Item 1. Business - ----------------
Providence and Worcester Railroad Company ("P&W") is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The Company is the only interstate freight carrier serving the State of Rhode Island and possesses the exclusive and perpetual right to conduct freight operations over the Northeast Corridor between New Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing independent operations in 1973, the Company, through a series of acquisitions of connecting lines, has grown from 45 miles of track to its current system of approximately 545 miles. P&W operates the largest double stack intermodal terminal facilities in New England in Worcester, Massachusetts, a strategic location for regional transportation and distribution enterprises.
The Company transports a wide variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, 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-Mobil Corporation, Frito-Lay, Inc., General Dynamics Corporation, Getty Petroleum Marketing Inc., International Paper Company, R.R. Donnelly & Sons and Tilcon Connecticut, Inc. In 2000, P&W transported approximately 30,000 carloads of freight and 72,000 intermodal containers. The Company also generates income through sales of properties, grants of easements and licenses and leases of land and tracks.
P&W's connections to multiple Class I railroads, either directly or through connections with regional and short-line carriers, provide the Company with a competitive advantage by allowing it to offer creative pricing and routing alternatives to its customers. In addition, the Company's commitment to maintaining its track and equipment to high standards enables P&W to provide fast, reliable and efficient service.
Industry Overview
General
Railroads are divided into three classes based on operating revenues: Class I, $258.5 million or more; Class II, $20.7 million to $258.5 million; and Class III, less than $20.7 million. As a result of mergers and consolidations, there are now only seven 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 nearly 30% of all rail track, employ 12% 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 rail to and from an intermodal terminal and then either delivered to their final destinations by truck or transferred to ship for export. Over the past decade, commodity shippers have increasingly turned to intermodal transportation principally as an alternative to long-haul trucking. The development of new intermodal technology, which allows containers to be moved by rail double stacked (i.e., stacked one on top of the other) in specially designed railcars, together with increasing highway traffic congestion and the shortage of long-haul truck drivers have contributed to this trend.
Break Up of Conrail
Pursuant to the approval of the United States Surface Transportation Board ("STB"), CSX Corporation ("CSX") and Norfolk Southern Railroad ("Norfolk Southern") jointly acquired Consolidated Rail Corporation ("Conrail") and split its assets between them on June 1, 1999. CSX acquired and now operates Conrail's New England facilities.
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The acquisition of Conrail and the division of its assets between CSX and Norfolk Southern resulted in service related delays and the temporary diversion of some conventional carloads of freight to trucks during the third and fourth quarters of 1999. Service, however, did improve during the fourth quarter of 1999 and largely returned to normal during 2000. Service issues notwithstanding, the Company believes that the acquisition of Conrail should create business opportunities as a result of longer Class I single line service on competitive routes, particularly between the Southeast and New England.
The New York City and Long Island metropolitan area is one of the country's largest markets for the consumption of products and freight transportation services. In August 1997, the Company entered into an agreement with CSX that enables the Company to market rail service between its system and New York City. Moreover, in rendering its decision authorizing CSX's and Norfolk Southern's acquisition of Conrail, the STB required CSX to discuss with the Company the possibility of additional rail service between New Haven, CT and Fresh Pond Junction (Queens), NY as a step to provide competitive rail service to and from New York City. Although the STB has declined to compel formal discussions between CSX and the Company, it continues to encourage the Company and CSX to develop mutually beneficial business on this route. The Company intends to aggressively pursue such opportunities.
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 the redevelopment of a 1,000 acre portion of the former Naval facility at Quonset/Davisville to a more active port and industrial park. This facility already houses a number of rail oriented industries and an auto port. Construction of a freight rail improvement project to provide additional track capacity and double stack clearance on the Northeast Corridor between Quonset/Davisville and the connection of the Corridor to the Company's main line at Central Falls, R.I is expected to commence in 2002 at a cost in excess of $120 million.
Massachusetts Highway Improvement Program
Work has begun on a significant expansion of the Company's bulk transload and intermodal yards in Worcester in conjunction with the Massachusetts Highway Department's $250 million project creating a direct Worcester connection to the Massachusetts Turnpike. This project will result in a near doubling of the Company's transload facilities over the next year.
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 2002, will provide the Company with increased access to customers at the Port of New Haven.
Middletown/Hartford Line
In cooperation with the state of Connecticut, the Company is engaged in the restoration of the rail line extending from Middletown to Hartford, Connecticut. In April 2000, the state of Connecticut appropriated $1.85 million to fund their portion of the project (approx 70%). This 11 mile segment should be ready for service by the summer of 2001. With a planned industrial park along this line and a new connection to other carriers in Hartford, the Company believes restoration of this line will present opportunities for revenue growth.
Railroad Operations
The Company's rail freight system extends over approximately 545 miles of track. The Company interchanges freight traffic with CSX at Worcester, Massachusetts and at New Haven, Connecticut; with the Springfield Terminal
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Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts; with the New England Central Railroad (formerly Central Vermont Railway) at New London, Connecticut; and with the New York and Atlantic Railroad (formerly Long Island Railroad) at Fresh Pond Junction on Long Island. Through its connections, P&W links more than 80 communities on its lines. It operates four classification yards (areas containing tracks used to group freight cars destined for a particular industry or interchange), located in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield and New Haven, Connecticut.
By agreement with a private operator, the Company operates two approved customs intermodal yards in Worcester. A customs intermodal yard is an area containing tracks used for the loading and unloading of containers. These yards are U.S. Customs bonded, and international traffic must be inspected and approved by U.S. Customs officials. The intermodal facility serves primarily as a terminal for movement of container traffic from the Far East destined for points in New England. Several major container ship lines utilize double stack train service through this terminal. P&W works closely with the terminal operator to develop and maintain strong relationships with steamship lines involved in international intermodal transportation.
Customers
The Company serves approximately 160 customers in Massachusetts, Rhode Island, Connecticut and New York. The Company's 10 largest customers account for roughly half of its operating revenues. In 2000, 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 12.6% of the Company's operating revenues. No other customer accounted for 10% or more of its total operating revenues in 2000.
Markets
The Company transports a wide variety of commodities for its customers. In 2000, chemicals and plastics and construction aggregate were the two largest commodity groups transported by the Company, constituting 38% and 17%, 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:
Sales and Marketing
P&W's sales and marketing staff of four people has nearly 50 years of combined experience in pricing and marketing railroad services. The sales and marketing staff focuses on understanding and addressing the raw material requirements and transportation needs of its existing customers and businesses on its lines. The staff grows existing business by maintaining close working relationships with both customers and connecting carriers. The sales and marketing staff strives to generate new business for the Company through (i) targeting companies already on P&W's rail lines but not currently using rail services, (ii) working with state and local development officials, developers and real estate brokers to encourage the development of industry on the Company's rail lines and (iii) identifying and targeting the non-rail transportation of goods into and out of the region in which the Company operates. Unlike many other regional and short-line railroads, the Company is able to offer its customers creative pricing and routing alternatives because of its multiple connections to other carriers.
Safety
An important component of the Company's operating strategy is conducting safe railroad operations for the benefit and protection of employees, customers and the communities served by its rail lines. Since commencing active operations in 1973, the Company has committed significant resources to track maintenance to minimize the risk of derailments and believes its rail system is in good condition.
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Safety of the Company's operations is of paramount importance for the benefit and protection of the Company's employees, customers and the communities served by its rail lines. The Company and its employees have made dramatic improvements in preventing injuries while at the same time increasing operations and expanding the work force.
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, 2001, the Company had 154 full-time employees, 116 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 July 1, 2004 for the United Transportation Union (trainmen), July 1, 2006 for the Brotherhood of Railroad Signalmen (maintenance) and December 31, 2005 for the Transportation Communications Union (clerical). The Company considers its employee and labor relations to be good.
Competition
The Company is the only rail carrier serving businesses located on- line. However, the Company competes with other carriers in the location of new rail-oriented businesses in the region. The Company also competes with other modes of transportation, particularly long-haul trucking companies, for the transportation of commodities. Any improvement in the cost or quality of these alternate modes of transportation, for example, legislation granting material increases in truck size or allowable weight, could increase competition and may materially adversely affect the Company's business and results of operations. As a means of competing, P&W strives to offer greater convenience and better service than competing carriers and at costs lower than some competing non-rail carriers. The Company also competes by participating in efforts to attract new industry to the areas which it serves.
Certain rail competitors, including CSX and Norfolk Southern, are larger or better capitalized than the Company. While P&W believes the acquisition and division of Conrail will lead to expansion opportunities, the Conrail transaction may lead to increased competition with other freight railroads, particularly in Massachusetts, and efforts by CSX and Norfolk Southern to reduce revenue to connecting regional and short-line carriers.
The Company believes that its ability to grow depends, in part, upon its ability to acquire additional connecting rail lines. In making acquisitions, P&W competes with other short-line and regional rail operators, some of which are larger and have greater financial resources than the Company.
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Governmental Regulation
The Company is subject to governmental regulation by the United States Surface Transportation Board ("the STB"), the Federal Railroad Administration ("the FRA") and other federal, state and local regulatory authorities with respect to certain rates and railroad operations, as well as a variety of health, safety, labor, environmental and other matters, all of which could potentially affect the competitive position and profitability of the Company. Additionally, the Company is subject to STB regulation and may be required to obtain STB approval prior to its acquisition of any new railroad properties. Management of the Company believes that the regulatory freedoms granted by the Staggers Rail Act have been beneficial to the Company by giving it flexibility to adjust prices and operations to respond to market forces and industry changes. However, various interests, and certain members of the United States House of Representatives and Senate (which have jurisdiction over federal regulation of railroads), have from time to time expressed their intention to support legislation that would eliminate or reduce significant freedoms granted by the Staggers Rail Act.
Environmental Matters
The Company's railroad operations and real estate ownership are subject to extensive federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company handles, stores, transports and disposes of petroleum and other hazardous substances and wastes. The Company also transports hazardous substances for third parties and arranges for the disposal of hazardous wastes generated by the Company. The Company believes that it is in material compliance with applicable environmental laws and regulations.
Item 2.
Item 2. Properties - ------------------
Track
P&W's rail system extends over approximately 545 miles of track, of which it owns approximately 170 miles. The Company has the right to use the remaining 375 miles pursuant to perpetual easements and long- term trackage rights agreements. Under certain of these agreements, the Company pays fees based on usage.
Virtually all of the main lines on which the Company operates are in FRA class 3 condition (allowing 40 m.p.h. speeds) or better. The Company intends to maintain these lines in such excellent condition.
Of the approximately 545 miles of the Company's system, 313 miles, or 57%, are located in Connecticut, 103 miles, or 19%, are located in Massachusetts, 102 miles, or 19%, are located in Rhode Island and 28 miles, or 5%, are located in New York.
Rail Facilities
P&W owns land and a building with approximately 69,500 square feet of floor space in Worcester, Massachusetts. The building houses the Company's executive and administrative offices and some of the Company's storage space. Approximately 2,100 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. The Company has completed an expansion of its primary locomotive and rail car maintenance and repair facility in Worcester, MA. This approximately $1.8 million expansion has increased capacity and productivity and has enabled the Company to accept contract work for other railroads and customers. In addition, the Company has upgraded its Plainfield, CT equipment maintenance facility to include a modern paint shop. 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.
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The Company has invested nearly $12 million in the development of the South Quay, which is adjacent to 12 acres of land owned by the Company. This investment has resulted in the creation of approximately 33 acres of waterfront land.
P&W actively manages its real estate assets in order to maximize revenues. The income from property management is derived from sales and leasing of properties and tracks and grants of easements to government agencies, utility companies and other parties for the installation of overhead or underground cables, pipelines and transmission wires as well as recreational uses such as bike paths.
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as of December 31, 2000:
The 34 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 gondolas and flat cars are considered modern rail cars and are used by certain P&W customers. Other rail freight customers use their own freight cars or obtain such equipment from other sources. The ballast cars are used in track maintenance. From time to time, the Company has leased ballast cars to other adjoining railroads. The passenger equipment and caboose are not utilized in P&W's rail freight operations but are used on an occasional basis for Company functions, excursions and charter trips.
Equipment
P&W has a state-of-the-art digital touch control dispatching system at its Worcester operations center permitting two-way radio contact with every train crew and maintenance vehicle on its lines. The system also enables each train crew to maintain radio contact with other crew members. The Company maintains a computer facility in Worcester with back-up computer facilities in Worcester and Plainfield, Connecticut to assure the Company's ability to operate in the event of disruption of service in Worcester. The Company also has state-of-the-art automatic train defect detectors at strategic locations which inspect passing trains and audibly communicate the results to train crews and dispatchers in order to protect against equipment failure en route.
The Company maintains a modern fleet of track maintenance equipment and aggressively pursues available opportunities to work with federal and state agencies for the rehabilitation of bridges, grade crossings and track. The Company's locomotives are equipped with the cab signal technology necessary for operations on the Northeast Corridor and are equipped with automatic civil speed enforcement systems which were required by the introduction of high speed passenger service on the Northeast Corridor.
Item 3.
Item 3. Legal Proceedings - -------------------------
The Company is party to an arbitration proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases effective August 1999 with respect to the Company's freight operations over a portion of Amtrak's Northeast Corridor in the states of Rhode Island and Connecticut. The arbitration is in its early stages and as yet the Company has not received sufficient data from Amtrak to evaluate the merits of Amtrak's claim. Accordingly, the Company cannot predict the amount, if any, of such increase or the period to which it might apply.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
Not applicable.
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Part II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters - ----------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on the American Stock Exchange ("AMEX") under the trading symbol "PWX". The following table sets forth, for the periods indicated, the high and low sale prices per share for the Common Stock as reported on the AMEX. Also included are dividends paid per share of Preferred Stock and Common Stock during these quarterly periods.
As of March 2, 2001, there were approximately 739 holders of record of the Company's Common Stock.
The declaration of cash dividends on the Common Stock is made at the discretion of the Board of Directors based on the Company's earnings, financial condition, capital requirements and other relevant factors and restrictions.
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Item 6.
Item 6. Selected Financial Data - -------------------------------
The selected financial data set forth below has been derived from audited financial statements. The data should be read in conjunction with the Company's audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other information included elsewhere in this annual report on Form 10-K.
(a) The income per share amounts for 1998 are stated net of a loss of $.06 per share attributable to the extraordinary item.
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations -------------
The following discussion should be read in connection with the Company's audited financial statements and notes thereto included elsewhere in this annual report on Form 10-K.
This annual report on Form 10-K 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 & Signals, and Maintenance of Equipment Departments. Operating revenues also include amortization of deferred grant income.
The Company's operating expenses consist of salaries and wages and related payroll taxes and employee benefits, depreciation and amortization, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services and other expenses. Many of the Company's operating expenses are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company's management were to take specific actions to restructure the Company's operations.
When comparing the Company's results of operations from one year to another, the following factors should be taken into consideration. First, the Company has historically experienced fluctuations in operating revenues and expenses due to unpredictable events such as one-time freight moves and customer plant expansions and shut-downs. Second, the Company's freight volumes are susceptible to increases and decreases due to changes in international, national and regional economic conditions. Third, the volume of capitalized track or recollectable projects performed by the Company's Maintenance of Way and Communications & Signals Departments can vary significantly from year to year thereby impacting total operating expenses.
The Company also generates income through sales of properties, grants of easements and licenses, and leases of land and tracks. Income or loss from sale, condemnation and disposal of property and equipment and grants of easements is recorded at the time the transaction is consummated and collectibility is assured. This income varies significantly from year to year.
One of the Company's customers, Tilcon Connecticut, Inc., which ships construction aggregate from three separate quarries on the Company's system to asphalt production plants in Connecticut and New York, accounted for approximately 12.6%, 13.2%, and 13.4% of its operating revenues in 2000, 1999, and 1998, 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.
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Results of Operations - ---------------------
The following table sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues:
The following table sets forth conventional carload freight revenues by commodity group in dollars and as a percentage of such revenues:
The following table sets forth a comparison of the Company's operating expenses expressed in dollars and as a percentage of operating revenues:
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Year ended December 31, 2000 Compared to Year Ended December 31, 1999
Operating Revenues
Operating revenues increased $1.3 million, or 5.8%, to $23.1 million in 2000 from $21.9 million in 1999. This increase was comprised of a $410,000 (2.3%) increase in conventional freight revenue, a $611,000 (25.6%) increase in net container freight revenue and a $247,000 (16.7%) increase in non-freight operating revenues.
The increase in conventional freight revenues results from an increase in the average revenue received per conventional carloading of 2.8% partially offset by a small decrease in traffic volume. The Company's conventional freight carloadings decreased by 157, or .5%, to 29,776 in 2000 from 29,933 in 1999.
The decrease in conventional carloadings results primarily from a net decrease in carloadings for existing customers partially offset by traffic from new customers. The increase in the average revenue received per conventional carloading is principally due to moderate increases in certain freight rates.
The increase in net container freight revenue is the result of an increase in container traffic volume as well as a 4.9% increase in the average revenue received per container. Total intermodal containers handled increased by 11,818, or 19.7%, to 71,739 in 2000 from 59,921 in 1999. The increase in the average revenue per container is attributable to increased rates tied to certain railroad cost indices and to variations in the mix of containers handled. The increase in container traffic volume is attributable to increased volume from existing customers.
The increase in non-freight operating revenues for the year is the result of increased demurrage and other transportation related revenues partially offset by decreases in maintenance departmental billings. The increase in demurrage revenue is related to the increase in net car hire expense incurred during the year. Non-freight operating revenues can vary from year to year depending upon customer needs.
Operating Expenses
Operating expenses increased $841,000, or 4.0%, to $22.0 million in 2000 from $21.1 million in 1999. Operating expenses as a percentage of operating revenues ("operating ratio") decreased to 94.9% in 2000 from 96.6% in 1999. While operating expenses increased generally, across the board, the more significant increases were in the following areas:
o Diesel fuel increased by $482,000, or 60.4%, to $1.3 million in 2000 from $798,000 in 1999 as a result of sharply increased prices for petroleum products. o Depreciation and amortization expense increased $164,000, or 6.5%, to $2.7 million in 2000 from $2.5 million in 1999 as a result of significant recent additions to property and equipment. o Net car hire expense increased $406,000, or 74.3%, to $952,000 in 2000 from $546,000 in 1999. As previously discussed, this increase has been more than offset by increased demurrage revenue.
Other Income
Other income decreased to $2.0 million in 2000 from $4.0 million in 1999 primarily due to a decrease in gains from the sale, condemnation and disposal of property, equipment and easements (including fiber optics licenses). In addition 1999 included $947,000 of income related to the recovery of a portion of an environmental claim paid by the Company in prior years.
Year ended December 31, 1999 Compared to Year Ended December 31, 1998
Operating Revenues
Operating revenues decreased $867,000, or 3.8%, to $21.9 million in 1999 from $22.7 million in 1998. This decrease was comprised of a $1.0 million (5.4%) decrease in conventional freight revenue, and a $94,000 (6.0%) decrease in non-freight operating revenues partially offset by a $252,000 (11.8%) increase in net container freight revenues.
The decrease in conventional freight revenues is attributable to a decrease in traffic volume and to a decrease in the average revenue received per conventional car-loading of 3.7%. The Company's conventional freight carloadings decreased by 549, or 1.8%, to 29,933 in 1999 from 30,482 in 1998.
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On June 1, 1999 the rail lines and operations of Consolidated Rail Corporation ("Conrail"), with which the Company has historically interchanged the majority of its rail freight traffic, were split between CSX Corporation and Norfolk Southern Railroad. The Company estimates that delays and other service problems attributable to this split-up accounted for a traffic reduction of nearly 700 carloadings which were diverted to truck. The Company believes that most of this traffic will be returned to rail once the service problems related to the Conrail split-up have been overcome. While the situation has improved, service problems still remained as of the end of 1999. During 1999, two of the Company's rail-freight customers continued to phase out operations which utilized the Company's rail-freight services. Reduced traffic to these two customers accounted for a reduction of approximately 890 carloadings during the year. It is anticipated that these two customers will complete the phase-out of their rail-freight served operations over the next year or two.
The Company did experience increased rail-freight traffic from several new customers and from certain existing customers which partially offset the traffic declines discussed above. The reduction in the average revenue received per conventional carloading, between years, is largely attributable to a change in the mix of freight hauled toward lower revenue commodities. Management believes that the average freight received per carloading should increase in the future as freight, temporarily lost to Conrail split-up related service problems, returns to the railroads.
The increase in container freight revenue was primarily the result of increased container traffic volume. Total intermodal containers handled increased by 6,098, or 11.3%, to 59,921 containers in 1999 from 53,823 containers in 1998. The average revenue received per intermodal container increased by approximately .5% due to rate increases attributable to increases in certain railroad industry cost indices. The increase in container traffic volume results from both new customers and increased volume from existing customers.
The decrease in non-freight operating revenues is attributable to decreases in billings for demurrage, secondary switching and other transportation related services. Such revenues can vary from year to year depending upon traffic volumes and customer requirements.
Operating Expenses
Operating expenses increased $1.1 million, or 5.5%, to $21.1 million in 1999 from $20.0 million in 1998. The operating ratio increased to 96.6% in 1999 from 88.1% in 1998. While operating expenses have risen generally across the board, the most significant increase was in the area of salaries, wages, payroll taxes and employee benefits which increased $741,000, or 6.4%, to $12.3 million in 1999 from $11.6 million in 1998. This increase results from additional employees hired throughout 1998, increases in the average rates of pay due to semi- annual cost of living adjustments and pay rate increases mandated by union contracts and from higher costs of payroll taxes and employee health and welfare benefits. In addition the amount expended for diesel fuel increased by $140,000, or 21.3%, between years due to the increased cost of petroleum products, and depreciation and amortization expense increased by $292,000 or 13.1% as a result of recent additions to property and equipment and amortization of goodwill related to the 1998 acquisition of Connecticut Central Railroad Company.
Other Income
Other income decreased by $182,000, or 4.4% to $4.0 million in 1999 from $4.2 million in 1998. The principal items of income in this category for 1999 were $2.1 million derived from the sale of long-term fiber optics cable licenses and $947,000 related to the recovery of the portion of an environmental claim paid by the Company in prior years.
Interest Expense
The Company had no interest expense in 1999 compared with $495,000 of interest expense in 1998. This decrease resulted from the Company utilizing a portion of the net proceeds of its 1998 public stock offerings and other income to retire all of its long and short-term debt.
Liquidity and Capital Resources
The Company generated $3.9 million, $2.4 million and $2.3 million of cash from operations in 2000, 1999 and 1998, respectively. The Company's total cash and cash equivalents increased by $933,000 in 2000, decreased by $2.7 million in 1999, and increased by $6.8 million in 1998. The principal utilization of cash
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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 2000, 1999 and 1998 the Company generated $1.2 million, $2.4 million and $2.6 million, respectively, from the sales and disposals of properties not considered essential for railroad operations and from the granting of easements and licenses. Included in these amounts are $1.1 million in 2000 generated from the sale of permanent easements and $2.1 million in 1999 and $2.3 million in 1998 generated from sales of fiber optics cable licenses. In addition, the Company received $947,000 in 1999 and $1.0 million in 1998 from Bestfoods as payment of the Company's 10% recovery due from Bestfoods relating to Bestfoods' recovery from its insurance carrier for the portion of an environmental claim paid by the Company in previous years. The Company holds various properties which could be made available for sale, lease or grants of easements and licenses. Revenues from sales of properties, easements and licenses can vary significantly from year to year.
The Company completed secondary public offerings of 1,000,000 newly issued shares of its common stock in March 1998 and 750,000 shares in October 1998. Net proceeds from these offerings totaled $20.1 million. These funds were utilized to retire all of the Company's long and short-term borrowings, for acquisitions of equipment and to expand the Company's Worcester MA maintenance facility.
In June 1999, the Company's principal bank renewed the Company's $2.0 million revolving line of credit for a two year period through June 1, 2001. Borrowings under this line are unsecured and bear interest at either the prime rate or one and one half per cent over either the one or three month London Interbank Offered Rates. The Company does not pay any commitment fee on this line. The Company had no advances against the line of credit during 2000.
The Company entered into a contract in 1999 for the expansion of its equipment maintenance facilities in Worcester, Massachusetts in the amount of $1.8 million. This project was substantially completed in 1999 and was placed in service early in 2000.
Substantially all of the mainline track owned by the Company meets FRA Class 3 standards (permitting freight train speeds of 40 miles per hour), and the Company intends to continue to maintain this track at this level. The Company expended $3.0 million, $2.5 million and $3.0 million for track structure and bridge improvements in 2000, 1999 and 1998, respectively. Deferred grant income of $679,000 in 2000, $664,000 in 1999 and $144,000 in 1998 financed a portion of these improvements. Management estimates that approximately $2.5 million of improvements to the Company's track structure and bridges will be made in 2001, 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.
In 2000, the Company paid dividends in the amount of $5.00 per share, aggregating $3,000, on its outstanding noncumulative Preferred Stock and $0.16 per share, aggregating $693,000, on its outstanding Common Stock. Continued payment of such dividends is contingent upon the Company's continuing to have the necessary financial resources available.
The Company believes that expected cash flows from operating activities 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.
The Company is party to an arbitration proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases effective August 1999 with respect to the Company's freight operations over a portion of Amtrak's Northeast Corridor in the states of Rhode Island and Connecticut. The arbitration is in its early stages and as yet the Company has not received sufficient data from Amtrak to evaluate the merits of Amtrak's claim. Accordingly, the Company cannot predict the amount, if any, of such increase or the period to which it might apply.
Selected Quarterly Financial Data
Historically the Company has experienced lower operating revenues in the first quarter of the year. The following table sets forth selected financial data for each quarter of 2000 and 1999. The information for each of these quarters is unaudited but includes all normal recurring adjustments that the Company considers necessary for a fair presentation. These results, however are not necessarily indicative of results for any future period.
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Inflation
In recent years, inflation has not had a significant impact on the Company's operations.
Seasonality
Historically, the Company's operating revenues are lowest for the first quarter due to the absence of construction aggregate shipments during this period and to winter weather conditions.
Recent Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", subsequently amended in June 1999 and effective for fiscal years beginning after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company adopted this accounting standard, as required. The Company does not utilize instruments covered by this standard; accordingly, adoption has had no impact on financial position or results of operations.
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Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk - ------------------------------------------------------------------
Cash and Cash Equivalents
As of December 31, 2000, the Company is exposed to market risks which primarily include changes in U.S. interest rates.
The Company invests cash balances in excess of operating requirements in short-term securities, generally with maturities of 90 days or less. In addition, the Company's revolving line of credit agreement provides for borrowings which bear interest at variable rates based on either prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company had no borrowings outstanding pursuant to the revolving line of credit agreement at December 31, 2000. The Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial position, results of operations, and cash flows would not be material.
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Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
PROVIDENCE AND WORCESTER RAILROAD COMPANY
Page ---- Independent Auditors' Report ......................... II-11
Balance Sheets as of December 31, 2000 and 1999 ...... II-12
Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 ................................. II-13
Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 .................... II-14
Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 .................... II-15
Notes to Financial Statements ........................ II-16
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Providence and Worcester Railroad Company Worcester, Massachusetts
We have audited the accompanying balance sheets of Providence and Worcester Railroad Company as of December 31, 2000 and 1999, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Providence and Worcester Railroad Company as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts March 2, 2001
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PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (Dollars in Thousands Except Per Share Amounts)
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF INCOME (Dollars in Thousands Except Per Share Amounts)
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands Except Per Share Amounts)
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands)
The accompanying notes are an integral part of the financial statements.
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PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999, and 1998 (Dollars in Thousands Except Per Share Amounts)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business -----------------------
Providence and Worcester Railroad Company (the "Company") is an interstate freight carrier conducting railroad operations in Massachusetts, Rhode Island, Connecticut and New York. Through its connecting carriers, it services customers located throughout North America.
One customer accounted for approximately 12.6%, 13.2% and 13.4% of the Company's operating revenues in 2000, 1999 and 1998, respectively.
Cash and Equivalents --------------------
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents for purposes of classification in the balance sheets and statements of cash flows. Cash equivalents are stated at cost, which approximates fair market value.
Materials and Supplies ----------------------
Materials and supplies, which consist of items for the improvement and maintenance of track structure and equipment, are stated at cost, determined on a first-in, first-out basis, and are charged to expense or added to the cost of property and equipment when used.
Property and Equipment ----------------------
Property and equipment, including land held for development, is stated at historical cost (including self-construction costs). Acquired railroad property is recorded at the purchased cost. Major renewals or betterments are capitalized while routine maintenance and repairs, which do not improve or extend asset lives, are charged to expense when incurred. Gains or losses on sales or other dispositions are credited or charged to income. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows:
Track structure 20 to 67 years Buildings and other structures 33 to 45 years Equipment 4 to 25 years
The Company continually evaluates long-lived assets and certain identifiable intangibles held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of the assets in measuring whether the assets are recoverable.
Goodwill --------
Goodwill is being amortized on a straight-line basis over a period of three years.
Deferred Grant Income ---------------------
The Company has availed itself of various federal and state programs administered by the states of Connecticut, Massachusetts and Rhode Island for reimbursement of expenditures for capital improvements. In order to receive reimbursement, the Company must submit requests for the projects, including cost estimates. The Company receives from 70% to 100% of the costs of such projects, which have included bridges, track structure and public improvements. To the extent that such grant proceeds are used for capital improvements to bridges and track structure, they are recorded as
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deferred grant income and amortized into operating revenues on a straight-line basis over the estimated useful lives of the related improvements ($201 in 2000, $171 in 1999 and $161 in 1998).
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.
Gain or loss from sale, condemnation and disposal of property and equipment and easements is recorded at the time the transaction is consummated and collectibility is assured.
Income Taxes ------------
Deferred income taxes are recorded based on the differences between the financial statement and tax basis of assets and liabilities and tax credit carry forwards, using enacted rates in effect in the years in which the differences are expected to reverse.
Income per Common Share -----------------------
Basic income per common share is computed using the weighted average number of common shares outstanding during each year. Diluted income per common share reflects the effect of the Company's outstanding convertible preferred stock, options and warrants (using the treasury stock method), except where such items would be antidilutive.
A reconciliation of weighted average shares used for the basic computation and that used for the diluted computation is as follows:
Options and warrants to purchase 204,563, 188,952 and 182,960 shares of common stock were outstanding during 2000, 1999 and 1998, respectively, but were not included in the computation of diluted earnings per common share because their effect would be antidilutive.
Employee Stock Option Plan --------------------------
The Company accounts for stock-based awards to employees using the intrinsic value method.
Use of Estimates ----------------
The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
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expenses during the reporting period. Actual results may differ from those estimates. The Company's principal estimates include the allowance for doubtful accounts, useful lives of properties, goodwill, accrued liabilities including health insurance claims and legal and other contingencies, and income taxes.
Comprehensive Income --------------------
Comprehensive Income equals net income for 2000, 1999 and 1998.
Segment Reporting -----------------
The Company organizes itself as one segment reporting to the chief operating decision maker. Products and services consist primarily of interstate freight rail services. These include the movement of freight in both conventional freight cars and in intermodal containers on flat cars over the Company's rail lines, as well as non-freight transportation services such as switching, weighing and special trains and other services rendered to freight customers and other outside parties by the Company's Maintenance of Way, Communications & Signals and Maintenance of Equipment Departments.
Recently Issued Financial Accounting Standards ----------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", subsequently amended in June 1999 and effective for fiscal years beginning after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company has adopted this accounting standard, as required. The Company does not utilize instruments covered by this standard; accordingly, adoption has had no impact on financial position or 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 consists of the following:
3. Land Held for Development
Pursuant to permits issued by the United States Department of the Army Corp of Engineers ("ACE") and the Rhode Island Coastal Resources Management Council ("CRMC"), the Company has created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay") designed to capitalize on the growth of intermodal transportation utilizing rail, water and highway connections. The property has good highway access (1/2 mile from I-195) and direct rail access and is adjacent to a 12 acre site also owned by the Company.
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The permits for the property allow for construction of a dock along the west face of the South Quay. The ACE permit has been extended to December 31, 2003 and the CRMC permit has been extended to May 11, 2009.
In April 1999, the Rhode Island Supreme Court issued an Opinion confirming the Company's fee simple absolute title to the South Quay. In January 2000, the Rhode Island Superior Court confirmed the Company's fee simple absolute title to the 12 acre parcel adjacent to the South Quay. Also in 1999, the Rhode Island Department of Transportation entered into a contract for engineering services to undertake roadway improvements to provide direct vehicular access from the interstate highway system to the South Quay. The project is anticipated to be complete by 2002.
Cushman & Wakefield, a real estate services company engaged by the Company in 1999 to provide real estate advisory and marketing services for the South Quay and the adjacent 12 acre parcel, has developed an analysis of the "highest and best use" of the property and a marketing strategy, and has provided brokerage services for the property. The combined 45 acre site enjoys excellent visibility and is located approximately 2 miles from downtown Providence, Rhode Island. Potential uses identified include development of a private port facility, manufacturing use with direct multi-modal access (truck, port and rail), and other commercial, industrial or residential development. The Company intends to explore all development opportunities for the South Quay including both rail and non-rail related uses and believes its costs will be fully recovered from such future developments, including the lease or sale 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 is considering a proposal to develop the site to provide freight service for the transport of automobiles along the Company's Main Line to and from East Providence, pending the development of the Quonset Point-Davisville Industrial Park. In addition, the Company is considering development options consistent with the plans of the City of East Providence, including a corporate office park.
If able to attract user or investment commitments, the Company intends to construct a vessel unloading area. The Company has engaged in discussions with potential users interested in utilizing the property for offloading bulk products such as salt and construction aggregate. The Company has also explored the development of the facility for offloading container vessels and barges. The Company will need additional terminal capacity to achieve expected growth in its intermodal container business and may use a portion of the property as an intermodal terminal facility to provide it with such capacity. This development will not proceed, however, until the Company completes overhead clearances which are anticipated to be completed during 2001.
4. Notes Payable, Bank and Long-Term Debt
The Company has a revolving line of credit with its principal bank in the amount of $2,000 expiring June 1, 2001. Borrowings outstanding under this line of credit are unsecured, due on demand and bear interest at either the bank's prime rate or one and one half percent over either the one or three month London Interbank Offered Rates. The Company pays no commitment fee on this line. There were no loans outstanding under the line at any time during 2000 or 1999.
In 1998 the Company utilized a substantial portion of the proceeds from its common stock offerings and other income to pre-pay all of its outstanding long-term debt. Prepayment penalties of $344 were incurred on early extinguishments of a significant portion of this debt which penalties, net of a $125 income tax benefit, have been reported as an extraordinary item on the accompanying statement of income for 1998.
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5. Other Income
Gains from sale, condemnation and disposal of property and equipment and easements for 2000 includes $1,132 received from the sale of permanent easements and for 1999 and 1998 includes $2,127 and $2,293 received from the sale of long-term fiber optics cable licenses, respectively.
6. Income Taxes
The provision for income taxes consists of the following:
The 1998 provision for income taxes is net of a $125 current income tax benefit related to the extraordinary loss from early extinguishment of debt.
The following summarizes the estimated tax effect of temporary differences that are included in the net deferred income tax provision:
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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, 2000 and 1999 are as follows:
A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:
7. Commitments and Contingencies
The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits.
The Company is party to an arbitration proceeding with the National Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases effective August 1999 with respect to the Company's freight operations over a portion of Amtrak's Northeast Corridor in the states of Rhode Island and Connecticut. The arbitration is in its early stages and as yet the Company has not received sufficient data from Amtrak to evaluate the merits of Amtrak's claim. Accordingly, the Company cannot predict the amount, if any, of such increase or the period to which it might apply.
In 1995 the Company entered into a settlement agreement with Bestfoods (formerly CPC International, Inc.) resolving an environmental claim against the Company, arising out of a 1974 rail car incident. Pursuant to the settlement agreement, the Company paid Bestfoods $990 in common stock of the Company and cash. The Company and Bestfoods agreed that in the event Bestfoods recovered proceeds from its insurance carrier for the costs of remediation of the involved site, the Company would be entitled to 10% of Bestfoods' net recovery after deduction of litigation expenses. In 1997, Bestfoods obtained a judgment in its favor from its insurance carrier for over $18,000 (which amount includes approximately $5,000 of prejudgment interest). The insurance carrier's appeal of this judgment was unsuccessful and it paid the $18,000 judgment to Bestfoods. In July 1998, Bestfoods paid $1,000 to the Company as an interim payment of the Company's 10% recovery
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pending final resolution of amounts to be paid to Bestfoods by its insurance carrier. In September 1999, Bestfoods and the insurance carrier entered into a final settlement agreement. In December 1999 the Company received $947 in final payment of its 10% share of the recovery net of litigation expenses.
8. Issuance of Common Stock
In March 1998 the Company completed an underwritten secondary public offering of common stock and issued 1,000,000 shares of common stock at $14.25 per share. In October 1998 the Company completed another secondary public offering of common stock and issued 750,000 shares of Common Stock at $11.125 per share. Net proceeds from these offerings amounted to $20,056. A substantial portion of these funds were utilized to retire the Company's long and short-term debt, to acquire rail cars and to expand the Company's Worcester, Massachusetts maintenance facility.
In connection with the March Offering the Company sold to the underwriters warrants to purchase up to 100,000 shares of common stock at an exercise price of $22.09 per share. In connection with the October Offering the Company sold to the underwriter warrants to purchase up to 75,000 shares of common stock at an exercise price of $17.24 per share. These warrants became exercisable in 1999, one year from the effective dates of the respective Offerings, and expire four years thereafter. They grant to the holders thereof certain demand and "piggyback" rights of registration of the securities issuable upon exercise. These warrants have not been included in the calculation of diluted income per common share since their effect is antidilutive.
In March 1998 Massachusetts Capital Resource Company ("MCRC") exercised its warrants to acquire 200,000 newly issued shares of the Company's common stock for $7.10 per share. Proceeds to the Company consisted of a $1,420 reduction in the outstanding principal balance of its 10% subordinated long-term note payable to MCRC.
9. Acquisition of Connecticut Central Railroad Company
On April 21, 1998 the Company acquired 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. The Company issued an additional 3,614 shares of its common stock to retire $50 of debt owed by Conn Central to two of its former shareholders. The total fair market value of the shares issued was $383, which exceeded the fair market value of the net assets acquired by $199, which amount, net of amortization, is reported as goodwill on the accompanying balance sheet. In April 1999, the Company issued an additional 7,500 shares of its Common Stock to the former shareholders of Conn Central since certain financial and other considerations as specified in the purchase and sale agreement were met. Issuance of these shares gave rise to additional goodwill in the amount of $82. The Company is amortizing this goodwill over a period of three years. Conn Central was a shortline railroad which had operating rights over approximately 28 miles of track in central Connecticut connecting to the Company's Middletown Secondary line. Conn Central's operations were merged into those of the Company at the time of acquisition. Pro forma information would not be materially different from historical information.
10. 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,
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whichever is greater (217,591 shares at December 31, 2000). 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:
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:
2000 1999 1998 --------- --------- --------- Average risk-free interest rate 6.30% 6.30% 4.53% Expected life of option grants 7.0 years 7.0 years 7.0 years Expected volatility of underlying stock 55% 30% 36% Expected dividend payment rate, as a percentage of the share price on the date of grant 2.00% 1.21% .65%
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, 2000:
Weighted Average Range of Number ---------------- Number Exercise Currently Exercise Remaining of Options Prices Exercisable Price Life (in years) --------- ---------- ---------- ---------- ----------- 4,716 $3.25 - 4.38 4,716 $3.76 1 23,177 5.50 - 8.25 23,177 4.88 3 6,889 8.50 - 12.75 6,889 12.38 8 6,822 18.38 6,822 18.38 7
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The Company has elected to remain with the accounting prescribed by Accounting Principles Board Opinion No. 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 available to common shareholders and income per share would have been as follows:
The income per share figures for 1998 are net of a $.06 per share loss attributable to an extraordinary item.
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 $357 in 2000, $400 in 1999, and $425 in 1998. The Company made its 1998 and 1999 contributions and intends to make its 2000 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 $208 in 2000 and $197 in 1999 and 1998.
Employee Stock Purchase Plan ----------------------------
The Company has an Employee Stock Purchase Plan ("ESPP") under which eligible employees may purchase registered shares of common stock at 85% of the market price for such shares. An aggregate of 200,000 shares of common stock are authorized for issuance under the ESPP which was established in 1997. Any shares purchased under the ESPP are subject to a two year lock-up. ESPP purchases amounted to 12,828 shares in 2000, 8,665 shares in 1999, and 5,504 shares in 1998.
11. Preferred Stock
The Company's $50 par value preferred stock is convertible into 100 shares of common stock at the option of the shareholder. The noncumulative stock dividend is fixed by the Company's Charter at an annual rate of $5.00 per share, out of funds legally available for the payment of dividends.
The holders of preferred stock are entitled to one vote for each share in the election of two-thirds of the Board of Directors. The holders of preferred stock and holders of common stock are entitled to one vote per share, voting as separate classes, upon matters voted on by shareholders.
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Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure - ------------------------------------------------------------ None.
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
The Company's Charter and Bylaws provide that the members of the Board of Directors (the "Board") shall be elected separately by the Company's two classes of stock. Holders of Common Stock elect one-third of the Board of Directors and the holders of Preferred Stock elect the remainder of the Board. Directors are elected to serve until the next annual meeting and until their successors have been duly elected by the shareholders. There are currently three directors elected by the holders of the Common Stock and six directors elected by the holders of the Preferred Stock. Officers are elected by and serve at the discretion of the Board of Directors.
Directors and Executive Officers
The current directors and executive officers, their ages and their positions held with the Company are as follows:
Name Age Position ---- --- -------- Robert H. Eder(a) ................ 68 Chairman of the Board and Chief Executive Officer Orville R. Harrold(b) ............ 68 President, Chief Operating Officer and Director Robert J. Easton ................. 57 Treasurer P. Scott Conti ................... 43 Vice President Engineering Mary A. Tanona ................... 43 Secretary and General Counsel Richard W. Anderson (a) .......... 53 Director Frank W. Barrett(b) .............. 61 Director John H. Cronin(b) ................ 67 Director J. Joseph Garrahy(b) ............. 70 Director John J. Healy(b) ................. 65 Director Charles M. McCollam, Jr.(b) ...... 68 Director Merrill W. Sherman(a) ............ 52 Director
(a) Elected by holders of Common Stock. (b) Elected by holders of Preferred Stock.
The following is a brief summary of the background of each director and executive officer.
Directors and Executive Officers
Robert H. Eder, Chairman of the Board and Chief Executive Officer. Mr. Eder became President of the Company in 1966 and led the Company through its efforts to become an independent operating company. He has been Chairman of the Board since 1980. He is a graduate of Harvard College and Harvard Law School. He (with his wife) is also majority owner and Chairman of an affiliated company, Capital Properties, Inc., a real estate holding company of which he is also a Director. Mr. Eder is admitted to practice law in Rhode Island and New York.
Orville R. Harrold, President, Chief Operating Officer and Director. Mr. Harrold has been with the Company since the commencement of independent operations in February 1973. Over the past 28 years, he has held the positions of Chief Engineer and General Manager, becoming President in 1980. Mr. Harrold has a bachelors degree in mechanical engineering from the Pratt Institute, Brooklyn, New York and has been employed in the railroad industry in various capacities since 1960.
Robert J. Easton, Treasurer. Mr. Easton has been with the Company since 1986, initially as Controller. He was promoted to the position of Treasurer and Controller in 1988. Prior to joining the Company, Mr. Easton had 21 years of experience in public accounting. He is a Certified Public Accountant with a bachelors degree in accounting from the University of Rochester.
P. Scott Conti, Vice President Engineering. Mr. Conti has been with the Company since 1988 and is responsible for all activities of the Maintenance of Way and Engineering Department which maintains the Company's tracks, bridges,
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buildings and grade crossings, overseeing all construction activity on or affecting railroad property. From June 1988 to December 1997, Mr. Conti served as Engineering Manager. In January 1998 he was promoted to Chief Engineer and in March 1999 he was promoted to Vice President. Prior to Joining the Company, Mr. Conti was employed by Perini Corporation.
Mary A. Tanona, Secretary and General Counsel. Ms. Tanona joined the Company in 1999 as Assistant General Counsel and Assistant Secretary. In 2000 she was promoted to General Counsel. Prior to joining the Company, Ms Tanona was an associate with Dewey Ballantine in New York. Most recently, she served as associate general counsel at Arbor National Mortgage. She is a 1987 graduate of Fordham University School of Law and holds a bachelor of arts degree from Smith College. Ms. Tanona is admitted to practice law in Massachusetts, Rhode Island and New York.
Richard W. Anderson, Director. Mr. Anderson has been a Director of the Company since 1998. He is Senior Vice President of Massachusetts Capital Resource Company ("MCRC"), a private investment firm funded by major Massachusetts based life insurance companies providing higher risk growth capital to Massachusetts businesses. He began working at MCRC in 1981 as Vice President. He was promoted to Senior Vice President in 1985.
Frank W. Barrett, Director. Mr. Barrett has been a Director of the Company since 1995. From 1993 to 1998 he was Executive Vice President at Springfield Institution for Savings ("SIS"). Effective January 1, 1999 he became Executive Vice President and Chief Lending Officer of Family Bank. Family Bank is a Massachusetts subsidiary of Peoples Heritage Financial Group and the acquirer of SIS. He is also a director of Dairy Mart Convenience Store, Inc.
John H. Cronin, Director. Mr. Cronin has been a Director of the Company since 1986. Since 1971 until his retirement in 1996, Mr. Cronin was owner and President of Ideal Products, Inc., a wholesale entertainment supply company.
J. Joseph Garrahy, Director. Mr. Garrahy has been a Director of the Company since 1992. He is a former four term Governor of Rhode Island and, since 1990, has been an independent business consultant in the State of Rhode Island. Mr. Garrahy is also a director of Grove Real Estate Investment Trust.
John J. Healy, Director. Mr. Healy has been a Director of the Company since 1991. He has been President of Worcester Affiliated Mfg. L.L.C., an independent business consulting firm involved in efforts to revitalize manufacturing in Massachusetts, since January 1997. Prior thereto, Mr. Healy was President and Chief Executive Officer of HMA Behavioral Health, Inc., a behavioral health care management service provider.
Charles M. McCollam, Jr., Director. Mr. McCollam has been a Director of the Company since 1996. He owns and operates a number of insurance businesses in the State of Connecticut, as well as McCollam Associates, a consulting firm. He was the Chief of Staff to a former governor of Connecticut.
Merrill W. Sherman, Director. Ms. Sherman has been a Director of the Company since 1999. She has been President, Director and Chief Executive Officer of Bank Rhode Island, a community bank in the greater Providence metropolitan area since its formation in March 1996. Prior thereto, from September 1993 to August 1995, Ms. Sherman was a partner in the corporate and real estate departments of the law firm Brown, Rudnick, Freed & Gesmer where she headed the firm's banking consulting group affiliate. She retired from her position in August 1995 to devote full-time efforts to the creation of Bank Rhode Island.
Committees of the Board of Directors
The Board of Directors has an Executive Committee, a Stock Option & Compensation Committee and an Audit Committee. The Board of Directors does not have a nominating committee. In accordance with the By-laws of the Company, the Executive Committee, currently comprised of Robert H. Eder, Chairman, John J. Healy and Orville R. Harrold, exercises the authority of the Board of Directors when formal Board action is required between meetings, subject to the limitations imposed by law, the By-laws or the Board of Directors. The Executive Committee acts on routine matters such as authorizing the execution of government contracts for reimbursement for Company work on highway projects adjacent to the railroad and grade crossing rehabilitation.
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The Stock Option & Compensation Committee, currently comprised of John H. Cronin, Chairman, Richard W. Anderson and Charles M. McCollam, Jr., is responsible for establishing the amount of option shares to be granted to the Company's employees under the Stock Option Plan and for making recommendations to the full Board concerning executive officer compensation.
The Audit Committee of the Board of Directors is responsible for providing independent, objective oversight of the Company's accounting functions and internal controls. The Audit Committee is composed of three directors, all of whom are independent as defined by the American Stock Exchange listing standards. The Audit Committee operates under a written charter first adopted and approved by the Board of Directors on April 26, 2000. A copy of the Audit Committee Charter is attached to this Proxy Statement as Appendix A.
The Board of Directors held four meetings, the Audit Committee held six meetings, the Stock Option & Compensation Committee held one meeting and the Executive Committee held eight meetings during the fiscal year ended December 31, 2000.
Audit Committee Report
Management is responsible for the Company's internal controls and financial reporting process. The independent accountants are responsible for performing an audit of the Company's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and to issue a report thereon. The Audit Committee's responsibility is to monitor and oversee these processes.
The responsibilities of the Audit Committee include recommending to the Board an accounting firm to be engaged as the Company's independent accountants. Additionally, and as appropriate, the Audit Committee reviews and evaluates, and discusses and consults with the Company's management and independent accountants regarding the scope of the audit plan, the results of the audit, the Company's financial statement disclosure documents, the adequacy and effectiveness of the Company's accounting and financial controls and changes in accounting principles.
In connection with these responsibilities, the Audit Committee reviewed and discussed the audited financial statements with management and the Company's independent accountants, Deloitte & Touche LLP. The Audit Committee also discussed with Deloitte & Touche LLP the matters required by Statement on Auditing Standards No. 61. The Audit Committee received from Deloitte & Touche LLP written disclosures and the letter regarding its independence as required by Independence Standards Board Standard No. 1. The Audit Committee discussed this information with Deloitte & Touche LLP and also considered the compatibility of non-audit services provided by Deloitte & Touche LLP with its independence. Based on the review of the audited financial statements and these various discussions, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K, to be filed with the SEC.
Audit Committee:
J. Joseph Garrahy, Chairman Frank W. Barrett Merrill W. Sherman
Compensation of Directors
During the fiscal year ended December 31, 2000, each director who was not an employee of the Company received a base fee of $500 for each attended meeting of the Board of Directors plus $50 per attended meeting for each year of service as a director, and each member of the Audit Committee and the Stock Option & Compensation Committee received $300 for each attended meeting of the committee (other than the Chairman of the Committee, who received $350).
During the month of January of each year, directors of the Company who were serving as such on the preceding December 31 and are not full time employees of the Company are granted options for the purchase of 100 shares of the Common Stock of the Company, plus options for an additional ten shares for each full year of service to the Company. The exercise price is the last sale price of the Common Stock on the last business day of the preceding year, and the term of each option is ten years (subject to earlier termination if the grantee ceases to serve as a director), provided, however, that no option is exercisable within six months following the date of grant.
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Item 11.
Item 11. Executive Compensation - -------------------------------
The following table summarizes the compensation paid or accrued by the Company during the three year period ended December 31, 2000, to its Chief Executive Officer and each of its four most highly compensated executive officers who earned more than $100,000 in salary and bonus in 2000, for services rendered in all capacities to the Company during 2000.
SUMMARY COMPENSATION TABLE
(a) Includes amounts taxable to employees for personal use of Company-owned vehicles, other than Mr. Eder, who does not have personal use of a Company-owned vehicle.
(b) Includes amounts paid directly to the retirement accounts of management staff under the Company's simplified employee pension plan, and, in the case of Robert H. Eder and Orville R. Harrold, includes for 2000 premiums paid for life insurance coverage in the amounts of $34,552 and $26,492, respectively.
(c) Includes the cost of a vehicle for Mr. Eder.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock options under the Company's Non-Qualified Stock Option Plan to the Named Executive Officers during the Company's last fiscal year. The Company does not issue stock appreciation rights.
(a) All options were granted on January 3, 2000 and became exercisable on July 3, 2000.
(b) Amounts represent fair value of options and were estimated as of the date of grant using Black-Scholes options - pricing model with the following weighted average assumptions: expected volatility of 55%; expected life 7 years; and risk free interest rate of 6.3%. Dividends at the rate of 2.0% per share were assumed for purposes of this estimate.
(c) Under the terms of the Company's Non-Qualified Stock Option Plan, Mr. Eder is not eligible to receive a grant of stock options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth individual exercises of stock options during 2000 and the year-end values of options to purchase Common Stock held by the Named Executive Officers as of December 31, 2000.
(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, 2000, which was $7.125.
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
The table set forth below reflects the only persons (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who, to the best of the Company's knowledge, were on March 2, 2001 the beneficial owners of more than five percent of the Company's outstanding Common Stock, $.50 par value, or Preferred Stock, $50 par value. Each share of the Company's outstanding Preferred Stock is convertible at any time, at the option of the holder, into one hundred shares of Common Stock of the Company. The footnote to the table below sets forth the percentages of the outstanding Common Stock which would be held by the indicated owners if such owners' Preferred Stock were converted in whole into Common Stock.
(a) Assuming no conversion of Preferred Stock. If their Preferred Stock were converted in whole to Common Stock, Mr. and Mrs. Eder would own 20.2% of the outstanding Common Stock.
Of the shares owned by Mr. and Mrs. Eder, 768,162 shares of Common Stock and 500 shares of Preferred Stock were held directly by Mr. Eder, and 74,580 shares of Common Stock were held directly by Mrs. Eder. By reason of their ownership, Mr. and Mrs. Eder may be deemed to be "control persons" with respect to the Company.
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The following table reflects, as of March 2, 2001, the beneficial ownership of the Common Stock of the Company by directors, nominees for directors and officers of the Company.
* Less than one percent
(a) Includes 200,000 shares of common stock held by Massachusetts Capital Resource Company of which Mr. Anderson disclaims beneficial ownership. Mr. Anderson is Senior Vice President of Massachusetts Capital Resource Company. Also includes 210 shares of Common Stock issuable under stock options exercisable within 60 days.
(b) Includes 500 shares of Common Stock issuable under stock options exercisable within 60 days.
(c) Includes 511 shares of Common Stock issuable under stock options exercisable within 60 days.
(d) Includes 660 shares of Common Stock issuable under stock options exercisable within 60 days.
(e) Includes 118 shares of Common Stock held by Mr. Easton's wife in her name and 1,614 shares of Common Stock issuable under stock options exercisable within 60 days.
(f) 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.
(g) Includes 480 shares of Common Stock issuable under stock options exercisable within 60 days.
(h) Includes (i) 1,700 shares of Common Stock held by Mr. Harrold's wife, (ii) 2,600 shares of Common Stock held by a custodian in an individual retirement account for the benefit of Mr. Harrold and (iii) 3,060 shares of Common Stock issuable under stock options exercisable within 60 days.
(i) Includes 1,050 shares of Common Stock issuable under stock options exercisable within 60 days.
(j) Includes 230 shares of Common Stock issuable under stock options exercisable within 60 days.
(k) Includes 100 shares of Common Stock issuable under stock options exercisable within 60 days.
(l) Includes 50,000 shares of Common Stock issuable upon conversion of Preferred Stock and 8,415 shares of Common Stock issuable under stock options exercisable within 60 days.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
Not Applicable
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PART IV
Item 14.
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 schedule: Schedule II Valuation and Qualifying Accounts ....... Page IV-3
All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or the notes thereto.
(3) Listing of Exhibits.
(10A) Material Contracts (incorporated by reference to Exhibit 10 to the registration statement of the Registrant on Form 10, to the Non-Qualified Stock Option Plan and Employee Stock Purchase Plan of the Registrant on Forms S-8 and to the registration statements of the Registrant on Form S-1).
(23) Independent Auditors' Consent
(b) A report on Form 8-K was filed on June 9, 2000. In it the Registrant reported that it had advised the general public through a press release dated June 8, 2000 the commencement of construction of a 12 mile right-of-way bringing freight service into Hartford, Connecticut.
(c) Exhibits (annexed).
Financial Statement Schedule. See item (a) (2.) above
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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 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Robert H. Eder ________________________ Chief Executive Officer March 30, 2001 Robert H. Eder and Chairman (Principal Executive Officer)
/s/ Orville R. Harrold ________________________ President and Director March 30, 2001 Orville R. Harrold (Chief Operating Officer)
/s/ Robert J. Easton ________________________ Treasurer March 30, 2001 Robert J. Easton (Principal financial officer and principal accounting officer) /s/ Frank W. Barrett ________________________ Director March 30, 2001 Frank W. Barrett
/s/ J. Joseph Garrahy ________________________ Director March 30, 2001 J. Joseph Garrahy
/s/ Merrill W. Sherman ________________________ Director March 30, 2001 Merrill W. Sherman
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SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSAND DOLLARS)
(A) Bad debts written off.
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EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 333-65937, 333-65949, and 333-21617 of Providence and Worcester Railroad Company on Form S-8 of our report dated March 2, 2001 appearing in this Annual Report on Form 10-K of Providence and Worcester Railroad Company for the year ended December 31, 2000.
/s/ Deloitte & Touche LLP
Boston, Massachusetts March 27, 2001