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, 2007
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16704
PROVIDENCE AND WORCESTER RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0344399
_____________________________ __________________________
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
75 Hammond Street, Worcester, Massachusetts 01610
_____________________________ __________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(508) 755-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
_____________________________ __________________________
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
________________________________________________________________
(Title of Class)
________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No 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 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer X Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act) Yes No X
As of June 30, 2007, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $67,601,036. (For this purpose, all
directors of the Registrant are considered affiliates.)
As of March 19, 2008, the Registrant had 4,793,909 shares of Common Stock
outstanding.
Documents Incorporated by Reference -
-------------------------------------
Portions of the Registrant's Proxy Statement for the 2008 Annual Meeting of
Shareholders to be held on April 30, 2008, is incorporated by reference into
Part III of this Form 10-K.
Exhibit Index - Page IV-1.
PART I
Item 1. Business
----------------
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 516 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 automobiles, construction aggregate, iron and steel products,
chemicals, lumber, scrap metals, plastic resins, cement, coal, construction and
demolition debris, and processed foods and edible food stuffs, such as frozen
foods, corn syrup and animal and vegetable oils. Its customers include Aventine
Renewable Energy, Inc., Cargill, Inc., The Dow Chemical Company, Exxon-Mobil
Corporation, First Light Power Resources, Frito-Lay, Inc., International Paper
Company, Northeast Utilities, Nucor Steel, Smurfit-Stone Container Corporation
and Tilcon Connecticut, Inc. In 2007, P&W transported approximately 31,000
carloads of freight and approximately 41,000 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, $319.3 million or more; Class II, $25.5 million to $319.3 million; and Class
III, less than $25.5 million. As a result of mergers and consolidations, there
are now only seven Class I railroads in the country. The Class I railroads
handle 93% 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 32% of all
rail track, employ 11% of all rail workers and generate about 7% 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) on specially designed railcars,
together with increasing highway traffic congestion and the shortage of
long-haul truck drivers have contributed to this trend.
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Regional Developments
There are a number of development projects underway in New England to
increase port capacity along the extensive coastline and to improve the
intermodal transportation and distribution infrastructure in the region. These
projects present significant opportunities for the Company to increase its
business.
Quonset/Davisville
The State of Rhode Island 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 has provided additional track
capacity and double stack clearance on the Northeast Corridor between
Quonset/Davisville; the connection of the Corridor to the Company's main line at
Central Falls, RI was completed in October of 2006. Shipments of automobiles by
rail commenced in the fall of 2007 with the Company handling 167 autoracks.
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 the line is in service.
New London and Willimantic Interchanges
Through its New London interchange with the New England Central Railroad
("NEC"), P&W has been able to develop significant new business with the Canadian
National Railway ("CN") and the Canadian Pacific Railway ("CP"). The Company
recently reactivated the Willimantic Interchange which provides a route with
improved overhead clearances with the NEC, further strengthening its connections
with the CN and CP.
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
significant source of revenue for the Company over the next few years.
In October 2006, the Company initiated the rehabilitation of its South
Providence yard to facilitate handling unit trains of ethanol. This commodity is
being transported by rail throughout the country and is a component of the
gasoline mix available at gasoline service stations throughout southern New
England. This rehabilitation was completed and shipments of ethanol commenced
during the third quarter of 2007.
Railroad Operations
The Company's rail freight system extends over approximately 516 miles of
track. The Company interchanges freight traffic with CSX Transportation at
Worcester, Massachusetts and at New Haven, Connecticut; with Pan Am Railways
(formerly Springfield Terminal Railway Company) at Gardner, Massachusetts; with
the New England Central Railroad at New London and Willimantic, Connecticut; and
with the New York and Atlantic 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.
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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, Southeast Asia
and Europe 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
half of its operating revenues. In 2007 one customer, which ships construction
aggregate from three separate quarries on P&W's system to asphalt production
plants in Connecticut and New York, accounted for 13.8% of the Company's
operating revenues. No other customer accounted for 10% or more of its total
operating revenues in 2007.
Markets
The Company transports a wide variety of commodities for its customers. In
recent years, chemicals and plastics (including ethanol in 2007) and
construction aggregate were the two largest commodity groups transported by the
Company, constituting 37% and 17%, respectively, of conventional carload freight
revenues in 2007. The following table summarizes the Company's conventional
carload freight revenues by commodity group as a percentage of such revenues:
Commodity 2007 2006 2005
--------- ---- ---- ----
Chemicals and plastics ........... 37% 33% 34%
Construction aggregate ........... 17 19 17
Food and agricultural products 12 12 12
Forest and paper products ........ 12 14 14
Metal products ................... 9 7 14
Coal ............................. 8 11 7
Other ............................ 5 4 2
---- ---- ----
Total 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.
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Since commencing active operations in 1973, the Company has committed
significant resources to track maintenance to minimize the risk of derailments
and believes its rail system is in good condition.
Safety of the Company's operations is of paramount importance for the
benefit and protection of the Company's employees, customers and the communities
served by its rail lines. The Company and its employees have continued to make
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 may 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 December 31, 2007, the Company had 152 full-time employees, 119 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 moratoria. The Company signed
eight year agreements with the United Transportation Union (trainmen) in October
2005, the Transportation Communications Union (clerical) in August 2006 and the
Brotherhood of Railroad Signalmen (maintenance) in July 2007. 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. Certain rail competitors, including CSX
Transportation and Norfolk Southern, are larger and better capitalized than the
Company. The Company also competes with other modes of transportation,
particularly long-haul trucking companies for the transportation of commodities,
and ocean- going vessels for the transportation of containers. 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.
I-4
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. In making acquisitions, P&W
competes with other short-line and regional rail operators, some of which are
larger and have greater financial resources than the Company.
Governmental Regulation
The Company is subject to governmental regulation by the United States
Surface Transportation Board (the "STB"), the Federal Railroad Administration
(the "FRA") and other federal, state and local regulatory authorities with
respect to certain rates and railroad operations, as well as a variety of
health, safety, labor, environmental and other matters, all of which could
potentially affect the competitive position and profitability of the Company.
Additionally, the Company is subject to STB regulation and may be required to
obtain STB approval prior to its acquisition of any new railroad properties.
Management of the Company believes that the regulatory freedoms granted by the
Staggers Rail Act have been beneficial to the Company by giving it flexibility
to adjust prices and operations to respond to market forces and industry
changes. However, various interests, and certain members of the United States
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 of
1980 (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.
Internet Address and SEC Reports
We maintain a website with the address www.pwrr.com. We are not including
the information contained on our website as a part of, or incorporating it by
reference into, this Annual Report on Form 10-K. We make available free of
charge through our website our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as
soon as reasonably practicable after we electronically file such material with,
or furnish such material to, the Securities and Exchange Commission. We also
include on our website our corporate governance guidelines and the charters for
each of the major committees of our board of directors. In addition, we intend
to disclose on our website any amendments to, or waivers from, our code of
business conduct and ethics that are required to be publicly disclosed pursuant
to rules of the SEC.
Item 1A. Risk Factors
---------------------
Fluctuations in Operating Revenues
Historically, the Company's operating revenues have been tied to national
and regional economic conditions, especially those impacting the manufacturing
sector, while the Company's expenses have been relatively inelastic.
Increasingly, the Company's business is impacted by global economic events. A
downturn in general economic conditions could materially adversely affect the
Company's business and results of operations. In addition, shifts in the New
England economy between manufacturing and service sectors could materially
affect the Company's performance. The Company's operating revenues and expenses
have also fluctuated due to unpredictable events, such as adverse weather
conditions and customer plant closings. While generally the Company has been
able to replace revenues lost due to plant closings through expansion of
existing business or replacement with new customers, there can be no assurance
that it could do so in the future. The occurrence of such unpredictable events
in the future could cause further fluctuations in operating revenues and
expenses and materially adversely affect the Company's financial performance.
I-5
Availability of Acquisition and Growth Opportunities and Associated
Risks
The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. There are a limited number
of acquisition targets in the Company's market. In addition, in making
acquisitions, the Company competes with other short- line and regional rail
operators, some of which are larger and have greater financial resources than
the Company. The growing competition for such acquisitions may cause an increase
in acquisition prices and related costs, resulting in fewer attractive
acquisition opportunities, which could materially adversely affect the Company's
growth. No assurance can be given that the Company will be able to acquire
suitable additional rail lines or that, if acquired, the Company would be able
to successfully operate such additional rail lines.
Acquisitions of additional rail lines may be subject to regulatory review
and approval by the Surface Transportation Board. The Company is a Class II
railroad and acquisitions made by Class II railroads are subject to a
requirement that employees affected by an acquisition be paid up to one year's
severance.
Competition
For customers located directly on line, which constitute the majority of
the Company's freight business, the Company is the only rail carrier providing
direct service. However, the Company competes with other freight railroads on
the location of new businesses in the region. The Company also competes with
other modes of transportation, particularly long-haul trucking companies and
ocean-going vessels. Any improvement in the cost or quality of these alternate
modes of transportation, for example, legislation granting increases in truck
size or allowable weight, could increase this competition and materially affect
the Company's business and results of operations.
Customer Concentration
The Company's ten largest customers accounted for approximately 50% of the
Company's operating revenues for 2007 with one customer accounting for more than
13%. The Company's business could be materially adversely affected if any of
these customers reduces shipments of commodities transported by the Company.
Although in the past the Company has been able to replace revenues lost due to a
reduction in existing customers' rail service requirements, no assurance can be
given that it could do so in the future.
Labor Issues
Substantially all of the Company's non-management employees are represented
by national railroad labor organizations. The Company's inability to
satisfactorily conclude negotiations with unions could materially adversely
affect the Company's operations and financial performance. Similarly, any
protracted work stoppages against the Company's connecting railroads could
materially adversely affect the Company's business and results of operations.
Historically, Congress has intervened in such events to avoid disruptions in
interstate commerce, but there can be no assurance that it would do so in the
future.
All railroad industry employees are covered by the Railroad Retirement Act
and the Railroad Unemployment Insurance Act in lieu of Social Security and other
federal and state unemployment insurance programs, and the Federal Employers
Liability Act in lieu of state workers' compensation. Significant increases in
the taxes payable pursuant to the Railroad Retirement Act would increase the
Company's costs of operations.
Relationships with Other Railroads
The railroad industry in the United States is dominated by a small number
of large Class I carriers that have substantial market control and negotiating
leverage. A majority of the Company's carloadings is interchanged with a Class I
carrier, CSX Transportation. A decision by CSX Transportation to discontinue
serving routes or transporting certain commodities could materially adversely
affect the Company's business.
The Company's ability to provide rail service to its customers depends in
large part upon its ability to maintain cooperative relationships with all its
connecting carriers with respect to, among
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other matters, freight rates, car supply, interchange and trackage rights. A
deterioration in the operating relationships with or service provided by those
connecting carriers could materially adversely affect the Company's business.
Rail Infrastructure and Availability of Government Programs
Certain of the Company's growth opportunities are contingent upon
anticipated improvements to P&W's existing rail infrastructure. No assurance can
be given that the Company will be able to complete such projects as planned.
Unforeseen delays or other problems which prevent completion of such
improvements could materially adversely affect the Company's business and
results of operations. In addition, the Company has worked with federal and
state agencies to improve its rail infrastructure and has been effective in
obtaining federal and state financial support for such projects. However, there
can be no assurance that such federal and state programs or funds will be
available in the future or that the Company will be eligible to participate in
such programs. Failure to participate in federal and state programs or to
receive federal or state funding for rail infrastructure improvements would
cause the Company to incur the full cost of rail infrastructure improvements and
significantly increase its costs of rail maintenance.
Potential for Increased Governmental Regulation and Mandated Upgrade
to Property
The Company is subject to governmental regulation by the STB, 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. Management of the Company
believes that the regulatory freedoms granted by the Staggers Rail Act have been
beneficial to the Company by giving it flexibility to adjust prices and
operations to respond to market forces and industry changes. However, various
interests and certain members of the United States House of Representatives and
Senate (which have jurisdiction over the 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. If
enacted, these proposals, or court or administrative rulings to the same effect
under current law, could materially adversely affect the Company's business and
results of operations.
Casualty Losses
The Company has obtained insurance coverage for losses arising from
personal injury and for property damage in the event of derailments or other
accidents or occurrences. The Company believes that its insurance coverage is
adequate based on its experience. However, under catastrophic circumstances such
as accidents involving passenger trains or spillage of hazardous materials, the
Company's liability could exceed its insurance limits. The Company transports
hazardous chemicals throughout its system and conducts operations on the
Northeast Corridor on which there is heavy passenger traffic. Insurance is
available from only a limited number of insurers, and there can be no assurance
that insurance protection at the Company's current levels will continue to be
available or, if available, will be obtainable on terms acceptable to the
Company. Losses or other liabilities incurred by the Company which are not
covered by insurance or which exceed the Company's insurance limits could
materially adversely affect the Company's financial condition, liquidity and
results of operation.
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 transports hazardous materials and periodically uses hazardous
material in its operations. While the Company believes it is in substantial
compliance with all applicable environmental laws and regulations, any
allegations or findings to the effect that the Company had violated such laws or
regulations could materially adversely affect the Company's business and results
of operations. The Company operates on properties that have been used for rail
operations for over a century. There can be no assurance that historic releases
of hazardous waste or materials will not be discovered, requiring remediation of
Company properties, and that the cost of such remediation would not be material.
I-7
Item 1B. Unresolved Staff Comments
----------------------------------
None
Item 2. Properties
------------------
Track
P&W's rail system extends over approximately 516 miles of track, of which
it owns approximately 163 miles. The Company has the right to use the remaining
353 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 516 miles of the Company's system, 306 miles, or 59%,
are located in Connecticut, 95 miles, or 19%, are located in Massachusetts, 87
miles, or 17%, 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 Putnam and Plainfield,
Connecticut, and in Worcester, Massachusetts. 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 has resulted in the creation of approximately 33 acres of waterfront
land. The Company also owns 12 acres of land adjacent to the South Quay, both of
which are being held for future development.
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.
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Rolling Stock
The following schedule sets forth the rolling stock owned by the Company as
of December 31, 2007:
Description Number
----------- ------
Locomotive .................................................. 30
Gondola ..................................................... 77
Flat Car .................................................... 5
Ballast Car ................................................. 30
Passenger Equipment ......................................... 7
Caboose ..................................................... 2
------
Total .................................................. 151
======
The 30 diesel electric locomotives, which include nine pre-owned 3,900
horsepower GE B39-8 locomotives acquired in 2002 and 2003 and three pre-owned GE
B40-8 locomotives acquired in 2004 and 2005, are used on a daily basis, are
maintained to a high standard, comply with all FRA and Association of American
Railroads rules and regulations and are adequate for the needs of the Company's
freight operations. The gondolas and flat cars are considered modern rail cars
and are used by certain P&W customers. Other rail freight customers use their
own freight cars or obtain such equipment from other sources. The ballast cars
are used in track maintenance. From time to time, the Company has leased ballast
cars to other adjoining railroads. The passenger equipment and caboose are not
utilized in P&W's rail freight operations but are used on an occasional basis
for Company functions, excursions and charter trips.
Equipment
P&W has a state-of-the-art digital touch control dispatching system at its
Worcester operations center permitting two-way radio contact with every train
crew and maintenance vehicle on its lines. The system also enables each train
crew to maintain radio contact with other crew members. The Company maintains a
computer facility in Worcester with back-up computer facilities in Worcester and
Plainfield, Connecticut to assure the Company's ability to operate in the event
of disruption of service in Worcester. The Company also has state-of-the-art
automatic train defect detectors at strategic locations which inspect passing
trains and audibly communicate the results to train crews and dispatchers in
order to protect against equipment failure en route.
The Company maintains a modern fleet of track maintenance equipment and
aggressively pursues available opportunities to work with federal and state
agencies for the rehabilitation of bridges, grade crossings and track. The
Company's locomotives are equipped with the cab signal technology necessary for
operations on the Northeast Corridor and are equipped with automatic civil speed
enforcement systems which were required by the introduction of high speed
passenger service on the Northeast Corridor.
Item 3. Legal Proceedings
-------------------------
On January 29, 2002, the Company received a "Notice of Potential Liability"
from the United States Environmental Protection Agency ("EPA") regarding an
existing Superfund Site (the "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 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). 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
I-9
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.
The Company believes that none of its activities caused contamination at the
Site, and will contest this claim by EPA and therefore no liability has been
accrued for this matter.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled CCL
Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with
Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L,
on December 18, 2002. The Company was one of about sixty parties named by
Plaintiffs, in this suit, to recover response costs incurred in investigating
and responding to the releases of hazardous substances at the Site. Plaintiffs
alleged that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an
"arranger" or "generator" of waste that ended up at the Site. The Company
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. Although the Company does not believe it
generated any waste that ended up at the Site, or that its activities caused
contamination at the Site, the Company paid $45,000 to settle this suit in March
2006.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
Not applicable.
I-10
Part II
-------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters and
--------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
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
---- --- --------- ------
2006
----
First Quarter ........ $16.99 $14.71 $5.00 $ .04
Second Quarter ....... 20.80 15.75 -0- .04
Third Quarter ........ 21.00 16.50 -0- .04
Fourth Quarter ....... 21.84 18.51 -0- .04
2007
----
First Quarter ........ $19.50 $16.70 $5.00 $ .04
Second Quarter ....... 21.61 17.46 -0- .04
Third Quarter ........ 19.55 14.35 -0- .04
Fourth Quarter ....... 20.74 16.50 -0- .04
As of February 29, 2008, 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
PERFORMANCE GRAPH
PREPARED BY BURNHAM SECURITIES INC.
FOR PROVIDENCE AND WORCESTER RAILROAD COMPANY.
5 - Year Return
Providence and Worcester Railroad Company,
U.S. Railroad Index and Russell 2000(R) Index
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
Fiscal Years Ended December 31
------------------------------
2002 2003 2004 2005 2006 2007
-------------------------- ----- ----- ----- ----- ----- -----
-------------------------- ----- ----- ----- ----- ----- -----
PWX 100.0 116.8 178.7 200.1 263.9 228.3
U.S. Railroad Index 100.0 116.9 128.4 166.7 183.1 229.3
Russell 2000 100.0 145.4 170.1 175.7 205.6 200.0
-------------------------- ----- ----- ----- ----- ----- -----
The Russell 2000 Index measures the performance of small capitalization US
companies by measuring the performance of the 2,000 smallest securities in the
Russell 3000 Index. The U.S. Railroad Index is compiled by Burnham Securities
Inc. and includes 9 railroad-operating companies.
The Board of Directors recognizes that the market price of stock is influenced
by many factors, only one of which is issuer performance. The Company's stock
price may also be influenced by market perception, economic conditions and
government regulation. The stock price performance shown in the graph is not
necessarily an indicator of future price performance.
II-2
Item 6. Selected Financial Data
-------------------------------
The selected financial data set forth below has been derived from the
Company's 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,
2007 2006 2005 2004 2003
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Income Statement Data:
Operating revenues ........ $26,164 $28,451 $26,734 $24,943 $23,961
Other income .............. 890 1,373 1,208 1,547 661
------- ------- ------- ------- -------
Total Revenues ............ 27,054 29,824 27,942 26,490 24,622
Operating expenses ........ 27,856 28,222 26,114 24,854 23,592
------- ------- ------- ------- -------
(Loss) income before income
taxes .................... (802) 1,602 1,828 1,636 1,030
Provision for income taxes
(benefit) ................ (150) 560 615 631 387
------- ------- ------- ------- -------
Net (loss) income ......... (652) 1,042 1,213 1,005 643
Preferred stock dividend .. 3 3 3 3 3
------- ------- ------- ------- -------
Net (loss) income available
to common shareholders ... $ (655) $ 1,039 $ 1,210 $ 1,002 $ 640
======= ======= ======= ======= =======
Basic and diluted (loss)
income per common share .. $ (.14) $ .23 $ .27 $ .22 $ .14
======= ======= ======= ======= =======
Weighted average
shares-basic ............. 4,545 4,523 4,496 4,470 4,449
======= ======= ======= ======= =======
Weighted average
shares-diluted ........... 4,545 4,602 4,574 4,548 4,516
======= ======= ======= ======= =======
Cash dividends per share of
Common Stock ............. $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
======= ======= ======= ======= =======
December 31,
2007 2006 2005 2004 2003
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Total assets ................ $95,158 $95,024 $93,484 $91,582 $90,711
Shareholders' equity ....... 69,675 70,624 69,845 69,027 68,523
II-3
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 the 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 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 determining whether
the carrying amounts of the assets are recoverable. If an impairment exists, the
impairment is measured by comparing the carrying value to the fair value.
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 freight related operating
revenues are derived from demurrage, switching, weighing, special train and
other transportation services. Other operating revenues are derived 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. Fourth, diesel fuel comprises a
significant portion of the Company's operating costs. As fuel prices increase
the Company attempts to recover these costs through surcharges and increased
fees; however, the Company's profitability can be impacted by changes in fuel
prices.
II-4
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 which ships construction aggregate from three
separate quarries on the Company's rail system to asphalt production plants in
Connecticut and New York, accounted for 13.8%, 14.8% and 13.3% of its operating
revenues in 2007, 2006 and 2005, 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,
-----------------------------------------------
2007 2006 2005
------------- -------------- -------------
(in thousands, except percentages)
Freight Revenues:
Conventional carloads ....... $22,682 86.7% $23,443 82.4% $22,082 82.6%
Containers .................. 2,389 9.1 3,572 12.5 3,201 12.0
Other freight related ....... 774 3.0 876 3.1 850 3.2
Other operating revenues...... 319 1.2 560 2.0 601 2.2
------- ----- ------- ----- ------- -----
Total ...................... $26,164 100.0% $28,451 100.0% $26,734 100.0%
======= ===== ======= ===== ======= =====
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,
-----------------------------------------------
2007 2006 2005
------------- -------------- -------------
(in thousands, except percentages)
Chemicals and plastics ....... $ 8,387 37.0% $ 7,759 33.1% $ 7,441 33.7%
Construction aggregate ....... 3,840 16.9 4,359 18.6 3,745 17.0
Food and agricultural products 2,777 12.2 2,749 11.7 2,571 11.6
Forest and paper products .... 2,756 12.2 3,181 13.6 3,135 14.2
Metal products ............... 2,132 9.4 2,488 10.6 3,208 14.5
Coal ......................... 1,818 8.0 1,651 7.0 1,478 6.7
Other ........................ 972 4.3 1,256 5.4 504 2.3
------- ----- ------- ----- ------- -----
Total ...................... $22,682 100.0% $23,443 100.0% $22,082 100.0%
======= ===== ======= ===== ======= =====
II-5
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,
-----------------------------------------------
2007 2006 2005
------------- -------------- -------------
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits ....... $15,204 58.1% $14,945 52.5% $14,471 54.1%
Casualties and insurance ..... 919 3.5 956 3.4 1,084 4.1
Depreciation ................. 2,884 11.0 2,829 9.9 2,764 10.3
Diesel fuel .................. 2,524 9.6 2,495 8.8 2,014 7.5
Car hire, net ................ 818 3.1 1,096 3.9 1,123 4.2
Purchased services, including
legal and professional fees . 2,037 7.8 1,947 6.8 1,564 5.9
Repairs and maintenance of
equipment ................... 1,711 6.5 1,943 6.8 1,280 4.8
Track and signal materials ... 2,135 8.2 2,949 10.4 2,428 9.1
Track usage fees ............. 615 2.4 829 2.9 827 3.1
Other materials and supplies . 1,222 4.7 1,239 4.4 1,016 3.8
Other ........................ 1,833 7.0 1,891 6.6 1,680 6.3
------- ----- ------- ----- ------- -----
Total ....................... 31,902 121.9 33,119 116.4 30,251 113.2
Less capitalized and
recovered costs ............ 4,046 15.4 4,897 17.2 4,137 15.5
------- ----- ------- ----- ------- -----
Total ...................... $27,856 106.5% $28,222 99.2% $26,114 97.7%
======= ===== ======= ===== ======= =====
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating Revenues
Operating Revenues decreased $2.3 million, or 8.0%, to $26.2 million in 2007
from $28.5 million in 2006. This decrease resulted from a $1.2 million (33.1%)
decrease in container freight revenues, a $761,000 (3.2%) decrease in
conventional freight revenues, a $102,000 (11.6%) decrease in other freight
related revenues and a $241,000 (43.0%) decrease in other operating revenues.
The decrease in container freight revenues is attributable to a 35.9% decline in
traffic volume partially offset by a 4.3% increase in the average revenue
received per container. Intermodal containers handled decreased by 22,678 to
40,505 in 2007 from 63,183 in 2006. Among other factors, rate increases imposed
by western rail carriers in the United States resulted in steamship lines using
"all water" routings to the East Coast for a larger portion of container traffic
thereby significantly reducing the volume of such traffic shipped cross-country
by rail. This trend began during the second quarter of the year and the Company
is unable to predict if and when this trend will be reversed. The increase in
the average revenue received per container is primarily due to contractual rate
adjustments based upon railroad industry cost indices.
The decrease in conventional freight revenues is the result of an 8.8% reduction
in traffic volume partially offset by a 6.1% increase in the average revenue
received per carloading. The Company's conventional carloadings decreased by
2,983 to 30,797 in 2007 from 33,780 in 2006. The largest single reduction in
conventional traffic volume was construction aggregates which declined by more
than a half million dollars. Declines in other commodities were largely offset
by increases in coal, ethanol and automobiles. Shipments of these latter two
commodities commenced during the second half of the year and the Company
anticipates that they will contribute to future traffic growth. The increase in
the average revenue received per conventional carloading results from a shift in
the mix of traffic away from construction aggregates, a lower rated commodity,
as well as modest rate increases, including diesel fuel surcharges.
The decrease in other freight related revenues is attributable to reduced
billings for demurrage charges which is related to the decrease in conventional
traffic volume.
II-6
The decrease in other operating revenues results from a reduction in maintenance
department billings. Revenues of this nature typically vary from year to year
depending upon the needs of freight customers and other outside parties.
Other Income
Other income decreased by $483,000 to $890,000 in 2007 from $1.4 million in
2006. This decrease is due to a reduction in gains from the sale of property,
equipment and easements, which revenue can vary significantly from year to year.
Operating Expenses
Operating expenses decreased $366,000, or 1.3%, to $27.9 million in 2007 from
$28.2 million. The Company's operating expenses are of a fixed nature to a very
high degree and, therefore, do not fluctuate proportionally with increases or
decreases in operating revenues. The decrease in track and signal materials
expense of $814,000 was offset by a $1.0 million decrease in reimbursements
received from the states for non-capitalized crossing signals and other public
improvements.
Provision for Income Taxes (Benefit)
The Company's federal income tax benefit for 2007 was reduced by $113,000 of
railroad track maintenance credits which were utilized in 2005 and 2006. These
credits were "freed up" by carrying back a portion of the net operating loss
incurred in 2007 to those years.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenues
Operating Revenues increased $1.7 million, or 6.4%, to $28.4 million in 2006
from $26.7 million in 2005. This increase was the result of a $1.4 million
(6.2%) increase in conventional freight revenues, a $371,000 (11.6%) increase in
container freight revenues and a $26,000 (3.1%) increase in other freight
related revenues, slightly offset by a $41,000 (6.8%) decrease in other
operating revenues.
The increase in conventional freight revenues results from a 1.7% increase in
traffic volume and a 4.3% increase in the average revenue received per
carloading. The Company's conventional carloadings increased by 577 to 33,780 in
2006 from 33,203 in 2005. Rate increases, including diesel fuel surcharges, as
well as a shift in the mix of commodities hauled account for the increase in the
average revenue per carloading.
The increase in container freight revenues results from an 11.1% increase in the
average revenue received per container and a small (.4%) increase in traffic
volume. Intermodal containers handled increased by 278 to 63,183 in 2006 from
62,905 in 2005. The increase in the average revenue received per container is
attributable to contractual rate adjustments based upon railroad industry cost
indices, as well as a shift in the mix of traffic toward higher rated
containers.
The increase in other freight related revenues results from increased billings
for demurrage and secondary switching services.
The decrease in other operating revenues reflects a decrease in maintenance
department billings. Revenues of this type vary from year to year depending upon
the needs of freight customers and other outside parties.
Other Income
Other income increased by $165,000 to $1.4 million in 2006 from $1.2 million in
2005. This increase is the result of increased gains from the sale of property,
equipment and easements, as well as rentals and interest income.
Operating Expenses
Operating expenses increased $2.1 million, or 8.1%, to $28.2 million in 2006
from $26.1 million in 2005. Operating expenses amounted to 99.2% of operating
revenues in 2006 compared to 97.7% in 2005. Increased costs of diesel fuel,
equipment repairs and maintenance and personnel expense account for a
substantial portion of this increase.
II-7
Provision for Income Taxes
The Company's income tax provision for 2006 amounts to 35% of income before
income taxes compared to 34% in 2005. Railroad tax maintenance credits in the
amount of $36,000 were utilized to reduce the 2006 provision compared to $65,000
in 2005.
Liquidity and Capital Resources
The Company generated $3.3 million, $3.8 million and $4.9 million of cash from
operations in 2007, 2006 and 2005, respectively. The Company's total cash and
cash equivalents decreased by $1.1 million in 2007 and $810,000 in 2006 and
increased by $328,000 in 2005. The principal utilization of cash during the
three year period was for expenditures for property and equipment acquisitions
and improvements and payment of dividends.
During 2007, 2006 and 2005 the Company generated $288,000, $863,000 and
$691,000, respectively, from the sale 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.
The Company has a revolving line of credit of $5.0 million with its principal
bank, which line expires on May 31, 2009. 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. During 2007 the Company borrowed $1.2 million
against this line of credit and repaid $300,000 by the end of the year. Total
interest paid on these borrowings amounted to $52,000. The balance of these
borrowings was subsequently repaid in full in January 2008. The Company had no
advances against this line during 2006.
Substantially all of the mainline track owned by the Company meets FRA Class 3
standards (permitting freight train speeds of 40 miles per hour), and the
Company intends to continue to maintain this track at this level. The Company
expended $3.5 million, $3.4 million and $2.9 million for additions and
improvements to its track structure in 2007, 2006 and 2005, respectively.
Deferred grant income of $520,000 in 2007, $121,000 in 2006 and $411,000 in 2005
financed a portion of these additions and improvements. Improvements to the
Company's track structure are made, for the most part, by the Company's
Maintenance of Way Department personnel.
In 2007, 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 $727,000, 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 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
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 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). 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
II-8
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. The Company believes
that none of its activities caused contamination at the Site, and will contest
this claim by EPA and therefore no liability has been accrued for this matter.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled CCL
Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with
Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L,
on December 18, 2002. The Company was one of about sixty parties named by
Plaintiffs, in this suit, to recover response costs incurred in investigating
and responding to the releases of hazardous substances at the Site. Plaintiffs
alleged that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an
"arranger" or "generator" of waste that ended up at the Site. The Company
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. Although 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 paid $45,000 to settle this suit in March
2006.
Pursuant to permits issued by the United States Department of the Army Corps of
Engineers and the Rhode Island Coastal Resources Management Council, the Company
created 33 acres of waterfront land in East Providence, Rhode Island ("South
Quay"). The permits for the property, both of which have been extended to 2009,
also allow for construction of a dock along the west face of the South Quay. The
property, which has a carrying value of $12.0 million, is adjacent to a 12 acre
site also owned by the Company.
The property is located a half mile from I-195. In 2006, the Rhode Island
Department of Transportation ("RIDOT") awarded a contract to construct
Waterfront Drive, which provides direct vehicular access from the interstate
highway system to the South Quay, which project was completed in 2007. The
planned extension by RIDOT of Waterfront Drive northward toward an industrial
area in which the Company owns two additional waterfront parcels comprising 11
acres, creating direct access to such property, is in the design stage.
The City of East Providence has created a 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.
On January 10, 2008, subsequent to year-end, the Company entered into an
agreement with GATX Corporation ("GATX") whereby GATX acquired 239,523 newly
issued shares of the Company's common stock (4.99%) for approximately $5.5
million which is to be utilized for capital improvements to enhance the
Company's operations. The Company and GATX also entered into an Exclusive
Railcar Supply Agreement whereby GATX has the exclusive right to supply the
Company with railcars for certain rail traffic on market-competitive terms to be
determined by the two parties. In addition, the Company exchanged 72 of its mill
gondolas for 137 open-top hoppers owned by GATX. The Company agreed to lease the
72 mill gondolas from GATX under operating leases for a period of up to 7 years
at minimum annual rentals of $248,000. This amount is not significantly
different from the rentals previously paid to GATX for the open-top hoppers
which have been used by the Company to transport coal.
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 2007 and 2006. 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.
II-9
Year Ended December 31, 2007
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 5,185 $ 6,972 $ 7,296 $ 6,711
Other income .......................... 115 478 159 138
------- ------- ------- -------
Total revenues ........................ 5,300 7,450 7,455 6,849
Operating expenses .................... 7,101 6,893 7,174 6,688
------- ------- ------- -------
Income (loss) before income taxes
(benefit) ............................ (1,801) 557 281 161
Provision for income taxes
(benefit) ............................ (640) 210 100 180
------- ------- ------- -------
Net income (loss) ..................... $(1,161) $ 347 $ 181 $ (19)
------- ------- ------- -------
Basic and diluted income (loss) per
common share ......................... $ (.26) $ .08 $ .04 $ .00
------- ------- ------- -------
Year Ended December 31, 2006
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues .................... $ 6,607 $ 7,243 $ 7,786 $ 6,815
Other income .......................... 180 244 682 267
------- ------- ------- -------
Total revenues ........................ 6,787 7,487 8,468 7,082
Operating expenses .................... 7,188 7,080 7,134 6,820
------- ------- ------- -------
Income (loss) before income taxes
(benefit) ............................ (401) 407 1,334 262
Provision for income taxes
(benefit) ............................ (132) 148 425 119
------- ------- ------- -------
Net income (loss) ..................... $ (269) $ 259 $ 909 $ 143
------- ------- ------- -------
Basic and diluted income (loss) per
common share ......................... $ (.06) $ .06 $ .20 $ .03
------- ------- ------- -------
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 September 2006, the FASB issued Statement of Financial Accounting Standards
157, Fair Value Measurements, or SFAS 157, which addresses how companies should
measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under generally accepted accounting
principles. In February 2008, the implementation dates of certain provisions of
SFAS 152 related to non-financial assets and liabilities were delayed until
January 1, 2009. The Company has not yet adopted this pronouncement and is
currently evaluating the expected impact that the adoption of SFAS 157 will have
on its financial position and results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards
159, The Fair Value Option for Financial Assets and Financial Liabilities, or
SFAS 159, which permits companies to elect to measure certain eligible items at
fair value. Subsequent unrealized gains and losses on those items will be
II-10
reported in earnings. Upfront costs and fees related to those items will be
reported in earnings as incurred and not deferred. SFAS 159 is effective for the
Company beginning January 1, 2008. If a company elects to apply the provisions
of the statement to eligible items existing at that date, the effect of the
remeasurement to fair value will be reported as a cumulative effect adjustment
to the opening balance of retained earnings. Retrospective application will not
be permitted. The Company is currently assessing whether we will elect to use
the fair value option for any of the eligible items.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Cash and Cash Equivalents
As of December 31, 2007, the Company is exposed to market risks which primarily
include changes in U.S. interest rates.
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's revolving line of credit agreement provides for
borrowings which bear interest at variable rates based on either the bank's
prime rate or one and one half percent over either the one or three month London
Interbank Offered Rates. The Company had $900,000 of borrowings outstanding
pursuant to the revolving line of credit agreement at December 31, 2007, which
borrowings were subsequently repaid in full in January 2008. The Company
believes that the effect, if any, of reasonably possible near-term changes in
interest rates on the Company's financial position, results of operations, and
cash flows should not be material.
II-11
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------
PROVIDENCE AND WORCESTER RAILROAD COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting
Firm................................................ II-13
Balance Sheets as of December 31, 2007 and 2006...... II-14
Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005.................... II-15
Statements of Shareholders' Equity for the Years Ended
December 31, 2007, 2006 and 2005.................... II-16
Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005.................... II-17
Notes to Financial Statements........................ II-18
II-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 (the "Company") as of December 31, 2007 and
2006, and the related statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended December
31, 2007. Our audits also included the financial statement schedule
listed in the Index at Item 15. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, 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, 2007 and 2006, and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 2007, 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 19, 2008
II-13
PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
December 31,
2007 2006
------- -------
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 181 $ 1,253
Accounts receivable, net of allowance for
doubtful accounts of $150 in 2007 and $175 in 2006 . 2,726 3,244
Materials and supplies .............................. 914 1,483
Prepaid expenses and other current assets ........... 90 148
Deferred income taxes ............................... 325 347
------- -------
Total Current Assets ............................... 4,236 6,475
Property and Equipment, net .......................... 78,964 76,591
Land Held for Development ............................ 11,958 11,958
------- -------
Total Assets ......................................... $95,158 $95,024
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under line of credit ..................... $ 900 $ --
Accounts payable .................................... 2,809 2,717
Accrued expenses .................................... 1,511 1,433
------- -------
Total Current Liabilities .......................... 5,220 4,150
------- -------
Profit-Sharing Plan Contribution ..................... -- 178
------- -------
Deferred Income Taxes ................................ 11,969 12,051
------- -------
Deferred Grant Income ................................ 8,294 8,021
------- -------
Commitments and Contingent Liabilities................
Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding 640
shares in 2007 and 2006 ............................ 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,552,557 shares in 2007 and 4,534,056 shares
in 2006 ............................................ 2,276 2,267
Additional paid-in capital .......................... 31,104 30,680
Retained earnings ................................... 36,263 37,645
------- -------
Total Shareholders' Equity ......................... 69,675 70,624
------- -------
Total Liabilities and Shareholders' Equity ........... $95,158 $95,024
======= =======
The accompanying notes are an integral part of the financial statements.
II-14
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,
2007 2006 2005
-------- -------- --------
Revenues:
Operating Revenues ........................... $26,164 $28,451 $26,734
Other Income ................................. 890 1,373 1,208
-------- -------- --------
Total Revenues ............................. 27,054 29,824 27,942
-------- -------- --------
Expenses:
Operating:
Maintenance of way and structures ........... 3,746 3,971 3,776
Maintenance of equipment .................... 3,539 3,692 2,908
Transportation .............................. 8,598 8,555 7,892
General and administrative .................. 5,205 4,544 4,333
Depreciation ................................ 2,884 2,829 2,764
Taxes, other than income taxes .............. 2,223 2,299 2,056
Car hire, net ............................... 818 1,095 1,123
Employee retirement plans ................... 228 408 435
Track usage fees ............................ 615 829 827
-------- -------- --------
Total Operating Expenses ................... 27,856 28,222 26,114
-------- -------- --------
(Loss) Income before Income Taxes ............. (802) 1,602 1,828
Provision for Income Taxes (Benefit) .......... (150) 560 615
-------- -------- --------
Net (Loss) Income ............................. (652) 1,042 1,213
Preferred Stock Dividends ..................... 3 3 3
-------- -------- --------
Net (Loss) Income Available to Common
Shareholders ................................. $ (655) $ 1,039 $ 1,210
======= ======= =======
Basic and Diluted (Loss) Income Per Common
Share ........................................ $ (.14) $ .23 $ .27
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-15
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 2007, 2006 and 2005
Additional Share-
Preferred Common Paid-in Retained holders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
Balance, January 1, 2005.. $ 32 $ 2,241 $29,914 $36,840 $69,027
Issuance of 13,980 common
shares to fund the Company's
2005 profit sharing plan
contribution ............ 7 181 188
Issuance of 12,069 common
shares for stock options
exercised, employee stock
purchases, and other..... 6 135 141
Dividends paid:
Preferred stock,
$5.00 per share ........ (3) (3)
Common stock,
$.16 per share ......... (721) (721)
Net income for the year... 1,213 1,213
------- ------- ------- ------- -------
Balance, December 31, 2005. 32 2,254 30,230 37,329 69,845
Issuance of 13,011 common
shares to fund the Company's
2006 profit sharing plan
contribution............. 6 205 211
Issuance of 13,489 common
shares for stock options
exercised, employee stock
purchases, and other..... 7 158 165
Conversion of 5 shares of
preferred stock into 500
shares of common stock... -- -- --
Share-based compensation -
options granted ......... 87 87
Dividends paid:
Preferred stock, $5.00 per
share .................. (3) (3)
Common stock, $.16 per share. (723) (723)
Net income for the year 1,042 1,042
------- ------- ------- ------- -------
Balance, December 31, 2006. 32 2,267 30,680 37,645 70,624
Issuance of 9,581 common
shares to fund the Company's
2006 profit sharing plan
contribution............. 5 173 178
Issuance of 8,920 common
shares for stock options
exercised, employee stock
purchases, and other .... 4 131 135
Share based compensation -
options granted ......... 120 120
Dividends paid:
Preferred stock,
$5.00 per share ........ (3) (3)
Common stock,
$.16 per share ......... (727) (727)
Net loss for the year..... (652) (652)
------- ------- ------- ------- -------
Balance, December 31, 2007. $ 32 $ 2,276 $31,104 $36,263 $69,675
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-16
PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
2007 2006 2005
------- ------- -------
Cash Flows from Operating Activities:
Net (loss) income ............................ $ (652) $ 1,042 $ 1,213
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation ............................... 2,884 2,829 2,764
Amortization of deferred grant income ...... (247) (240) (234)
Profit-sharing plan contribution to be
funded with common stock ................. -- 178 211
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ........................... (288) (766) (691)
Deferred income taxes ...................... (60) 503 395
Share-based compensation ................... 165 115 29
Increase (decrease) in cash and cash
equivalents from:
Accounts receivable ...................... 684 (127) 425
Materials and supplies ................... 569 171 235
Prepaid expenses and other ............... 58 4 87
Accounts payable and accrued expenses .... 206 77 475
------- ------- -------
Net cash flows from operating activities ..... 3,319 3,786 4,909
------- ------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment ........... (5,293) (5,077) (5,011)
Proceeds from sale and condemnation of
property, equipment and easements ........... 288 863 691
------- ------- -------
Net cash flows used in investing activities (5,005) (4,214) (4,320)
------- ------- -------
Cash Flows from Financing Activities:
Net borrowings under line of credit .......... 900 -- --
Dividends paid ............................... (730) (726) (724)
Issuance of common shares for stock options
exercised and employee stock purchases ...... 90 137 112
Proceeds from deferred grant income .......... 354 207 351
------- ------- -------
Net cash flows from (used in) financing
activities .................................. 614 (382) (261)
------- ------- -------
(Decrease) Increase in Cash and Cash
Equivalents .................................. (1,072) (810) 328
Cash and Cash Equivalents, Beginning of Year .. 1,253 2,063 1,735
------- ------- -------
Cash and Cash Equivalents, End of Year ........ $ 181 $ 1,253 $ 2,063
======= ======= =======
Supplemental Disclosures:
Cash paid during year for interest ........... $ 47 $ -- $ --
Cash paid during year for income taxes ....... $ -- $ 136 $ --
======= ======= =======
The accompanying notes are an integral part of the financial statements.
II-17
PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(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 13.8%, 14.8% and 13.3% of the Company's
operating revenues in 2007, 2006 and 2005, respectively, and this customer
accounted for 8.2% and 13.9% of total accounts receivable at December 31,
2007 and 2006, respectively.
Cash and Cash 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, including rolling stock 4 to 25 years
The Company 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
determining whether the carrying amounts of the assets are recoverable. If
an impairment exists it is measured by comparing the carrying value to the
fair value.
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 to
fund 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 ($247 in 2007, $240 in 2006 and $234 in 2005).
II-18
Grant proceeds utilized to finance public improvements, such as grade
crossings and signals, are recorded as a direct offset to the cost of the
improvements, which are not capitalized.
Revenue Recognition
-------------------
Freight revenues are recorded at the time delivery is made to the customer
or the connecting carrier.
Other freight related revenues and other operating revenues are recorded at
the time the services are rendered to the customer.
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
------------
The Company provides reserves for potential payments of tax to various tax
authorities related to uncertain tax positions and other issues. Prior to
2007, these reserves were recorded when management determined that it was
probable that a loss would be incurred related to these matters and the
amount of the loss was reasonably determinable. In 2007, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. As a result, reserves recorded subsequent to adoption are based on a
determination of whether and how much of a tax benefit taken by the Company
in its tax filings or positions is "more likely than not" to be realized
following resolution of any potential contingencies present related to the
tax benefit, assuming that the matter in question will be raised by the tax
authorities. Potential interest and penalties associated with such
uncertain tax positions is recorded as a component of income tax expense.
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 state tax rates. Valuation allowances are recorded
against deferred tax assets that are not expected to be realized.
(Loss) Income per Common Share
------------------------------
Basic (loss) income per common share is computed using the weighted average
number of common shares outstanding during each year. Diluted (loss) income
per common share reflects the effect of the Company's outstanding
convertible preferred stock (using the if-converted method) and options
(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,
2007 2006 2005
--------- --------- ---------
Weighted average shares for basic ...... 4,545,160 4,522,763 4,495,683
Dilutive effect of convertible preferred
stock and options ..................... -- 79,603 77,975
--------- --------- ---------
Weighted average shares for diluted .... 4,545,460 4,602,366 4,573,658
========= ========= =========
Options to purchase 43,634, 3,731 and 5,029 shares of common stock were
outstanding during 2007, 2006 and 2005, respectively, but were not included
in the computation of diluted (loss) earnings per common share because
their effect would be antidilutive. Shares of preferred stock convertible
into 64,000 shares of common stock were outstanding during 2007 but were
not included in the computation of the diluted loss per common share
because of their antidilutive effect.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States 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 legal and other contingencies, and income
taxes.
II-19
Liabilities for casualty claims, legal judgments and other loss
contingencies are recorded when it is probable that an asset has
been impaired or a liability has been incurred and the amount of
the loss can be reasonably estimated. The Company does not
accrue estimated legal fees for appeals of legal judgments since
we do not believe that such costs meet the definition of a
liability and thus are accruable only at such time as legal
services have been provided.
Comprehensive Income
--------------------
Comprehensive Income equals net income for 2007, 2006 and 2005.
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 freight related services such as
switching, weighing and special trains and other services rendered to
freight customers and other outside parties by the Company's Maintenance of
Way, Communications & Signals and Maintenance of Equipment Departments.
Recent Accounting Pronouncements
--------------------------------
In September 2006, the FASB issued Statement of Financial Accounting
Standards 157, Fair Value Measurements, or SFAS 157, which addresses how
companies should measure fair value when they are required to use a fair
value measure for recognition or disclosure purposes under generally
accepted accounting principles. In February 2008, the implementation dates
of certain provisions of SFAS 157 related to non-financial assets and
liabilities were delayed until January 1, 2009. The Company has not yet
adopted this pronouncement and is currently evaluating the expected impact
that the adoption of SFAS 157 will have on its financial position and
results of operations.
In February 2007, the FASB issued Statement of Financial Accounting
Standards 159, The Fair Value Option for Financial Assets and Financial
Liabilities, or SFAS 159, which permits companies to elect to measure
certain eligible items at fair value. Subsequent unrealized gains and
losses on those items will be reported in earnings. Upfront costs and fees
related to those items will be reported in earnings as incurred and not
deferred. SFAS 159 is effective for the Company beginning January 1, 2008.
If a company elects to apply the provisions of the statement to eligible
items existing at that date, the effect of the remeasurement to fair value
will be reported as a cumulative effect adjustment to the opening balance
of retained earnings. Retrospective application will not be permitted. The
Company is currently assessing whether we will elect to use the fair value
option for any of the eligible items.
2. Share-Based Compensation
The Company has a non-qualified stock option plan ("SOP") covering all
management personnel who have 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 Company's
stockholders have authorized 5% of the shares of common stock outstanding
(227,628 shares at December 31, 2007) for issuance under the SOP. Options
granted under the SOP, which are fully vested when granted, are exercisable
over a ten year period at the closing market price for the Company's common
stock on the last business day of the year prior to the date the options
are granted. The Company issues new common stock to satisfy stock options
exercised.
II-20
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment," (SFAS No. 123(R))
using the modified prospective method. This method requires that companies
recognize compensation expense for new stock option grants and the unvested
portion of prior stock option grants at their fair value on the grant date
and recognize this expense over the requisite service period for awards
expected to vest. All of the Company's stock options granted prior to
January 1, 2006 were 100% vested and as a result did not impact the amount
of expense recorded during 2007 or 2006. The 2005 financial statements were
not restated for the effects of adopting SFAS No. 123(R). As a result of
adopting SFAS No. 123(R), stock- based employee compensation expense, net
of income taxes, in the amounts of $77 and $56, have been charged against
income in 2007 and 2006, respectively, for stock options granted during
those years. The Company's policy is to estimate the fair market value of
each option granted on the date of grant, the first business day in January
of each year, using the Black-Scholes option pricing model, and record the
compensation expense on a straight- line basis over the year in which the
grant was made.
The following table illustrates the effect on the net income and net income
per share for 2005 as if the fair value based method of SFAS No. 123,
"Accounting for Stock-Based Compensation," had been applied for all
outstanding awards for periods prior to the adoption of SFAS No. 123(R).
Net income ................................ $1,213
Preferred stock dividends ................. 3
------
Net income available to common shareholders
as reported ............................... 1,210
Less impact of stock option expense ....... 42
------
Pro forma ................................. $1,168
======
Basic and diluted income per share as
reported .................................. $ .27
Less impact of stock option expense ....... .01
------
Pro forma ................................. $ .26
======
Key assumptions used to apply the Black-Scholes option pricing model are
set forth below:
2007 2006 2005
--------- --------- ---------
Average risk-free interest rate 4.68% 4.32% 3.94%
Expected life of option grants 7.0 years 7.0 years 7.0 years
Expected volatility of underlying stock 87% 88% 65%
Expected dividend payment rate, as a
percentage of the share price on the
date of grant .82% 1.07% 1.19%
Weighted average grant date fair value $14.39 $10.70 $8.02
II-21
The following table summarizes the stock option activity under the
Company's plan for 2005, 2006 and 2007:
Weighted Average
----------------
Number of Exercise Fair
Options Price Value
------ ------ ------
Outstanding and exercisable at
January 1,2005 ................... 46,223 $ 9.47
Granted ........................... 8,260 13.49 $ 8.02
Exercised ......................... (4,006) 10.35
Expired ........................... (5,809) 8.95
------ ------ ------
Outstanding and exercisable at
December 31, 2005 ................ 44,668 10.20
Granted ........................... 8,140 14.90 $10.70
Exercised ......................... (7,338) 9.11
Expired ........................... (4,326) 11.61
------ ------ ------
Outstanding and exercisable at
December 31, 2006 ................ 41,144 11.18
Granted ........................... 8,310 19.50 $ 14.39
Exercised ......................... (1,853) 11.58
Expired ........................... (3,967) 12.56
------ ------ ------
Outstanding and exercisable at
December 31, 2007 ................ 43,634 $12.62
====== ====== ======
The total intrinsic value of options exercised for the years ended December
31, 2007 and 2006 totaled approximately $14 and $76, and cash proceeds from
the exercise of stock options totaled approximately $21 and $67 for the
years ended December 31, 2007 and 2006, respectively. The income tax
benefits realized from the exercise of stock options was not material for
the periods presented.
The aggregate intrinsic value of the stock options outstanding, based on
the closing stock price of the Company's common stock as of December 31,
2007 and 2006, totaled approximately $174 and $342, respectively.
Common Stock Awards
-------------------
The Company has awarded certain of its employees common stock under stock
award plans. During the years ended December 31, 2007, 2006 and 2005, the
Company awarded 2,575, 1,775 and 2,135 shares, respectively. The
compensation expense recorded for these awards was $45, $28 and $29 for
2007, 2006 and 2005, respectively.
II-22
3. Property and Equipment
Property and equipment consists of the following:
December 31,
2007 2006
------- -------
Land and improvements, excluding land held
for development .......................... $11,587 $11,458
Track structure .......................... 78,840 74,572
Buildings and other structures ........... 8,612 8,372
Equipment ................................ 26,780 26,295
------- -------
125,819 120,697
Less accumulated depreciation ............ 46,855 44,106
------- -------
Total property and equipment, net ........ $78,964 $76,591
======= =======
4. Land Held for Development
Pursuant to permits issued by the United States Department of the Army
Corps of Engineers and the Rhode Island Coastal Resources Management
Council, the Company created 33 acres of waterfront land in East
Providence, Rhode Island ("South Quay"). The permits for the property, both
of which have been extended to 2009, also allow for construction of a dock
along the west face of the South Quay. The property, which has a carrying
value of $11,958, is adjacent to a 12 acre site also owned by the Company.
The property is located a half mile from I-195. In 2006, the Rhode Island
Department of Transportation awarded a contract for roadway improvements to
provide direct vehicular access from the interstate highway system to the
South Quay. The project is anticipated to be substantially complete in
2009.
The City of East Providence has created a 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.
5. Revolving Line of Credit
The Company has a revolving line of credit with its principal bank in the
amount of $5,000 expiring May 31, 2009. 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. During the second
quarter of 2007, the Company borrowed $1,200 under this line and repaid
$300 during the fourth quarter leaving an outstanding balance of $900 at
December 31, 2007. This balance was repaid in full in January 2008.
Interest expense of $52 was incurred during 2007 and is included in general
and administrative expense.
II-23
6. Accrued Expenses
Accrued expenses consist of the following:
December 31,
2007 2006
------- -------
Salaries and wages ....................... $ 540 $ 535
Payroll taxes ............................ 134 154
Simplified employee pension plan
contributions ............................ 209 212
Legal and professional fees .............. 138 92
Casualty loss claims ..................... 308 310
Other .................................... 182 130
------- -------
$ 1,511 $ 1,433
======= =======
7. Other Income
Other income consists of the following: Years Ended December 31,
2007 2006 2005
------ ------ ------
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ...................... $ 288 $ 766 $ 691
Rentals and license fees under various
operating leases .................... 577 547 486
Interest ............................. 25 60 31
------ ------ ------
$ 890 $1,373 $1,208
====== ====== ======
8. Income Taxes (Benefit)
The provision for income taxes (benefit) consists of the following:
Years Ended December 31,
2007 2006 2005
------ ------ ------
Current:
Federal .......................... $ (90) $ 51 $ 202
State ............................ -- 6 18
------ ------ ------
(90) 57 220
Deferred, Federal and State ....... (60) 503 395
------ ------ ------
$ (150) $ 560 $ 615
====== ====== ======
II-24
The following summarizes the estimated tax effect of temporary differences
that are included in the net deferred income tax provision:
Years Ended December 31,
2007 2006 2005
----- ----- -----
Depreciation ........................... $ 495 $ 508 $ 462
Deferred grant income .................. (96) 42 (63)
Net operating loss carry forward ....... (362) -- --
Contribution carry forward ............. (75) -- --
Accrued casualty and other claims ...... 1 21 37
Accrued compensated time off and related
payroll taxes ......................... 12 (39) (25)
Share based compensation ............... (42) (31) --
Other .................................. 7 2 (16)
----- ----- -----
$ (60) $ 503 $ 395
===== ===== =====
In 2007, 2006 and 2005 the Company generated Railroad Track Maintenance
Credits in the amount of $3,369. These credits may be utilized, subject to
certain limitations, to offset the Company's current federal income tax
liability. Any credits not utilized in the year earned may be carried
forward to offset future income tax liabilities for a period of 20 years.
None of these credits have been utilized to date and, therefore, such
unused credits constitute deferred income tax assets. Such assets, however,
have been fully reserved since their future realization is not assured.
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, 2007 and 2006 are as follows:
December 31,
2007 2006
------- -------
Deferred income tax liabilities -
Differences between book and tax basis
of property and equipment ............... $15,423 $14,928
------- -------
Deferred income tax assets:
Deferred grant income ................... 2,944 2,848
Net operating loss carry forward ........ 362 --
Contribution carry forward .............. 75 --
Accrued casualty and other claims ....... 109 110
Accrued compensated time off and related
payroll taxes .......................... 162 174
Share based compensation ................ 73 31
Allowance for doubtful accounts and other 54 61
------- -------
3,779 3,224
------- -------
Net deferred income tax liability ........ $11,644 $11,704
======= =======
II-25
A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:
Years Ended December 31,
2007 2006 2005
---- ---- ----
Federal statutory rate .............. (34%) 34% 34%
Railroad track maintenance credits .. 14 (2) (3)
Non deductible expenses, state income
taxes, etc. ........................ 1 3 3
---- ---- ----
Effective tax rate .................. (19%) 35% 34%
==== ==== ====
The Company is subject to U.S. federal income tax as well as income tax in
the Commonwealth of Massachusetts. All U.S. federal income tax matters
through 2006 have been concluded. Massachusetts income tax matters have
been concluded through 2004.
9. Commitments and Contingent Liabilities
The Company is a defendant in certain lawsuits relating to casualty losses,
many of which are covered by insurance subject to a deductible. The Company
believes that adequate provision has been made in the financial statements
for any expected liabilities which may result from disposition of such
lawsuits.
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 Site. Via these Notice letters, EPA
makes a demand for payment of past costs (identified in the letter as $762)
and future costs associated with the response actions taken to address the
contamination at the Site, and requests PRPs to indicate their willingness
to participate and resolve their potential liability at the Site. The
Company has responded to EPA by stating that it does not believe it has any
liability for this Site, but that it is interested in cooperating with EPA
to address issues concerning liability at the Site. At this point, two
other parties have already committed via a consent order with EPA to pay
for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the
clean-up at the Site, which will take approximately two or more years to
complete. After that, EPA will likely seek to negotiate the cost of the
Remedial Design and implementation of the remedy at the Site with the PRPs
it has identified via these Notice letters (which presently includes over
sixty parties, and is likely to increase after EPA completes its
investigation of the identity of PRPs). 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. The Company believes that
none of its activities caused contamination at the Site, and will contest
this claim by EPA and, therefore, no liability has been accrued for this
matter.
In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled
CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al
(consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et
al), C.A. No. 01- 496/L, on December 18, 2002. The Company was one of about
sixty parties named by Plaintiffs, in this suit, to recover response costs
incurred in investigating and responding to the releases of hazardous
substances at the Site. Plaintiffs alleged that the Company is liable under
42 U.S.C. ss. 961(a)(3) of CERCLA as an "arranger" or "generator" of waste
that ended up at the Site. The Company 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. Although the Company does not believe it generated any
waste that ended up at this Site, or that its
II-26
activities caused contamination at the Site, the Company paid $45
to settle this suit in March 2006.
10. Employee Benefit Plans
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 for the Company's stock on the last business day of
the year prior to the date the options are granted. Contributions accrued
under this Plan amounted to $178 in 2006 and $211 in 2005. No contribution
is being made for 2007. The Company made its 2006 and 2005 contributions in
newly issued shares of its common stock.
The Company also has a Simplified Employee Pension Plan ("SEP") which
covers substantially all employees who are not members of one of its
collective bargaining units. Contributions to the SEP 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 SEP amounted to $208 in 2007, $212 in 2006 and $208 in
2005 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
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 4,492 shares in 2007, 4,376 shares in
2006 and 5,928 shares in 2005.
11. Preferred Stock
The Company's $50 par value preferred stock is convertible at any time at
the option of the holder of the preferred stock into 100 shares of common
stock. 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.
12. Subsequent Event
On January 10, 2008 the Company entered into an agreement with GATX
Corporation ("GATX") whereby GATX acquired 239,523 (approximately 4.99%)
newly issued shares of the Company's common stock for approximately $5.5
million to be utilized for capital improvements to enhance the Company's
railroad lines. The parties also entered into an Exclusive Railcar Supply
Agreement whereby GATX has the exclusive right to supply the Company with
railcars for certain rail traffic on market-competitive terms to be
determined by the two parties. In addition the Company exchanged 72 of its
mill gondolas for 137 open-top hoppers owned by GATX. The Company agreed to
lease the 72 mill gondolas from GATX under operating leases for a period of
up to 7 years at a minimum annual rental of $248.
II-27
Item 9. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
--------------------------------
Management's Report Regarding the Effectiveness of Disclosure Controls and
Procedures
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934 (the "Exchange Act")). Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this annual report,
the Company's disclosure controls and procedures were effective.
Management's Report Regarding the Effectiveness of Internal Controls
and Procedures
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting
includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate as a result of changes in conditions, or that the
degree of compliance with the applicable polices and procedures may deteriorate.
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, has conducted an evaluation of the Company's
internal control over financial reporting as of the end of the period covered by
this annual report based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Such evaluation included reviewing the documentation of the
Company's internal controls, evaluating the design effectiveness of the internal
controls and testing their operating effectiveness.
Based on such evaluation, the Company's management has concluded that as of the
end of the period covered by this annual report, the Company's internal control
over financial reporting was effective.
Item 9B. Other Information
--------------------------
None.
II-28
PART III
Item 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------
For information with respect to the directors of the Company, see Pages 2
through 7 and 10 and 11 of the Company's definitive proxy statement for the 2008
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 75 Chairman 1980
P. Scott Conti 50 President 2005
David F. Fitzgerald 57 Vice President 2005
Frank K. Rogers 46 Vice President 2005
Robert J. Easton 64 Treasurer 1988
Marie A. Angelini 49 Secretary 2007
Any officer elected or appointed by the Company's Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. Mr. Conti served as Vice President from 1999 until his election as
President in 2005. Prior to that, he served first as Engineering Manager
beginning with his hiring in 1988, and then as Chief Engineer after joining the
Company in 1988. Mr. Fitzgerald joined the Company in 1973 and served as
Superintendent of Transportation prior to his election as Vice President in
2005. Mr. Rogers joined the Company in 1994 and served as Director of Marketing
prior to his election as Vice President in 2005. Ms. Angelini joined the Company
in 2005 and served as Assistant General Counsel prior to her election as
Secretary in 2007.
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; wlavely@pwrr.com
Item 11. Executive Compensation
-------------------------------
See pages 6 and 7 and 10 through 17 of the Company's definitive proxy statement
for the 2008 annual meeting of its shareholders, which pages are incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
--------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
See pages 8 and 9 of the Company's definitive proxy statement for the 2008
annual meeting of its shareholders, which pages are incorporated herein by
reference.
III-1
The following table sets forth information as of the end of the Company's most
recently completed fiscal year with respect to compensation plans (including
individual compensation arrangements) under which equity securities of the
Company are authorized for issuance.
Number of Securities Number of
To be Issued Upon Weighted Average Securities
Exercise of Exercise Price of Remaining
Outstanding Options Outstanding Options Available For
Plan Category Warrants and Rights Warrants and Rights Future Issuance
------------- -------------------- ------------------- ---------------
Equity compensation
plans approved
by security holders .. 43,634 $ 12.62 302,976
Equity compensation
plans not approved by
security holders ..... N/A N/A 182,220
Total ................ 43,634 $ 12.62 485,196
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------
See pages 2 and 17 of the Company's definitive proxy statement for the 2008
annual meeting of its shareholders which pages are incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services
-----------------------------------------------
See pages 17 and 18 of the Company's definitive proxy statement for the 2008
annual meeting of its shareholders which pages are incorporated herein by
reference.
III-2
PART IV
Item 15. Exhibits and Financial Statement Schedules
---------------------------------------------------
(a) (1) All financial statements:
An index of financial statements is included in Item 8, page II-12 of
this annual report
(2) Financial Statement schedule:
Schedule II Valuation and Qualifying Accounts........Page IV-4
All other schedules are omitted because they are not applicable or not
required, or because the required information is shown either in the
financial statements or the notes thereto.
(3) Listing of Exhibits.
(10A) Material Contracts (incorporated by reference to Exhibit 10 to
the registration statement of the Registrant on Form 10, to the
Non-Qualified Stock Option Plan and Employee Stock Purchase Plan
of the Registrant on Forms S-8 and to the registration statements
of the Registrant on Form S-1).
(23) Consent of Independent Registered Public Accounting Firm
(31) Certification 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.
IV-1
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROVIDENCE AND WORCESTER RAILROAD COMPANY
/s/ Robert H. Eder
------------------
By Robert H. Eder
Chief Executive Officer
Dated: March 25, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert H. Eder
________________________ Chief Executive March 25, 2008
Robert H. Eder Officer
and Chairman
(Principal
Executive Officer)
/s/ P. Scott Conti
________________________ President and March 25, 2008
P. Scott Conti Director
(Chief Operating
Officer)
/s/ Robert J. Easton
________________________ Treasurer March 25, 2008
Robert J. Easton (Principal financial
officer and principal
accounting officer)
/s/ Richard W. Anderson
________________________ Director March 25, 2008
Richard W. Anderson
Richard W. Anderson
/s/ Frank W. Barrett
________________________ Director March 25, 2008
Frank W. Barrett
/s/ J. Joseph Garrahy
________________________ Director March 25, 2008
J. Joseph Garrahy
IV-2
SCHEDULE II
PROVIDENCE AND WORCESTER RAILROAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(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, 2007..... $175 $ 0 $ 25 $150
==== ==== ==== ====
Year ended
December 31, 2006..... $175 $ 0 $ 0 $175
==== ==== ==== ====
Year ended
December 31, 2005..... $125 $ 50 $ 0 $175
==== ==== ==== ====
(A) Adjustment of allowance.
IV-3
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.
333-65937, 333-65949, and 333-21617 on Form S-8 of our report dated March 19,
2008, relating to the financial statements and financial statement schedule of
Providence and Worcester Railroad Company, appearing in this Annual Report on
Form 10-K of Providence and Worcester Railroad Company for the year ended
December 31, 2007.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 24, 2008
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 annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying 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 25, 2008
/s/ Robert H. Eder
By:
______________________________
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 annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying 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 25, 2008
/s/ Robert J. Easton
By:
______________________________
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, 2007, 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. sec. 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 25, 2008
In connection with the Annual Report of Providence and Worcester Railroad
Company (the Company) on form 10-K for the year ended December 31, 2007, 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. sec. 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
Treasurer and Chief Financial Officer
March 25, 2008