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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to _______________
Commission file number 0-17604
PROVIDENCE AND WORCESTER RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0344399
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 755-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
As of March 1, 1996, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $8,942,407. (For this
purpose, all directors of the Registrant are considered affiliates.)
As of March 1, 1996, the Registrant had 2,163,676 shares of Common
Stock outstanding.
Documents Incorporated by Reference - Portions of the proxy statement
for the 1996 annual meeting of shareholders are incorporated by
reference into Part III. Portions of the annual report of Providence
and Worcester Railroad Company to shareholders for the year ended
December 31, 1995 are incorporated by reference into Parts I, II, and
IV.
Exhibit Index - Page IV-1.
PART I
Item 1. Business
General Development:
The Registrant was organized under the laws of Rhode Island
in 1969 and is the successor by merger to the freight railroad
business which had been actively conducted by Registrant's
predecessors in Rhode Island and Massachusetts since 1973 and was
thereafter expanded to Eastern Connecticut.
From 1983 through 1987, the Registrant was a wholly-owned
subsidiary of Capital Properties, Inc., a Rhode Island
corporation ("CPI"). On January 1, 1988, through a series of
transactions, the shareholders of CPI received, as a distribution
with respect to each share of CPI capital stock held, one share
of the Registrant's common stock and one share of the
Registrant's preferred stock, and the status of CPI as the parent
corporation of the Registrant was terminated. As a result, the
Registrant became, upon completion of the transactions, an
independent, publicly-held corporation.
No regularly scheduled passenger service is provided by the
Registrant. It operates over approximately 470 miles of
trackage, of which it owns approximately 170 miles. The
Registrant interchanges freight traffic with Consolidated Rail
Corporation (Conrail) at Worcester, Massachusetts and at New
Haven, Connecticut; with the Springfield Terminal Railway Company
(formerly Boston and Maine Railroad) at Gardner, Massachusetts;
and with the New England Central Railroad (formerly Central
Vermont Railway) at New London, Connecticut. Through its
connections, Registrant links approximately 78 communities on its
lines, excluding those communities through which the Registrant
passes but does not have the right to service customers. There
are three principal classification yards (areas containing tracks
used to group freight cars destined for a particular industry or
interchange), located in Worcester, Massachusetts; Cumberland,
Rhode Island and Plainfield, Connecticut.
The Registrant operates, by agreement with a private
operator, two approved customs container yards in Worcester,
Massachusetts. A customs container yard is an area containing
tracks used for the loading and unloading of containers. These
yards are U.S. Customs bonded and international traffic must be
inspected and approved by U.S. Customs officials. The Registrant
has been working closely with the container terminal operator to
develop strong relationships with container lines involved in
international intermodal traffic (traffic which moves via several
modes of transportation; i.e. railroad, truck, ship and/or
airplane). Container traffic, especially double stack (the
method by which containers are moved, via rail, stacked one on
top of the other in specially designed rail cars), is expected to
be a significant growth market for the transport of goods into
New England.
I-1
Registrant is compensated for rail freight transportation
services for traffic handled jointly with other railroads by a
share of the aggregate freight revenues. On local traffic
handled solely by the Registrant, charges are retained entirely
by Registrant and are in amounts specified in tariffs or
contracts.
The Registrant competes with Conrail, Springfield Terminal
Railway Company and New England Central Railroad for rail freight
traffic of customers who lack sidings of their own and utilize
public delivery areas. The Registrant is also subject to
competition for substantially all of its traffic from common,
contract and proprietary motor carriers, although Registrant is
attempting to compete with such carriers through the rail to
truck distribution service offered through its arrangement with a
public warehouse operator.
Many of these competitors, including Conrail, are larger or
better capitalized than the Registrant. The Registrant attempts
to compete by offering greater convenience and better service
than competing carriers and at costs lower than some competing
non-rail carriers. The Registrant also competes by participating
in efforts to attract new industry to the area which it serves.
No single customer of Registrant during 1995, except Tilcon
Connecticut, Inc., accounted for as much as 10% of its total
freight revenue for the year. Tilcon Connecticut, Inc. accounted
for approximately 12% of the Registrant's freight revenue. In
addition, the Registrant's business is dependent upon the
continued operation of Conrail and Springfield Terminal Railway
Company, with whom in the aggregate it interchanges substantially
all of its freight traffic.
Miscellaneous
During the last three years, no monies were expended by the
Registrant on material research activities.
Compliance with federal, state and local provisions which
have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, does not have a material effect
upon the capital expenditures, earnings or competitive position
of Registrant.
The Registrant's business is seasonal to the extent that it
is affected by summer vacation shutdowns of shippers on its
lines, normal seasonal patterns of its customers, and by
occasionally adverse weather conditions during the winter months.
On December 31, 1995, the Registrant employed a total of 144
persons.
I-2
Item 2. Properties.
Physical Facilities
The Registrant owns land and a building in Worcester,
Massachusetts adjacent to one of its principal classification
yards. A portion of the building has been renovated and this
renovated portion houses the Registrant's executive and
administrative offices as well as some space leased to outside
tenants. The Registrant's executive and administrative offices
occupy approximately 21,000 square feet of space out of a total
space of approximately 69,500 square feet in the building. In
addition the registrant is leasing approximately 2,100 square
feet of space to an outside tenant. The Registrant has no
current plans to renovate any additional portions of this
building.
The Registrant's three principal classification yards are
located in Worcester, Massachusetts (approximately 125 acres),
Valley Falls, Rhode Island (approximately 6.5 acres) and
Plainfield, Connecticut (approximately 10 acres). The Worcester
yard contains an engine house, a maintenance center and the
communications center and freight office. The Valley Falls yard
contains an engine house for heated overnight storage of
locomotives. The Registrant also has a centralized maintenance-
of-way equipment repair depot in Plainfield, Connecticut.
The Registrant's operating real property located in
Worcester County, Massachusetts, has been mortgaged to CPI to
secure the payment by the Registrant of a 20-year, 10% promissory
note with an outstanding principal balance of $4,597,000 as of
December 31, 1995.
Other Real Property:
The Registrant and Amtrak own approximately 130 acres of
real estate located along the principal railroad lines from
downtown Providence (from approximately 2/3 of a mile west of
Union Station) through Pawtucket, Rhode Island. Of this amount,
Registrant owns approximately 8 acres in Pawtucket and has a
perpetual easement for railroad purposes over the remaining 122
acres.
The Registrant has other parcels of real property at other
points along its lines which could be made available for other
than operating purposes. At this time, management of Registrant
has no specific program for development of such properties.
Historically, the Registrant has sold parcels not integral to its
operations and will continue to entertain offers to sell other
similar parcels.
The Registrant owns the Wilkesbarre Pier in the Port of
Providence at East Providence, Rhode Island, and has direct
access to this deep-water pier by rail. At present, the pier has
berthing space for only one vessel and is used primarily for the
off-loading of petroleum products.
I-3
In April 1975, the Rhode Island Coastal Resources Management
Council (CRMC) issued a permit allowing the Registrant to fill
and reclaim tide-flowed land immediately south of and abutting
the Wilkesbarre Pier for the purpose of developing a major
rail/ship terminal ("South Quay"). That permit, issued for a
ten-year period, became effective in June 1976 following the
dismissal of an appeal over its issuance. Prior to commencing
construction pursuant to the CRMC permit, the Registrant was also
required to obtain a permit from the United States Department of
the Army Corps of Engineers ("COE"). That permit was obtained in
August 1978. The Registrant was not able to commence
construction until 1979, after the Registrant satisfied concerns
of the United States Department of the Interior--Fish and
Wildlife Service.
In 1979, the Registrant commenced the engineering and design
of a berm for the containment basin in which dredged material
would be deposited to create the land area. The construction of
the berm, including a specially designed facing, was completed in
1984. Due to escalating construction costs, the unavailability
of any public assistance which had been originally contemplated,
general economic conditions of the early 1980's, and the
Registrant's acquisition of all of Conrail's lines in Rhode
Island and southeastern Connecticut (which lines were in need of
significant rehabilitation), the Registrant was unable to
complete the construction of the South Quay within the time
allowed under its permits. The Registrant applied for and was
granted extensions of time from CRMC and COE to complete the
project. The CRMC and COE permits now expire in 1998.
The City of East Providence, in which the South Quay is
located, filed a lawsuit appealing CRMC's decision to grant the
extension. In 1989, the Registrant and the City negotiated a
settlement agreement resolving the litigation. The parties
entered into a consent judgement which permitted the Registrant
to move forward to develop the site. As part of the settlement,
the Registrant and the City entered into an agreement which
established a procedure for future taxation of the property; and
the City, with the Registrant's concurrence, adopted zoning
ordinances which regulate the operation of the port facility.
In 1988 and early 1989, the Registrant filled in the
southeast and southwest corners of the Quay to provide sufficient
radii for future track construction and to prepare the site for
dredging. In 1990, the Registrant conducted a series of
engineering and design studies related to the next phases of the
development.
In 1991 and 1992, the Registrant completed earthwork necessary to
prepare the site for dredging and completed dredging a ship berth
approximately 135 feet in width by 1900 feet in length with a
depth of approximately -40 feet mean low water. The earthwork
consisted of reconstruction of a portion of the existing west
berm to improve its capacity to filter out water being deposited
in the basin during dredging, the completion of the phase of a
I-4
secondary containment basin between the north berm and the nearby
Wilkesbarre Pier, and other grading.
After the completion of the dredging on March 31, 1992, the
site was allowed to stand to permit excess water to drain from
it. The next phase of construction is to complete filling the
containment basin. The Registrant began this process in 1993 and
to date, approximately 430,300 cubic yards of material has been
deposited, substantially completing the filling process, to
create approximately 31 acres of land. When combined with
adjoining properties owned by the Registrant, the site consists
of approximately 45 acres. The Registrant has entered into an
agreement and has begun construction to provide slope protection
for the south face of the berm to protect against erosion and
storm damage. Remaining phases of the project also include dock
construction and infrastructure improvements.
The Registrant has further engaged a maritime consulting
firm, with international port expertise, to assist it in
identifying strategic market opportunities for the port facility
and to develop financing strategies for the completion of the
facility. The Registrant is also exploring finance strategies
with an investment banking firm.
Rolling Stock
The following schedule sets forth the Registrant's rolling
stock as at December 31, 1995, all of which is owned by the
Registrant:
Description Number
Locomotive 20
Gondola 37
Flat Car 4
Ballast Car 42
Passenger Equipment 5
Caboose 2
Total 110
The Registrant has equipment permitting two-way radio
contact with every train crew and maintenance vehicle in its
system thereby permitting each train crew to maintain radio
contact with other crew members.
I-5
Item 3. Legal Proceedings.
The Registrant owns a site which is contaminated with
petroleum products. It is currently productive as a part of the
Registrant's double-stack intermodal yard. The site is not the
subject of any agency proceedings. Environmental specialists
have indicated that natural biodegradation of the contamination
is occurring. It is not anticipated that the costs of
remediation, if any, would be material to the operations,
financial position or liquidity of the Registrant.
The Registrant was notified by CPC International, Inc.
("CPC") and the United States Environmental Protection Agency
("EPA") that the Registrant 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. The EPA's preliminary estimate of the
clean-up alternative it recommended was approximately $7 million
with additional past response costs of approximately $5 million
("Costs"). The Registrant has no ownership interest in the site.
The Registrant denied responsibility. No formal claims or
proceedings against the Registrant were instituted in this
matter. In December 1995 the Registrant concluded an agreement
with CPC ("Agreement") in which the Registrant agreed to pay
$990,000 in settlement of all claims against it relating to this
incident. Payment of this claim can be all or partially made
through issuance of unregistered, restricted common stock of the
Registrant. The Registrant issued 55,000 shares of its Common
Stock, having a value of $391,000 to CPC in December 1995 in
partial payment of this claim. An additional 53,155 shares,
having a value of $378,000 were issued in January 1996. The
remaining liability of $221,000 (plus interest at an annual rate
of 8 3/4% for any portion paid in cash) must be paid no later
than June 30, 1999. The agreement further provides that, in the
event CPC recovers insurance proceeds for the Costs, the
Registrant is entitled to receive 10% of the net recovery after
deduction of litigation expenses. CPC is actively engaged in
litigation with an insurer seeking such a recovery.
Other Litigation:
The business in which the Registrant is engaged ordinarily
results in actions for negligence and other claims, and in the
opinion of management, the legal proceedings to which it is a
party in addition to those set forth above are normal for such
business.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
I-6
PART II
Item 5. Market for Railroad's Common Stock and Related
Security Holder Matters.
See page 31 of Registrant's 1995 Annual Report to Share-
holders, which is incorporated by reference herein.
Item 6. Selected Financial Data.
See page 12 of Registrant's 1995 Annual Report to Share-
holders, which page is incorporated by reference herein.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
See pages 13 through 16 of Registrant's 1995 Annual Report
to Shareholders, which pages are incorporated by reference
herein.
Recently issued accounting standards:
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-
Lived Assets to Be Disposed Of." This statement, which will be
required in 1996, establishes accounting standards for the
impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable
intangibles to be disposed of.
The FASB has also issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement, which will be
required in 1996, establishes financial accounting and reporting
standards for stock-based employee compensation plans.
The Registrant has not determined the effects of
implementing SFAS No. 121 and No. 123 on its financial position
and results of operations for any future period.
Item 8. Financial Statements and Supplementary Data.
Information in response to this item is contained in the
Registrant's 1995 Annual Report to Shareholders which is
incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
II-1
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant.
For information with respect to the directors of the
Registrant, see pages 2 and 3 of the Registrant's definitive
proxy statement for the 1996 annual meeting of its shareholders,
which page is incorporated by reference, herein.
The following are the executive officers of the Registrant:
NAME AGE OFFICE HELD ELECTION TO OFFICE
Robert H. Eder 63 Chairman 1980
Orville R. Harrold 63 President 1980
Carl P. Belke 44 Vice President 1995
Ronald P. Chrzanowski 53 Vice President 1983
Heidi J. Eddins 39 Secretary 1988
Robert J. Easton 52 Treasurer 1988
All officers hold their respective offices until their
successors are duly elected and qualified. For further
information with respect to Messrs. Eder, Harrold, Belke,
Chrzanowski and Easton, see pages 2 and 3 of the Registrant's
definitive proxy statement for the 1996 annual meeting. Ms.
Eddins has served as General Counsel to the Registrant since
1984.
Item 11. Executive Compensation.
See page 3 of the Registrant's definitive proxy statement
for the 1996 annual meeting of its shareholders, which pages are
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
See pages 6 and 7 of the Registrant's definitive proxy
statement for the 1996 annual meeting of its shareholders, which
pages are incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions.
Not Applicable.
III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) (1) and (2)
The response to this portion of Item 14 is
submitted as a separate section of this report at
page IV-3.
(3) Listing of Exhibits.
(10A) Material Contracts (incorporated by
reference to Exhibit 10 to the registration
statement of the Registrant on Form 10 and
to the Non-Qualified Stock Option Plan of
the Registrant on Form S-8).
(13) Annual report to shareholders for the year
ended December 31, 1995.
(23) Independent Auditors' Consent
(b) Not applicable.
(c) Exhibits (annexed).
(d) Financial Statement Schedules. The response to this
portion of Item 14 is submitted as a separate section
of this report at Page IV-3.
IV-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
Orville R. Harrold
By Orville R. Harrold, President
Dated: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Title Date
Orville R. Harrold
President and Director March 29, 1996
Orville R. Harrold (Principal executive
officer)
Carl P. Belke
Vice President and March 29, 1996
Carl P. Belke Director
Ronald P. Chrzanowski
Vice President and March 29, 1996
Ronald P. Chrzanowski Director
Robert J. Easton
Treasurer and Director March 29, 1996
Robert J. Easton (Principal financial
officer and principal
accounting officer)
J. Joseph Garrahy
Director March 29, 1996
J. Joseph Garrahy
John J. Healy
Director March 29, 1996
John J. Healy
William J. LeDoux
Director March 29, 1996
William J. LeDoux
IV-2
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1995
PROVIDENCE AND WORCESTER RAILROAD COMPANY
WORCESTER, MASSACHUSETTS
IV-3
FORM 10-K--ITEMS 14(a) (1) and (2), and 14(d)
PROVIDENCE AND WORCESTER RAILROAD COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Providence and Worcester
Railroad Company, included in the annual report of Registrant to its
shareholders for the year ended December 31, 1995 and independent
auditors' report are incorporated by reference in Item 8:
Independent auditors' report.
Balance sheets - December 31, 1995 and 1994.
Statements of income - years ended December 31, 1995, 1994 and
1993.
Statements of shareholders' equity - years ended December 31,
1995, 1994 and 1993.
Statements of cash flows - years ended December 31, 1995, 1994,
and 1993.
Notes to financial statements - years ended December 31, 1995,
1994 and 1993.
The following financial statement schedules of Providence and
Worcester Railroad Company and independent auditors' reports are
included in Item 14(d):
Page
Independent auditors' report IV-5
II Valuation and qualifying accounts IV-6
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or the notes thereto.
IV-4
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Providence and Worcester Railroad Company
Worcester, Massachusetts
We have audited the financial statements of Providence and
Worcester Railroad Company as of December 31, 1995 and 1994
and for each of the three years in the period ended
December 31, 1995, and have issued our report thereon dated
March 8, 1996; such financial statements and report are
included in your 1995 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included
the financial statement schedule of Providence and Worcester
Railroad Company, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Worcester, Massachusetts
March 8, 1996
IV-5
PROVIDENCE AND WORCESTER RAILROAD COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(IN THOUSAND DOLLARS)
_________________________________________________________________________________________________
Column A Column B Column C Column D Column E
Additions
(1) (2)
Balance at Charged to Charged to Balance at
beginning costs and other accounts end of
Description of period expenses describe Deductions period
_________________________________________________________________________________________________
_________________________________________________________________________________________________
Allowance for doubtful accounts:
Year ended December 31, 1995 $125 $125
Year ended December 31, 1994 $125 $41 (A) ($41) $125
Year ended December 31, 1993 $175 (B)($13) (A) ($37) $125
(A) Bad debts written off.
(B) Recovery of bad debts previously written off.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
ANNUAL REPORT 1995
PROVIDENCE AND WORCESTER RAILROAD COMPANY
EMPLOYEE INJURIES 1994-1995
(GRAPH)
INJURIES PER 200,000 PEOPLE HOURS
PAGE 1
A BRIEF DESCRIPTION OF THE COMPANY'S BUSINESS
The Company is an interstate freight carrier conducting railroad
operations in Massachusetts, Rhode Island, and Connecticut. The railroad
first began operations in 1847 between the cities of Providence, Rhode
Island and Worcester, Massachusetts and operated independently until
1888, at which time it was leased to others. In February 1973, the
Company resumed control of the railroad and its 45 miles of track. The
Company presently operates over approximately 470 miles of trackage of
which it owns approximately 170 miles. No regularly scheduled passenger
service is provided by the Company. The Company interchanges freight
traffic with Consolidated Rail Corporation (Conrail) at Worcester,
Massachusetts and at New Haven, Connecticut; with Springfield Terminal
Railway Company (formerly Boston and Maine Railroad) at Gardner,
Massachusetts; and with New England Central Railroad (formerly Central
Vermont Railway) at New London, Connecticut. Through its connections
the Company links approximately 78 communities on its lines, excluding
those communities through which the Company passes but does not have
the right to service customers. The main freight classification yard
is located in Worcester, Massachusetts and encompasses approximately
125 acres. Worcester is also the location of the Company's locomotive
and car maintenance facility and the Company's corporate headquarters
building. There are smaller classification yards in Cumberland, Rhode
Island, and Plainfield, Connecticut. Plainfield also houses an equipment
maintenance facility.
The Company services by agreement with a private operator, two
approved custom container yards in Worcester, Massachusetts. In 1995,
the Company handled 29,139 carloads of freight and 41,211 containers.
PAGE 2
PROVIDENCE AND WORCESTER RAILROAD COMPANY
(GRAPHS 1992 - 1995)
CONVENTIONAL CARLOADS INTERMODAL (CONTAINERS)
TOTAL REVENUES OPERATING REVENUES
EARNINGS PER SHARE NET INCOME
PAGE 3
PRESIDENT'S REPORT
The Company's operating results in 1995 did not match those of
1994. The reduction in operating profits discussed below is substantially
due to a reduction in revenue generated by container traffic and the
impacts of a settlement of an environmental claim against the Company.
Conventional traffic volume increased by 3%. There were, however,
several significant events in 1995 that help position the Company for long
term growth.
The Company substantially completed the process of depositing clean
fill inside the berm at the deep-water pier under construction in East
Providence, Rhode Island to create approximately 31 acres of land. The
Company continues to work with Amtrak, the Federal Railroad
Administration and the Rhode Island Department of Transportation in an
effort to improve rail service to Rhode Island's Quonset Point/Davisville
port facilities. The Company in conjunction with the State of Rhode
Island also began a major upgrading of certain track and rail bridges in
Rhode Island. Moreover, an outstanding environmental claim of CPC
International, Inc. in excess of $10 million was resolved in 1995 with the
Company agreeing to pay $990,000 primarily in unregistered, restricted
Company common stock.
On February 26, 1996, Governor William F. Weld signed into law a
bill entitled "An Act Relative to the Revitalization and Development of the
Commonwealth's Seaports" which establishes a program to develop full
double stack rail service on certain rail lines in the Commonwealth of
Massachusetts. The Act authorizes such improvements on the Company's
rail lines in Worcester County, the costs of which are to be shared equally
by the Company and the Commonwealth with the Commonwealth
contributing up to $5.5 million.
I would be remiss if I did not mention and recognize the excellent
safety record compiled by the Company's employees in 1995: the number
of reportable injuries fell from 9 in 1994 to 5 in 1995, a 44% decrease, the
lowest number of injuries the Company has incurred in any calendar year
since it began independent operations in 1973. Three departments went
without a reportable injury in 1995: Transportation, Maintenance of
Equipment and Communications and Signals. These employees are to be
commended for an outstanding performance. The graph on page 1 shows
the decrease in the number of injuries per 200,000 people hours worked in
1995 versus 1994.
At this time, I would like to discuss in more detail events of 1995
and several significant developments that are expected to have an impact
on our operations and financial results in the years ahead.
I. Financial Results and General Business Conditions
Freight operating revenues decreased by approximately 3% in 1995
(see figure 4, page 3). Earnings, however, decreased in 1995 approximately
50%, from $1,811,000 in 1994to $917,000 in 1995 (see figure 6, page 3).
Earnings per share decreased from $.88 in 1994 to $.44 in 1995
(see figure 5, page 3).
As mentioned previously, 1995's freight traffic demonstrated mixed
PAGE 4
results, in that conventional carloads increased by 3% while container
volumes decreased by 9%. The Company did see a decrease in traffic in the
fourth quarter of 1995, primarily in plastics and paper.
II Development of Deep-Water Pier
In April 1975, the Rhode Island Coastal Resources Management
Council ("CRMC") issued a permit allowing the Company to fill and
reclaim tide-flowed land immediately south of and abutting the Company's
Wilkesbarre Pier for the purpose of developing a major rail/ship terminal
("South Quay"). That permit, issued for a ten-year period, became effective
in June 1976 following the dismissal of an appeal over its issuance. Prior to
commencing construction pursuant to the CRMC permit, the Company was
also required to obtain a permit from the United States Department of the
Army Corps of Engineers ("COE"). That permit was obtained in August
1978. The Company was not able to commence construction until 1979,
after the Company satisfied concerns of the United States Department of the
Interior--Fish and Wildlife Service.
In 1979, the Company commenced the engineering and design of a
berm for the containment basin in which dredged material would be
deposited to create the land area. The construction of the berm, including a
specially designed facing, was completed in 1984. Due to escalating
construction costs, the unavailability of any public assistance which had
been originally contemplated, general economic conditions, and the
Company's acquisition of all of Conrail's lines in Rhode Island and
southeastern Connecticut (which lines were in need of significant
rehabilitation), the Company was unable to complete the construction of the
South Quay within the time allowed under its permits. The Company
applied for and was granted extensions of time from CRMC and COE to
complete the project. The permits now expire in 1998.
The City of East Providence, in which the South Quay is located,
filed a lawsuit over the permit extension. In 1989, the Company and the
City negotiated a settlement agreement resolving the litigation. The parties
entered into a consent judgment which permitted the Company to move
forward to develop the site. As part of the settlement, the Company and the
City entered into an agreement which established a procedure for future
taxation of the property; and the City, with the Company's concurrence,
adopted zoning ordinances which regulate the operation of the port facility.
In 1988 and early 1989, the Company filled in the southeast and
southwest corners of the Quay to provide sufficient radii for future track
construction and to prepare the site for dredging. In 1990, the Company
conducted a series of engineering and design studies related to the next
phases of the development.
In 1991 and 1992, the Company completed earthwork necessary to
prepare the site for dredging and completed dredging a ship berth
approximately 135 feet in width by 1900 feet in length with a depth of
approximately -40 feet mean low water. The earthwork consisted of
reconstruction of a portion of the existing west berm to improve its capacity
to filter out water being deposited in the basin during dredging, the
completion of the first phase of a secondary containment basin between the
north berm and the nearby Wilkesbarre Pier, and other grading.
PAGE 5
After the completion of the dredging on March 31, 1992, the site
was allowed to stand to permit excess water to drain from it. The next phase
of construction is to complete filling the containment basin. The Company
began this process in 1993 and to date, approximately 430,300 cubic yards
of material has been deposited, substantially completing the filling process,
to create approximately 31 acres of land. When combined with adjoining
properties owned by the Company, the site consists of approximately 45
acres. The Company has entered into an agreement and has begun
construction to provide slope protection for the south face of the berm to
protect against erosion and storm damage. Remaining phases of the project
also include dock construction and infrastructure improvements.
The subject of the quality of title to formerly tide flowed properties
has been the subject of much debate in recent years. In 1995, the Rhode
Island Supreme Court issued a decision in Greater Providence Chamber of
Commerce et al v. State of Rhode Island clarifying the quality of title to tide
flowed properties filled with the acquiescence or approval of the State. The
Company is reviewing the impact of this decision on the South Quay.
The Company has further engaged a maritime consulting firm, with
international port expertise, to assist it in identifying strategic market
opportunities for the port facility and to develop financing strategies for the
completion of the facility. The Company is also exploring finance strategies
with an investment banking firm.
III. Northeast Corridor
The Company possesses an exclusive freight service easement over
that portion of the Northeast Corridor ("NEC") owned by the National
Railroad Passenger Corporation ("Amtrak") extending from the
Massachusetts/Rhode Island line to New Haven, Connecticut, as well as
overhead rights between New Haven and South Norwalk to serve Danbury,
Connecticut. Amtrak is in the process of completing its design of a plan to
electrify the portion of the NEC from Boston, Massachusetts to New Haven
to permit high-speed passenger trains to operate on the line with
construction expected to begin in the Spring of 1996. The Company
continues to monitor this project closely, due to potential negative impacts
on the Company's ability to provide freight service to its customers on the
line and on clearance conditions which may inhibit the Company's ability to
carry modern rail cars on the line.
The high speed passenger service project has been the subject of
various reviews by the Federal Railroad Administration ("FRA"). In the
context of such reviews, the Company advocated modifications to the design
such as construction of additional track capacity to mitigate the potential
adverse effects of the project on freight service. In May, 1995, the FRA
issued a Record of Decision ("ROD") authorizing the project which ROD
requires Amtrak to construct several passing sidings (tracks which are
parallel to the main lines which will permit high speed passenger trains to
pass lower speed freight trains) and other capacity improvements. The
Company will continue to work with the FRA and Amtrak to ensure the
construction and implementation of mitigation measures.
As more fully discussed in the next section, the State of Rhode
Island has also proposed a Freight Rail Improvement Project ("FRIP") on
that portion of the NEC between its connection with the Company's main
PAGE 6
line to the State's Quonset Point/Davisville port facilities. The FRIP is
intended to increase substantially the capacity of the NEC to handle more
freight and commuter trains by constructing additional track and to improve
overhead clearances to permit the movement of modern rail cars.
IV. Intermodal Transportation Network
Both the State of Rhode Island and Commonwealth of
Massachusetts have developed plans to promote the development of full
double stack rail service to certain intermodal facilities in New England
some of which are served by the Company's rail lines. The existing double
stack rail route utilized by the Company for service to the Port of Worcester
is the only double stack access in New England and provides only limited
clearances.
On February 26, 1996, Governor William F. Weld signed into law
"An Act Relative to the Revitalization and Development of the
Commonwealth's Seaport". This Act establishes the Massachusetts Double
Stack Network, consisting of the Boston and Albany Line of Consolidated
Rail Corporation ("Conrail") from the New York border to the presently
existing intermodal facility at Beacon Park Yard in the City of Boston,
Massachusetts, the main line of the Boston and Maine Corporation from the
Vermont border to the existing intermodal facility at Fort Devens in the
town of Ayer, Massachusetts and all lines of the Company in Worcester
County and authorizes clearance improvements on these lines. With the
exception of two line segments which may be fully funded by the
Commonwealth (Worcester to Boston on the Conrail line and Gardner to
Ayer on the B&M line) the Act requires the costs of clearance
improvements to be borne 50% by the affected railroad and 50% by the
State. For the Company's lines in Worcester County, the Commonwealth's
contribution is a maximum of $5.5 million. For the two line segments
which may be fully funded by the Commonwealth, the Commonwealth will
assess a reimbursement charge on certain containers moving over such lines
above designated levels. Pursuant to the Act, all affected parties will work
with the Commonwealth's Executive Office of Transportation and
Construction to develop a master agreement to establish the terms and
conditions for accomplishing the clearance improvements.
In Rhode Island the State has completed a draft environmental
impact statement ("DEIS") for the FRIP, discussed in Section III, which
DEIS includes preliminary design. Six million dollars of federal
appropriations have been obtained by the State in the past two fiscal years to
be matched on a dollar for dollar basis by the State; the State and Rhode
Island congressional delegation continue to request additional
appropriations. Moreover, legislation is pending in the Rhode Island
General Assembly to authorize a public referendum for a general obligation
bond to fund the state's costs for the FRIP. The FRIP is intended to enable
the development of the State's Quonset Point/Davisville port facilities.
These facilities, consisting of over 800 acres of land, three active piers, an
on-site airport and on-site rail, represent a significant portion of Rhode
Island's prime industrial land.
These two state projects to raise overhead clearance to full double
stack height (overhead clearance of 20'6") should permit the Company to
participate even further in intermodal transportation including the movement
of both domestic and international double stack containers and other high
clearance rail cars such as automobile carriers.
PAGE 7
V. Settlement with CPC International, Inc.
Last year, the Company reported that it was engaged in discussions
with CPC International, Inc. ("CPC") to resolve CPC's claim that the
Company was liable to CPC for past and future costs for remediating a
Superfund site in Rhode Island ("Site"). The claims arose out of a 1974
incident involving a rail car. In 1995, CPC and other parties, not including
the Company, ("Settling Parties"), entered into a Consent Decree with the
United States Environmental Protection Agency ("USEPA") pursuant to
which the Settling Parties agreed to reimburse USEPA for its past and future
response costs and to remediate the Site.
In December 1995, the Company and CPC entered into a settlement
agreement resolving CPC's claims against the Company. CPC had asserted
that due to the 1974 rail car incident, the Company was fully responsible for
past and future response costs, including CPC's obligations to USEPA, and
totaling over Ten Million Dollars. The agreement provides for the payment
to CPC of $990,000 to be paid primarily in unregistered, restricted common
stock of the Company. The Company has delivered to CPC 108,155 shares
(4.999% of the Company's issued and outstanding common stock), having a
value of $769,000. The remaining balance will be paid no later than June
30, 1999, at the Company's option in stock or cash. As more fully discussed
in the notes to the financial statements herein, the Company may be entitled
to reimbursement of some or all of its payments to CPC.
In consideration of P&W's payment, CPC has agreed to release,
defend and indemnify P&W from and against any claims by CPC or any
other party, including the USEPA and the State of Rhode Island, resulting
from or arising out of the contamination.
Resolution of this matter eliminates a significant contingent liability
which has been reflected on the Company's financial statements for quite
some time.
VI. Massachusetts Capital Resource Company
On December 19, 1995, the Company concluded a transaction with
Massachusetts Capital Resource Company ("MCRC") which transaction
was enabled by the successful and amicable resolution of the outstanding
claim of CPC. MCRC is a limited partnership privately owned and funded
by seven Massachusetts based life insurance companies, the four general
partners being John Hancock Mutual Life, Massachusetts Mutual Life, The
New England and State Mutual Life.
In the transaction the Company obtained $5,000,000 from MCRC in
exchange for a secured subordinated note in the original principal amount
of $4,920,000 and warrants to purchase 200,000 shares of the Company's
common stock at the exercise price of $7.10 per share, which warrants were
valued at $80,000. The note will bear an interest rate of 10% per annum
paid quarterly, with quarterly scheduled redemptions of varying principal
amounts beginning on December 31, 1998 at $62,500 and increasing to
$187,500, with a final payment of $1,250,000 on December 31, 2005. The
purchase warrants are exercisable until the later of December 31, 2005 or
such time as all principal and interest on the note are paid in full.
PAGE 8
The proceeds were used to retire the Company's long term note to
Fleet Bank of Massachusetts, N.A. which had an outstanding balance of
approximately $1,736,000 as well as for working capital and capital
improvements.
VII. Conrail Line Sales
The Company has been notified by Conrail of Conrail's intentions to
dispose of all of its rail properties and interests in rail properties in
Connecticut and certain of its properties and interests in rail properties in
Massachusetts.
The Company, in conjunction with certain other New England
railroads made a preliminary bid for certain of these properties. Conrail has
informed the Company that it has chosen to negotiate exclusively with the
Company and RailTex of San Antonio, Texas.
While the proposed transaction is subject to further due diligence by
the Company and RailTex, Conrail has indicated that it anticipates
completing the transaction by August 1996. Under the terms of the
proposed transaction, the Company would obtain the following:
Ownership of and all freight service in Cedar Hill Yard in New
Haven, North Haven and Hamden, Connecticut, including all freight
service rights on Amtrak's Hartford Line from Milepost 0 to
Milepost 7 and ownership of and freight service rights on the
Middletown Branch from Mile Post 0 to Milepost 4.8.
All freight service rights on Amtrak's Northeast Corridor from New
Haven to the Connecticut/New York border.
Limited trackage rights on Conrail between the Connecticut/New
York border and Queens, New York.
Operating and certain freight service rights on the Northeast
Corridor between the Massachusetts/Rhode Island border and
Conrail's Readville Yard outside of Boston (excluding customers at
several stations which are proposed to be served by RailTex), as
well as all freight service rights on the Stoughton and East Junction
branch lines, which are owned by the MTBA.
As discussed in Section III above, the Company already provides all
freight service on the Northeast Corridor between the Massachusetts/Rhode
Island border and New Haven, Connecticut.
The Company looks forward to the growth opportunities presented by
the proposed transaction and will keep you advised of further developments.
VIII. Change in Size and Composition of the Board of Directors
In December 1995, holders of majorities of the outstanding common
stock and preferred stock of the Company by written vote approved certain
amendments to the Company's Bylaws resulting in an increase of the Board
of Directors to 12 members from its previous 9 members. The Bylaw
amendments were also approved by the Board of Directors.
PAGE 9
Phillip D. Brown and Frank W. Barrett were elected as preferred
stock directors and Carl P. Belke was elected a common stock director. Mr.
Brown is President of Unibank for Savings in Whitinsville, Massachusetts.
Mr. Barrett is Executive Vice President, Chief Credit Officer at Springfield
Institution of Savings in Springfield, Massachusetts. Mr. Belke recently
joined the Company in July of 1995 as Vice President - Transportation and
Sales and was previously President of the Delaware and Hudson Railroad
Company and most recently Director, Government Affairs and Plant
Development at CP Rail Systems. The Company welcomes these new
members to the Board.
The Company has been notified by Francis M. White, a Director
since 1987, that due to health reasons, he is unable to stand for reelection.
Mr. White has been a highly valued member of the Board of Directors as
well as the Board's Audit Committee. I want to take this opportunity to
thank Mr. White for his years of dedicated service; his services will be
greatly missed.
IX. Increase in Authorized Stock
Finally, the Board also increased the amount of shares the Company
has authority to issue by 750,000 shares, resulting in authorized stock of
3,023,436. This action was taken to provide shares of stock for issuance to
CPC, to reserve stock for the exercise by MCRC of its purchase warrants,
and to provide adequate authorized stock for the Company's profit sharing
plan, which covers all personnel covered by collective bargaining
agreements, the Company's non-qualified stock option plan covering
management employees and outside directors, and the Company's
supervisors' incentive program.
The Company paid the following dividends in 1995: On May 25,
1995, a 10% noncumulative annual preferred dividend of $5.00 per share to
holders of preferred stock; on May 25, 1995 and November 24, 1995, semi-
annual dividends of $.05 per share to holders of common stock. The
common stock of the Company is listed on the National Market System of
the National Association of Securities Dealers ("NASD") under the trading
symbol "PWRR".
On behalf of the management and employees of the Company, I wish
to express my appreciation and gratitude to you our shareholders, for your
continued confidence and support of the Company.
Sincerely yours,
Orville R. Harrold
President
March 13, 1996
PAGE 10
DIRECTORS AND OFFICERS
OF
PROVIDENCE AND WORCESTER RAILROAD COMPANY
Robert H. Eder, Chairman of Providence and Worcester
Director and Chairman Railroad Company
Worcester, Massachusetts
Orville R. Harrold, President of Providence and Worcester
President Railroad Company
Worcester, Massachusetts
Carl P. Belke, Vice President of Providence and Worcester
Director and Vice President Railroad Company
Worcester, Massachusetts
Ronald P. Chrzanowski, Vice President of Providence and Worcester
Director and Vice President Railroad Company
Worcester, Massachusetts
Heidi J. Eddins, Secretary and General Counsel of
Secretary and General Providence and Worcester
Counsel Railroad Company
Worcester, Massachusetts
Robert J. Easton, Treasurer of Providence and Worcester
Director and Treasurer Railroad Company
Worcester, Massachusetts
Frank W. Barrett, Executive Vice President of Springfield
Director Institution for Savings
Springfield, Massachusetts
Phillip D. Brown, President and CEO of Unibank for Savings
Director Whitinsville, Massachusetts
John H. Cronin, Retired President of Ideal Products, Inc.
Director Worcester, Massachusetts
Joseph Garrahy, President of J. Joseph Garrahy &
Director Associates, Inc.
Providence, Rhode Island
John J. Healy, President of HMA Behavioral Health, Inc.
Director Worcester, Massachusetts
William J. LeDoux, Attorney
Director Worcester, Massachusetts
Francis M. White, Retired Chairman of the Board of Bank
Director of Boston, Connecticut
Waterbury, Connecticut
TRANSFER AGENT INDEPENDENT AUDITORS
Fleet National Bank Deloitte & Touche LLP
Stock Transfer Department One Chestnut Place - Suite 1010
Post Office Box 366 Ten Chestnut Street
Providence, RI 02901 Worcester, MA 01608
PAGE 11
PROVIDENCE AND WORCESTER RAILROAD COMPANY
SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
__________ __________ __________ __________ __________
Operating revenues $19,778,000 $20,292,000 $18,657,000 $16,508,000 $15,472,000
__________ __________ __________ __________ _________
__________ __________ __________ __________ _________
Other income $ 581,000 $ 1,206,000 $ 707,000 $ 460,000 $ 2,273,000
__________ __________ __________ __________ _________
__________ __________ __________ __________ _________
Income before taxed $ 1,507,000 $ 3,011,000 $ 1,675,000 $ 695,000 $ 1,600,000
__________ __________ __________ __________ __________
__________ __________ __________ __________ _________
Net income $ 917,00 $ 1,811,000 $ 1,105,000 $ 465,000 $ 1,050,000
__________ __________ __________ __________ _________
__________ __________ __________ __________ _________
Earnings per common
and common
equivalent share $ .44 $ .88 $ .54 $ .23 $ .52
__________ __________ __________ __________ _________
__________ __________ __________ __________ _________
Total assets $68,012,000 $61,496,000 $60,706,000 $58,700,000 $58,364,000
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
Long-term
obligations $12,977,000 $10,485,000 $11,378,000 $11,305,000 $11,710,000
__________ __________ __________ __________ __________
__________ __________ __________ __________ _________
Cash dividends
per share:
New preferred $ 5.00 $ N/A $ N/A $ N/A $ N/A
__________ __________ __________ __________ _________
__________ __________ __________ __________ _________
Old preferred $ N/A $ .05 $ .05 $ .05 $ .05
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
Common $ .10 $ .10 $ .10 $ .10 $ .10
__________ __________ __________ __________ _________
__________ __________ __________ __________ _________
PAGE 12
PROVIDENCE AND WORCESTER RAILROAD COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As detailed in the Statements of Cash Flows in the accompanying
financial statements, the Company generated $3,177,000 from
operations in 1995 compared with $3,262,000 in 1994. On an
overall basis the Company's total cash and equivalents increased
by $1,417,000 in 1995, compared with an increase of $21,000 in
1994. The principal utilization of cash during both years were
expenditures for property and equipment acquisitions and
principal payments on long-term debt obligations.
During 1995 and 1994 the Company generated $108,000 and $972,000
respectively from the sales of properties not considered
essential for railroad operations and easements. The Company has
no established policy regarding the sale or other disposition of
properties not considered essential for railroad operations.
However, there remain certain properties which could be made
available for sale, the proceeds of which could be used to
further reduce the Company's long-term debt, acquire or make
improvements to properties and equipment, reduce current
borrowings or provide additional funds for current operations.
Such properties include branch lines over which the former
Interstate Commerce Commission has granted the Company permission
to abandon rail freight service having a net book value of
approximately $400,000. Revenue from sales of properties and
easements can vary significantly from year to year.
In 1995 the Company added $1,875,000 of track structure and
bridge improvements to its plant and equipment. Deferred grant
income financed $785,000 of these capital projects. Management
estimates that a similar amount of improvements to its track
structure and bridges will be made in 1996, provided that
sufficient funds, including grant proceeds, are available.
Improvements to the Company's track structure are made, for the
most part, by the Company's Maintenance of Way Department
personnel.
Substantially all of the Company's mainline track meets Federal
Railroad Administration Class 3 standards (permitting freight
train speeds of forty miles per hour) and the Company intends to
continue to maintain it at this level.
As discussed more fully in Note 2 to the accompanying financial
statements, the Company, since 1979, has been engaged in the
engineering, design and construction of a deep-water pier and
rail/ship port facility. Costs incurred in connection with this
project, exclusive of land acquisition costs, amounted to
$10,419,000 through December 31, 1995. The Company expended
$1,074,000 on this project in 1995 to obtain and deposit fill
material, which phase of the project was substantially complete
as of the end of that year. In 1996 the Company intends to
complete the rip rapping of the south end of the berm at an
estimated cost of approximately $420,000. Management remains
committed to the completion of this project and intends to
continue to explore development opportunities with outside
parties for the purpose of obtaining the financial and other
assistance necessary to complete this project as a port facility.
In 1995, the Company's principal bank increased its short term
revolving credit line from $1,250,000 to $1,500,000 and decreased
the interest rate on borrowings under this line from prime plus
3/4% to prime plus 1/2% (see Note 3 to the accompanying financial
statements). Loans are drawn against this line and payments of
principal are made from time to time depending upon current cash
balances and requirements. No loans were outstanding under this
line of credit at December 31, 1995.
PAGE 13
During 1995 the Company received a commitment from a bank for
long term borrowings which would enable it to refinance its 12%
mortgage note payable to Capital Properties, Inc. ("CPI") at a
reduced interest rate. CPI and the Company have a common
controlling shareholder. The Company and CPI subsequently
reached an agreement in which the Company agreed to make an
advance principal payment of $1,800,000 and CPI agreed to reduce
the interest rate on the remaining indebtedness to 10%. In
August 1995 the Company obtained a five year senior term note
from its principal bank and utilized the proceeds to make the
agreed upon principal payment to CPI. The Company repaid this
senior term note, in full, in December 1995 from a portion of the
proceeds from a subordinated note payable.
As disclosed in Note 4 to the accompanying financial statements,
the Company obtained $5,000,000 from Massachusetts Capital
Resources Company ("MCRC") in December 1995 in exchange for a 10%
subordinated note payable in the amount of $4,920,000 and
warrants to purchase 200,000 shares of the Company's common stock
at an exercise price of $7.10 per share, which warrants were
valued at $80,000. A portion of the proceeds were utilized to
repay the outstanding principal balance on the $1,800,000 term
note previously discussed. The remainder of the proceeds are
being utilized for additions to property and equipment and for
working capital purposes.
As disclosed more fully in Note 8 to the accompanying financial
statements, the Company reached an agreement with CPC
International, Inc. ("CPC") in December 1995 in which the Company
agreed to pay CPC $990,000 in settlement of an environmental
claim by CPC against the Company relating to a Superfund site.
The Company may, at its option, pay all or any portion of this
settlement through the issuance of unregistered, restricted
shares of its common stock. The Company issued 108,155 shares of
its common stock, having an aggregate fair market value of
$769,000, to CPC in December 1995 and January 1996. The
remaining liability to CPC of $221,000 (plus interest at an
annual rate of 8 3/4% for any portion paid in cash) must be paid
no later than June 30, 1999.
In 1995 the Company paid dividends in the amount of $5.00 per
share on its outstanding new preferred stock and $.10 per share
on its outstanding common stock. The Company intends to continue
the dividend policy established in 1989 and pay dividends in the
aggregate amount of $.10 per share on its outstanding common
stock in 1996. Payment of such dividends is contingent upon the
Company's continuing to have the necessary financial resources
available.
At December 31, 1995, for income tax reporting purposes, the
Company has available prior years' investment tax credit and
other general business credit carryforwards of $641,000 expiring
between 1996 and 2000 and an AMT credit carryforward of $242,000.
Results of Operations
The Company's operating revenues exceeded operating expenses by
$2,101,000 in 1995 compared with $3,090,000 in 1994 and
$2,321,000 in 1993. The decline in operating profits for 1995
from 1994 is about equally attributable to decreases in operating
revenues and increases in operating expenses between years. The
increase in 1994 from 1993 resulted from a substantial increase
in operating revenues which outpaced the increases in operating
expenses experienced between years. The principal reasons for
these changes in operating revenues and expenses are explained in
the following paragraphs.
PAGE 14
Operating revenues for 1995 decreased by 3% from 1994. This
decrease is almost entirely the result of a 27% decrease in net
revenue from container traffic which declined from $2,077,000 in
1994 to $1,524,000 in 1995. A decline in container traffic
volume accounted for approximately 9% of this decrease with a
decrease in the average net revenue received per container
accounting for the balance. Conventional traffic volume
increased by 3% in 1995 from 1994, but this increase in volume
was largely offset by a 3% decrease in the average revenue
received per conventional carloading.
Operating revenues increased by 9% in 1994 from 1993 as a result
of a 7% increase in conventional traffic volume and a 5% increase
in the average revenue received per conventional carloading.
These increases in conventional freight revenue were partially
offset by a 5% decrease in container traffic volume.
One of the Company's major containership line customers withdrew
from the Company's intermodal terminal facility in Worcester,
Massachusetts, effective July 1, 1994 and moved to the facility
of another New England railroad. Loss of this customer
substantially accounts for the decrease in container traffic
volume in both 1995 and 1994 from the previous years. The
decrease in the net revenue received per container in 1995 from
1994 is attributable to rate adjustments necessitated by
competitive factors within the industry. The Company's
intermodal terminal facility serves primarily as a terminal for
"mini-landbridge" movements of container traffic from the Far
East destined for points in Southeastern New England. Several
major containership lines utilize regularly scheduled double-
stack train service through this terminal.
The relatively small increase in conventional traffic volume in
1995 from 1994 is explained by the fact that, while the volume of
construction aggregate traffic increased significantly between
years, this increase was substantially offset by decreases in
other commodities. These decreases were primarily incurred
during the fourth quarter of 1995 and can be attributed to
temporary reductions in the traffic of specific commodities such
as plastics and paper. This change in the mix of commodities,
between years, toward lower revenue construction aggregates has
given rise to the decrease in the average revenue per carload.
The increase in conventional traffic volume in 1994 from 1993 was
generally attributable to improved economic conditions in effect
during that year and the increase in the average revenue per
conventional carload resulted from the fact that the traffic
increases were disproportionately concentrated in higher revenue
commodities.
The Company's principal operating expenses are labor and related
costs, depreciation and insurance and casualty claim expense,
which collectively amounted to 75% of operating expenses in 1995,
72% in 1994 and 69% in 1993. The majority of the Company's
employees are covered by union contracts which provide for semi-
annual cost-of-living adjustments. Many of the Company's
operating costs are of a relatively fixed nature and do not
increase or decrease proportionately with increases or decreases
in operating revenues.
Total operating expenses increased by 3% in 1995 from 1994 and by
5% in 1994 from 1993. Transportation expense includes the costs
of casualty and environmental claims which increased from
$135,000 in 1993 to $460,000 in 1994 to $728,000 in 1995. The
casualty and environmental claims expense recognized in 1994 and
1995 is largely attributable to the environmental claim
settlement with CPC previously discussed.
PAGE 15
The changes in other income for 1995 and 1994 from the
immediately preceding years result, for the most part, from
changes in the net gains realized from the sales of properties
and easements. The amount of revenue realized from the sale of
easements and non-essential properties can vary significantly
from year to year and management is not able to estimate the
revenue which might be realized in future years from such sales.
Interest expense in 1995 decreased by 9% from 1994. This
decrease results from lower levels of long-term borrowings and
from lower interest rates in effect on both long and short-term
borrowings during the year. Interest expense in 1994 decreased
by 5% from 1993 as a result of lower levels of long and short-
term borrowings, partially offset by higher interest rates on
short-term debt.
PAGE 16
To the Shareholders and Board of Directors of
Providence and Worcester Railroad Company
Worcester, Massachusetts
We have audited the accompanying balance sheets of Providence and
Worcester Railroad Company as of December 31, 1995 and 1994 and
the related statements of income, shareholders' equity and cash
flows for each of the three years in the period ended
December 31, 1995. 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, 1995 and 1994, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Worcester, Massachusetts
March 8, 1996
PAGE 17
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
1995 1994
_________ _________
Current assets:
Cash and equivalents................ $2,012,000 $ 595,000
Accounts receivable, net of
allowance for doubtful accounts of
$125,000 (Notes 3 and 4)........... 2,834,000 1,791,000
Materials and supplies.............. 731,000 663,000
Prepaid expenses and other.......... 139,000 127,000
Deferred income taxes (Note 7)...... 767,000 893,000
_________ _________
Total current assets.............. 6,483,000 4,069,000
_________ _________
Properties (Notes 2 and 4):
Land and land improvements.......... 8,614,000 8,520,000
Deep-water pier project............. 10,419,000 9,091,000
Track structure..................... 44,390,000 42,550,000
Buildings and other structures...... 5,853,000 5,531,000
Equipment........................... 15,156,000 13,393,000
_________ _________
84,432,000 79,085,000
Less accumulated depreciation....... 22,903,000 21,658,000
_________ _________
Total properties, net............. 61,529,000 57,427,000
_________ _________
$68,012,000 $61,496,000
_________ _________
_________ _________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
(Note 4)........................... $ 612,000 $ 638,000
Notes payable, bank (Note 3)........ 120,000
Accounts payable.................... 4,907,000 2,904,000
Accrued expenses (Note 5)........... 1,642,000 1,774,000
_________ _________
Total current liabilities......... 7,161,000 5,436,000
_________ _________
Long-term debt, less current portion
(Note 4).............................. 12,977,000 10,485,000
_________ _________
Deferred grant income................. 5,035,000 4,371,000
_________ _________
Deferred income taxes (Note 7)........ 8,384,000 8,290,000
_________ _________
Contingencies (Note 8)................
Shareholders' equity (Notes 8, 9 and 10):
Preferred stock, 10% noncumulative,
$50 par; authorized, issued and
outstanding 653 shares ............ 33,000 33,000
Common stock, $.50 par; authorized
3,023,436 shares; issued and
outstanding 2,110,041 shares in
1995 and 2,010,061 shares in
1994 .............................. 1,055,000 1,005,000
Capital in excess of par............ 5,828,000 5,046,000
Retained earnings................... 27,539,000 26,830,000
_________ _________
Total shareholders' equity........ 34,455,000 32,914,000
_________ _________
$68,012,000 $61,496,000
_________ _________
_________ _________
See notes to financial statements.
PAGE 18
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
_________ _________ _________
Revenues:
Operating revenues, freight
and other.................... $19,778,000 $20,292,000 $18,657,000
Other income (Note 6)......... 581,000 1,206,000 707,000
_________ _________ _________
Total revenues.............. 20,359,000 21,498,000 19,364,000
_________ _________ _________
Expenses:
Operating:
Maintenance of way and
structures.................. 3,499,000 3,706,000 3,995,000
Maintenance of equipment..... 2,298,000 2,237,000 2,124,000
Transportation (Note 5)...... 5,106,000 4,646,000 4,057,000
General...................... 4,095,000 4,162,000 3,556,000
Taxes, other than income..... 1,971,000 1,850,000 1,818,000
Car hire, net................ 708,000 601,000 786,000
_________ _________ _________
17,677,000 17,202,000 16,336,000
_________ _________ _________
Interest (Notes 3 and 4):
Capital Properties, Inc...... 668,000 836,000 913,000
Other........................ 507,000 449,000 440,000
_________ _________ _________
1,175,000 1,285,000 1,353,000
_________ _________ _________
Total expenses.............. 18,852,000 18,487,000 17,689,000
_________ _________ _________
Income before income taxes...... 1,507,000 3,011,000 1,675,000
Income taxes (Note 7)........... 590,000 1,200,000 570,000
_________ _________ _________
Net income...................... $ 917,000 $1,811,000 $1,105,000
_________ _________ _________
_________ _________ _________
Earnings per common and common
equivalent share ............. $ .44 $ .88 $ .54
_________ _________ _________
_________ _________ _________
See notes to financial statements.
PAGE 19
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Capital in
Preferred Common excess Retained
stock stock of par earnings
_______ ________ ________ _________
Balance, January 1, 1993.... $323,000 $689,000 $4,766,000 $24,291,000
Conversion of 28,253 old
preferred shares into
common shares.............. (14,000) 14,000
Issuance of 8,626 common
shares for stock options
exercised.................. 4,000 30,000
Issuance of 18,353 common
shares to fund the
Company's 1992 profit
sharing plan contribution.. 9,000 69,000
Dividends:
Old preferred stock, $.05
per share................ (32,000)
Common stock, $.10 per
share..................... (141,000)
Net income for the year..... 1,105,000
_______ ________ ________ _________
Balance, December 31, 1993.. 309,000 716,000 4,865,000 25,223,000
Repurchase of 361 old
preferred shares........... (3,000)
Conversion of 470,284 old
preferred shares into
common shares.............. (235,000) 235,000
Conversion of 827 new
preferred shares into
common shares.............. (41,000) 41,000
Issuance of 1,968 common
shares for stock options
exercised.................. 1,000 9,000
Issuance of 22,558 common
shares to fund the
Company's 1993 profit
sharing plan contribution.. 12,000 175,000
Dividends:
Old preferred stock, $.05
per share................ (31,000)
Common stock, $.10 per
share..................... (173,000)
Net income for the year..... 1,811,000
_______ ________ ________ _________
Balance, December 31, 1994.. 33,000 1,005,000 5,046,000 26,830,000
Issuance of 40,606 common
shares to fund the
Company's 1994 profit
sharing plan
contribution .............. 20,000 315,000
Issuance of 55,000 common
shares in payment of an
environmental claim........ 28,000 363,000
Issuance of 4,374 common
shares for stock options
exercised.................. 2,000 24,000
Issuance of common stock
warrants (Note 4).......... 80,000
Dividends:
New preferred stock, $5.00
per share................ (3,000)
Common stock, $.10 per
share..................... (205,000)
Net income for the year..... 917,000
_______ ________ ________ _________
Balance, December 31, 1995..
$ 33,000 $1,055,000 $5,828,000 $27,539,000
_______ ________ ________ _________
_______ ________ ________ _________
See notes to financial statements.
PAGE 20
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
INCREASE (DECREASE) IN CASH
1995 1994 1993
_________ _________ _________
Cash flows from operating
activities:
Net income.................... $ 917,000 $1,811,000 $1,105,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation................ 1,790,000 1,666,000 1,659,000
Amortization of deferred
grant income............... (121,000) (104,000) (95,000)
Retirement of track
structure.................. 19,000 13,000 23,000
Provision for doubtful
accounts................... (13,000)
Gain from sales of
properties and easements... (64,000) (737,000) (281,000)
Deferred income taxes....... 220,000 415,000 300,000
Changes in assets and
liabilities:
Accounts receivable........ (636,000) 625,000 (183,000)
Materials and supplies..... (68,000) 58,000 44,000
Prepaid expenses and
other..................... (12,000) 100,000 (6,000)
Accounts payable........... 537,000 (1,425,000) 86,000
Accrued expenses........... 595,000 840,000 (22,000)
_________ _________ _________
Net cash provided by
operating activities......... 3,177,000 3,262,000 2,617,000
_________ _________ _________
Cash flows from investing
activities:
Purchase of properties........ (4,490,000) (3,200,000) (1,986,000)
Proceeds from:
Sales of properties and
easements.................. 108,000 972,000 304,000
Deferred grant income....... 378,000 909,000
_________ _________ _________
Net cash used in investing
activities................... (4,004,000) (1,319,000) (1,682,000)
_________ _________ _________
Cash flows from financing
activities:
Net borrowings under lines of
credit....................... (120,000) (880,000) 250,000
Repurchase of old preferred
shares...................... (3,000)
Payments of:
Long-term debt............... (4,254,000) (845,000) (5,565,000)
Dividends.................... (208,000) (204,000) (173,000)
Proceeds from:
Long-term debt and warrants.. 6,800,000 5,000,000
Issuance of common shares for
stock
options exercised........... 26,000 10,000 34,000
_________ _________ _________
Net cash provided by (used in)
financing
activities................... 2,244,000 (1,922,000) (454,000)
_________ _________ _________
Increase in cash and
equivalents.................... 1,417,000 21,000 481,000
Cash and equivalents, beginning
of year........................ 595,000 574,000 93,000
_________ _________ _________
Cash and equivalents, end of
year........................... $2,012,000 $ 595,000 $ 574,000
_________ _________ _________
_________ _________ _________
Supplemental disclosures:
Cash paid for:
Interest...................... $1,269,000 $1,290,000 $1,353,000
_________ _________ _________
_________ _________ _________
Income taxes.................. $ 543,000 $ 729,000 $ 292,000
_________ _________ _________
_________ _________ _________
See notes to financial statements.
PAGE 21
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
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 and
Connecticut. Through its connecting carriers, it services
customers located throughout North America.
One customer accounted for approximately 12% and 10% of the
Company's operating revenues in 1995 and 1994, respectively.
Another customer accounted for approximately 10% of its
operating revenues in 1993.
Cash and equivalents:
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Materials and supplies:
Materials and supplies are stated at cost, determined on a
first-in, first-out basis, and are charged to expense or added
to the cost of properties when used.
Properties and deferred grant income:
Properties are stated at cost (including self-construction
costs). Depreciation is provided using the straight-line
method over the estimated useful lives of the respective
assets which range from four to sixty-seven years. On sale or
retirement, the asset cost and related accumulated
depreciation are removed from the accounts, and any related
gain or loss is included in income. Land and land improvements
includes property held for resale having a net book value of
approximately $400,000.
The Company has availed itself of various federal and state
programs administered by the states of Connecticut,
Massachusetts and Rhode Island for reimbursement of expenses
for capital improvements. In order to receive reimbursement,
the Company must submit requests for the projects, including
cost estimates. The Company receives from 70% to 100% of the
costs of such projects, which have included bridges, track
structure and public improvements. To the extent that such
grant proceeds are used for capital improvements to bridges
and track structure, they are recorded as deferred grant
income and amortized into operating revenues on a straight-
line basis over the estimated useful lives of the related
improvements.
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 from sales of properties and easements is recorded at
the time the sale is consummated.
PAGE 22
Income taxes:
The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". This Statement requires the Company to
compute deferred income taxes based on the differences between
the financial statement and tax basis of assets and
liabilities using enacted rates in effect in the years in
which the differences are expected to reverse.
Earnings per common and common equivalent share:
Earnings per common and common equivalent share were computed
by dividing net income by the weighted average of common and
preferred shares outstanding (2,107,869 shares in 1995,
2,069,548 shares in 1994, and 2,038,978 shares in 1993).
The Company considers its $50 par "new preferred stock", each
share of which is convertible into 100 shares of common stock
at the option of the shareholders, to be common equivalent
shares for purposes of computing earnings per share.
Unexercised stock options and warrants have not been
considered in the calculation of earnings per share since
their effect is not material.
Use of estimates:
The preparation of the Company's financial statements in
conformity with generally accepted accounted principles
necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the balance sheet dates. 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 carrying amounts of cash and
equivalents, accounts payable and accrued expenses approximate
fair value because of their short-term nature. The carrying
amounts of the Company's debt instruments approximate fair
value.
Recently issued accounting standards:
The Financial Accounting Standards Board ("FASB") has issued
SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-Lived Assets to Be Disposed Of." This
statement, which will be required in 1996, establishes
accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of.
The FASB has also issued SFAS No. 123, "Accounting for Stock-
Based Compensation". This statement, which will be required
in 1996, establishes financial accounting and reporting
standards for stock-based employee compensation plans.
The Company has not determined the effects of implementing
SFAS No. 121 and No. 123 on its financial position and results
of operations for any future period.
PAGE 23
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
2. Deep-water pier project:
In 1975, the Rhode Island Coastal Resources Management Council
(CRMC) issued a permit allowing the Company to fill and
reclaim tide-flowed land in the Port of Providence immediately
south of and abutting the Company's Wilkesbarre Pier for the
purpose of developing a major rail/ship terminal (South Quay).
That permit, issued for a ten-year period, became effective in
June 1976 following the dismissal of an appeal over its
issuance. The Company was also required to obtain a permit
from the United States Department of the Army Corps of
Engineers (COE). That permit was obtained in August 1978.
The Company was not able to commence construction until 1979,
after the Company satisfied concerns of the United States
Department of the Interior--Fish and Wildlife Service.
In 1979, the Company commenced the engineering and design of a
berm for the containment basin in which dredged material would
be deposited to create the land area. The construction of the
berm, including a specially designed facing, was completed in
1984. Due to escalating construction costs, the
unavailability of any public assistance which had been
originally contemplated, general economic conditions of the
early 1980's, and the Company's acquisition of all of
Consolidated Rail Corporation's lines in Rhode Island and
southeastern Connecticut (which lines were in need of
significant rehabilitation), the Company was unable to
complete the construction of the South Quay within the time
allowed under its permits. The Company applied for and was
granted extensions of time from CRMC and COE to complete the
project. Both the CRMC and COE permits expire in 1998.
In 1988 and early 1989, the Company filled in the southeast
and southwest corners of the Quay to provide sufficient radii
for future track construction and to prepare the site for
dredging. The Company expended additional funds in 1990 to
conduct soil borings and other engineering and design studies.
In 1991, the Company entered into contracts to complete
earthwork necessary to prepare the site for dredging and to
dredge a ship berth. The earthwork contract was completed in
1991 and the dredging work was completed in 1992. Since
completion of the dredging project, the Company has been
engaged in the process of obtaining and depositing fill
material in the basin and has substantially completed this
process as of December 31, 1995. Total costs of $10,419,000,
exclusive of land acquisition costs, have been incurred on the
South Quay through that date. Depreciation of the capitalized
project costs will not commence until the project is
completed.
The Company has engaged a maritime consulting firm, with
international port expertise, to assist it in identifying
strategic market opportunities for the port facility and to
develop financing strategies for the completion of the
facility. The Company is also exploring finance strategies
with an investment banking firm. The Company's management
believes the costs are recoverable, remains committed to the
completion of the project and intends to continue to explore
development opportunities with outside parties for the purpose
of obtaining the necessary financial and other assistance to
complete this project as a port facility.
PAGE 24
3. Notes payable, bank:
The Company has a revolving line of credit with its principal
bank in the amount of $1,500,000. This line was increased
from $1,250,000 in August 1995. 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, 1995) 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. No loans were outstanding under this line of
credit at December 31, 1995. Loans in the amount of $120,000
were outstanding at December 31, 1994.
4. Long-term debt:
1995 1994
_________ _________
10%, payable to Capital Properties,
Inc. (which, with the Company, has
a common controlling shareholder),
certain real estate pledged as
collateral, presently payable in
monthly installments of principal
and interest of
$55,000 to 2007 (i) .............. $4,597,000 $6,682,000
8.69%, payable to a commercial
lender, certain equipment and
track structure along with a
second lien on accounts receivable
pledged as collateral, payable in
monthly installments of principal
and interest of $62,000 to 2003 .. $4,072,000 $4,441,000
10% subordinated notes payable to
Massachusetts Capital Resources
Company ("MCRC"), effective
interest rate of 10.3%,
Massachusetts track structure
pledged as collateral, payable in
quarterly installments of interest
only through September 1998 and
interest and principal payments
increasing from $63,000 to
$187,500 commencing in
December 1998 with a final
principal payment of $1,250,000
due
December 31, 2005 (ii)............ 4,920,000
_________ _________
Total long-term debt............... 13,589,000 11,123,000
Less current portion............... 612,000 638,000
_________ _________
Long-term debt, less current
portion........................... $12,977,000 $10,485,000
_________ _________
_________ _________
(i) The Company made total additional principal
payments of $1,855,000 on this indebtedness in 1995 and
$300,000 in 1994. The interest rate on this
indebtedness was reduced from 12% to 10% in
August 1995.
PAGE 25
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
4. Long-term debt (continued):
(ii) In December 1995 the Company concluded an
agreement with MCRC whereby the Company received
$5,000,000 in exchange for a subordinated note payable
in the amount of $4,920,000 and warrants to purchase
200,000 shares of the Company's common stock at an
exercise price of $7.10 per share. The warrants are
exercisable through December 31, 2005. The cost of the
warrants of $80,000 was recorded as capital in excess
of par in the accompanying financial statements. 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 schedule by year of principal payments:
Year ending December 31:
1996........................ $612,000
1997........................ 670,000
1998........................ 796,000
1999........................ 1,054,000
2000........................ 1,193,000
Later years................. 9,264,000
_________
$13,589,000
_________
_________
5. Accrued expenses:
1995 1994
________ ________
Casualty and environmental
claims........................ $ 936,000 $ 768,000
Defined contribution retirement
plans......................... 326,000 479,000
Other.......................... 380,000 527,000
________ ________
$1,642,000 $1,774,000
________ ________
________ ________
Casualty loss and environmental claims expense, included in
transportation expense, amounted to $728,000 in 1995, $460,000 in
1994 and $135,000 in 1993.
6. Other income:
1995 1994 1993
________ ________ ________
Gain from sales of
properties and
easements, net......... $ 64,000 $ 737,000 $ 281,000
Rentals and license
fees, under various
operating leases....... 494,000 461,000 422,000
Interest................ 23,000 8,000 4,000
________ ________ ________
$ 581,000 $1,206,000 $ 707,000
________ ________ ________
________ ________ ________
PAGE 26
7. Income taxes:
The provision for income taxes under SFAS 109 consists of the
following:
1995 1994 1993
________ ________ _______
Current:
Federal................ $ 320,000 $ 675,000 $ 235,000
State.................. 50,000 110,000 35,000
________ ________ ________
370,000 785,000 270,000
Deferred................ 220,000 415,000 300,000
________ ________ ________
$ 590,000 $1,200,000 $ 570,000
________ ________ ________
________ ________ ________
Components of the deferred provision for income taxes are as
follows:
1995 1994 1993
________ ________ ________
Depreciation............ $ 85,000 $ 20,000 $ 1,000
General business tax
credits................ 400,000 855,000 277,000
Deferred grant income... (91,000) (225,000) (27,000)
Gain on sale of
properties............. (14,000) (34,000) 25,000
Accrued casualty
losses................. (169,000) (162,000)
Other................... 9,000 (39,000) 24,000
________ ________ ________
$ 220,000 $ 415,000 $ 300,000
________ ________ ________
________ ________ ________
Deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes, and (b) tax credit carryforwards. The
tax effects of significant items comprising the Company's net
deferred income tax liability as of December 31, 1995 and 1994
are as follows:
1995 1994
_________ _________
Deferred income tax liabilities-
Differences between book and tax
basis of properties................. $10,544,000 $10,473,000
_________ _________
Deferred income tax assets:
Tax credit carryforwards............. 883,000 1,283,000
Deferred grant income................ 1,638,000 1,547,000
Accrued casualty losses............. 331,000 162,000
Other................................ 75,000 84,000
_________ _________
2,927,000 3,076,000
_________ _________
Net deferred income tax liability..... $ 7,617,000 $ 7,397,000
_________ _________
_________ _________
As of December 31, 1995, the Company has available for federal
income tax reporting purposes investment tax credit and other
general business credit carryforwards of $641,000 which expire
during the years 1996 through 2000, and AMT credit carryforwards
of $242,000. For financial reporting purposes, all of these
credits have been recorded as deferred tax assets.
PAGE 27
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
7. Income taxes (continued):
A reconciliation of the income tax provision as computed by
applying the statutory federal income tax rate of 34% to income
before income taxes is as follows:
1995 1994 1993
________ ________ ________
Statutory tax rate
expense................ $512,000 $1,024,000 $ 570,000
Increase (decrease) in
taxes
resulting from:
Depreciation of
properties acquired
from bankrupt
railroads having a
tax basis in excess
of acquired cost.... (22,000) (22,000) (22,000)
Statutory
exclusions.......... 62,000 107,000
State income tax, net
of federal income
tax benefit......... 33,000 73,000 23,000
Other................ 5,000 18,000 (1,000)
________ ________ ________
$ 590,000 $1,200,000 $ 570,000
________ ________ ________
________ ________ ________
8. Contingencies:
A number of lawsuits relating to casualty losses are pending
against the Company, many of which are covered by insurance
subject to a deductible. The Company has provided for its
estimate of exposure to such claims and in management's opinion
additional liability, if any, will not be material to the
operations, financial position or liquidity of the Company.
The Company owns a site which is contaminated with petroleum
products. It is currently productive as a part of the Company's
double-stack intermodal yard. The site is not the subject of any
agency proceedings. Environmental specialists have indicated
that natural biodegradation of the contamination is occurring.
It is not anticipated that the costs of remediation, if any,
would be material to the operations, financial position or
liquidity of the Company.
The Company was notified by CPC International, Inc. ("CPC") and
the United States Environmental Protection Agency ("EPA") 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. The EPA's preliminary estimate of the clean-up alternative
it recommended was approximately $7 million with additional past
response costs of approximately $5 million ("Costs"). The
Company has no ownership interest in the site. The Company
denied responsibility. No formal claims or proceedings against
the Company were instituted in this matter. In December 1995 the
Company concluded an agreement with CPC ("Agreement") in which
the Company agreed to pay $990,000 in settlement of all claims
against it relating to this incident. Payment of this claim can
be all or partially made through issuance of unregistered,
restricted common stock of the Company. The Company issued
55,000 shares of its Common Stock, having a value of $391,000 to
CPC in December 1995 in partial payment of this claim. An
additional 53,155 shares, having a value of $378,000 were issued
in January 1996. The remaining liability of $221,000 (plus
interest at an annual rate of 8 3/4% for any portion paid in
cash) must be paid no later than June 30, 1999. The agreement
further provides that, in the event CPC recovers insurance
proceeds for the Costs, the Company is entitled to receive 10% of
the net recovery after deduction of litigation expenses. CPC is
actively engaged in litigation with an insurer seeking such a
recovery.
PAGE 28
9. Stock option plan:
The Company has a non-qualified stock option plan covering all
management personnel having a minimum of one year of service with
the Company and who are not holders of a majority of either its
outstanding common stock or its outstanding preferred stock. In
addition, the Company's outside directors are eligible to
participate in the plan. The plan covers 50,000 common shares or
5% of the shares of common stock outstanding, whichever is
greater (105,502 shares at December 31, 1995). Options issued
under the plan 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.
During the three year period ended December 31, 1995, options for
shares of common stock granted and exercised were as follows:
Number Exercise price
of shares per share
______ __________
Outstanding at
January 1, 1993 25,711 $3.25- $8.50
Granted 7,550 $4.375
Exercised (8,626) $3.25- $8.50
______
Outstanding at
December 31, 1993 24,635 $3.25- $8.50
Granted 7,690 $7.50
Exercised (1,968) $3.25- $8.50
______
Outstanding at
December 31, 1994 30,357 $3.25- $8.50
Granted 7,808 $7.00
Exercised (4,374) $3.25- $8.50
______
Outstanding and
exercisable at
December 31, 1995 33,791 $3.25- $8.50
______
______
10. Preferred stock recapitalization:
On June 25, 1994, holders in the aggregate of majorities of the
Company's outstanding common stock and preferred stock approved a
plan of recapitalization of Providence and Worcester Railroad
Company ("the plan") and amendments to the Company's charter,
provided for in the plan, which became effective on July 6, 1994.
The plan and charter amendments were previously approved by the
Company's Board of Directors.
Pursuant to the plan and the charter amendments provided for
therein, the Company's preferred stock, $.50 par value (the "Old
Preferred Stock") was converted into an equal number of shares of
the Company's common stock, $.50 par value, provided, that (i) at
the election of a holder of 100 or more shares of Old Preferred
Stock filed with the Company's exchange agent prior to
September 5, 1994, such shares could be converted into shares of
a newly authorized class of preferred stock, $50 par value (the
"New Preferred Stock") at the rate of one share of New Preferred
Stock for each 100 shares of Old Preferred Stock held, and at the
further election of the holder, any remaining shares of Old
Preferred Stock could be paid for in cash by the Company at the
rate of $7.75 per share, and (ii) a holder of less than 100
shares of Old Preferred Stock could receive payment in cash
therefor at the rate of $7.75 per share by election filed with
the exchange agent prior to September 5, 1994.
PAGE 29
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
10. Preferred stock recapitalization (continued):
Holders of 361 shares of Old Preferred Stock elected to have the
Company repurchase those shares at a total cost of $3,000.
Holders of 148,000 shares of Old Preferred Stock elected to
convert those shares into 1,480 shares of New Preferred Stock.
Subsequently, holders of 827 shares of New Preferred Stock
elected to convert those shares into common stock at the rate of
100 common shares for each preferred share.
11. Defined contribution retirement plans:
The Company has a deferred profit-sharing plan ("the Plan") which
covers all of its employees who are members of its collective
bargaining units. Contributions to the Plan are required in
years in which the Company has income from "railroad operations"
as defined in the Plan. Contributions are to be equal to at
least 10% but not more than 15% of the greater of income before
income taxes or income from railroad operations subject to a
maximum contribution of $3,500 per eligible employee.
Contributions to the Plan may be made in cash or in shares of the
Company's common stock. Contributions accrued under this Plan
amounted to $167,000 in 1995, $335,000 in 1994 and $187,000 in
1993.
The Company also has a Simplified Employee Pension Plan which
covers substantially all employees who are not members of one of
its collective bargaining units. Contributions to this plan are
discretionary and are determined annually as a percentage of each
covered employee's compensation. Contributions accrued under
this plan amounted to $159,000 in 1995, $144,000 in 1994 and
$117,000 in 1993.
PAGE 30
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
The Company's stock was first held by the public on January 1, 1988. The
common stock is listed on the National Market System of the National
Association of Securities Dealers ("NASD") under the trading symbol "PWRR".
Each share of the Company's preferred stock is convertible into 100 shares of
common stock.
The following table shows the high and low prices for the Company's
common stock during the quarterly periods indicated as obtained from NASD.
Also included are dividends paid per share of preferred and common stock during
these quarterly periods.
Trading Prices Dividends Paid
High Low Preferred Common
1995
1st Quarter..... 9 7 $-0- $-0-
2nd Quarter..... 9 8 1/4 5.00 .05
3rd Quarter..... 9 7 5/8 -0- -0-
4th Quarter..... 8 1/8 6 5/8 -0- .05
1994
1st Quarter..... 9 7 1/2 $.051 $-0-
2nd Quarter..... 8 1/4 7 -0- .05
3rd Quarter..... 8 6 3/4 -0- -0-
4th Quarter..... 7 3/4 6 3/8 -0- .05
At March 1, 1996, there were 682 holders of record of the Company's
common stock.
1 1994 dividend paid prior to recapitalization of Old Preferred Stock
into New Preferred
Stock at the rate of one share of New Preferred Stock for 100 shares of Old
Preferred
Stock.
PAGE 31
(MAP)
PROVIDENCE AND WORCESTER RAILROAD CO.
OPERATED AND CONTROLLED LINES
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement No. 33-26944 of Providence and Worcester Railroad
Company on Form S-8 of our report dated March 8, 1996, appearing
in this Annual Report on Form 10-K of Providence and Worcester
Railroad Company for the year ended December 31, 1995.
Deloitte & Touche LLP
Worcester, Massachusetts
March 27, 1996