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, 1997
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 February 18, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $20,596,197. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of February 18, 1998, the Registrant had 2,222,830 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 515 miles.
P&W operates the largest double stack intermodal terminal facilities in New
England in Worcester, Massachusetts, a strategic location for regional
transportation and distribution enterprises.
The Company transports a wide variety of commodities for its customers,
including construction aggregate, iron and steel products, chemicals, lumber,
scrap metals, plastic resins, cement, processed foods and edible food stuffs,
such as frozen foods, corn syrup and animal and vegetable oils. Its customers
include The Dow Chemical Company, Exxon Corporation, Frito-Lay, Inc., General
Dynamics Corporation, Getty Petroleum Marketing Inc., International Paper
Company, Leggett & Platt, Incorporated, Mobil Oil Corporation, R.R. Donnelly &
Sons and Tilcon Connecticut, Inc. In 1997, P&W transported over 31,000 carloads
of freight and over 43,000 intermodal containers, representing an increase of
14.0% and 9.3%, respectively, over 1996 volumes. The Company also generates
income through sales of properties, grants of easements and licenses and leases
of land and tracks.
P&W's connections to multiple Class I railroads, either directly or through
connections with regional and short-line carriers, provide the Company with a
competitive advantage by allowing it to offer creative pricing and routing
alternatives to its customers. In addition, the Company's commitment to
maintaining its track and equipment to high standards enables P&W to provide
fast, reliable and efficient service.
Industry Overview
General
Railroads are divided into three classes based on operating revenues: Class I,
$255 million or more; Class II, $20.4 million to $255 million; and Class III,
less than $20.4 million. As aresult of mergers and consolidations, there are
only nine Class I railroads in the country. These large systems handle 91% of
the nation's rail freight business.
The rail freight industry underwent a revitalization after the passage of the
Staggers Rail Act, which deregulated the pricing and types of services provided
by railroads. As a result, railroads were able to achieve significant
productivity gains and operating cost decreases while gaining pricing
flexibility. Rail freight service became more competitive with other
transportation modes with respect to both quality and price. The volume of
freight moved by rail has risen dramatically since 1980 and profitability has
improved significantly.
One result of the revitalization of the industry has been the growth of
regional (over 350 miles) and short-line railroads, which has been fueled by a
trend among Class I railroads to divest certain branch lines in order to focus
on their long-haul core systems. There are now more than 500 of these regional
and short-line railroads. They operate in all 50 states, account for over one-
fourth of all rail track, employ 11% of all rail workers and generate about 9%
of all rail revenue.
Generally, freight railroads handle two types of traffic: conventional
carloads and intermodal containers used in the shipment of goods via more than
one mode of transportation, e.g., by ship, rail and truck. By using a hub-and-
spoke approach to shipping, multiple containers can be moved by rails to and
from an intermodal terminal and then either delivered to their final
destinations by trucks or transferred to ships for export. Over the past
decade, commodity shippers have increasingly turned to intermodal
transportation principally as an alternative to long-haul trucking. The
development of new intermodal technology, which allows containers to be moved by
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.
Break Up of Conrail
In October 1996, CSX Corporation ("CSX") and Consolidated Rail Corporation
("Conrail") announced plans to merge. In response to the merger announcement,
Norfolk Southern announced a competing tender offer to acquire Conrail.
Subsequently, CSX and Norfolk Southern Railroad ("Norfolk Southern") agreed to
divide Conrail and filed for approval of the transaction with the STB in June
1997. Based upon management's review of publicly available information
currently included in the filing regarding the breakup of Conrail, CSX will
acquire all of Conrail's properties and operating rights in New England.
While the impact of the proposed merger on future traffic patterns and the
resultant effect on P&W's railroad operations are uncertain at this time, P&W
does not anticipate any significant negative impact as a result of the merger,
and believes that the merger may create additional business for the Company as
a result of longer Class I single line service on competitive routes.
Furthermore, the continued implementation of the North American Free Trade
Agreement is expected to increase trade between the northeast and South
American manufacturing centers via Gulf Coast ports. The introduction of longer
single line service between the southeast and New England via CSX, together
with P&W's intermodal facility, should position the Company to capture more
international and domestic double stack containerized cargo.
Regional Developments
There are a number of development projects underway in New England to
increase port capacity along the extensive coastline and to improve the
intermodal transportation and distribution infrastructure in the region. These
projects present significant opportunities for the Company to increase its
business.
Quonset/Davisville
The State of Rhode Island has proposed a development plan for a 3,000 acre
industrial park, commonly known as ''Quonset/Davisville,'' located near the
entrance of Narragansett Bay. The site, which is owned by the Rhode Island
Economic Development Corporation, contains nearly 1,000 acres of developable
property, three active piers, an on-site airport and on-site rail. The plan
contemplates creating the largest on-dock double stack container and tri-level
auto rail facility in New England with a deepwater port and related facilities,
including increased intermodal container storage and automobile handling
capacity. To facilitate the port development, the State plans a $120 million
freight rail improvement project to be funded with both State and federal funds
which will provide additional track capacity and double stack clearances on the
Northeast Corridor between Quonset/Davisville and the Company's mainline
connection at Central Falls, Rhode Island. The freight rail improvement project
and first phase of the proposed development will require numerous governmental
approvals and will take approximately four years to implement. The State's plan
anticipates that, upon completion of the proposed development,
Quonset/Davisville will become a substantial port of entry for automobiles,
containerized cargo and other commodities and will generate substantial
additional rail traffic to and from the industrial park.
Massachusetts Highway Improvement Program
The Commonwealth of Massachusetts is in the process of implementing a $250
million highway reconstruction project to create a direct Worcester connection
to the Massachusetts Turnpike and significantly increase traffic capacity on
the highway connecting Providence and Worcester. A population of 7.2 million
resides within a 50 miles radius of Worcester. The highway project, which is
scheduled in phases for completion over the next three years, is expected to
significantly improve access and shorten travel times to and from Worcester for
this population as well as businesses located throughout New England.
Port of New Haven
The State of Connecticut is in the process of rebuilding the Tomlinson Bridge
in New Haven, which will provide rail access to the Port of New Haven. In
conjunction with this project, the Company is working with the City of New
Haven and area users of the rail systems to fund a design for the restoration
of local street rail service directly to port properties. Completion of this
project, which is scheduled for late 2000, will provide the Company with
increased access to customers at the Port of New Haven.
Railroad Operations
The Company's rail freight system extends over approximately 515 miles of
track. The Company interchanges freight traffic with Conrail at Worcester,
Massachusetts and at New Haven, Connecticut; with the Springfield Terminal
Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts;
with the New England Central Railroad (formerly Central Vermont Railway) at New
London, Connecticut; and with the New York and Atlantic Railroad (formerly Long
Island Railroad) at Fresh Pond Junction on Long Island. Through its
connections, P&W links 79 communities on its lines. It operates four
classification yards (areas containing tracks used to group freight cars
destined for a particular industry or interchange), located in Worcester,
Massachusetts, Cumberland, Rhode Island and Plainfield and New Haven,
Connecticut.
By agreement with a private operator, the Company operates two approved
customs intermodal yards in Worcester. A customs intermodal yard is an area
containing tracks used for the loading and unloading of containers. These yards
are U.S. Customs bonded, and international traffic must be inspected and
approved by U.S. Customs officials. The intermodal facility serves primarily as
a terminal for movement of container traffic from the Far East destined for
points in New England. Several major container ship lines utilize double stack
train service through this terminal. P&W works closely with the terminal
operator to develop and maintain strong relationships with steamship lines
involved in international intermodal transportation.
Customers
The Company serves over 150 customers in Massachusetts, Rhode Island,
Connecticut and New York. The Company's 10 largest customers accounted for
approximately 51.5% of operating revenues in 1997. In 1997, Tilcon Connecticut,
Inc., which ships construction aggregate from three separate quarries on P&W's
system to asphalt production plants in Connecticut and New York, accounted for
approximately 15.1% of the Company's operating revenues. No other customer
accounted for 10% or more of its total operating revenues in 1997.
In recent years, P&W has benefited from the expansion of existing customers'
facilities as well as the location of new customers on its railroad. For
example, during 1997, two of the Company's manufacturing customers increased
production at facilities on P&W's lines by approximately 35% and 25%,
respectively, which resulted in increased rail service to these companies. In
the past two years, the development of Quonset/Davisville and growth of certain
customers' operations at this industrial park has resulted in a 29% increase in
the Company's rail traffic to and from the park.
Certain other P&W customers have recently made or announced developments that
the Company anticipates will provide increased revenues. For example, a food
distributor in Worcester was recently awarded a contract to distribute frozen
french fries to fast food restaurants in the New England region. In addition, a
major office supply retailer has recently concluded construction of a regional,
rail-served distribution facility in Killingly, Connecticut and is now
receiving rail service from the Company.
Markets
The Company transports a wide variety of commodities for its customers. In
1997, chemicals and plastics and construction aggregate were the two largest
commodity groups transported by the Company, constituting 42% and 20%,
respectively, of conventional carload freight revenues. The following table
summarizes the Company's conventional carload freight revenues by commodity
group as a percentage of such revenues:
Commodity 1993 1994 1995 1996 1997
Chemicals and Plastics 46% 46% 44% 43% 42%
Construction Aggregate 11 15 18 18 20
Food and Agricultural 16 16 17 17 15
Forest and Paper Products 15 14 13 14 13
Scrap Metal and Waste 4 3 3 3 5
Other 8 6 5 5 5
_____ _____ _____ _____ _____
Total 100% 100% 100% 100% 100%
Sales and Marketing
P&W's sales and marketing staff of three people has over 45 years of combined
experience in pricing and marketing railroad services. The sales and marketing
staff focuses on understanding and addressing the raw material requirements and
transportation needs of its existing customers and businesses on its lines. The
staff grows existing business by maintaining close working relationships with
both customers and connecting carriers. The sales and marketing staff strives to
generate new business for the Company through (i) targeting companies already on
P&W's rail lines but not currently using rail services, (ii) working with state
and local development officials, developers and real estate brokers to
encourage the development of industry on the Company's rail lines and (iii)
identifying and targeting the non-rail transportation of goods into and out of
the region in which the Company operates. Unlike many other regional and
short-line railroads, the Company is able to offer its customers creative
pricing and routing alternatives because of its multiple connections to other
carriers.
Safety
An important component of the Company's operating strategy is conducting safe
railroad operations for the benefit and protection of employees, customers and
the communities served by its rail lines. Since commencing active operations in
1973, the Company has committed significant resources to track maintenance to
minimize the risk of derailments and believes its rail system is in good
condition.
Employee safety is also an important part of the Company's operating policy.
P&W has dramatically reduced the frequency and severity of employee injuries
through a comprehensive safety program which includes extensive training,
personal protection equipment and incentives. Employees attend annual classes
and take annual exams regarding operating and safety rules and practices. The
Company's safety program also includes a hot line which is used to report
safety issues directly to the safety director, a safety suggestion program
which includes financial incentives and a peer recognition program for
colleagues to discuss safety rules and good work habits. Since it
began its safety program in 1981, the Company has made dramatic improvements to
its safety records both in terms of the frequency and severity of injuries
while significantly increasing its operations and expanding its workforce.
Reportable injuries have declined to below 10 incidents per year for the past
five years, as compared to over 100 reportable injuries in 1981. The Company
has won three E.H. Harriman industry safety awards in the last five years.
Rail Traffic
Rail traffic is classified as on-line or overhead traffic. On-line traffic is
traffic that originates or terminates with shippers located on a railroad.
Overhead traffic passes from one connecting carrier to another and neither
originates nor terminates with shippers located on a railroad. Presently, P&W
is solely an on-line carrier but expects to provide overhead service in the
future for certain rail traffic to and from Long Island.
Rail freight rates can be in various forms. Generally, customers are given a
''through'' rate, a single figure encompassing the rail transportation of a
commodity from point of origin to point of destination, regardless of the
number of carriers which handle the car. Rates are developed by the carriers
based on the commodity, volume, distance and competitive market considerations.
The entire freight bill is paid either to the originating carrier (''prepaid'')
or to the destination carrier (''collect'') and divided between all carriers
which handle the move. The basis for the division varies and can be based on
factors (or revenue requirements) independently established by each carrier
which comprise the through rate, or on a percentage basis established by
division agreements among the carriers. A carrier such as P&W, which actually
places the car at the customer's location and attends to the customer's daily
switching requirements, receives revenue greater than an amount based simply
on mileage hauled.
Employees
As of January 1, 1998, the Company had 147 full-time employees, 112 of which
were represented by three national railroad labor organizations. The Company's
employees have been represented by unions since the Company commenced
independent operations in 1973.
The Company's initial agreement with the United Transportation Union covering
the trainmen was unusual in the railroad industry since it provided the Company
with discretion in determining crew sizes, eliminated craft distinctions and
provided a guaranteed annual wage for a maximum number of hours worked. The
Company's collective bargaining agreements have been in effect since February
1973 for trainmen, since May 1974 for clerical employees, dispatchers and
police and since June 1974 for maintenance employees. These contracts do not
expire but are subject to re-negotiation after the agreed-upon moratoriums.
The moratorium periods are typically three to five years in length. The labor
agreements may next be amended at June 1, 1998 for the United Transportation
Union (trainmen), December 31, 1999 for the Transportation Communication Union
(clerical) and July 1, 2000 for the Brotherhood of Railroad Signalmen
(maintenance). The Company considers its employee and labor relations to be
good.
Competition
The Company is the only rail carrier serving businesses located on-line.
However, the Company competes with other carriers in the location of new rail-
oriented businesses in the region. The Company also competes with other modes
of transportation, particularly long-haul trucking companies, for the
transportation of commodities. Any improvement in the cost or quality of these
alternate modes of transportation, for example, legislation granting material
increases in truck size or allowable weight, could increase competition and may
materially adversely affect the Company's business and results of operations. As
a means of competing, P&W strives to offer greater convenience and better
service than competing carriers and at costs lower than some competing non-rail
carriers. The Company also competes by participating in efforts to attract new
industry to the areas which it serves.
Certain rail competitors, including Conrail and CSX, are larger or better
capitalized than the Company. While P&W believes the acquisition and division of
Conrail will lead to expansion opportunities, the Conrail 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.
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.
As a result of the planned introduction of high speed passenger service on the
Northeast Corridor, the FRA has issued an order requiring that all locomotives
operating on the Northeast Corridor between New Haven and Boston be equipped
with automatic civil speed enforcement systems, the cost of which is
anticipated to be at least $45,000 per locomotive. The proposed order does not
address whether the federally funded high speed project or the Company will bear
the costs of required locomotive retrofits.
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 515 miles of track, of which it
owns approximately 170 miles. The Company has the right to use the remaining
345 miles pursuant to perpetual easements and long-term trackage rights
agreements. Under certain of these agreements, the Company pays fees based on
usage.
Of the approximately 515 miles of track on which the Company operates, 341
miles, or 66%, are in FRA Class 3 condition or better, which permits speeds of
40 miles per hour for freight trains. An additional 59 miles of track, or 12%,
of the Company's trackage are in FRA Class 2 condition, which permits speeds up
to 25 miles per hour. The remaining 116 miles, or 22%, are in FRA Class 1 or
FRA Excepted condition, which permits maximum speeds of 10 miles per hour. Of
the 116 miles of FRA Class 1 or FRA Excepted track, 35 miles, or 30%, are owned
and maintained by other railroads; of the remaining 81 miles of FRA Class 1 or
FRA Excepted track, the Company operates on only 35 miles, or 30%, and the
balance of 46 miles, or 40%, is not currently in use. The following chart shows
the percentage value of the Company's trackage by FRA classification.
Part of the Company's operating strategy is to maintain and improve the
classification of its trackage in order to allow the Company to operate at
maximum freight train speeds to consistently provide its customers with fast,
reliable and efficient rail service. P&W believes that regular track
maintenance is important to the long-term prosperity of the Company. The
Company is responsible for maintaining 207 of the 515 miles of track included
within its operating system. Of the remaining 308 miles of track, 186 miles are
maintained by Amtrak and 122 miles are maintained by other railroads or are
currently not in use. Substantially all of the mainline track owned by the
Company is maintained in FRA Class 3 condition.
Of the approximately 515 miles of the Company's system, 283 miles, or 55%,
are located in Connecticut, 103 miles, or 20%, are located in Massachusetts,
102 miles, or 20%, are located in Rhode Island and 28 miles, or 5%, are located
in New York.
Rail Facilities
P&W owns land and a building with approximately 69,500 square feet of floor
space in Worcester, Massachusetts. The building houses the Company's executive
and administrative offices and some of the Company's storage space.
Approximately 2,100 square feet are leased to an outside tenant.
The Company owns and operates three principal classification yards located in
Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield, Connecticut
and also operates a classification yard in New Haven, Connecticut. In addition,
the Company has maintenance facilities in Plainfield and Worcester. P&W plans
to expand the Worcester facility in order to increase the efficiency of routine
maintenance and repairs and increase the Company's ability to provide contract
maintenance. P&W believes that its executive and administrative office
facilities, classification yards and maintenance facilities are adequate to
support its current level of operations.
Other Properties
The Company owns or has the right to use a total of approximately 130 acres
of real estate located along the principal railroad lines from downtown
Providence through Pawtucket, Rhode Island. Of this amount, P&W owns
approximately eight acres in Pawtucket and has a perpetual easement for
railroad purposes over the remaining 122 acres.
The Company has invested approximately $11 million in the development of the
South Quay, which is adjacent to 12 acres of land owned by the Company. This
investment has resulted in the creation of approximately 33 acres of waterfront
land that are the subject of a title dispute pending before the Rhode Island
Supreme Court. See ''Item 3 Legal Proceedings.''
P&W actively manages its real estate assets in order to maximize revenues.
The income from property management is derived from sales and leasing of
properties and tracks and grants of easements to government agencies, utility
companies and other parties for the installation of overhead or underground
cables, pipelines and transmission wires as well as recreational uses such as
bike paths. See ''Management's Discussion and Analysis of Financial Condition
and Results of Operations.''
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of December 31, 1997:
Description Number
Locomotive 24
Gondola 37
Flat Car 4
Ballast Car 36
Passenger Equipment 5
Caboose 2
___
Total 108
The 24 diesel electric locomotives are used on a daily basis, are maintained
to a high standard, comply with all FRA and Association of American Railroads
rules and regulations and are adequate for the needs of the Company's freight
operations. The 37 100-ton capacity gondolas and four flat cars are considered
modern rail cars and are used by certain P&W customers. Other rail freight
customers use their own freight cars or obtain such equipment from other
sources. The 36 ballast cars are used in track maintenance. From time to time,
the Company has leased ballast cars to other adjoining railroads. The passenger
equipment and cabooses are not utilized in P&W's rail freight operations but
are used on an occasional basis for Company functions, excursions and charter
trips.
Equipment
P&W has a state-of-the-art digital touch control dispatching system at its
Worcester operations center permitting two-way radio contact with every train
crew and maintenance vehicle on its lines. The system also enables each train
crew to maintain radio contact with other crew members. The Company maintains a
computer facility in Worcester with back-up computer facilities in Worcester and
Plainfield, Connecticut to assure the Company's ability to operate in the event
of disruption of service in Worcester. The Company also has state-of-the-art
automatic train defect detectors at strategic locations which inspect passing
trains and audibly communicate the results to train crews and dispatchers in
order to protect against equipment failure en route.
The Company maintains a modern fleet of track maintenance equipment and
aggressively pursues available opportunities to work with federal and state
agencies for the rehabilitation of bridges, grade crossings and track. The
Company's locomotives are equipped with the cab signal technology necessary for
operations on the Northeast Corridor and will be equipped with automatic civil
speed enforcement systems which will be required upon the introduction of high
speed passenger service on the Northeast Corridor scheduled for late 1999.
Item 3. Legal Proceedings
In 1995, the Company entered into a Settlement Agreement with the Selling
Shareholder, Bestfoods, pursuant to which Bestfoods (formerly known as CPC
International, Inc.) released the Company from any claims arising out of the
contamination of certain property formerly owned by a subsidiary of Bestfoods.
Bestfoods' insurance carrier (which to date has denied coverage to Bestfoods)
has notified the Company that it intends to bring suit against the Company to
enforce its alleged rights of subrogation. The Company believes that since
Bestfoods has released the Company from any liability, its carrier has no right
of subrogation and its claim is without merit. Moreover, under the Settlement
Agreement, Bestfoods is obligated to defend, indemnify and hold harmless the
Company for any claims which arise from such contamination, including claims of
the insurance carrier.
The Company has invested approximately $11 million in the development of the
South Quay, approximately 33 acres of reclaimed formerly tide flowed land which
is adjacent to 12 acres owned by the Company. On April 25, 1996, the Company
filed an action in Rhode Island Superior Court seeking to confirm the Company's
fee simple absolute title in the South Quay. The State of Rhode Island and the
Rhode Island Coastal Resources Management Council ("the Coastal Council")
objected to the Company's petition. Acting on motions for summary judgment filed
by both sides, the Superior Court ruled that the Company is the owner of the
South Quay in fee simple absolute. The State and Coastal Council have appealed
this decision to the Rhode Island Supreme Court. The Company intends to
vigorously defend the appeal and advocate that the Rhode Island Supreme Court
should affirm the Superior Court decision. A decision from the Rhode Island
Supreme Court is expected in 1999. A finding that the Company possesses only a
50 year license should not prevent the utilization of the South Quay as an
intermodal facility.
In connection with the division of Conrail, the Company instituted a lawsuit
against Conrail in the United States District Court in the District of Columbia
on November 12, 1997 in which the Company contends that, pursuant to a 1982
Order of the United States Special Court established pursuant to the Regional
Rail Reorganization Act of 1973, the Company is entitled to acquire New Haven
Station and that Conrail is not permitted to convey it to CSX. New Haven Station
includes all of Conrail's rail properties in New Haven and related facilities
(including a classification yard) necessary for the operations of P&W. Conrail
disagrees with the Company's position. On January 22, 1998, the District Court
dismissed the Company's claim without prejudice, finding that its claim was not
ripe for adjudication prior to the STB's decision on the breakup of Conrail. The
Company plans to reinstitute the claim when it is ripe for adjudication.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on the AMEX under the symbol ''PWX.'' Prior to
March 5, 1997, the Common Stock was traded on The Nasdaq National Market
(''NASDAQ'') under the symbol ''PWRR.'' The following table sets forth, for the
periods indicated, the high and low sale price per share for the Common Stock as
reported on the AMEX and NASDAQ. Also included are dividends paid per share of
Preferred Stock and Common Stock during these quarterly periods.
Common Stock
Trading Prices Dividends Paid
High Low Preferred Common
1996
First Quarter $8 1/2 $6 3/4 $ -0- $ -0-
Second Quarter 8 1/2 7 1/2 5.00 .05
Third Quarter 8 1/2 6 1/2 -0- -0-
Fourth Quarter 8 6 1/2 -0- .05
1997
First Quarter 10 3/8 7 1/2 5.00 -0-
Second Quarter 12 1/2 9 3/4 -0- .06
Third Quarter 14 1/4 10 5/8 -0- -0-
Fourth Quarter 22 1/4 13 1/4 -0- .06
1998
First Quarter 18 7/8 15 5/8 5.00 .03
On February 27, 1998, the last reported sale price of the Common Stock on the
AMEX was $17.375 per share. As of February 27, 1998, there were approximately
705 holders of record of the Common Stock.
The Company has paid semi-annual dividends on the Common Stock and an annual
non-cumulative 10% dividend on the Preferred Stock since 1989. The non-
cumulative Preferred Stock dividend is fixed by the Company's Charter at the
rate of $5.00 per share per year, out of funds legally available for the payment
of dividends. In 1997, the Company raised its Common Stock dividend 20%, from
$.05 a share semi-annually to $.06 a share. At a meeting of the Board of
Directors held January 28, 1998, the Board modified the Company's dividend
policy to pay a $.03 per share dividend on the Common Stock quarterly. Although
the Board of Directors presently anticipates continuing this policy, the
declaration of cash dividends on the Common Stock will be at the discretion of
the Board of Directors based on the Company's earnings, financial condition,
capital requirements and other relevant factors, including applicable law and
any restrictions set forth in credit facilities entered into by the Company.
Currently, the terms of the Massachusetts Capital Resource Company ("MCRC") Note
limit dividend payments to 25% of the Company's net income.
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.
Years Ended December 31,
1993 1994 1995 1996 1997
(in thousands, except per share amounts)
Income Statement Data:
Operating revenues $18,657 $20,292 $19,778 $19,456 $22,083
Operating expenses 16,336 17,202 17,677 17,714 18,333
_______ _______ _______ _______ _______
Income from operations 2,321 3,090 2,101 1,742 3,750
Other income 707 1,206 581 1,660 638
Interest expense (1,353) (1,285) (1,175) (1,371) (1,358)
_______ _______ _______ _______ _______
Income before income taxes 1,675 3,011 1,507 2,031 3,030
Provision for income taxes 570 1,200 590 780 1,100
_______ _______ _______ _______ _______
Net income 1,105 1,811 917 1,251 1,930
Preferred Stock dividend 32 31 3 3 3
_______ _______ _______ _______ _______
Net income available to
common shareholders $1,073 $1,780 $ 914 $1,248 $1,927
_______ _______ _______ _______ _______
Basic income per share $ 0.76 $ 0.99 $ 0.45 $ 0.57 $ 0.87
_______ _______ _______ _______ _______
Diluted income per share $ 0.54 $ 0.87 $ 0.43 $ 0.54 $ 0.81
_______ _______ _______ _______ _______
Weighted average shares-basic(a) 1,406 1,796 2,043 2,178 2,209
_______ _______ _______ _______ _______
Weighted average shares-diluted(a) 2,042 2,077 2,136 2,461 2,489
_______ _______ _______ _______ _______
Cash dividends declared on
Common Stock $141 $ 173 $ 205 $ 218 $ 267
At December 31,
1993 1994 1995 1996 1997
Balance Sheet Data:
Total assets $60,706 $61,496 $68,012 $68,491 $71,212
Short-term debt 1,590 758 612 2,117 2,281
Long-term debt, less current
Portion 11,378 10,485 12,977 12,131 11,916
Shareholders' equity 31,113 32,914 34,455 36,061 38,038
(a) The income per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, ''Earnings
per Share.'' See Note 1 to the Company's audited financial statements included
elsewhere in this annual report.
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.
This annual report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements
Overview
The Company is a regional freight railroad operating in Massachusetts, Rhode
Island, Connecticut and New York.
The Company generates operating revenues primarily from the movement of
freight in both conventional freight cars and in intermodal containers on flat
cars over its rail lines. Freight revenues are recorded at the time delivery is
made to the customer or the connecting carrier. Modest non-freight operating
revenues are derived from demurrage, switching, weighing, special train and
other transportation services as well as from services rendered to freight
customers and other outside parties by the Company's Maintenance of Way,
Communications and Signals and Maintenance of Equipment Departments. Operating
revenues also include amortization of deferred grant income.
The Company's operating expenses consist of salaries and wages and related
payroll taxes and employee benefits, depreciation, insurance and casualty claim
expense, diesel fuel, car hire, property taxes, materials and supplies,
purchased services and other expenses. Many of the Company's operating expenses
are of a relatively fixed nature and do not increase or decrease proportionately
with increases or decreases in operating revenues unless the Company's
management takes specific actions to restructure the Company's operations.
When comparing the Company's results of operations from one year to another,
the following factors should be taken into consideration. First, the Company has
historically experienced fluctuations in operating revenues and expenses due
to unpredictable events such as one-time freight moves and customer plant
expansions and shut-downs. Second, the Company's freight volumes are susceptible
to increases and decreases due to changes in national and regional economic
conditions.
The Company also generates income through sales of properties, grants of
easements and licenses and leases of land and tracks. Income or loss from sale,
condemnation and disposal of property and equipment and grants of easements is
recorded at the time the transaction is consummated and collectibility is
assured. This income varies significantly from year to year. Over the last ten
years, such income has ranged from a low of $460,000 to a high of $2.6 million
with an annual average over this period of $1.3 million.
The Company has one customer, Tilcon Connecticut, Inc., which accounted for
approximately 12.1%, 12.6% and 15.1% of its operating revenues in 1995, 1996 and
1997, respectively. The Company does not believe that this customer will cease
to be a rail shipper or will significantly decrease its freight volume in the
foreseeable future. In the event that this customer should cease or
significantly reduce its rail freight operations, management believes that the
Company could restructure its operations to reduce operating costs by an amount
sufficient to offset the decrease in operating revenues.
Results of Operations
The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
Years Ended December 31,
1995 1996 1997
(in thousands, except percentages)
Freight Revenues:
Conventional carloads $17,352 87.7% $17,050 87.6% $19,001 86.0%
Containers 1,524 7.7 1,508 7.8 1,675 7.6
Non-Freight Operating Revenues:
Transportation services 528 2.7 455 2.3 632 2.9
Other 374 1.9 443 2.3 775 3.5
_______ _____ _______ _____ _______ ____
Total $19,778 100% $19,456 100% $22,083 100%
The following table sets forth conventional carload freight revenues by
commodity group in dollars and as a percentage of such revenues:
Years Ended December 31,
1995 1996 1997
(in thousands, except percentages)
Chemicals and plastics $ 7,548 43.5% $ 7,366 43.2% $ 8,000 42.1%
Construction aggregate 3,054 17.6 3,086 18.1 3,762 19.8
Food and agricultural products 3,019 17.4 2,864 16.8 2,831 14.9
Forest and paper products 2,308 13.3 2,319 13.6 2,546 13.4
Scrap metal and waste 538 3.1 477 2.8 969 5.1
Other 885 5.1 938 5.5 893 4.7
_______ _____ _______ _____ _______ _____
Total $17,352 100.0 $17,050 100.0 $19,001 100.0
The following table sets forth a comparison of the Company's operating
expenses expressed in dollars and as a percentage of operating revenues:
Years Ended December 31,
1995 1996 1997
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits $ 9,997 50.6% $10,686 54.9% $11,023 49.9%
Casualties and insurance 1,373 6.9 800 4.1 572 2.6
Depreciation 1,790 9.1 1,940 10.0 2,054 9.3
Diesel fuel 522 2.6 656 3.4 708 3.2
Car hire, net 708 3.6 605 3.1 598 2.7
Purchased services, including
legal and professional fees 1,749 8.8 1,213 6.2 1,762 8.0
Repairs and maintenance of
Equipment 714 3.6 687 3.5 943 4.3
Track and signal materials 1,877 9.5 1,257 6.4 1,866 8.4
Other materials and supplies 796 4.0 848 4.4 1,012 4.6
Other 1,302 6.6 1,318 6.8 1,325 6.0
_______ _____ _______ _____ _______ ____
Total 20,828 105.3 20,010 102.8 21,863 99.0
Less capitalized and recovered
costs 3,151 15.9 2,296 11.8 3,530 16.0
_______ _____ _______ _____ _______ ____
Total $17,677 89.4% $17,714 91.0% $18,333 83.0%
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Operating Revenues
Operating revenues increased $2.6 million, or 13.5%, to $22.1 million in 1997
from $19.5 million in 1996. This increase was comprised of a $2.0 million
(11.4%) increase in conventional freight revenues, a $167,000 (11.1%) increase
in net container freight revenues and a $509,000 (56.7%) increase in non-freight
operating revenues.
The increases in conventional and container freight revenues were primarily
the result of increases in freight traffic volume. The Company's conventional
freight carloadings increased by 3,806, or 14.0%, to 31,047 carloadings in 1997
from 27,241 in 1996. Total intermodal containers handled increased by 3,707, or
9.3%, to 43,408 containers in 1997 from 39,701 in 1996. Average revenue per
conventional carloading decreased slightly, principally due to a shift in the
relative volume of commodities handled toward construction aggregates, which
command a comparatively lower freight rate. The average rate received per
intermodal container increased slightly due to rate increases attributable to
increases in certain railroad industry cost indices.
The Company experienced increases in shipments by many of the Company's
freight customers, attributable primarily to improved national and regional
economic conditions as well as the Company's marketing efforts. The increase
also reflected the addition of several new customers utilizing the Company's
rail services.
The $509,000 increase in non-freight operating revenues resulted primarily
from increases in Maintenance of Way Department billings and from special train
and other transportation revenues. Such revenues can vary significantly
from year to year depending upon customer needs.
Operating Expenses
Operating expenses increased $619,000, or 3.5%, to $18.3 million in 1997 from
$17.7 million in 1996. Operating expenses as a percentage of operating revenues
(''operating ratio''), however, decreased to 83.0% in 1997 from 91.0% in 1996.
The small increase in operating expenses and the decrease in the operating ratio
were attributable to the relatively fixed nature of the Company's operating
expenses and the fact that capitalized costs for track and bridge projects as
well as costs recovered from government grants for public improvements, such as
surfacing and signals for grade crossings, increased $1.2 million, or 53.7%, to
$3.5 million in 1997 from $2.3 million in 1996.
Casualties and insurance expense decreased $228,000, or 28.5%, to $572,000 in
1997 from $800,000 in 1996, principally due to the absence of any expenditures
in 1997 for casualty losses in excess of amounts previously reserved. Casualty
loss expense was $171,000 in 1996.
Purchased services and track and signal materials expense
increased $1.2 million, or 46.9%, to $3.6 million in 1997 from
$2.5 million in 1996. This increase was primarily attributable to
the increased capital projects and cost recovery programs carried
out in 1997.
Other Income
Other income decreased $1.0 million, or 61.6%, to $638,000 in 1997 from $1.7
million in 1996, due primarily to a decrease in net gains from the sale,
condemnation and disposal of properties and easements. The 1996 amount reflected
a $1.0 million condemnation award.
Interest Expense
Interest expense was virtually unchanged between 1996 and 1997. Interest on
approximately $730,000 of debt incurred to finance the acquisition of three
locomotives during the second quarter of 1997 was essentially offset by interest
reductions resulting from principal payments on existing indebtedness.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Operating Revenues
Operating revenues decreased $322,000, or 1.6%, to $19.5 million in 1996 from
$19.8 million in 1995. This decrease was comprised primarily of a $302,000
(1.7%) decrease in conventional carload revenues. Other non-freight operating
revenues were virtually unchanged between the two years.
The decreases in conventional and container freight revenues were primarily
due to decreases in traffic volumes partially offset by higher average revenues
received per conventional carloading and per container. The Company's
conventional freight carloadings decreased 1,898, or 6.5%, to 27,241 carloadings
in 1996 from 29,139 in 1995. Total intermodal containers handled decreased
1,510, or 3.7%, to 39,701 in 1996 from 41,211 in 1995. Increases in the average
revenue received per conventional carloading were primarily due to a change in
the mix of commodities toward higher revenue items while the increase in the
average revenue received per container resulted from rate increases tied to
increases in certain railroad industry cost indices.
The decreases in both carload and container traffic volume in 1996 from 1995
were attributable to an economic slowdown which first became apparent late in
the third quarter of 1995. Adverse weather conditions in the first quarter of
1996 also contributed to the decline in traffic. During the third quarter of
1996, as a result of improving economic conditions, conventional traffic volume
began to return to 1995 levels. Conventional traffic volume for the fourth
quarter of 1996 exceeded the prior year's level by 7.0% and, as previously
noted, these higher traffic levels carried forward into 1997.
Operating Expenses
Operating expenses remained relatively stable at approximately $17.7 million
in 1995 and 1996. The operating ratio increased in 1996 to 91.0% from 89.4% in
1995.
Casualties and insurance expense decreased $573,000, or 41.7%, to $800,000 in
1996 from $1.4 million in 1995. This decrease was primarily attributable to a
decrease in the cost of casualty and environmental claims, which decreased
$557,000 to $171,000 in 1996 from $728,000 in 1995. The high level of claims in
1995 was attributable to a large environmental claim that was settled during
that year.
Purchased services and track and signal materials expense decreased $1.1
million, or 31.9%, to $2.5 million in 1996 from $3.6 million in 1995. This
decrease was attributable to a lower level of capital projects and cost recovery
programs carried out during 1996.
Other Income
Other income increased $1.1 million, or 185.7%, to $1.7 million in 1996 from
$581,000 in 1995 due to substantially higher net gains realized from the sale,
condemnation and disposal of properties and easements. In 1996, the Company
received $1.0 million from the State of Rhode Island's condemnation of an
abandoned rail line.
Interest Expense
Interest expense increased $196,000, or 16.7%, to $1.4 million in 1996 from
$1.2 million in 1995. This increase was principally the result of interest on
the subordinated note payable to MCRC, in the principal amount of $5.0 million,
which originated in December 1995.
Liquidity and Capital Resources
The Company has relied primarily on cash generated from operations to fund
working capital and capital expenditures relating to ongoing operations, while
relying on borrowed funds to finance acquisitions and equipment needs, primarily
rolling stock. The Company generated $3.2 million, $1.5 million and $3.5 million
of cash from operations in 1995, 1996 and 1997, respectively. The Company's
total cash and cash equivalents increased by $1.4 million in 1995, but decreased
by $1.3 million and $167,000 in 1996 and 1997, respectively. The principal
utilization of cash during the three-year period was for expenditures for
property and equipment acquisitions, principal payments on long-term debt
obligations, reduction of current liabilities and payment of dividends.
During 1995, 1996 and 1997, the Company generated approximately $108,000, $1.3
million and $230,000, respectively, from the sales and disposals of properties
not considered essential for railroad operations and from easements, including
the $1.0 million condemnation award received in 1996. The Company holds various
properties which could be made available for sale, lease, license or grants of
easements. Revenues from sales of properties and easements can vary
significantly from year to year.
Substantially all of the mainline track owned by the Company meets FRA Class 3
standards (permitting freight train speeds of 40 miles per hour), and the
Company intends to continue to maintain this track at this level. The Company
expended $1.9 million, $1.9 million and $2.5 million for track structure and
bridge improvements in 1995, 1996 and 1997, respectively. Deferred grant income
in the amount of $785,000 in 1995, $671,000 in 1996 and $935,000 in 1997
financed a portion of these improvements. In addition, the Company received
$588,000 of grant proceeds in 1997 to purchase track materials for a three-year
track improvement project commenced in 1997, which the Company expects to
complete by 2000. The track materials were purchased during 1997 and are
included in ''materials and supplies'' on the accompanying balance sheet as of
December 31, 1997. Management estimates that approximately $2.0 million of
improvements to the Company's track structure and bridges will be made in 1998,
provided that sufficient funds, including grant proceeds, are available.
Improvements to the Company's track structure are made, for the most part, by
the Company's Maintenance of Way Department personnel.
The Company acquired and renovated three used locomotives during the second
quarter of 1997 at a total cost of $730,000, financed through long-term
borrowings from a commercial lender. Expenditures incurred on this project are
included as expenditures for equipment additions in the accompanying
statements of cash flows.
The Company's principal bank renewed the Company's revolving line of credit in
June 1997 and increased the maximum borrowings allowed from $1.5 million to $1.8
million. Loans in the amount of $1.4 million were outstanding under this line of
credit as of December 31, 1997. The average interest rate for 1997 was 9.3%.
The Company obtained $5.0 million from MCRC in December 1995 in exchange for a
10% subordinated note and warrants to purchase 200,000 shares of the Company's
Common Stock at an exercise price of $7.10 per share. A portion of the proceeds
was utilized to repay the outstanding principal balance on a $1.8 million term
note. The remaining proceeds have been used for additions to property and
equipment and for working capital purposes. MCRC must apply $1.4 million of the
amount due on the MCRC note toward the exercise of the MCRC warrants upon the
Company's consummation of a public offering of its Common Stock at a purchase
price of not less than $14.20 per share which results in gross proceeds to the
Company of not less than $10 million.
At December 31, 1997, the Company had long-term senior debt and subordinated
debt outstanding totaling $12.8 million, of which $931,000 is due within one
year. Comparable figures at December 31, 1996 were $12.8 million and $677,000,
respectively.
The Company concluded an agreement in October 1997 to acquire all of the
outstanding stock of Connecticut Central Railroad Company (''Conn Central'') in
exchange for shares of Common Stock. The Company expects to complete this
acquisition during the second quarter of 1998. Management is not able to predict
the total impact of this acquisition upon future operations but estimates that
rail freight revenues from existing customers of Conn Central will total
approximately $500,000 per year at the current level of operations. In addition,
management intends to pursue additional growth opportunities that may be
available on these lines.
In 1997, the Company paid dividends in the amount of $5.00 per share on its
outstanding Preferred Stock and $0.12 per share on its outstanding Common Stock.
Continued payment of such dividends is contingent upon the Company's continuing
to have the necessary financial resources available and is limited by the MCRC
agreement to 25% of the Company's net income.
The Company believes that expected cash flows from operating activities and
cash flows from financing activities will be sufficient to fund the Company's
capital requirements for at least the next 12 months. To the extent that the
Company is successful in consummating acquisitions or implementing its expansion
plans, it may be necessary to finance such acquisitions or expansion plans
through the issuance of additional equity securities, incurrence of indebtedness
or both.
Inflation
In recent years, inflation has not had a significant impact on the Company's
operations.
Seasonality
Historically, the Company's operating revenues are lowest for the first
quarter due to the absence of aggregate shipments during this period and to
winter weather conditions.
Year 2000 Compliance
The Company operates a mainframe computer with a PC network and employs three
in-house programmers who write and maintain a substantial portion of the
Company's software programs. The Company utilizes Electronic Data Interchange
and Interline Settlement Systems through Railinc in Washington, D.C. for the
interchange of rail cars and revenue allocations with other railroads. The
Company has compatible back up mainframe systems at both its Worcester,
Massachusetts and Plainfield, Connecticut facilities.
Preparations for the year 2000 have been underway for six years and changes to
the Company's programs are substantially complete. Due to the short periodic
cycle of rail car movements, the exchange of data covers time periods where
''Year 2000'' compliance is not a major factor and should not adversely affect
the Company's business. The Company does rely on waybills and car supply and
revenue data generated by other railroads in the interchange of rail cars. The
failure of these railroads to supply accurate data could disrupt the Company's
operations. Railinc has informed the Company that it is currently addressing the
Year 2000 issue and the Company believes that its programs can be readily
modified to accommodate any resulting changes which may be required.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (''SFAS'') No. 130, ''Reporting Comprehensive
Income'' and SFAS No. 131, ''Disclosures about Segments of an Enterprise and
Related Information.'' SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards of
related disclosures about products and services, geographic areas and major
customers. Both standards will be adopted by the Company during the first
quarter of 1998 and are not expected to have material effects on its financial
position and results of operations.
Item 8. Financial Statements and Supplementary Data
PROVIDENCE AND WORCESTER RAILROAD COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report II-11
Balance Sheets as of December 31, 1996 and 1997 II-12
Statements of Income for the Years Ended December 31,
1995, 1996 and 1997 II-13
Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 II-14
Statements of Cash Flows for the Years Ended December
31, 1995, 1996 and 1997 II-15
Notes to Financial Statements II-16
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Providence and Worcester Railroad Company:
We have audited the accompanying balance sheets of Providence and Worcester
Railroad Company as of December 31, 1996 and 1997, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the aaccounting principles used an significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Providence and Worcester Railroad Company as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Worcester, Massachusetts
January 30, 1998
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
ASSETS
December 31,
1996 1997
Current Assets:
Cash and equivalents $ 686 $ 519
Accounts receivable, net of allowance for doubtful
accounts of $125 in 1996 and 1997 (Notes 3 and 4) 2,537 2,345
Materials and supplies 1,021 2,086
Prepaid expenses and other 121 167
______ ______
Deferred income taxes (Note 7) 400 204
Total Current Assets 4,765 5,321
Property and Equipment, net (Notes 2 and 4) 63,726 65,891
______ ______
Total Assets $68,491 $71,212
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable, bank (Note 3) $ 1,440 $ 1,350
Current portion of long-term debt (Note 4) 677 931
Accounts payable 2,861 2,083
Accrued expenses (Note 5) 907 931
______ ______
Total Current Liabilities 5,885 5,295
______ ______
Long-Term Debt, Less Current Portion (Note 4) 12,131 11,916
______ ______
Profit-Sharing Plan Contribution (Note 9) 226 337
______ ______
Deferred Grant Income (Note 1) 5,571 6,945
______ ______
Deferred Income Taxes (Note 7) 8,617 8,681
______ ______
Commitments and Contingent Liabilities (Note 8)
Shareholders' Equity (Notes 8, 9 and 10):
Preferred stock, 10% noncumulative, $50 par value;
authorized 6,817 shares; issued and outstanding 653
shares 33 33
Common stock, $.50 par value; authorized 3,023,436
shares; issued and outstanding 2,188,244 shares in
1996 and 2,221,933 shares in 1997 1,094 1,111
Additional paid-in capital 6,365 6,665
Retained earnings 28,569 30,229
______ ______
Total Shareholders' Equity 36,061 38,038
______ ______
Total Liabilities and Shareholders' Equity $68,491 $71,212
[FN]
The accompanying notes are an integral part of the financial statements.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,
1995 1996 1997
Operating Revenues - Freight and Non-Freight. $19,778 $19,456 $22,083
_______ _______ _______
Operating Expenses:
Maintenance of way and structures 2,469 2,815 3,035
Maintenance of equipment 1,538 1,555 1,874
Transportation 5,106 4,917 4,987
General and administrative 4,095 3,859 3,764
Depreciation 1,790 1,940 2,054
Taxes, other than income taxes 1,971 2,023 2,021
Car hire, net 708 605 598
_______ _______ _______
Total Operating Expenses 17,677 17,714 18,333
_______ _______ _______
Income from Operations 2,101 1,742 3,750
_______ _______ _______
Other Income (Note 6) 581 1,660 638
Interest Expense (Notes 3 and 4):
Capital Properties, Inc. (668) (437) (410)
Other (507) (934) (948)
_______ _______ _______
Total Interest Expense (1,175) (1,371) (1,358)
Income before Income Taxes 1,507 2,031 3,030
Provision for Income Taxes (Note 7) 590 780 1,100
_______ _______ _______
Net Income $ 917 $ 1,251 $ 1,930
Preferred Stock Dividends 3 3 3
_______ _______ _______
Net Income Available to Common Shareholders $ 914 $ 1,248 $ 1,927
_______ _______ _______
Basic Income Per Share $ .45 $ .57 $ .87
_______ _______ _______
Diluted Income Per Share $ .43 $ .54 $ .81
[FN]
The accompanying notes are an integral part of the financial statements.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
For the years ended December 31, 1995, 1996 and 1997
Additional Total
Preferred Common paid-in Retain Shareholders'
Stock Stock Capital Earnings Equity
Balance, January 1, 1995 $33 $1,005 $5,046 $26,830 $32,914
Issuance of 55,000 common shares
in payment of an environmental
claim 28 363 391
Issuance of 40,606 common shares
to fund the Company's 1994
profit sharing plan contribution 20 315 335
Issuance of 4,374 common shares
for stock options exercised 2 24 26
Issuance of common stock
warrants (Note 4) 80 80
Dividends paid:
Preferred stock, $5.00 per share (3) (3)
Common stock, $.10 per share (205) (205)
Net income for the year 917 917
____ ______ ______ _______ _______
Balance, December 31, 1995 33 1,055 5,828 27,539 34,455
Issuance of 53,155 common shares
in payment of an environmental
claim 27 352 379
Issuance of 20,925 common shares
to fund the Company's 1995
profit sharing plan contribution
(Note 9) 10 157 167
Issuance of 4,123 common shares
for stock options exercised and
other 2 28 30
Dividends paid:
Preferred stock, $5.00 per share (3) (3)
Common stock, $.10 per share. (218) (218)
Net income for the year 1,251 1,251
____ ______ ______ _______ _______
Balance, December 31, 1996 33 1,094 6,365 28,569 36,061
Issuance of 22,550 common shares
to fund the Company's 1996 profit
sharing plan contribution (note 9) 11 215 226
Issuance of 11,139 common shares
for stock options exercised,
employee stock purchases and other 6 85 91
Dividends paid:
Preferred stock, $5.00 per share (3) (3)
Common stock, $.12 per share (267) (267)
Net income for the year 1,930 1,930
____ ______ ______ _______ _______
Balance, December 31, 1997 33 1,111 6,665 30,229 38,038
[FN]
The accompanying notes are an integral part of the financial statements.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
1995 1996 1997
Cash Flows from Operating Activities:
Net income $917 $1,251 $1,930
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 1,790 1,940 2,054
Amortization of deferred grant income (121) (136) (149)
Gains from sale, condemnation and disposal of
property and equipment (64) (1,103) (157)
Deferred income taxes 220 600 260
Other, net 19 26 65
Increase (decrease) in cash from:
Accounts receivable (636) 68 217
Materials and supplies (68) (290) (1,065)
Prepaid expenses and other (12) 18 (46)
Accounts payable and accrued expenses 1,132 (914) 422
______ ______ _____
Net cash flows from operating activities 3,177 1,460 3,531
______ ______ _____
Cash Flows from Investing Activities:
Purchase of property and equipment (4,490) (5,465) (5,160)
Proceeds from sale and condemnation of
Property and equipment 108 1,319 230
Proceeds from deferred grant income 378 901 1,475
______ ______ ______
Net cash flows used by investing activities (4,004) (3,245) (3,455)
______ ______ ______
Cash Flows from Financing Activities:
Net borrowings (payments) under line of credit (120) 1,440 (90)
Payments of long-term debt (4,254) (789) (699)
Dividends paid (208) (221) (270)
Proceeds from long-term debt 6,800 730
Issuance of common shares for stock options
exercised and employee stock purchases 26 29 86
______ ______ ______
Net cash flows from (used by) financing
activities 2,244 459 (243)
______ ______ ______
Increase (Decrease) in Cash and Equivalents 1,417 (1,326) (167)
Cash and Equivalents, Beginning of Year 595 2,012 686
______ ______ ______
Cash and Equivalents, End of Year $2,012 $ 686 $ 519
Supplemental Disclosures:
Cash paid during year for:
Interest $1,269 $1,333 $1,328
______ ______ ______
Income taxes $ 543 $ 60 $ 873
[FN]
The accompanying notes are an integral part of the financial statements.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(Dollars in Thousands Except Per Share Amounts)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company is an interstate freight carrier conducting railroad operations in
Massachusetts, Rhode Island, Connecticut and New York.
One customer accounted for approximately 12.1%, 12.6% and 15.1% of the
Company's operating revenues in 1995, 1996 and 1997, respectively.
Cash and Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the balance sheets and statements of cash flows. Cash
equivalents are stated at cost, which approximates fair market value.
Materials and Supplies
Materials and supplies, which consist of items for the improvement and
maintenance of track structure and equipment, are stated at cost, determined on
a ffirst-in, first-out basis, an are charged to expense or added to the cost of
property and equipment when used.
Property and Equipment
Property and equipment are stated at historical cost (including self-
construction costs). Acquired railroad property is recorded at the purchased
cost. Major renewals or betterments are capitalized while routine maintenance
and repairs, which do not improve or extend asset lives, are charged to expense
when incurred. Gains or losses on sales or other dispositions are credited or
charged to income. Depreciation is provided using the straight-line method over
the estimated useful lives of the assets as follows:
Depreciable Properties Estimated Useful Lives
Track structure 20 to 67 years
Buildings and other structures 33 to 45 years
Equipment 4 to 25 years
In 1996, the Company adopted Statement of Financial Accounting Standards
(''SFAS'') No. 121, ''Accounting for the Impairment of Long-Lived Assets to be
Disposed of.'' This standard requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company continually evaluates whether later
events and circumstances have occurred that indicate assets may not be
recoverable. When factors indicate that assets should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted future cash
flows over the remaining lives of the assets in measuring whether the assets are
recoverable.
Deferred Grant Income
The Company has availed itself of various federal and state programs
administered by the States of Connecticut and Rhode Island and by the
Commonwealth of Massachusetts for reimbursement of expenditures for capital
improvements. In order to receive reimbursement, the Company must submit
requests for the projects, including cost estimates. The Company receives from
70% to 100% of the costs of such projects, which have included bridges, track
structure and public improvements. To the extent that such grant proceeds are
used for capital improvements to bridges and track structure, they are recorded
as deferred grant income and amortized into operating revenues on a straight-
line basis over the estimated useful lives of the related improvements ($121 in
1995, $136 in 1996, and $149 in 1997).
Grant proceeds utilized to finance public improvements, such as grade crossings
and signals, are recorded as a direct offset to the related expense.
Although the Company cannot predict the extent and length of future grant
programs, it intends to continue filing requests for such grants when they are
available.
Revenue Recognition
Freight revenues are recorded at the time delivery is made to the customer or
the connecting carrier.
Income or loss from sale, condemnation and disposal of property and equipment
and easements is recorded at the time the transaction is consummated and
collectibility is assured.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, ''Accounting for
Income Taxes.'' This standard requires the Company to compute deferred income
taxes based on the differences between the financial statement and tax basis of
assets and liabilities using enacted rates in effect in the years in which
the differences are expected to reverse.
Income per Share
In February 1997, the Financial Accounting Standards Board (''FASB'') issued
SFAS No. 128 ''Earnings per Share,'' which establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. Prior to 1997, the Company computed
income per common share using the methods outlined in Accounting Principles
Board (''APB'') Opinion No. 15, ''Earnings per Share,'' and its
interpretations. The Company adopted SFAS No. 128 in 1997 and restated its
earnings per share for 1995 and 1996. Previously reported income per common
share for years prior to 1997 did not differ materially from that computed using
SFAS 128.
Basic income per common share is computed using the weighted average number of
common shares outstanding during each year. Diluted income per common share
reflects the effect of the Company's outstanding convertible preferred stock,
options and warrants (using the treasury stock method), except where such
items would be antidilutive.
A reconciliation of net income available to common shareholders for the
computation of diluted income per share is as follows:
Years Ended December 31,
1995 1996 1997
Net income available to common shareholders $ 914 $1,248 $1,930
Interest expense impact (net of tax) on
assumed conversion of debt to exercise
warrants 0 84 84
______ ______ ______
Net income available to common
shareholders assuming dilution $ 914 $1,332 $2,014
A reconciliation of weighted average shares used for the basic computation and
that used for the diluted computation is as follows:
Years Ended December 31,
1995 1996 1997
Weighted average shares-basic 2,042,569 2,178,382 2,208,820
Dilutive effect of convertible preferred
stock, options and warrants 93,184 282,295 280,450
_________ _________ _________
Weighted average shares-diluted 2,135,753 2,460,677 2,489,270
Employee Stock Option Plan
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB Opinion No. 25, ''Accounting for Stock
Issued to Employees.''
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates. The
Company's principal estimates include reserves for accounts receivable, useful
lives of properties, accrued liabilities, including health insurance claims and
legal and environmental contingencies, and deferred income taxes.
Fair Value of Financial Instruments
SFAS No. 107 ''Disclosures About Fair Value of Financial Instruments''
requires disclosure of the fair value of certain financial instruments.
The following methods and assumptions are used to estimate the fair value of
each class of financial instrument held or owed by the Company:
Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.
Long-term debt: The fair value of the Company's long-term debt is based on
secondary market indicators. Since the Company's debt is not quoted, estimates
are based on each obligation's characteristics, including remaining maturities,
interest rate, credit rating, collateral, amortization schedule and liquidity.
The carrying amount approximates fair value.
Adoption of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, ''Reporting Comprehensive
Income,'' and SFAS No. 131, ''Disclosures about Segments of an Enterprise and
Related Information.'' SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Both
standards will be adopted by the Company during the first quarter of 1998 and
are not expected to have material effects on its financial position and results
of operations.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
2. Property and Equipment
Property and equipment consist of the following:
December 31,
1996 1997
Land and improvements $ 9,020 $ 9,128
South Quay property 11,339 11,464
Track structure 45,833 48,241
Buildings and other structures 5,955 5,318
Equipment 15,991 17,196
_______ ________
88,138 91,347
Less accumulated depreciation 24,412 25,456
_______ ________
Total property and equipment, net $63,726 $ 65,891
Land and improvements include property held for resale having a net book value
of approximately $400.
South Quay Property
Pursuant to permits issued by the United States Department of the Army Corps
of Engineers and the Rhode Island Coastal Resources Management Council, the
Company has developed 33 acres of waterfront land in East Providence, Rhode
Island (the ''South Quay'') designed to capitalize on the growth of intermodal
transportation, utilizing rail, water and highway connections. The property has
highway access (1/2 mile from I-195), direct rail access and is adjacent to a 12
acre site also owned by the Company.
The permits for the property allow for the construction of a dock along the
west face of the South Quay. Unless extended, the existing permits expire in
1998. The Company intends to apply for extensions of its existing permits to
enable the Company to construct a vessel unloading area if it is able to attract
user or investment commitments. The Company has also recently engaged in
discussions with potential users interested in utilizing the property for off
loading bulk products such as salt and construction aggregate. In addition, the
Company has explored the development of the facility for off loading container
vessels and barges.
The Company will need additional terminal capacity to achieve expected growth
in its intermodal container business. The Company currently intends to use a
portion of the property as an intermodal terminal facility to provide it with
such capacity. This development will not occur until the Company completes the
overhead clearance project required for the State of Rhode Island's freight rail
improvement project.
The Company intends to explore all development opportunities for the South
Quay and believes its costs will be fully recovered from future leases of the
property, associated rail freight revenues, particularly intermodal double stack
container trains, and possible port charges such as wharfage, dockage and
storage.
The Company, relying on Rhode Island Supreme Court decisions concerning title
to formerly tide flowed property, filed a lawsuit in 1996 in Rhode Island
Superior Court seeking to confirm the Company's fee simple absolute title to the
South Quay. Acting on motions for summary judgment from the Company and the
State of Rhode Island and Coastal Resources Management Council (''Coastal
Council''), the Superior Court ruled that the Company is the fee simple absolute
owner of the South Quay. The State and Coastal Council have appealed the
decision to the Rhode Island Supreme Court contending that the Company possesses
only a 50 year exclusive license to develop and occupy the South Quay, which
license must be renewed at the end of the term. A decision from the Rhode Island
Supreme Court is expected in 1999. A finding that the Company possesses only a
50 year license should not prevent the utilization of the South Quay as an
intermodal facility.
3. Notes Payable, Bank
The Company has a revolving line of credit with its principal bank in the
amount of $1,750 expiring June 1, 1998. Borrowings outstanding under this line
of credit are due on demand, bear interest at the bank's prime rate plus one-
half of one percent (9% at December 31, 1997) and are secured by the Company's
accounts receivable. In addition, the Company pays a commitment fee of one-half
of one percent per year on the unused portion of the line of credit. Loans in
the amount of $1,440 and $1,350 were outstanding under this line of credit at
December 31, 1996 and 1997, respectively.
4. Long-term debt
Long-term debt consists of the following:
December 31,
1996 1997
10% note payable to Capital Properties, Inc.
(which, with the Company, has a common
controlling shareholder), certain real estate
pledged as collateral, presently payable in
monthly installments of principal and interest
of $53 to 2007 $ 4,211 $ 3,993
8.69% note payable to a commercial lender,
certain equipment and track structure along
with a second lien on accounts receivable
pledged as collateral, payable in monthly
installments of principal and interest of
$62 to 2003 3,669 3,229
7.9% note payable to a commercial lender, three
locomotives pledged as collateral, payable in
monthly installments of principal and interest
of $15 to 2002 (i) 689
10% subordinated note payable to Massachusetts
Capital Resource Company (''MCRC''), effective
interest rate of 10.3%, Massachusetts track
structure pledged as collateral, payable in
quarterly installments of interest only through
September 1998 and interest and principal
payments increasing from $63 to $188 commencing
in December 1998 with a final principal payment
of $1,250 due December 31, 2005 (ii). 4,928 4,936
______ ______
Total long-term debt 12,808 12,847
Less current portion 677 931
______ ______
Long-term debt, less current portion $12,131 $11,916
(i) In July 1997, the Company completed the acquisition and renovation of
three used locomotives at a total cost of $730 financed through long-term
borrowings from a commercial lender. The interest rate, which is variable, is
set at 2.35% over the 30 day Commercial Paper rate (approximately 7.9% as of
December 31, 1997). The Company has the option of converting to a fixed rate of
interest set at 2.1% over the then current weekly average rate of three year
U.S. Treasury Constant Maturities. The amount of the monthly payments will be
adjusted annually in August to reflect the effects of the variable interest
rates in effect during the previous year.
(ii) In December 1995, the Company concluded an agreement with MCRC whereby the
Company received $5,000 in exchange for a subordinated note payable in the
amount of $4,920 and warrants to purchase 200,000 shares of the Company's common
stock at an exercise price of $7.10 per share. The warrants are exercisable
through Decemmber 31, 2005. MCRC must apply $1,420 of the amount due on its
subordinate note toward the exercise of the warrants upon the Company's
consummation of a public offering of its common stock at a purchase price of not
less than $14.20 per share which results in gross proceeds to the Company of not
less than $10,000. The value assigned to the warrants of $80 was derived from a
valuation made by MCRC on the date of issue. The value assigned to the warrants
is being amortized over the life of the debt. The agreement contains various
covenants which, among other things, limit the payment of dividends to 25% of
the Company's net income and require the Company to maintain certain ratios of
leverage and interest coverage.
The following is a summary of the maturities of long-term debt as of December
31, 1997:
Year ending December 31:
1998 $ 931
1999 1,179
2000 1,328
2001 1,611
2002 1,030
Thereafter 6,768
_______
$12,847
5. Accrued Expenses
Accrued expenses consist of the following:
December 31,
1996 1997
Casualty and environmental claims $ 320 $ 279
Other 587 652
_____ _____
$ 907 $ 931
Casualty loss and environmental claims expense, included in transportation
expense, amounted to $728 in 1995 and $171 in 1996. The Company did not incur
any casualty loss and environmental claims expense in 1997.
6. Other Income
Other income consists of the following:
Years Ended December 31,
1995 1996 1997
Gain from sale, condemnation and disposal of
property and equipment and easements, net $ 64 $ 1,103 $ 157
Rentals and license fees, under various
operating leases 494 494 470
Interest 23 63 11
_____ _______ _____
$ 581 $ 1,660 $ 638
7. Income Taxes
The provision for income taxes consists of the following:
Years Ended December 31
1995 1996 1997
Current:
Federal $ 320 $ 150 $ 750
State 50 30 90
_____ _______ _______
370 180 840
Deferred, Federal and State 220 600 260
_____ _______ _______
$ 590 $ 780 $ 1,100
The following summarizes the estimated tax effect of
significant cumulative temporary differences that are included in
the net deferred income tax provision:
Years Ended December 31,
1995 1996 1997
Depreciation $ 85 $ 87 $ 148
General business tax credits 400 238 588
Deferred grant income (91) (271) (478)
Gain from sale, condemnation and disposal of
properties and equipment (14) 319 (17)
equipment .
Accrued casualty and environmental claims (169) 218 14
Other 9 9 5
_____ _____ _____
$ 220 $ 600 $ 260
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) tax credit
carryforwards. The tax effects of significant items comprising the Company's net
deferred income tax liability as of December 31, 1996 and 1997 are as follows:
December 31,
1996 1997
Deferred income tax liabilities -
Differences between book and tax basis of
properties $10,956 $11,087
_______ _______
Deferred income tax assets:
Tax credit carryforwards 649 61
Deferred grant income 1,909 2,387
Accrued casualty losses 113 99
Other 68 63
_______ _______
2,739 2,610
_______ _______
Net deferred income tax liability 8,217 8,477
A reconciliation of the U.S. federal statutory rate to the effective tax rate
is as follows:
Years Ended December 31,
1995 1996 1997
Federal statutory rate 34% 34% 34%
Depreciation of properties acquired from
bankrupt railroads having a tax
basis in excess cost (1) (1) (1)
Non-deductible expenses 4 4 1
State income tax, net of federal income tax
benefit 2 1 2
___ ___ ___
Effective tax rate 39% 38% 36%
8. Commitments and Contingent Liabilities
The Company is a defendant in certain lawsuits relating to casualty losses,
many of which are covered by insurance subject to a deductible. The Company
believes that adequate provision has been made in the financial statements for
any expected liabilities which may result from disposition of such lawsuits.
The Company was notified by CPC International, Inc. (now ''Bestfoods'') and
the United States Environmental Protection Agency that the Company was alleged
to be a potentially responsible party for some or all of the costs of
remediation of a Superfund site, reportedly due to the impact of a 1974 incident
involving a rail car. In December 1995, the Company concluded an agreement with
Bestfoods (''Agreement'') in which the Company agreed to pay $990 in settlement
of all claims against it relating to this incident. The Company issued 55,000
shares of its common stock, having a value of $391, to Bestfoods in December
1995 in partial payment of this claim. An additional 53,155 shares, having a
value of $379, were issued in January 1996. The Company has the option of paying
the remaining liability of $220 in cash or by the issuance of approximately
31,000 shares of unregistered, restricted common stock of the Company. This
remaining liability must be paid by the earlier of June 30, 1999, or the closing
of a public offering of at least 565,000 shares of common stock. The Agreement
further provides that, in the event Bestfoods recovers insurance proceeds for
its costs, the Company is entitled to receive 10% of the net recovery after
deduction of litigation expenses. Bestfoods is actively engaged in litigation
with an insurer seeking such a recovery. Bestfood's insurance carrier (which to
date has denied coverage to Bestfoods) has notified the Company that it intends
to bring suit against the Company to enforce its alleged rights of subrogation.
The Company believes that since Bestfoods has released the Company from any
liability, its carrier has no right of subrogation and its claim is without
merit. Moreover, under the Agreement, Bestfoods is obligated to defend,
indemnify and hold harmless the Company for any claims which arise from such
contamination, including claims of the insurance carrier.
While it is possible that some of the foregoing matters may be settled at a
cost greater than that provided for, it is the opinion of management based upon
the advice of counsel that the ultimate liability, if any, will not be material
to the Company's financial statements.
In October 1997, the Company's Board of Directors approved an agreement to
purchase all of the outstanding common stock of Connecticut Central Railroad
Company (''Conn Central'') for 20,000 shares of newly issued common stock of the
Company. If certain financial and other conditions are met, Conn Central's
shareholders will receive an additional 7,500 shares of the Company's common
stock one year from the date of the closing. The transaction is expected to be
completed in the second quarter of 1998 following approval or exemption by the
United States Surface Transportation Board. Conn Central is a shortline railroad
headquartered in Middletown, Connecticut which has operating rights over
approximately 28 miles in central Connecticut and connects to the Company's
Middletown Secondary line. After completion of the acquisition, Conn Central
will be merged into the Company.
9. Employee Benefit Plans
Stock Option Plan
The Company has a non-qualified stock option plan (''SOP'') covering all
management personnel having a minimum of one year of service with the Company
and who are not holders of a majority of either its outstanding common stock or
its outstanding preferred stock. In addition, the Company's outside directors
are eligible to participate in the SOP. The SOP covers 50,000 common shares or
5% of the shares of common stock outstanding, whichever is greater (111,097
shares at December 31, 1997). Options granted under the SOP, which are fully
vested when granted, are exercisable over a ten year period at the market price
for the Company's common stock as of the date the options are granted.
Changes in stock options outstanding are as follows:
Weighted Average
Number Exercise Fair
of shares price Value
Outstanding at January 1, 1995 30,357 $ 6.03
Granted 7,808 7.00 $2.29
Exercised (4,374) 5.89
______
Outstanding and exercisable at December 31,
1995 33,791 6.27
Granted 7,790 6.88 $2.21
Exercised (3,823) 5.99
______
Outstanding and exercisable at December 31,
1996 35,154 6.44
Granted 7,970 7.88 $2.96
Exercised (7,593) 6.63
Expired (1,513) 5.98
______
Outstanding and exercisable at December 31,
1997 34,018 6.76
The fair value of options on their grant date was measured using the Black-
Scholes options pricing model. Key assumptions used to apply this pricing model
are as follows:
Years Ended December 31,
1995 1996 1997
Average risk-free interest rate 5.9% 6.4% 5.75%
Expected life of option grants 7.0 years 7.0 years 7.0 years
Expected volatility of underlying stock. 22% 22% 29%
Expected dividend payment rate, as a
percentage of the share price
on the date of grant 1.43% 1.45% 1.26%
It should be noted that the option pricing model used was designed to value
readily tradable stock options with relatively short useful lives. The options
granted to employees are not tradable and have contractual lives of up to ten
years. However, management believes that the assumptions used to value the
options and the model applied yield a reasonable estimate of the fair value of
the grants made under the circumstances.
The following table sets forth information regarding options at December 31,
1997:
Range of Number Weighted Average
Number Exercise Currently Exercise Remaining
of Options Prices Exercisable Price Life (in years)
_________ ____________ ___________ _________ ____________
6,430 $3.25 - 4.38 6,430 $3.78 4.1
22,046 5.50 - 7.88 22,046 7.19 7.0
5,542 8.50 5,542 8.50 2.0
The Company has elected to remain with the accounting prescribed by APB 25,
instead of adopting SFAS No. 123, ''Accounting for Stock-Based Compensation''.
Therefore, no compensation cost has been recognized for the SOP. Had
compensation cost for the Company's SOP been determined on the fair value of the
grant dates for awards under the SOP consistent with the method of SFAS 123, the
Company's net income and income per share would have been as follows:
Years Ended December 31,
1995 1996 1997
Net income:
As reported $ 917 $1,251 $1,930
Pro forma 914 1,245 1,921
Basic income per share:
As reported .45 .57 .87
Pro forma .45 .57 .87
Diluted income per share:
As reported .43 .54 .81
Pro forma .43 .54 .80
Defined Contribution Retirement Plans
The Company has a deferred profit-sharing plan (''Plan'') which covers all of
its employees who are members of its collective bargaining units. Contributions
to the Plan are required in years in which the Company has income from
''railroad operations'' as defined in the Plan. Contributions are to be equal to
at least 10% but not more than 15% of the greater of income before income taxes
or income from railroad operations subject to a maximum contribution of $3.5 per
eligible employee. Contributions to the Plan may be made in cash or in shares of
the Company's common stock. Contributions accrued under this Plan amounted to
$167 in 1995, $226 in 1996 and $337 in 1997. The Company made its 1995 and 1996
contributions and intends to make its 1997 contribution in newly issued shares
of its common stock.
The Company also has a Simplified Employee Pension Plan (''SEPP'') which
covers substantially all employees who are not members of one of its collective
bargaining units. Contributions to the SEPP are discretionary and are determined
annually as a percentage of each covered employee's compensation. Contributions
accrued under the SEPP amounted to $159 in 1995, $189 in 1996 and $196 in 1997.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (''ESPP'') under which
eligible employees may purchase registered shares of common stock at 85% of the
market price for such shares. An aggregate of 200,000 shares of common stock are
authorized for issuance under the ESPP. Any shares purchased under the ESPP are
subject to a two year lock-up. As of December 31, 1997, 2,846 shares have been
purchased under the ESPP.
10. Preferred Stock
Each share of the Company's $50 par value preferred stock is convertible into
100 shares of common stock at the option of the shareholder. The noncumulative
annual stock dividend is fixed by the Company's Charter at the raate of $5.00
per share, out of funds legally available for the payment of dividends.
The holders of preferred stock are entitled to one vote for each share in the
election of two-thirds of the Board of Directors. The holders of preferred stock
and holders of common stock are entitled to one vote per share, voting in
separate classes, upon matters voted on by shareholders.
* * * * * * *
Item 9. Disagreements on Accounting and Financial Disclosure
None.
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 tthe Board of
Directors and the holders of Preferred Stock elect the remainder of the Board.
Directors are elected to serve until the next annual meeting and until their
successors have been duly elected by the shareholders. There are currently three
directors elected by the holders of the Common Stock and seven directors elected
by the holders of the Preferred Stock. Officers are elected by and serve
at the discretion of the Board of Directors.
Directors and Executive Officers
The current directors and executive officers, their ages and their positions
held with the Company are as follows:
Name Age Position
Robert H. Eder(a) 65 Chairman of the Board and Chief Executive Officer
Orville R. Harrold(b) 65 President, Chief Operating Officer and Director
Robert J. Easton(b) 54 Treasurer and Director
Heidi J. Eddins 41 Vice President, Secretary and General Counsel
Frank W. Barrett(b) 57 Director
Phillip D. Brown(b) 54 Director
John H. Cronin(b) 64 Director
J. Joseph Garrahy(b) 67 Director
John J. Healy(b) 61 Director
William J. LeDoux(a) 66 Director
Charles M. McCollam, Jr.(a) 65 Director
(a) Elected by holders of Common Stock.
(b) Elected by holders of Preferred Stock.
The following is a brief summary of the background of each director 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, a real estate holding company. Mr. Eder is admitted to practice law
in Rhode Island and New York.
Orville R. Harrold, President, Chief Operating Officer and Director. Mr.
Harrold has been with the Company since the commencement of independent
operations in February 1973. Over the past 25 years, he has held the positions
of Chief Engineer and General Manager, becoming President in 1980. Mr. Harrold
has a bachelors degree in mechanical engineering from the Pratt Institute,
Brooklyn, New York and has been employed in the railroad industry in various
capacities since 1960.
Heidi J. Eddins, Vice President, Secretary and General Counsel. Mrs. Eddins
joined the Company in 1983 as Assistant General Counsel, becoming General
Counsel and Assistant Secretary in 1984, Secretary in 1988 and Vice President in
1997. Prior to joining the Company, she was in private practice at the law firm
of Updike, Kelly and Spellacy in Hartford, Connecticut. She is a 1981 graduate
of the University of Connecticut Law School and holds a bachelors degree from
Boston College. Mrs. Eddins is admitted to practice law in Connecticut,
Massachusetts and Rhode Island.
Robert J. Easton, Treasurer and Director. Mr. Easton has been with the Company
since 1986, initially as Controller. He was promoted to the position of
Treasurer and Controller in 1988. Prior to joining the Company, Mr. Easton had
21 years of experience in public accounting. He is a Certified Public Accountant
with a bachelors degree in accounting from the University of Rochester.
Frank W. Barrett, Director. Mr. Barrett has been a Director of the Company
since 1995. He has been Executive Vice President at Springfield Institution for
Savings since December 1993. From 1990 until that time, Mr. Barrett was the
Senior Vice President, Credit Administration, of First New Hampshire Bank.
Phillip D. Brown, Director. Mr. Brown has been a Director of the Company
since 1995. He has been President and Chief Executive Officer of Unibank for
Savings, a regional bank in central Massachusetts since August 1993. From 1990
until that time, Mr.Brown was the President of Citizens Bank of Massachusetts.
John H. Cronin, Director. Mr. Cronin has been a Director of the Company since
1986. Since 1971 until his retirement in 1996, Mr. Cronin was owner and
President of Ideal Products, Inc., a wholesale entertainment supply company.
J. Joseph Garrahy, Director. Mr. Garrahy has been a Director of the Company
since 1992. He is a former four term Governor of Rhode Island and, since 1990,
has been an independent business consultant in the State of Rhode Island.
John J. Healy, Director. Mr. Healy has been a Director of the Company since
1991. He has been President of Worcester Affiliated Mfg. L.L.C., an independent
business consulting firm involved in efforts to revitalize manufacturing in
Massachusetts, since January 1997. Prior thereto, Mr. Healy was President and
Chief Executive Officer of HMA Behavioral Health, Inc., a behavioral health care
management service provider.
William J. LeDoux, Director. Mr. LeDoux has been a Director of the Company
since 1990. He has been engaged in the private practice of law in the City of
Worcester since 1963.
Charles M. McCollam, Jr., Director. Mr. McCollam has been a Director of the
Company since 1996. He owns and operates a number of insurance businesses in the
State of Connecticut and was the Chief of Staff to a former governor of
Connecticut.
Board Committees
The Board of Directors has established an Executive Committee, an Audit
Committee and a Stock Option and Compensation Committee.
Messrs. Eder, Harrold and Easton serve as members of the Executive Committee.
The members of the Audit Committee are John H. Cronin, Chairman, J. Joseph
Garrahy and Philip D. Brown. William J. LeDoux, Chairman, John J. Healy and
Frank W. Barrett serve as members of the Stock Option and Compensation
Committee.
Director Compensation
Each director who is not an employee of the Company receives an attendance fee
for each meeting of the Board equal to $500 plus the product of $50 multiplied
by the number of years of service as a director. Each member of the Audit
Committee and the Stock Option and Compensation Committee receives $300 for each
attended meeting of the committee and the Chairman of each committee receives an
additional $50 attendance fee.
During the month of January of each year, each non-employee director who
served on the Board on the preceding December 31 is granted options for the
purchase of 100 shares of Common Stock, plus options for an additional 10 shares
of Common Stock for each full year of service. The exercise price for such
options is the last sale price of the Common Stock on the last business day of
the preceding year, and the term of each option is 10 years (subject to earlier
termination if the grantee ceases to serve as a director), provided however that
no option is exercisable within six months following the date of grant.
Item 11. Executive Compensation
The following table sets forth the compensation paid or accrued to each person
who served as the Company's chief executive officer and each of the other four
most highly compensated executive officers of the Company (together, the
''Named Executive Officers'') during the three year period ended December 31,
1997.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Securities All Other
Underlying Compensation(b)
Options
Other Annual to Purchase
Name and Principal Year Salary(a) Compensation Common Stock
position
Robert H. Eder 1997 $288,530 0 0 $47,453
Chairman of the Board 1996 289,216 0 0 47,617
And Chief Executive 1995 272,513 0 0 48,117
Officer
Orville R. Harrold 1997 234,588 0 913 42,526
President and Chief 1996 231,787 0 932 40,508
Operating Officer 1995 222,421 0 888 40,510
Ronald P. Chrzanowski 1997 133,241 $28,193(d) 451 12,000
Chief Engineer until 1996 129,059 0 451 9,066
12/31/97 (Vice 1995 123,003 0 448 7,396
President and Director
until 11/13/97)(c)
Heidi J. Eddins 1997 138,920 0 311 10,702
Vice President, 1996 133,997 0 313 9,381
Secretary and General 1995 127,444 0 301 7,713
Council
Robert J. Easton 1997 123,232 0 210 9,353
Treasurer 1996 120,191 0 210 8,430
1995 113,706 0 203 6,880
(a) Includes amounts taxable to employees for personal use of Company-owned
vehicles.
(b) Includes amounts paid directly to the retirement account of management
staff under the Company's simplified employee pension plan, and, in the
case of Robert H. Eder and Orville R. Harrold, includes for 1997 premiums
paid for life insurance coverage in the amounts of $35,453 and $30,526,
respectively.
(c) Mr. Chrzanowski left the Company to join its former parent company,
Capital Properties Inc., as President and a Director.
(d) Includes value of a vehicle transferred to Mr. Chrzanowski ($18,193)
and $10,000 paid to him to cover additional income taxes attributable to
the transfer of the vehicle.
Option Grants in Last Fiscal Year
In July 1989, the shareholders adopted the Company's Non- Qualified Stock
Option Plan (the ''Stock Option Plan'') that provides for the granting to
employees, officers and directors (excluding Mr. Eder) of options to purchase up
to the greater of 50,000 shares or 5% of the number of shares of Common Stock
outstanding (which equated to 111,097 shares at December 31, 1997). To date,
options to purchase 77,398 shares of the Common Stock have been granted under
the Stock Option Plan.
The following table contains information concerning the grant of stock options
under the Stock Option Plan to the Named Executive Officers during the Company's
last fiscal year.
Number of
Securities % of Total
Underlying Options
Options Granted
Granted(a) to Employees Exercise Expiration Grant Date
Name In Fiscal 1997 Price Date Present Value(b)
Orville R. Harrold 913 11% $7.87 01/02/07 $ 2,702
Ronald P. Chrzanowski 451 5 7.87 01/02/07 1,335
Heidi J. Eddins 311 4 7.87 01/02/07 921
Robert J. Easton 210 3 7.87 01/02/07 622
(b) Amounts represent the fair value of each option granted and were estimated
as of the date of the grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: expected volatility of 29%; expected
life of 7 years; risk-free interest rate of 5.75%; and expected dividend payment
rate, as a percentage of the share price on the date of grant, of 1.26%.
Option Exercises And Fiscal Year End Values
The following table contains information with respect to stock options held by
the Named Executive Officers as of December 31, 1997.
Aggregated Option/SAR Exercises In Last Fiscal Year And Fiscal
Year End Option Values
Number of Value of
Unexercised Unexercised
Options at In-the-Money at
December 31, 1997 December 31, 1997(b)
Shares Exercisable/ Exercisable/
Acquired on Value Unexercisable Unexercisable
Name Exercise Realized(a)
Orville R. Harrold 1,214 $ 5,494 1,567/0 $14,808/0
Ronald P. Chrzanowski 451 2,594 417/0 4,118/0
Heidi J. Eddins 632 3,770 784/0 8,147/0
Robert J. Easton 210 1,469 830/0 8,876/0
(a) Based on the last sale price of the Common Stock on the date of exercise
minus the exercise price.
(b) Based on the difference between the exercise price of each grant and the
closing price of the Company's Common Stock on the AMEX on December 31, 1997,
which was $183/8.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of February 9, 1998, by each person who is
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, each of the Company's executives officers and director; and all
directors and executive officers of the Company as a group:
Shares Owned
Name Number Percentage
Robert H. Eder(a) 1,046,492 46.0%
Orville R. Harrold(b) 22,710 *
Robert J. Easton(c) 2,111 *
Heidi J. Eddins(d) 3,927 *
Frank W. Barrett(e) 610 *
Phillip D. Brown(f) 210 *
John H. Cronin 1,430 *
J. Joseph Garrahy 1,000 *
John J. Healy(g) 840 *
William J. LeDoux(h) 1,480 *
Charles M. McCollam, Jr. 500 *
Massachusetts Capital Resource Company(i) 200,000 8.3%
Bestfoods 108,155 4.9%
All executive officers and directors
as a group (11 people)(j) 1,081,310 47.5%
[FN]
* Less than one percent
(a) Mr. Eder's business address is 75 Hammond Street,
Worcester, Massachusetts 01610. Includes 74,580 shares of
Common Stock owned by Mr. Eder's wife and assumes the
conversion of the 500 shares of Preferred Stock owned by Mr. Eder.
(b) Includes (i) 1,700 shares of Common Stock held by Mr.
Harrold's wife, (ii) 2,600 shares of Common Stock held by a
custodian in an individual retirement account for the benefit
of Mr. Harrold and (iii) 1,467 shares of Common Stock under
stock options exercisable within 60 days.
(c) Includes 118 shares of Common Stock held by Mr. Easton's
wife in her name and 830 shares of Common Stock issuable under
stock options exercisable within 60 days.
(d) Includes 900 shares of Common Stock held by Ms. Eddins'
minor children under the Uniform Gift to Minors Act and 784
shares of Common Stock issuable under stock options
exercisable within 60 days.
(e) Includes 110 shares of Common Stock issuable under stock
options exercisable within 60 days.
(f) Includes 110 shares of Common Stock issuable under stock
options exercisable within 60 days.
(g) Includes 540 shares of Common Stock issuable under stock
options exercisable within 60 days.
(h) Includes 880 shares of Common Stock issuable under stock
options exercisable within 60 days.
(i) MCRC's address is 420 Boylston Street, Boston,
Massachusetts 02116. Includes the 200,000 shares of Common
Stock issuable upon the exercise of the MCRC Warrant. See
''Use of Proceeds'' and ''Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity
and Capital Resources.''
(j) Includes 50,000 shares of Common Stock issuable upon
conversion of Preferred Stock and 4,721 shares of Common Stock
issuable under stock options exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
On January 1, 1988, in accordance with a plan of distribution,
shares of the Company were distributed to the shareholders of
Capital Properties, Inc., ("Capital Properties") on a pro rata
basis. Mr. Eder and his wife own 52.3% of the outstanding common
stock of Capital Properties. As part of the plan, the Company
issued to Capital Properties a promissory note in the amount of
$9,377,000 payable over a period of 20 years with interest at 12%
per year, prepayable at any time without penalty. The Capital
Properties note is secured by a first mortgage on the Company's
operating right-of-way in Worcester County, Massachusetts. During
1995, the Company and Capital Properties negotiated an agreement
reducing the interest rate to 10% and providing for the Company's
prepayment of $1,800,000 on its note. Payments by the Company
together with the interest rate adjustment result in a current
monthly payment of principal and interest over the remaining
twelve-year term of the note in the amount of $53,000. Fifty
percent (50%) of any additional prepayments will reduce the
required monthly payments. Prior to negotiating the agreement,
the Company made additional voluntary prepayments totaling
$300,000, $55,000 and $200,000 during 1994, 1995 and 1996, respectively.
In 1995, the Company also entered into an agreement with
Capital Properties releasing a portion of the collateral securing
the note in exchange for the right to have the Company convey the
Wilkesbarre Pier in East Providence, Rhode Island for the sum of
one dollar to the purchaser of Capital Properties' petroleum
terminal facilities in East Providence, Rhode Island. Effective
January 1, 1998, a wholly-owned subsidiary of Capital Properties
which acquired the petroleum terminal facilities, exercised the
purchase right and acquired the Wilkesbarre Pier. The Company
retained the right to use the pier for certain purposes.
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-10 of this annual report
(2) Financial Statement schedules:
Independent auditors' report Page IV-3
Schedule II Valuation and qualifying accountsPage IV-4
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
statement of the Registrant on Form S-1).
(23) Independent Auditors' Consent
(b) Not applicable.
(c) Exhibits (annexed).
Financial Statement Schedules. See item (a) (2.) above
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 9, 1998
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 March 9, 1998
Robert H. Eder Officer And Chairman
(Principal Executive Officer)
/s/ Orville R. Harrold President and Director March 9, 1998
Orville R. Harrold (Chief Operating Officer)
/s/ Robert J. Easton Treasurer and Director March 9, 1998
Robert J. Easton (Principal financial
officer and principal
accounting officer)
/s/ Phillip D. Brown Director March 9, 1998
Phillip D. Brown
/s/ John H. Cronin Director March 9, 1998
John H. Cronin
/s/ J. Joseph Garrahy Director March 9, 1998
J. Joseph Garrahy
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Providence and Worcester Railroad Company:
We have audited the financial statements of Providence and
Worcester Railroad Company as of December 31, 1996 and 1997, and
for each of the three years in the period ended December 31,
1997, and have issued our report thereon dated January 30, 1998.
Our audits also included the financial statement schedule of
Providence and Worcester Railroad Company, listed in Item 16(b)
of this Registration Statement. This financial statement schedule
is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
Worcester, Massachusetts
January 30, 1998
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSAND DOLLARS)
Column Column Column Column
Column A B C D E
Additions
(1) (2) balance
Balance Charged Charged at end
at to costs to other of
Description begining and accounts period
of period expenses describe(B) Deductions(A)
Allowance for doubtful
accounts:
Year ended December 31,
1995 $125 $125
Year ended December 31,
1996 $125 $7 $(7) $125
Year ended December 31,
1997 $125 $43 $(43) $125
(A) Bad debts written off.
(B) Recovery of bad debts previously written off.
INDEPENDANT AUDITORS' CONSENT
We consent to the incorportation by reference in Registration Statement
Nos 33-26944, 333-02975 and 333-21617 of Providence and Worcester Railroad
Company on Forms s-8 of our reports dated January 30, 1998, appearing
in this Annual Report on Form 10-K of Providence and Worcester Railroad
Company for the year ended December 31, 1997.
/s/ Delotte & Touche LLP
Delotte & Touche
Worcester, Massachusetts
March 9, 1998