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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, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-16704
PROVIDENCE AND WORCESTER RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0344399
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 755-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
(Title of Class)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
As of March 1, 1997, the aggregate market value of the
voting stock held by non-affiliates of the Registrant
was $10,168,025. (For this purpose, all directors of the
Registrant are considered affiliates.)
As of March 1, 1997, the Registrant had 2,189,799
shares of Common Stock outstanding.
Documents Incorporated by Reference - Portions of the
proxy statement for the 1997 annual meeting of
shareholders are incorporated by reference into Part
III. Portions of the annual report of Providence and
Worcester Railroad Company to shareholders for the
year ended December 31, 1996 are incorporated by
reference into Parts I, II, and IV.
Exhibit Index - Page IV-1.
PART I
Item 1. Business
See pages 4 through 8 of Registrant's 1996 Annual Report to
Shareholders for the "President's Report" which includes a
discussion of various aspects of the Registrant's business, which
pages are incorporated by reference herein.
General Development:
The Registrant was organized under the laws of Rhode Island
in 1969 and is the successor by merger to the freight railroad
business which had been actively conducted by Registrant's
predecessors in Rhode Island and Massachusetts since 1973 and was
thereafter expanded to Eastern Connecticut. In October 1996 the
Registrant commenced service to Queens, New York hauling trap
rock and similar products.
From 1983 through 1987, the Registrant was a wholly-owned
subsidiary of Capital Properties, Inc., a Rhode Island
corporation ("CPI"). On January 1, 1988, through a series of
transactions, the shareholders of CPI received, as a distribution
with respect to each share of CPI capital stock held, one share
of the Registrant's common stock and one share of the
Registrant's preferred stock, and the status of CPI as the parent
corporation of the Registrant was terminated. As a result, the
Registrant became, upon completion of the transactions, an
independent, publicly-held corporation.
No regularly scheduled passenger service is provided by the
Registrant. It operates over approximately 516 miles of trackage,
of which it owns approximately 170 miles. The Registrant
interchanges freight traffic with Consolidated Rail Corporation
(Conrail) at Worcester, Massachusetts and at New Haven,
Connecticut; with the Springfield Terminal Railway Company
(formerly Boston and Maine Railroad) at Gardner, Massachusetts;
and with the New England Central Railroad (formerly Central
Vermont Railway) at New London, Connecticut. Effective October 3,
1996, the Company also handles all sand and stone movements
between its system and the Long Island Rail Road at Fresh Pond
Junction in Queens, New York. Through its connections,
Registrant links approximately 79 communities on its lines,
excluding those communities through which the Registrant passes
but does not have the right to service customers. There are three
principal classification yards (areas containing tracks used to
group freight cars destined for a particular industry or
interchange), located in Worcester, Massachusetts; Cumberland,
Rhode Island and Plainfield, Connecticut.
The Registrant operates, by agreement with a private operator,
two approved customs container yards in Worcester, Massachusetts.
A customs container yard is an area containing tracks used for
I - 1
the loading and unloading of containers. These yards are U.S.
Customs bonded and international traffic must be inspected and
approved by U.S. Customs officials. The Registrant has been
working closely with the container terminal operator to develop
strong relationships with container lines involved in
international intermodal traffic (traffic which moves via several
modes of transportation; i.e. railroad, truck, ship and/or
airplane). Container traffic, especially double stack (the method
by which containers are moved, via rail, stacked one on top of
the other in specially designed rail cars), is expected to be a
significant growth market for the transport of goods into New
England.
Registrant is compensated for rail freight transportation
services for traffic handled jointly with other railroads by a
share of the aggregate freight revenues. On local traffic handled
solely by the Registrant, charges are retained entirely by
Registrant and are in amounts specified in tariffs or contracts
The Registrant competes with Conrail, Springfield Terminal
Railway Company and New England Central Railroad for rail freight
traffic of customers who lack sidings of their own and utilize
public delivery areas. The Registrant is also subject to
competition for substantially all of its traffic from common,
contract and proprietary motor carriers, although Registrant is
attempting to compete with such carriers through the rail to
truck distribution service offered through its arrangement with a
public warehouse operator.
Many of these competitors, including Conrail, are larger or
better capitalized than the Registrant. The Registrant attempts
to compete by offering greater convenience and better service
than competing carriers and at costs lower than some competing
non-rail carriers. The Registrant also competes by participating
in efforts to attract new industry to the area which it serves.
No single customer of Registrant during 1996, except Tilcon
Connecticut, Inc., accounted for as much as 10% of its total
freight revenue for the year. Tilcon Connecticut, Inc. accounted
for approximately 13% of the Registrant's freight revenue. In
addition, the Registrant's business is dependent upon the
continued operation of Conrail, Springfield Terminal Railway
Company, and New England Central Railway, with whom in the
aggregate it interchanges substantially all of its freight
traffic.
The Registrant does not believe that it is likely that Tilcon
Connecticut, Inc. will cease to be a rail shipper or will
significantly decrease its freight volume in the foreseeable
future. The nature of Tilcon's business operations, such as the
quarrying of trap rock and production of asphalt, does not
readily lend itself to alternative modes of transportation. In
the unlikely event that this customer should cease or
significantly reduce it's rail freight operations Registrant
believes that it could restructure it's operations so as to
reduce operating costs by an amount sufficient to offset the
decrease in operating revenue.
I - 2
The following table sets forth the volume of conventional
freight cars and containers handled by Registrant during the past
three years.
Conventional
Year Carloads Containers
1996 27,241 39,701
1995 29,139 41,211
1994 28,404 45,405
Reasons for the variations in traffic volume between years
are discussed in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Net container
freight revenue amounted to approximately 8% of total operating
revenue in each of the three years.
Miscellaneous
The Registrant's executive and administrative offices as
well as it's transportation operations center are located in
Worcester Massachusetts at the hub of it's rail system. All of
the day to day management of Registrant's rail freight operations
as well as it's executive, administrative, financial, sales and
marketing, engineering and maintenance activities are conducted
from this centralized location.
Substantially all of Registrant's main line track meets
Federal Railroad Administration Class 3 standards permitting
freight train speeds of forty miles per hour and Registrant
intends to continue to maintain it at this level. The Registrant
maintains the track on it's various branch lines to whatever
level is necessary to properly service the rail freight customers
located on those lines. In many instances such branch lines are
maintained to less than Class 3 standards permitting maximum
freight train speeds as low as 10 miles per hour. The track on
these lines will be upgraded only if anticipated future rail
traffic volumes warrant such upgrading. The Registrant is
engaged in a clearance improvement program on its main line, in
connection with clearance improvement programs initiated by the
Commonwealth of Massachusetts and the State of Rhode Island. The
programs, when completed, should provide high clearance access
for double stack container and tri-level auto rail cars to
identified terminal/port facilities. Other clearance
improvements on the Registrant's rail system will be evaluated
upon the identification of additional terminal facilities.
During the last three years, no moneys were expended by the
Registrant on material research activities.
I - 3
Compliance with federal, state and local provisions which
have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, does not have a material effect
upon the capital expenditures, earnings or competitive position
of Registrant.
The Registrant's business is seasonal to the extent that it
is affected by summer vacation shutdowns of shippers on its
lines, normal seasonal patterns of its customers, and by
occasionally adverse weather conditions during the winter months.
On December 31, 1996, the Registrant employed a total of 140
persons.
Item 2. Properties.
See pages 4 through 8 of Registrant's 1996 Annual Report to
Shareholders for the "President's Report" which includes a
discussion of various matters relating to the Registrant's
properties, which pages are incorporated by reference herein.
Physical Facilities
The Registrant owns land and a building in Worcester,
Massachusetts adjacent to one of its principal classification
yards. A portion of the building has been renovated and this
renovated portion houses the Registrant's executive and
administrative offices as well as some space leased to outside
tenants. The Registrant's executive and administrative offices
occupy approximately 21,000 square feet of space out of a total
space of approximately 69,500 square feet in the building. In
addition the registrant is leasing approximately 2,100 square
feet of space to an outside tenant. The Registrant has no current
plans to renovate any additional portions of this building.
The Registrant's three principal classification yards are
located in Worcester, Massachusetts (approximately 125 acres),
Valley Falls, Rhode Island (approximately 6.5 acres) and
Plainfield, Connecticut (approximately 10 acres). The Worcester
yard contains an engine house, a maintenance center and the
communications center and freight office. The Valley Falls yard
contains an engine house for heated overnight storage of
locomotives. The Registrant also has a centralized maintenance of
way equipment repair depot in Plainfield, Connecticut.
The Registrant's operating real property located in
Worcester County, Massachusetts, has been mortgaged to CPI to
secure the payment by the Registrant of a 20-year, 10% promissory
note with an outstanding principal balance of $4,211,000 as of
December 31, 1996.
The Registrant believes that it's executive and
administrative office facilities, classification yards,
maintenance facilities, etc. are fully adequate to support its
current level of operations. In addition such facilities could be
expanded to handle any likely increase in rail freight operations
as might be expected in the future.
I - 4
Other Real Property:
The Registrant and Amtrak own approximately 130 acres of
real estate located along the principal railroad lines from
downtown Providence (from approximately 2/3 of a mile west of
Union Station) through Pawtucket, Rhode Island. Of this amount,
Registrant owns approximately 8 acres in Pawtucket and has a
perpetual easement for railroad purposes over the remaining 122
acres.
The Registrant has other parcels of real property at other
points along its lines which could be made available for other
than operating purposes. At this time, management of Registrant
has no specific program for development of such properties.
Historically, the Registrant has sold parcels not integral to its
operations and will continue to entertain offers to sell other
similar parcels.
The Registrant owns the Wilkesbarre Pier in the Port of
Providence at East Providence, Rhode Island, and has direct
access to this deep-water pier by rail. At present, the pier has
berthing space for only one vessel and is used primarily for the
off-loading of petroleum products.
As discussed more fully in the President's Report, the
Registrant, since 1979, has been engaged in the engineering,
design and construction of a rail/ship terminal ("South Quay")
located immediately south of and abutting the Wilkesbarre Pier.
The work remaining at the South Quay terminal includes dock
construction and infrastructure improvements such as paving,
lighting, and utility installation. The nature and cost of
these improvements are directly dependent on the size and use of
the facility. These parameters will be established by future
users. With respect to the dock, if construction is not
accomplished by the end of 1998, the Registrant will require
extensions of the existing permits from the Rhode Island Coastal
Resource Management Council ("CRMC") and the U.S. Army Corps of
Engineers ("COE"). The CRMC has jurisdiction over construction
activity within 200 feet of a coastal feature and the COE has
concurrent jurisdiction over dock construction in the waterway.
The Registrant expects to begin discussions with the agencies in
the last quarter of 1997 or first quarter of 1998. In the event
permit extensions are not granted, the Registrant will seek new
permits for each new phase of construction. The type of permits
required for particular phases of further construction depend on
the nature and location of the work.
I - 5
Rolling Stock
The following schedule sets forth the Registrant's rolling
stock as at December 31, 1996, all of which is owned by the
Registrant:
Description Number
Locomotive 20
Gondola 37
Flat Car 4
Ballast Car 36
Passenger Equipment 5
Caboose 2
Total 104
The 20 locomotives are used on a daily basis, are maintained
to high standard, comply with all Federal Railroad Administration
and Association of American Railroads rules and regulations and
are adequate for the needs of the Registrant's freight
operations. The Registrant intends to expand its locomotive
fleet by the acquisition of 3 locomotives in 1997.
The 37 gondolas and 4 flat cars are used by certain of the
Registrant's customers. Other rail freight customers utilize
their own freight cars or obtain such equipment from other
sources.
The 36 ballast cars are used to maintain the surface of the
Registrant's track structure as well as the track shoulders by
depositing ballast (crushed rock). The Registrant has leased,
from time to time, its ballast cars to other adjoining railroads
also for the purpose of adding ballast to support track
structure.
The passenger equipment and cabooses are not utilized in the
Registrant's rail freight operation.
The Registrant has equipment permitting two-way radio
contact with every train crew and maintenance vehicle in its
system thereby permitting each train crew to maintain radio
contact with other crew members. In addition the Registrant's
Operations Center, located in Worcester, Massachusetts, maintains
constant radio contact with all trains, maintenance vehicles and
any other vehicles located anywhere on it's rail system.
I - 6
Item 3. Legal Proceedings.
The Registrant owns a site which is contaminated with
petroleum products. It is currently productive as a part of the
Registrant's double-stack intermodal yard. The site is not the
subject of any agency proceedings. Environmental specialists have
indicated that natural biodegradation of the contamination is
occurring. The Registrant is in the process of developing a plan
for the site which will address remediation requirements. It is
anticipated that only minor remediation, if any, will be
required. The exact costs of remediation are not known at this
time, but it is expected that the costs will not be material to
the operations, financial position or liquidity of the
Registrant.
Other Litigation:
The business in which the Registrant is engaged ordinarily
results in actions for negligence and other claims, and in the
opinion of management, the legal proceedings to which it is a
party in addition to those set forth above are normal for such
business.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable:
I - 7
PART II
Item 5. Market for Railroad's Common Stock and Related
Security Holder Matters.
See page 32 of Registrant's 1996 Annual Report to
Shareholders, which page is incorporated by reference herein.
Item 6. Selected Financial Data.
See page 10 of Registrant's 1996 Annual Report to
Shareholders, which page is incorporated by reference herein.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
See pages 11 through 14 of Registrant's 1996 Annual
Report to Shareholders, which pages are incorporated
by reference herein.
Item 8. Financial Statements and Supplementary Data.
Information in response to this item is contained
in the Registrant's 1996 Annual Report to Shareholders
which is incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
II-1
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant.
For information with respect to the
directors of the Registrant, see pages 2 and 3
of the Registrant's definitive proxy statement for
the 1997 annual meeting of its shareholders, which
pages are incorporated by reference, herein.
The following are the executive officers of the Registrant:
NAME AGE OFFICE HELD ELECTION TO OFFICE
Robert H. Eder 64 Chairman 1980
Orville R. Harrold 64 President 1980
Ronald P. Chrzanowski 54 Vice President 1983
Heidi J. Eddins 40 Secretary 1988
Robert J. Easton 53 Treasurer 1988
All officers hold their respective
offices until their successors are duly elected
and qualified. For further information with
respect to Messrs. Eder, Harrold, Chrzanowski and
Easton, see pages 2 and 3 of the Registrant's
definitive proxy statement for the 1997 annual
meeting. Ms. Eddins has served as General Counsel to
the Registrant since 1984.
Item 11. Executive Compensation.
See pages 4 and 5 of the Registrant's definitive
proxy statement for the 1997 annual meeting of its
shareholders, which pages are incorporated by reference
herein.
Item 12. Security Ownership of Certain Beneficial
Owners and Management.
See pages 6 and 7 of the Registrant's definitive
proxy statement for the 1997 annual meeting of its
shareholders, which pages are incorporated by reference
herein.
If all of Robert H. and Linda Eder's shares of
Preferred Stock were converted into Common Stock they
would own 1,046,492 shares of the Registrant's
outstanding Common Stock.
Item 13. Certain Relationships and Related
Transactions.
Not Applicable.
III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
(a) (1) and (2)
The response to this portion of Item 14
is submitted as a separate section of this report at page IV-3.
(3) Listing of Exhibits.
(10A) Material Contracts (incorporated by
reference to Exhibit 10 to the registration statement of the
Registrant on Form 10 and to the Non-Qualified Stock Option Plan of
the Registrant on Form S-8).
(13) Annual report to shareholders for the year ended
December 31, 1996.
(23) Independent Auditors' Consent
(b) Not applicable.
(c) Exhibits (annexed).
(d) Financial Statement Schedules. The response to this
portion of Item 14 is submitted as a separate section of this
report at Page IV-3.
IV-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
/s/ Orville R. Harrold
By Orville R. Harrold, President
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Orville R. Harrold
Orville R. Harrold, President and Director March 28,1997
(Principal executive Officer)
/s/ Ronald P. Chrzanowski
Ronald P. Chrzanowski Vice President and Director March 28,1997
/s/ Robert J. Easton
Robert J. Easton Treasurer and Director March 28,1997
(Principal financial officer
and principal accounting officer)
/s/ Phillip D. Brown
Phillip D. Brown Director March 28,1997
/s/ John H. Cronin
John H. Cronin Director March 28,1997
/s/ J. Joseph Garrahy
J. Joseph Garrahy Director March 28,1997
IV-2
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
PROVIDENCE AND WORCESTER RAILROAD COMPANY
WORCESTER, MASSACHUSETTS
IV-3
FORM 10-K--ITEMS 14 (a) (1) and (2), and 14 (d)
PROVIDENCE AND WORCESTER RAILROAD COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Providence and
Worcester Railroad Company, included in the annual report
of Registrant to its shareholders for the year ended
December 31, 1996 and independent auditors' report are
incorporated by reference in Item 8:
Independent auditors' report.
Balance sheets - December 31, 1996 and 1995.
Statements of income - years ended December 31, 1996, 1995 and 1994.
Statements of shareholders' equity - years ended December 31, 1996,
1995 and 1994.
Statements of cash flows - years ended December 31, 1996, 1995, and 1994.
Notes to financial statements - years ended December 31, 1996, 1995 and
1994.
The following financial statement schedules of
Providence and Worcester Railroad Company and
independent auditors' reports are included in Item 14(d):
Page
Independent auditors' report IV-5
II Valuation and qualifying accounts IV-6
All other schedules are omitted because they are not
applicable or not required, or because the required
information is shown either in the financial statements
or the notes thereto.
IV-4
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Providence and Worcester Railroad Company:
We have audited the financial statements of Providence and
Worcester Railroad Company as of December 31, 1996 and 1995,
and for each of the three years in the period ended December
31, 1996, and have issued our report thereon dated March 7,
1997; such financial statements and report are included in
your 1996 Annual Report to Shareholders and are incorporated
herein by reference. Our audits also included the financial
statement schedule of Providence and Worcester Railroad
Company, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/S/ Deloitte & Touche LLP
Boston, Massachusetts
March 7, 1997
IV-5
PROVIDENCE AND WORCESTER RAILROAD COMPANY SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSAND DOLLARS)
______________________________________________________________________________
Column A Column B Column C Column D Column E
Additions
(1) (2)
Balance a Charged to Charged to Balance
beginning costs and other accounts at end
Description of period expenses describe Deductions of period
_______________________________________________________________________________
_______________________________________________________________________________
Allowance for
doubtful
accounts:
Year ended
December 31,
1996 $125 $7 (A) ($7) $125
Year ended
December 31,
1995 $125 $125
Year ended
December 31,
1994 $125 $41 (A) ($41) $125
(A) Bad debts written off.
IV - 6
PROVIDENCE AND WORCESTER RAILROAD COMPANY
ANNUAL REPORT 1996
COVER PAGE
PROVIDENCE AND WORCESTER RAILROAD COMPANY
EMPLOYEE INJURIES 1994 - 1996
GRAPH
INJURIES PER 200,000 PEOPLE HOURS
Providence and Worcester Railroad Company has reduced
injuries dramatically in the past 3 years as show by the
above chart. This accomplishment has earned the company and
its employees a prestigious E. H. Harriman Safety Award.
These awards are given to railroads who achieve the lowest
injury frequency per 200,000 people hours. Awards are given
to 3 classes of railroads based on size, measured in total
number of people hours. The company's employees finished 2nd
in Class C (4,000,000 people hours or less but with a
minimum of 250,000 people hours.) There were 20 other
railroads competing in this class. The company will receive
the Silver Medal in the competition.
- 1 -
A BRIEF DESCRIPTION OF THE COMPANY'S BUSINESS
The Company is an interstate freight carrier
conducting railroad operations in Massachusetts, Rhode
Island, Connecticut and New York. The railroad first began
operations in 1847 between the cities of Providence, Rhode
Island and Worcester, Massachusetts and operated
independently until 1888, at which time it was leased to
others. In February 1973, the Company resumed control of
the railroad and its 45 miles of track. In the ensuing 24
years, the Company has expanded its service territories
through various transactions. The Company presently
operates over approximately 516 miles of trackage of which
it owns approximately 170 miles. No regularly scheduled
passenger service is provided by the Company. The Company
interchanges freight traffic with Consolidated Rail
Corporation (Conrail) at Worcester, Massachusetts; with
Springfield Terminal Railway Company (formerly Boston and
Maine Railroad) at Gardner, Massachusetts; and with New
England Central Railroad (formerly Central Vermont Railway)
at New London, Connecticut. Effective October 3, 1996, the
Company also handles all sand and stone movements between
its system and the Long Island Rail Road at Fresh Pond
Junction in Queens, New York. Through its connections, the
Company links approximately 79 communities on its lines,
excluding those communities through which the Company passes
but does not have the right to service customers. The main
freight classification yard is located in Worcester,
Massachusetts and encompasses approximately 125 acres.
Worcester is also the location of the Company's locomotive
and car maintenance facility and the Company's corporate
headquarters building. There are smaller classification
yards in Cumberland, Rhode Island, and Plainfield,
Connecticut. Plainfield also houses an equipment
maintenance facility.
The Company services by agreement with a private
operator, two approved custom bonded container yards in
Worcester, Massachusetts. In 1996, the Company handled
27,241 carloads of freight and 39,701 containers.
- 2 -
PROVIDENCE AND WORCESTER RAILROAD COMPANY
CONVENTIONAL CARLOADS INTERMODAL (CONTAINERS)
GRAPH GRAPH
TOTAL REVENUES OPERATING REVENUES
GRAPH GRAPH
EARNINGS PER SHARE NET INCOME
GRAPH GRAPH
- 3 -
PRESIDENT'S REPORT
On Friday, October 4, 1996, at approximately 8:00 p.m.,
the Providence and Worcester Railroad Company operated its first
train out of Cedar Hill Yard in New Haven, Connecticut to Fresh
Pond Junction on the Long Island Rail Road in Queens, New York.
The train consisted of three 2,000 horsepower diesel-electric
locomotives and 58 open top hopper cars loaded with 5,750 tons of
trap rock destined for Long Island. This was the Company's first
service into New York State, with the train crossing the noted
Hell Gate Railroad Bridge (see back cover) from the Borough of
the Bronx to the Borough of Queens, at 2:30 a.m., and arriving at
Fresh Pond Junction at approximately 3:30 a.m. on Saturday
morning. The Company made 17 such trips to Fresh Pond in 1996
hauling 402 loaded cars. The Company now operates in four
states, Massachusetts, Rhode Island, Connecticut and New York and
provides freight service within an area of approximately 516
miles.
The Company's performance in 1996 exceeded that of 1995.
Income before taxes increased 34.8% in 1996 and earnings
increased from $.44 a share to $.56 a share (see figure 5, page
3). Operating revenue for 1996 was down 2% from 1995 (see figure
4, page 3) due to a decrease in conventional carloads of 6% (see
figure 1, page 3) and 4% (see figure 2, page 3) in intermodal
containers. Non-operating income rose approximately $1.1
million, including the proceeds of the eminent domain taking of
the Washington Secondary Branch by the State of Rhode Island in
December of 1996.
Once again, the Company's employees had an excellent
safety record in 1996 with only two reportable injuries in 1996
as compared to five in 1995 and nine in 1994. This represents a
60% decrease, 1996 versus 1995, and a 78% decrease, 1996 versus
1994. Four departments went without a reportable injury in 1996:
Transportation, Clerical, Maintenance of Equipment, and
Communications and Signals. These employees are to be commended
for this tremendous achievement. The graph on page 1 shows the
decrease in the number of injuries per 200,000 people hours
worked in 1996, 1995 and 1994. The Company and its employees
will receive a prestigious Harriman Award for this excellent
safety record.
At this time, I would like to discuss in more detail
events of 1996 and several significant developments that are
expected to have an impact on our operations and financial
results in the years ahead.
I. Rhode Island Freight Rail Improvement Project.
The State of Rhode Island is developing a Freight Rail
Improvement Project ("FRIP") on that portion of the National
Railroad Passenger Corporation's ("Amtrak") Northeast Corridor
("NEC") between its connection with the Company's main line in
Central Falls, Rhode Island and the Quonset Point/Davisville port
and industrial park ("QP/D"). QP/D contains over 900 acres of
developable property, three active piers, an on-site airport and
on-site rail. Its total land area of 3,000 acres represents a
significant portion of Rhode Island's prime industrial land and
currently houses eleven companies which actively use the
- 4 -
Company's rail services. The State has prepared a development
plan for QP/D that includes expanded use of the port facilities
and growth of the industrial park.
The FRIP will increase the capacity of the NEC by adding
or rehabilitating a third track for approximately 18 miles and
will increase overhead clearances to allow for the movement of
double stack container cars and other high clearance rail cars
such as tri-level automobile cars.
In November, the Rhode Island electorate approved the
issuance of state general obligations bonds totaling $72 million
for the QP/D project; $50 million of this amount is earmarked for
the FRIP, with $22 million identified for infrastructure
improvements within the QP/D facilities. The state investment is
expected to be matched with federal appropriations; to date,
Congress has appropriated $13 million for the FRIP.
The State is preparing a Final Environmental Impact
Statement ("FEIS"). The FRIP will take approximately 3 to 4
years to construct following issuance of a Record of Decision
from the Federal Highway Administration which is overseeing the
development of the FEIS.
When coupled with the Company's clearance improvement
program, the FRIP should assist the development of QP/D as a more
active port and industrial facility and enable the Company to
participate in this traffic growth.
II. Expansion of System
As mentioned above, on October 3, 1996, the Company
received approval from the United States Surface Transportation
Board ("STB") for the acquisition of the rights to haul sand and
stone between the Company's lines and the Long Island Rail Road
at Fresh Pond Junction in Queens, New York. Previously, these
commodities originating at quarries serviced by the Company and
destined for Long Island were required to be interchanged with
Consolidated Rail Corporation ("Conrail") at New Haven,
Connecticut.
The Company provides rail service from three aggregate
quarries to three asphalt production plants and to other users of
aggregate such as railroads for ballast.
III. Clearance Program
In conjunction with the FRIP and to facilitate growth in
its intermodal business, the Company continued in 1996 to make
clearance improvements under structures over its main line
between Worcester, Massachusetts and Cumberland (Valley Falls),
Rhode Island.
On February 26, 1996, Governor William F. Weld signed into
law a bill entitled "An Act Relative to the Revitalization and
Development of the Commonwealth's Seaports". This Act
establishes the Massachusetts Double Stack Network, consisting of
the Boston and Albany Line of Conrail from the New York border to
the presently existing intermodal facility at Beacon Park Yard in
the City of Boston, Massachusetts, the main line of the Boston
- 5 -
and Maine Corporation from the Vermont border to the existing
intermodal facility at Fort Devens in the town of Ayer,
Massachusetts, and all lines of the Company in Worcester County,
and authorizes clearance improvements on these lines. With the
exception of two line segments which may be fully funded by the
Commonwealth (Worcester to Boston on the Conrail line and Gardner
to Ayer on the B&M line), the Act requires the costs of clearance
improvements to be borne 50% by the affected railroad and 50% by
the State. For the Company's lines in Worcester County, the
Commonwealth's contribution is a maximum of $5.5 million. For
the two line segments which may be fully funded by the
Commonwealth, the Commonwealth will assess a reimbursement charge
on certain containers moving over such lines above designated
levels.
The Company is endeavoring to complete the required master
agreement to establish the terms and conditions for accomplishing
the clearance improvements with the Commonwealth's financial
participation and intends to utilize the program to maximum
advantage.
The Company successfully completed 4 clearance projects in
1996 and early 1997 and expects to have all clearance projects on
its main line in Rhode Island accomplished by the end of 1997.
IV. Status of Conrail
Last year the Company advised that it had been selected by
Conrail to negotiate for the acquisition of certain Conrail
properties in Connecticut and Massachusetts. The parties,
however, were unable to come to a mutually acceptable agreement
and the negotiations were terminated. Conrail subsequently sold
all of its properties and interests in properties north of North
Haven, Connecticut to another party. Conrail retained ownership
of and continues to operate in Cedar Hill Yard in New Haven,
North Haven and Hamden, Connecticut, and on a portion of Amtrak's
Hartford line and provides freight service (except sand and
stone) on the NEC from New Haven to the Connecticut/New York
border. Pursuant to an April 13, 1982 order of the United States
Special Court, In the Matter of Expedited Supplemental
Transactions Pursuant to Section 305(f) of the Regional Rail
Reorganization Act of 1973, the Company possesses the right to
acquire all of Conrail's properties in New Haven, Connecticut and
that portion of Cedar Hill yard reasonably necessary to conduct
operations of the Company if Conrail discontinues service or
withdraws from the market. Conrail has indicated its intentions
to convey the Massachusetts properties to another buyer, but to
date that transaction has not occurred.
It is anticipated that ownership and control of Conrail
will change. CSX Corporation ("CSX") and Conrail first announced
a proposed merger on October 15, 1996. Shortly after the merger
announcement, on October 23, 1996, Norfolk Southern Corporation
made an independent offer for all of Conrail's stock. According
to published reports, the three carriers - Conrail, CSX and
Norfolk Southern - are engaged in discussions to attempt a
mutually acceptable resolution. Absent an agreement, it is
expected that both CSX and Norfolk Southern will make
applications to the STB to acquire or merge with Conrail.
- 6 -
The Company does business with all three carriers and
enjoys a good working relationship with each. The Company does
not intend to advocate a position as to which of the entities
seeking to acquire Conrail should prevail.
A significant majority of the Company's interline freight
is interchanged with Conrail. The company will be monitoring the
discussions and the STB proceedings. Of significant interest to
the Company will be the resolution of issues concerning
competitive access to Northeast shippers and ports. The Company
firmly believes that competitive access to the New England region
by at least two Class 1 carriers would benefit the areas
shippers and ports.
V. Development of Deep Water Pier
In April 1975, the Rhode Island Coastal Resources
Management Council ("CRMC") issued a permit allowing the Company
to fill and reclaim tide-flowed land immediately south of and
abutting the Company's Wilkesbarre Pier for the purpose of
developing a rail/ship terminal ("South Quay"). In 1979,
following issuance of a permit from the United States Department
of the Army Corps of Engineers ("COE"), the Company commenced the
engineering and design of a berm for the containment basin in
which dredged material would be deposited to create the land
area. The construction of the berm, including a specially
designed facing, was completed in 1984. Due to escalating
construction costs, the unavailability of any public assistance
which had been originally contemplated, general economic
conditions, and the Company's acquisition of all of Conrail's
lines in Rhode Island and southeastern Connecticut (which lines
were in need of significant rehabilitation), the Company was
unable to complete the construction of the South Quay within the
time allowed under its permits. The Company applied for and was
granted extensions of time from CRMC and COE to complete the
project. The permits now expire in 1998.
The Company and the City of East Providence entered into
an agreement in 1989 which established a procedure for future
taxation of the property; and the City, with the Company's
concurrence, adopted zoning ordinances which regulate the
operation of the port facility.
The Company has completed the dredging of a ship berth
approximately 135 feet in width by 900 feet in length with a
depth of approximately -40 feet mean low water and has
substantially completed the process of filling the containment
basin to create approximately 33 acres of waterfront land.
Erosion protection has also been constructed.
In 1995, the Rhode Island Supreme Court issued a decision
in Greater Providence Chamber of Commerce, et al v. State of
Rhode Island clarifying the quality of title to formerly tide-
flowed properties filled with the acquiescence or approval of the
State. In that case, the Supreme Court set forth a two-part test
which, if satisfied, permits a littoral owner to acquire fee
simple absolute title to filled lands. In reliance on this
decision, the Company filed an action in Rhode Island Superior
Court seeking to confirm the Company's fee simple absolute title
- 7 -
in the South Quay. The State and the Coastal Resources
Management Council objected to the Company's petition. Acting on
motions for summary judgment filed by both sides, the Superior
Court, in a written decision dated January 31, 1997, ruled that
the Company is the owner of the South Quay property in fee simple
absolute. The State has appealed this decision to the Rhode
Island Supreme Court. The Company will defend the Superior Court
decision vigorously.
The construction of a dock and infrastructure such as
utilities, lighting and paving are required to complete the
project. The required investment is directly dependent on the
size and use of the facility. These parameters should be
established by the users of the facility. The Company is
continuing its efforts, working with maritime consultants, to
identify investment and finance partners, and strategic market
opportunities.
VI. Application for Listing on the American Stock Exchange
On March 5, 1997, the common stock of the Company began
trading on the American Stock Exchange ("Exchange") under the
ticker symbol "PWX". The Exchange is an auction market system
enabling direct dealing between investors. This system should
reduce volatility in the securities listed on the Exchange. The
Exchange also provides services to its listed companies to
enhance visibility and communications with the investment
community.
The Company paid the following dividends in 1996: On May
23, 1996, a 10% noncumulative annual preferred dividend of $5.00
per share to holders of preferred stock; on May 23, 1996 and
November 29, 1996, semi-annual dividends of $.05 per share to
holders of common stock.
On behalf of the management and employees of the Company,
I wish to express my appreciation and gratitude to you our
shareholders, for your continued confidence in and support of the
Company.
Sincerely yours,
/S/ Orville R. Harrold
Orville R. Harrold
President
March 12, 1997
- 8 -
DIRECTORS AND OFFICERS
OF
PROVIDENCE AND WORCESTER RAILROAD COMPANY
Robert H. Eder, Director and Chairman of Providence and Worcester
Chairman Railroad Company, Worcester, Massachusetts
Orville R. Harrold, Director President of Providence and Worcester
and President Railroad Company Worcester, Massachusetts
Ronald P. Chrzanowski, Vice President of Providence and Worcester
Director and Railroad Company
Vice President Worcester, Massachusetts
Heidi J. Eddins, Secretary Secretary and General Counsel of Providence
and General and Worcester Railroad Company
Counsel Worcester, Massachusetts
Robert J. Easton, Director Treasurer of Providence and Worcester
and Treasurer Railroad Company
Worcester, Massachusetts
Frank W. Barrett, Director Executive Vice President of Springfield
Institution for Savings
Springfield, Massachusetts
Phillip D. Brown, Director President and CEO of Unibank for Savings
Whitinsville, Massachusetts
John H. Cronin, Director Retired President of Ideal Products, Inc.
Worcester, Massachusetts
J. Joseph Garrahy, Director President of J. Joseph Garrahy & Associates,
Inc. Providence, Rhode Island
John J. Healy, Director President of Worcester Affiliated Mfg.
L.L.C. Worcester, Massachusetts
William J. LeDoux, Director Attorney
Worcester, Massachusetts
Charles M. McCollam, Jr., President of Bertha M. McCollam, Inc.
Director President of McCollam Associates
Bethel, Connecticut
TRANSFER AGENT INDEPENDENT AUDITORS
Fleet National Bank Deloitte & Touche LLP
Stock Transfer Department One Chestnut Place - Suite 1010
Post Office Box 1440 Ten Chestnut Street
Hartford, CT 06143 Worcester, MA 01608
- 9 -
PROVIDENCE AND WORCESTER RAILROAD COMPANY
SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
___________ ___________ ___________ ___________ ___________
Operating $19,456,000 $19,778,000 $20,292,000 $18,657,000 $16,508,000
revenues
=========== =========== =========== =========== ===========
Other income $1,660,000 $ 581,000 $1,206,000 $ 707,000 $ 460,000
=========== =========== =========== =========== ===========
Income before
income
taxes $2,031,000 $1,507,000 $3,011,000 $1,675,000 $695,000
=========== =========== =========== =========== ===========
Net income $1,251,000 $ 917,000 $1,811,000 $1,105,000 $465,000
=========== =========== =========== =========== ===========
Earnings per
common and
common
equivalent
share $ .56 $ .44 $ .88 $ .54 $ .23
=========== =========== =========== =========== ===========
Total assets $68,491,000 $68,012,000 $61,496,000 $60,706,000 $58,700,000
=========== =========== =========== =========== ===========
Long-term debt $12,131,000 $12,977,000 $10,485,000 $11,378,000 $11,305,000
=========== =========== =========== =========== ===========
Cash dividends
per share:
New preferred $ 5.00 $ 5.00 $ N/A $ N/A $ N/A
=========== =========== =========== =========== ===========
Old preferred $ N/A $ N/A $ .05 $ .05 $ .05
=========== =========== =========== =========== ===========
Common $ .10 $ .10 $ .10 $ .10 $ .10
=========== =========== =========== =========== ===========
- 10 -
PROVIDENCE AND WORCESTER RAILROAD COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As detailed in the statements of cash flows in the accompanying financial
statements, the Company generated $1,460,000 of cash from operations in
1996 compared with $3,177,000 in 1995. On an overall basis the Company's
total cash and equivalents decreased by $1,326,000 in 1996, compared with
an increase of $1,417,000 in 1995. The principal utilization of cash
during both years were expenditures for property and equipment
acquisitions, principal payments on long-term debt obligations, and
payments of dividends. In addition, during 1996 the Company reduced its
current liabilities by $1,050,000.
During 1996 and 1995 the Company generated $1,319,000 and $108,000
respectively from the sales and disposals of properties not considered
essential for railroad operations and easements, including $1,000,000
received from the State of Rhode Island from its eminent domain taking of
the Company's Washington Secondary Branch in December 1996. The Company
has no established policy regarding the sale or other disposition of
properties not considered essential for railroad operations. However,
there remain certain properties which could be made available for sale,
the proceeds of which could be used to further reduce the Company's long-
term debt, acquire or make improvements to properties and equipment,
reduce current borrowings or provide additional funds for current
operations. Such properties include a branch line over which the former
Interstate Commerce Commission has granted the Company permission to
abandon rail freight service having a net book value of approximately
$400,000. Revenue from sales of properties and easements can vary
significantly from year to year.
In 1996 the Company expended $1,860,000 for track structure and bridge
improvements to its plant and equipment. Deferred grant income financed
$671,000 of these capital projects. Management estimates that a similar
amount of improvements to its track structure and bridges will be made in
1997, provided that sufficient funds, including grant proceeds, are
available. Improvements to the Company's track structure are made, for
the most part, by the Company's Maintenance of Way Department personnel.
Substantially all of the Company's mainline track meets Federal Railroad
Administration Class 3 standards (permitting freight train speeds of
forty miles per hour) and the Company intends to continue to maintain it
at this level.
In addition, in 1996 the Company expended $659,000 for land and building
improvements and $1,860,000 for equipment, principally additions to its
locomotive fleet and track maintenance machinery.
As discussed more fully in Note 2 to the accompanying financial
statements, the Company, since 1979, has been engaged in the engineering,
design and construction of a deep-water pier and rail/ship port facility.
Costs incurred in connection with this project, exclusive of land
acquisition costs, amounted to $11,339,000 through December 31, 1996.
The Company expended $1,215,000 on this project in 1996 to obtain and
deposit fill material and to complete the rip-rapping of the south end of
the berm. As of December 31, 1996 this phase of the project has been
substantially completed. Management remains committed to the completion
of this project and intends to continue to explore development
opportunities with outside parties for the purpose of obtaining the
financial and other assistance necessary to complete this project.
- 11 -
The Company possesses an exclusive freight service easement over that
portion of the Northeast corridor ("NEC") extending from the
Massachusetts/Rhode Island line to New Haven, Connecticut, as well as
overhead rights between New Haven and Queens, New York. National
Railroad Passenger Corporation ("Amtrak") is in the process of designing
and implementing a plan to electrify the portion of the NEC from Boston,
Massachusetts to New Haven to permit high speed passenger trains to
operate on the line.
In conjunction with this project the State of Rhode Island is developing
a Freight Rail Improvement Project ("FRIP") on that portion of the NEC
between its connection with the Company's main line in Central Falls,
Rhode Island (north of Providence) and the Quonset Point/Davisville port
and industrial park ("QP/D"). QP/D, which is located south of
Providence, contains over 900 acres of developable property, three active
piers, an on-site airport and on-site rail; its total land area of 3,000
acres represents a significant portion of Rhode Island's prime industrial
land and currently houses eleven companies which actively use the
Company's rail services. The State has prepared a development plan for
QP/D that includes expanded use of the port facilities and growth of the
industrial park. The FRIP will increase the capacity of the NEC by
adding or rehabilitating a third track, dedicated to freight service, for
approximately eighteen miles and will increase overhead clearances to
allow for the movement of double stack container and other high clearance
rail cars.
In November 1996 the Rhode Island electorate approved the issuance of $72
million of state general obligation bonds for the QP/D Project, $50
million of which is to fund the State's portion of the FRIP. The State
investment is expected to be matched by Federal appropriations. When
coupled with the Company's ongoing project of expanding bridge clearances
along its right of way, the FRIP should assist the development of QP/D as
a more active port and industrial facility and enable the Company to
experience significant growth in its rail traffic. This project is not
expected to have a significant impact upon the Company's operations for
several years.
In 1996, the Company's principal bank renewed its short term revolving
credit line of $1,500,000 (see Note 3 to the accompanying financial
statements). Loans are drawn against this line and payments of principal
are made from time to time depending upon current cash balances and
requirements. Loans in the amount of $1,440,000 were outstanding under
this line of credit at December 31, 1996.
As disclosed in Note 4 to the accompanying financial statements, the
Company obtained $5,000,000 from Massachusetts Capital Resources Company
("MCRC") in December 1995 in exchange for a 10% subordinated note payable
in the amount of $4,920,000 and warrants to purchase 200,000 shares of
the Company's common stock at an exercise price of $7.10 per share, which
warrants were valued at $80,000. A portion of the proceeds were utilized
to repay the outstanding principal balance on a $1,800,000 term note.
The remainder of the proceeds have been utilized for additions to
property and equipment and for working capital purposes.
As disclosed more fully in Note 8 to the accompanying financial
statements, the Company reached an agreement with CPC International, Inc.
("CPC") in December 1995 in which the Company agreed to pay CPC $990,000
in settlement of an environmental claim by CPC against the Company
relating to a Superfund site. The Company may, at its option, pay all or
any portion of this settlement through the issuance of unregistered,
restricted shares of its common stock. The Company issued 108,155 shares
of its common stock, having an aggregate fair market value of $780,000,
to CPC in December 1995 and January 1996. The remaining liability to CPC
of $220,000 (plus interest at an annual rate of 8 3/4% for any portion
paid in cash) must be paid no later than June 30, 1999.
- 12 -
In 1996 the Company paid dividends in the amount of $5.00 per share on
its outstanding new preferred stock and $.10 per share on its outstanding
common stock. The Company intends to continue the dividend policy
established in 1989. Payment of such dividends is contingent upon the
Company's continuing to have the necessary financial resources available.
At December 31, 1996, for income tax reporting purposes, the Company has
available prior years' investment tax credit and other general business
credit carryforwards of $407,000 expiring between 1997 and 2000 and an
AMT credit carryforward of $242,000.
Results of Operations
The Company's operating revenue exceeded operating expenses by $1,742,000
in 1996 compared with $2,101,000 in 1995 and $3,090,000 in 1994. The
decrease in operating profits for 1996 from 1995 is almost entirely
attributable to a decrease in operating revenues. Operating expense
between years increased by just $37,000. The decline in 1995 from 1994
is about equally attributable to decreases in operating revenues and
increases in operating expenses. The principal reasons for these changes
in operating revenues and expenses are explained in the following
paragraphs.
Operating revenues for 1996 decreased by 2% from 1995. The decrease is
the net result of a 6% decrease in conventional traffic volume partially
offset by a 4% increase in the average revenue received per conventional
carloading. Net revenue from container traffic decreased by just 1%
between years from $1,524,000 in 1995 to $1,508,000 in 1996. Container
traffic volume decreased by 4% between years but this decrease was
largely offset by a 3% increase in the average net revenue received per
container.
Operating revenues for 1995 decreased by 3% from 1994. This decrease is
almost entirely the result of a 27% decrease in net revenue from
container traffic which declined from $2,077,000 in 1994 to $1,524,000 in
1995. A decline in container traffic volume accounted for approximately
9% of this decrease with a decrease in the average net revenue received
per container accounting for the balance. Conventional traffic volume
increased by 3% in 1995 from 1994, but this increase in volume was
largely offset by a 3% decrease in the average revenue received per
conventional carloading.
The decrease in conventional traffic volume in 1996 from 1995 is
attributable to an economic slowdown which first became apparent late in
the third quarter of 1995. Adverse weather conditions experienced during
the first quarter of 1996 added to the decline in traffic. During the
third quarter of 1996, as a result of improving economic conditions,
conventional traffic volume came back to 1995 levels. Conventional
traffic volume for the fourth quarter of 1996 exceeded 1995's levels by
7% and it appears that these higher traffic levels are carrying forward
into 1997. A change in the mix of commodities hauled toward higher
revenue items, as well as handling certain construction aggregate traffic
internally which previously had been interchanged with another railroad,
substantially account for the increase in the average revenue received
per carloading. The decrease in container traffic volume in 1996 from
1995 is attributable to the same economic factors which affected
conventional traffic.
The relatively small increase in conventional traffic volume in 1995 from
1994 is explained by the fact that, while the volume of construction
aggregate traffic increased significantly between years, this increase
was substantially offset by decreases in other commodities. These
decreases were primarily incurred during the fourth quarter of 1995 and
can be attributed to temporary reductions in the traffic volume of
specific commodities such as plastics and paper. This change in the mix
of commodities, between years, toward lower revenue construction
aggregates has given rise to the decrease in the average revenue per
carload.
- 13 -
One of the Company's major containership line customers withdrew from the
Company's intermodal terminal facility in Worcester, Massachusetts,
effective July 1, 1994 and moved to the facility of another New England
railroad. Loss of this customer substantially accounts for the decrease
in container traffic volume in 1995 from 1994. The decrease in the net
revenue per container in 1995 from 1994 is attributable to rate
adjustments necessitated by competitive factors within the industry. The
Company's intermodal terminal facility serves primarily as a terminal for
"mini-landbridge" movements of container traffic from the Far East
destined for points in Southeastern New England. Several major
containership lines utilize regularly scheduled double stack train
service through this terminal.
The Company has one customer which accounted for approximately 13% of its
operating revenues in 1996 and 12% in 1995. Management does not believe
that it is likely that this customer will cease to be a rail shipper or
will significantly decrease its freight volume in the foreseeable future.
In the unlikely event that this customer should cease or significantly
reduce its rail freight operations, management believes that it could
restructure its operations so as to reduce operating costs by an amount
sufficient to offset the decrease in operating revenue.
The Company's principal operating expenses are labor and related costs,
depreciation and insurance and casualty claim expense, which collectively
amounted to 76% of operating expenses in 1996, 75% in 1995 and 72% in
1994. The majority of the Company's employees are covered by union
contracts which provide for semi-annual cost-of-living adjustments. Many
of the Company's operating costs are of a relatively fixed nature and do
not increase or decrease proportionately with increases or decreases in
operating revenues unless management takes concrete steps to restructure
its operations.
Total operating expenses increased by less than 1% in 1996 from 1995 and
by 3% in 1995 from 1994. Transportation expense includes the costs of
casualty and environmental claims, which claims increased from $460,000
in 1994 to $728,000 in 1995 and then decreased to $171,000 in 1996. The
casualty and environmental claims expense recognized in 1994 and 1995 is
largely attributable to the environmental claim settlement with CPC
previously discussed.
The 186% increase in other income in 1996 from 1995 and the 52% decrease
in 1995 from 1994 result, for the most part, from changes in the net
gains realized from the sale, condemnation and disposal of properties and
easements. The amount of revenue realized from the sale, condemnation
and disposal of easements and non-essential properties can vary
significantly from year to year and management is not able to estimate
the revenue which might be realized in future years from such
transactions.
Interest expense increased by 17% in 1996 over 1995. The increase is
principally the result of interest on the subordinated note payable to
MCRC, which originated in December 1995 as previously discussed.
Interest expense in 1995 decreased by 9% from 1994. This decrease
results from lower levels of long-term borrowings and lower rates in
effect on both long and short-term borrowing during the year.
The statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MDA") which are not
historical are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent the Company's present expectations or beliefs
concerning future events. The Company cautions, however, that actual
results could differ materially from those indicated in MDA.
- 14 -
To the Shareholders and Board of
Directors of Providence and
Worcester Railroad Company:
We have audited the accompanying balance sheets of
Providence and Worcester Railroad Company as of December 31,
1996 and 1995, and the related statements of income,
shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of Providence
and Worcester Railroad Company as of December 31, 1996 and
1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 7, 1997
- 15 -
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
__________ __________
Current assets:
Cash and equivalents $ 686,000 $ 2,012,000
Accounts receivable, net of allowance
for doubtful accounts of $125,000
(Notes 3 and 4) 2,537,000 2,834,000
Materials and supplies 1,021,000 731,000
Prepaid expenses and other 121,000 139,000
Deferred income taxes (Note 7) 400,000 767,000
__________ __________
Total current assets 4,765,000 6,483,000
__________ __________
Properties (Notes 2 and 4):
Land and improvements 9,020,000 8,614,000
Deep-water pier project 11,339,000 10,419,000
Track structure 45,833,000 44,390,000
Buildings and other structures 5,955,000 5,853,000
Equipment 15,991,000 15,156,000
__________ __________
88,138,000 84,432,000
Less accumulated depreciation 24,412,000 22,903,000
__________ __________
Total properties, net 63,726,000 61,529,000
__________ __________
$ 68,491,000 $ 68,012,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, bank (Note 3) $ 1,440,000 $ -
Current portion of long-term debt
(Note 4) 677,000 612,000
Accounts payable 2,861,000 4,907,000
Accrued expenses (Note 5) 1,133,000 1,642,000
__________ __________
Total current liabilities 6,111,000 7,161,000
__________ __________
Long-term debt, less current portion
(Note 4) 12,131,000 12,977,000
__________ __________
Deferred grant income (Note 1) 5,571,000 5,035,000
__________ __________
Deferred income taxes (Note 7) 8,617,000 8,384,000
__________ __________
Contingencies (Note 8)
Shareholders' equity (Notes 8, 9 and 10):
Preferred stock, 10% noncumulative,
$50 par; authorized, issued and
outstanding 653 shares 33,000 33,000
Common stock, $.50 par; authorized
3,023,436 shares; issued and
outstanding 2,188,244 shares in 1996
and 2,110,041 shares in 1995 1,094,000 1,055,000
Capital in excess of par 6,365,000 5,828,000
Retained earnings 28,569,000 27,539,000
__________ __________
Total shareholders' equity 36,061,000 34,455,000
__________ __________
$ 68,491,000 $ 68,012,000
========== ==========
See notes to financial statements.
- 16 -
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
___________ ___________ ____________
Revenues:
Operating revenues, freight
and other $19,456,000 $19,778,000 $ 20,292,000
Other income (Note 6) 1,660,000 581,000 1,206,000
___________ ___________ ____________
Total revenues 21,116,000 20,359,000 21,498,000
___________ ___________ ____________
Expenses:
Operating:
Maintenance of way and
structures 3,885,000 3,499,000 3,706,000
Maintenance of equipment 2,425,000 2,298,000 2,237,000
Transportation (Note 5) 4,917,000 5,106,000 4,646,000
General 3,859,000 4,095,000 4,162,000
Taxes, other than income 2,023,000 1,971,000 1,850,000
Car hire, net 605,000 708,000 601,000
___________ ___________ ____________
17,714,000 17,677,000 17,202,000
Interest (Notes 3 and 4):
Capital Properties, Inc. 437,000 668,000 836,000
Other 934,000 507,000 449,000
___________ ___________ ____________
1,371,000 1,175,000 1,285,000
___________ ___________ ____________
Total expenses 19,085,000 18,852,000 18,487,000
Income before income taxes 2,031,000 1,507,000 3,011,000
___________ ___________ ____________
Income taxes (Note 7) 780,000 590,000 1,200,000
Net income $ 1,251,000 $ 917,000 $ 1,811,000
=========== =========== ============
Earnings per common and common
equivalent share $ .56 $ .44 $ .88
=========== =========== ============
Weighted average common and
common equivalent shares
outstanding 2,243,682 2,107,869 2,069,548
=========== =========== ============
See notes to financial statements.
- 17 -
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Capital in
Preferred Common excess Retained
Stock Stock of par Earnings
_________ _________ __________ ___________
Balance, January 1, 1994 $ 309,000 $ 716,000 $4,865,000 $25,223,000
Repurchase of 361 old
preferred shares (3,000)
Conversion of 470,284 old
preferred shares into common
shares (235,000) 235,000
Conversion of 827 new
preferred shares into common
shares (41,000) 41,000
Issuance of 1,968 common
shares for stock options
exercised 1,000 9,000
Issuance of 22,558 common
shares to fund the Company's
1993 profit sharing plan
contribution 12,000 175,000
Dividends:
Old preferred stock, $.05
per share (31,000)
Common stock, $.10 per share (173,000)
Net income for the year 1,811,000
________ _________ _________ ___________
Balance, December 31, 1994 33,000 1,005,000 5,046,000 26,830,000
Issuance of 40,606 common
shares to fund the Company's
1994 profit sharing plan
contribution (Note 11) 20,000 315,000
Issuance of 55,000 common
shares in payment of an
environmental claim 28,000 363,000
Issuance of 4,374 common
shares for stock options
exercised 2,000 24,000
Issuance of common stock
warrants (Note 4) 80,000
Dividends:
New preferred stock, $5.00
per share (3,000)
Common stock, $.10 per share (205,000)
Net income for the year 917,000
________ _________ _________ ___________
Balance, December 31, 1995 33,000 1,055,000 5,828,000 27,539,000
Issuance of 53,155 common
shares in payment of an
environmental claim 27,000 352,000
Issuance of 20,925 common
shares to fund the Company's
1995 profit sharing plan
contribution (Note 11) 10,000 157,000
Issuance of 4,123 common
shares for stock options
exercised and other 2,000 28,000
Dividends:
New preferred stock, $5.00
per share (3,000)
Common stock, $.10 per share (218,000)
Net income for the year 1,251,000
_________ __________ __________ ___________
Balance, December 31, 1996 $ 33,000 $1,094,000 $6,365,000 $28,569,000
========= ========== ========== ===========
See notes to financial statements.
- 18 -
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
INCREASE (DECREASE) IN CASH
1996 1995 1994
__________ __________ __________
Cash flows from operating
activities:
Net income $ 1,251,000 $ 917,000 $ 1,811,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,940,000 1,790,000 1,666,000
Amortization of deferred
grant income (136,000) (121,000) (104,000)
Gains from sale,
condemnation and disposal
of properties and
easements (1,103,000) (64,000) (737,000)
Deferred income taxes 600,000 220,000 415,000
Other, net 26,000 19,000 13,000
Changes in assets and
liabilities:
Accounts receivable 68,000 (636,000) 625,000
Materials and supplies (290,000) (68,000) 58,000
Prepaid expenses and
other 18,000 (12,000) 100,000
Accounts payable (951,000) 537,000 (1,425,000)
Accrued expenses 37,000 595,000 840,000
__________ __________ __________
Net cash provided by
operating activities 1,460,000 3,177,000 3,262,000
__________ __________ __________
Cash flows from investing
activities:
Purchase of properties (5,465,000) (4,490,000) (3,200,000)
Proceeds from:
Sale, condemnation and
disposal of properties and
easements 1,319,000 108,000 972,000
Deferred grant income 901,000 378,000 909,000
__________ __________ __________
Net cash used in investing
activities (3,245,000) (4,004,000) (1,319,000)
__________ __________ __________
Cash flows from financing
activities:
Net borrowings under lines
of credit 1,440,000 (120,000) (880,000)
Repurchase of old preferred
shares (3,000)
Payments of:
Long-term debt (789,000) (4,254,000) (845,000)
Dividends (221,000) (208,000) (204,000)
Proceeds from:
Long-term debt and warrants 6,800,000
Issuance of common shares
for stock options
exercised 29,000 26,000 10,000
__________ __________ __________
Net cash provided by (used
in) financing activities 459,000 2,244,000 (1,922,000)
__________ __________ __________
Increase (decrease) in cash
and equivalents (1,326,000) 1,417,000 21,000
Cash and equivalents,
beginning of year 2,012,000 595,000 574,000
__________ _________ __________
Cash and equivalents, end of
year $ 686,000 $ 2,012,000 $ 595,000
========== ========== ==========
Supplemental disclosures:
Cash paid for:
Interest $ 1,333,000 $ 1,269,000 $ 1,290,000
========== ========== ==========
Income taxes $ 60,000 $ 543,000 $ 729,000
========== ========== ==========
See notes to financial statements.
- 19 -
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. Description of Business and Summary of Significant Accounting
Policies:
Description of business:
The Company is an interstate freight carrier conducting railroad
operations in Massachusetts, Rhode Island, Connecticut and New
York. Through its connecting carriers, it services customers
located throughout North America.
One customer accounted for approximately 13%, 12% and 10% of the
Company's operating revenues in 1996, 1995 and 1994,
respectively.
Cash and equivalents:
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Materials and supplies:
Materials and supplies are stated at cost, determined on a first-
in, first-out basis, and are charged to expense or added to the
cost of properties when used.
Properties and deferred grant income:
Properties are stated at cost (including self-construction
costs). Depreciation is provided using the straight-line method
over the estimated useful lives of the respective assets as
follows:
Depreciable Propertie Estimated Useful Lives
Track Structure 20 to 67 years
Buildings and Other Structures 33 to 45 years
Equipment 4 to 25 years
On sale or retirement, the asset cost and related accumulated
depreciation are removed from the accounts, and any related gain
or loss is included in income. Land and improvements includes
property held for resale having a net book value of approximately
$400,000.
The Company has availed itself of various federal and state
programs administered by the states of Connecticut, Massachusetts
and Rhode Island for reimbursement of expenses for capital
improvements. In order to receive reimbursement, the Company must
submit requests for the projects, including cost estimates. The
Company receives from 70% to 100% of the costs of such projects,
which have included bridges, track structure and public
improvements. To the extent that such grant proceeds are used for
capital improvements to bridges and track structure, they are
recorded as deferred grant income and amortized into operating
revenues on a straight-line basis over the estimated useful lives
of the related improvements.
- 20 -
Grant proceeds utilized to finance public improvements, such as
grade crossings and signals, are recorded as a direct offset to
the related expense. Although the Company cannot predict the
extent and length of future grant programs, it intends to continue
filing requests for such grants when they are available.
Revenue recognition:
Freight revenues are recorded at the time delivery is made to the
customer or the connecting carrier.
Income or loss from sale, condemnation and disposal of properties
and easements is recorded at the time the sale, condemnation or
disposal is consummated.
Income taxes:
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". This Statement requires the Company to compute deferred
income taxes based on the differences between the financial
statement and tax basis of assets and liabilities using enacted
rates in effect in the years in which the differences are expected
to reverse.
Earnings per common and common equivalent share:
Earnings per common and common equivalent share were computed by
dividing net income by the weighted average of common and
preferred shares outstanding.
The Company considers its $50 par "new preferred stock", each
share of which is convertible into 100 shares of common stock at
the option of the shareholders, to be common equivalent shares for
purposes of computing earnings per share.
Unexercised stock options and warrants have not been considered in
the calculation of earnings per share since their effect is not
material.
Use of estimates:
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the balance
sheet dates. The Company's principal estimates include reserves
for accounts receivable, useful lives of properties, accrued
liabilities including health insurance claims and legal and
environmental contingencies, and deferred income taxes.
- 21 -
1. Description of Business and Summary of Significant Accounting
Policies (continued):
Fair value of financial instruments:
SFAS No. 107 "Disclosures About Fair Value of Financial
Instruments" requires disclosure of the fair value of certain
financial instruments. The carrying amounts of cash and
equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of their short-term
nature. The carrying amounts of the Company's debt instruments
approximate fair value.
Adoption of new accounting pronouncements:
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-
Lived Assets to be Disposed Of". SFAS No. 121 requires that long-
lived assets held and used by an entity be reviewed for impairment
whenever circumstances indicate that the carrying amount of an
asset may not be recoverable. It also requires that long-lived
assets to be disposed of be reported at the lower of the carrying
amount or fair value less the cost to sell. The adoption of SFAS
No. 121 did not have a material effect on the Company's financial
position or results of operations for 1996.
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company has
continued to account for its stock-based transactions to employees
in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Pro forma
disclosures as required by SFAS No. 123 are presented in Note 9.
2. Deep-water pier project:
In 1975, the Rhode Island Coastal Resources Management Council
(CRMC) issued a permit allowing the Company to fill and reclaim
tide-flowed land in the Port of Providence immediately south of
and abutting the Company's Wilkesbarre Pier for the purpose of
developing a major rail/ship terminal (South Quay). That permit,
issued for a ten-year period, became effective in June 1976
following the dismissal of an appeal over its issuance. The
Company was also required to obtain a permit from the United
States Department of the Army Corps of Engineers (COE). That
permit was obtained in August 1978. The Company was not able to
commence construction until 1979, after the Company satisfied
concerns of the United States Department of the Interior--Fish and
Wildlife Service.
In 1979, the Company commenced the engineering and design of a
berm for the containment basin in which dredged material would be
deposited to create the land area. The construction of the berm,
including a specially designed facing, was completed in 1984. Due
to escalating construction costs, the unavailability of any public
assistance which had been originally contemplated, general
economic conditions of the early 1980's, and the Company's
acquisition of all of Consolidated Rail Corporation's lines in
Rhode Island and eastern Connecticut (which lines were in need of
significant rehabilitation), the Company was unable to complete
the construction of the South Quay within the time allowed under
its permits. The Company applied for and was
- 22 -
granted extensions of time from CRMC and COE to complete the project.
Both the CRMC and COE permits expire in 1998.
In 1988 and early 1989, the Company filled in the southeast and
southwest corners of the Quay to provide sufficient radii for
future track construction and to prepare the site for dredging.
The Company expended additional funds in 1990 to conduct soil
borings and other engineering and design studies. In 1991, the
Company entered into contracts to complete earthwork necessary to
prepare the site for dredging and to dredge a ship berth. The
earthwork contract was completed in 1991 and the dredging work was
completed in 1992. Since completion of the dredging project, the
Company has been engaged in the process of obtaining and
depositing fill material in the basin and has substantially
completed this process as of December 31, 1996. Total costs of
$11,339,000, exclusive of land acquisition costs, have been
incurred on the South Quay through that date. Depreciation of the
capitalized project costs will not commence until the project is
completed.
The Company has engaged a maritime consulting firm, with
international port expertise, to assist it in identifying
strategic market opportunities for the port facility and to
develop financing strategies for the completion of the facility.
The Company's management remains committed to the completion of
the project and intends to continue to explore development
opportunities with outside parties for the purpose of obtaining
the necessary financial and other assistance to complete this
project. Management believes that upon completion of this project
its costs will be fully recoverable from future lease and port
related charges and from associated railroad freight revenues.
3. Notes payable, bank:
The Company has a revolving line of credit with its principal bank
in the amount of $1,500,000 expiring June 1, 1997. Borrowings
outstanding under this line of credit are due on demand, bear
interest at the bank's prime rate plus one-half of one percent
(8 3/4% at December 31, 1996) and are secured by the Company's
accounts receivable. In addition, the Company pays a commitment
fee of one-half of one percent per year on the unused portion of
the line of credit. Loans in the amount of $1,440,000 were
outstanding under this line of credit at December 31, 1996. There
were no loans outstanding at December 31, 1995.
- 23 -
4. Long-term debt:
1996 1995
__________ __________
10%, payable to Capital Properties,
Inc. (which, with the Company,
has a common controlling
shareholder), certain real estate
pledged as collateral, presently
payable in monthly installments
of principal and interest of
$53,000 to 2007 (i) $4,211,000 $4,597,000
8.69%, payable to a commercial
lender, certain equipment and
track structure along with a
second lien on accounts
receivable pledged as collateral,
payable in monthly installments
of principal and interest of
$62,000 to 2003 3,669,000 4,072,000
10% subordinated notes payable to
Massachusetts Capital Resources
Company ("MCRC"), effective
interest rate of 10.3%,
Massachusetts track structure
pledged as collateral, payable in
quarterly installments of
interest only through September
1998 and interest and principal
payments increasing from $63,000
to $187,500 commencing in
December 1998 with a final
principal payment of $1,250,000
due December 31, 2005 (ii). 4,928,000 4,920,000
__________ __________
Total long-term debt 12,808,000 13,589,000
Less current portion............... 677,000 612,000
__________ __________
Long-term debt, less current
portion $12,131,000 $12,977,000
========== ==========
(i) The Company made additional principal payments of
$200,000 on this indebtedness in 1996 and $1,855,000 in 1995.
The interest rate on this indebtedness was reduced from 12%
to 10% in August 1995.
(ii) In December 1995 the Company concluded an agreement with
MCRC whereby the Company received $5,000,000 in exchange for
a subordinated note payable in the amount of $4,920,000 and
warrants to purchase 200,000 shares of the Company's common
stock at an exercise price of $7.10 per share. The warrants
are exercisable through December 31, 2005. The cost assigned
to the warrants of $80,000 was derived from a valuation made
by MCRC on the date of their issuance. The cost assigned to
the warrants is being amortized over the life of the warrants
using the straight-line method. The agreement contains
various covenants which, among other things, limit the
payment of dividends to 25% of the Company's net income and
require the Company to maintain certain ratios of leverage
and interest coverage.
- 24 -
The following is a schedule by year of principal payments:
Year ending December 31:
1997 $ 677,000
1998 785,000
1999 1,041,000
2000 1,179,000
2001 1,450,000
Thereafter 7,676,000
__________
$12,808,000
==========
5. Accrued expenses:
1996 1995
__________ __________
Casualty and environmental claims $ 320,000 $ 936,000
Defined contribution retirement
plans 415,000 326,000
Other 398,000 380,000
__________ __________
$1,133,000 $1,642,000
========== ==========
Casualty loss and environmental claims expense, included in
transportation expense, amounted to $171,000 in 1996, $728,000 in
1995, and $460,000 in 1994.
6. Other income:
1996 1995 1994
__________ __________ __________
Gains from sale,
condemnation and
disposal of
properties and
easements, net $1,103,000 $ 64,000 $ 737,000
Rentals and license
fees, under various
operating leases 494,000 494,000 461,000
Interest 63,000 23,000 8,000
__________ __________ __________
$1,660,000 $ 581,000 $1,206,000
========== ========== ==========
- 25 -
7. Income taxes:
The provision for income taxes consists of the following:
1996 1995 1994
__________ __________ __________
Current:
Federal................ $ 150,000 $ 320,000 $ 675,000
State 30,000 50,000 110,000
__________ __________ __________
180,000 370,000 785,000
Deferred 600,000 220,000 415,000
__________ __________ __________
$ 780,000 $ 590,000 $1,200,000
========== ========== ==========
Components of the deferred provision for income taxes are as
follows:
1996 1995 1994
__________ __________ __________
Depreciation $ 87,000 $ 85,000 $ 20,000
General business tax
credits 238,000 400,000 855,000
Deferred grant income (271,000) (91,000) (225,000)
Gain on sale,
condemnation and
disposal of properties 319,000 (14,000) (34,000)
Accrued casualty and
environmental claims 218,000 (169,000) (162,000)
Other 9,000 9,000 (39,000)
__________ __________ __________
$ 600,000 $ 220,000 $ 415,000
========== ========== ==========
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes, and (b) tax credit carryforwards. The tax effects
of significant items comprising the Company's net deferred income
tax liability as of December 31, 1996 and 1995 are as follows:
- 26 -
1996 1995
__________ __________
Deferred income tax liabilities-
Differences between book and tax
basis of properties $10,956,000 $10,544,000
___________ ___________
Deferred income tax assets:
Tax credit carryforwards 649,000 883,000
Deferred grant income 1,909,000 1,638,000
Accrued casualty
losses............. 113,000 331,000
Other 68,000 75,000
__________ __________
2,739,000 2,927,000
__________ __________
Net deferred income tax liability $8,217,000 $7,617,000
========== ==========
As of December 31, 1996, the Company has available for federal
income tax reporting purposes investment tax credit and other
general business credit carryforwards of $407,000 which expire
during the years 1997 through 2000, and AMT credit carryforwards
of $242,000. For financial reporting purposes, all of these
credits have been recorded as deferred tax assets.
A reconciliation of the income tax provision as computed by
applying the statutory federal income tax rate of 34% to income
before income taxes is as follows:
1996 1995 1994
__________ __________ __________
Statutory tax rate
expense $ 691,000 $ 512,000 $1,024,000
Increase (decrease) in
taxes resulting from:
Depreciation of
properties acquired
from bankrupt
railroads having a
tax basis in excess
of acquired cost (22,000) (22,000) (22,000)
Statutory exclusions 87,000 62,000 107,000
State income tax, net
of federal income tax
benefit 22,000 33,000 73,000
Other 2,000 5,000 18,000
__________ __________ __________
$ 780,000 $ 590,000 $1,200,000
========== ========== ==========
- 27 -
8. Contingencies:
A number of lawsuits relating to casualty losses are pending
against the Company, many of which are covered by insurance
subject to a deductible. The Company has provided for its
estimate of exposure to such claims and in management's opinion
additional liability, if any, will not be material to the
operations, financial position or liquidity of the Company.
The Company owns a site which is contaminated with petroleum
products. It is currently productive as a part of the Company's
double-stack intermodal yard. The site is not the subject of any
agency proceedings. Environmental specialists have indicated that
natural biodegradation of the contamination is occurring. It is
not anticipated that the costs of remediation, if any, would be
material to the operations, financial position or liquidity of the
Company.
The Company was notified by CPC International, Inc. ("CPC") and
the United States Environmental Protection Agency that the Company
was alleged to be a potentially responsible party for some or all
of the costs of remediation of a Superfund site, reportedly due to
the impact of a 1974 incident involving a rail car. In December
1995 the Company concluded an agreement with CPC ("Agreement") in
which the Company agreed to pay $990,000 in settlement of all
claims against it relating to this incident. Payment of this
claim can be all or partially made through issuance of
unregistered, restricted common stock of the Company. The Company
issued 55,000 shares of its Common Stock, having a value of
$391,000 to CPC in December 1995 in partial payment of this claim.
An additional 53,155 shares, having a value of $379,000 were
issued in January 1996. The remaining liability of $220,000 (plus
interest at an annual rate of 8 3/4% for any portion paid in cash)
must be paid no later than June 30, 1999. The agreement further
provides that, in the event CPC recovers insurance proceeds for
the costs, the Company is entitled to receive 10% of the net
recovery after deduction of litigation expenses. CPC is actively
engaged in litigation with an insurer seeking such a recovery.
9. Stock option plan:
The Company has a non-qualified stock option plan covering all
management personnel having a minimum of one year of service with
the Company and who are not holders of a majority of either its
outstanding common stock or its outstanding preferred stock. In
addition, the Company's outside directors are eligible to
participate in the plan. The plan covers 50,000 common shares or
5% of the shares of common stock outstanding, whichever is greater
(109,412 shares at December 31, 1996). Options issued under the
plan, which are fully vested when issued, are exercisable over a
ten year period at the market price for the Company's common stock
as of the date the options are granted.
- 28 -
During the three year period ended December 31, 1996, options for
shares of common stock granted, exercised and expired were as
follows:
Weighted Average
__________
Number Exercise Fair
of shares Price Value
__________ _________ _______
Outstanding at January 1, 1994 24,635 $5.49
Granted 7,690 7.50
Exercised (1,968) 5.18
__________
Outstanding at December 31, 1994 30,357 6.03
Granted 7,808 7.00 $2.29
Exercised (4,374) 5.89
__________
Outstanding at December 31, 1995 33,791 6.27
Granted 7,790 6.88 2.21
Exercised (3,823) 5.99
Expired (2,604) 6.17
__________
Outstanding at December 31, 1996 35,154 6.44
==========
The fair value of options on their grant date was measured using
the Black/Scholes options pricing model. Key assumptions used to
apply this pricing model are as follows:
1996 1997
__________ _________
Average risk-free interest rate 6.4% 5.9%
Expected life of option grants 7.0 years 7.0 years
Expected volatility of underlying stock 22% 22%
Expected dividend payment rate, as
a percentage of the stock price
on the date of grant 1.45% 1.43%
It should be noted that the option pricing model used was designed
to value readily tradable stock options with relatively short
useful lives. The options granted to employees are not tradable
and have contractual lives of up to ten years. However,
management believes that the assumptions used to value the options
and the model applied yield a reasonable estimate of the fair
value of the grants made under the circumstances.
- 29 -
9. Stock option plan (continued):
The following table sets forth information regarding options at
December 31, 1996:
Range of Number Weighted Average
________________________
Number Exercise Currently Exercise Remaining
of Options Prices Exercisable Price Life (in years)
________ ________ ________ ________ ___________
8,183 $3.25 - $4.38 8,183 $3.76 5
20,590 5.50 - 7.50 20,590 6.87 7
6,381 8.50 6,381 8.50 3
As described in Note 1, the Company uses the provisions of APB 25,
commonly referred to as the intrinsic value method, to measure
compensation expense associated with grants of stock options to
employees. Had the Company used the fair value method to measure
compensation, reported net income and earnings per share would not
have been materially different.
10. Preferred stock recapitalization:
On June 25, 1994, holders in the aggregate of majorities of the
Company's outstanding common stock and preferred stock approved a
plan of recapitalization of Providence and Worcester Railroad
Company ("the plan") and amendments to the Company's charter,
provided for in the plan, which became effective on July 6, 1994.
The plan and charter amendments were previously approved by the
Company's Board of Directors.
Pursuant to the plan and the charter amendments provided for
therein, the Company's preferred stock, $.50 par value (the "Old
Preferred Stock") was converted into an equal number of shares of
the Company's common stock, $.50 par value, provided, that (i) at
the election of a holder of 100 or more shares of Old Preferred
Stock filed with the Company's exchange agent prior to
September 5, 1994, such shares could be converted into shares of a
newly authorized class of preferred stock, $50 par value (the "New
Preferred Stock") at the rate of one share of New Preferred Stock
for each 100 shares of Old Preferred Stock held, and at the
further election of the holder, any remaining shares of Old
Preferred Stock could be paid for in cash by the Company at the
rate of $7.75 per share, and (ii) a holder of less than 100 shares
of Old Preferred Stock could receive payment in cash therefor at
the rate of $7.75 per share by election filed with the exchange
agent prior to September 5, 1994.
Holders of 361 shares of Old Preferred Stock elected to have the
Company repurchase those shares at a total cost of $3,000.
Holders of 148,000 shares of Old Preferred Stock elected to
convert those shares into 1,480 shares of New Preferred Stock.
Subsequently, holders of 827 shares of New Preferred Stock elected
to convert those shares into common stock at the rate of 100
common shares for each preferred share.
- 30 -
11. Defined contribution retirement plans:
The Company has a deferred profit-sharing plan ("the Plan") which
covers all of its employees who are members of its collective
bargaining units. Contributions to the Plan are required in years
in which the Company has income from "railroad operations" as
defined in the Plan. Contributions are to be equal to at least
10% but not more than 15% of the greater of income before income
taxes or income from railroad operations subject to a maximum
contribution of $3,500 per eligible employee. Contributions to
the Plan may be made in cash or in shares of the Company's common
stock. Contributions accrued under this Plan amounted to $226,000
in 1996, $167,000 in 1995, and $335,000 in 1994. The Company made
its 1994 and 1995 contributions and intends to make its 1996
contribution in newly issued shares of its common stock.
The Company also has a Simplified Employee Pension Plan which
covers substantially all employees who are not members of one of
its collective bargaining units. Contributions to this plan are
discretionary and are determined annually as a percentage of each
covered employee's compensation. Contributions accrued under this
plan amounted to $189,000 in 1996, $159,000 in 1995, and $144,000
in 1994.
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MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
The Company's stock was first held by the public on January
1, 1988. Effective March 5, 1997, the common stock of the
Company began trading on the American Stock Exchange (the
"Exchange") under the trading symbol "PWX". Each share of
the Company's preferred stock is convertible into 100 shares
of common stock.
The following table shows the high and low prices for the
Company's common stock during the quarterly periods
indicated1. Also included are dividends paid per share of
preferred and common stock during these quarterly periods.
Trading Prices
Dividends Paid
High Low Preferred Common
1996
1st Quarter..... 8 1/2 6 3/4 $-0- $-0-
2nd Quarter..... 8 1/2 7 1/2 5.00 .05
3rd Quarter..... 8 1/2 6 1/2 -0- -0-
4th Quarter..... 8 6 1/2 -0- .05
1995
1st Quarter..... 9 7 $-0- $-0-
2nd Quarter..... 9 8 1/4 5.00 .05
3rd Quarter..... 9 7 5/8 -0- -0-
4th Quarter..... 8 1/8 6 5/8 -0- .05
At February 28, 1997, there were 676 holders of record of the
Company's common stock.
1Information obtained from National Association of Securities
Dealers on whose National Market System the common stock was
previously listed until March 5, 1997.
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EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorportation by refernece in Registration Statements No.
33-26944, No. 333-02975, and No. 333-21617 of Providence and Worcester
Railroad Company on Forms S-8 of our reports dated March 7, 1997,
appearing in and incorporated by reference in this Annual Report on Form 10-k
of Providence and Worcester Railroad Company for the year ended December
31, 1996.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 27, 1997