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, 2002 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, 2003, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $24,306,539. (For this purpose, all directors of the Registrant are considered affiliates.) As of March 1, 2003, the Registrant had 4,443,756 shares of Common Stock outstanding. Documents Incorporated by Reference - - ------------------------------------- None Exhibit Index - Page IV-1. PART I Item 1. Business - ---------------- Providence and Worcester Railroad Company ("P&W") is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The Company is the only interstate freight carrier serving the State of Rhode Island and possesses the exclusive and perpetual right to conduct freight operations over the Northeast Corridor between New Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing independent operations in 1973, the Company, through a series of acquisitions of connecting lines, has grown from 45 miles of track to its current system of approximately 545 miles. P&W operates the largest double stack intermodal terminal facilities in New England in Worcester, Massachusetts, a strategic location for regional transportation and distribution enterprises. The Company transports a wide variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, coal, processed foods and edible food stuffs, such as frozen foods, corn syrup and animal and vegetable oils. Its customers include Cargill, Inc., The Dow Chemical Company, Exxon-Mobil Corporation, Frito-Lay, Inc., Getty Petroleum Marketing Inc., International Paper Company, Northeast Utilities, Smurfit-Stone Container Corporation and Tilcon Connecticut, Inc. In 2002, P&W transported approximately 32,000 carloads of freight and 59,000 intermodal containers. The Company also generates income through sales of properties, grants of easements and licenses and leases of land and tracks. P&W's connections to multiple Class I railroads, either directly or through connections with regional and short-line carriers, provide the Company with a competitive advantage by allowing it to offer creative pricing and routing alternatives to its customers. In addition, the Company's commitment to maintaining its track and equipment to high standards enables P&W to provide fast, reliable and efficient service. Industry Overview General Railroads are divided into three classes based on operating revenues: Class I, $266.7 million or more; Class II, $21.3 million to $266.6 million; and Class III, less than $21.3 million. As a result of mergers and consolidations, there are now only seven Class I railroads in the country. These large systems handle 92% of the nation's rail freight business. The rail freight industry underwent a revitalization after the passage of the Staggers Rail Act, which deregulated the pricing and types of services provided by railroads. As a result, railroads were able to achieve significant productivity gains and operating cost decreases while gaining pricing flexibility. Rail freight service became more competitive with other transportation modes with respect to both quality and price. The volume of freight moved by rail has risen dramatically since 1980 and profitability has improved significantly. One result of the revitalization of the industry has been the growth of regional (over 350 miles) and short-line railroads, which has been fueled by a trend among Class I railroads to divest certain branch lines in order to focus on their long-haul core systems. There are now more than 550 of these regional and short-line railroads. They operate in all 50 states, account for more than 30% of all rail track, employ 12% of all rail workers and generate about 8% of all rail revenue. Generally, freight railroads handle two types of traffic: conventional carloads and intermodal containers used in the shipment of goods via more than one mode of transportation, e.g., by ship, rail and truck. By using a hub-and-spoke approach to shipping, multiple containers can be moved by rail to and from an intermodal terminal and then either delivered to their final destinations by truck or transferred to ship for export. Over the past decade, commodity shippers have increasingly turned to intermodal transportation principally as an alternative to long-haul trucking. The development of new intermodal technology, which allows containers to be moved by rail double stacked (i.e., stacked one on top of the other) in specially designed railcars, together with increasing highway traffic congestion and the shortage of long-haul truck drivers have contributed to this trend. Regional Developments There are a number of development projects underway in New England to increase port capacity along the extensive coastline and to improve the intermodal transportation and distribution infrastructure in the region. These projects present significant opportunities for the Company to increase its business. I-1 Quonset/Davisville The State of Rhode Island has proposed the redevelopment of a 1,000 acre portion of the former Naval facility at Quonset/Davisville to a more active port and industrial park. This facility already houses a number of rail oriented industries and an auto port. Construction of a freight rail improvement project to provide additional track capacity and double stack clearance on the Northeast Corridor between Quonset/Davisville and the connection of the Corridor to the Company's main line at Central Falls, R.I commenced in 2002 at a cost in excess of $120 million. Massachusetts Highway Improvement Program Work has begun on a significant expansion of the Company's bulk transload and intermodal yards in Worcester in conjunction with the Massachusetts Highway Department's $250 million project creating a direct Worcester connection to the Massachusetts Turnpike. This project will result in a near doubling of the Company's transload facilities when completed. Port of New Haven The State of Connecticut has completed rebuilding the Tomlinson Bridge in New Haven, which provides rail access to the Port of New Haven. In conjunction with this project, the Company is working with the City of New Haven and area users of the rail systems to fund a design for the restoration of local street rail service directly to port properties. Completion of this project will provide the Company with improved access to customers at the Port of New Haven. Middletown/Hartford Line In cooperation with the state of Connecticut, the Company has been engaged in the restoration of the rail line extending from Middletown to Hartford, Connecticut. In April 2000, the state of Connecticut appropriated $1.85 million to fund their portion of the project (approx 70%). The restoration of this 11 mile segment is now complete and ready for service. With a planned industrial park along this line and a new connection to other carriers in Hartford, the Company believes restoration of this line presents opportunities for future revenue growth. New London Interchange Through its New London interchange with the New England Central Railroad P&W has been able to develop significant new business with the Canadian National Railway ("CN") and the Canadian Pacific Railway. P&W has worked aggressively to leverage its extensive bulk transload facilities in developing additional chemical and plastics traffic with CN and has developed a significant volume of steel traffic with CN that had previously moved via truck. Port of Providence The Port of Providence, in conjunction with the Company, has made investments in its infrastructure, including paving, lighting and "on dock" rail, to accommodate growth in the movement of imported coal to inland markets and to handle that product more efficiently. This is expected to be a growing source of revenue for the Company over the next few years. More than 250,000 tons of coal have been handled through the Port of Providence to date. Railroad Operations The Company's rail freight system extends over approximately 545 miles of track. The Company interchanges freight traffic with CSX at Worcester, Massachusetts and at New Haven, Connecticut; with the Springfield Terminal Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts; with the New England Central Railroad (formerly Central Vermont Railway) at New London, Connecticut; and with the New York and Atlantic Railroad (formerly Long Island Railroad) at Fresh Pond Junction on Long Island. Through its connections, P&W links more than 80 communities on its lines. It operates four classification yards (areas containing tracks used to group freight cars destined for a particular industry or interchange), located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield and New Haven, Connecticut. By agreement with a private operator, the Company operates two approved customs intermodal yards in Worcester. A customs intermodal yard is an area containing tracks used for the loading and unloading of containers. These yards I-2 are U.S. Customs bonded, and international traffic must be inspected and approved by U.S. Customs officials. The intermodal facility serves primarily as a terminal for movement of container traffic from the Far East destined for points in New England. Several major container ship lines utilize double stack train service through this terminal. P&W works closely with the terminal operator to develop and maintain strong relationships with steamship lines involved in international intermodal transportation. Customers The Company serves approximately 160 customers in Massachusetts, Rhode Island, Connecticut and New York. The Company's 10 largest customers account for nearly half of its operating revenues. In 2002, Tilcon Connecticut, Inc., which ships construction aggregate from three separate quarries on P&W's system to asphalt production plants in Connecticut and New York, accounted for approximately 15.4% of the Company's operating revenues. No other customer accounted for 10% or more of its total operating revenues in 2002. Markets The Company transports a wide variety of commodities for its customers. In 2002, chemicals and plastics and construction aggregate were the two largest commodity groups transported by the Company, constituting 35% and 20%, respectively, of conventional carload freight revenues. The following table summarizes the Company's conventional carload freight revenues by commodity group as a percentage of such revenues: Commodity 2002 2001 2000 1999 1998 - --------- ---- ---- ---- ---- ---- Chemicals and Plastics ............ 35% 34% 38% 41% 41% Construction Aggregate ............ 20 19 17 17 17 Forest and Paper Products ......... 13 16 16 14 14 Food and Agricultural ............. 12 13 13 14 15 Metal products and other .......... 12 12 10 8 75 Scrap Metal and Waste ............. 8 6 6 6 6 --- --- --- --- --- Total .......................... 100% 100% 100% 100% 100% === === === === === Sales and Marketing P&W's sales and marketing staff of four people has 50 years of combined experience in pricing and marketing railroad services. The sales and marketing staff focuses on understanding and addressing the raw material requirements and transportation needs of its existing customers and businesses on its lines. The staff grows existing business by maintaining close working relationships with both customers and connecting carriers. The sales and marketing staff strives to generate new business for the Company through (i) targeting companies already on P&W's rail lines but not currently using rail services, (ii) working with state and local development officials, developers and real estate brokers to encourage the development of industry on the Company's rail lines and (iii) identifying and targeting the non-rail transportation of goods into and out of the region in which the Company operates. Unlike many other regional and short-line railroads, the Company is able to offer its customers creative pricing and routing alternatives because of its multiple connections to other carriers. Safety An important component of the Company's operating strategy is conducting safe railroad operations for the benefit and protection of employees, customers and the communities served by its rail lines. Since commencing active operations in 1973, the Company has committed significant resources to track maintenance to minimize the risk of derailments and believes its rail system is in good condition. Safety of the Company's operations is of paramount importance for the benefit and protection of the Company's employees, customers and the communities served by its rail lines. The Company and its employees have made dramatic improvements in preventing injuries while at the same time increasing operations and expanding the work force. I-3 Rail Traffic Rail traffic is classified as on-line or overhead traffic. On-line traffic is traffic that originates or terminates with shippers located on a railroad. Overhead traffic passes from one connecting carrier to another and neither originates nor terminates with shippers located on a railroad. Presently, P&W is solely an on-line carrier but expects to provide overhead service in the future for certain rail traffic to and from Long Island. Rail freight rates can be in various forms. Generally, customers are given a "through" rate, a single figure encompassing the rail transportation of a commodity from point of origin to point of destination, regardless of the number of carriers which handle the car. Rates are developed by the carriers based on the commodity, volume, distance and competitive market considerations. The entire freight bill is paid either to the originating carrier ("prepaid") or to the destination carrier ("collect") and divided between all carriers which handle the move. The basis for the division varies and can be based on factors (or revenue requirements) independently established by each carrier which comprise the through rate, or on a percentage basis established by division agreements among the carriers. A carrier such as P&W, which actually places the car at the customer's location and attends to the customer's daily switching requirements, receives revenue greater than an amount based simply on mileage hauled. Employees As of January 1, 2003, the Company had 153 full-time employees, 117 of which were represented by three national railroad labor organizations. The Company's employees have been represented by unions since the Company commenced independent operations in 1973. The Company's initial agreement with the United Transportation Union covering the trainmen was unusual in the railroad industry since it provided the Company with discretion in determining crew sizes, eliminated craft distinctions and provided a guaranteed annual wage for a maximum number of hours worked. The Company's collective bargaining agreements have been in effect since February 1973 for trainmen, since May 1974 for clerical employees and dispatchers and since June 1974 for maintenance employees. These contracts do not expire but are subject to re-negotiation after the agreed-upon moratoriums. The moratorium periods are typically three to five years in length. The labor agreements may next be amended at July 1, 2004 for the United Transportation Union (trainmen), July 1, 2006 for the Brotherhood of Railroad Signalmen (maintenance) and December 31, 2005 for the Transportation Communications Union (clerical). The Company considers its employee and labor relations to be good. Competition The Company is the only rail carrier serving businesses located on- line. However, the Company competes with other carriers in the location of new rail-oriented businesses in the region. The Company also competes with other modes of transportation, particularly long-haul trucking companies, for the transportation of commodities. Any improvement in the cost or quality of these alternate modes of transportation, for example, legislation granting material increases in truck size or allowable weight, could increase competition and may materially adversely affect the Company's business and results of operations. As a means of competing, P&W strives to offer greater convenience and better service than competing carriers and at costs lower than some competing non-rail carriers. The Company also competes by participating in efforts to attract new industry to the areas which it serves. Certain rail competitors, including CSX and Norfolk Southern, are larger or better capitalized than the Company. While P&W believes the acquisition and division of Conrail will lead to expansion opportunities, the Conrail transaction may lead to increased competition with other freight railroads, particularly in Massachusetts, and efforts by CSX and Norfolk Southern to reduce revenue to connecting regional and short-line carriers. The Company believes that its ability to grow depends, in part, upon its ability to acquire additional connecting rail lines. In making acquisitions, P&W competes with other short-line and regional rail operators, some of which are larger and have greater financial resources than the Company. I-4 Governmental Regulation The Company is subject to governmental regulation by the United States Surface Transportation Board ("the STB"), the Federal Railroad Administration ("the FRA") and other federal, state and local regulatory authorities with respect to certain rates and railroad operations, as well as a variety of health, safety, labor, environmental and other matters, all of which could potentially affect the competitive position and profitability of the Company. Additionally, the Company is subject to STB regulation and may be required to obtain STB approval prior to its acquisition of any new railroad properties. Management of the Company believes that the regulatory freedoms granted by the Staggers Rail Act have been beneficial to the Company by giving it flexibility to adjust prices and operations to respond to market forces and industry changes. However, various interests, and certain members of the United States House of Representatives and Senate (which have jurisdiction over federal regulation of railroads), have from time to time expressed their intention to support legislation that would eliminate or reduce significant freedoms granted by the Staggers Rail Act. Environmental Matters The Company's railroad operations and real estate ownership are subject to extensive federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company handles, stores, transports and disposes of petroleum and other hazardous substances and wastes. The Company also transports hazardous substances for third parties and arranges for the disposal of hazardous wastes generated by the Company. The Company believes that it is in material compliance with applicable environmental laws and regulations. Item 2. Properties - ------------------ Track P&W's rail system extends over approximately 545 miles of track, of which it owns approximately 170 miles. The Company has the right to use the remaining 375 miles pursuant to perpetual easements and long- term trackage rights agreements. Under certain of these agreements, the Company pays fees based on usage. Virtually all of the main lines on which the Company operates are in FRA class 3 condition (allowing 40 m.p.h. speeds) or better. The Company intends to maintain these lines in such excellent condition. Of the approximately 545 miles of the Company's system, 313 miles, or 57%, are located in Connecticut, 103 miles, or 19%, are located in Massachusetts, 102 miles, or 19%, are located in Rhode Island and 28 miles, or 5%, are located in New York. Rail Facilities P&W owns land and a building with approximately 69,500 square feet of floor space in Worcester, Massachusetts. The building houses the Company's executive and administrative offices and some of the Company's storage space. Approximately 2,600 square feet are leased to outside tenants. The Company owns and operates three principal classification yards located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield, Connecticut and also operates a classification yard in New Haven, Connecticut. In addition, the Company has maintenance facilities in Plainfield and Worcester. P&W believes that its executive and administrative office facilities, classification yards and maintenance facilities are adequate to support its current level of operations. Other Properties The Company owns or has the right to use a total of approximately 130 acres of real estate located along the principal railroad lines from downtown Providence through Pawtucket, Rhode Island. Of this amount, P&W owns approximately eight acres in Pawtucket and has a perpetual easement for railroad purposes over the remaining 122 acres. The Company has invested nearly $12 million in the development of the South Quay, which is adjacent to 12 acres of land owned by the Company. This investment has resulted in the creation of approximately 33 acres of waterfront land. I-5 P&W actively manages its real estate assets in order to maximize revenues. The income from property management is derived from sales and leasing of properties and tracks and grants of easements to government agencies, utility companies and other parties for the installation of overhead or underground cables, pipelines and transmission wires as well as recreational uses such as bike paths. Rolling Stock The following schedule sets forth the rolling stock owned by the Company as of December 31, 2002: Description Number ----------- ------ Locomotive .................................................. 32 Gondola ..................................................... 77 Flat Car .................................................... 5 Ballast Car ................................................. 30 Passenger Equipment ......................................... 7 Caboose ..................................................... 2 ------ Total .................................................. 153 ====== The 32 diesel electric locomotives, which include seven used 3,900 horsepower GE B39-8 locomotives acquired in 2002, are used on a daily basis, are maintained to a high standard, comply with all FRA and Association of American Railroads rules and regulations and are adequate for the needs of the Company's freight operations. The gondolas and flat cars are considered modern rail cars and are used by certain P&W customers. Other rail freight customers use their own freight cars or obtain such equipment from other sources. The ballast cars are used in track maintenance. From time to time, the Company has leased ballast cars to other adjoining railroads. The passenger equipment and caboose are not utilized in P&W's rail freight operations but are used on an occasional basis for Company functions, excursions and charter trips. Equipment P&W has a state-of-the-art digital touch control dispatching system at its Worcester operations center permitting two-way radio contact with every train crew and maintenance vehicle on its lines. The system also enables each train crew to maintain radio contact with other crew members. The Company maintains a computer facility in Worcester with back-up computer facilities in Worcester and Plainfield, Connecticut to assure the Company's ability to operate in the event of disruption of service in Worcester. The Company also has state-of-the-art automatic train defect detectors at strategic locations which inspect passing trains and audibly communicate the results to train crews and dispatchers in order to protect against equipment failure en route. The Company maintains a modern fleet of track maintenance equipment and aggressively pursues available opportunities to work with federal and state agencies for the rehabilitation of bridges, grade crossings and track. The Company's locomotives are equipped with the cab signal technology necessary for operations on the Northeast Corridor and are equipped with automatic civil speed enforcement systems which were required by the introduction of high speed passenger service on the Northeast Corridor. Item 3. Legal Proceedings - ------------------------- On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Superfund Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762,000) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the I-6 identity of PRPs). The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA. In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about sixty parties named thus far by Plaintiffs, who seek to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C. section 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company has entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. The Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site. The Company will contest this suit. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- Not applicable. I-7 Part II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters - ---------------------------------------------------------------------------- The Common Stock is quoted on the American Stock Exchange ("AMEX") under the trading symbol "PWX". The following table sets forth, for the periods indicated, the high and low sale prices per share for the Common Stock as reported on the AMEX. Also included are dividends paid per share of Preferred Stock and Common Stock during these quarterly periods. Common Stock ------------ Trading Prices Dividends Paid -------------- -------------- High Low Preferred Common ---- --- --------- ------ 2002 First Quarter........ 8.36 6.87 $ 5.00 $ .04 Second Quarter....... 11.99 7.85 -0- .04 Third Quarter........ 8.30 6.86 -0- .04 Fourth Quarter....... 8.44 6.05 -0- .04 2001 First Quarter........ 9 6.875 $ 5.00 $ .04 Second Quarter....... 10.12 7.35 -0- .04 Third Quarter........ 8.52 6.57 -0- .04 Fourth Quarter....... 7.30 6.24 -0- .04 As of March 1, 2003, there were approximately 695 holders of record of the Company's Common Stock. The declaration of cash dividends on both the Preferred and the Common Stock is made at the discretion of the Board of Directors based on the Company's earnings, financial condition, capital requirements and other relevant factors and restrictions. II-1 Item 6. Selected Financial Data - ------------------------------- The selected financial data set forth below has been derived from audited financial statements. The data should be read in conjunction with the Company's audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other information included elsewhere in this annual report on Form 10-K. Years Ended December 31, 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- (in thousands, except per share amounts) Income Statement Data: Operating revenues .......... $22,868 $22,598 $23,470 $22,152 $22,974 Other income ................ 877 1,003 2,049 3,974 4,156 ------- ------- ------- ------- ------- Total Revenues .............. 23,745 23,601 25,519 26,126 27,130 ------- ------- ------- ------- ------- Operating expenses .......... 23,698 22,245 22,301 21,410 20,272 Interest expense ............ -- -- -- -- 495 ------- ------- ------- ------- ------- Total expenses .............. 23,698 22,245 22,301 21,410 20,767 ------- ------- ------- ------- ------- Income before income taxes and extraordinary item ..... 47 1,356 3,218 4,716 6,363 Provision for income taxes .. 25 505 1,200 1,690 2,360 ------- ------- ------- ------- ------- Income before extraordinary item ....................... 22 851 2,018 3,026 4,003 Extraordinary loss from early extinguishment of debt, net of income tax benefit .................... -- -- -- -- 219 ------- ------- ------- ------- ------- Net income .................. 22 851 2,018 3,026 3,784 Preferred Stock dividend .... 3 3 3 3 3 ------- ------- ------- ------- ------- Net income available to common shareholders ........ $ 19 $ 848 $ 2,015 $ 3,023 $ 3,781 ======= ======= ======= ======= ======= Basic income per common share (a) .................. $ -- $ .19 $ .47 $ .71 $ 1.13 ======= ======= ======= ======= ======= Diluted income per common share (a) .................. $ -- $ .19 $ .46 $ .70 $ 1.10 ======= ======= ======= ======= ======= Weighted average shares-basic ............... 4,429 4,390 4,323 4,260 3,352 ======= ======= ======= ======= ======= Weighted average shares-diluted ............. 4,497 4,458 4,390 4,334 3,433 ======= ======= ======= ======= ======= Cash dividends declared on Common Stock ............... $ 710 $ 702 $ 693 $ 640 $ 402 ======= ======= ======= ======= ======= December 31, 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- (in thousands) Balance Sheet Data: Total assets ................. $90,500 $89,161 $89,073 $86,371 $84,594 Shareholders' equity ......... 68,641 69,073 68,483 66,683 63,709 (a) The income per share amounts for 1998 are stated net of a loss of $.06 per share attributable to the extraordinary item. II-2 Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------- ---------------------------------------------------------- of Operations ------------- The following discussion should be read in connection with the Company's audited financial statements and notes thereto included elsewhere in this annual report on Form 10-K. The statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MDA") which are not historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward- looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions, however, that actual results could differ materially from those indicated in MDA. Critical Accounting Policies The Securities and Exchange Commission ("SEC") recently issued guidance for the disclosure of "critical accounting policies". The SEC defines such policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 1 of the Notes to Financial Statements. None of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates, and therefore none meet the SEC definition of "critical". Overview The Company is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The Company generates operating revenues primarily from the movement of freight in both conventional freight cars and in intermodal containers on flat cars over its rail lines. Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier. Modest non-freight operating revenues are derived from demurrage, switching, weighing, special train and other transportation services as well as from services rendered to freight customers and other outside parties by the Company's Maintenance of Way, Communications & Signals, and Maintenance of Equipment Departments. Operating revenues also include amortization of deferred grant income. The Company's operating expenses consist of salaries and wages and related payroll taxes and employee benefits, depreciation and amortization, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services and other expenses. Many of the Company's operating expenses are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company's management were to take specific actions to restructure the Company's operations. When comparing the Company's results of operations from one year to another, the following factors should be taken into consideration. First, the Company has historically experienced fluctuations in operating revenues and expenses due to unpredictable events such as one-time freight moves and customer plant expansions and shut-downs. Second, the Company's freight volumes are susceptible to increases and decreases due to changes in international, national and regional economic conditions. Third, the volume of capitalized track or recollectable projects performed by the Company's Maintenance of Way and Communications & Signals Departments can vary significantly from year to year thereby impacting total operating expenses. II-3 The Company also generates income through sales of properties, grants of easements and licenses, and leases of land and tracks. Income or loss from sale, condemnation and disposal of property and equipment and grants of easements is recorded at the time the transaction is consummated and collectibility is assured. This income varies significantly from year to year. One of the Company's customers, Tilcon Connecticut, Inc., which ships construction aggregate from three separate quarries on the Company's system to asphalt production plants in Connecticut and New York, accounted for approximately 15.4%, 14.4% and 12.4% of its operating revenues in 2002, 2001, and 2000, respectively. The Company does not believe that this customer will cease to be a rail shipper or will significantly decrease its freight volume in the foreseeable future. In the event that this customer should cease or significantly reduce its rail freight operations, management believes that the Company could restructure its operations to reduce operating costs by an amount sufficient to substantially offset the decrease in operating revenues. Results of Operations The following table sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues: Years Ended December 31, ----------------------------------------------- 2002 2001 2000 ------------- -------------- ------------- (in thousands, except percentages) Freight Revenues: Conventional carloads ....... $19,119 83.6% $18,427 81.6% $18,747 79.9% Containers .................. 2,406 10.5 2,826 12.5 2,995 12.8 Non-Freight Operating Revenues: Transportation services ..... 806 3.5 888 3.9 1,041 4.4 Other ....................... 537 2.4 457 2.0 687 2.9 ------- ----- ------- ----- ------- ----- Total.................... $22,868 100.0% $22,598 100.0% $23,470 100.0% ======= ===== ======= ===== ======= ===== The following table sets forth conventional carload freight revenues by commodity group in dollars and as a percentage of such revenues: Years Ended December 31, ----------------------------------------------- 2002 2001 2000 ------------- -------------- ------------- (in thousands, except percentages) Chemicals and plastics ....... $ 6,783 35.5% $ 6,263 34.0% $ 7,053 37.6% Construction aggregate ....... 3,759 19.7 3,509 19.0 3,150 16.8 Forest and paper products .... 2,434 12.7 2,847 15.5 2,940 15.7 Food and agricultural products 2,400 12.5 2,453 13.3 2,495 13.3 Metal products and other ..... 2,235 11.7 2,152 11.7 1,924 10.3 Scrap metal and waste ........ 1,508 7.9 1,203 6.5 1,185 6.3 ------- ----- ------- ----- ------- ----- Total ...................... $19,119 100.0% $18,427 100.0% $18,747 100.0% ======= ===== ======= ===== ======= ===== II-4 The following table sets forth a comparison of the Company's operating expenses expressed in dollars and as a percentage of operating revenues: Years Ended December 31, ----------------------------------------------- 2002 2001 2000 ------------- -------------- ------------- (in thousands, except percentages) Salaries, wages, payroll taxes and employee benefits ....... $13,402 58.6% $13,372 59.2% $12,688 54.1% Casualties and insurance ..... 1,049 4.6 709 3.1 795 3.4 Depreciation and amortization 2,734 12.0 2,728 12.1 2,681 11.4 Diesel fuel .................. 1,051 4.6 1,074 4.8 1,280 5.5 Car hire, net ................ 874 3.8 983 4.3 952 4.0 Purchased services, including legal and professional fees . 1,550 6.8 2,159 9.6 2,385 10.2 Repairs and maintenance of equipment ................... 875 3.8 803 3.5 971 4.1 Track and signal materials ... 2,242 9.8 2,381 10.5 2,245 9.6 Track usage fees ............. 1,715 7.5 330 1.5 331 1.4 Other materials and supplies . 842 3.7 910 4.0 918 3.9 Other ........................ 1,449 6.3 1,549 6.8 1,627 6.9 ------- ----- ------- ----- ------- ----- Total ....................... 27,783 121.5 26,998 119.4 26,873 114.5 Less capitalized and recovered costs ............ 4,085 17.9 4,753 21.0 4,572 19.5 ------- ----- ------- ----- ------- ----- Total ...................... $23,698 103.6% $22,245 98.4% $22,301 95.0% ======= ===== ======= ===== ======= ===== Year ended December 31, 2002 Compared to Year Ended December 31, 2001 Amtrak Arbitration The Company has been party to an arbitration proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases with respect to the Company's freight operations over a portion of Amtrak's Northeast Corridor in the States of Rhode Island and Connecticut. The arbitrator issued a decision in June 2002 in which he ordered the Company to pay Amtrak additional track usage fees and siding maintenance costs retroactive to July 9, 1999. The statement of income for 2002 includes $935,000 of track usage fees and $165,000 of siding maintenance costs which relate to years prior to 2002. The additional costs related to 2002 operations, resulting from the arbitrator's decision, are track usage fees and siding maintenance costs of approximately $427,000 and $40,000, respectively. In past years it was the Company's practice to net its track usage fees against conventional freight revenues. Because of the increased significance of track usage fees upon the Company's operations and in order to conform to common industry practice the Company began reporting track usage fees as an operating expense during 2002. Operating revenues and expenses for prior years have been reclassified to conform to the presentation in 2002. Operating Revenues Operating revenues increased $270,000, or 1.2%, to $22.9 million in 2002 from $22.6 million in 2001. This increase was comprised of a $692,000 (3.8%) increase in conventional freight revenues partially offset by a $420,000 (14.9%) decrease in container freight revenues and a $2,000 (.1%) decrease in non-freight operating revenues. The increase in conventional freight revenues results from a 6.0% increase in traffic volume, partially offset by a 2.1% decrease in the average revenue received per conventional carloading. The Company's conventional freight carloadings increased by 1,803 to 31,938 in 2002 from 30,135 in 2001. The increase in conventional traffic results from new customers as well as increases from certain existing customers. The decrease in the average revenue received per conventional carloading is attributable to a shift in traffic mix toward lower rated commodities, such as construction and demolition debris and construction aggregates. The decrease in container freight revenues is primarily due to a decrease in traffic volume. Total intermodal containers handled decreased by 9,305 to 59,391 containers in 2002 from 68,696 containers in 2001. This decrease is the result of the loss of a customer during the third quarter of 2001 and to the continuing weakness in economic conditions. II-5 Operating Expenses Operating expenses increased $1.5 million, or 6.5%, to $23.7 million in 2002 from $22.2 million in 2001. Operating expenses as a percentage of operating revenues ("operating ratio") increased to 103.6% in 2002 from 98.4% in 2001. This increase is entirely attributable to the impact of the Amtrak arbitration decision as previously discussed. Other Income Other income decreased to $877,000 in 2002 from $1.0 million in 2001. This decrease is primarily the result of a reduction in interest income due to lower investable cash balances and rates of return. Year ended December 31, 2001 Compared to Year Ended December 31, 2000 Operating Revenues Operating revenues decreased $872,000, or 3.7%, to $22.6 million in 2001 from $23.5 million in 2000. This decrease was comprised of a $320,000 (1.7%) decrease in conventional freight revenues, a $169,000 (5.6%) decrease in container freight revenues and a $383,000 (22.2%) decrease in non-freight operating revenues. The decrease in conventional freight revenues results from a 2.9% decrease in the average revenue received per conventional carloading, partially offset by a small increase in traffic volume. The Company's conventional freight carloadings increased by 359, or 1.2%, to 30,135 in 2001 from 29,776 in 2000. The increase in conventional carloadings results from new customers and increased traffic from certain existing customers, partially offset by decreases in traffic from other existing customers, primarily in the manufacturing sector of the economy. These decreases have resulted from weakening conditions in the national economy and from several plant closings. The decrease in the average revenue received per conventional carloading occurred because of a shift in traffic mix toward lower rated commodities, such as construction and demolition debris and construction aggregates. The impact of this shift in traffic mix more than offset the effect of modest increases in the freight rates for certain commodities. The decrease in container freight revenues is primarily due to a decrease in container traffic volume. Total intermodal containers handled decreased by 3,043 or 4.2% to 68,696 in 2001 from 71,739 in 2000. This decrease is attributable to weakened economic conditions as well as the loss of a customer. The decrease in non-freight operating revenue is the result of decreased demurrage charges and maintenance department billings. Revenues of this nature typically vary from year to year depending upon the needs of customers and other outside parties. Operating Expenses Operating expenses decreased $56,000, or .3%, to $22.2 million in 2001 from $22.3 million in 2000. The operating ratio increased to 98.4% in 2001 from 95.0% in 2000. Increases in certain operating expense categories were offset by decreases in others. The expense category with the greatest change was salaries, wages, payroll taxes and employee benefits, which increased by $684,000 during 2001. An increase in employee health and welfare costs of $418,000 accounts for the majority of this increase. Other Income Other income decreased to $1.0 million in 2001 from $2.0 million in 2000. This decrease is primarily attributable to a reduction in gains from the sale, condemnation and disposal of property, equipment and easements. Liquidity and Capital Resources The Company generated $4.3 million, $3.0 million and $3.9 million of cash from operations in 2002, 2001 and 2000, respectively. The Company's total cash and cash equivalents decreased by $916,000 in 2002 and $1.8 million in 2001 and increased by $933,000 in 2000. The principal utilization of cash during the three year period was for expenditures for property and equipment acquisitions and payment of dividends. II-6 During 2002, 2001 and 2000 the Company generated $444,000, $498,000 and $1.3 million, respectively, from the sales and disposals of properties not considered essential for railroad operations and from the granting of easements and licenses. Included in these amounts are $1.1 million in 2000 generated from the sale of permanent easements. The Company holds various properties which could be made available for sale, lease or grants of easements and licenses. Revenues from sales of properties, easements and licenses can vary significantly from year to year. In June 2001, the Company's principal bank renewed the Company's revolving line of credit for a two year period through June 1, 2003 and increased the borrowing limit to $3.0 million. Borrowings under this line are unsecured and bear interest at either the prime rate or one and one half per cent over either the one or three month London Interbank Offered Rates. The Company does not pay any commitment fee on this line. The Company had no advances against this line of credit during 2002 and 2001. Substantially all of the mainline track owned by the Company meets FRA Class 3 standards (permitting freight train speeds of 40 miles per hour), and the Company intends to continue to maintain this track at this level. The Company expended $3.1 million, $3.4 million and $3.0 million for track structure and bridge improvements in 2002, 2001 and 2000, respectively. Deferred grant income of $305,000 in 2002, $204,000 in 2001 and $679,000 in 2000 financed a portion of these improvements. Management estimates that approximately $3.0 million of improvements to the Company's track structure and bridges will be made in 2003, 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. During 2002 the Company acquired seven used 3,900 horsepower GE B39-8 locomotives for $1.3 million in cash and seven older 2,250 horsepower GE U-23B locomotives which it owned. The Company intends to acquire two additional used GE B39-8 locomotives in 2003 for approximately $320,000 and one additional GE U-23B locomotive. In 2002, the Company paid dividends in the amount of $5.00 per share, aggregating $3,000, on its outstanding noncumulative Preferred Stock and $0.16 per share, aggregating $710,000, on its outstanding Common Stock. Continued payment of such dividends is contingent upon the Company's continuing to have the necessary financial resources available. The Company believes that expected cash flows from operating activities will be sufficient to fund its capital requirements for at least the next 12 months. To the extent that the Company is successful in consummating acquisitions or implementing its expansion plans, it may be necessary to finance such acquisitions or expansion plans through the issuance of additional equity securities, incurrence of indebtedness or both. On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Superfund Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762,000) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA. In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about sixty parties named thus far by Plaintiffs, who seek to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C. section 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company has II-7 entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. The Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site. The Company will contest this suit. Land Held for Development Pursuant to permits issued by the United States Department of the Army Corp of Engineers ("ACE") and the Rhode Island Coastal Resources Management Council ("CRMC"), the Company created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay") originally designed to capitalize on the growth of intermodal transportation utilizing rail, water and highway connections. The property has good highway access (1/2 mile from I-195) and direct rail access and is adjacent to a 12 acre site also owned by the Company. The permits for the property allow for construction of a dock along the west face of the South Quay. The ACE permit has been extended to December 31, 2003 and the CRMC permit has been extended to May 11, 2009. In April 1999, the Rhode Island Supreme Court issued an Opinion confirming the Company's fee simple absolute title to the South Quay. In January 2000, the Rhode Island Superior Court confirmed the Company's fee simple absolute title to the 12 acre parcel adjacent to the South Quay. Also in 1999, the Rhode Island Department of Transportation entered into a contract for engineering services to undertake roadway improvements to provide direct vehicular access from the interstate highway system to the South Quay. The project is anticipated to be complete by 2004. The City of East Providence has been working to create a large waterfront redevelopment area with a proposed zoning overlay (which has not yet been unveiled) that would encourage development of restaurants, shops, marinas, condominiums and "clean" employment. The Company has been cooperating with the City of East Providence in these efforts. In addition, the City is moving forward with the plan, described above, that will provide a direct connection from I-195 to the South Quay. In 2001, the Company completed overhead clearances between Worcester and the South Quay, which enables operation of double stack trains (having a height of nineteen feet, two inches) and multi-level automobile cars. Selected Quarterly Financial Data Historically the Company has experienced lower operating revenues in the first quarter of the year. The following table sets forth selected financial data for each quarter of 2002 and 2001. The information for each of these quarters is unaudited but includes all normal recurring adjustments that the Company considers necessary for a fair presentation. These results, however, are not necessarily indicative of results for any future period. Year Ended December 31, 2002 ------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share amounts) Operating Revenues ............. $ 4,956 $ 6,284 $ 6,313 $ 5,315 Income (Loss) from Operations .. (809) (653) 681 (49) Net Income (Loss) .............. (313) (318) 543 110 Basic Income (Loss) Per Common Share ......................... $ (.07) $ (.07) $ .12 $ .02 Diluted Income (Loss) Per Common Share ......................... $ (.07) $ (.07) $ .12 $ .02 II-8 Year Ended December 31, 2001 ------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share amounts) Operating Revenues ............. $ 5,074 $ 5,830 $ 6,071 $ 5,623 Income (Loss) from Operations .. (484) 263 526 48 Net Income (Loss) .............. (191) 301 448 293 Basic Income (Loss) Per Common Share ......................... $ (.04) $ .07 $ .10 $ .06 Diluted Income (Loss) Per Common Share ......................... $ (.04) $ .07 $ .10 $ .06 Inflation In recent years, inflation has not had a significant impact on the Company's operations. Seasonality Historically, the Company's operating revenues are lowest for the first quarter due to the absence of construction aggregate shipments during this period and to winter weather conditions. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 requires, among other things, the cessation of the amortization of goodwill. The Company adopted this statement on January 1, 2002 and there was no effect on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated costs. Under this statement, an entity must recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred or in a period in which a reasonable estimate of fair value may be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect any material financial statement impact as a result of the adoption of this statement. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets or for Long-Lived Assets to be Disposed Of," in its entirety, and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," only for segments to be disposed of. The provisions of this statement were adopted January 1, 2002 and there was no effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for financial statements issued on or after May 15, 2002. The Company does not expect any material financial statement impact as a result of the adoption of this statement. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for II-9 Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect any material financial statement impact as a result of the adoption of this statement. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company does not currently intend to adopt the fair value based method of measuring compensation associated with stock awards and grants. As a consequence of continuing to utilize the intrinsic value method of measuring such compensation, the Company will be required in 2003 to provide additional disclosures in its quarterly financial statements which will reflect the impact on net income and earnings per share on a pro forma basis as if it had applied the fair value method to stock-based employee compensation. Item 7A. Quantitative and Qualitative Disclosure About Market Risk - ------------------------------------------------------------------ Cash and Cash Equivalents As of December 31, 2002, the Company is exposed to market risks which primarily include changes in U.S. interest rates. The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. In addition, the Company's revolving line of credit agreement provides for borrowings which bear interest at variable rates based on either prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company had no borrowings outstanding pursuant to the revolving line of credit agreement at December 31, 2002. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations, and cash flows would not be material. II-10 Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- PROVIDENCE AND WORCESTER RAILROAD COMPANY INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report......................... II-12 Balance Sheets as of December 31, 2002 and 2001...... II-13 Statements of Income for the Years Ended December 31, 2002, 2001 and 2000................................. II-14 Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000.................... II-15 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.................... II-16 Notes to Financial Statements........................ II-17 II-11 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Providence and Worcester Railroad Company Worcester, Massachusetts We have audited the accompanying balance sheets of Providence and Worcester Railroad Company as of December 31, 2002 and 2001, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, 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, 2003 II-12 PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (Dollars in Thousands Except Per Share Amounts) December 31, 2002 2001 ------- ------- ASSETS Current Assets: Cash and equivalents .................................. $ 2,888 $ 3,804 Accounts receivable, net of allowance for doubtful accounts of $125 in 2002 and 2001 ........... 3,304 3,809 Materials and supplies ................................ 1,634 1,434 Prepaid expenses and other ............................ 536 493 Deferred income taxes ................................. 126 73 ------- ------- Total Current Assets ................................. 8,488 9,613 Property and Equipment, net ............................ 70,057 67,647 Land Held for Development .............................. 11,955 11,901 ------- ------- Total Assets ........................................... $90,500 $89,161 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable ...................................... $ 3,017 $ 1,745 Accrued expenses ...................................... 964 781 ------- ------- Total Current Liabilities ............................ 3,981 2,526 ------- ------- Profit-Sharing Plan Contribution ....................... -- 151 ------- ------- Deferred Grant Income .................................. 7,980 7,891 ------- ------- Deferred Income Taxes .................................. 9,898 9,520 ------- ------- Commitments and Contingencies (Note 8) Shareholders' Equity: Preferred stock, 10% noncumulative, $50 par value; authorized, issued and outstanding 645 shares in 2002 and 2001 .............................. 32 32 Common stock, $.50 par value; authorized 15,000,000 shares; issued and outstanding 4,443,380 shares in 2002 and 4,411,238 shares in 2001 .............................................. 2,222 2,206 Additional paid-in capital ............................ 29,619 29,376 Retained earnings ..................................... 36,768 37,459 ------- ------- Total Shareholders' Equity ........................... 68,641 69,073 ------- ------- Total Liabilities and Shareholders' Equity ............. $90,500 $89,161 ======= ======= The accompanying notes are an integral part of the financial statements. II-13 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF INCOME (Dollars in Thousands Except Per Share Amounts) Years Ended December 31, 2002 2001 2000 -------- -------- -------- Revenues: Operating Revenues - Freight and Non- Freight .................................... $22,868 $22,598 $23,470 Other Income ................................ 877 1,003 2,049 -------- -------- -------- Total Revenues ............................ 23,745 23,601 25,519 -------- -------- -------- Expenses: Operating: Maintenance of way and structures .......... 3,279 3,124 3,324 Maintenance of equipment ................... 2,166 2,004 2,175 Transportation ............................. 6,532 6,326 6,376 General and administrative ................. 3,925 4,036 3,541 Depreciation ............................... 2,734 2,681 2,587 Taxes, other than income taxes ............. 2,253 2,391 2,441 Car hire, net .............................. 874 983 952 Employee retirement plans .................. 220 370 574 Track usage fees ........................... 1,715 330 331 -------- -------- -------- Total Operating Expenses .................. 23,698 22,245 22,301 -------- -------- -------- Income before Income Taxes ................... 47 1,356 3,218 Provision for Income Taxes ................... 25 505 1,200 -------- -------- -------- Net Income ................................... 22 851 2,018 Preferred Stock Dividends .................... 3 3 3 -------- -------- -------- Net Income Available to Common Shareholders .. $ 19 $ 848 $ 2,015 ======= ======= ======= Basic Income Per Common Share ................ $ -- $ .19 $ .47 ======= ======= ======= Diluted Income Per Common Share .............. $ -- $ .19 $ .46 ======= ======= ======= The accompanying notes are an integral part of the financial statements. II-14 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands Except Per Share Amounts) Years Ended December 31, 2002, 2001 and 2000 --------------------------------------------- Total Additional Share- Preferred Common Paid-in Retained holders' Stock Stock Capital Earnings Equity ------- ------- ------- ------- ------- Balance, January 1, 2000 .... $ 32 $ 2,141 $28,519 $35,991 $66,683 Issuance of 56,418 common shares to fund the Company's 1999 profit sharing plan contribution ............... 28 363 391 Issuance of 14,117 common shares for stock options exercised, employee stock purchases, conversion of 2 preferred shares and other . 7 80 87 Dividends paid: Preferred stock, $5.00 per share ..................... (3) (3) Common stock, $.16 per share (693) (693) Net income for the year ..... 2,018 2,018 ------- ------- ------- ------- ------- Balance, December 31, 2000 .. 32 2,176 28,962 37,313 68,483 Issuance of 45,140 common shares to fund the Company's 2000 profit sharing plan contribution ............... 23 334 357 Issuance of 14,283 common shares for stock options exercised, employee stock purchases, and other ....... 7 80 87 Dividends paid: Preferred stock, $5.00 per share ..................... (3) (3) Common stock, $.16 per share (702) (702) Net income for the year ..... 851 851 ------- ------- ------- ------- ------- Balance, December 31, 2001 .. 32 2,206 29,376 37,459 69,073 Issuance of 16,205 common shares to fund the Company's 2001 profit sharing plan contribution ............... 8 143 151 Issuance of 15,937 common shares for stock options exercised, employee stock purchases, and other ....... 8 100 108 Dividends paid: Preferred stock, $5.00 per share ..................... (3) (3) Common stock, $.16 per share (710) (710) Net income for the year ..... 22 22 ------- ------- ------- ------- ------- Balance, December 31, 2002 .. $ 32 $ 2,222 $29,619 $36,768 $68,641 ======= ======= ======= ======= ======= The accompanying notes are an integral part of the financial statements. II-15 PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) Years Ended December 31, 2002 2001 2000 -------- -------- -------- Cash Flows from Operating Activities: Net income ................................ $ 22 $ 851 $ 2,018 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization ........... 2,734 2,728 2,681 Amortization of deferred grant income ... (216) (211) (201) Profit-sharing plan contribution to be funded with common stock .............. -- 151 348 Gains from sale, condemnation and disposal of property, equipment and easements, net ........................ (337) (359) (1,244) Deferred income taxes ................... 325 405 230 Other, net .............................. 38 69 55 Increase (decrease) in cash and equivalents from: Accounts receivable ................... 506 (642) (73) Materials and supplies ................ (200) 298 375 Prepaid expenses and other ............ (43) 219 (531) Accounts payable and accrued expenses . 1,511 (489) 208 -------- -------- -------- Net cash flows from operating activities .. 4,340 3,020 3,866 -------- -------- -------- Cash Flows from Investing Activities: Purchase of property and equipment ........ (5,378) (5,019) (4,255) Proceeds from sale and condemnation of property, equipment and easements ........ 444 498 1,288 Proceeds from deferred grant income ....... 289 368 647 -------- -------- -------- Net cash flows used in investing activities (4,645) (4,153) (2,320) -------- -------- -------- Cash Flows from Financing Activities: Dividends paid ............................ (713) (705) (696) Issuance of common shares for stock options exercised and employee stock purchases ... 102 83 83 -------- -------- -------- Net cash flows used in financing activities (611) (622) (613) -------- -------- -------- Increase (Decrease) in Cash and Equivalents (916) 933 Cash and Equivalents, Beginning of Year .... 3,804 5,559 4,626 -------- -------- -------- Cash and Equivalents, End of Year .......... $ 2,888 $ 3,804 $ 5,559 ======== ======== ======== Supplemental Disclosures: Cash paid during year for income taxes .... $ -- $ 11 $ 1,464 ======== ======== ======== The accompanying notes are an integral part of the financial statements. II-16 PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in Thousands Except Per Share Amounts) 1. Description of Business and Summary of Significant Accounting Policies Description of Business ----------------------- Providence and Worcester Railroad Company (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 15.4%, 14.4% and 12.4% of the Company's operating revenues in 2002, 2001 and 2000, respectively. Cash and Equivalents -------------------- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents for purposes of classification in the balance sheets and statements of cash flows. Cash equivalents are stated at cost, which approximates fair market value. Materials and Supplies ---------------------- Materials and supplies, which consist of items for the improvement and maintenance of track structure and equipment, are stated at cost, determined on a first-in, first-out basis, and are charged to expense or added to the cost of property and equipment when used. Property and Equipment ---------------------- Property and equipment, including land held for development, is stated at historical cost (including self-construction costs). Acquired railroad property is recorded at the purchased cost. Major renewals or betterments are capitalized while routine maintenance and repairs, which do not improve or extend asset lives, are charged to expense when incurred. Gains or losses on sales or other dispositions are credited or charged to income. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: Track structure 20 to 67 years Buildings and other structures 33 to 45 years Equipment 4 to 25 years The Company continually evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in measuring whether the carrying amounts of the assets are recoverable. Deferred Grant Income --------------------- The Company has availed itself of various federal and state programs administered by the states of Connecticut, Massachusetts and Rhode Island for reimbursement of expenditures 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 ($216 in 2002, $211 in 2001 and $201 in 2000). Grant proceeds utilized to finance public improvements, such as grade crossings and signals, are recorded as a direct offset to the related expense. II-17 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. Gain or loss from sale, condemnation and disposal of property and equipment and easements is recorded at the time the transaction is consummated and collectibility is assured. Income Taxes ------------ Deferred income taxes are recorded based on the differences between the financial statement and tax basis of assets and liabilities. Such deferred income taxes are also adjusted to reflect changes in the U.S. tax laws when enacted and changes in blended state tax rates. Income per Common Share ----------------------- Basic income per common share is computed using the weighted average number of common shares outstanding during each year. Diluted income per common share reflects the effect of the Company's outstanding convertible preferred stock, options and warrants (using the treasury stock method), except where such items would be antidilutive. A reconciliation of weighted average shares used for the basic computation and that used for the diluted computation is as follows: Years Ended December 31, 2002 2001 2000 --------- --------- --------- Weighted average shares for basic ...... 4,428,522 4,389,916 4,323,237 Dilutive effect of convertible preferred stock, options and warrants ........... 68,692 67,919 67,028 --------- --------- --------- Weighted average shares for diluted .... 4,497,214 4,457,835 4,390,265 ========= ========= ========= Options and warrants to purchase 188,103, 195,503 and 204,563 shares of common stock were outstanding during 2002, 2001 and 2000, respectively, but were not included in the computation of diluted earnings per common share because their effect would be antidilutive. Employee Stock Option Plan -------------------------- The Company accounts for stock-based awards to employees using the intrinsic value method. Use of Estimates ---------------- The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Company's principal estimates include the allowance for doubtful accounts, useful lives of properties, accrued liabilities including health insurance claims and legal and other contingencies, and income taxes. II-18 Stock Based Compensation ------------------------ The Company accounts for stock-based compensation awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company used the fair value method to value compensation, as set forth in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the Company's net income and net income per share would have been reported as follows: Years Ended December 31, 2002 2001 2000 ------- ------- ------- Net income (loss) available to common shareholders: As reported .......................... $ 19 $ 848 $ 2,015 Less impact of stock option expense... 30 32 30 ------- ------- ------- Pro forma ............................ $ (11) $ 816 $ 1,985 ======= ======= ======= Basic income (loss) per share: As reported .......................... $ -- $ .19 $ .47 Less impact of stock option expense... -- -- .01 ------- ------- ------- Pro forma ............................ $ -- $ .19 $ .46 ======= ======= ======= Diluted income (loss) per share: As reported .......................... $ -- $ .19 $ .46 Less impact of stock option expense... -- .01 .01 ------- ------- ------- Pro forma ............................ $ -- $ .18 $ .45 ======= ======= ======= The fair value of options on their grant date is measured using the Black/Scholes option pricing model. The estimated weighted average fair value of options granted during 2002, 2001 and 2000 were $4.35, $3.62 and $4.20 per option, respectively. Key assumptions used to apply this pricing model are as follows: 2002 2001 2000 --------- --------- --------- Average risk-free interest rate 4.97% 4.97% 6.30% Expected life of option grants 7.0 years 7.0 years 7.0 years Expected volatility of underlying stock 76% 58% 55% Expected dividend payment rate, as a percentage of the share price on the date of grant 2.37% 2.25% 2.00% The option pricing model used was designed to value readily tradable stock options with relatively short lives and no vesting restrictions. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because the options granted to employees are not tradable and have contractual lives of ten years and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the models do not necessarily provide a reliable measure of fair value of the options issued under the Company's stock plan. Comprehensive Income -------------------- Comprehensive Income equals net income for 2002, 2001 and 2000. Segment Reporting ----------------- The Company organizes itself as one segment reporting to the chief operating decision maker. Products and services consist primarily of interstate freight rail services. These include the movement of freight in both conventional freight cars and in intermodal containers on flat cars over the Company's rail lines, as well as non-freight transportation services such as switching, weighing and special trains and other services II-19 rendered to freight customers and other outside parties by the Company's Maintenance of Way, Communications & Signals and Maintenance of Equipment Departments. Recently Issued Financial Accounting Standards ---------------------------------------------- On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 requires, among other things, the cessation of the amortization of goodwill. The Company adopted this statement on January 1, 2002 and there was no effect on the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated costs. Under this statement, an entity must recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred or in a period in which a reasonable estimate of fair value may be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect any material financial statement impact as a result of the adoption of this statement. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets or for Long-Lived Assets to be Disposed Of," in its entirety, and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," only for segments to be disposed of. The provisions of this statement were adopted January 1, 2002 and there was no effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for financial statements issued on or after May 15, 2002. The Company does not expect any material financial statement impact as a result of the adoption of this statement. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect any material financial statement impact as a result of the adoption of this statement. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company does not currently intend to adopt the fair value based method of measuring compensation associated with stock awards and grants. As a consequence of continuing to utilize the intrinsic value method of measuring such compensation, the Company will be required in 2003 to provide additional disclosures in its quarterly II-20 financial statements which will reflect the impact on net income and earnings per share on a pro forma basis as if it had applied the fair value method to stock-based employee compensation. Reclassifications ----------------- Certain prior year amounts have been reclassified to be consistent with current year presentation. 2. Property and Equipment Property and equipment consists of the following: December 31, 2002 2001 ------- ------- Land and improvements .................... $10,414 $10,303 Track structure .......................... 62,473 59,499 Buildings and other structures ........... 7,888 7,686 Equipment ................................ 24,962 23,949 ------- ------- 105,737 101,437 Less accumulated depreciation ............ 35,680 33,790 ------- ------- Total property and equipment, net ........ $70,057 $67,647 ======= ======= 3. Land Held for Development Pursuant to permits issued by the United States Department of the Army Corp of Engineers ("ACE") and the Rhode Island Coastal Resources Management Council ("CRMC"), the Company created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay") originally designed to capitalize on the growth of intermodal transportation utilizing rail, water and highway connections. The property has good highway access (1/2 mile from I-195) and direct rail access and is adjacent to a 12 acre site also owned by the Company. The permits for the property allow for construction of a dock along the west face of the South Quay. The ACE permit has been extended to December 31, 2003 and the CRMC permit has been extended to May 11, 2009. In April 1999, the Rhode Island Supreme Court issued an Opinion confirming the Company's fee simple absolute title to the South Quay. In January 2000, the Rhode Island Superior Court confirmed the Company's fee simple absolute title to the 12 acre parcel adjacent to the South Quay. Also in 1999, the Rhode Island Department of Transportation entered into a contract for engineering services to undertake roadway improvements to provide direct vehicular access from the interstate highway system to the South Quay. The project is anticipated to be complete by 2004. The City of East Providence has been working to create a large waterfront redevelopment area with a proposed zoning overlay (which has not yet been unveiled) that would encourage development of restaurants, shops, marinas, condominiums and "clean" employment. The Company has been cooperating with the City of East Providence in these efforts. In addition, the City is moving forward with the plan, described above, that will provide a direct connection from I-195 to the South Quay. In 2001, the Company completed overhead clearances between Worcester and the South Quay, which enables operation of double stack trains (having a height of nineteen feet, two inches) and multi-level automobile cars. II-21 4. Revolving Line of Credit The Company has a revolving line of credit with its principal bank in the amount of $3,000 expiring June 1, 2003. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank's prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company pays no commitment fee on this line. There were no loans outstanding under the line at any time during 2002 or 2001. 5. Other Income Other income consists of the following: Years Ended December 31, 2002 2001 2000 ------ ------ ------ Gains from sale, condemnation and disposal of property, equipment and easements, net ........................... $ 337 $ 359 $1,244 Rentals and license fees under various operating leases ................. 490 448 489 Interest .................................. 50 196 316 ------ ------ ------ $ 877 $1,003 $2,049 ====== ====== ====== Gains from sale, condemnation and disposal of property, equipment and easements for 2000 includes $1,132 received from the sale of permanent easements. 6. Amtrak Arbitration The Company has been party to an arbitration proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases with respect to the Company's freight operations over a portion of Amtrak's Northeast Corridor in the states of Rhode Island and Connecticut. The arbitrator issued a decision in June 2002 in which he ordered the Company to pay Amtrak additional track usage fees and siding maintenance costs retroactive to July 9, 1999. The statement of income for 2002 includes $935 of track usage fees and $165 of siding maintenance costs which relate to years prior to 2002. The liability to Amtrak as of December 31, 2002, in the amount of $1,250, is included in accounts payable. 7. Income Taxes The provision for income taxes consists of the following: Years Ended December 31, 2002 2001 2000 ------ ------ ------ Current: Federal ........................... $ (300) $ 90 $ 900 State ............................. -- 10 70 ------ ------ ------ (300) 100 970 Deferred, Federal and State ........ 325 405 230 ------ ------ ------ $ 25 $ 505 $1,200 ====== ====== ====== II-22 The following summarizes the estimated tax effect of temporary differences that are included in the net deferred income tax provision: Years Ended December 31, 2002 2001 2000 ----- ----- ----- Depreciation ........................... $ 382 $ 326 $ 207 Deferred grant income .................. (32) 2 (272) Gains from sale, condemnation and disposal of property and equipment .... (15) (20) 346 Accrued casualty and other claims ...... (56) 56 (71) Other .................................. 46 41 20 ----- ----- ----- $ 325 $ 405 $ 230 ===== ===== ===== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's net deferred income tax liability as of December 31, 2002 and 2001 are as follows: December 31, 2002 2001 ------- ------- Deferred income tax liabilities: Differences between book and tax basis of property and equipment ....................... $12,723 $12,356 ------- ------- Other ......................................... 13 18 ------- ------- 12,736 12,374 ------- ------- Deferred income tax assets: Rental income received in advance ............. 7 17 Deferred grant income ......................... 2,833 2,801 Accrued casualty and other claims ............. 80 24 Allowance for doubtful accounts and other ..... 44 85 ------- ------- 2,964 2,927 ------- ------- Net deferred income tax liability .............. $ 9,772 $ 9,447 ======= ======= A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows: Years Ended December 31, 2002 2001 2000 ---- ---- ---- Federal statutory rate ....................... 34% 34% 34% Depreciation of properties acquired from bankrupt railroads having a tax basis in excess of cost ........................... (48) (3) (2) Non deductible expenses, etc ................. 67 5 4 State income tax, net of federal income tax benefit ................................. -- 1 1 ---- ---- ---- Effective tax rate ........................... 53% 37% 37% ==== ==== ==== II-23 8. Commitments and Contingencies The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits. On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Superfund Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA. In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01- 496/L, on December 18, 2002. The Company is one of about sixty parties named thus far by Plaintiffs, who seek to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C. section 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company has entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. The Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site. The Company will contest this suit. 9. Employee Benefit Plans Stock Option Plan ----------------- The Company has a non-qualified stock option plan ("SOP") covering all management personnel having a minimum of one year of service with the Company and who are not holders of a majority of either its outstanding common stock or its outstanding preferred stock. In addition, the Company's outside directors are eligible to participate in the SOP. The SOP covers 50,000 common shares or 5% of the shares of common stock outstanding, whichever is greater (222,169 shares at December 31, 2002). Options granted under the SOP, which are fully vested when granted, are exercisable over a ten year period at the market price for the Company's common stock as of the date the options are granted. II-24 Changes in stock options outstanding are as follows: Weighted Average ---------------- Number Exercise Fair of shares Price Value ------ ------ ------ Outstanding at January 1, 2000 ..... 37,569 $ 9.92 Granted ............................ 8,060 8.00 $4.20 Exercised .......................... (614) 5.37 Expired ............................ (3,411) 8.90 ------ ------ ------ Outstanding and exercisable at December 31, 2000.................. 41,604 9.70 Granted ............................ 8,130 7.13 $3.62 Exercised .......................... (1,220) 5.72 Expired ............................ (1,763) 5.99 ------ ------ ------ Outstanding and exercisable at December 31, 2001.................. 46,751 9.50 Granted ............................ 8,200 6.75 $4.35 Exercised .......................... (3,431) 7.17 Expired ............................ (2,761) 6.88 ------ ------ ------ Outstanding and exercisable at December 31, 2002.................. 48,759 $ 9.35 ====== ====== ====== The following table sets forth information regarding options at December 31, 2002: Weighted Average Range of Number ---------------- Number Exercise Currently Exercise Remaining of Options Prices Exercisable Price Life (in years) --------- ---------- ---------- ---------- ----------- 1,779 $3.25 - 4.88 1,779 $4.38 1 33,877 5.50 - 8.25 33,877 7.30 7 6,703 8.50 - 12.75 6,703 12.38 7 6,400 18.38 6,400 18.38 6 Defined Contribution Retirement Plans ------------------------------------- The Company has a deferred profit-sharing plan ("Plan") which covers all of its employees who are members of its collective bargaining units. Contributions to the Plan are required in years in which the Company has income from "railroad operations" as defined in the Plan. Contributions are to be equal to at least 10% but not more than 15% of the greater of income before income taxes or income from railroad operations subject to a maximum contribution of $3.5 per eligible employee. Contributions to the Plan may be made in cash or in shares of the Company's common stock valued at the closing market price on the day contributed. Contributions accrued under this Plan amounted to $151 in 2001 and $357 in 2000. No contributions were accrued in 2002 since the Company had negative income from operations. The Company made its 2001 and 2000 contributions in newly issued shares of its common stock. The Company also has a Simplified Employee Pension Plan ("SEPP") which covers substantially all employees who are not members of one of its collective bargaining units. Contributions to the SEPP are discretionary and are determined annually as a percentage of each covered employee's compensation up to the maximum amount allowable by law. Contributions accrued under the SEPP amounted to $203 in 2002, $201 in 2001 and $208 in 2000 which, in each year, was less than the maximum amount allowable by law. II-25 Employee Stock Purchase Plan ---------------------------- The Company has an Employee Stock Purchase Plan ("ESPP") under which eligible employees may purchase registered shares of common stock at 85% of the market price for such shares. An aggregate of 200,000 shares of common stock are authorized for issuance under the ESPP which was established in 1997. Any shares purchased under the ESPP are subject to a two year lock-up. ESPP purchases amounted to 11,831 shares in 2002, 12,413 shares in 2001 and 12,828 shares in 2000. 10. Preferred Stock The Company's $50 par value preferred stock is convertible into 100 shares of common stock at the option of the shareholder. The noncumulative stock dividend is fixed by the Company's Charter at an annual rate of $5.00 per share, out of funds legally available for the payment of dividends. The holders of preferred stock are entitled to one vote for each share in the election of two-thirds of the Board of Directors. The holders of preferred stock and holders of common stock are entitled to one vote per share, voting as separate classes, upon matters voted on by shareholders. II-26 Item 9. Disagreements on Accounting and Financial Disclosure - ------------------------------------------------------------ None. II-27 PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The Company's Charter and Bylaws provide that the members of the Board of Directors (the "Board") shall be elected separately by the Company's two classes of stock. Holders of Common Stock elect one-third of the Board of Directors and the holders of Preferred Stock elect the remainder of the Board. Directors are elected to serve until the next annual meeting and until their successors have been duly elected by the shareholders. There are currently three directors elected by the holders of the Common Stock and six directors elected by the holders of the Preferred Stock. Officers are elected by and serve at the discretion of the Board of Directors. Directors and Executive Officers The current directors and executive officers, their ages and their positions held with the Company are as follows: Name Age Position ---- --- -------- Robert H. Eder(a) ............... 70 Chairman of the Board and Chief Executive Officer Orville R. Harrold(b) ........... 70 President, Chief Operating Officer and Director Robert J. Easton ................ 59 Treasurer P. Scott Conti .................. 45 Vice President Engineering Mary A. Tanona .................. 45 Secretary and General Counsel Richard W. Anderson (a) ......... 55 Director Frank W. Barrett(b) ............. 63 Director John H. Cronin(b) ............... 69 Director J. Joseph Garrahy(b) ............ 72 Director John J. Healy(b) ................ 67 Director Charles M. McCollam, Jr.(b) ..... 70 Director Merrill W. Sherman(a) ........... 54 Director - -------------- (a) Elected by holders of Common Stock. (b) Elected by holders of Preferred Stock. The following is a brief summary of the background of each director and executive officer. Directors and Executive Officers Robert H. Eder, Chairman of the Board and Chief Executive Officer. Mr. Eder became President of the Company in 1966 and led the Company through its efforts to become an independent operating company. He has been Chairman of the Board since 1980. He is a graduate of Harvard College and Harvard Law School. He (with his wife) is also majority owner and Chairman of an affiliated company, Capital Properties, Inc., a real estate holding company of which he is also a Director. Mr. Eder is admitted to practice law in Rhode Island and New York. Orville R. Harrold, President, Chief Operating Officer and Director. Mr. Harrold has been with the Company since the commencement of independent operations in February 1973. Over the past 29 years, he has held the positions of Chief Engineer and General Manager, becoming President in 1980. Mr. Harrold has a bachelors degree in mechanical engineering from the Pratt Institute, Brooklyn, New York and has been employed in the railroad industry in various capacities since 1960. Robert J. Easton, Treasurer. Mr. Easton has been with the Company since 1986, initially as Controller. He was promoted to the position of Treasurer and Controller in 1988. Prior to joining the Company, Mr. Easton had 21 years of experience in public accounting. He is a Certified Public Accountant with a bachelors degree in accounting from the University of Rochester. P. Scott Conti, Vice President Engineering. Mr. Conti has been with the Company since 1988 and is responsible for all activities of the Maintenance of Way and Engineering Department which maintains the Company's tracks, bridges, III-1 buildings and grade crossings, overseeing all construction activity on or affecting railroad property. From June 1988 to December 1997, Mr. Conti served as Engineering Manager. In January 1998 he was promoted to Chief Engineer and in March 1999 he was promoted to Vice President. Prior to Joining the Company, Mr. Conti was employed by Perini Corporation. Mary A. Tanona, Secretary and General Counsel. Ms. Tanona joined the Company in 1999 as Assistant General Counsel and Assistant Secretary. In 2000 she was promoted to General Counsel. Prior to joining the Company, Ms Tanona was an associate with Dewey Ballantine in New York. Most recently, she served as associate general counsel at Arbor National Mortgage. She is a 1987 graduate of Fordham University School of Law and holds a bachelor of arts degree from Smith College. Ms. Tanona is admitted to practice law in Massachusetts, Rhode Island and New York. Richard W. Anderson, Director. Mr. Anderson has been a Director of the Company since 1998. He is Senior Vice President of Massachusetts Capital Resource Company ("MCRC"), a private investment firm funded by major Massachusetts based life insurance companies providing high risk growth capital to Massachusetts businesses. He began working at MCRC in 1981. Mr. Anderson is also a director of Valpey Fisher Corporation, a company specializing in frequency control devices. Frank W. Barrett, Director. Mr. Barrett has been a Director of the Company since 1995. From 1993 to 1998 he was Executive Vice President at Springfield Institution for Savings ("SIS"). Effective January 1, 1999, he became Executive Vice President and Chief Lending Officer of Family Bank. Family Bank was a Massachusetts subsidiary of Peoples Heritage Financial Group and the acquirer of SIS. Family Bank became First Massachusetts Bank, N.A. upon the acquisition of Bank North Group by Peoples Heritage Financial Group (which then changed its name to BankNorth Group). Effective June 2000, he became Executive Vice President of First Massachusetts Bank, N.A. Effective January 2002, First Massachusetts Bank, N.A. was merged into Banknorth Massachusetts. No change in Mr. Barrett's responsibility was effected as a result of the merger. Mr. Barrett is also a director of Dairy Mart Convenience Store, Inc. John H. Cronin, Director. Mr. Cronin has been a Director of the Company since 1986. Since 1971 until his retirement in 1996, Mr. Cronin was owner and President of Ideal Products, Inc., a wholesale entertainment supply company. J. Joseph Garrahy, Director. Mr. Garrahy has been a Director of the Company since 1992. He is a former four term Governor of Rhode Island and, since 1990, has been an independent business consultant in the State of Rhode Island. Mr. Garrahy is also a director of Grove Real Estate Investment Trust. John J. Healy, Director. Mr. Healy has been a Director of the Company since 1991. He has been President of Worcester Affiliated Mfg. L.L.C., an independent business consulting firm involved in efforts to revitalize manufacturing in Massachusetts, since January 1997. Mr. Healy is also President of the Manufacturing Assistance Center. Charles M. McCollam, Jr., Director. Mr. McCollam has been a Director of the Company since 1996. He owns and operates a number of insurance businesses in the State of Connecticut, as well as McCollam Associates, a consulting firm. He was the Chief of Staff to a former governor of Connecticut. Merrill W. Sherman, Director. Ms. Sherman has been a Director of the Company since 1999. She is President and Chief Executive Officer of Bancorp Rhode Island, Inc. and has been President, Director and Chief Executive Officer of its primary subsidiary, Bank Rhode Island, a community bank in the greater Providence metropolitan area, since its formation in March 1996. Committees of the Board of Directors The Board of Directors has an Executive Committee, a Stock Option & Compensation Committee and an Audit Committee. The Board of Directors does not have a nominating committee. In accordance with the By-laws of the Company, the Executive Committee, currently comprised of Robert H. Eder, Chairman, John J. Healy and Orville R. Harrold, exercises the authority of the Board of Directors when formal Board action is required between meetings, subject to the limitations imposed by law, the By-laws or the Board of Directors. The Executive III-2 Committee acts on routine matters such as authorizing the execution of government contracts for reimbursement for Company work on highway projects adjacent to the railroad and grade crossing rehabilitation. The Stock Option & Compensation Committee, currently comprised of John H. Cronin, Chairman, Richard W. Anderson and Charles M. McCollam, Jr., is responsible for establishing the amount of option shares to be granted to the Company's employees under the Stock Option Plan and for making recommendations to the full Board concerning executive officer compensation. The Audit Committee of the Board of Directors, currently comprising J. Joseph Garrahy, Chairman, Frank W. Barrett and Merrill W. Sherman, is responsible for providing independent, objective oversight of the Company's accounting functions and internal controls. The Audit Committee is composed of three directors, all of whom are independent as defined by the American Stock Exchange listing standards. The Audit Committee operates under a written charter first adopted and approved by the Board of Directors on April 26, 2000. The Company reviews the charter annually, and expects that it will be modified to comply with the requirements of the Sarbanes-Oxley Act of 2002. The Board of Directors held four meetings, the Audit Committee held six meetings, the Stock Option & Compensation Committee held two meetings and the Executive Committee held five meetings during the fiscal year ended December 31, 2002. Compensation of Directors During the fiscal year ended December 31, 2002, each director who was not an employee of the Company received a base fee of $500 for each attended meeting of the Board of Directors plus $50 per attended meeting for each year of service as a director, and each member of the Audit Committee and the Stock Option & Compensation Committee received $300 for each attended meeting of the committee (other than the Chairman of the Committee, who received $350). During the month of January of each year, directors of the Company who were serving as such on the preceding December 31 and are not full time employees of the Company are granted options for the purchase of 100 shares of the Common Stock of the Company, plus options for an additional ten shares for each full year of service to the Company. The exercise price is the last sale price of the Common Stock on the last business day of the preceding year, and the term of each option is ten years (subject to earlier termination if the grantee ceases to serve as a director), provided, however, that no option is exercisable within six months following the date of grant. III-3 Item 11. Executive Compensation - ------------------------------- The following table summarizes the compensation paid or accrued by the Company during the three year period ended December 31, 2002, to its Chief Executive Officer and each of its executive officers who earned more than $100,000 in salary and bonus in 2002 (the "Named Executive Officers"), for services rendered in all capacities to the Company during 2002. Summary Compensation Table Long-Term Annual Compensation Compensation ------------------- ------------ Securities Underlying All Other Options to Other Annual Purchase Compen- Salary Compen- Common sation Name and Principal Position Year ($)(a) Bonus($) sation($) Stock ($)(b) - ---------------------------- ---- ------ ------ -------- ------------ ------ Robert H. Eder.............. 2002 358,655 0 2,638 0 45,796 Chairman of the Board and 2001 342,464 0 36,459(c) 0 45,236 Chief Executive Officer 2000 325,621 0 35,337(c) 0 47,302 Orville R. Harrold.......... 2002 308,250 0 0 1,151 38,992 President and Chief 2001 293,955 0 0 1,128 37,758 Operating Officer 2000 279,077 0 0 1,178 39,242 P. Scott Conti.............. 2002 125,578 0 0 234 8,503 Vice President Engineering 2001 114,192 0 0 223 7,993 2000 105,546 0 0 232 7,916 Robert J. Easton............ 2002 144,618 0 0 356 9,762 Treasurer 2001 138,846 0 0 281 9,719 2000 133,304 0 0 301 9,998 Mary A. Tanona.............. 2002 116,352 0 0 112 7,854 Secretary and General 2001 109,373 0 0 90 7,656 Counsel 2000 84,954(d) 0 0 0 6,372 (a) Includes amounts taxable to employees for personal use of Company-owned vehicles, other than Mr. Eder and Ms. Tanona, who do not have personal use of a Company-owned vehicle. (b) Includes amounts paid directly to the retirement accounts of management staff under the Company's simplified employee pension plan, and, in the case of Robert H. Eder and Orville R. Harrold, includes for 2002 premiums paid for life insurance coverage in the amounts of $32,296 and $25,492, respectively. (c) Includes the cost of a vehicle for Mr. Eder. (d) Appointed to the position of Secretary and General Counsel effective October 2, 2000. III-4 OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table contains information concerning the grant of stock options under the Company's Non-Qualified Stock Option Plan to the Named Executive Officers during the Company's last fiscal year. The Company does not issue stock appreciation rights. % of Total Number of Options Securities Granted To Underlying Employees Grant Date Options In Fiscal Exercise Expiration Present Name Granted(a) 2002 Price($) Date Value($)(b) ------ ---------- --------- ------ -------- ----------- Robert H. Eder(c)..... 0 0 0 0 0 Orville R. Harrold.... 1,151 16.44 6.75 01/02/12 5,006.85 P. Scott Conti........ 234 3.34 6.75 01/02/12 1,017.90 Robert J. Easton...... 356 5.09 6.75 01/02/12 1,548.60 Mary A. Tanona........ 112 1.60 6.75 01/02/12 487.20 (a) All options were granted on January 2, 2002 and became exercisable on July 2, 2002. (b) Amounts represent fair value of options and were estimated as of the date of grant using Black-Scholes options - pricing model with the following weighted average assumptions: expected volatility of 76%; expected life 7 years; and risk free interest rate of 4.97%. Dividends at the rate of 2.37% per share were assumed for purposes of this estimate. (c) Under the terms of the Company's Non-Qualified Stock Option Plan, Mr. Eder is not eligible to receive a grant of stock options. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth individual exercises of stock options during 2002 and the year-end values of options to purchase Common Stock held by the Named Executive Officers as of December 31, 2002. Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money at December 31, 2002 December 31, 2002(b) ----------------- -------------------- Shares Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized($)(a) Unexercisable Unexercisable($) ---- ----------- -------------- ------------- ---------------- Robert H. Eder....... 0 0 0/0 0/0 Orville R. Harrold... 2,702 2,494 2,018/0 85/0 P. Scott Conti....... 223 396 745/0 234/0 Robert J. Easton..... 0 0 2,251/0 745/0 Mary A. Tanona....... 0 0 202/0 168/0 (a) Based on the last sale price of the Common Stock on the date of exercise minus the exercise price. (b) Based on the difference between the exercise price of each grant and the closing price of the Company's Common Stock on the AMEX on December 31, 2002, which was $7.75. III-5 Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- The table set forth below reflects the only persons (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who, to the best of the Company's knowledge, were on March 7, 2003 the beneficial owners of more than five percent of the Company's outstanding Common Stock, $.50 par value, or Preferred Stock, $50 par value. Each share of the Company's outstanding Preferred Stock is convertible at any time, at the option of the holder, into one hundred shares of Common Stock of the Company. The footnote to the table below sets forth the percentages of the outstanding Common Stock which would be held by the indicated owners if such owners' Preferred Stock were converted in whole into Common Stock. Percent Name and Address Number of Shares Owned of Class - ---------------- ---------------------- -------- Robert H. and Linda Eder 842,742 (Common) 19.0%(a) 2441 S.E. Bahia Way 500 (Preferred) 77.5% Stuart, Florida 34996 Steinberg Priest & Sloan Capital 508,870 (Common) 11.5% Management, LLC. Michael A. Steinberg & Company, Inc. Michael A. Steinberg 12 East 49th Street New York, New York 10017 Franklin Resources, Inc. 302,000 (Common) 6.8% One Franklin Parkway San Mateo, CA 94403-1906 Keeley Asset Management Corp. 245,820 (Common) 5.5% Kamco Performance Limited Partnership Kamco Limited Partnership No. 1 401 South LaSalle Street Chicago, Illinois 60605 (a) Assuming no conversion of Preferred Stock. If their Preferred Stock were converted in whole to Common Stock, Mr. and Mrs. Eder would own 19.9% of the outstanding Common Stock. Of the shares owned by Mr. and Mrs. Eder, 768,162 shares of Common Stock and 500 shares of Preferred Stock were held directly by Mr. Eder, and 74,580 shares of Common Stock were held directly by Mrs. Eder. By reason of their ownership, Mr. and Mrs. Eder may be deemed to be "control persons" with respect to the Company. III-6 The following table reflects, as of March 7, 2003, the beneficial ownership of the Common Stock of the Company by directors, nominees for directors, Named Executive Officers and all officers and directors as a group. Name Number Percentage - ---- ------ ---------- Richard W. Anderson(a) ....................... 201,160 4.5% Frank W. Barrett(b) .......................... 1,310 * P. Scott Conti(c) ............................ 3,952 * John H. Cronin(d) ............................ 2,480 * Robert J. Easton(e) .......................... 4,723 * Robert H. Eder(f) ............................ 892,742 19.8% J. Joseph Garrahy(g) ......................... 1,520 * Orville R. Harrold(h) ........................ 34,574 * John J. Healy(i) ............................. 1,740 * Charles M. McCollam, Jr.(j) .................. 1,050 * Merrill W. Sherman(k) ........................ 830 * Mary A. Tanona(l) ............................ 1,134 * All executive officers and directors as a group (13 people)(m)................................ 1,147,260 25.5% * Less than one percent (a) Includes 200,000 shares of common stock held by Massachusetts Capital Resource Company of which Mr. Anderson disclaims beneficial ownership. Mr. Anderson is Senior Vice President of Massachusetts Capital Resource Company. Also includes 460 shares of Common Stock issuable under stock options exercisable within 60 days. (b) Includes 810 shares of Common Stock issuable under stock options exercisable within 60 days. (c) Includes 745 shares of Common Stock issuable under stock options exercisable within 60 days. (d) Includes 1,150 shares of Common Stock issuable under stock options exercisable within 60 days. (e) Includes 118 shares of Common Stock held by Mr. Easton's wife in her name and 2,251 shares of Common Stock issuable under stock options exercisable within 60 days. (f) Includes 74,580 shares of Common Stock owned by Mr. Eder's wife and assumes the conversion of the 500 shares of Preferred Stock owned by Mr. Eder. (g) Includes 850 shares of Common Stock issuable under stock options exercisable within 60 days. (h) Includes (i) 1,700 shares of Common Stock held by Mr. Harrold's wife, (ii) 3,200 shares of Common Stock held by a custodian in an individual retirement account for the benefit of Mr. Harrold and (iii) 1,882 shares of Common Stock issuable under stock options exercisable within 60 days. (i) Includes 1,440 shares of Common Stock issuable under stock options exercisable within 60 days. (j) Includes 110 shares of Common Stock issuable under stock options exercisable within 60 days. (k) Includes 330 shares of Common Stock issuable under stock options exercisable within 60 days. (l) Includes 202 shares of Common Stock issuable under stock options exercisable within 60 days. (m) Includes 19 shares of Common Stock owned by an officer of the Company who is not a Named Executive Officer, 50,000 shares of Common Stock issuable upon conversion of Preferred Stock and 10,230 shares of Common Stock issuable under stock options exercisable within 60 days. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- Not Applicable III-7 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) (1) All financial statements: An index of financial statements is included in Item 8, page II-11 of this annual report (2) Financial Statement schedule: Schedule II Valuation and Qualifying Accounts.....Page 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. (3) Listing of Exhibits. (10A) Material Contracts (incorporated by reference to Exhibit 10 to the registration statement of the Registrant on Form 10, to the Non-Qualified Stock Option Plan and Employee Stock Purchase Plan of the Registrant on Forms S-8 and to the registration statements of the Registrant on Form S-1). (23) Independent Auditors' Consent (99) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbannes-Oxley Act of 2002. (b) A report on Form 8-K was filed on April 4, 2002 reporting that by press release dated April 3, 2002 the Registrant reported to the general public that it had entered into a memorandum of understanding with an affiliate of Chevron Texaco Corp. with respect to joint development by the two companies of property located on the waterfront in East Providence, Rhode Island. A report on Form 8-K was filed on June 28, 2002 reporting that by press release dated June 27, 2002 the Registrant announced to the general public that a ruling had been issued by the arbitrator in a proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases and maintenance costs for rail sidings with respect to the Registrant's freight operations over a portion of Amtrak's Northeast Corridor in the States of Rhode Island and Connecticut. (c) Exhibits (annexed). Controls and Procedures Financial Statement Schedule. See item (a) (2.) above 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/ Robert H. Eder -------------------------------------------- By Robert H. Eder Chief Executive Officer Dated: March 31, 2003 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/ Robert H. Eder ________________________ Chief Executive Officer March 31, 2003 Robert H. Eder and Chairman (Principal Executive Officer) /s/ Orville R. Harrold ________________________ President and Director March 31, 2003 Orville R. Harrold (Chief Operating Officer) /s/ Robert J. Easton ________________________ Treasurer March 31, 2003 Robert J. Easton (Principal financial officer and principal accounting officer) /s/ Frank W. Barrett ________________________ Director March 31, 2003 Frank W. Barrett /s/ J. Joseph Garrahy ________________________ Director March 31, 2003 J. Joseph Garrahy /s/ Merrill W. Sherman ________________________ Director March 31, 2003 Merrill W. Sherman IV-2 Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Robert H. Eder, certify that: 1. I have reviewed this annual report on Form 10-K of Providence and Worcester Railroad Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within those entries, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: March 31, 2003 By: /s/ Robert H. Eder --------------------------- Robert H. Eder, Chairman of the Board And Chief Executive Officer IV-3 Providence and Worcester Railroad Company Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Robert J. Easton certify that: 1. I have reviewed this annual report on Form 10-K of Providence and Worcester Railroad Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within those entries, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: March 31, 2003 By: /s/ Robert J. Easton --------------------------- Robert J. Easton Treasurer and Principal Financial Officer IV-4 Controls and Procedures Based on their evaluation of the effectiveness of the Company;s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report, the undersigned officers of the Company have concluded that such disclosure controls and procedures are adequate. There were no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses, subsequent to the date of the most recent evaluation by the undersigned officers of the Company of the design and operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data. IV-5 SCHEDULE II PROVIDENCE AND WORCESTER RAILROAD COMPANY VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (IN THOUSAND DOLLARS) Column A Column B Column C Additions Column D Column E -------- -------- ------------------ -------- -------- (1) (2) Balance Charged to Charged to Balance at costs and other at end Description beginning expenses accounts Deductions of of period describe (A) period Allowance for doubtful accounts: Year ended December 31, 2002..... $ 125 $125 ===== ==== Year ended December 31, 2001..... $ 125 $ 5 $ (5) $125 ===== ==== ====== ==== Year ended December 31, 2000..... $ 125 $125 ===== ==== - --------- (A) Bad debts written off. IV-6 EXHIBIT 99 PROVIDENCE AND WORCESTER RAILROAD COMPANY CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Providence and Worcester Railroad Company (the Company) on form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert H. Eder ----------------------------- Robert H. Eder, Chairman of the Board And Chief Executive Officer March 31, 2003 In connection with the Annual Report of Providence and Worcester Railroad Company (the Company) on form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert J. Easton ----------------------------- Robert J. Easton, Treasurer and Chief Financial Officer March 31, 2003 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-65937, 333-65949, and 333-21617 of Providence and Worcester Railroad Company on Form S-8 of our report dated March 7, 2003 appearing in this Annual Report on Form 10-K of Providence and Worcester Railroad Company for the year ended December 31, 2002. /s/ Deloitte & Touche LLP Boston, Massachusetts March 28, 2003