UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16704
PROVIDENCE AND WORCESTER RAILROAD COMPANY
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(Exact name of registrant as specified in its charter)
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Rhode Island 05-0344399
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(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(508) 755-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
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(Title of Class)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes No X
As of March 1, 2004, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $32,537,343. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of March 1, 2004, the Registrant had 4,457,594 shares of Common Stock
outstanding.
Documents Incorporated by Reference -
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Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of
Shareholders to be held on April 28, 2004, is incorporated by reference into
Part III of this Form 10-K.
Exhibit Index - Page III-2.
PART I
Item 1. Business
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Providence and Worcester Railroad Company ("P&W" or "the Company") is a
class II regional freight railroad operating in Massachusetts, Rhode Island,
Connecticut and New York. The Company is the only interstate freight carrier
serving the State of Rhode Island and possesses the exclusive and perpetual
right to conduct freight operations over the Northeast Corridor between New
Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing
independent operations in 1973, the Company, through a series of acquisitions of
connecting lines, has grown from 45 miles of track to its current system of
approximately 545 miles. P&W operates the largest double stack intermodal
terminal facilities in New England in Worcester, Massachusetts, a strategic
location for regional transportation and distribution enterprises.
The Company transports a wide variety of commodities for its customers,
including construction aggregate, iron and steel products, chemicals, lumber,
scrap metals, plastic resins, cement, coal, construction and demolition debris,
processed foods and edible food stuffs, such as frozen foods, corn syrup and
animal and vegetable oils. Its customers include Cargill, Inc., The Dow Chemical
Company, Exxon- Mobil Corporation, Frito-Lay, Inc., International Paper Company,
Northeast Utilities, Smurfit-Stone Container Corporation and Tilcon Connecticut,
Inc. In 2003, P&W transported approximately 32,000 carloads of freight and
65,000 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, $272.0 million or more; Class II, $21.8 million to $272.0 million; and Class
III, less than $21.8 million. As a result of mergers and consolidations, there
are now only seven Class I railroads in the country. These large systems handle
92% of the nation's rail freight business.
The rail freight industry underwent a revitalization after the passage of
the Staggers Rail Act, which deregulated the pricing and types of services
provided by railroads. As a result, railroads were able to achieve significant
productivity gains and operating cost decreases while gaining pricing
flexibility. Rail freight service became more competitive with other
transportation modes with respect to both quality and price. The volume of
freight moved by rail has risen dramatically since 1980 and profitability has
improved significantly.
One result of the revitalization of the industry has been the growth of
regional (over 350 miles) and short-line railroads, which has been fueled by a
trend among Class I railroads to divest certain branch lines in order to focus
on their long-haul core systems. There are now more than 550 of these regional
and short-line railroads. They operate in all 50 states, account for nearly 30%
of all rail track, employ 11% of all rail workers and generate about 8% of all
rail revenue.
Generally, freight railroads handle two types of traffic: conventional
carloads and intermodal containers used in the shipment of goods via more than
one mode of transportation, e.g., by ship, rail and truck. By using a
hub-and-spoke approach to shipping, multiple containers can be moved by rail to
and from an intermodal terminal and then either delivered to their final
destinations by truck or transferred to ship for export. Over the past decade,
commodity shippers have increasingly turned to intermodal transportation
principally as an alternative to long-haul trucking. The development of new
intermodal technology, which allows containers to be moved by rail double
stacked (i.e., stacked one on top of the other) in specially designed railcars,
together with increasing highway traffic congestion and the shortage of
long-haul truck drivers have contributed to this trend.
Regional Developments
There are a number of development projects underway in New England to
increase port capacity along the extensive coastline and to improve the
intermodal transportation and distribution infrastructure in the region. These
projects present significant opportunities for the Company to increase its
business.
I - 1
Quonset/Davisville
The State of Rhode Island and the federal government are progressing with
the redevelopment of a 1,000 acre portion of the former Naval facility at
Quonset/Davisville to a more active port and industrial park. This facility
already houses a number of rail oriented industries and an auto port.
Construction of a freight rail improvement project to provide additional track
capacity and double stack clearance on the Northeast Corridor between
Quonset/Davisville and the connection of the Corridor to the Company's main line
at Central Falls, R.I commenced in 2002 at a cost in excess of $120 million and
scheduled to be completed by the first quarter of 2006.
Massachusetts Highway Improvement Program
Work is continuing on a significant expansion of the Company's bulk
transload and intermodal yards in Worcester in conjunction with the
Massachusetts Highway Department's $250 million project creating a direct
Worcester connection to the Massachusetts Turnpike. This project will result in
a near doubling of the Company's transload facilities when completed.
Port of New Haven
The State of Connecticut has completed rebuilding the Tomlinson Bridge in
New Haven, which provides rail access to the Port of New Haven. In conjunction
with this project, the Company is working with the City of New Haven and area
users of the rail systems to fund a design for the restoration of local street
rail service directly to port properties. Completion of this project will
provide the Company with improved access to customers at the Port of New Haven.
Middletown/Hartford Line
In cooperation with the state of Connecticut, the Company has been engaged
in the restoration of the rail line extending from Middletown to Hartford,
Connecticut. In April 2000, the state of Connecticut appropriated $1.85 million
to fund their portion of the project (approx 70%). The restoration of this 11
mile segment is now complete and ready for service. With a planned industrial
park along this line and a new connection to other carriers in Hartford, the
Company believes restoration of this line presents opportunities for future
revenue growth.
New London Interchange
Through its New London interchange with the New England Central Railroad
P&W has been able to develop significant new business with the Canadian National
Railway ("CN") and the Canadian Pacific Railway. P&W has worked aggressively to
leverage its extensive bulk transload facilities in developing additional
chemical and plastics traffic with CN and has developed a significant volume of
steel traffic with CN that had previously moved via truck.
Port of Providence
The Port of Providence, in conjunction with the Company, has made
investments in its infrastructure, including paving, lighting and "on dock"
rail, to accommodate growth in the movement of imported coal to inland markets
and to handle that product more efficiently. This is expected to be a growing
source of revenue for the Company over the next few years. More than 300,000
tons of coal were handled through the Port of Providence in 2003.
Railroad Operations
The Company's rail freight system extends over approximately 545 miles of
track. The Company interchanges freight traffic with CSX at Worcester,
Massachusetts and at New Haven, Connecticut; with the Springfield Terminal
Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts;
with the New England Central Railroad (formerly Central Vermont Railway) at New
London, Connecticut; and with the New York and Atlantic Railroad (formerly Long
Island Railroad) at Fresh Pond Junction on Long Island. Through its connections,
P&W links more than 80 communities on its lines. It operates four classification
yards (areas containing tracks used to group freight cars destined for a
particular industry or interchange), located in Worcester, Massachusetts,
Cumberland, Rhode Island and Plainfield and New Haven, Connecticut.
I - 2
The Company is dependent upon the railroads with which it interchanges
freight traffic to enable it to properly service its customers at competitive
rates. Failure of any of these connecting railroads to provide adequate service
at reasonable rates can result in a loss of freight customers and revenues.
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 165 customers in Massachusetts, Rhode
Island, Connecticut and New York. The Company's 10 largest customers account for
nearly half of its operating revenues. In 2003, 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 13.3% of the Company's operating revenues. No other customer
accounted for 10% or more of its total operating revenues in 2003.
Markets
The Company transports a wide variety of commodities for its customers. In
2003, chemicals and plastics and construction aggregate were the two largest
commodity groups transported by the Company, constituting 33% and 16%,
respectively, of conventional carload freight revenues. The following table
summarizes the Company's conventional carload freight revenues by commodity
group as a percentage of such revenues:
Commodity 2003 2002 2001 2000 1999
- --------- ---- ---- ---- ---- ----
Chemicals and plastics ............ 33% 35% 34% 38% 41%
Construction aggregate ............ 16 20 19 17 17
Food and agricultural products .... 12 12 13 13 14
Forest and paper products ......... 12 13 16 16 14
Metal products .......... 10 7 7 8 5
Scrap metal and waste ............. 9 8 6 6 6
Other, including coal ............. 8 5 5 2 3
--- --- --- --- ---
Total .......................... 100% 100% 100% 100% 100%
=== === === === ===
Sales and Marketing
P&W's sales and marketing staff of three people has substantial 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 or not using them to
their full capacity, (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.
I - 3
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, 2004, the Company had 153 full-time employees, 117 of whom
are represented by three railroad labor organizations that are national in
scope. The Company's employees have been represented by unions since the Company
commenced independent operations in 1973.
The Company's initial agreement with the United Transportation Union
covering the trainmen was unusual in the railroad industry since it provided the
Company with discretion in determining crew sizes, eliminated craft distinctions
and provided a guaranteed annual wage for a maximum number of hours worked. The
Company's collective bargaining agreements have been in effect since February
1973 for trainmen, since May 1974 for clerical employees and dispatchers and
since June 1974 for maintenance employees. These contracts do not expire but are
subject to re-negotiation after the agreed-upon moratoriums. P&W's moratorium
periods are currently 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 rail 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 that CSX and Norfolk
Southern's acquisition and division of Conrail will lead to expansion
opportunities, this transaction has also led to increased competition with other
freight railroads, particularly in Massachusetts, and efforts by CSX and Norfolk
Southern to reduce revenue to connecting regional and short-line carriers.
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. In making acquisitions, P&W
competes with other short-line and regional rail operators, some of which are
larger and have greater financial resources than the Company.
I - 4
Governmental Regulation
The Company is subject to governmental regulation by the United States
Surface Transportation Board ("the STB"), the Federal Railroad Administration
("the FRA") and other federal, state and local regulatory authorities with
respect to certain rates and railroad operations, as well as a variety of
health, safety, labor, environmental and other matters, all of which could
potentially affect the competitive position and profitability of the Company.
Additionally, the Company is subject to STB regulation and may be required to
obtain STB approval prior to its acquisition of any new railroad properties.
Management of the Company believes that the regulatory freedoms granted by the
Staggers Rail Act have been beneficial to the Company by giving it flexibility
to adjust prices and operations to respond to market forces and industry
changes. However, various interests, and certain members of the United States
Congress (which has jurisdiction over federal regulation of railroads), have
from time to time expressed their intention to support legislation that would
eliminate or reduce significant freedoms granted by the Staggers Rail Act.
Environmental Matters
The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters and
the handling, storage, transportation and disposal of waste and other materials.
The Company handles, stores, transports and disposes of petroleum and other
hazardous substances and wastes. The Company also transports hazardous
substances for third parties and arranges for the disposal of hazardous wastes
generated by the Company. The Company believes that it is in material compliance
with applicable environmental laws and regulations.
Item 2. Properties
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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 the main line tracks which it owns in such excellent condition.
Of the approximately 545 miles of the Company's system, 312 miles, or 57%,
are located in Connecticut, 103 miles, or 19%, are located in Massachusetts, 102
miles, or 19%, are located in Rhode Island and 28 miles, or 5%, are located in
New York.
Rail Facilities
P&W owns land and a building with approximately 69,500 square feet of floor
space in Worcester, Massachusetts. The building houses the Company's executive
and administrative offices and some of the Company's storage space.
Approximately 2,600 square feet are leased to outside tenants.
The Company owns and operates three principal classification yards located
in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield,
Connecticut and also operates a classification yard in New Haven, Connecticut.
In addition, the Company has maintenance facilities in Plainfield and Worcester.
P&W believes that its executive and administrative office facilities,
classification yards and maintenance facilities are adequate to support its
current level of operations.
Other Properties
The Company owns or has the right to use a total of approximately 130 acres
of real estate located along the principal railroad lines from downtown
Providence through Pawtucket, Rhode Island. Of this amount, P&W owns
approximately eight acres in Pawtucket and has a perpetual easement for railroad
purposes over the remaining 122 acres.
The Company has invested nearly $12 million in the development of the South
Quay, which is adjacent to 12 acres of land owned by the Company. This
investment has resulted in the creation of approximately 33 acres of waterfront
land.
I - 5
P&W actively manages its real estate assets in order to maximize revenues.
The income from property management is derived from sales and leasing of
properties and tracks and grants of easements to government agencies, utility
companies and other parties for the installation of overhead or underground
cables, pipelines and transmission wires as well as recreational uses such as
bike paths.
Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of December 31, 2003:
Description Number
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Locomotive .................................................. 31
Gondola ..................................................... 77
Flat Car .................................................... 5
Ballast Car ................................................. 30
Passenger Equipment ......................................... 7
Caboose ..................................................... 2
------
Total .................................................. 152
======
The 31 diesel electric locomotives, which include nine used 3,900
horsepower GE B39-8 locomotives acquired in 2002 and 2003, are used on a daily
basis, are maintained to a high standard, comply with all FRA and Association of
American Railroads rules and regulations and are adequate for the needs of the
Company's freight operations. The gondolas and flat cars are considered modern
rail cars and are used by certain P&W customers. Other rail freight customers
use their own freight cars or obtain such equipment from other sources. The
ballast cars are used in track maintenance. From time to time, the Company has
leased ballast cars to other adjoining railroads. The passenger equipment and
caboose are not utilized in P&W's rail freight operations but are used on an
occasional basis for Company functions, excursions and charter trips.
Equipment
P&W has a state-of-the-art digital touch control dispatching system at its
Worcester operations center permitting two-way radio contact with every train
crew and maintenance vehicle on its lines. The system also enables each train
crew to maintain radio contact with other crew members. The Company maintains a
computer facility in Worcester with back-up computer facilities in Worcester and
Plainfield, Connecticut to assure the Company's ability to operate in the event
of disruption of service in Worcester. The Company also has state-of-the-art
automatic train defect detectors at strategic locations which inspect passing
trains and audibly communicate the results to train crews and dispatchers in
order to protect against equipment failure en route.
The Company maintains a modern fleet of track maintenance equipment and
aggressively pursues available opportunities to work with federal and state
agencies for the rehabilitation of bridges, grade crossings and track. The
Company's locomotives are equipped with the cab signal technology necessary for
operations on the Northeast Corridor and are equipped with automatic civil speed
enforcement systems which were required by the introduction of high speed
passenger service on the Northeast Corridor.
Item 3. Legal Proceedings
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On January 29, 2002, the Company received a "Notice of Potential Liability"
from the United States Environmental Protection Agency ("EPA") regarding an
existing Superfund Site that includes the J.M. Mills Landfill in Cumberland,
Rhode Island. EPA sends these "Notice" letters to potentially responsible
parties ("PRPs") under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its
status as an owner and/or operator because its railroad property traverses the
Superfund Site. Via these Notice letters, EPA makes a demand for payment of past
costs (identified in the letter as $762,000) and future costs associated with
the response actions taken to address the contamination at the Site, and
requests PRPs to indicate their willingness to participate and resolve their
potential liability at the Site. The Company has responded to EPA by stating
that it does not believe it has any liability for this Site, but that it is
interested in cooperating with EPA to address issues concerning liability at the
Site. At this point, two other parties have already committed via a consent
order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS")
phase of the clean-up at the Site, which will take approximately two or more
years to complete. After that, EPA will likely seek to negotiate the cost of the
Remedial Design and implementation of the remedy at the Site with the PRPs it
has identified via these Notice Letters (which presently includes over sixty
parties, and is likely to increase after EPA completes its investigation of the
I - 6
identity of PRPs). The Company believes that none of its activities caused
contamination at the Site, and will contest this claim by EPA.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company and others, in an action
entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al.
(consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et
al.), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about sixty
parties named thus far by Plaintiffs, who seek to recover response costs
incurred in investigating and responding to the releases of hazardous substances
at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C.
section 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended
up at the Site. The Company has entered into a Generator Cooperation Agreement
with other defendants to allocate costs in responding to this suit, and to share
technical costs and information in evaluating the Plaintiffs' claims. The
Company does not believe it generated any waste that ended up at this Site, or
that its activities caused contamination at the Site. The Company will contest
this suit.
On December 15, 2003, the EPA issued a second "Notice of Potential
Liability" letter to the Company regarding the Site. The EPA again identified
the Company as a PRP, this time because EPA "believes that [the Company]
accepted hazardous substance for transport to disposal or treatment facilities
and selected the site for disposal." The Company responded again to EPA stating
that it is interested in cooperating with EPA but that it does not believe it
has engaged in any activities that caused contamination at the Site.
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
I - 7
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- ----------------------------------------------------------------------------
The Common Stock is quoted on the American Stock Exchange ("AMEX") under the
trading symbol "PWX". The following table sets forth, for the periods indicated,
the high and low sale prices per share for the Common Stock as reported on the
AMEX. Also included are dividends paid per share of Preferred Stock and Common
Stock during these quarterly periods.
Common Stock
------------
Trading Prices Dividends Paid
-------------- --------------
High Low Preferred Common
---- --- --------- ------
2003
First Quarter ........ 7.87 6.75 $ 5.00 $ .04
Second Quarter ....... 7.30 6.25 -0- .04
Third Quarter ........ 9.46 7.00 -0- .04
Fourth Quarter ....... 9.50 8.60 -0- .04
2002
First Quarter ........ 8.36 6.87 $ 5.00 $ .04
Second Quarter ....... 11.99 7.85 -0- .04
Third Quarter ........ 8.30 6.86 -0- .04
Fourth Quarter ....... 8.44 6.05 -0- .04
As of March 1, 2004, there were approximately 688 holders of record of the
Company's Common Stock.
The declaration of cash dividends on both the Preferred and the Common Stock is
made at the discretion of the Board of Directors based on the Company's
earnings, financial condition, capital requirements and other relevant factors
and restrictions.
II - 1
Item 6. Selected Financial Data
- -------------------------------
The selected financial data set forth below has been derived from audited
financial statements. The data should be read in conjunction with the Company's
audited financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
information included elsewhere in this annual report on Form 10-K.
Years Ended December 31,
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Income Statement Data:
Operating revenues .......... $23,961 $22,868 $22,598 $23,470 $22,152
Other income ................ 661 877 1,003 2,049 3,974
------- ------- ------- ------- -------
Total Revenues .............. 24,622 23,745 23,601 25,519 26,126
Operating expenses .......... 23,554 23,698 22,245 22,301 21,410
------- ------- ------- ------- -------
Income before income taxes .. 1,068 47 1,356 3,218 4,716
Provision for income taxes .. 400 25 505 1,200 1,690
------- ------- ------- ------- -------
Net income .................. 668 22 851 2,018 3,026
Preferred Stock dividend .... 3 3 3 3 3
------- ------- ------- ------- -------
Net income available to
common shareholders ........ $ 665 $ 19 $ 848 $ 2,015 $ 3,023
======= ======= ======= ======= =======
Basic income per common
share ...................... $ .15 $ -- $ .19 $ .47 $ .71
======= ======= ======= ======= =======
Diluted income per common
share ...................... $ .15 $ -- $ .19 $ .46 $ .70
======= ======= ======= ======= =======
Weighted average
shares-basic ............... 4,449 4,429 4,390 4,323 4,260
======= ======= ======= ======= =======
Weighted average
shares-diluted ............. 4,516 4,497 4,458 4,390 4,334
======= ======= ======= ======= =======
Cash dividends declared on
Common Stock ............... $ 712 $ 710 $ 702 $ 693 $ 640
======= ======= ======= ======= =======
December 31,
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Total assets ................ $90,619 $90,500 $89,161 $89,073 $86,371
Shareholders' equity ........ 68,691 68,641 69,073 68,483 66,683
II - 2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The following discussion should be read in connection with the Company's audited
financial statements and notes thereto included elsewhere in this annual report.
The statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MDA") which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward- looking statements represent the Company's present
expectations or beliefs concerning future events. The Company cautions, however,
that actual results could differ materially from those indicated in MDA.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines critical accounting
policies as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
The Company's significant accounting policies are described in Note 1 of the
Notes to Financial Statements. Not all of these significant accounting policies
require management to make difficult, subjective or complex judgments or
estimates. Management believes that the Company's policy for the evaluation of
long-lived asset impairment meets the SEC definition of critical.
The Company continually evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. When factors indicate that assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted future cash flows over the remaining lives of the assets in
measuring whether the carrying amounts of the assets are recoverable.
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, insurance and casualty claim
expense, diesel fuel, car hire, property taxes, materials and supplies,
purchased services, track usage fees 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
recollectible projects performed by the Company's Maintenance of Way and
Communications & Signals Departments can vary significantly from year to year,
thereby impacting total operating expenses.
II - 3
The Company also generates income through sales of properties, grants of
easements and licenses, and leases of land and tracks. Income or loss from sale,
condemnation and disposal of property and equipment and grants of easements is
recorded at the time the transaction is consummated and collectibility is
assured. This income varies significantly from year to year.
One of the Company's customers, Tilcon Connecticut, Inc., which ships
construction aggregate from three separate quarries on the Company's system to
asphalt production plants in Connecticut and New York, accounted for
approximately 13.3%, 15.7% and 14.4% of its operating revenues in 2003, 2002,
and 2001, respectively. The Company does not believe that this customer will
cease to be a rail shipper or will significantly decrease its freight volume in
the foreseeable future. In the event that this customer should cease or
significantly reduce its rail freight operations, management believes that the
Company could restructure its operations to reduce operating costs by an amount
sufficient to substantially offset the decrease in operating revenues.
Results of Operations
The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2003 2002 2001
------------- -------------- -------------
(in thousands, except percentages)
Freight Revenues:
Conventional carloads ....... $19,795 82.6% $19,119 83.6% $18,427 81.6%
Containers .................. 2,953 12.3 2,406 10.5 2,826 12.5
Non-Freight Operating Revenues:
Transportation services ..... 727 3.1 806 3.5 888 3.9
Other ....................... 486 2.0 537 2.4 457 2.0
------- ----- ------- ----- ------- -----
Total ...................... $23,961 100.0% $22,868 100.0% $22,598 100.0%
======= ===== ======= ===== ======= =====
The following table sets forth conventional carload freight revenues by
commodity group in dollars and as a percentage of such revenues:
Years Ended December 31,
-----------------------------------------------
2003 2002 2001
------------- -------------- -------------
(in thousands, except percentages)
Chemicals and plastics ....... $ 6,463 32.7% $ 6,783 35.5% $ 6,263 34.0%
Construction aggregate ....... 3,086 15.6 3,759 19.7 3,509 19.0
Food and agricultural products 2,480 12.5 2,400 12.5 2,453 13.3
Forest and paper products .... 2,454 12.4 2,434 12.7 2,847 15.5
Metal products ............... 1,966 9.9 1,382 7.2 1,275 6.9
Scrap metal and waste ........ 1,694 8.6 1,508 7.9 1,203 6.5
Other, including coal ........ 1,652 8.3 853 4.5 877 4.8
------- ----- ------- ----- ------- -----
Total ...................... $19,795 100.0% $19,119 100.0% $18,427 100.0%
======= ===== ======= ===== ======= =====
II - 4
The following table sets forth a comparison of the Company's operating expenses
expressed in dollars and as a percentage of operating revenues:
Years Ended December 31,
-----------------------------------------------
2003 2002 2001
------------- -------------- -------------
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits ....... $13,550 56.5% $13,402 58.6% $13,372 59.2%
Casualties and insurance ..... 1,031 4.3 1,049 4.6 709 3.1
Depreciation and amortization 2,754 11.5 2,734 12.0 2,728 12.1
Diesel fuel .................. 1,203 5.0 1,051 4.6 1,074 4.8
Car hire, net ................ 753 3.1 874 3.8 983 4.3
Purchased services, including
legal and professional fees . 1,313 5.5 1,550 6.8 2,159 9.6
Repairs and maintenance of
equipment ................... 947 4.0 875 3.8 803 3.5
Track and signal materials ... 1,985 8.3 2,242 9.8 2,381 10.5
Track usage fees ............. 812 3.4 1,715 7.5 330 1.5
Other materials and supplies . 1,056 4.4 842 3.7 910 4.0
Other ........................ 1,596 6.7 1,449 6.3 1,549 6.8
------- ----- ------- ----- ------- -----
Total ....................... 27,000 112.7 27,783 121.5 26,998 119.4
Less capitalized and
recovered costs ............ 3,446 14.4 4,085 17.9 4,753 21.0
------- ----- ------- ----- ------- -----
Total ...................... $23,554 98.3% $23,698 103.6% $22,245 98.4%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Amtrak Arbitration
The Company was party to an arbitration proceeding with the National Railroad
Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate increases
with respect to the Company's freight operations over a portion of Amtrak's
Northeast Corridor in the States of Rhode Island and Connecticut. The arbitrator
issued a decision in June 2002 in which he ordered the Company to pay Amtrak
additional track usage fees and siding maintenance costs retroactive to July 9,
1999. The statement of income for 2002 includes $935,000 of track usage fees and
$165,000 of siding maintenance costs which relate to years prior to 2002.
Operating Revenues
Operating revenues increased $1.1 million, or 4.8%, to $24.0 million in 2003
from $22.9 million in 2002. This increase was comprised of a $676,000 (3.5%)
increase in conventional freight revenues and a $547,000 (22.7%) increase in
container freight revenues partially offset by a $130,000 (9.7%) decrease in
non-freight operating revenues.
The increase in conventional freight revenues results from a 3.5% increase in
the average revenue received per conventional carloading. The Company's
conventional freight carloadings increased by just 10 to 31,948 in 2003 from
31,938 in 2002. Increases in carloadings of certain commodities, such as metal
products and coal were largely offset by decreases in carloadings of
construction aggregates and certain other commodities. The increase in the
average revenue received per conventional carloading is attributable to a shift
in traffic mix away from construction aggregates, a lower rated commodity, as
well as some modest rate increases.
The increase in container freight revenues results from an increase in traffic
volume and from an 11.3% increase in the average revenue received per container.
Intermodal containers handled increased by 6,094, or 10.3% to 65,485 containers
in 2003 from 59,391 containers in 2002. The increase in the average revenue
received per container is the result of a contractual rate increase as well as a
change in the mix of containers handled.
The decrease in non-freight operating revenues for the year is the result of
decreases in maintenance department billings, as well as a decrease in demurrage
charges. Revenues of this nature typically vary from year to year depending upon
the needs of freight customers and other outside parties.
II - 5
Operating Expenses
Operating expenses decreased $144,000, or .6%, to $23.6 million in 2003 from
$23.7 million in 2002. Operating expenses as a percentage of operating revenues
decreased to 98.3% in 2003 from 103.6% in 2002. This small decrease is
attributable to the impact of the Amtrak arbitration decision on 2002, as
previously discussed, offset, in part, by increases in various other expense
categories including profit sharing, maintenance and utility costs.
Other Income
Other income decreased to $661,000 in 2003 from $877,000 in 2002. This decrease
results from lower gains from the sale of property, equipment and easements as
well as decreases in rental income and interest earned on temporary cash
investments.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Operating Revenues
Operating revenues increased $270,000, or 1.2%, to $22.9 million in 2002 from
$22.6 million in 2001. This increase was comprised of a $692,000 (3.8%) increase
in conventional freight revenues partially offset by a $420,000 (14.9%) decrease
in container freight revenues and a $2,000 (.1%) decrease in non-freight
operating revenues.
The increase in conventional freight revenues results from a 6.0% increase in
traffic volume, partially offset by a 2.1% decrease in the average revenue
received per conventional carloading. The Company's conventional freight
carloadings increased by 1,803 to 31,938 in 2002 from 30,135 in 2001. The
increase in conventional traffic results from new customers as well as increases
from certain existing customers. The decrease in the average revenue received
per conventional carloading is attributable to a shift in traffic mix toward
lower rated commodities, such as construction and demolition debris and
construction aggregates.
The decrease in container freight revenues is primarily due to a decrease in
traffic volume. Total intermodal containers handled decreased by 9,305 to 59,391
containers in 2002 from 68,696 containers in 2001. This decrease is the result
of the loss of a customer during the third quarter of 2001 and to the continuing
weakness in economic conditions.
Operating Expenses
Operating expenses increased $1.5 million, or 6.5%, to $23.7 million in 2002
from $22.2 million in 2001. Operating expenses as a percentage of operating
revenues increased to 103.6% in 2002 from 98.4% in 2001. This increase is
attributable to the impact of the Amtrak arbitration decision as previously
discussed.
Other Income
Other income decreased to $877,000 in 2002 from $1.0 million in 2001. This
decrease is primarily the result of a reduction in interest income due to lower
investable cash balances and rates of return.
Liquidity and Capital Resources
The Company generated $2.4 million, $4.3 million and $3.0 million of cash from
operations in 2003, 2002 and 2001, respectively. The Company's total cash and
cash equivalents decreased by $1.7 million in 2003, $916,000 in 2002 and $1.8
million in 2001. The principal utilization of cash during the three year period
was for expenditures for property and equipment acquisitions and payment of
dividends.
During 2003, 2002 and 2001 the Company generated $237,000, $444,000 and
$498,000, respectively, from the sales and disposals of properties not
considered essential for railroad operations and from the granting of easements
and licenses. The Company holds various properties which could be made available
for sale, lease or grants of easements and licenses. Revenues from sales of
properties, easements and licenses can vary significantly from year to year.
In June 2003, the Company's principal bank renewed the Company's $3.0 million
revolving line of credit for a two year period through May 31, 2005. Borrowings
under this line are unsecured and bear interest at either the prime rate or one
II - 6
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 and has
no compensating balance requirements. The Company had no advances against this
line of credit during 2003 and 2002.
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 $2.5 million, $3.1 million and $3.4 million for track structure and
bridge improvements in 2003, 2002 and 2001, respectively. Deferred grant income
of $399,000 in 2003, $305,000 in 2002 and $204,000 in 2001 financed a portion of
these improvements. Management estimates that $2.5 million to $3.0 million of
improvements to the Company's track structure and bridges will be made in 2004,
provided that sufficient funds, including grant proceeds, are available.
Improvements to the Company's track structure are made, for the most part, by
the Company's Maintenance of Way Department personnel.
During 2003 the Company acquired two additional used 3,900 horsepower GE B39-8
locomotives for $320,000 in cash and one older 2,250 horsepower GE U-23B
locomotive which it owned.
In 2003, 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 $712,000, on its outstanding Common Stock. Continued
payment of such dividends is contingent upon the Company's continuing to have
the necessary financial resources available.
The Company believes that expected cash flows from operating activities will be
sufficient to fund its capital requirements for at least the next 12 months. To
the extent that the Company is successful in consummating acquisitions or
implementing its expansion plans, it may be necessary to finance such
acquisitions or expansion plans through the issuance of additional equity
securities, incurrence of indebtedness or both.
On January 29, 2002, the Company received a "Notice of Potential Liability" from
the United States Environmental Protection Agency ("EPA") regarding an existing
Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode
Island. EPA sends these "Notice" letters to potentially responsible parties
("PRPs") under the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its
status as an owner and/or operator because its railroad property traverses the
Superfund Site. Via these Notice letters, EPA makes a demand for payment of past
costs (identified in the letter as $762,000) and future costs associated with
the response actions taken to address the contamination at the Site, and
requests PRPs to indicate their willingness to participate and resolve their
potential liability at the Site. The Company has responded to EPA by stating
that it does not believe it has any liability for this Site, but that it is
interested in cooperating with EPA to address issues concerning liability at the
Site. At this point, two other parties have already committed via a consent
order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS")
phase of the clean-up at the Site, which will take approximately two or more
years to complete. After that, EPA will likely seek to negotiate the cost of the
Remedial Design and implementation of the remedy at the Site with the PRPs it
has identified via these Notice Letters (which presently includes over sixty
parties, and is likely to increase after EPA completes its investigation of the
identity of PRPs). The Company believes that none of its activities caused
contamination at the Site, and will contest this claim by EPA.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company and others, in an action
entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al.
(consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et
al.), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about sixty
parties named thus far by Plaintiffs, who seek to recover response costs
incurred in investigating and responding to the releases of hazardous substances
at the Site. Plaintiffs allege that the Company is liable under 42 U.S.C.
section 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended
up at the Site. The Company has entered into a Generator Cooperation Agreement
with other defendants to allocate costs in responding to this suit, and to share
technical costs and information in evaluating the Plaintiffs' claims. The
Company does not believe it generated any waste that ended up at this Site, or
that its activities caused contamination at the Site. The Company will contest
this suit.
On December 15, 2003, the EPA issued a second "Notice of Potential Liability"
letter to the Company regarding the Site. EPA again identified the Company as a
PRP, this time because EPA "believes that [the Company] accepted hazardous
substance for transport to disposal or treatment facilities and selected the
site for disposal." The Company responded again to EPA stating that it is
interested in cooperating with EPA but that it does not believe it has engaged
in any activities that caused contamination at the Site.
II - 7
Land Held for Development
Pursuant to permits issued by the United States Department of the Army Corp of
Engineers ("ACE") and the Rhode Island Coastal Resources Management Council
("CRMC"), the Company created 33 acres of waterfront land in East Providence,
Rhode Island ("South Quay") originally designed to capitalize on the growth of
intermodal transportation utilizing rail, water and highway connections. The
property has good highway access (1/2 mile from I-195) and direct rail access
and is adjacent to a 12 acre site also owned by the Company.
The permits for the property allow for construction of a dock along the west
face of the South Quay. Both the ACE and CRMC permits have been extended to
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 2005.
The City of East Providence has created a large waterfront redevelopment area
with a zoning overlay that would encourage development of offices, hotels,
restaurants, shops, marinas, apartments and other "clean" employment. The
Company has been cooperating with the City of East Providence in these efforts.
In addition, the City is moving forward with the plan, described above, that
will provide a direct connection from I-195 to the South Quay.
In 2001, the Company completed overhead clearances between Worcester and the
South Quay, which enables operation of double stack trains (having a height of
nineteen feet, two inches) and multi-level automobile cars.
Selected Quarterly Financial Data
Historically the Company has experienced lower operating revenues in the first
quarter of the year. The following table sets forth selected financial data for
each quarter of 2003 and 2002. The information for each of these quarters is
unaudited but includes all normal recurring adjustments that the Company
considers necessary for a fair presentation. These results, however, are not
necessarily indicative of results for any future period.
Year Ended December 31, 2003
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 4,859 $ 6,256 $ 6,674 $ 6,172
Income (Loss) from Operations ......... (909) 480 816 20
Net Income (Loss) ..................... (506) 389 694 91
Basic Income (Loss) Per Common Share .. $ (.11) $ .09 $ .16 $ .02
Diluted Income (Loss) Per Common Share. $ (.11) $ .09 $ .15 $ .02
II - 8
Year Ended December 31, 2002
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 4,956 $ 6,284 $ 6,313 $5,315
Income (loss) from Operations ......... (809) (653) 681 (49)
Net Income ............................ (313) (318) 543 110
Basic Income (Loss) Per Common Share... $ (.07) $ (.07) $ .12 $ .02
Diluted Income (Loss) Per Common Share $ (.07) $ (.07) $ .12 $ .02
Inflation
In recent years, inflation has not had a significant impact on the Company's
operations.
Seasonality
Historically, the Company's operating revenues are lowest for the first quarter
due to the absence of construction aggregate shipments during this period and to
winter weather conditions.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". This statement is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted this statement on January 1, 2003 and there was no
effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123".
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. The Company does not currently intend to adopt the fair value
based method of measuring compensation associated with stock awards and grants.
As a consequence of continuing to utilize the intrinsic value method of
measuring such compensation, the Company has provided additional disclosures in
its financial statements which reflect the impact on net income and earnings per
share on a pro forma basis as if it had applied the fair value method to
stock-based employee compensation.
In May 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" for certain
decisions made by the FASB as part of the Derivatives Implementation Group
process. This statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designed after June 30, 2003.
The Company adopted this statement in 2003 and there was no effect on the
Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The Company adopted this statement in 2003 and there was
no effect on the Company's financial statements
II - 9
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
PROVIDENCE AND WORCESTER RAILROAD COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report......................... II-11
Balance Sheets as of December 31, 2003 and 2002...... II-12
Statements of Income for the Years Ended December 31,
2003, 2002 and 2001................................. II-13
Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001.................... II-14
Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.................... II-15
Notes to Financial Statements........................ II-16
II - 10
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, 2003 and 2002, and
the related statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31,
2003. 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, 2003 and 2002, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, 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 15, 2004
II - 11
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
December 31,
2003 2002
------- -------
ASSETS
Current Assets:
Cash and equivalents ................................ $ 1,232 $ 2,888
Accounts receivable, net of allowance for
doubtful accounts of $125 in 2003 and 2002 ......... 3,820 3,304
Materials and supplies .............................. 1,771 1,634
Prepaid expenses and other .......................... 239 536
Deferred income taxes ............................... 191 126
------- -------
Total Current Assets ............................... 7,253 8,488
Property and Equipment, net .......................... 71,408 70,057
Land Held for Development ............................ 11,958 11,955
------- -------
Total Assets ......................................... $90,619 $90,500
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 2,019 $ 3,017
Accrued expenses .................................... 1,378 964
------- -------
Total Current Liabilities .......................... 3,397 3,981
------- -------
Profit-Sharing Plan Contribution ..................... 119 --
------- -------
Deferred Grant Income ................................ 8,154 7,980
------- -------
Deferred Income Taxes ................................ 10,258 9,898
------- -------
Commitments and Contingencies (Note 8)................
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding 645
shares in 2003 and 2002 ............................ 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,457,494 shares in 2003 and 4,443,380 shares
in 2002 ............................................ 2,229 2,222
Additional paid-in capital .......................... 29,709 29,619
Retained earnings ................................... 36,721 36,768
------- -------
Total Shareholders' Equity ......................... 68,691 68,641
------- -------
Total Liabilities and Shareholders' Equity ........... $90,619 $90,500
======= =======
The accompanying notes are an integral part of the financial statements.
II - 12
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,
2003 2002 2001
-------- -------- --------
Revenues:
Operating Revenues - Freight and Non-
Freight ..................................... $ 23,961 $ 22,868 $ 22,598
Other Income ................................. 661 877 1,003
-------- -------- --------
Total Revenues ............................. 24,622 23,745 23,601
-------- -------- --------
Expenses:
Operating:
Maintenance of way and structures ........... 3,639 3,279 3,124
Maintenance of equipment .................... 2,421 2,166 2,004
Transportation .............................. 6,701 6,532 6,326
General and administrative .................. 3,876 3,925 4,036
Depreciation ................................ 2,754 2,734 2,681
Taxes, other than income taxes .............. 2,258 2,253 2,391
Car hire, net ............................... 753 874 983
Employee retirement plans ................... 340 220 370
Track usage fees ............................ 812 1,715 330
-------- -------- --------
Total Operating Expenses ................... 23,554 23,698 22,245
-------- -------- --------
Income before Income Taxes .................... 1,068 47 1,356
Provision for Income Taxes .................... 400 25 505
-------- -------- --------
Net Income .................................... 668 22 851
Preferred Stock Dividends ..................... 3 3 3
-------- -------- --------
Net Income Available to Common Shareholders ... 665 $ 19 $ 848
======= ======= =======
Basic and Diluted Income Per Common Share ..... $ .15 $ -- $ .19
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II - 13
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 2003, 2002 and 2001
Total
Additional Share-
Preferred Common Paid-in Retained holders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
Balance, January 1, 2001 .... $ 32 $ 2,176 $28,962 $37,313 $68,483
Issuance of 45,140 common
shares to fund the Company's
2000 profit sharing plan
contribution ............... 23 334 357
Issuance of 14,283 common
shares for stock options
exercised, employee stock
purchases, and other ....... 7 80 87
Dividends paid:
Preferred stock, $5.00 per
share ..................... (3) (3)
Common stock, $.16 per share (702) (702)
Net income for the year ..... 851 851
------- ------- ------- ------- -------
Balance, December 31, 2001 .. 32 2,206 29,376 37,459 69,073
Issuance of 16,205 common
shares to fund the Company's
2001 profit sharing plan
contribution ............... 8 143 151
Issuance of 15,937 common
shares for stock options
exercised, employee stock
purchases, and other ....... 8 100 108
Dividends paid:
Preferred stock, $5.00 per
share ..................... (3) (3)
Common stock, $.16 per share (710) (710)
Net income for the year ..... 22 22
------- ------- ------- ------- -------
Balance, December 31, 2002 .. 32 2,222 29,619 36,768 68,641
Issuance of 14,114 common
shares for stock options
exercised, employee stock
purchases, and other ....... 7 90 97
Dividends paid:
Preferred stock, $5.00 per
share ..................... (3) (3)
Common stock, $.16 per share (712) (712)
Net income for the year ..... 668 668
------- ------- ------- ------- -------
Balance, December 31, 2003 .. $ 32 $ 2,229 $29,709 $36,721 $68,691
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
II - 14
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
2003 2002 2001
-------- -------- --------
Cash Flows from Operating
Activities:
Net income ................................. $ 668 $ 22 $ 851
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization ............ 2,754 2,734 2,728
Amortization of deferred grant income .... (224) (216) (211)
Profit-sharing plan contribution to be
funded with common stock ............... 119 -- 151
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ......................... (206) (337) (359)
Deferred income taxes .................... 295 325 405
Other, net ............................... 32 38 69
Increase (decrease) in cash and
equivalents from:
Accounts receivable .................... (559) 506 (642)
Materials and supplies ................. (137) (200) 298
Prepaid expenses and other ............. 297 (43) 219
Accounts payable and accrued expenses .. (604) 1,511 (489)
------- ------- -------
Net cash flows from operating activities ... 2,435 4,340 3,020
------- ------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment ......... (4,127) (5,378) (5,019)
Proceeds from sale and condemnation of
property, equipment and easements ......... 237 444 498
Proceeds from deferred grant income ........ 427 289 368
------- ------- -------
Net cash flows used in investing activities. (3,463) (4,645) (4,153)
------- ------- -------
Cash Flows from Financing Activities:
Dividends paid ............................. (715) (713) (705)
Issuance of common shares for stock options
exercised and employee stock purchases .... 87 102 83
------- ------- -------
Net cash flows used in financing activities (628) (611) (622)
------- ------- -------
Decrease in Cash and Equivalents ............ (1,656) (916) (1,755)
Cash and Equivalents, Beginning of Year ..... 2,888 3,804 5,559
------- ------- -------
Cash and Equivalents, End of Year ........... $ 1,232 $ 2,888 $ 3,804
======= ======= =======
Supplemental Disclosures:
Cash paid during year for income taxes ..... $ 35 $ -- $ 11
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II - 15
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(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 13.3%, 15.7% and 14.4% of the Company's
operating revenues in 2003, 2002 and 2001, respectively.
Cash and Equivalents
--------------------
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents for purposes of
classification in the balance sheets and statements of cash flows. Cash
equivalents are stated at cost, which approximates fair market value.
Materials and Supplies
----------------------
Materials and supplies, which consist of items for the improvement and
maintenance of track structure and equipment, are stated at cost,
determined on a first-in, first-out basis, and are charged to expense or
added to the cost of property and equipment when used.
Property and Equipment
----------------------
Property and equipment, including land held for development, is stated at
historical cost (including self-construction costs). Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments
are capitalized while routine maintenance and repairs, which do not improve
or extend asset lives, are charged to expense when incurred. Gains or
losses on sales or other dispositions are credited or charged to income.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
Track structure 20 to 67 years
Buildings and other structures 33 to 45 years
Equipment 4 to 25 years
The Company continually evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. When factors indicate that assets should be
evaluated for possible impairment, the Company uses an estimate of the
related undiscounted future cash flows over the remaining lives of the
assets in measuring whether the carrying amounts of the assets are
recoverable.
Deferred Grant Income
---------------------
The Company has availed itself of various federal and state programs
administered by the states of Connecticut, Massachusetts and Rhode Island
for reimbursement of expenditures for capital improvements. In order to
receive reimbursement, the Company must submit requests for the projects,
including cost estimates. The Company receives from 70% to 100% of the
costs of such projects, which have included bridges, track structure and
public improvements. To the extent that such grant proceeds are used for
capital improvements to bridges and track structure, they are recorded as
deferred grant income and amortized into operating revenues on a
straight-line basis over the estimated useful lives of the related
improvements ($224 in 2003, $216 in 2002 and $211 in 2001).
Grant proceeds utilized to finance public improvements, such as grade
crossings and signals, are recorded as a direct offset to the related
expense.
II - 16
Although the Company cannot predict the extent and length of future grant
programs, it intends to continue filing requests for such grants when they
are available.
Revenue Recognition
-------------------
Freight revenues are recorded at the time delivery is made to the customer
or the connecting carrier.
Gain or loss from sale, condemnation and disposal of property and equipment
and easements is recorded at the time the transaction is consummated and
collectibility is assured.
Income Taxes
------------
Deferred income taxes are recorded based on the differences between the
financial statement and tax basis of assets and liabilities. Such deferred
income taxes are also adjusted to reflect changes in the U.S. tax laws when
enacted and changes in blended state tax rates.
Income per Common Share
-----------------------
Basic income per common share is computed using the weighted average number
of common shares outstanding during each year. Diluted income per common
share reflects the effect of the Company's outstanding convertible
preferred stock, options and warrants (using the treasury stock method),
except where such items would be antidilutive.
A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:
Years Ended December 31,
2003 2002 2001
--------- --------- ---------
Weighted average shares for basic ...... 4,448,627 4,428,522 4,389,916
Dilutive effect of convertible preferred
stock, options and warrants ........... 67,050 68,692 67,919
--------- --------- ---------
Weighted average shares for diluted .... 4,515,677 4,497,214 4,457,835
========= ========= =========
Options and warrants to purchase 193,517, 188,103 and 195,503 shares of
common stock were outstanding during 2003, 2002 and 2001, respectively, but
were not included in the computation of diluted earnings per common share
because their effect would be antidilutive.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. The Company's principal
estimates include the allowance for doubtful accounts, useful lives of
properties, accrued liabilities including health insurance claims and legal
and other contingencies, and income taxes.
II - 17
Stock Based Compensation
------------------------
The Company accounts for stock-based compensation awards to employees using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company
used the fair value method to value compensation, as set forth in Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per share would have
been reported as follows:
Years Ended December 31,
2003 2002 2001
------- ------- -------
Net income (loss) available to common shareholders:
As reported ............................. $ 665 $ 19 $ 848
Less impact of stock option expense ..... 38 30 32
------- ------- -------
Pro forma ............................... $ 627 $ (11) $ 816
======= ======= =======
Basic income (loss) per share:
As reported ............................. $ .15 $ -- $ .19
Less impact of stock option expense ..... .01 -- --
------- ------- -------
Pro forma ............................... $ .14 $ -- $ .19
======= ======= =======
Diluted income (loss) per share:
As reported ............................. $ .15 $ -- $ .19
Less impact of stock option expense ..... .01 -- .01
------- ------- -------
Pro forma ............................... $ .14 $ -- $ .18
======= ======= =======
The fair value of options on their grant date is measured using the
Black/Scholes option pricing model. The estimated weighted average fair
value of options granted during 2003, 2002 and 2001 were $4.49, $4.35 and
$3.62 per option, respectively. Key assumptions used to apply this pricing
model are as follows:
2003 2002 2001
--------- --------- ---------
Average risk-free interest rate 3.62% 4.97% 4.97%
Expected life of option grants 7.0 years 7.0 years 7.0 years
Expected volatility of underlying stock 73% 76% 58%
Expected dividend payment rate, as
a percentage of the share price
on the date of grant 2.06% 2.37% 2.25%
The option pricing model used was designed to value readily tradable stock
options with relatively short lives and no vesting restrictions. In
addition, option valuation models require the input of highly subjective
assumptions including the expected price volatility. Because the options
granted to employees are not tradable and have contractual lives of ten
years and changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the models do not
necessarily provide a reliable measure of fair value of the options issued
under the Company's stock plan.
Comprehensive Income
--------------------
Comprehensive Income equals net income for 2003, 2002 and 2001.
Segment Reporting
-----------------
The Company organizes itself as one segment reporting to the chief
operating decision maker. Products and services consist primarily of
interstate freight rail services. These include the movement of freight in
both conventional freight cars and in intermodal containers on flat cars
over the Company's rail lines, as well as non-freight transportation
services such as switching, weighing and special trains and other services
II - 18
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 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted
this statement on January 1, 2003 and there was no effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Company does not currently intend to
adopt the fair value based method of measuring compensation associated with
stock awards and grants. As a consequence of continuing to utilize the
intrinsic value method of measuring such compensation, the Company has
provided additional disclosures in its financial statements which reflect
the impact on net income and earnings per share on a pro forma basis as if
it had applied the fair value method to stock-based employee compensation.
In May 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" for
certain decisions made by the FASB as part of the Derivatives
Implementation Group process. This statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designed after June 30, 2003. The Company adopted this statement in 2003
and there was no effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and Equity".
This statement establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. The
Company adopted this statement in 2003 and there was no effect on the
Company's financial statements.
2. Property and Equipment
Property and equipment consists of the following:
December 31,
2003 2002
------- -------
Land and improvements .................... $10,552 $10,414
Track structure .......................... 65,051 62,473
Buildings and other structures ........... 8,279 7,888
Equipment ................................ 25,578 24,962
------- -------
109,460 105,737
Less accumulated depreciation ............ 38,052 35,680
------- -------
Total property and equipment, net ........ $71,408 $70,057
======= =======
II - 19
3. Land Held for Development
Pursuant to permits issued by the United States Department of the Army Corp
of Engineers ("ACE") and the Rhode Island Coastal Resources Management
Council ("CRMC"), the Company created 33 acres of waterfront land in East
Providence, Rhode Island ("South Quay") originally designed to capitalize
on the growth of intermodal transportation utilizing rail, water and
highway connections. The property has good highway access (1/2 mile from
I-195) and direct rail access and is adjacent to a 12 acre site also owned
by the Company.
The permits for the property allow for construction of a dock along the
west face of the South Quay. Both the ACE and CRMC permits have been
extended to 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 scheduled for completion in 2005.
The City of East Providence has created a large waterfront redevelopment
area with a zoning overlay that would encourage development of offices,
hotels, restaurants, shops, marinas, apartments and other "clean"
employment. The Company has been cooperating with the City of East
Providence in these efforts. In addition, the City is moving forward with
the plan, described above, that will provide a direct connection from I-195
to the South Quay.
In 2001, the Company completed overhead clearances between Worcester and
the South Quay, which enables operation of double stack trains (having a
height of nineteen feet, two inches) and multi-level automobile cars.
4. Revolving Line of Credit
The Company has a revolving line of credit with its principal bank in the
amount of $3,000 expiring May 31, 2005. Borrowings under this line of
credit are unsecured, due on demand and bear interest at either the bank's
prime rate or one and one half percent over either the one or three month
London Interbank Offered Rates. The Company pays no commitment fee on this
line and has no compensating balance requirements. There were no loans
outstanding under the line at any time during 2003 or 2002.
5. Other Income
Other income consists of the following: Years Ended December 31,
2003 2002 2001
------ ------ ------
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ........................... $ 206 $ 337 $ 359
Rentals and license fees under
various operating leases ................. 443 490 448
Interest .................................. 12 50 196
------ ------ ------
$ 661 $ 877 $1,003
====== ====== ======
6. Amtrak Arbitration
The Company was party to an arbitration proceeding with the National
Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for
rate increases with respect to the Company's freight operations over a
portion of Amtrak's Northeast Corridor in the states of Rhode Island and
II - 20
Connecticut. The arbitrator issued a decision in June 2002 in which he
ordered the Company to pay Amtrak additional track usage fees and siding
maintenance costs retroactive to July 9, 1999. The statement of income for
2002 includes $935 of track usage fees and $165 of siding maintenance costs
which relate to years prior to 2002.
7. Income Taxes
The provision for income taxes consists of the following:
Years Ended December 31,
2003 2002 2001
------ ------ ------
Current:
Federal .......................... $ 105 $ (300) $ 90
State ............................ -- -- 10
------ ------ ------
105 (300) 100
Deferred, Federal and State ....... 295 325 405
------ ------ ------
$ 400 $ 25 $ 505
====== ====== ======
The following summarizes the estimated tax effect of temporary differences
that are included in the net deferred income tax provision: Years Ended
December 31,
Years Ended December 31,
2003 2002 2001
----- ----- -----
Depreciation ........................... $ 431 $ 382 $ 326
Deferred grant income .................. (62) (32) 2
Gains from sale, condemnation and
disposal of property and equipment .... (8) (15) (20)
Accrued casualty and other claims ...... (74) (56) 56
Other .................................. 8 46 41
----- ----- -----
$ 295 $ 325 $ 405
===== ===== =====
II - 21
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's net deferred income
tax liability as of December 31, 2003 and 2002 are as follows:
December 31,
2003 2002
------- -------
Deferred income tax liabilities:
Differences between book and tax basis of
property and equipment ....................... $13,146 $12,723
Other ......................................... 14 13
------- -------
13,160 12,736
------- -------
Deferred income tax assets:
Rental income received in advance ............. -- 7
Deferred grant income ......................... 2,895 2,833
Accrued casualty and other claims ............. 154 80
Allowance for doubtful accounts and other ..... 44 44
------- -------
3,093 2,964
------- -------
Net deferred income tax liability .............. $10,067 $ 9,772
======= =======
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
Years Ended December 31,
2003 2002 2001
---- ---- ----
Federal statutory rate ....................... 34% 34% 34%
Depreciation of properties acquired from
bankrupt railroads having a tax basis
in excess of cost ........................... (6) (48) (3)
Non deductible expenses, etc ................. 9 67 5
State income tax, net of federal income
tax benefit ................................. -- -- 1
---- ---- ----
Effective tax rate ........................... 37% 53% 37%
==== ==== ====
8. Commitments and Contingencies
The Company is a defendant in certain lawsuits relating to casualty losses,
many of which are covered by insurance subject to a deductible. The Company
believes that adequate provision has been made in the financial statements
for any expected liabilities which may result from disposition of such
lawsuits.
On January 29, 2002, the Company received a "Notice of Potential Liability"
from the United States Environmental Protection Agency ("EPA") regarding an
existing Superfund Site that includes the J.M. Mills Landfill in
Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially
responsible parties ("PRPs") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). EPA identified the
Company as a PRP based on its status as an owner and/or operator because
its railroad property traverses the Superfund Site. Via these Notice
letters, EPA makes a demand for payment of past costs (identified in the
letter as $762) and future costs associated with the response actions taken
to address the contamination at the Site, and requests PRPs to indicate
their willingness to participate and resolve their potential liability at
the Site. The Company has responded to EPA by stating that it does not
believe it has any liability for this Site, but that it is interested in
cooperating with EPA to address issues concerning liability at the Site. At
this point, two other parties have already committed via a consent order
with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS")
II - 22
phase of the clean-up at the Site, which will take approximately two or
more years to complete. After that, EPA will likely seek to negotiate the
cost of the Remedial Design and implementation of the remedy at the Site
with the PRPs it has identified via these Notice Letters (which presently
includes over sixty parties, and is likely to increase after EPA completes
its investigation of the identity of PRPs). The Company believes that none
of its activities caused contamination at the Site, and will contest this
claim by EPA.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company and others, in an action
entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al.
(consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et
al.), C.A. No. 01-496/L, on December 18, 2002. The Company is one of about
sixty parties named thus far by Plaintiffs, who seek to recover response
costs incurred in investigating and responding to the releases of hazardous
substances at the Site. Plaintiffs allege that the Company is liable under
42 U.S.C. section 961(a)(3) of CERCLA as an "arranger" or "generator" of
waste that ended up at the Site. The Company has entered into a Generator
Cooperation Agreement with other defendants to allocate costs in responding
to this suit, and to share technical costs and information in evaluating
the Plaintiffs' claims. The Company does not believe it generated any waste
that ended up at this Site, or that its activities caused contamination at
the Site. The Company will contest this suit.
On December 15, 2003, the EPA issued a second "Notice of Potential
Liability" letter to the Company regarding the Site. EPA again identified
the Company as a PRP, this time because EPA "believes that [the Company]
accepted hazardous substance for transport to disposal or treatment
facilities and selected the site for disposal." The Company responded again
to EPA stating that it is interested in cooperating with EPA but that it
does not believe it has engaged in any activities that caused contamination
at the Site.
9. Employee Benefit Plans
Stock Option Plan
-----------------
The Company has a non-qualified stock option plan ("SOP") covering all
management personnel having a minimum of one year of service with the
Company and who are not holders of a majority of either its outstanding
common stock or its outstanding preferred stock. In addition, the Company's
outside directors are eligible to participate in the SOP. The SOP covers
50,000 common shares or 5% of the shares of common stock outstanding,
whichever is greater (222,875 shares at December 31, 2003). Options granted
under the SOP, which are fully vested when granted, are exercisable over a
ten year period at the market price for the Company's common stock as of
the date the options are granted.
II - 23
Changes in stock options outstanding are as follows:
Weighted Average
----------------
Number Exercise Fair
of shares Price Value
------ ------ ------
Outstanding at January 1, 2001 .... 41,604 $ 9.70
Granted ........................... 8,130 7.13 $ 3.62
Exercised ......................... (1,220) 5.72
Expired ........................... (1,763) 5.99
------ ------ ------
Outstanding and exercisable at
December 31, 2001................. 46,751 9.50
Granted ........................... 8,200 6.75 $ 4.35
Exercised ......................... (3,431) 7.17
Expired ........................... (2,761) 6.88
------ ------ ------
Outstanding and exercisable at
December 31, 2002................. 48,759 9.35
Granted ........................... 8,270 7.75 $ 4.49
Exercised ......................... (2,344) 7.21
Expired ........................... (3,379) 7.34
------ ------ ------
Outstanding and exercisable at
December 31, 2003................. 51,306 $ 9.32
====== ====== ======
The following table sets forth information regarding options at December
31, 2003:
Weighted Average
Range of Number ----------------
Number Exercise Currently Exercise Remaining
of Options Prices Exercisable Price Life (in years)
--------- ---------- ---------- ---------- -----------
38,747 $6.75 - 8.00 38,747 $7.38 6
12,559 12.38 - 18.38 12,559 15.30 5
Defined Contribution Retirement Plans
-------------------------------------
The Company has a deferred profit-sharing plan ("Plan") which covers all of
its employees who are members of its collective bargaining units.
Contributions to the Plan are required in years in which the Company has
income from "railroad operations" as defined in the Plan. Contributions are
to be equal to at least 10% but not more than 15% of the greater of income
before income taxes or income from railroad operations subject to a maximum
contribution of $3.5 per eligible employee. Contributions to the Plan may
be made in cash or in shares of the Company's common stock valued at the
closing market price on the day contributed. Contributions accrued under
this Plan amounted to $119 in 2003 and $151 in 2001. No contributions were
accrued in 2002 since the Company had negative income from operations. The
Company made its 2001 contribution and intends to make its 2003
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 up to the maximum amount allowable by law. Contributions
accrued under the SEPP amounted to $204 in 2003, $203 in 2002 and $201 in
2001 which, in each year, was less than the maximum amount allowable by
law.
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
II - 24
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 10,665 shares in 2003, 11,831 shares in
2002 and 12,413 shares in 2001.
10. Preferred Stock
The Company's $50 par value preferred stock is convertible into 100 shares
of common stock at the option of the shareholder. The noncumulative stock
dividend is fixed by the Company's Charter at an annual rate of $5.00 per
share, out of funds legally available for the payment of dividends.
The holders of preferred stock and holders of common stock are entitled to
one vote per share, voting as separate classes, upon matters voted on by
shareholders. The holders of common stock elect one third of the Board of
Directors; the voters of preferred stock elect the remainder of the Board.
II - 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
- --------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company carried out an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
as of the end of the year covered by this annual report. This evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Treasurer. Based upon that evaluation, the Chief Executive Officer and the
Treasurer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms.
There was no significant change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal year that has
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting.
II - 26
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
For information with respect to the directors of the Company, see Pages 3
through 6 of the Company's definitive proxy statement for the 2004 annual
meeting of its shareholders, which pages are incorporated herein by reference.
The following are the executive officers of the Company:
Date of First
Name Age Position Election to Office
- ---- --- -------- ------------------
Robert H. Eder 71 Chairman 1980
Orville R. Harrold 71 President 1980
P. Scott Conti 46 Vice President 1999
Robert J. Easton 60 Treasurer 1988
Mary A. Tanona 46 Secretary 2000
All officers hold their respective offices until their successors are duly
elected and qualified. Mr. Conti served as Engineering Manager and then Chief
Engineer of the Company from 1988 until his election as Vice President in 1999.
Ms. Tanona joined the Company as Assistant General Counsel and Assistant
Secretary beginning in 1999. Prior to joining the Company she was Associate
General Counsel of Arbor National Commercial Mortgage Corporation in Boston.
The Company has adopted a written code of ethics that applies to all of its
employees including its Chief Executive Officer and its Chief Financial Officer.
A copy of the Company's code of ethics, entitled "Business Conduct Policy," is
available on the Company's website at http://www.pwrr.com, and/ or may be
obtained without charge by contacting:
Investor Relations
Attention: Wendy Lavely
Providence and Worcester Railroad Company
75 Hammond Street
Worcester, Massachusetts 01610
(800) 447-2003
Internet Address: http://www.pwrr.com; [email protected]
Item 11. Executive Compensation
- -------------------------------
See pages 7 through 9 of the Company's definitive proxy statement for the 2004
annual meeting of its shareholders, which pages are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
See pages 11 and 12 of the Company's definitive proxy statement for the 2004
annual meeting of its shareholders, which pages are incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
Not Applicable
Item 14. Principal Accountant Fees and Services
- -----------------------------------------------
See pages 13 and 14 of the Company's definitive proxy statement for the 2004
annual meeting of its shareholders which pages are incorporated herein by
reference.
III - 1
Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1) All financial statements:
An index of financial statements is included in Item 8, page II- 11 of
this annual report
(2) Financial Statement schedule:
Schedule II Valuation and Qualifying Accounts.....Page III-4
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or the notes thereto.
(3) Listing of Exhibits.
(10A) Material Contracts (incorporated by reference to Exhibit 10 to
the registration statement of the Registrant on Form 10, to the
Non-Qualified Stock Option Plan and Employee Stock Purchase Plan of
the Registrant on Forms S-8 and to the registration statements of the
Registrant on Form S-1).
(23) Independent Auditors' Consent
(31) Certifications Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002
(32) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Not applicable.
(c) Exhibits (annexed).
Financial Statement Schedule. See item (a) (2.) above
III - 2
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 26, 2004
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 26, 2004
Robert H. Eder and Chairman (Principal
Executive Officer)
/s/ Orville R. Harrold
________________________ President and Director March 26, 2004
Orville R. Harrold (Chief Operating Officer)
/s/ Robert J. Easton
________________________ Treasurer March 26, 2004
Robert J. Easton (Principal financial officer and
principal accounting officer)
/s/ Frank W. Barrett
________________________ Director March 26, 2004
Frank W. Barrett
/s/ J. Joseph Garrahy
________________________ Director March 26, 2004
J. Joseph Garrahy
/s/ Merrill W. Sherman
________________________ Director March 26, 2004
Merrill W. Sherman
III - 3
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(IN THOUSAND DOLLARS)
Column A Column B Column C Additions Column D Column E
-------- -------- ------------------ -------- --------
(1) (2)
Balance Charged to Charged to Balance
at costs and other at end
Description beginning expenses accounts Deductions of
of period describe (A) period
Allowance for doubtful
accounts:
Year ended
December 31, 2003..... $ 125 $125
===== ====
Year ended
December 31, 2002..... $ 125 $125
===== ====
Year ended
December 31, 1991..... $ 125 $ 5 $ (5) $125
===== ==== ====== ====
- ---------
(A) Bad debts written off.
III - 4
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 15, 2004 appearing in this Annual Report
on Form 10-K of Providence and Worcester Railroad Company for the year ended
December 31, 2003.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 26, 2004
EXHIBIT 31.1
Providence and Worcester Railroad Company
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, ROBERT H. EDER, certify that:
1. I have reviewed this annual report on Form 10-K of Providence and Worcester
Railroad Company;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report, based on our evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
DATE: March 26, 2004
By: /s/ Robert H. Eder
---------------------------
Robert H. Eder,
Chairman of the Board
And Chief Executive Officer
EXHIBIT 31.2
Providence and Worcester Railroad Company
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, ROBERT J. EASTON certify that:
1. I have reviewed this annual report on Form 10-K of Providence and Worcester
Railroad Company;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report, based on our evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
DATE: March 26, 2004
By: /s/ Robert J. Easton
---------------------------
Robert J. Easton
Treasurer and Principal
Financial Officer
EXHIBIT 32
PROVIDENCE AND WORCESTER RAILROAD COMPANY
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Providence and Worcester Railroad
Company (the Company) on form 10-K for the year ended December 31, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Robert H. Eder
-----------------------------
Robert H. Eder,
Chairman of the Board And Chief
Executive Officer
March 26, 2004
In connection with the Annual Report of Providence and Worcester Railroad
Company (the Company) on form 10-K for the year ended December 31, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Robert J. Easton
-----------------------------
Robert J. Easton,
Treasurer and Chief Financial Officer
March 26, 2004