, permits, trade secrets, trademarks, trademark rights, trade names or trade name rights or franchises, copyrights, inventions and intellectual property rights of others. The Company has no obligation to compensate any Person for the use of any such patents or such rights nor has the Company granted to any Person any license or other rights to use in any manner any of such patents or such rights of the Company. 3.08. Financial Information. The financial statements which are included --------------------- in the Company's Annual Report and in its Form 10-Q present fairly the financial position of the Company as at the dates thereof and its results of operations for the periods covered thereby and have been prepared in accordance with generally accepted accounting principles consistently applied. The financial statements so included are: (i) for the two years ended December 31, 1993 and December 31, 1994, certified by Deloitte & Touche LLP and (ii) for the nine- month period ended September 30, 1995, being unaudited and subject to year-end adjustments consisting of normal recurring items which will not be material in the aggregate. The Company has no liability contingent or otherwise not disclosed in the aforesaid financial statements or in the notes thereto that could, together with all such other liabilities, materially affect the financial condition of the Company, nor does the Company have any reasonable grounds to know of any such liability. Since the date of said certified financial statements, (i) there has been no adverse change in the business, assets or condition, financial or otherwise, operations or prospects, of the Company; (ii) neither the business, condition, operations or prospects of the Company nor any of its properties or assets has been adversely affected as a result of any legislative or regulatory change, any revocation or change in any franchise, license or right to do business, or any other event or occurrence, whether or not insured against; and (iii) except for the Settlement Agreement, dated December 12, 1995, between the Company and CPC International, Inc., the Company has not entered into any material transaction or made any distribution on its capital stock. 3.09. Taxes. The Company has accurately prepared and timely filed all ----- federal, state and other tax returns required by law to be filed by it, and all taxes shown to be due and all additional assessments have been paid or provision made therefor. The Company knows of no additional assessments or adjustments pending or threatened against the Company for any period, nor of any basis for any such assessment or adjustment. 3.10. ERISA. No employee benefit plan established or maintained, or to ----- which contributions have been made, by the Company, which is subject to part 3 of Subtitle B of Title I of The Employee Retirement Income Security Act of 1974, as amended ("ERISA") had an accumulated funding deficiency (as such term is defined in Section 302 of ERISA) as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no material liability to the Pension Benefit Guaranty Corporation has been incurred with respect to any such plan by the Company. 3.11. Transactions with Affiliates. Except as is set forth in Exhibit ---------------------------- ------- 3.11, there are no loans, leases, royalty agreements or other continuing - ---- transactions between the Company and any Person owning five percent (5%) or more of any class of capital stock of the Company or other entity controlled by such stockholder or a member of such stockholder's family. -12- 3.12. Assumptions or Guaranties of Indebtedness of Other Persons. The ---------------------------------------------------------- Company has not assumed, guaranteed, endorsed or otherwise become directly or contingently liable on (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor or otherwise to assure the creditor against loss) any Indebtedness of any other Person, except for guaranties by endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 3.13. Investments in Other Persons. The Company has not made any loan or ---------------------------- advance to any Person which is outstanding on the date of this Agreement, nor is the Company obligated or committed to make any such loan or advance, nor does the Company own any capital stock or assets comprising the business of, obligations of, or any interest in, any Person. 3.14. Equal Employment Opportunity. The Company has reviewed its ---------------------------- employment practices and policies and, to the best of its knowledge, the Company is in full compliance with (a) all applicable laws of the United States, of the Commonwealth of Massachusetts and of each other applicable jurisdiction, relating to equal employment opportunity (including, without limitation, Title VII of the Civil Rights Act of 1964, as amended (42 U.S.C. (S)2000e-17), the Age Discrimination in Employment Act of 1967, as amended (29 U.S.C. (S)(S)621-634), the Equal Pay Act of 1963 (29 U.S.C. (S)206(d)), and any rules, regulations and administrative orders and Executive Orders relating thereto; Mass. Gen. Laws. c. 151B, Mass. Gen. Laws c. 149 (S)24A et seq. and (S)105A et seq., and any rules or regulations relating thereto; and (b) the applicable terms, relating to equal employment opportunity, of any contract, agreement or grant the Company has with, from, or relating (by way of subcontract or otherwise) to any other contract, agreement or grant of, any federal or state governmental unit ("Government Contract"), including, without limitation, any terms required pursuant to Federal Executive Order No. 11246 and Massachusetts Executive Order No. 74 (both as amended). To the best of the Company's knowledge, it has kept all records required to be kept, and has filed all reports, affirmative action plans and forms (including, without limitation and where applicable, Form EEO-1) required to be filed pursuant to any such applicable law or the terms of any such Government Contract. The Company has not been subject to any adverse final determination or order, with respect to any charge of employment discrimination made against it, by the United States Equal Employment Opportunity Commission, the Massachusetts Commission Against Discrimination or any other governmental unit (including, without limitation, any such governmental unit with which it has a Government Contract), and the Company is not presently, to the best of its knowledge, subject to any formal proceedings before, or investigations by, such commissions or governmental units. 3.15. Status of Notes and Warrants as Qualified Investments. The Company ----------------------------------------------------- has duly authorized the execution and delivery to the Purchaser on behalf of the Company of the certificate attached as Exhibit 3.15 hereto, setting forth such ------------ statements, information and related data as are necessary to permit the Purchaser to determine and demonstrate that the Notes and Warrants issued pursuant to this Agreement will constitute "qualified investments" within the meaning of that term as set forth in the Capital Resource Company Act and that the full proceeds of the Notes and Warrants will be used for purposes which will materially increase or maintain equal opportunity employment in the Commonwealth of Massachusetts. All such statements, information and related data presented in such certificate as are not based on estimates and projections of future events are true and correct as of the date of such certificate and all such -13- statements, information and related data based upon estimates or projections of future events have been carefully considered and prepared on behalf of the Company. 3.16. Securities Act. Neither the Company nor anyone acting on its -------------- behalf has offered any of the Notes, Warrants or similar securities, or solicited any offers to purchase or made any attempt by preliminary conversation or negotiations to dispose of the Notes, Warrants or similar securities, to any Person other than the Purchaser or the institutions described in Exhibit 3.15. ------------ Neither the Company nor anyone acting on its behalf has offered or will offer to sell the Notes, Warrants or similar securities to, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any Person, so as to bring the issuance and sale of the Notes and Warrants under the registration provisions of the Securities Act. 3.17. Disclosure. Neither this Agreement, the Form 10-K, the Form ---------- 10-Q, the Annual Report, the Proxy Statement, the Certificate set forth as Exhibit 3.15 hereof, nor any other agreement, document, certificate or written - ------------ statement furnished to the Purchaser or its special counsel by or on behalf of the Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact within the special knowledge of the Company or any of its executive officers which has not been disclosed herein or in writing by them to the Purchaser and which materially adversely affects, or in the future in their opinion may, insofar as they can now foresee, materially adversely affect the business, properties, assets or condition, financial or otherwise, of the Company. Without limiting the foregoing, the Company has no knowledge or belief that there exists, or there is pending or planned, any patent, invention, device, application or principle or any statute, rule, law, regulation, standard or code which would materially adversely affect the condition, financial or otherwise, or the operations of the Company. 3.18. No Brokers or Finders. No Person has or will have, as a result --------------------- of the transactions contemplated by this Agreement, any right, interest or valid claim against or upon the Company for any commission, fee or other compensation as a finder or broker because of any act or omission by the Company or any agent of the Company. 3.19. Other Agreements of Officers. To the best of the knowledge of ---------------------------- the Company, no officer or key employee of the Company is a party to or bound by any agreement, contract or commitment, or subject to any restrictions, particularly but without limitation in connection with any previous employment of any such person, which materially and adversely affects, or in the future may (so far as the Company can reasonably foresee) materially and adversely affect, the business or operations of the Company or the right of any such person to participate in the affairs of the Company. To the best of the knowledge of the Company, no officer or key employee has any present intention of terminating his employment with the Company and the Company has no present intention of terminating any such employment. 3.20. Capitalization; Status of Capital Stock. The Company has a --------------------------------------- total authorized capitalization consisting of: (i) 3,023,436 shares of Common Stock, of which 2,110,021 shares are issued and outstanding, and (ii) 653 shares of Preferred Stock, $50 par value, all of which -14- shares are issued and outstanding. The Proxy Statement sets forth a complete list of those persons who, as of March 1, 1995, were the record and, to the best of the Company's knowledge, beneficial owners of more than five percent (5%) of the Company's outstanding Common Stock or Preferred Stock. All the outstanding shares of capital stock of the Company have been duly authorized, are validly issued and are fully paid and nonassessable. The shares of Common Stock issuable upon exercise of the Warrants, when so issued, will be duly authorized, validly issued and fully paid and nonassessable. Except as otherwise indicated on Exhibit 3.20, there are no options, warrants or rights to purchase shares of - ------------ capital stock or other securities of the Company authorized, issued or outstanding, nor is the Company obligated in any other manner to issue shares of its capital stock or other securities. There are no restrictions on the transfer of shares of capital stock of the Company other than those imposed by relevant state and federal securities laws. No holder of any security of the Company is entitled to preemptive or similar statutory or contractual rights, either arising pursuant to any agreement or instrument to which the Company is a party, or which are otherwise binding upon the Company. Neither the issuance of the Notes or the Warrants nor the shares of Common Stock issued upon exercise of the Warrants will result in an adjustment under the antidilution or exercise rights of any holders of any outstanding shares of capital stock options, warrants or other rights to acquire any securities of the Company. The offer and sale of all shares of capital stock and other securities of the Company issued before the Closing complied with or were exempt from all federal and state securities laws. 3.21. Labor Relations. To the best of the knowledge of the Company, --------------- except for its present unions, no labor union or any representative thereof is presently making any attempt to organize or represent employees of the Company. There are no unfair labor practice charges, pending trials with respect to unfair labor practice charges, pending material grievance proceedings or adverse decisions of a Trial Examiner of the National Labor Relations Board against the Company. Furthermore, to the best of the knowledge of the Company, relations with employees of the Company are good and there is no reason to believe that any labor difficulties will arise in the foreseeable future. 3.22. Insurance. The Company carries insurance covering its --------- properties and business adequate and customary for the type and scope of the properties and business, but in any event in amounts sufficient, in the case of real property, to prevent the Company from becoming a co-insurer. 3.23. Books and Records. The books of account, ledgers, order books, ----------------- records and documents of the Company accurately and completely reflect all material information relating to the business of the Company, the nature, acquisition, maintenance, location and collection of the assets of the Company, and the nature of all transactions giving rise to the obligations or accounts receivable of the Company. 3.24. Foreign Corrupt Practices Act. The Company has reviewed its ----------------------------- practices and policies and to the best of its knowledge and belief it is not engaged, nor has any officer, director, employee or agent of the Company engaged, in any act or practice which would constitute a violation of the Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder. -15- 3.25. Registration Rights. Other than the Purchaser pursuant to the ------------------- terms of Article V hereof and CPC International, Inc. pursuant to that certain Settlement Agreement, dated December 12, 1995, no Person has demand or other rights to cause the Company to file any registration statement under the Securities Act relating to any securities of the Company or any right to participate in any such registration statement. ARTICLE IV COVENANTS OF THE COMPANY 4.01. Affirmative Covenants of the Company Other Than Reporting --------------------------------------------------------- Requirements. Without limiting any other covenants and provisions hereof, the - ------------ Company covenants and agrees that, as long as any of the Notes or Warrants are outstanding, it will perform and observe the following covenants and provisions and will cause each Subsidiary to perform and observe such of the following covenants and provisions as are applicable to such Subsidiary: (a) Punctual Payment. Pay the principal of, premium, if any, and ---------------- interest on each of the Notes at the times and place and in the manner provided in the Notes and herein. (b) Payment of Taxes and Trade Debt. Pay and discharge, and cause ------------------------------- each Subsidiary to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or business, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a lien or charge upon any properties of the Company or any Subsidiary, provided that neither the Company nor the Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by appropriate proceedings if the Company or Subsidiary concerned shall have set aside on its books adequate reserves with respect thereto. Pay and cause each Subsidiary to pay, when due, or in conformity with customary trade terms, all lease obligations, all trade debt, and all other Indebtedness incident to the operations of the Company or its Subsidiaries, except such as are being contested in good faith and by appropriate proceedings if the Company or Subsidiary concerned shall have set aside on its books adequate reserves with respect thereto. (c) Maintenance of Insurance. Maintain, and cause each Subsidiary to ------------------------ maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies of similar size engaged in similar businesses and owning similar properties in the same general areas in which the Company or such Subsidiary operates, but in any event in amounts sufficient, in the case of real property, to prevent the Company or such Subsidiary from becoming a co-insurer. (d) Preservation of Corporate Existence. Preserve and maintain, and ----------------------------------- cause each Subsidiary to preserve and maintain, its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its properties; provided, however, that nothing herein contained shall -------- ------- prevent any merger, -16- consolidation or transfer of assets permitted by subsection 4.02(e). Preserve and maintain, and cause each Subsidiary to preserve and maintain, all licenses and other rights to use patents, processes, licenses, trademarks, trade names, inventions, intellectual property rights or copyrights owned or possessed by it and necessary to the conduct of its business. (e) Compliance with Laws. Comply, and cause each Subsidiary to -------------------- comply, with all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which would materially adversely affect its business or condition, financial or other. (f) Visitation Rights. At any reasonable time and from time to time, ----------------- permit the Purchaser or any agents or representatives thereof, to examine and make copies of and extracts from the records and books of account of, and visit and inspect the properties of, the Company and any Subsidiary, and to discuss the affairs, finances and accounts of the Company and any Subsidiary with any of their officers or directors and independent accountants. (g) Keeping of Records and Books of Account. Keep, and cause each --------------------------------------- Subsidiary to keep, adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and such Subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made. (h) Maintenance of Properties, etc. Maintain and preserve, and cause ------------------------------ each Subsidiary to maintain and preserve, all of its properties, necessary in the proper conduct of its business, in good repair, working order and condition, ordinary wear and tear excepted. (i) Compliance with ERISA. Comply, and cause each Subsidiary to --------------------- comply, with all minimum funding requirements applicable to any pension or other employee benefit or employee contribution plans which are subject to ERISA or to the Internal Revenue Code of 1986, as amended (the "Code"), and comply, and cause each Subsidiary to comply, in all other material respects with the provisions of ERISA and the Code, and the rules and regulations thereunder, which are applicable to any such plan. Neither the Company nor any Subsidiary will permit any event or condition to exist which could permit any such plan to be terminated under circumstances which would cause the lien provided for in Section 4068 of ERISA to attach to the assets of the Company or any Subsidiary. (j) Maintenance of Debt to Equity Ratio. Maintain a ratio of ----------------------------------- Consolidated Indebtedness (other than Indebtedness represented by the Notes and deferred grant income reflected on the balance sheet of the Company at the end of the fiscal quarter being measured) to Consolidated Net Worth (plus Indebtedness represented by the Notes) of not more than 1 to 1, such ratio to be measured at the end of each fiscal quarter of the Company. (k) Maintenance of Interest Coverage. Maintain a ratio of -------------------------------- Consolidated Net Earnings Available for Interest Charges to Interest Charges of not less than 2 to 1, such ratio to be measured at the end of each fiscal quarter of the Company as an average of the four most recent fiscal quarters of the Company. -17- (l) Foreign Corrupt Practices Act. Comply, and cause each Subsidiary ----------------------------- to comply, and cause each officer, director, employee and agent of the Company and each Subsidiary to comply, at all times with the prohibitions on certain acts and practices set forth in the Foreign Corrupt Practices Act of 1977, and any rules or regulations promulgated thereunder. (m) Equal Employment Opportunity. Comply, and cause each Subsidiary ---------------------------- to comply, with all applicable laws of the United States, the Commonwealth of Massachusetts, and of each other applicable jurisdiction relating to equal employment opportunity, any rules, regulations, administrative orders and Executive Orders relating thereto and the applicable terms, relating to equal employment opportunity, of any Government Contract; and keep, and cause each Subsidiary to file, all reports, affirmative action plans and forms required to be filed, pursuant to any such applicable law or the terms of any such Government Contract; provided, however, the Company or any Subsidiary shall not -------- ------- be considered to have failed to comply with the foregoing during any period that any matter relating to the Company's or such Subsidiary's employment practices is being contested by the Company or such Subsidiary in appropriate proceedings, or thereafter, if the Company or such Subsidiary complies with any final determination issued in such proceedings. (n) Status of Notes and Warrants as Qualified Investments. In the ----------------------------------------------------- event that any of the statements, information and related data provided by or on behalf of the Company or any Subsidiary and relied upon by the Purchaser in determining that the Notes and Warrants constitute "qualified investments" within the meaning of that term in the Capital Resource Company Act shall be put in issue in any formal or informal proceedings initiated or conducted by or on behalf of the Commonwealth of Massachusetts, the Company shall, upon reasonable notice and at its expense, provide, and, cause each Subsidiary to provide, such additional information, witnesses and related data as may be reasonably necessary or appropriate to support the representations and warranties set forth in Article III. (o) Attendance at Board Meetings. The Company shall permit the ---------------------------- Purchaser or its designee to have one observer attend each meeting of its Board of Directors. The Company shall send to the Purchaser and such designee the notice of the time and place of such meeting in the same manner and at the same time as it shall send such notice to its directors. The Company shall also provide to the Purchaser copies of all notices, reports, minutes and consents at the time and in the manner as they are provided to the Board of Directors. (p) Compensation. Compensation of all officers of the Company and ------------ any Subsidiary shall be determined by a committee of the Company's Board of Directors, which committee shall consist of not less than three (3) directors who are not employees of the Company or any Subsidiary. (q) Compliance with Security Agreement. Comply at all times with all ---------------------------------- of the terms and conditions of the Security Agreement. 4.02. Negative Covenants of the Company. Without limiting any other --------------------------------- covenants and provisions hereof, the Company covenants and agrees that, as long as any of the Notes or Warrants are outstanding, it will comply with and observe the following covenants and provisions, -18- and will cause each Subsidiary to comply with and observe such of the following covenants and provisions as are applicable to such Subsidiary, and will not: (a) Liens. Create, incur, assume or suffer to exist, or permit any ----- Subsidiary to create, incur, assume or suffer to exist, any mortgage, deed of trust, pledge, lien, security interest or other charge or monetary claims(including the lien or retained security title of a conditional vendor) of any nature, upon or with respect to any of its properties, now owned or hereinafter acquired, or assign or otherwise convey any right to receive income, except that the foregoing restrictions shall not apply to mortgages, deeds of trust, pledges, liens, security interests or other charges or monetary claims: (i) for taxes, assessments or governmental charges or levies on property of the Company or any Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings; (ii) imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business; (iii) arising out of pledges or deposits under workmen's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation; (iv) securing the performance of bids, tenders, contracts (other than for the repayment of borrowed money), statutory obligations and surety bonds; (v) in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property which do not materially detract from its value or impair its use; (vi) arising by operation of law in favor of the owner or sublessor of leased premises and confined to the property rented; (vii) arising from any litigation or proceeding which is being contested in good faith by appropriate proceedings, provided, however, that no execution or levy has been made; (viii) described in Exhibit 3.07 which secure the Indebtedness ------------ set forth in Exhibit 3.05, provided that no such lien is extended to cover ------------ other or different property of the Company or any Subsidiary, except as is otherwise set forth in Exhibit 3.07; ------------ (ix) now or hereafter granted to the Purchaser pursuant to the Security Agreement; (x) arising out of a purchase money mortgage or security interest on personal property to secure the purchase price of such property (or to secure Indebtedness incurred solely for the purpose of financing the acquisition of any such property), provided -19- that such purchase money mortgage or security interest does not extend to any other or different property of the Company or any Subsidiary; and (xi) now or hereafter granted to secure Senior Debt. (b) Indebtedness. Create, incur, assume or suffer to exist, or ------------ permit any Subsidiary to create, incur, assume or suffer to exist, any liability with respect to Indebtedness except for: (i) the Notes; (ii) Indebtedness for money borrowed, provided that at the time such Indebtedness for money borrowed is incurred there does not exist, and such Indebtedness does not create, an Event of Default or an event which, but for the requirement that notice be given or time lapse or both, would constitute an Event of Default; (iii) Current Liabilities, other than for borrowed money, which are incurred in the ordinary course of business; and (iv) Indebtedness with respect to lease obligations, provided that such lease obligations do not violate subsection 4.02(c). (c) Lease Obligations. Create, incur, assume or suffer to exist, or ----------------- permit any Subsidiary to create, incur, assume or suffer to exist, any obligations as lessee for the rental or hire of real or personal property in connection with any sale and leaseback transaction; or become obligated to pay any rent for real property or personal property under any lease with an original term, including any lessor options to renew or extend, of more than three years if the aggregate of consolidated fixed annual rent which would be payable in any fiscal year by the Company and its Subsidiaries under all such leases would exceed $800,000. (d) Assumptions or Guaranties of Indebtedness of Other Persons. ---------------------------------------------------------- Assume, guarantee, endorse or otherwise become directly or contingently liable on, or permit any Subsidiary to assume, guarantee, endorse or otherwise become directly or contingently liable on (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor or otherwise to assure the creditor against loss) any Indebtedness of any other Person, except for guaranties by endorsement of negotiable instruments for deposit or collection in the ordinary course of business. (e) Mergers, Sale of Assets, etc. Merge or consolidate with, or sell, ---------------------------- assign, lease or otherwise dispose of or voluntarily part with the control of (whether in one transaction or in a series of transactions) a material portion of its assets (whether now owned or hereinafter acquired) or sell, assign or otherwise dispose of (whether in one transaction or in a series of transactions) any of its accounts receivable (whether now in existence or hereinafter created) at a discount or with recourse, to, any Person, or permit any Subsidiary to do any of the foregoing, except for sales or other dispositions of assets in the ordinary course of business and except that (1) any Subsidiary may merge into or consolidate with or transfer assets to any other Subsidiary, (2) any Subsidiary may merge into or transfer assets to the Company, (3) the Company may -20- merge any Person into it or otherwise acquire such Person as long as the Company is the surviving entity, such merger or acquisition does not result in the violation of any of the provisions of this Agreement and no such violation exists at the time of such merger or acquisition, and, provided that such merger or acquisition does not result in the issuance (in one or more transactions) of shares of the voting stock of the Company representing in the aggregate more than twenty percent (20%) of the total outstanding voting stock of the Company, on a fully diluted basis, immediately following the issuance thereof, (4) the Company may sell fixed assets up to two percent (2%) (based upon its then net book value) of its consolidated net fixed assets in any period of twelve (12) consecutive months and (5) the Company may sell, lease, transfer all or a portion of, control of, enter into a joint venture pertaining to, or otherwise dispose of its so-called "South Quay" project, as described in its Annual Report, provided that any disposition is for not less than its fair market value as reasonably determined by the Board of Directors of the Company and further provided that, if any distribution is made to the holders of Common Stock of the Company in connection with, or as a result of, such disposition, a similar distribution shall be made to the holders of the Warrants, calculated as if such Warrants had been exercised in their entirety as of the record or payment date for such distribution. (f) Investments in Other Persons. Make or permit any Subsidiary to ---------------------------- make, any loan or advance to any person, or purchase, otherwise acquire, or permit any Subsidiary to purchase or otherwise acquire, the capital stock, assets comprising the business of, obligations of, or any interest in, any Person, except: (i) investments by the Company or a Subsidiary in evidences of indebtedness issued or fully guaranteed by the United States of America and having a maturity of not more than one year from the date of acquisition; (ii) investments by the Company or a Subsidiary in certificates of deposit, notes, acceptances and repurchase agreements having a maturity of not more than one year from the date of acquisition issued by a bank organized in the United States having capital, surplus and undivided profits of at least $100,000,000 and whose parent holding company has long- term debt rated Aa1 or higher, and whose commercial paper (if rated) is rated Prime 1, by Moody's Investors Service, Inc.; (iii) loans or advances from a Subsidiary to the Company; (iv) investments by the Company or a Subsidiary in the highest- rated commercial paper having a maturity of not more than one year from the date of acquisition; (v) other loans, advances and investments; provided that the aggregate amount of all such other loans, advances and investments does not exceed, at any one time outstanding, two percent (2%) of the Consolidated Net Worth of the Company as of the end of its then most recent fiscal quarter; and -21- (vi) loans, advances or investments for the "South Quay" project, including loans, advances or investments to joint venture partners, subsidiaries or other entities, if any, which may become involved in said project. (g) Distributions. Declare or pay any dividends, purchase, redeem, ------------- retire, or otherwise acquire for value any of its capital stock (or rights, options or warrants to purchase such shares) now or hereafter outstanding, return any capital to its stockholders as such, or make any distribution of assets to its stockholders as such, or permit any Subsidiary to do any of the foregoing (such transactions being hereinafter referred to as "Distributions"), except that the Subsidiaries may declare and make payment of cash and stock - ------ dividends, return capital and make distributions of assets to the Company; provided, however, that nothing herein contained shall prevent the Company from: - -------- ------- (i) effecting a stock split or declaring or paying any dividend consisting of shares of any class of capital stock to the holders of shares of such class of capital stock, or (ii) redeeming any stock of a deceased stockholder out of insurance held by the Company on that stockholder's life, or (iii) making cash distributions to its stockholders, provided such cash distributions in any fiscal year do not exceed twenty-five percent (25%) of the Company's Consolidated Net Income for its immediately prior fiscal year, or (iv) making distributions permitted by subsection 4.02(e)(5), or (v) repurchasing shares of the Company's Common Stock in the open market provided that the shares of Common Stock so repurchased are used solely to satisfy the Company's commitment to deliver shares of Common Stock to CPC International Inc. pursuant to that certain Settlement Agreement, dated December 12 1995, if in the case of any such transaction there does not exist at the time of such Distribution an Event of Default or an event which, but for the requirement that notice be given or time elapse or both, would constitute an Event of Default and provided that such Distribution can be made in compliance with the other terms of this Agreement. (h) Dealings with Affiliates. Enter or permit any Subsidiary to ------------------------ enter into any transaction with any holder of 5% or more of any class of capital stock of the Company, or any member of their families or any corporation or other entity in which any one or more of such stockholders or members of their immediate families directly or indirectly holds five percent (5%) or more of any class of capital stock except in the ordinary course of business and on terms not less favorable to the Company or the Subsidiary than it would obtain in a transaction between unrelated parties. (i) Maintenance of Ownership of Subsidiaries. Sell or otherwise ---------------------------------------- dispose of any shares of capital stock of any Subsidiary, except to the Company or another Subsidiary, or permit -22- any Subsidiary to issue, sell or otherwise or the capital stock of any Subsidiary, except to the Company or another Subsidiary, provided, however, that -------- ------- nothing herein contained shall prevent any merger, consolidation or transfer of assets permitted by subsection 4.02(e). (j) Change in Nature of Business. Make, or permit any Subsidiary to ---------------------------- make, any material change in the nature of its business as carried on at the date hereof. 4.03. Reporting Requirements. The Company will furnish to each ---------------------- registered holder of any Note, any Warrant or any Common Stock issued upon exercise of any Warrant: (a) as soon as possible and in any event within five (5) days after the occurrence of each Event of Default or each event which, with the giving of notice or lapse of time or both, would constitute an Event of Default, the statement of the chief financial officer of the Company setting forth details of such Event of Default or event and the action which the Company proposes to take with respect thereto; (b) as soon as available and in any event within forty-five (45) days after the end of each of the first three quarters of each fiscal year of the Company, consolidated balance sheets of the Company and its Subsidiaries, if any, as of the end of such quarter and consolidated statements of income and cash flows of the Company and its Subsidiaries, if any, for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer of the Company as having been prepared in accordance with generally accepted accounting principles consistently applied; (c) as soon as available and in any event within ninety (90) days after the end of each fiscal year of the Company, a copy of the annual audit report for such year for the Company and its Subsidiaries, if any, including therein consolidated balance sheets of the Company and its Subsidiaries, if any, as of the end of such fiscal year and consolidated statements of income, shareholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, all duly certified by independent public accountants of recognized standing acceptable to the Purchaser; (d) at the time of delivery of each quarterly and annual statement, a certificate, executed by the chief financial officer in the case of quarterly statements and the Company's independent public accountants in the case of annual statements, stating that such officer or accountants, as the case may be, has caused this Agreement, the Security Agreement, the Notes, and the Warrants to be reviewed and has no knowledge of any default by the Company or any Subsidiary in the performance or observance of any of the provisions of this Agreement, the Security Agreement, the Notes or the Warrants or, if such officer or accountant has such knowledge, specifying such default and the nature thereof. Each such certificate shall set forth computations in reasonable detail demonstrating compliance with the provisions of subsections 4.01(j) and (k) and subsection 4.02(c); -23- (e) promptly upon receipt thereof, any written report submitted to the Company by independent public accountants in connection with an annual or interim audit of the books of the Company and its Subsidiaries made by such accountants; (f) prior to the start of each fiscal year, consolidated capital and operating expense budgets, cash flow projections and income and loss projections for the Company and its Subsidiaries in respect of such fiscal year, in such form as is customarily prepared by the Company for its own internal use, and, promptly after preparation, any revisions to any of the foregoing; (g) promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Company or any Subsidiary of the type described in Section 3.04; and (h) promptly after sending, making available, or filing the same, such reports and financial statements as the Company or any Subsidiary shall send or make available to the stockholders of the Company or the Securities and Exchange Commission. 4.04. Termination of Certain Covenants. The covenants set forth in -------------------------------- subsections 4.01(a), (b), (c), (h), (i), (j), (k), (l) and (q) and in subsections 4.02(a), (b), (c), (d), (e), (f), (h) and (i) shall terminate and be of no further force or effect when the Notes have been redeemed in their entirety. Further, all of the covenants set forth in Sections 4.01, 4.02 and 4.03 shall terminate and be of no further force and effect when the Notes have been redeemed in their entirety and the Warrants have been exercised in their entirety provided that the Company shall then be subject to the reporting requirements of the Exchange Act. ARTICLE V REGISTRATION RIGHTS 5.01. "Piggy Back" Registration. If at any time the Company shall ------------------------- determine to register under the Securities Act (including pursuant to a demand of any stockholder of the Company exercising registration rights) any of its Common Stock of the type which has been or may be issued upon the exercise of the Warrants, other than on Form S-8 or its then equivalent or in connection with a merger or acquisition or consolidation with another corporation, it shall send to each holder of Registrable Shares, including each holder who has the right to acquire Registrable Shares, written notice of such determination and, if within thirty (30) days after receipt of such notice, such holder shall so request in writing, the Company shall use its best efforts to include in such registration statement all or any part of the Registrable Shares such holder requests to be registered, except that if, in connection with any offering involving an underwriting of Common Stock to be issued by the Company, the managing underwriter shall impose a limitation on the number of shares of such Common Stock which may be included in any such registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution, and such limitation is imposed pro rata among the holders of such --- ---- Common Stock having an incidental ("piggy back") right to include such Common Stock in the registration statement according to the amount of such Common Stock which each holder had requested to be -24- included pursuant to such right, then the Company shall be obligated to include in such registration statement only such limited portion of the Registrable Shares with respect to which such holder has requested inclusion hereunder. No incidental right under this Section 5.01 shall be construed to limit any registration required under Section 5.02. 5.02. Required Registration. If on any one occasion, one or more --------------------- holders of at least forty percent (40%) of the Registrable Shares shall notify the Company in writing that it or they intend to offer or cause to be offered for public sale at least twenty percent (20%) of the Registrable Shares, the Company will so notify all holders of Registrable Shares, including all holders who have a right to acquire Registrable Shares. Upon written request of any holder given within thirty (30) days after the receipt by such holder from the Company of such notification, the Company will use its best efforts to cause such of the Registrable Shares as may be requested by any holder thereof (including the holder or holders giving the initial notice of intent to offer) to be registered under the Securities Act as expeditiously as possible; provided, however, if the Company's managing underwriter, if any, for a required - -------- ------- registration under this Section 5.02 shall impose a limitation on the number of shares of such Common Stock which may be included in any such registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution, and such limitation is imposed pro rata among any --- ---- participating holders, then the Company shall be obligated to include in such registration statement only such limited portion of the Registration Shares with respect to which such holder has requested inclusion hereunder. If the Company: (i) determined to include shares to be sold by it in any registration requests pursuant to this Section 5.02 or (ii) is engaged in or has fixed plans to engage within sixty (60) days of the date of such request in a registered public offering, in which the holders of Registrable Shares may exercise their "piggy back" rights under Section 5.01, then, in either of such events, such registration shall be deemed to have been a registration under Section 5.01 of this Article V. The Company may postpone the filing of any registration statement required under this Section 5.02 for a reasonable period of time, not to exceed ninety (90) days during any twelve (12) month period, if the Company has been advised by legal counsel, which counsel shall be reasonably acceptable to the holders of Registrable Shares, that such filing would require the disclosure of a material transaction or other matter and the Company determines in good faith that such disclosure would have a material adverse effect on the Company. The Company shall not be required to cause a registration statement requested pursuant to this Section 5.02 to become effective prior to ninety (90) days following the effective date of a registration statement initiated by the Company, if the request for registration has been received by the Company subsequent to the giving of written notice by the Company, made in good faith, to the holders of Registrable Shares to the effect that the Company is commencing to prepare a Company-initiated registration statement (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 or any other similar rule of the Securities and Exchange Commission under the Securities Act is applicable); provided, however, -------- ------- that the Company shall use its best efforts to achieve such effectiveness promptly following such ninety (90) day period if the request pursuant to this Section 5.02 has been made prior to the expiration of such ninety (90) day period. In the event the Company exercises its right to delay a required registration, the Holders initiating the request hereunder may withdraw such request by giving written notice to the Company within thirty (30) days after receipt of the notice of delay. -25- 5.03. Registration on Form S-3. In addition to the rights provided ------------------------ the holder of Registrable Shares in Sections 5.01 and 5.02 above, if the registration of Registrable Shares under the Securities Act can be effected on Form S-3 (or any similar form promulgated by the Securities and Exchange Commission), the Company will promptly so notify each holder of Registrable Shares, including each holder who has a right to acquire Registrable Shares, and then will at any time, and from time to time, thereafter, as expeditiously as possible, use its best efforts to effect qualification and registration under the Securities Act on said Form S-3 of all or such portion of the Registrable Shares as the holder or holders shall specify; provided, however, that the -------- ------- number of Registrable Shares requested to be included in such registration statement shall have an estimated aggregate price to the public of at least $500,000 and further provided that the Company shall not be required to effect ------- -------- more than one registration on Form S-3 pursuant to this Section 5.03 in any period of twelve (12) consecutive months. 5.04. Effectiveness. The Company will use its best efforts to ------------- maintain the effectiveness for up to nine (9) months of any registration statement pursuant to which any of the Registrable Shares are being offered, and from time to time will amend or supplement such registration statement and the prospectus contained therein as and to the extent necessary to comply with the Securities Act and any applicable state securities statute or regulation. The Company will also provide each holder of Registrable Shares with as many copies of the prospectus contained in any such registration statement as it may reasonably request. 5.05. Indemnification of Holder of Registrable Shares. In the event ----------------------------------------------- that the Company registers any of the Registrable Shares under the Securities Act, the Company will indemnify and hold harmless each holder and each underwriter of the Registrable Shares so registered (including any broker or dealer through whom such shares may be sold) and each person, if any, who controls such holder or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject under the Securities Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse each such holder, each such underwriter and each such controlling person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, in any preliminary or amended preliminary prospectus or in the prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with such registration, unless such untrue statement or omission was made in such registration statement, preliminary or amended, preliminary prospectus or prospectus (or the registration statement or prospectus as from time to time amended or supplemented) in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares, any such underwriter or any such controlling person expressly for use therein, or unless such indemnity would inure to the benefit of any underwriter or any person controlling -26- such underwriter, if such underwriter failed to send or give a copy of the final prospectus to the person asserting the claim at or prior to the written confirmation of the sale of Registrable Shares to such person and if the untrue statement or omission concerned had been corrected in such final prospectus. Promptly after receipt by any holder of Registrable Shares, any underwriter or any controlling person, of notice of the commencement of any action in respect of which indemnity may be sought against the Company, such holder of Registrable Shares, or such underwriter or such controlling person, as the case may be, will notify the Company in writing of the commencement thereof, and, subject to the provisions hereinafter stated, the Company shall assume the defense of such action (including the employment of counsel, who shall be counsel reasonably satisfactory to such holder of Registrable Shares, such underwriter or such controlling person, as the case may be), and the payment of expenses insofar as such action shall relate to any alleged liability in respect of which indemnity may be sought against the Company. Such holder of Registrable Shares, any such underwriter or any such controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of the Company unless the employment of such counsel has been specifically authorized by the Company. The Company shall not be liable to indemnify any person for any settlement of any such action effected without the Company's consent. The Company shall not, except with the approval of each party being indemnified under this Section 5.05, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to the parties being so indemnified of a release from all liability in respect to such claim or litigation. 5.06. Indemnification of Company. In the event that the Company -------------------------- registers any of the Registrable Shares under the Securities Act, each holder of the Registrable Shares so registered will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each underwriter of the Registrable Shares so registered (including any broker or dealer through whom such of the shares may be sold) and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them may become subject under the Securities Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer, underwriter or controlling person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, in any preliminary or amended preliminary prospectus or in the prospectus (or the registration statement or prospectus as from time to time amended or supplemented) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares expressly for use therein; provided, however, that -------- ------- such holder's obligations hereunder shall be limited to an amount equal to the proceeds to such holder of the Registrable Shares sold in such registration. Promptly after receipt of notice of the commencement of any action in respect of which indemnity may be sought against -27- such holder of Registrable Shares, the Company will notify such holder of Registrable Shares in writing of the commencement thereof, and such holder of Registrable Shares shall, subject to the provisions hereinafter stated, assume the defense of such action (including the employment of counsel, who shall be counsel reasonably satisfactory to the Company) and the payment of expenses insofar as such action shall relate to the alleged liability in respect of which indemnity may be sought against such holder of Registrable Shares. The Company and each such director, officer, underwriter or controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of such holder of Registrable Shares unless employment of such counsel has been specifically authorized by such holder of Registrable Shares. Such holder of Registrable Shares shall not be liable to indemnify any person for any settlement of any such action effected without such holder's consent. No holder of Registrable Shares shall, except with the approval of each party being indemnified under this Section 5.06, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to the parties being so indemnified of a release from all liability in respect to such claim or litigation. 5.07. Exchange Act Registration. If the Company at any time shall ------------------------- list any of its Common Stock of the type which may be issued upon the exercise of the Warrants on any national securities exchange and shall register such Common Stock under the Exchange Act, the Company will, at its expense, simultaneously list on such exchange and maintain such listing of, all of the Common Stock from time to time issuable upon exercise of the Warrants. The Company will use its best efforts to timely file with the Securities and Exchange Commission such information as the Securities and Exchange Commission may require under Sections 13 or 15(d) of the Exchange Act; and the Company shall use its best efforts to take all action as may be required as a condition to the availability of Rule 144 under the Securities Act (or any successor exemptive rule hereinafter in effect) with respect to the Common Stock issuable upon exercise of the Warrants. The Company shall furnish to any holder of Registrable Shares forthwith upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 144, (ii) a copy of the most recent annual or quarterly report of the Company as filed with the Securities and Exchange Commission, and (iii) such other reports and documents as a holder may reasonably request in availing itself of any rule or regulation of the Securities and Exchange Commission allowing a holder to sell any such Registrable Securities without registration. 5.08. Damages. The Company recognizes and agrees that the holder of ------- Registrable Shares will not have an adequate remedy if the Company fails to comply with this Article V and that damages will not be readily ascertainable, and the Company expressly agrees that, in the event of such failure, it shall not oppose an application by the holder of Registrable Shares or any other person entitled to the benefits of this Article V requiring specific performance of any and all provisions hereof or enjoining the Company from continuing to commit any such breach of this Article V. 5.09. Further Obligations of the Company. Whenever under the ---------------------------------- preceding Sections of this Article V, the Company is required hereunder to register Registrable Shares, it agrees that it shall also do the following: -28- (a) Furnish to each selling holder such copies of each preliminary and final prospectus and such other documents as said holder may reasonably request to facilitate the public offering of its Registrable Shares; (b) Use its best efforts to register or qualify the Registrable Shares covered by said registration statement under the applicable securities or "blue sky" laws of such jurisdictions as any selling holder may reasonably request; provided, however, that the Company shall not be obligated to qualify -------- ------- to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to the service of process in suits other than those arising out of the offer or sale of the securities covered by the registration statement in any jurisdiction where it is not then so subject; (c) Furnish to each selling holder a signed counterpart of (i) an opinion of counsel for the Company, dated the effective date of the registration statement, and (ii) "comfort" letters signed by the Company's independent public accountants who have examined and reported on the Company's financial statements included in the registration statement, to the extent permitted by the standards of the American Institute of Certified Public Accountants, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the accountants' "comfort" letters) with respect to events subsequent to the date of the financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' "comfort" letters delivered to the underwriters in underwritten public offerings of securities, to the extent that the Company is required to deliver or cause the delivery of such opinion or "comfort" letters to the underwriters in an underwritten public offering of securities; (d) Permit each selling holder or his counsel or other representatives to inspect and copy such corporate documents and records as may reasonably be requested by them; (e) Furnish to each selling holder a copy of all documents filed and all correspondence from or to the Securities and Exchange Commission in connection with any such offering; and (f) Use its best efforts to insure the obtaining of all necessary approvals from the National Association of Securities Dealers, Inc. 5.09. Expenses. In the case of a registration under Section 5.01, -------- 5.02 or 5.03, the Company shall bear all costs and expenses of each such registration, including, but not limited to, printing, legal and accounting expenses, Securities and Exchange Commission filing fees and "blue sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or -------- ------- otherwise bear (i) any portion of the actual and reasonable fees or disbursements of more than one counsel for the selling holders of Registrable Shares in connection with the registration of their -29- Registrable Shares, or (ii) any portion of the underwriters' commissions or discounts attributable to the Registrable Shares being offered and sold by the holders of Registrable Shares. 5.10. Certain Exceptions to Registration. The foregoing ---------------------------------- notwithstanding, the Company shall not be required to file a registration statement requested pursuant to Section 5.02 or Section 5.03 hereof, if: (i) within ten (10) days from the receipt of any request for such registration it shall deliver to each holder of Registrable Shares making such request an opinion of counsel to the Company, which opinion shall be addressed to each such holder, shall be in form and substance reasonably acceptable to such holder and which shall be to the effect that such holder may publicly sell all of such holder's Registrable Shares without restriction, including, without limitation, restrictions relating to the volume of shares which may be sold, the manner of any such sales, and (ii) the Company shall immediately upon receipt of the certificate or certificates for such Registrable Shares issue to the registered holder thereof a new certificate or certificates without the inscription thereon of any restrictive legend or legends and shall remove any "stop transfer" orders which may have been placed against such shares in order to insure compliance with federal and applicable state securities laws. ARTICLE VI EVENTS OF DEFAULT 6.01. Events of Default. If any of the following events ("Events of ----------------- Default") shall occur and be continuing: (a) The Company shall fail to pay any installment of principal of any of the Notes when due and such failure shall continue for five (5) business days; or (b) The Company shall fail to pay any interest or premium on any of the Notes when due and such failure shall continue for five (5) business days; or (c) The Company shall default in the performance of any covenant contained in subsections 4.01(j) or (k) and any registered holder of the Notes shall have given the Company at least five (5) days written notice thereof; or (d) Any representation or warranty made by the Company or any Subsidiary in this Agreement or by the Company or any Subsidiary (or any officers of the Company or any Subsidiary) in any certificate, instrument or written statement contemplated by or made or delivered pursuant to or in connection with this Agreement, shall prove to have been incorrect when made in any material respect; or (e) The Company or any Subsidiary shall fail to perform or observe any other term, covenant or agreement contained in this Agreement, the Security Agreement, the Notes or the Warrants on its part to be performed or observed and any such failure has not been remedied within thirty (30) days after written notice thereof shall have been given to the Company by any registered holder of the Notes; or -30- (f) The Company or any Subsidiary shall fail to pay any Indebtedness for borrowed money (other than as evidenced by the Notes) owing by the Company or such Subsidiary (as the case may be), or any interest or premium thereon, when due (or, if permitted by the terms of the relevant document, within any applicable grace period), whether such Indebtedness shall become due by scheduled maturity, by required prepayment, by acceleration, by demand or otherwise, or shall fail to perform any term, covenant or agreement on its part to be performed under any agreement or instrument (other than this Agreement or the Notes) evidencing or securing or relating to any Indebtedness owing by the Company or any Subsidiary, as the case may be, when required to be performed (or, if permitted by the terms of the relevant document, within any applicable grace period), if the effect of such failure to pay or perform is to accelerate, or to permit the holder or holders of such Indebtedness, or the trustee or trustees under any such agreement or instrument to accelerate, the maturity of such Indebtedness, unless such failure to pay or perform shall be waived by the holder or holders of such Indebtedness or such trustee or trustees; or (g) The Company or any Subsidiary shall be involved in financial difficulties as evidenced (i) by its admitting in writing its inability to pay its debts generally as they become due; (ii) by its commencement of a voluntary case under Title 11 of the United States Code as from time to time in effect, or by its authorizing, by appropriate proceedings of its Board of Directors or other governing body, the commencement of such a voluntary case; (iii) by its filing an answer or other pleading admitting or failing to deny the material allegations of a petition filed against it commencing an involuntary case under said Title 11, or seeking, consenting to or acquiescing in the relief therein provided, or by its failing to controvert timely the material allegations of any such petition; (iv) by the entry of an order for relief in any involuntary case commenced under said Title 11, which order is not dismissed or stayed within sixty (60) days; (v) by its seeking relief as a debtor under any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or by its consenting to or acquiescing in such relief; (vi) by the entry of an order by a court of competent jurisdiction (a) finding it to be bankrupt or insolvent, (b) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors, or (c) assuming custody of, or appointing a receiver or other custodian for, all or a substantial part of its property; or (vii) by its making an assignment for the benefit of, or entering into a composition with, its creditors, or appointing or consenting to the appointment of a receiver or other custodian for all or a substantial part of its property; or (h) Any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Company or any Subsidiary and, unless another method of payment has been agreed to by the adverse party, such judgment, writ, or similar process shall not be released, vacated or fully bonded within sixty (60) days after its issue or levy; then, and in any such event, the Purchaser or any other holder of the Notes may, by notice to the Company, declare the entire unpaid principal amount of the Notes, all interest accrued and unpaid thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such accrued interest and all such amounts shall become and be forthwith due and payable (unless there shall have occurred an Event of Default under subsection -31- 6.01(g) in which case all such amounts shall automatically become due and payable), without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company. 6.02. Annulment of Defaults. Section 6.01 is subject to the --------------------- condition that, if at any time after the principal of any of the Notes shall have become due and payable, and before any judgment or decree for the payment of the moneys so due, or any portion thereof, shall have been entered, all arrears of interest upon all the Notes and all other sums payable under the Notes and under this Agreement (except the principal of the Notes which by such declaration shall have become payable) shall have been duly paid, and every other default and Event of Default shall have been made good or cured, then and in every such case the holders of fifty one percent (51%) or more in principal amount of all Notes then outstanding shall, by written instrument filed with the Company, rescind and annul such declaration and its consequences; but no such rescission or annulment shall extend to or affect any subsequent default or Event of Default or impair any right consequent thereon. ARTICLE VII DEFINITIONS AND ACCOUNTING TERMS 7.01. Certain Defined Terms. As used in this Agreement, the --------------------- following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Agreement" means this Secured Subordinated Note and Warrant Purchase Agreement as from time to time amended and in effect between the parties. "Annual Report" means the 1994 Annual Report of the Company. "Capital Resource Company Act" shall have the meaning assigned to that term in Section 1.12. "Clinton" shall have the meaning assigned to that term in Section 3.01. "Code" shall have the meaning assigned to that term in Section 4.01(i). "Company" means and shall include Providence and Worcester Railroad Company and its successors and assigns. "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" includes the Company's Common Stock, $.50 par value per share, as authorized on the date of this Agreement and any other securities into which or for which any of such Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. -32- "Consolidated" and "consolidating" when used with reference to any term defined herein mean that term as applied to the accounts of the Company and its Subsidiaries consolidated in accordance with generally accepted accounting principles. "Consolidated Net Earnings Available for Interest Charges" means, for any period, Consolidated Net Income for such period plus the sum of: (a) interest paid or accrued by the Company and its Subsidiaries with respect to all Indebtedness for such period, (b) income and excess profit taxes for such period and all other taxes for such period which are imposed on or measured by income after deduction of interest charges and (c) amortization deducted in the determination of Consolidated Net Income for such period. "Consolidated Net Income" means, for any period, the net income (or net deficit) of the Company and its Subsidiaries for such period, after all expenses, taxes and other proper charges, determined in accordance with generally accepted accounting principles eliminating (i) all intercompany items, (ii) all earnings attributable to equity interests in Persons that are not Subsidiaries unless actually received by the Company or its Subsidiaries, (iii) all income arising from the forgiveness, adjustment or negotiated settlement of any Indebtedness, and (iv) any increase or decrease of income arising from any change in the method of accounting for any item from that employed in the preparation of the financial statements attached hereto as Exhibit 3.08. ------------ "Consolidated Net Worth" means, at any dates, the sum of (a) the par value of all of the stock of the Company issued and outstanding, (b) the amount of any additional paid-in-capital and (c) (i) the positive retained earnings, if any, of the Company and its Subsidiaries, or (ii) less, the amount of any deficit in the retained earnings of the Company and its Subsidiaries as the same appears on a consolidated balance sheet of the Company and its Subsidiaries prepared in accordance with generally accepted accounting principles consistently applied as of such date, after eliminating all intercompany items and all amounts properly attributable to (1) any write-up in the book value of any asset resulting from a revaluation thereof after the date of this Agreement; (2) the amount of any intangible assets including patents, trademarks, unamortized debt discount and expense, goodwill, covenants and agreements and the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of the Company or of the Subsidiary which shall have acquired the same; (3) earnings attributable to any other Person unless actually received by the Company or its Subsidiaries; and (4) changes in the method of accounting. "Current Liabilities" means all liabilities of any corporation which would, in accordance with generally accepted accounting principles consistently applied, be classified as current liabilities of a corporation conducting a business the same as or similar to that of such corporation, including, without limitation, all rental payments due under leases required to be capitalized in accordance with applicable Statements of Financial Accounting Standards and fixed -33- prepayments of, and sinking fund payments with respect to, Indebtedness (including Indebtedness evidenced by the Notes), which payments are required to be made within one year from the date of determination. "Distribution" shall have the meaning assigned to that term in Section 4.02(g). "ERISA" shall have the meaning assigned to that term in Section 3.10. "Events of Default" shall have the meaning assigned to that term in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934 or any similar federal statute, and the rules and regulations of the Securities and Exchange Commission (or of any other Federal Agency then administering the Exchange Act) thereunder, all as the same shall be in effect at the time. "Form 10-K" means the Company's Form 10-K for the fiscal year ended December 31, 1994 as filed with the Commission pursuant to the Exchange Act. "Form 10-Q" means the Company's Form 10-Q for the quarter ended September 30, 1995 as filed with the Commission pursuant to the Exchange Act. "Government Contract" shall have the meaning assigned to that in Section 3.14. "Indebtedness" means all obligations, contingent and otherwise, which should, in accordance with generally accepted accounting principles consistently applied, be classified upon the obligor's balance sheet as liabilities, but in any event including, without limitation, liabilities secured by any mortgage on property owned or acquired subject to such mortgage, whether or not the liability secured thereby shall have been assumed, and also including, without limitation, (i) all guaranties, endorsements and other contingent obligations, in respect of Indebtedness of others, whether or not the same are or should be so reflected in said balance sheet, except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business and (ii) the present value of any lease payments due under leases required to be capitalized in accordance with applicable Statements of Financial Accounting Standards, determined in accordance with applicable Statements of Financial Accounting Standards. "Interest Charges" means the interest expense of the Company and its Subsidiaries on Indebtedness (including the current portion thereof). "Notes" shall have the meaning assigned to that term in Section 1.01. "Person" means an individual, corporation, partnership, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. "Proxy Statement" means the Proxy Statement of the Company, dated March 31, 1995, used in connection with its April 26, 1995 annual meeting of stockholder. -34- "Purchaser" means and shall include not only the Massachusetts Capital Resource Company but also any other holder or holders of any of the Notes or Warrants. "Registrable Shares" means and include the shares of Common Stock issued and issuable upon exercise of the Warrants. "Securities Act" means the Securities Act of 1933 or any similar Federal statute, and the rules and regulations of the Securities and Exchange Commission (or of any other Federal agency then administering the Securities Act) thereunder, all as the same shall be in effect at the time. "Security Agreement" shall have the meaning assigned to that term in Section 2.02(a). "Senior Debt" shall have the meaning assigned to that term in Section 1.10(h). "Subsidiary" or "Subsidiaries" means any corporation or trust of which the Company and/or any of its other Subsidiaries (as herein defined) directly or indirectly owns at the time all of the outstanding shares of every class of such corporation or trust other than directors' qualifying shares. "Warrants" shall have the meaning assigned to that term in Section 1.02. 7.02. Accounting Terms. All accounting terms not specifically ---------------- defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in preparation of the financial statements attached hereto as Exhibit 3.08, and all financial data ------------ submitted pursuant to this Agreement and all financial tests to be calculated in accordance with this Agreement shall be prepared and calculated in accordance with such principles. ARTICLE VIII MISCELLANEOUS 8.01. No Waiver; Cumulative Remedies. No failure or delay on the ------------------------------ part of the Purchaser, or any other holder of the Notes or Warrants in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 8.02. Amendments, Waivers and Consents. Any provision in this -------------------------------- Agreement, the Security Agreement, the Notes or the Warrants to the contrary notwithstanding, changes in or additions to this Agreement may be made, and compliance with any covenant or provision herein or therein set forth may be omitted or waived, if the Company (i) shall, in the case of the Notes, obtain consent thereto in writing from the holder or holders of at least seventy-five percent (75%) in principal amount of all Notes then outstanding, and (ii) shall, in the case of the Warrants, obtain the consent thereto in writing from the holder or holders of at least seventy-five percent (75%) of the Common Stock issuable upon exercise of the Warrants, provided that no such consent shall be -------- effective to reduce or to postpone the date fixed for the payment of the principal (including any -35- required redemption) or interest payable on any Note, without the consent of the holder thereof, or to reduce the percentage of the Notes and Warrants the consent of the holders of which is required under this Section. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Written notice of any waiver or consent effected under this subsection shall promptly be delivered by the Company to any holders who did not execute the same. 8.03. Addresses for Notices, etc. All notices, requests, demands and -------------------------- other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed by certified mail, return receipt requested, or telegraphed or delivered to the applicable party at the addresses indicated below: If to the Company: Providence and Worcester Railroad Company 75 Hammond Street Worcester, Massachusetts 01610 Attention: President If to the Purchaser: Payments should be mailed to: Massachusetts Capital Resource Company P. O. Box 3707 Boston, Massachusetts 02241 and all other deliveries and other communications made at or sent to: Massachusetts Capital Resource Company 420 Boylston Street Boston, Massachusetts 02116 Attention: President If to any other holder of the Notes or Warrants: at such holder's address for notice as set forth in the register maintained by the Company, or, as to each of the foregoing, at such other address as shall be designated by such Person in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been duly given on (i) the date of receipt if delivered by hand or if sent by express carrier service or (ii) the earlier of the date of receipt and the date of first attempted delivery by the United States Postal Service if transmitted by mail which shall be by certified mail, postage prepaid, return receipt requested. 8.04. Costs, Expenses and Taxes. The Company agrees to pay on demand ------------------------- all costs and expenses of the Purchaser in connection with the preparation, execution and delivery of this Agreement, the Security Agreement, the Notes, the Warrants and other instruments and -36- documents to be delivered hereunder, including the reasonable fees and out-of- pocket expenses of Messrs. Testa, Hurwitz & Thibeault, special counsel for the Purchaser, with respect thereto, as well as the reasonable fees and out-of- pocket expenses of legal counsel, independent public accountants and other outside experts reasonably retained by the Purchaser in connection with the enforcement of this Agreement, the Security Agreement, the Notes, the Warrants and other instruments and documents to be delivered hereunder or thereunder. In addition, the Company shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement, the Security Agreement, the Notes, the Warrants and the other instruments and documents to be delivered hereunder or thereunder and agrees to save the Purchaser harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and filing fees. 8.05. Binding Effect; Assignment. This Agreement shall be binding -------------------------- upon and inure to the benefit of the Company and the Purchaser and their respective successors and assigns, except that the Company shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Purchaser. 8.06. Survival of Representations and Warranties. All ------------------------------------------ representations and warranties made in this Agreement, the Security Agreement, the Notes, the Warrants or any other instrument or document delivered in connection herewith or therewith, shall survive the execution and delivery hereof or thereof and the making of the loans. 8.07. Prior Agreements. This Agreement constitutes the entire ---------------- agreement between the parties and supersedes any prior understandings or agreements concerning the subject matter hereof. 8.08. Severability. The invalidity or unenforceability of any ------------ provision hereof shall in no way affect the validity or enforceability of any other provision. 8.09. Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the Commonwealth of Massachusetts. 8.10. Headings. Article, Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 8.11. Sealed Instrument. This Agreement is executed as an instrument ----------------- under seal. 8.12. Counterparts. This Agreement may be executed in any number of ------------ counterparts, all of which taken together shall constitute one and the same instrument, and each of the parties hereto may execute this Agreement by signing any such counterpart. 8.13. Further Assurances. From and after the date of this Agreement, ------------------ upon the request of the Purchaser, the Company and each Subsidiary shall execute and deliver such instruments, documents and other writings as may be necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement, the Security Agreement, the Notes and the Warrants. -37- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. PROVIDENCE AND WORCESTER RAILROAD COMPANY By /S/ Orville R. Harrold --------------------------------------------- Orville R. Harrold, President MASSACHUSETTS CAPITAL RESOURCE COMPANY By /S/ Richard W. Anderson --------------------------------------------- Richard W. Anderson, Senior Vice President -38- Exhibit 1.01 ------------ The Note represented by this certificate has not been registered under the Securities Act of 1933, as amended. This Note cannot be offered or sold except pursuant to a registration statement under the Act, or an exemption from registration under such Act. PROVIDENCE AND WORCESTER RAILROAD COMPANY SECURED SUBORDINATED NOTE DUE 2005 $5,000,000 December 19, 1995 For value received, Providence and Worcester Railroad Company, a Rhode Island corporation (the "Company"), hereby promises to pay to Massachusetts Capital Resource Company or registered assigns (hereinafter referred to as the "Payee"), on or before December 31, 2005, the principal sum of Five Million Dollars ($5,000,000) or such part thereof as then remains unpaid, to pay interest from the date hereof on the whole amount of said principal sum remaining from time to time unpaid at the rate of ten percent (10%) per annum, such interest to be payable quarterly on the last day of March, June, September and December in each year, the first such payment to be due and payable on December 31, 1995, until the whole amount of the principal hereof remaining unpaid shall become due and payable, and to pay interest at the rate of fourteen percent (14%) (so far as the same may be legally enforceable) on all overdue principal (including any overdue required redemption), premium and interest. Principal, premium, if any, and interest shall be payable in lawful money of the United States of America, in immediately available funds, at the principal office of the Payee or at such other place as the legal holder may designate from time to time in writing to the Company. Interest shall be computed on the basis of a 360-day year and a 30-day month. This Note is issued pursuant to and is entitled to the benefits of a certain Secured Subordinated Note and Warrant Purchase Agreement, dated as of December 19, 1995, between the Company and Massachusetts Capital Resource Company (as the same may be amended from time to time, hereinafter referred to as the "Agreement"), and each holder of this Note, by his acceptance hereof, agrees to be bound by the provisions of the Agreement, including, without limitation, that (i) this Note is subject to prepayment, in whole or in part, as specified in said Agreement, (ii) the principal of and interest on this Note is subordinated to Senior Debt, as defined in the Agreement and (iii) in case of an Event of Default, as defined in the Agreement, the principal of this Note may become or may be declared due and payable in the manner and with the effect provided in the Agreement. As further provided in the Agreement, upon surrender of this Note for transfer or exchange, a new Note or new Notes of the same tenor dated the date to which interest has been paid on the surrender Note and in an aggregate principal amount equal to the unpaid principal amount of the Note so surrendered will be issued to, and registered in the name of, the transferee or transferees. The Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes. -39- This Note is secured by and entitled to the benefits of a certain Security Agreement (as that term is defined in the Agreement), dated December 19, 1995, from the Company to Massachusetts Capital Resource Company. In case any payment herein provided for shall not be paid when due, the Company promises to pay all cost of collection, including all reasonable attorney's fees. This Note shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts and shall have the effect of a sealed instrument. The Company and all endorsers and guarantors of this Note hereby waive presentment, demand, notice of nonpayment, protest and all other demands and notices in connection with the delivery, acceptance, performance or enforcement of this Note. PROVIDENCE AND WORCESTER RAILROAD COMPANY By:_____________________________________________ Orville R. Harrold, President [Corporate Seal] Attest: By:_________________________ Its 4GWT140358-1 -40- Exhibit 1.02 ------------ The Warrant represented by this certificate and the securities issuable upon exercise hereof have not been registered under the Securities Act of 1933, as amended. Neither the Warrant nor such securities can be offered or sold except pursuant to a registration statement under the Act, or an exemption from registration under such Act. No. W-1 Right to Purchase 200,000 Shares of Common Stock of Providence and Worcester Railroad Company PROVIDENCE AND WORCESTER RAILROAD COMPANY Common Stock Purchase Warrant PROVIDENCE AND WORCESTER RAILROAD COMPANY, a Rhode Island corporation (the "Company"), hereby certifies that, for value received Massachusetts Capital Resource Company, or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 P.M., Boston time, on December 31, 2005, or such later time as may be specified in Section 17 hereof, 200,000 fully paid and nonassessable shares of Common Stock, $.50 par value, of the Company, at a purchase price per share of $7.10 (such purchase price per share as adjusted from time to time as herein provided is referred to herein as the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. This Warrant is one of the Common Stock Purchase Warrants (the "Warrants") evidencing the right to purchase shares of Common Stock of the Company, issued pursuant to a certain Secured Subordinated Note and Warrant Purchase Agreement (the "Agreement"), dated as of December 19, 1995, between the Company and Massachusetts Capital Resource Company, a copy of which is on file at the principal office of the Company and the holder of this Warrant shall be entitled to all of the benefits of the Agreement, as provided therein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Providence and Worcester Railroad Company and any corporation which shall succeed or assume the obligations of the Company hereunder. (b) The term "Common Stock" includes the Company's Common Stock, $.50 par value per share, as authorized on the date of the Agreement and any other securities into which or for which any of such Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, on the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to section 5 or otherwise. 1. Exercise of Warrant. ------------------- 1.1. Full Exercise. This Warrant may be exercised in full by the ------------- holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 1.2. Partial Exercise. This Warrant may be exercised in part by ---------------- surrender of this Warrant in the manner and at the place provided in subsection 1.1 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the subscription at the end hereof by (b) the Purchase Price then in effect. On any such partial exercise the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. 1.3. Payment by Notes Surrender. Notwithstanding the payment -------------------------- provisions of subsections 1.1 and 1.2, all or part of the payment due upon exercise of this Warrant in full or in part may be made by the surrender by such holder to the Company of any of the Company's Notes issued pursuant to the Agreement and such Notes so surrendered shall be credited against such payment in an amount equal to the principal amount thereof plus premium (if any) and accrued interest to the date of surrender. 1.4 Net Issue Election. The holder hereof may elect to receive, ------------------ without the payment by such holder of any additional consideration, shares equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the form of subscription at the end hereof duly executed by such holder, at the office of the Company. Thereupon, the Company shall issue to such holder such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A-B) ------- A where X = the number of shares to be issued to such holder pursuant to this subsection 1.4. Y = the number of shares covered by this Warrant in respect of which the net issue election is made pursuant to this subsection 1.4. A = the fair market value (as hereinafter defined) of one share of Common Stock, as determined in good faith by the Board of Directors of the Company, as at the time the net issue election is made pursuant to this subsection 1.4. B = the Purchase Price in effect under this Warrant at the time the net issue election is made pursuant to this subsection 1.4. For the purposes of this section 1.4, "fair market value" shall mean (i) the average (on the date the net issue election is made) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sales price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common stock is not reported on the Nasdaq National Market. If the Common Stock is not publicly traded at such date, "fair market value" shall mean the fair value of the Common Stock as determined in good faith by the Board of Directors of the Company after taking into consideration all factors which they deem appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. The Board of Directors of the Company shall promptly respond in writing to an inquiry by the holder hereof as to the fair market value of one share of Common Stock. 1.5. Required Exercise in Certain Events. In the event that the ----------------------------------- Company shall, on or after that date of the Agreement, effect a firm commitment underwritten public offering of shares of its Common Stock in which (i) the aggregate gross proceeds to the Company shall be at least $10,000,000 and (ii) the price per share to the public shall be at least $14.20 , then, in such event, to the extent that the holder of this Warrant is also the holder of one or more of the Notes, the outstanding principal amount and all accrued, but unpaid, interest on such Notes shall be used to the maximum extent available to exercise this Warrant, such exercise to be effective as of the closing of such public offering; provided, however, that such required exercise shall occur only: (i) to the extent that the shares of Common Stock issued upon such exercise are included in the registration statement for such underwritten public offering, or (ii) the shares of Common Stock issued upon such exercise may be freely sold by the holder hereof pursuant to subsection (k) of Rule 144 under the Securities Act of 1933, as amended. 1.6. Company Acknowledgment. The Company will, at the time of the ---------------------- exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 1.7. Trustee for Warrant Holders. In the event that a bank or trust --------------------------- company shall have been appointed as trustee for the holders of the Warrants pursuant to subsection 4.2, such bank or trust company shall have all the powers and duties of a warrant agent appointed pursuant to section 12 and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this section 1. 2. Delivery of Stock Certificates, etc., on Exercise. As soon as ------------------------------------------------- practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to section 1 or otherwise. 3. Adjustment for Dividends in Other Stock, Property, etc.; -------------------------------------------------------- Reclassification, etc. In case at any time or from time to time, the holders of - --------------------- Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in subsection 5.4), then and in each such case the holder of this Warrant, on the exercise hereof as provided in section 1, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this section 3) which such holder would hold on the date of such exercise if on the date hereof he had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this section 3) receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by sections 4 and 5. 4. Adjustment for Reorganization, Consolidation, Merger, etc. --------------------------------------------------------- 4.1. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, on the exercise hereof as provided in section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in sections 3 and 5. 4.2. Dissolution. In the event of any dissolution of the Company ----------- following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holders of the Warrants after the effective date of such dissolution pursuant to this section 4 to a bank or trust company having its principal office in Boston, Massachusetts, as trustee for the holder or holders of the Warrants. 4.3. Continuation of Terms. Upon any reorganization, consolidation, --------------------- merger or transfer (and any dissolution following any transfer) referred to in this section 4, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in section 6. 5. Adjustment for Issue or Sale of Common Stock at Less Than the ------------------------------------------------------------- Purchase Price in Effect. - ------------------------ 5.1. General. If the Company shall at any time or from time to time, ------- issue any additional shares of Common Stock (other than shares of Common Stock excepted from the provisions of this section 5 by subsections 5.4 and 5.5) without consideration or for a net consideration per share less than the Purchase Price in effect immediately prior to such issuance, then, and in each such case: (a) the Purchase Price shall be lowered to an amount determined by multiplying such Purchase Price then in effect by a fraction: (1) the numerator of which shall be (a) the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock, plus (b) the number of shares of Common Stock which the net aggregate consideration, if any, received by the Company for the total number of such additional shares of Common Stock so issued would purchase at the Purchase Price in effect immediately prior to such issuance, and (2) the denominator of which shall be (a) the number of shares of Common stock outstanding immediately prior to the issuance of such additional shares of Common Stock plus (b) the number of such additional shares of Common Stock so issued; and (b) the holder of this Warrant shall thereafter, on the exercise hereof as provided in section 1, be entitled to receive the number of shares of Common stock determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this subsection 5.1) be issuable on such exercise by the fraction of which (i) the numerator is the Purchase Price which would otherwise (but for the provisions of this subsection 5.1) be in effect, and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 5.2. Definitions, etc. For purposes of this section 5 and of ---------------- section 7: The issuance of any warrants, options or other subscription or purchase rights with respect to shares of Common Stock and the issuance of any securities convertible into or exchangeable for shares of Common Stock (or the issuance of any warrants, options or any rights with respect to such convertible or exchangeable securities) shall be deemed an issuance at such time of such Common Stock if the Net Consideration Per Share which may be received by the Company for such Common Stock (as hereinafter determined) shall be less than the Purchase Price at the time of such issuance and, except as hereinafter provided, an adjustment in the Purchase Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be made upon each such issuance in the manner provided in subsection 5.1. Any obligation, agreement or undertaking to issue warrants, options, or other subscription or purchase rights at any time in the future shall be deemed to be an issuance at the time such obligation, agreement or undertaking is made or arises. No adjustment of the Purchase Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be made under subsection 5.1 upon the issuance of any shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if any adjustment shall previously have been made upon the issuance of any such warrants, options or other rights or upon the issuance of any convertible securities (or upon the issuance of any warrants, options or any rights therefor) as above provided. Any adjustment of the Purchase Price and the number of shares of Common Stock issuable upon exercise of this Warrant with respect to this subsection 5.2 which relates to warrants, options or other subscription or purchase rights with respect to shares of Common Stock shall be disregarded if, as, and when all of such warrants, options or other subscription or purchase rights expire or are cancelled without being exercised, so that the Purchase Price effective immediately upon such cancellation or expiration shall be equal to the Purchase Price in effect at the time of the issuance of the expired or cancelled warrants, options or other subscriptions or purchase rights, with such additional adjustments as would have been made to that Purchase Price had the expired or cancelled warrants, options or other subscriptions or purchase rights not been issued. For purposes of this subsection 5.2, the "Net Consideration Per Share" which may be received by the Company shall be determined as follows: (A) The "Net Consideration Per Share" shall mean the amount equal to the total amount of consideration, if any, received by the Company for the issuance of such warrants, options, subscriptions, or other purchase rights or convertible or exchangeable securities, plus the minimum amount of consideration, if any, payable to the Company upon exercise or conversion thereof, divided by the aggregate number of shares of Common Stock that would be issued if all such warrants, options, subscriptions, or other purchase rights or convertible or exchangeable securities were exercised, exchanged or converted. (B) The "Net Consideration Per Share" which may be received by the Company shall be determined in each instance as of the date of issuance of warrants, options, subscriptions or other purchase rights, or convertible or exchangeable securities without giving effect to any possible future price adjustments or rate adjustments which may be applicable with respect to such warrants, options, subscriptions or other purchase rights or convertible securities. For purposes of this section 5, if a part or all of the consideration received by the Company in connection with the issuance of shares of the Common Stock or the issuance of any of the securities described in this section 5, consists of property other than cash, such consideration shall be deemed to have the same value as shall be determined in good faith by the Board of Directors of the Company. This subsection 5.2 shall not apply under any of the circumstances described in subsections 5.4 and 5.5. 5.3. Dilution in Case of Other Securities. In case any Other ------------------------------------ Securities shall be issued or sold, or shall become subject to issue upon the conversion or exchange of any stock (or Other Securities) of the Company (or any other issuer of Other Securities or any other person referred to in section 4) or to subscription, purchase or other acquisition pursuant to any rights or options granted by the Company (or such other issuer or person), for a consideration per share such as to dilute the purchase rights evidenced by this Warrant, the computations, adjustments and readjustments provided for this section 5 with respect to the Purchase Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable on the exercise of the Warrants, so as to protect the holders of the Warrants against the effect of such dilution. 5.4. Extraordinary Events. In the event that the Company shall (i) -------------------- issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of -47- shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this subsection 5.4. The holder of this Warrant shall thereafter, on the exercise hereof as provided in section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this subsection 5.4) be issuable on such exercise by a fraction of which (i) the numerator is the Purchase Price which would otherwise (but for the provisions of this subsection 5.4) be in effect, and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 5.5 Excluded Shares. Subsection 5.1 shall not apply to: (i) the --------------- issuance of shares of Common Stock, or options therefor, to directors, officers and employees of the Company pursuant to the Company's Stock Option Plan, Profit Sharing Plan and Supervisors Incentive Plan, as long as the aggregate number of shares, and options therefor (including options outstanding on the date of the Agreement) so issued does not exceed the number of shares authorized, or which could be issued, under such plans on the date of the Agreement or (ii) the issuance of shares of Common Stock pursuant to that certain Settlement Agreement, dated December 12, 1995, between the Company and CPC International, Inc. 6. No Dilution or Impairment. The Company will not, by amendment of ------------------------- its Articles of Organization or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of the Warrants above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of all Warrants from time to time outstanding, (c) will not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par value in respect of participation in dividends and in any such distribution of assets, and (d) will not transfer all or substantially all of its properties and assets to any other person (corporate or otherwise), or consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company (if the Company is not the surviving person), unless such other person shall expressly assume in writing and will be bound by all the terms of the Warrants. 7. Accountants' Certificate as to Adjustments. In each case of any ------------------------------------------ adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrants, the Company at its expense will promptly cause independent certified public accountants of recognized standing selected by the Company to compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth -48- such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such issue or sale and as adjusted and readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to each holder of a Warrant, and will, on the written request at any time of any holder of a Warrant, furnish to such holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. 8. Notices of Record Date, etc. In the event of --------------------------- (a) any taking by the Company of a record of the holders of any class or securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution (other than dividends payable solely out of earnings or earned surplus of the Company), or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrants and the issuance of securities referred to in subsection 5.5 of the Warrants), then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such -49- notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken. 9. Reservation of Stock, etc., Issuable on Exercise of Warrants. The ------------------------------------------------------------ Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrants. 10. Exchange of Warrants. Subject to compliance with federal and -------------------- applicable state securities laws, on surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (on payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 11. Replacement of Warrants. On receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 12. Warrant Agent. The Company may, by written notice to each holder ------------- of a Warrant, appoint an agent having an office in either Boston, Massachusetts, Providence, Rhode Island or New York, New York for the purpose of issuing Common Stock (or Other Securities) on the exercise of the Warrants pursuant to section 1, exchanging Warrants pursuant to section 10, and replacing Warrants pursuant to section 11, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 13. Remedies. The Company stipulates that the remedies at law of the -------- holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 14. Negotiability, etc. This Warrant is issued upon the following ------------------ terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) subject to compliance with federal and applicable state securities laws, title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer -50- absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 15. Notices, etc. All notices and other communications from the ------------ Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 16. Miscellaneous. This Warrant and any term hereof may be changed, ------------- waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Massachusetts. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant is being executed as an instrument under seal. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 17. Expiration; Automatic Exercise. The right to exercise this ------------------------------ Warrant shall expire at 5:00 P.M., Boston time, on the later of (i) December 31, 2005 or (ii) at such time as all principal and interest on the Notes (as defined in the Agreement) is paid in full. Notwithstanding the foregoing, this Warrant shall automatically be deemed to be exercised in full pursuant to the provisions of subsection 1.4 hereof, without any further action on behalf of the holder hereof, immediately prior to the time this Warrant would otherwise expire pursuant to the preceding sentence. Dated: December 19, 1995 PROVIDENCE AND WORCESTER RAILROAD COMPANY By_______________________________________ Orville R. Harrold, President [Corporate Seal] Attest: By ________________________________ Its -51- FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO PROVIDENCE AND WORCESTER RAILROAD COMPANY The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, ........ shares of Common Stock of PROVIDENCE AND WORCESTER RAILROAD COMPANY and herewith makes payment of $........ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to .............., whose address is ................... Dated: .................................................. (Signature must conform to name of holder as specified on the face of the Warrant) .................................................. (Address) ____________________ FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto .................. the right represented by the within Warrant to purchase ............. shares of Common Stock of PROVIDENCE AND WORCESTER RAILROAD COMPANY to which the within Warrant relates, and appoints .......................... Attorney to transfer such right on the books of PROVIDENCE AND WORCESTER RAILROAD COMPANY with full power of substitution in the premises. Dated: .................................................. (Signature must conform to name of holder as specified on the face of the Warrant) .................................................. (Address) Signed in the presence of: ........................... -52- EX-10.2 6 SETTLEMENT AGREEMENT & RELEASE EXHIBIT 10.2 SETTLEMENT AGREEMENT AND RELEASE This Settlement Agreement and Release (the "Agreement") is entered into this 12th day of December 1995, by CPC International Inc., a Delaware Corporation (hereinafter "CPC"), and the Providence and Worcester Railroad Company, a Rhode Island Corporation (hereinafter "P&W"). W I T N E S S E T H ------------------- WHEREAS, CPC has alleged certain claims against P&W arising out of the release of a hazardous substance as defined under the Comprehensive Environmental Response, Compensation, and Liability Act 42 U.S.C.A. 9601 et seq. ("CERCLA") on property formerly owned by CPC's subsidiary company Peterson Puritan Inc. located in Cumberland, Rhode Island ("the Property") which the U.S. Environmental Protection Agency (the "EPA") has designated as a portion of a Superfund site and which includes the Property on the National Priority List known as the Peterson/Puritan Superfund Site (hereinafter "the Site") and has further designated the area affected by this release as Operable Unit 1 ("OU- 1"); and WHEREAS, the EPA has identified the solid and hazardous wastes, substances, pollutants and contaminants within the CCL Remediation Area of OU-1 in that Record of Decision executed September 30, 1993 for OU-1 by Paul Keough, Acting Regional Administrator (hereinafter the "Contamination"); and, WHEREAS, as a result of the action by the EPA, CPC as an indemnitor of the present owner of the Property which is the successor to Peterson Puritan Inc., has expended and will continue to expend considerable sums of money for the remediation of the Property as directed by the EPA under certain Administrative Orders and Consent Decree as from time to time modified by the EPA (the"Work"); and WHEREAS, P&W denies responsibility and liability for any of the claims for which CPC seeks recovery; and WHEREAS, CPC and P&W wish to settle the claims without any admissions of liability and in order to avoid the expense and uncertainty of litigation: NOW, THEREFORE, CPC and P&W, intending to be legally bound hereby and in consideration of the foregoing and the mutual exchange of promises as recited herein, as well as other good and valuable consideration, receipt of which is hereby acknowledged, agree as follows: 1 . (a) In accordance with the terms and conditions of this Agreement P&W shall issue and deliver to CPC an aggregate number of shares of P&W voting common stock, $0.50 par value per share, (the "Initial CPC Shares") which, after giving effect to the issuance and delivery thereof, represents five (5) percent of the issued and outstanding shares of such class (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act') and the rules and regulations thereunder) (but in no event will the value attributed to the Initial CPC Shares, as determined in accordance with Section 1(c) hereof, exceed $990,000). The Initial CPC Shares shall be delivered in two installments, one for approximately 50% of the Initial CPC Shares in December, 1995 (but no later than December 31, 1995) and the second for approximately 50% of the Initial CPC Shares in January, 1996 (but no later than January 6, 1996). (b) On the earlier of (i) June 30, 1999 or (ii) the closing date of any registered public offering by P&W of its own shares for its own account (other than a registration relating to stock option plans or employee benefit plans and similar plans) which, after giving pro forma effect to the closing --- ------ thereof and CPC's acquisition of Additional CPC Shares (as defined below), would not result in CPC being subjected to a reporting obligation under Section 13(d) of the Exchange Act or any successor provision (the earlier of such dates is hereinafter referred to as the "Deferred Payment Date"), P&W will pay to CPC additional consideration (the "Additional Consideration") having a value, expressed in dollar terms, equal to the difference (the "Difference") between (A) $990,000 and (B) the value of the Initial CPC Shares (as determined in accordance with Section 1 (c) hereof). The Additional Consideration shall be paid, at the option of P&W, in the form of either (aa) cash in the amount of the Difference, plus interest thereon at the rate of 8.75% per annum from the date for delivery of the second installment of the Initial CPC Shares through the date of such cash payment or (bb) the issuance and delivery to CPC of additional shares of P&W voting common stock, $0.50 par value per share, (the "Additional CPC Shares") having a value (as determined in accordance with Section. 1 (c) hereof) equal to the Difference. Notwithstanding anything to the contrary contained in this paragraph (b) of this Section 1: (A) if P&W elects to pay the Additional Consideration in the form of Additional CPC Shares, and if by so doing CPC would thereby be subjected to a reporting obligation under Section 13(d) of the Exchange Act or any successor provision, the issuance and delivery of such portion of the Additional CPC Shares which would otherwise subject CPC to such reporting obligation shall automatically, and without any action on the part of CPC or P&W, be deferred until the first anniversary of the Deferred Payment Date and (B) if P&W elects to pay the Additional Consideration in the form of additional CPC Shares, and if between the date for delivery of the second installment of the Initial CPC Shares and the date for delivery of the Additional CPC Shares, P&W shall undergo or suffer a stock split, stock dividend, combination of shares, recapitalization, merger, consolidation or other reorganization, then the term "Additional CPC Shares" shall mean and refer to, and CPC shall be entitled to receive, such securities or other consideration as would have been received by CPC as a result of such stock split, stock dividend, combination of shares, recapitalization, merger, consolidation or other reorganization had it owned the Additional CPC Shares at the time thereof. (c) For the purposes of this Section 1, the CPC Shares shall be deemed to have a market value equal to the average of the last reported sale price per share of 2 P&W's common stock on the NASD National Market System over the thirty (30) trading days next preceding: (i) in the case of any of the Initial CPC Shares, the date of Delivery (as hereinafter defined) thereof and (ii) in the case of any of the Additional CPC Shares, the date for Delivery of the second installment of the Initial CPC Shares. The parties recognize [(i)] that the share values so determined do not reflect the fact that the shares are restricted and are otherwise not readily salable; and (ii) that delivery of a portion of the Initial CPC Shares has been deferred as an accommodation to P&W. The term "Delivery", with respect to any CPC Shares, shall mean the date on which P&W issues direction to its transfer agent to issue such CPC Shares. (d) As used in this Agreement, the term "CPC Shares" shall mean and refer to both the Initial CPC Shares and the Additional CPC Shares. (e) In connection with the issuance and sale of the CPC Shares, P&W shall deliver to CPC stock certificates registered in the name of CPC, free of any restrictive legend except the following: "The shares represented hereby have not been registered under the Securities Act of 1933, as amended, or under state securities laws. The holder hereof has represented to the issuer that it has acquired the securities for investment and not with a view to resale or distribution, and they have been issued in reliance on that representation. Such shares may, therefore, not be sold, transferred, pledged or hypothecated unless they have been registered under said Act and state securities laws or unless counsel satisfactory to the Company has given an opinion that registration is not required." Concurrently with the delivery of the Initial CPC Shares, CPC shall execute and deliver to P&W an "investment letter" in form satisfactory to P&W and CPC and their respective counsel. P&W covenants that, with respect to the Initial CPC Shares, until the third (3rd) anniversary of the date upon which all of the Initial CPC Shares have been delivered to CPC, and, with respect to any Additional CPC Shares, until the third (3rd) anniversary of the date upon which all of such Additional CPC Shares have been delivered to CPC, and for so long thereafter as P&W has outstanding securities registered under the Securities Exchange Act of 1934 (the "Exchange Act"), P&W will take such action and timely file all reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission (the "Commission") thereunder, to the extent necessary to meet the public information requirements of Rule 144 under the Securities Act of 1933. 2. P&W will negotiate and execute Access Agreements and Institutional Controls required by EPA in connection with Work to be performed pursuant to the OU-1 Consent Decree. Such agreements shall provide that P&W will waive all Railway Protective Insurance required to undertake the EPA mandated remediation at the OU-1 3 Site and P&W will provide flagmen and other required safety personnel at its own costs for the protection of railroad traffic. Further P&W will be responsible for all other costs, if any, associated with access to and use of P&W property which are required for safety restrictions because of the proximity of the Work to the track, or otherwise in order to implement and monitor the Work (not to include capital costs associated with implementation and monitoring of the Work). 3. In the event of a recovery by way of litigation or settlement (hereinafter "the Recovery") by CPC against the NORTHBROOK EXCESS & SURPLUS INSURANCE COMPANY (hereinafter "Northbrook") in that litigation entitled CPC --- International Inc. v. Northbrook Excess & Surplus Insurance Company, C. A. No. - --------------------------------------------------------------------- 89-0211 L, presently pending in the U.S Court of Appeals or any further insurance claim (including actions against Northbrook, its successors or assigns) brought by CPC relating to the Contamination (hereinafter "the Litigation") P&W shall be entitled to ten percent (10%) of the Recovery. The Recovery shall be calculated after all unreimbursed out of pocket Litigation related expenses (to include outside attorneys fees, consultants and expert witness fees, and other expenses directly related to the Litigation) are subtracted. 4. In sole consideration of P&W's performance (as and when the same are to be performed hereunder) and non-breach of its obligations and agreements under this Agreement, CPC for itself and its successors and assigns hereby: (A) Agrees to defend, indemnify and hold harmless P&W, its past, present and future officers, directors, shareholders, affiliates, attorneys, agents, servants, representatives, subsidiaries, affiliates, partners, predecessors, successors, assigns, for any and all past, present or future claims (including without limitation, personal injury, property damage or any other type of claim), demands, obligations, actions, causes of action, damages, penalties, fines, costs, expenses, including attorneys fees and consultants' costs, or compensation of any nature whatever (including those which may be subrogated) whether known or unknown both in law and in equity which arise from the Contamination (collectively "Claims") including but not limited to, those arising from the failure of CPC to comply with the proposed Consent Decree and Statement of Work attached thereto as lodged in the U.S. District Court for the District of Rhode Island in that matter entitled United States of America v. Lonza et al Civil Action Number 95-397 and signed by the EPA Region 1 Administrator John DeVillars on July 25 1995, or otherwise in any administrative agency, or in any state, federal or other court or tribunal brought by any person or entity, private or governmental, whether asserted directly, by way of defense or set-off or recoupment, or otherwise, including, but not limited to, Claims of the EPA, CCL Custom Manufacturing, Inc., its successors and assigns, the State of Rhode Island and any agency or department thereof, any insurer of CPC, or its affiliates, any abutting property owner, or any other third party; 4 (B) Completely releases and forever discharges P&W, its past, present and future officers, directors, shareholders, affiliates, attorneys, agents, servants, representatives, subsidiaries, affiliates, partners, predecessors, successors and assigns (all of the foregoing being collectively referred to below as the P&W Releasees") of and from any and all past, present or future claims, demands, obligations, actions, causes of action, damages, costs, expenses or compensation of any nature whatsoever (including those which may be subrogated), whether known or unknown, both in law and equity, for P&W's actions or the actions of any P&W Releasees undertaken prior to execution of this Agreement which CPC, and its present affiliates, subsidiaries, successors and assigns ever had, now has or may hereafter have as a result of any of the facts or circumstances alleged and arising out of the Contamination; and (C) Covenants never to assert any complaint, charge or claim, file suit in a court of law, or commence any other proceeding against any of the P&W Releasees for actions undertaken by any P&W Releasees prior to execution of this Agreement which CPC or its successors and assigns ever had, now has or may hereafter have as a result of any of the facts or circumstances alleged or arising out of the Contamination. 5. P&W, for itself and its successors and assigns: (A) Completely releases and forever discharges CPC, its past, present and future officers, directors, shareholders, affiliates, attomeys, agents, servants, representatives, subsidiaries, affiliates, partners, predecessors, successors and assigns (all of the foregoing being collectively referred to below as the CPC Releasees") of and from any and all past, present or future claims, demands, obligations, actions, causes of action, damages, costs, expenses or compensation of any nature whatsoever (including those which may be subrogated), whether known or unknown, both in law and equity, for CPC's actions or the actions of any CPC Releasees undertaken prior to execution of this Agreement which P&W, its present and former affiliates and subsidiaries, and their successors and assigns, ever had, now has or may hereafter have as a result of any of the facts or circumstances alleged and arising out of the Contamination; and (B) Covenants never to assert any complaint, charge or claim, file suit in a court of law, or commence any other proceeding against any of the CPC Releasees for actions undertaken by any CPC Releasee prior to execution of this Agreement which any of the P&W Releasees ever had, now has or may hereafter have as a result of any of the facts or circumstances alleged and arising out of the contamination. 6. Nothing herein shall be deemed to release any representations, warranties or obligations of the parties made, undertaken or required pursuant to this Agreement. 5 7. P&W hereby represents and warrants to CPC as follows: (a) as of November 10, 1995, the authorized capital stock of P&W consists of 2,273,436 shares of P&W common stock, par value $.50 per share, of which at November 10, 1995, 2,054,620 shares were issued and outstanding; (b) P&W has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby; (c) the execution, delivery and performance of this Agreement by P&W have been duly authorized by P&W's Board of Directors, and no other corporate proceedings on the part of P&W are necessary to authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby; (d) each of the CPC Shares will be validly issued when delivered, fully paid and non-assessable and, when delivered, will be free and clear of any claims, liens, pledges, charges, encumbrances, mortgages, security interests, options, restrictions on transfer (except those imposed by the federal and state securities laws and this Agreement), rights of first refusal, preemptive or other rights or any other imperfections of title whatsoever; (e) all of P&W's filings with the Commission are current and conform to the disclosure requirements of the federal securities laws in all material respects; (f) P&W has delivered to CPC true and complete copies of all of P&W's filings with the Commission made within the last three (3) years, and none of such filings contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading; and (g) to the best of P&W's actual knowledge, there does not exist as of the execution of this Agreement any statutory or regulatory obligation that may be imposed upon an owner of shares of common stock of P&W by reason of its becoming an owner and owning such shares other than those imposed under the federal and state securities laws. 8.1 P&W Registrations. If at any time or times after the date hereof ------------------ and before January 6, 1999, P&W shall determine to register any of its securities (for itself or for any other securities holder of P&W) under the Securities Act of 1933, as amended (the "Act"), or any successor legislation (other than registration relating to stock option plans, employee benefit plans or a Rule 145 transaction), and in connection therewith P&W may lawfully register the common stock of P&W, P&W will promptly give written notice thereof to CPC and will use its best efforts to include in such registration and to effect the registration under the Act of all CPC Shares which CPC may request in writing delivered to P&W within 30 days after the date of the notice, given by P&W; provided, however, that in connection with an underwritten offering by P&W of any of its securities, if the managing underwriter shall impose a limitation on the number of shares of common stock which may be included in such registration by a group consisting of CPC and other holders of common stock having similar registration rights to CPC because, in its reasonable and good faith judgment, such limitation is necessary to effect an orderly public distribution, such limitation shall be imposed upon CPC and such other holders (and not on P&W) in proportion to the number of shares respectively requested by them to be included in such registration, except that if such registration is undertaken by P&W pursuant to the demand of any 6 such holder(s) of P&W common stock possessing so-called "demand" registration rights, the shares of other holders (including, without limitation, CPC) will not be included in such registration unless all shares to be issued and sold by P&W and all shares requested to be included by the demanding holder(s) are included. In the event of such a limitation, shares of persons not having similar registration rights will not be included in such registration. If P&W includes in such registration any securities to be offered by it, all expenses of the registration and offering shall be borne by P&W, except that CPC shall bear underwriting commissions and discounts and registration fees attributable solely to the CPC Shares being registered and the expense of its own legal counsel. If the registration is of exclusively a secondary offering, CPC shall bear its proportionate share of the expenses of the registration and offering (provided all stockholders registering shares thereunder bear their proportionate share of expenses), except expenses which P&W would have incurred whether or not registration was attempted, including without limitation the expense of preparing normal audited or unaudited financial statements or summaries consistent with this Agreement or applicable Securities and Exchange Commission reports. VVithout in any way limiting the types of registrations to which this paragraph shall apply, in the event that P&W shall effect any "shelf registrations," then for each shelf registration effected by P&W, P&W shall take all necessary action, including, without limitation, the filing of post- effective amendments, to permit CPC to include the CPC Shares in such registrations in accordance with the terms of this paragraph, provided that P&W shall not be required to include any CPC Shares in such registration by post- effective amendment to the extent that the amount of such CPC Shares, when added to the number of shares of common stock theretofore or contemporaneously to be sold by P&W under such registration statement, would exceed the total number of shares of common stock registered thereunder. 8.2 Short Form Registrations. In addition to the registrations -------------------------- provided in paragraph 8.1 above, CPC shall be entitled to request by written notice to P&W from time to time that P&W register the offering and sale of all or a portion of the CPC Shares (not less than $500,000 in aggregate market value) on Form S-3 (or any similar short form registration), provided that P&W is eligible for such registration. Upon the written request of CPC, P&W will use its best efforts to cause such of the CPC Shares as may be requested by CPC to be registered under the Act in accordance with the terms of this paragraph 8.2, provided that P&W will not be obligated to effect such a registration so that it shall become effective on a date prior to six months after the effective date of a prior registration pursuant to paragraph 8.1 or 8.2 hereof. All expenses of any such registrations in which P&W shall register any shares for sale by it shall be bome by P&W, except that CPC shall bear underwriting commissions and discounts and registration fees attributable solely to the CPC Shares being registered and the expense of its own legal counsel. If the registration is of exclusively a secondary offering, CPC shall bear its proportionate share of the expenses of the registration and offering (provided all other stockholders registering shares thereunder, who are required to do so, bear their proportionate share of expenses), except 7 expenses which P&W would have incurred whether or not registration was attempted. Notwithstanding the foregoing, if the short form registration is of exclusively a secondary offering for the account of CPC alone, CPC shall bear all expenses of the registration and offering. P&W will use its best efforts to qualify for registration on Form S-3 or any similar short form registration within the time as required by the Securities Exchange Act of 1934, as amended. 8.3 For the purposes of this Section 8, the term "CPC Shares" shall also include any common stock issued or issuable with respect to the CPC Shares by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. 8.4 Further Obligations of P&W. Whenever under the preceding ---------------------------- paragraphs of this Section 8, P&W is required hereunder to register the CPC Shares, it agrees that it shall also do the following: (a) Prepare and file with the Securities and Exchange Commission such amendments and supplements to said registration statement and the prospectus used in connection therewith as may be necessary to keep said registration statement effective and to comply with the provisions of the Act with respect to the sale of securities covered by said registration statement for the period necessary to complete the proposed public offering; provided, however, that in any case in which the required information may not be incorporated by reference to subsequent filings, P&W shall not be required to keep such registration statement effective beyond nine months after its effective date; (b) Furnish to CPC such copies of each preliminary and final prospectus and such other documents as CPC may reasonably request to facilitate the public offering of the CPC Shares; (c) Enter into an underwriting agreement with customary provisions reasonably required by the underwriter, if any, of the offering; (d) Use its best efforts to register or quality the CPC Shares covered by said registration statement under the securities or "blue-sky" laws of such jurisdictions as CPC may reasonably request, provided that in the case of a registration under Section 8.1, P&W shall not be required so to register or qualify CPC Shares in any state where shares to be sold by P&W are not to be registered or qualified; and (e) Furnish to CPC, a signed counter-part, addressed to CPC, of (i) an opinion of counsel for P&W, and (ii) "comfort" letter(s) signed by the independent public accountants who have certified P&W's financial statements included in the registration 8 statement, covering substantially the same matters with respect to P&W and the registration statement (and the prospectus included therein) and (in the case of the accountant's letter) with respect to events subsequent to the date of the financial statements, as are customarily covered in opinions of issuer's counsel and in accountants letters delivered to the underwriters in underwritten public offerings of securities. 8.5 Underwritten Registrations. --------------------------- (a) P&W shall have the right to select the managing underwriter or underwriters for any underwritten offering made pursuant to a registration under paragraphs 8.1 or 8.2 hereof. (b) In connection with P&W's first underwritten offering under Section 8.1, CPC shall, if requested by the managing underwriter or underwriters thereof, agree not to sell any of the CPC Shares in any transaction other than pursuant to such underwritten offering for a period of up to 90 days beginning on the effective date of the registration statement, provided that P&W's officers and directors, and its shareholders owning more than 5% of its issued and outstanding common stock, also agree to such limitations. 8.6 Indemnification. Incident to any registration statement referred ----------------- to in the preceding paragraphs of this Section, P&W will indemnify each underwriter, CPC, and each person controlling any of them against all claims, losses, damages and liabilities including legal and other expenses incurred in investigating or defending against the same, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained therein or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any violation by P&W of the Act, any state securities or "blue-sky" laws or any rule or regulation thereunder in connection with such registration, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing (including the omission from a written statement of information necessary to make such written statement not misleading) to P&W by the person seeking indemnification hereunder expressly for use therein, and with respect to any such untrue statement or omission in the information furnished in writing to P&W by CPC, CPC will indemnify the underwriters, P&W, its directors and officers, and each person controlling any of them against any losses, claims, damages, expenses or liabilities to which any of them may become subject, provided that CPC shall not be required to pay indemnification with respect to any registration hereunder exceeding in the aggregate the net proceeds received by CPC from its sale of CPC Shares under such registration. 8.7 Furnish Information. It shall be a condition precedent to the ---------------------- obligations of P&W to take any action pursuant to this Section 8 that CPC shall furnish to P&W such information regarding it, the CPC Shares held and the intended method of disposition 9 thereof as P&W shall reasonably request and as shall be required in connection with the action to be taken by P&W, and shall otherwise cooperate with P&W. 8.8 CPC Compliance with Securities Laws. CPC agrees to comply with ------------------------------------- all applicable Federal and state securities laws in connection with the sale or transfer of the CPC Shares, including applicable prospectus delivery requirements. 8.9 Notwithstanding anything to the contrary herein, P&W shall not be required to register any CPC Shares (i) which are no longer owned by CPC; (ii) on any Form S-8, Form S-4, or similar or successor form or (iii) pursuant to any registration which is undertaken by P&W pursuant to the demand of any holder of P&W common stock possessing so-called "demand" registration rights and which is of exclusively a secondary offering for the account of such holder(s). 9. CPC hereby represents and warrants to P&W as follows: (a) CPC has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and (b) the execution, delivery and performance of this Agreement has been duly authorized by CPC, and no other corporate proceedings on the part of CPC are necessary to authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. 10. This Agreement shall be binding upon CPC and P&W and their respective officers, directors, shareholders, affiliates, attorneys, agents, servants, representatives, subsidiaries, affiliates, partners, predecessors, successors, assigns and subrogees. 11. This Agreement is made without any admission of liability by any party with respect to any of the facts or circumstances alleged and arising from the Contamination. 12. This Agreement evidences the entire agreement by and among CPC and P&W and supersedes all prior oral or written agreements or understandings of the parties related thereto. This document may not be changed orally. Amendments and modifications hereto shall be in writing and signed by all the parties. 13. Except as otherwise expressly provided herein, this Agreement shall not be deemed or construed in any way to result in the creation of any rights in any person or entity not a party to this Agreement. Each party represents to the other party that it has not assigned to any third person any claim released hereby, or any interest therein. 14. CPC and P&W acknowledge that they each have participated in the drafting of this Agreement, and they each agree that the Agreement shall be interpreted without reference to any principle which can operate in favor of or against a party that drafts a written agreement. 10 IN WITNESS WHEREOF, CPC and P&W cause this Agreement to be duly executed and delivered on the day and year first above written. CPC INTERNATIONAL INC By:/s/ John W. Scott Dated: December 12, 1995 ----------------------------- ----------------- Title: Vice President -------------------------- PROVIDENCE AND WORCESTER RAILROAD COMPANY By:/s/ Orville R. Harrold Dated: December 12, 1995 ----------------------------- ----------------- Title: President -------------------------- 11 EX-10.3 7 PROVIDENCE & WORCESTER NON-QUALIFIED STOCK OPTION PLAN EXHIBIT 10.3 PROVIDENCE AND WORCESTER RAILROAD COMPANY ----------------------------------------- NON-QUALIFIED STOCK OPTION PLAN ------------------------------- 1. Purpose: ------- This Non-Qualified Stock Option Plan (herein called the "Plan") of Providence and Worcester Railroad Company, a Rhode Island corporation with its principal place of business in Worcester, Massachusetts (herein called the "Company"), is designed to provide, through the medium of options for the purchase of shares of Common Stock, $.50 par value (the "Common Stock"), of the Company, additional incentives for directors of the Company and certain employees of the Company and its subsidiaries to exert additional efforts on behalf of the Company and, by encouraging their stock ownership, to increase their proprietary interest in the progress of the Company. 2. Administration: -------------- (a) The Plan shall be administered by a committee appointed by the Board of Directors (the "Option Committee") and consisting of not less than two directors, each of whom shall be either an outside director (as defined in paragraph 3) or a director ineligible to participate in the Plan, pursuant to the provisions of paragraph 3. The interpretation of the provisions of the Plan by the Option Committee shall be final and conclusive. (b) The Option Committee shall adopt as the option to be granted hereunder such form of option agreement with such provisions consistent with the Plan as the Option Committee shall deem appropriate. (c) No member of the Option Committee shall be liable for any action or determination made in good faith under the Plan. 3. Eligibility: ----------- During any calendar year, all employees (including officers and employee-directors) of the Company or of any subsidiary of the Company (as hereinafter defined) who -1- (i) are not the subject of any labor agreement between the Company and a union, and (ii) shall have been employees of the Company for more than one (1) full year as of December 31 of the next prior year, shall be eligible to participate in the Plan. In addition, all directors of the Company or of any subsidiary who are not full-time employees of the Company or such subsidiary ("outside directors") shall be eligible to participate in the Plan, but only to the extent and in the manner provided in paragraph 6, below. Notwithstanding, no person who is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of more than fifty percent (50%) of the outstanding Common Stock or more than fifty percent (50%) of the outstanding Preferred Stock, $.50 par value, of the Company shall be eligible to participate in the Plan. For purposes of the Plan, a company shall be deemed to be a "subsidiary" of the Company if a majority of its outstanding shares of voting stock are owned or controlled by the Company. 4. Stock Subject to Options; Basis for Grants ------------------------------------------ The maximum number of shares of Common Stock that may at any time be made the subject of options under the Plan is the greater of (i) fifty thousand (50,000) shares, less any shares which may have been the subject of options previously granted and either exercises or remaining outstanding, or (ii) five percent (5%) of the number of shares of Common Stock outstanding at the time, less any shares which may have been the subject of options previously granted and either exercised or remaining outstanding. 5. Option Grants to Employee Participants: -------------------------------------- (a) Within the limits specified in paragraph 4, the Option Committee shall, during the month of January of each year, beginning with the month of January, 1994, designate for such year the number of shares of Common Stock of the Company which shall be made the subject of options during such year to eligible participants in the Plan other than outside directors (the "employee participants"). -2- (b) As soon as practicable following the designation provided for in subparagraph (a), an option shall be granted to each employee participant for that number of shares of Common Stock of the Company as results from multiplying the total number of shares of Common Stock designated by the Option Committee as being the subject of options in favor of all employee participants by a fraction, the numerator of which shall be such employee participant's compensation from the Company or any subsidiary for the next prior calendar year, as reported by the Company to the Internal Revenue Service, multiplied by such employee participant's "longevity factor" (determined as provided below), and the denominator of which is the aggregate of all products similarly computed for all employee participants. For the purposes of the foregoing, an employee participant's longevity factor shall be determined by the number of such participant's full years of service to the Company and/or any subsidiary as of December 31 of the next prior year, as follows: Length of Service (Years) Longevity Factor ------------------------- ---------------- More than one, but less than 5 1.0 More than 5, but less than 10 1.5 More than 10, but less than 15 2.0 More than 15, but less than 20 2.5 More than 20, but less than 25 3.0 More than 25 3.5 (c) No fractional shares shall be the subject of options under the Plan, and any fractional share resulting from the computation set forth above shall be ignored. 6. Option Grants to Outside Directors: ------------------------------------- During the month of January of each year, beginning with the month of January, 1994, the Option Committee shall, subject to the provisions of paragraph 4, cause options for the purchase of one hundred (100) shares of Common Stock to be issued to each person -3- who was serving as an outside director of the Company on the next preceding December 31, together with options for the purchase of an additional ten (10) shares of Common Stock for each full year of service by such person as a director of the Company for the period ending on such December 31. The terms and conditions of such options shall be as set forth in the following paragraphs of the Plan. 7. Purchase Price; Source of Shares: -------------------------------- (a) The purchase price per share with respect to an option granted hereunder shall be the fair market value of such share on the last business day of the December next preceding the date of grant. Such fair market value shall be equal to the last sale price, regular way, with respect to shares of Common Stock on such business day or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, with respect to such shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such shares are listed or admitted to trading; or, if such share are not so listed or admitted to trading, the last quoted price with respect to shares of Common Stock or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market with respect to shares of Common Stock, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other similar system then in use; or, if for such day shares of Common Stock are not quoted by any such system, the average of the closing bid and asked prices with respect to shares of Common Stock as furnished by a professional market maker making a market in Common Stock and selected by the Board of Directors of the Company in good faith; or, if no such market maker is available, the fair -4- market value as of such day as determined by the Board of Directors of the Company. (b) The shares of Common Stock which may be the subject of option grants hereunder may be either authorized and unissued shares or issued shares reacquired by the Company and held in the Company's treasury. Any shares which are made the subject of an option which is for any reason unexercised prior to its expiration may again be subject to an option or options under the Plan. 8. Term and Exercise of Options: ---------------------------- (a) The term of each option shall be ten (10) years, or such shorter period as may be determined by the Option Committee, from the date of grant of the option, unless sooner terminated under the provisions of paragraph 11. All or any part of the shares covered by an option may be purchased, subject to the provisions of paragraph 11, at any time or from time to time during the term of the option, but not earlier than six (6) months following the date of grant of the option. No option shall be granted after the termination of the Plan, but options theretofore granted may be exercised thereafter in accordance with the terms and provisions of the Plan. (b) When any shares are purchased pursuant to the exercise of options granted under the plan, the purchase price for the number of shares purchased shall be paid in full. The purchase price may be paid in cash (including personal check) or by the delivery to the Company of other shares of Common Stock already owned by the individual exercising the option, or by any combination of cash and such shares. Shares so delivered will be credited against the purchase price in an amount equal to their fair market value on the date of delivery, such fair market value to be determined as provided in paragraph 7(a), above. -5- (c) Until payment in full for shares purchased pursuant to the exercise of an option under the Plan and the issuance of a certificate for such shares, the holder of such option shall have no right to vote or receive dividends or any other rights as a stockholder with respect to the shares covered by such option. No adjustment will be made for dividends or other rights for which the record date is prior to the date the share certificate is issued. 9. Issuance of Stock: ----------------- Shares of Common Stock will be issued and certificates therefor will be delivered to a director or an employee upon his making payment for shares for which he has exercised his option to purchase, but less than twenty (20) shares will not be issued. 10. Transferability of Options: -------------------------- Options under the Plan shall not be transferable other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and shall be exercisable during the lifetime of the grantee only by such grantee. 11. Termination of Employment and Death: ----------------------------------- If the employment of an employee holding options under the Plan shall terminate, or if the office of an outside director shall terminate, in either case for any reason whatsoever (including retirement, resignation, dismissal, or death), the options of such employee or director under the Plan shall end automatically six (6) months after the date of such termination, unless sooner ended by their respective terms. Prior to the expiration of such six (6) month period, during the terms of such options, such director or employee (or his executor or administrator in the even of his death during such period) shall have the right to exercise such options to purchase the shares of stock which are subject thereto. -6- 12. Readjustment of Stock or Recapitalization: ----------------------------------------- Upon any recapitalization or readjustment of the Company's capital stock whereby the character of the present Common Stock shall be changed, appropriate adjustments shall be made so that the stock to be purchased under the Plan shall be the equivalent of the present Common Stock of the Company, after such readjustment or recapitalization. In the event of a subdivision or combination of the shares of Common Stock of the Company, the number of shares that may be optioned and sold to directors and employees under the Plan as provided in paragraph 4, and the number of shares to be optioned to outside directors as provided in paragraph 6, shall in each case be proportionately increased or decreased. In the case of outstanding options, the purchase prices thereunder and the number of shares covered thereby shall be proportionately adjusted by the Board of Directors and, in case of a reclassification or other change in the shares of Common Stock of the Company, such action shall be taken as in the opinion of the Board of Directors will be appropriate under the circumstances. Accordingly, in such cases the maximum number of authorized but unissued shares, or shares purchased by the Company and held as treasury stock, to be covered by the Plan may be increased by the Board of Directors without stockholder or any other action. 13. Term of the Plan: ---------------- The Plan shall become effective on the date of its adoption by the Board of Directors, subject to approval by the stockholders, and shall continue in effect through April 29, 2002, unless earlier terminated under paragraph 14. The powers of the Board of Directors and of the Option Committee (except with respect to the granting of additional options) shall continue in effect after the termination of the Plan, until exercise or expiration of all options then outstanding. 14. Amendment and Termination: ------------------------- The Board of Directors at any time may amend, suspend or terminate the Plan. No action of the Board of Directors, however, may without the consent of the holder alter or impair any option previously granted under the Plan (except pursuant to paragraph 12). In -7- addition, no action of the Board of Directors may, unless duly approved by the holders of a majority of the outstanding Common Stock and Preferred Stock of the Company, voting as separate classes: (i) increase the maximum number of shares which may be optioned and sold under the Plan (except pursuant to paragraphs 4 and 12); (ii) change the option price (except pursuant to paragraph 12); or (iii) permit granting options for a period longer than herein provided. 15. Obligation of the Company to Issue Shares: ----------------------------------------- Notwithstanding any other provision of the Plan, the Company shall not be obligated to issue any shares pursuant to any stock option unless or until: (a) the shares with respect to which the option is being exercised have been registered under the Securities Act of 1933, as amended, or are exempt from such registration in the opinion of the Company's counsel; (b) the prior approval of such sale or issuance has been obtained from any state regulatory body having jurisdiction; (c) in the event shares of Common Stock have been listed on any stock exchange, the shares with respect to which the option is being exercised have been duly listed on such exchange in accordance with the procedures specified therefor; (d) the Company has in its possession such amount as may be required to be withheld by it under the provisions of the Internal Revenue Code of 1986, as amended, on account of the exercise of such option. -8- EX-23.2 8 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-46433 of Providence and Worcester Railroad Company of our report dated January 30, 1998, appearing in the Prospectus, which is part of such Registration Statement, and of our report dated January 30, 1998 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. Deloitte & Touche LLP Worcester, Massachusetts March 2, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 519 0 2,470 125 2,086 5,321 91,347 25,456 71,212 5,295 11,916 0 33 1,111 36,894 71,217 0 22,721 0 18,333 0 0 1,358 3,030 1,100 1,930 0 0 0 1,930 .87 .81
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