-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DbJ3u7OtjuPkPfnDDjl3nRIDwXJFm7v1h15zy9AMBrfNahVPQO7RyYXM9gbwMQCS eI3DDc1bK7ih5jG9evUGDw== 0000757189-97-000001.txt : 19970329 0000757189-97-000001.hdr.sgml : 19970329 ACCESSION NUMBER: 0000757189-97-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELAWARE OTSEGO CORP CENTRAL INDEX KEY: 0000757189 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 160913491 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12985 FILM NUMBER: 97566958 BUSINESS ADDRESS: STREET 1: 1 RAILROAD AVE CITY: COOPERSTOWN STATE: NY ZIP: 13326 BUSINESS PHONE: 6075472555 MAIL ADDRESS: STREET 2: 1 RAILROAD AVE CITY: NEW YORK STATE: NY ZIP: 13326 10-K405 1 Aggregate No. Pages: 49 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File # 0-12985 DELAWARE OTSEGO CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) New York 16-0913491 ------------------------------- ---------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1 Railroad Ave., Cooperstown, New York 13326 - ---------------------------------------- ---------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (607) 547-2555 ----------------------- Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.125 per share --------------------------------------- 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 ] The aggregate market value of voting stock held by non-affiliates of the Registrant was $20,676,585 as of March 18, 1997. 1,830,880 - --------------------------------------------------------------------------- (Number of shares of Common Stock outstanding as of March 18, 1997) DOCUMENTS INCORPORATED BY REFERENCE Information with respect to Directors in Item 10 and the information required by Items 11-13 is incorporated herein by reference from the proxy material of the Registrant in connection with its annual meeting of shareholders scheduled for June 7, 1997. PART I - --------------------------------------------------------------------------- Item 1. BUSINESS - ----------------- General - ------- Delaware Otsego Corporation, a New York corporation, is a railroad holding company. The Company's principal executive offices are located at 1 Railroad Avenue, Cooperstown, New York 13326, and its telephone number is (607) 547-2555. As used in this Form 10-K, unless the context requires otherwise, the term "Company" or "DOC" refers to Delaware Otsego Corporation and its wholly-owned subsidiaries. The Company operates in one business segment - railroad transport- ation. DOC's rail system provides rail service for customers along its routes in Upstate New York and Northern New Jersey and access to the national rail system through interchange facilities with two of the major northeastern railroads, Conrail, Inc. ("Conrail") and the CP Rail System ("CP"). Additionally, pursuant to a Haulage Agreement with CP, the Company has direct access with the Norfolk Southern rail system and other carriers in Buffalo, NY. DOC's railroad system is devoted principally to carrying freight, but also generates revenue through the operation of passenger excursion trains. DOC seeks to encourage development on and near, and utilization of, its real estate and rights-of-way by potential shippers and as a possible source of additional revenue. The Company also generates revenues by granting to various entities, such as utilities, pipeline and communication companies and non-industrial tenants, the right to occupy its railroad right-of-way and other real property. The Company also hires rail equipment to, and repairs rail equipment owned by, others, provides services related to the transfer of bulk commodities from railcar to truck, and provides administrative services related to railroad operations. On January 31, 1996, the Company acquired a 40% interest in The Toledo, Peoria and Western Railroad Corporation ("TP&W"). The investment is accounted for under the provisions of APB 18, The Equity Method of Accounting for Investments in Common Stock. TP&W owns a 284 mile Class III regional railroad which provides rail service on a generally East-West route from Fort Madison, Iowa through Central Illinois (approximately 70 miles south of Chicago) to Logansport, Indiana. TP&W hauls agricultural products, chemicals, coal, fertilizer, food products, steel and manufactured goods and consumer products, and operates two intermodal facilities. In addition to its ownership interest, the Company derives revenue by providing certain administrative services to TP&W. Railroad Operations - ------------------- The Company operates a 500 mile regional railroad in New York, New Jersey and Pennsylvania, of which 200 miles consist of trackage rights over the lines of other railroads. The Company's rail lines have been integrated into a coordinated rail system which connects upstate New York - 2 - with the Northern New Jersey - New York City metropolitan area and provides rail service via two Class I carriers (through its connections with Conrail and CP). On October 15, 1996 CSX Corporation and Conrail announced plans to merge. Thereafter, Norfolk Southern announced a competing tender offer to acquire ownership of Conrail. Recent announcements in the press as of the date of this filing indicate that the rail lines of Conrail will be divided between CSX and Norfolk Southern. The Company's main operating subsidiary, NYS&W, derives approximately 49% of its operating revenue from traffic hauled for a CSX subsidiary, and derives approximately 20% of its operating revenue from intermodal traffic hauled in conjunction with Norfolk Southern. The Company has multi-year contracts for both of these revenue sources. The Company is unable to predict at this time either the final outcome of this possible restructuring of the eastern U.S. railroad system arising from the proposed sale of Conrail, or the impact such restructuring, if it occurs, will have on the Company in the future. The Company presently serves over 110 customers in its railroad operations, two of which accounted for approximately 69% of its traffic volume. In 1996, the Company earned approximately $15.8 million from CSX Intermodal, Inc., representing 49% of operating revenues, on traffic moving to CSXI's owned facility located adjacent to the NYS&W at Little Ferry, NJ. 1996 revenues for container traffic moved on behalf of Hanjin Shipping Lines to the Resources Warehousing and Consolidation Services, Incorporated facility ("RWCS"), were approximately $6.3 million, representing 20% of operating revenues. No assurance can be given that such revenue levels will be attained in the future. The principal freight carried by the Company consists of manufactured goods, industrial raw materials, paper products, and agricultural commodities. The operation of a railroad requires significant expenditures for maintenance-of-way and equipment, the availability of railcars in diverse locations for the carriage of customer freight, and reliance upon other carriers who participate in the transportation of almost all freight transported by the Company. The Company, as a substantial property owner, is subject to potential liability for personal injury and property damages to trespassers and others present on its property. Additionally, attendant to the Company's railroad operations is potential liability for personal injury and property damage arising from derailments, collisions at highway-rail grade crossings, and from job-related employee injuries pursuant to Federal Employer Liability Act. Real Estate Activities & Other Operations - ----------------------------------------- Through its subsidiaries, the Company seeks to maximize utilization of and revenues from its real estate holdings. Leasing and right-of-way agreements, sales where favorable prices can be obtained for property that is deemed unnecessary for the Company's rail operations, and the encouragement of industrial development are the focus of the Company's activities in this regard. - 3 - Marketing - --------- The Company markets its services primarily through its sales and customer service personnel, under the supervision of its Executive Vice President and Vice President-Marketing and Sales of its NYS&W subsidiary. In addition, the Company's executive officers are occasionally involved in formulating and making presentations to customers and potential customers. Suppliers - --------- The Company is able to acquire the equipment, parts and other materials it needs in the operation of its business from several suppliers. The Company does not believe that the loss of any supplier would have a material adverse effect on its business, as there are alternative suppliers available. Competition - ----------- The Company's regional rail system is relatively small in an industry dominated by carriers with far greater resources and facilities. In the Company's area of operation, it competes with Conrail, particularly with respect to bulk and intermodal traffic, and with both long-haul and short- haul trucking companies which may be able to offer more extensive facilities and resources than the Company. Deregulation of the railroad industry has intensified competition and will likely continue to do so, placing pressure on pricing and routing schedules of the Company. The Company believes that it is able to compete for railroad business on the basis of its quality of customer service, pricing, scheduling and concentration on its principal rail corridors. There can be no assurance, however, that the Company will be able to maintain its present competitive position. The Company relies on, and its ability to compete is dependent upon, its rail connections with CP and Conrail for a substantial portion of its rail traffic. Changes in the operations of either of these carriers could have a material adverse impact on the Company. With respect to its real estate activities, the Company competes with other railroads, developers and real estate businesses for purchasers, tenants and users of its real property. For example, other railroads seek some of the same customers for fiber optics cable installation, and real estate developers and other railroads seek the same type of industrial user as is sought by the Company. Such competitors may have greater financial resources, more experience in real estate development or a greater ability to offer incentives than does the Company. No assurance can be given that the Company's efforts to develop, lease or sell its real estate resources will be successful. Regulation - ---------- The Company is subject to regulation by the Surface Transportation Board, the Federal Railroad Administration, and certain state and local authorities, including state Departments of Transportation, in connection with some aspects of its railroad operations. Such regulation affects - 4 - rates, safety rules, maintenance of track, other facilities, and rights-of-way, and may affect the Company's revenues and expenses. Environmental Matters - --------------------- The Company transports hazardous materials on behalf of certain of its customers, and uses certain hazardous materials in the normal course of the repair and maintenance of its locomotives, rail cars and other equipment. The operation of a railroad includes the risk of derailments which could result in the release or spillage of diesel fuel and hazardous materials from locomotives and rail cars to property of the Company and adjoining properties. The Company is not aware of any such spills or releases which have not been remediated in compliance with applicable statutes and regulations. The Company, as the owner of real estate, may be responsible under certain circumstances for remediation of environmental conditions on its property, whether or not such conditions arose from the Company's operations. The Company has, with one exception, no knowledge of the existence of any such conditions, but cannot assure that such will not arise or occur in the future. During 1993, The New York, Susquehanna and Western Railway Corporation, a railroad operating subsidiary, received notice from the Environmental Protection Agency (EPA) that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and may be required to share in the cost to clean up a certain site identified by the EPA. The information presently available to the Company indicates that the estimated liability is less than ten thousand dollars and, therefore, will not have a material effect on the consolidated financial condition or results of operation. Employees - --------- At December 31, 1996, the Company employed 172 people, of whom 93 were operating personnel, 8 were supervisors, 44 were office and sales personnel, and 27 were executive officers and managerial personnel. 30 of the Company's operating personnel are subject to a collective bargaining agreement with the Brotherhood of Locomotive Engineers (BLE) which sets their general level of compensation and working conditions through December 31, 1996. The Company is currently negotiating with the BLE regarding these matters for periods after December 31, 1996. In 1995, the Company reached a collective bargaining agreement with the Brotherhood of Maintenance of Way Employes ("BMWE") covering 30 employees of the Company's Track Department which sets the general level of compensation and working conditions through December 31, 2000. The Company considers its employee relations to be good. At December 31, 1996, TP&W employed 93 people of whom 72 were operating personnel, 10 were supervisors and officers, and 11 were sales and office personnel. 48 of TP&W operating personnel are subject to collective bargaining agreement with the United Transportation Union which sets their general level of compensation and working conditions through December 31, 1999. 16 of TP&W operating personnel are subject to a collective bargaining agreement with the BMWE, which is currently in the process proscribed by the Railway Labor Act for renegotiation. - 5 - Item 2. PROPERTIES - ------------------- The Company's executive offices are located in approximately 4,500 square feet of space at 1 Railroad Avenue, Cooperstown, New York, a property owned by the Company. The Company also owns the Edgewater Executive Offices in Cooperstown. This structure, containing 10,000 square feet of space, presently is used for offices, conferences, and facilities for overnight accommodations for Company guests. The Company owns 82.6 miles of track and right-of-way in New Jersey and Orange County, New York and jointly owns with the County of Sussex, New Jersey, an additional 8.8 miles of track and right-of-way. Together these tracks and rights-of-way run from Jersey City, New Jersey to Warwick, New York and are referred to as the Southern Division. The Company has trackage and other operating rights to run over track owned by Conrail from Warwick, NY to Binghamton, NY and, alternatively, from Passaic Junction, NJ to Binghamton, NY. Although unlikely, these trackage rights may be terminated if their use is abandoned by its owners upon compliance with certain statutory procedures which may require approval of the Surface Transportation Board. The Company operates over 186.2 miles of track and right-of-way running from Binghamton, NY to Syracuse, NY (the Syracuse Branch ) and Chenango Forks, NY to Utica, NY (the Utica Branch ) pursuant to lease-purchase arrangements with six County Industrial Development Agencies. These leases, which expire in April, 1997, result in real estate tax savings. The Company has requested that these leases be extended for a period of five years. At the date of this filing, all six County Industrial Development Agencies have agreed to such extension. The Southern Division and Syracuse Branch consist mainly of Class II track in accordance with FRA standards, allowing operation at speeds of up to 40 mph. Generally all other trackage owned or leased by the Company, with the exception of industrial spurs and sidings, are designated Class III tracks allowing speeds of up to 25 mph. The Company owns 21.7 miles of right-of-way between Richfield Springs, NY and Richfield Junction, NY, of which 2.3 miles contains operating track. The track on the balance of this right-of-way was disposed of in 1996, and the Company intends to dispose of the non-operating portion of this right-of-way in 1997. The Company owns 15.9 miles of track and right-of-way between Cooperstown, NY and Cooperstown Junction, NY, which has no current rail operations. The Company has contracted to sell this track and right-of-way for $500,000. This sale is expected to close in 1997. The properties of the Company are subject to various easements, occupations, licenses, leases and rights-of-way. The trackage and other operating rights pursuant to which the Company is authorized to carry freight over track belonging to others are subject to contractual agreements which may be subject to termination or restriction, either of which may have a significant adverse effect on the railroad operations of the Company. - 6 - Substantially all the Company's properties are subject to lien, or mortgage, in connection with obligations of the Company to Manufacturers and Traders Trust Company, New Jersey Economic Development Authority, and Federal Railroad Administration. The Company owns 14 locomotives of various manufacture, age and size, three of which were acquired new in 1995, and leases an additional 9 locomotives. The Company believes it has an adequate fleet of locomotives for its current needs. The Company owns fewer than 50 railcars of various types and manufacture, and depends on connecting rail lines and customers to provide cars for outbound loadings. TP&W owns approximately 261.2 miles of railroad and has operating rights over approximately 30 miles of track owned by other railroads as part of its integrated railroad system between Fort Madison, Iowa and Logansport, Illinois. TP&W owns 22 locomotives of various age, manufacture and size, and believes it has an adequate fleet of locomotives for its current needs. Substantially all the assets of TP&W are subject to lien or mortgage in connection with obligations of TP&W to Creditanstalt Corporate Finance, Inc. Item 3. LEGAL PROCEEDINGS - -------------------------- There are no material pending legal proceedings other than ordinary routine litigation, incidental to the Company's business, to which the Company or any of its subsidiaries is a party or of which any of its or their property is the subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. Executive Officers and Key Employees of the Registrant - ------------------------------------------------------ Each of the following officers of the Company has been elected by the Board of Directors and serves at the discretion of the Board. Position with Officer Name Age the Registrant Since - --------------------- --- ------------------------------- ------- Walter G. Rich 51 President, Chief Executive 1968 Officer & Director C. David Soule 46 Executive Vice President 1981 & Director William B. Blatter 62 Senior Vice President & 1988 Chief Financial Officer Nathan R. Fenno 38 Vice President-Law, General 1988 Counsel & Secretary Frank Quattrocchi 47 Vice President & Treasurer 1993 William H. Matteson 46 Vice President-Administration 1991 - 7 - Mr. Rich has been a member of the Board of Directors of the Company since 1968, and has been President and Chief Executive Officer since 1971. Mr. Rich is also a director of Norwich Aero Products, Inc., New York State Business Development Corporation, Security Mutual Life Insurance Company of New York, and New York State Electric and Gas Company. Mr. Rich was appointed in 1993 to the New York State Public Transportation Safety Board. Mr. Soule has been Executive Vice President of the Company since June, 1983. He was elected to the Board of Directors in June, 1984. Mr. Blatter joined the Company as Vice President-Finance and Chief Financial Officer in April, 1988, and was named Senior Vice President and Chief Financial Officer in June, 1990. Mr. Fenno joined the Company as Attorney in July, 1987. Mr. Fenno was appointed General Counsel and Corporate Secretary in July, 1988, and Vice President-Law in September, 1991. Mr. Quattrocchi joined the NYS&W in June, 1983. Mr. Quattrocchi was promoted to Vice President & Treasurer of the Company in April, 1993. Mr. Matteson joined the Company in October, 1987. Mr. Matteson was promoted to Vice President-Administration in Jan. 1991. The following are other key employees of the Registrant's operating subsidiaries: Mr. Joseph G. Senchyshyn became Vice President-Operations of NYS&W on September 3, 1985. Mr. Robert A. Kurdock was appointed Vice President of NYS&W in June of 1985. He has been employed by the Company since September, 1980, serving in increasingly responsible positions. Mr. Richard J. Hensel became Vice President-Engineering of NYS&W in April, 1987. Mr. Paul Garber joined the NYS&W in 1989, and was appointed Vice President-Marketing & Sales in October, 1990. Mr. David Boyd, who previously was employed by TP&W for over five years, joined NYS&W as Vice President-Mechanical and Chief Mechanical Officer in June, 1996. Mr. Gordon Fuller joined NYS&W as an Executive Vice President in January, 1996 and will be active in the areas of railroad sales and marketing, governmental relations, industrial development and similar executive level functions. He previously was President of Toledo, Peoria & Western Railway Corporation for over five years. - 8 - PART II - --------------------------------------------------------------------------- Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------- Market Information - ------------------ The Company's common stock trades in the over-the-counter market and is quoted on the Nasdaq National Market. The symbol for the common stock is "DOCP". The following table sets forth the quarterly high and low sale prices of the Company's common stock as reported by Nasdaq for the two years ending December 31, 1996. 1996 High Low ---------------- ------- ------- First Quarter $11.00 $9.25 Second Quarter $11.00 $8.75 Third Quarter $ 9.25 $7.50 Fourth Quarter $11.00 $7.50 1995 High Low ---------------- ------- ------- First Quarter $11.00 $9.75 Second Quarter $10.25 $9.25 Third Quarter $10.50 $9.50 Fourth Quarter $10.00 $9.00 Holders of Record - ----------------- As of December 31, 1996, the approximate number of record holders of the Company's common stock was 1,504. Dividends - --------- During 1996, the Company paid a 5% stock dividend payable to stockholders of record February 17, 1996. The dividend was paid on March 20, 1996 and 82,297 shares were issued accordingly. The Company has declared a 5% stock dividend payable to stockholders of record February 28, 1997, to be paid on March 31, 1997. As a result of this dividend, 86,703 shares will be issued. The Company's loan with Manufacturers and Traders Trust Company provides that the Company may not declare any cash dividends in any fiscal year in excess of 40% of Consolidated Net Income in such fiscal year, and that cumulative dividends paid during the term of the loan may not exceed 10% of cumulative retained earnings. In addition, the Financing Agreement between the Company and its subsidiary NYS&W, and the Federal government through the FRA 505 Redeemable Preference Share Program provides that yearly dividends may not exceed 50% of the total additions to retained earnings of the Company for the previous year, nor 50% of the total additions to retained earnings for 1985 and each year thereafter. One agreement further stipulates that the ratio of dividends paid to net income for any fiscal year, may not be greater than that ratio for the five years prior to the agreement. - 9 - Item 6. SELECTED FINANCIAL DATA - -------------------------------- (Thousands except per share amounts) - ------------------------------------
Year Ended December 31, ------------------------------------------------ RESULTS OF OPERATIONS: 1996 1995 1994 1993 1992 - ----------------------------- -------- -------- -------- -------- -------- Operating Revenues $ 32,282 $ 34,524 $ 27,463 $ 22,610 $ 22,922 Directed Service Revenues (1) - - - - 149 Loss from Operations (789) (1,562) (2,459) (2,979) (2,093) Other (Expense) Income, Net (1,078) 4,055 (889) 1,098 166 -------- -------- -------- -------- -------- (Loss) Income Before Income Taxes, Extraordinary Item and Equity Interest in Income of Affiliate (1,867) 2,493 (3,348) (1,881) (1,927) Provision for Income Tax Benefit (Expense) 610 (878) 1,128 603 605 Extraordinary Item, net of tax (2) - - (228) - 765 Equity Interest in Income of Affiliate 92 - - - - -------- -------- -------- -------- -------- Net (Loss) Income $ (1,165) $ 1,615 $ (2,448) $ (1,278) $ (557) ======== ======== ======== ======== ======== Primary Earnings (Loss) per Share: Income (Loss) before Extraordinary Item $ (0.64) $ 0.95 $ (1.31) $ (0.75) $ (0.78) Extraordinary Item - - (0.13) - 0.45 -------- -------- -------- -------- -------- Net Income (Loss) per Share $ (0.64) $ 0.95 $ (1.44) $ (0.75) $ (0.33) ======== ======== ======== ======== ======== Fully Diluted Earnings (Loss) per Share: Income (Loss) before Extraordinary Item $ (0.64) $ 0.86 $ (1.31) $ (0.75) $ (0.78) Extraordinary Item - - (0.13) - 0.45 -------- -------- -------- -------- -------- Net Income (Loss) per Share $ (0.64) $ 0.86 $ (1.44) $ (0.75) $ (0.33) ======== ======== ======== ======== ======== Cash Dividends Per Share - - - - $ 0.08 FINANCIAL POSITION: - ----------------------------- Total Assets $ 78,323 $ 74,778 $ 68,877 $ 65,619 $ 63,530 Long-Term Debt 12,383 12,802 10,066 11,167 13,092 Property, Plant & Equipment 97,724 92,401 84,185 79,680 73,101 Stockholders' Equity (3) $ 34,594 $ 32,446 $ 29,511 $ 29,493 $ 28,844
[FN] (1) Revenue from the Company's temporary operations over lines of the Delaware & Hudson Railway. (2) See Management's Discussion and Analysis for discussion of the 1994 extraordinary item. The 1992 extraordinary item relates to a debt forgiveness transaction in connection with the termination of a land lease. (3) All data in the accompanying financial statements and related notes have been restated to give effect to a 5% stock dividend declared on February 19, 1997. - 10 - Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------------------- RESULTS OF OPERATIONS (Dollars in thousands) - -------------------------------------------- Recent Acquisition - ------------------ On January 31, 1996, the Company completed the purchase of a 40% interest in The Toledo, Peoria and Western Railroad Corporation (TP&W) for consideration totaling $2.25 million, including 25,000 shares of the Company's common stock. The non-stock portion of the consideration for the acquisition was funded through a $1 million loan and the private placement of 100,000 shares of the Company's common stock. Additionally, the Company issued warrants to purchase 60,000 common shares to another party involved in the transaction. The Company performs administrative services for the TP&W which have had a positive impact on general and administrative expenses. The investment is accounted for under the provisions of APB 18, The Equity Method of Accounting for Investments in Common Stock. See also Note 12 to the financial statements - Investment in Affiliate. The TP&W owns a 284 mile Class III regional railroad which provides rail service on a generally East-West route across one of the top grain producing regions in the world. It stretches from Fort Madison, Iowa through Central Illinois (approximately 70 miles south of Chicago) to Logansport, Indiana and includes service to two company-operated intermodal facilities. The TP&W hauls agricultural products, chemicals, coal, fertilizer, food products, steel, manufactured goods and consumer products for such customers as Archer Daniels Midland, Central Illinois Power, Witco, Lonza and Caterpillar. The Company believes that the TP&W's geographic location and connections with over 20 rail carriers, including seven Class I railroads, present numerous opportunities for growth and the acquisition provides the Company with an opportunity to diversify its rail holdings. The following Management's Discussion and Analysis of Financial Condition and Results of Operations relates to the continuing operations of the Company. - 11 - 1996 COMPARED TO 1995 - --------------------- Operating Revenues - ------------------ 1996 railway operating revenues, which include intermodal, carload and all other rail operating revenues, were $30,213 compared with $32,484 in 1995. Two major customers accounted for approximately 69% and 72% of the Company's 1996 and 1995 operating revenues, respectively. During 1996 and 1995, the Company generated approximately $15.8 million and $17.2 million in revenues, respectively from CSX Intermodal, Inc. During the same periods the Company generated approximately $6.3 million and $7.5 million in revenues from Hanjin Shipping Lines. The loss of either customer or a material reduction in either of their operations would have a material adverse effect on the Company's results of operations. Intermodal revenues for the year ending December 31, 1996 decreased $2,615 compared to that period in 1995. Intermodal revenues from CSX Intermodal, Inc. decreased $1,396 due principally to weak international volumes and declined business from General Motors as a result of changes in shipping patterns due to currency exchange rate fluctuations. Intermodal revenues derived from shipments on behalf of Hanjin Shipping Lines to the Resources facility declined $1,219, due primarily to market redistributions. The Company relies on, and its ability to compete is dependent upon, its rail connections with CP and with Conrail for a substantial portion of its rail traffic. Changes in the operations of either of these carriers could have a material adverse impact on the Company. On October 15, 1996 CSX Corporation and Conrail announced plans to merge. Thereafter, Norfolk Southern announced a competing tender offer to acquire ownership of Conrail. At the time of this filing, (March 28, 1997) press reports indicate that the rail lines of Conrail will be divided between CSX and Norfolk Southern, although details are not yet known. The Company's main operating subsidiary, NYS&W, derives approximately 49% of its operating revenue from traffic hauled for a CSX subsidiary, and derives approximately 20% of its operating revenue from intermodal traffic hauled in conjunction with Norfolk Southern. The Company has multi year contracts for both of these revenue sources. The Company is unable to predict either the final outcome of the possible restructuring of the eastern U.S. railroad system at this time arising from the proposed sale of Conrail, or the impact such restructuring, if it occurs, will have on the Company in the future. - 12 - 1996 carload revenues improved $399 compared to 1995, due mainly to movements of contaminated soil in the third and fourth quarters of 1996, partially offset by declines in shipments for plastics, paper, lumber, building materials and motor vehicles. Real property revenues declined $165 in 1996 as compared to 1995, due mainly to unearned rent revenues recognized as earned when certain property was sold by a Company subsidiary in the second quarter of 1995. Other operating revenues in the aggregate increased $194 from 1995 to 1996. This increase is primarily attributable to higher construction related revenues. Operating Expenses - ------------------ Maintenance of way expenses in 1996 were $365 lower than in 1995, due mainly to a decline of $220 in trackage rights expenses resulting from lower traffic counts and a benefit recognized as the result of a Conrail audit. Also contributing to reduced maintenance of way expenses were the effects of cost-cutting initiatives and the payment of a Company wide bonus in 1995, offset in part by expenses relating to severe winter weather in January of 1996. Maintenance of equipment costs were $109 higher during 1996 than in 1995 due to increased expenditures relating to the maintenance of the Company's locomotive fleet. Transportation expenses declined $3,125 in 1996 compared to 1995 due principally to lower traffic volumes, the effects of a new haulage agreement and cost-cutting measures. During the second quarter of 1996, the Company renegotiated a haulage agreement with CP that has created new marketing initiatives and resulted in overall lower haulage related expenses, offset principally by incremental increases in fuel, locomotive lease costs and car hire. Car hire expenses in 1996 increased by $355 from 1995 primarily due to the aforesaid changes in the haulage agreement, offset in part by a reduction in intermodal movements. Additions to the Company's fixed asset base accounted for the increase in depreciation and amortization expense of $418 from 1995 to 1996. General and administrative and other expenses were $390 lower in 1996 than in 1995 due in part to the positive effects of the - 13 - Company's Administrative Services Agreement with TP&W entered into on January 31, 1996. Also contributing to the overall reduction in costs were the Company's ongoing cost reduction measures and the impact of a Company wide bonus paid in 1995. These benefits were partially offset by higher marketing expenses in 1996 resulting from increased efforts in this area. As a result of the foregoing, operating expenses decreased $3,015 in 1996 as compared to 1995. The operating loss for the twelve month period ended December 31, 1996 of $789 is an improvement of $773 compared to the 1995 period. The operating ratio for 1996 was 102.4% compared to 104.5% in 1995. Other Income (Expense) - ---------------------- Interest expense, which is net of capitalized interest and interest income, increased $183 in 1996 compared to 1995 due principally to interest rate and average outstanding debt differentials. Gain on sales of property, equipment and other for the year ended December 31, 1996 declined approximately $5 million, compared to the same period in 1995, due principally to the sale in 1995 of an 8.8 mile railroad line located in Union County, New Jersey to the State of New Jersey for $6.4 million resulting in a gain of $5.2 million. Taxes - ----- The Company provides for income taxes in accordance with the liability method as set forth in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The Company recorded a $610 tax benefit in 1996 compared to a tax expense of $878 for 1995. See Note 7 to the financial statements for further discussion concerning income taxes. Equity Interest in Income of Affiliate - -------------------------------------- The TP&W had net income of $230 for the eleven months ended December 31, 1996. Accordingly, the Company recognized $92 from its equity interest in the income of the TP&W. - 14 - 1995 COMPARED TO 1994 - --------------------- Operating Revenues - ------------------ 1995 railway operating revenues, which include intermodal, carload and all other rail operating revenues, were $32,484 or $7,503 greater than in 1994. Two customers comprised approximately 72% and 64% of the Company's operating revenues, respectively for 1995 and 1994. During those years, the Company earned approximately $17.2 million and $9.8 million, respectively from CSX Intermodal, Inc. During the same periods, the Company earned approximately $7.5 million and $7.7 million from Hanjin Shipping Lines. Intermodal revenues increased $7,230 in 1995 compared to 1994. Intermodal revenues from CSX Intermodal, Inc. ("CSXI") increased $7,438 due to two new intermodal services that began in the second and third quarters of 1994. Both services transport containerized traffic to CSXI's Little Ferry Terminal in New Jersey. Intermodal revenues derived from shipments on behalf of Hanjin Shipping Lines to the Resources facility declined $208, due mainly to market re- distribution factors and a general softness in international business in the fourth quarter of 1995. 1995 carload revenues improved by $162 compared to 1994, due principally to volume improvements in newsprint and printing paper, contaminated soil, liquid food-grade commodities and automobiles. Other railway operating revenues improved by $112 in 1995 compared to 1994, due mostly to improved auto terminal and passenger revenues, offset by declines in demurrage and other incidental revenues. Real property revenues for 1995 were $165 greater than 1994, due mostly to unearned rent revenues recognized as earned when property was sold by a Company subsidiary in the second quarter. Other operating revenues in 1995 declined $607 compared to 1994, due mostly to declines in construction activity. Operating Expenses - ------------------ Maintenance of way and structures expenses for 1995 were $663 greater than in 1994 due primarily to a bonus paid in 1995 and higher trackage rights expenses associated with the increased intermodal traffic. - 15 - Maintenance of equipment expenses were $520 higher during 1995 as compared to 1994 due in large part to increased locomotive maintenance expenses. Transportation expenses increased in 1995 compared to 1994 by $3,733, due principally to the increase in the Company's intermodal business. Car hire expenses for 1995 were $261 greater than in 1994, due mostly to the increase in intermodal traffic. Depreciation and amortization expense for 1995 exceeded 1994 by $301. General, administrative and other expenses for 1995 were $673 greater than 1994, due in large part to a Company wide bonus paid in 1995. As a result of the foregoing, operating expenses increased $6,164 in 1995 compared to 1994. For the twelve month period ended December 31, 1995, the Company's operating loss declined by $897 compared to the 1994 period. The operating ratio for 1995 was 104.5% compared to 109.0% for 1994. Other Income (Expense) - ---------------------- Interest expense net, comprised of interest expense (net of capitalized interest) and interest income, for 1995 increased $50 compared to 1994. Gain on sale of property, equipment and other for 1995 increased $4,994 compared to 1994, due principally to the sale in 1995 of an 8.8 mile railroad line located in Union County, New Jersey to the State of New Jersey for $6.4 million resulting in a gain of $5.2 million. Taxes - ----- The Company provides for income taxes in accordance with the liability method as set forth in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The Company's provision for income taxes on income (loss) before extraordinary item resulted in a $878 tax expense in 1995 compared to a tax benefit of $1,128 for 1994. See Note 7 to financial statements for further discussion concerning income taxes. - 16 - LIQUIDITY AND CAPITAL RESOURCES (In thousands, except share amounts) - -------------------------------------------------------------------- Liquidity refers to the ability of an organization to generate adequate amounts of cash, principally from operating results or through borrowing power to meet its short-term and long-term cash requirements. At December 31, 1996 the Company had a working capital deficit of $6,022 and cash and cash equivalents of $1,179 compared to a working capital deficit of $5,284 and cash and cash equivalents of $1,213 at December 31, 1995. Total long-term liabilities at December 31, 1996 were $26,855, an increase of $75 compared to the previous year. Long-term debt exclusive of current maturities, as a percentage of equity at December 31, 1996 was 35.8% compared to 39.5% at December 31, 1995. Total capitalization which consists of long-term debt, convertible subordinated notes and equity was $50,561 at December 31, 1996, an increase of $1,733 from December 31, 1995. In 1995, the Company entered into an equipment line of credit with Key Bank of New York, whereby it may borrow up to $500. The interest rate is the lender's base rate plus three quarters percent. At December 31, 1996, the base rate was 8.25%. The line expires on April 30, 1997. Property, plant and equipment additions for 1996 were $5,584 of which $3,138 was funded by grants from the New York and New Jersey Departments of Transportation. The balance of $2,446 was provided by cash from operations, proceeds from additional debt and sales of real property. Late in 1995, the Company entered into a contract to sell certain parcels of railroad property of a non-operating subsidiary. The selling price is expected to be $500 and the carrying amount is estimated at $110. This transaction is expected to close during the first half of 1997 and the proceeds will be used for working capital purposes. The Company's spending program for 1997, including commitments, is projected at approximately $15 million, of which $6 million will be for railway projects, $8 million for acquisitions of land for terminals and rehabilitations of facilities and the remainder for improvements to and purchases of locomotives and other equipment. See also Note 11 to the financial statements. The expenditures are expected to be funded from grants from participating state governments which are expected to continue beyond 1997, cash from operations, debt financing and proceeds from sales of non-operating property. - 17 - During 1996, the Company paid a 5% stock dividend payable to stockholders of record February 17, 1996. The dividend was paid on March 20, 1996, resulting in the issuance of an additional 82,297 shares. Subsequent to year end, the Company declared a 5% stock dividend payable to stockholders of record February 28, 1997. The dividend will be paid on March 31, 1997 and 86,703 shares will be issued accordingly. SEASONALITY AND EFFECTS OF INFLATION - ------------------------------------ The Company's container revenues are affected by seasonal demands for consumer goods, generally resulting in higher intermodal revenues in the third quarter. The effects of inflation have not had a material effect on the Company's operating expenses in the aggregate. The Company enters into a diesel fuel supply agreement to hedge its exposures to price fluctuations on approximately 35% of its anticipated fuel requirements during an eight month period beginning in the fall, for its freight transportation business. The nature of the hedging transaction does not result in any significant risk to the Company. Generally accepted accounting principles require the use of historical costs in preparing financial statements. This approach disregards the effects of inflation on the replacement cost of property and equipment. The Company is a capital-intensive company and has approximately $97.7 million invested in such assets. The replacement costs of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical costs. ENVIRONMENTAL MATTERS - --------------------- During 1993, the New York, Susquehanna and Western Railway Corporation, a Company railroad operating subsidiary, received notice from the Environmental Protection Agency (EPA) that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and may be required to share in the cost to clean up a certain site identified by the EPA. The information presently available to the Company indicates that the estimated liability is less than ten thousand dollars and therefore, will not have a material affect on the consolidated financial condition or results of operations. - 18 - POTENTIAL CHANGE IN OWNERSHIP OF CONRAIL - ---------------------------------------- On October 15, 1996 CSX Corporation and Conrail announced plans to merge. Thereafter, Norfolk Southern announced a competing tender offer to acquire ownership of Conrail. At the time of this filing, (March 28, 1997) press reports indicate that the rail lines of Conrail will be divided between CSX and Norfolk Southern, although details are not yet known. The Company's main operating subsidiary, NYS&W, derives approximately 49% of its operating revenue from traffic hauled for a CSX subsidiary, and derives approximately 20% of its operating revenue from intermodal traffic hauled in conjunction with Norfolk Southern. The Company has multi year contracts for both of these revenue sources. The Company is unable to predict either the final outcome of the possible restructuring of the eastern U.S. railroad system at this time arising from the proposed sale of Conrail, or the impact such restructuring, if it occurs, will have on the Company in the future. - 19 - Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The Financial Statements and Supplementary Data begin on next page. - 20 - REPORT OF INDEPENDENT AUDITORS - ------------------------------ Board of Directors and Stockholders Delaware Otsego Corporation - ----------------------------------- We have audited the accompanying consolidated balance sheets of Delaware Otsego Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Delaware Otsego Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with the generally accepted accounting principles. /s/ Ernst & Young LLP Syracuse, New York February 28, 1997, except for Note 13 as to which the date is March 24, 1997 - 21 - CONSOLIDATED BALANCE SHEETS DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES (THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------
ASSETS ------ December 31, ------------------- 1996 1995 -------- -------- CURRENT ASSETS Cash and cash equivalents $ 1,179 $ 1,213 Accounts receivable 5,269 5,406 Reimbursable construction costs 1,794 1,212 Materials and supplies 1,179 742 Deferred income taxes 332 332 Prepaid expenses 730 698 Other current assets - Note 12 369 665 -------- -------- TOTAL CURRENT ASSETS 10,852 10,268 PROPERTY, PLANT AND EQUIPMENT Land 1,731 1,658 Buildings, machinery, equipment and leasehold improvements 95,993 90,743 -------- -------- 97,724 92,401 Less accumulated depreciation and amortization (33,790) (29,414) -------- -------- TOTAL PROPERTY, PLANT AND EQUIPMENT 63,934 62,987 OTHER ASSETS Other assets 838 1,134 Intangible assets, net 357 389 Investment in affiliate 2,342 - -------- -------- TOTAL OTHER ASSETS 3,537 1,523 -------- -------- TOTAL ASSETS $ 78,323 $ 74,778 ======== ========
[FN] See notes to consolidated financial statements - 22 - CONSOLIDATED BALANCE SHEETS DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES (THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ December 31, ------------------- 1996 1995 -------- -------- CURRENT LIABILITIES Notes payable to bank $ 2,400 $ 2,100 Accounts payable 11,020 10,400 Accrued and other current liabilities 1,686 1,977 Current maturities of long-term debt - Note 4 1,768 1,075 -------- -------- TOTAL CURRENT LIABILITIES 16,874 15,552 LONG-TERM LIABILITIES Long-term debt - Note 4 12,383 12,802 Deferred income tax 10,892 10,398 SUBORDINATED NOTES 6.5% Convertible subordinated notes 3,580 3,580 -------- -------- TOTAL LONG-TERM LIABILITIES 26,855 26,780 -------- -------- COMMITMENTS - Notes 8 and 11 TOTAL LIABILITIES 43,729 42,332 -------- -------- STOCKHOLDERS' EQUITY Common stock, par value, $.125 per share - authorized 10,000,000 shares; issued and outstanding - 1,830,880 in 1996 and 1,612,927 in 1995 229 202 Additional paid-in capital 6,126 4,029 Contributed capital 20,092 18,021 Retained earnings 8,147 10,194 -------- -------- TOTAL STOCKHOLDERS' EQUITY 34,594 32,446 -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 78,323 $ 74,778 ======== ========
[FN] See notes to consolidated financial statements. - 23 - CONSOLIDATED STATEMENTS OF OPERATIONS DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES (THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------
Year ended December 31, ----------------------------- 1996 1995 1994 --------- --------- --------- OPERATING REVENUES Railway operating revenues $ 30,213 $ 32,484 $ 24,981 Real property revenues 1,283 1,448 1,283 Other operating revenue 786 592 1,199 --------- --------- --------- TOTAL OPERATING REVENUES 32,282 34,524 27,463 --------- --------- --------- OPERATING EXPENSES Maintenance of way and structures 3,902 4,267 3,604 Maintenance of equipment 3,078 2,969 2,449 Transportation 14,896 18,021 14,288 Car hire expense 1,810 1,455 1,194 Depreciation and amortization 4,604 4,186 3,885 Taxes other than income taxes 239 256 243 General, administrative and other 4,542 4,932 4,259 --------- --------- --------- TOTAL OPERATING EXPENSES 33,071 36,086 29,922 --------- --------- --------- LOSS FROM OPERATIONS (789) (1,562) (2,459) Other (expense) income Interest expense, net (1,459) (1,276) (1,226) Gain on sale of property, equipment and other 381 5,331 337 --------- --------- --------- Other (expense) income, net (1,078) 4,055 (889) --------- --------- --------- (Loss) income before income taxes, extraordinary item and equity interest in income of affiliate (1,867) 2,493 (3,348) Provision for income tax benefit (expense) 610 (878) 1,128 --------- --------- --------- (Loss) income before extraordinary item and equity interest in income of affiliate (1,257) 1,615 (2,220) Extraordinary item, net of tax - - (228) --------- --------- --------- (Loss) income before equity interest in income of affiliate (1,257) 1,615 (2,448) Equity interest in income of affiliate 92 - - --------- --------- --------- NET (LOSS) INCOME $ (1,165) $ 1,615 $ (2,448) ========= ========= ========= Primary (Loss) Earnings per Share: (Loss) earnings before extraordinary item $ (0.64) $ 0.95 $ (1.31) Extraordinary item - - (0.13) --------- --------- --------- Net (loss) earnings per share $ (0.64) $ 0.95 $ (1.44) ========= ========= ========= Fully Diluted (Loss) Earnings per Share: (Loss) earnings before extraordinary item $ (0.64) $ 0.86 $ (1.31) Extraordinary item - - (0.13) --------- --------- --------- Net (loss) earnings per share $ (0.64) $ 0.86 $ (1.44) ========= ========= =========
[FN] See notes to consolidated financial statements. - 24 - CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (THOUSANDS) - ------------------------------------------------------------------------------
Additional Common Stock Paid-in Contributed Retained Par Value Capital Capital Earnings --------------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1993 $ 183 $ 2,544 $ 14,214 $ 12,552 Net Loss (2,448) 5% Stock Dividend declared January 12, 1995 9 734 (750) Rehabilitation Subsidies 2,473 ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1994 192 3,278 16,687 9,354 Net Income 1,615 5% Stock Dividend declared January 29, 1996 10 751 (775) Rehabilitation Subsidies 1,334 ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1995 202 4,029 18,021 10,194 ----------- ----------- ----------- ----------- Net Loss (1,165) 5% Stock Dividend declared February 19, 1997 12 866 (882) Rehabilitation Subsidies 2,071 Issuance of Common Stock - Note 12 15 1,231 ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1996 $ 229 $ 6,126 $ 20,092 $ 8,147 =========== =========== =========== ===========
[FN] See notes to consolidated financial statements. - 25 - CONSOLIDATED STATEMENTS OF CASH FLOWS DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES (THOUSANDS) - ---------------------------------------------------------------------------
Year ended December 31, ----------------------------- 1996 1995 1994 --------- --------- --------- OPERATING ACTIVITIES Net (loss) income $ (1,165) $ 1,615 $ (2,448) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 4,604 4,186 3,885 Provision for losses on accounts receivable 20 110 31 Provision for deferred income taxes (642) 829 (1,346) Gain on sale of fixed assets (379) (5,336) (328) Amortization of deferred income - (158) (8) Write-off of loan origination fees - - 334 Equity interest in income of affiliate (92) - - Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 118 569 (1,914) (Increase) decrease in materials, supplies, prepaids and other current assets (710) (1,173) 954 Increase in accounts payable and accrued expenses 392 135 1,932 Increase in other assets (281) (338) (71) --------- --------- --------- Net Cash Provided by Operating Activities 1,865 439 1,021 --------- --------- --------- INVESTING ACTIVITIES Additions to property, plant and equipment (5,584) (9,879) (7,182) Acquisition of intangible assets - - (282) Proceeds and deposits from sale of assets and easement 406 6,346 1,357 Contributed capital 3,138 2,021 4,491 Investment in affiliate (2,000) - - --------- --------- --------- Net Cash Used in Investing Activities (4,040) (1,512) (1,616) --------- --------- --------- FINANCING ACTIVITIES Increase (decrease) in notes payable 300 (1,300) 2,185 Proceeds from long-term borrowings 1,496 4,680 5,565 Principal payments on long-term debt (1,222) (1,990) (7,057) Proceeds from (payments on) other borrowings 577 (406) 406 Dividends paid (8) (6) (6) Issuance of common stock 998 - - --------- --------- --------- Net Cash Provided by Financing Activities 2,141 978 1,093 --------- --------- --------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (34) (95) 498 Cash and cash equivalents at beginning of year 1,213 1,308 810 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,179 $ 1,213 $ 1,308 ========= ========= =========
[FN] See notes to consolidated financial statements. - 26 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES December 31, 1996, 1995 and 1994 - --------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Business: The Company operates a 500 mile regional railroad system - --------- extending into the states of New York, Pennsylvania and New Jersey. The principal freight carried by the Company consists of manufactured goods, industrial raw materials, paper products and agricultural commodities. The principal markets for this freight are the New York City metropolitan area, Northern New Jersey and Central New York. The Company relies on, and its ability to compete is dependent upon, its rail connections with the CP Rail System and Consolidated Rail Corporation (Conrail.) Changes in the operations of either of these carriers could have a material adverse impact on the Company. See discussion of proposed changes in the ownership of Conrail as set forth in Note 13. Due to the volume of business concentration, two major customers accounted for 69%, 72% and 64% of the Company's revenue from operations for 1996, 1995 and 1994, respectively. The Company generated revenues of approximately $15.8 million in 1996, $17.2 million in 1995 and $9.8 million in 1994 from CSX Intermodal, Inc. The Company generated revenues of approximately $6.3 million in 1996, $7.5 million in 1995 and $7.7 million in 1994 from Hanjin Shipping Lines. The loss of either customer or a material reduction in their operations would have a material adverse effect on the Company's results of operations. Principles of Consolidation: The accompanying consolidated - ---------------------------- financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions and balances have been eliminated in consolidation. Unconsolidated investees are stated at cost plus equity in unremitted earnings since acquisition. The Company's share of earnings of unconsolidated investees is included in consolidated income using the equity method. Accounts Receivable and Revenue Recognition: Accounts receivable - -------------------------------------------- and accounts payable in the consolidated balance sheet reflect interline transactions with other railroads which the Company is required to enter into as part of settling freight payments received from customers. The system follows Railway Accounting Rules as adopted by member railroads of The Association of American Railroads, of which the Company is a member. At year end, in - 27 - NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------------- accordance with industry practice, accrued revenue on a completed service basis is reflected in the consolidated statements of operations for unsettled freight not yet part of the interline accounting system. At December 31, 1996, the Company's trade receivables include approximately $4.0 million or 76% of total receivables, representing balances due from the two major customers. At December 31, 1995, the Company's trade receivables include $4.1 million or 76% of total receivables, representing balances due from the same two major customers. The Company does not require collateral. The credit risk associated with this concentration is not deemed significant. Allowances for doubtful accounts of $194 thousand and $171 thousand have been applied as a reduction of accounts receivable at December 31, 1996 and 1995, respectively. Commodity Agreement Used to Hedge Price Fluctuations: The Company - ----------------------------------------------------- enters into a diesel fuel supply agreement to hedge its exposure to price fluctuations on approximately 35% of its anticipated fuel requirements during an eight month period, from Fall to early Spring, for its freight transportation business. The nature of the hedging transaction does not result in any significant risk to the Company. Materials and Supplies: Materials and supplies are stated at the - ----------------------- lower of cost or market determined by the average cost method. Materials and supplies are charged to expense, construction- in-progress or property, plant and equipment at the time of use. Property, Plant and Equipment: Property, plant and equipment is - ------------------------------ recorded at cost including capitalized interest during periods of construction. Depreciation is provided over the estimated useful lives of the related assets and is computed principally by the straight-line method for financial statement purposes. Costs of reimbursable rehabilitation projects not yet complete are recorded in reimbursable construction costs. Charges incurred during the project phase are billed to the respective state or federal government agency. The proceeds from these subsidies are recorded in the consolidated statement of stockholders' equity as contributed capital at the time of receipt, net of applicable income taxes. - 28 - NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------------- The cost of property retired or sold and related accumulated depreciation are removed from the asset and allowance accounts. Gain or loss on disposition of property is reflected in earnings. Maintenance and repairs are charged to earnings as incurred. Renewals and betterments are capitalized. Leasehold improvements are amortized on the straight-line method over the remaining life of the lease or the estimated life of the improvement, whichever is shorter. Intangible Assets: Intangibles are amortized by the straight-line - ------------------ method over a period of 5 to 40 years. Accumulated amortization was $169 thousand and $1.1 million at December 31, 1996 and 1995, respectively. During 1996, $943 thousand of fully amortized intangible assets were written off resulting in no net change to the financial statements. Estimated Self-Insurance Liability: The Company is self-insured to - ----------------------------------- various limits for public liability and property loss. The liability for self-insurance is generally accrued based on occurrence, with liability for possible escalation on unsettled claims being estimated based on individual situations. The Company does not accrue an estimated liability for unasserted claims unless (i) it is aware of the possibility of such claim; (ii) it is considered probable such claim will be asserted at a future date; and (iii) it has a basis to estimate its potential exposure and there is a reasonable possibility of an unfavorable outcome. In the opinion of management, after review with attorneys for the Company, such claims are of a nature that they will not have a material adverse effect on the financial position of the Company. Income Taxes: The Company provides for income taxes in accordance - ------------- with the liability method as set forth in Statement of Financial Accounting Standards No. 109, Accounting For Income Taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. (See Note 7.) Per Share Amounts: Primary earnings per share is computed by - ------------------ dividing net income (loss) by the weighted average number of shares outstanding of 1.820 million in 1996 and 1.694 million in 1995 and 1994, including the effects of a 5% stock dividend declared February 19, 1997. Fully diluted net income per share is computed by dividing net income (loss) plus after tax interest incurred on the convertible debentures by the weighted average number of common shares outstanding, after giving effect to shares assumed to be - 29 - NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------------- issued on conversion of the convertible debentures, of 2.048 million shares in 1995. Stock options and warrants are not considered in the calculation as their effect is anti-dilutive or not material. Reported fully diluted and primary net income per share are the same for 1996 and 1994 as dilution from the assumed conversion of the convertible debentures issued in 1993 is antidilutive. Cash Equivalents: The Company considers all highly liquid - ----------------- investments with a maturity of three months or less when purchased to be cash equivalents. Use of Estimates: The preparation of financial statements in - ----------------- conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT - -------------------------------------- A summary of property, plant and equipment balances by major classes at December 31, 1996 and 1995, is as follows: THOUSANDS 1996 1995 -------- -------- Land $ 1,731 $ 1,658 Buildings and bridges 6,673 6,527 Machinery, equipment and roadway 88,330 83,604 Leasehold improvements 990 612 -------- -------- 97,724 92,401 Less: allowance for depreciation and amortization (33,790) (29,414) -------- -------- PROPERTY, PLANT and EQUIPMENT, NET $ 63,934 $ 62,987 ========= ======== - 30 - NOTE 3 - NOTES PAYABLE TO BANK - ------------------------------ Notes payable at December 31, 1996 and 1995 consist of a secured advance under a $5 million line of credit with Manufacturers and Traders Trust Company. Interest on these borrowings is at Prime plus 1.25% (Prime at December 31, 1996 was 8.25%). Available borrowings are based on and secured by eligible accounts receivable. At December 31, 1996 and 1995, eligible accounts receivable were $3.7 and $3.6 million and borrowings on the line were $2.4 million and $2.1 million, respectively. The weighted average interest rate on the borrowings is 9.2% and 9.7% for 1996 and 1995, respectively. NOTE 4 - LONG-TERM DEBT - ----------------------- Long-term debt obligations at December 31 are summarized as follows: (in thousands) 1996 1995 -------- -------- Term loan payable to Manufacturers and Traders Trust Company in quarterly principal installments of $92 thousand plus interest through 2004, with a balloon payment of $1.33 million in same year. Interest on portions of the term loan are based on the prime rate plus 1.5% or LIBOR, and the greater of a 3.5% fixed rate above the yield on United States Treasury Obligations, or 8%. (Prime at 8.25% on December 31, 1996). $ 4,083 $ 4,133 Loan payable to the New Jersey Economic Development Authority due in monthly installments of $18 - $20 thousand plus interest, through 1999, with interest at a rate between 2% and 9% (6% at December 31, 1996) secured by a mortgage on real property. 693 927 Loan payable to the federal government through the Federal Railroad Administration (FRA) due in quarterly installments of $88 thousand, including interest at 6.276% with a balloon payment of $1.46 million on March 31, 2000, secured by a mortgage on real property. 2,147 2,356 - 31 - NOTE 4 - LONG-TERM DEBT (continued) - ----------------------------------- Loan payable to the federal government through the Federal Railroad Administration (FRA) due in quarterly installments of $93 thousand, including interest at 6.4% through 2015, secured by railway equipment. 4,034 4,143 Various promissory notes, mortgage notes and capital leases payable, due in monthly installments, with interest varying from 4.9% - - 10.9% at December 31, 1996. The notes are secured by land, buildings or equipment. 3,194 2,318 -------- -------- 14,151 13,877 Less current portion (1,768) (1,075) -------- -------- Long-term debt $ 12,383 $ 12,802 ======== ======== During 1994, the Company completed the refinancing of its major bank debt with Manufacturers and Traders Trust Company. In conjunction with this refinancing, the Company wrote-off $334 thousand, representing the unamortized balance of deferred financing costs incurred in 1990 in conjunction with its prior loans. The write-off was recorded as an extraordinary item net of applicable income taxes of $106. Substantially all assets of the Company are pledged as collateral under debt agreements. In addition to other requirements, the Company is required to meet certain minimum tangible net worth, working capital, and current ratio requirements under certain debt agreements. At December 31, 1996, the Company met all the minimum requirements. The Company's loan agreement with Manufacturers & Traders Trust Company provides that the Company may not declare cash dividends in any fiscal year in excess of 40% of Consolidated Net Income in such fiscal year, and that cumulative dividends paid during the term of the loan may not exceed 10% of cumulative retained earnings. In addition, the financing agreements between the Company and its subsidiary, NYS&W, and the federal government provides that yearly dividends may not exceed 50% of the total additions to retained earnings of the Company for the previous year, nor 50% of the total additions to retained earnings for 1985 and each year thereafter. One agreement further stipulates that the ratio of dividends paid to net income for any fiscal year, may not be greater than that - 32 - NOTE 4 - LONG-TERM DEBT (continued) - ----------------------------------- ratio for the 5 years prior to the agreement. Interest expense, net (in thousands) is comprised of interest expense of $1,719, $1,465 and $1,444 for 1996, 1995 and 1994 respectively, net of respective amounts for capitalized interest of $190, $104 and $147, and interest income of $70, $85 and $71. Interest paid (in thousands) was $1,640, $1,455 and $1,332 for the 1996, 1995 and 1994 periods. A summary of maturities of long-term debt at December 31, 1996 is as follows (in thousands): 1997 $ 1,768 1998 1,623 1999 1,566 2000 2,464 2001 897 Thereafter 5,833 -------- $ 14,151 ======== NOTE 5 - 6.5% CONVERTIBLE SUBORDINATED NOTES - -------------------------------------------- During 1993, the Company completed a private placement of $3.6 million of 6.5% convertible subordinated notes due September 1, 2003. The notes are convertible into shares of the Company's presently authorized common stock at a conversion price of $10.08 per share, after giving effect to stock dividends. Interest on the notes is payable semi-annually on the first day of March and September of each year. The notes may be converted into shares anytime prior to maturity. The Company has reserved 355 thousand shares of authorized common stock for the conversion of the notes. Directors of the Company purchased $850 thousand of the notes. NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------- The estimated fair values of the Company's financial instruments at December 31, 1996 and 1995 and the methods and assumptions used to estimate the fair value of each class of financial instruments held by the Company were as follows: Cash and Cash Equivalents: The carrying amount approximated fair - -------------------------- value because of the short maturity of these instruments. - 33 - NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) - -------------------------------------------------------------------------- Long-Term Debt: The fair value of the Company's long-term debt is - --------------- estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount reported in the balance sheet approximates its fair value. NOTE 7 - INCOME TAXES - --------------------- The components of the provision for federal and state income taxes are as follows (in thousands): 1996 1995 1994 -------- -------- -------- Current tax expense $ (32) $ (49) $ (218) Deferred tax benefit (expense) 642 (829) 1,346 -------- -------- -------- TOTAL INCOME TAX BENEFIT (EXPENSE) $ 610 $ (878) $ 1,128 ======== ======== ======== A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate follows: 1996 1995 1994 ------ ------ ------ Statutory income tax rate 34.00% 34.00% 34.00% State taxes, net of federal tax benefit 1.12 1.28 (2.72) Other (2.45) (.06) 2.41 ------ ------ ------ EFFECTIVE TAX RATE 32.67% 35.22% 33.69% ====== ====== ====== State taxes are based on a combination of pre-tax earnings, allocated capital and gross transportation receipts. Amounts included in current tax expense were $32 thousand, $49 thousand and $218 thousand for 1996, 1995 and 1994 respectively. The Company has general business credit carryovers of approximately $1.5 million which expire at various dates through the year 2003, net operating loss carryforwards of $12.4 million which expire at various dates through 2011, and alternative minimum tax credits of $983 thousand available to reduce income taxes otherwise currently payable. - 34 - NOTE 7 - INCOME TAXES (continued) - --------------------------------- Net income tax payments amounted to $63 thousand, $237 thousand, and $28 thousand in 1996, 1995 and 1994, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31 are as follows: Thousands 1996 1995 ------- ------- Deferred tax liabilities: Book basis in excess of tax basis of property, plant & equipment $17,555 $16,811 Deferred tax assets: Vacation reserve $ 154 $ 142 Bad debt reserve 66 58 Litigation reserve 34 55 Other-net 11 59 Net operating loss carryforwards 4,228 3,929 General business credit carryforwards 1,519 1,519 AMT credit carryforwards 983 983 ------- ------- Total deferred tax assets 6,995 6,745 ------- ------- Net deferred tax liabilities $10,560 $10,066 ======= ======= Classification of deferred taxes: Non-current liabilities $10,892 $10,398 Current assets (332) (332) ------- ------- $10,560 $10,066 ======= ======= NOTE 8 - LEASES - --------------- The Company leases certain equipment and real estate under operating lease agreements for periods ranging from one to ten years. The annual rental expenses were $2.7 million, $2.9 million and $2.9 million for 1996, 1995 and 1994, respectively. - 35 - NOTE 8 - LEASES (continued) - --------------------------- Future minimum lease payments for noncancelable operating leases as of December 31, 1996, are as follows (in thousands): Year ending December 31, 1997 $ 656 1998 654 1999 681 2000 680 2001 676 Thereafter 1,021 ------ TOTAL MINIMUM OPERATING LEASE PAYMENTS $4,368 ====== NOTE 9 - STOCK OPTIONS, WARRANTS and PREFERRED STOCK - ---------------------------------------------------- The Stockholders of the Company have approved stock option plans for officers, directors and employees. At December 31, 1996 there are 186 thousand exercisable shares under option, which includes the effects of any stock dividends declared after options were granted, and 63 thousand options available for future grants. The exercise price of options granted is equal to the fair market value of the common stock on the date of grant, adjusted for stock dividends declared after grant date. The options expire ten years from the date of grant and the options range in exercise price from $8.43 to $9.52. The weighted average exercise price at December 31, 1996 was $8.63 and the weighted average remaining contractual life of those options is 6.6 years. No options have been exercised during the years of 1996, 1995 or 1994. Options granted were 2,500, 6,300 and 0 in 1996, 1995 and 1994, respectively. The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 123, Accounting for Stock-Based Compensation, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. Because Statement 123 is applicable only to options granted subsequent to December 31, 1994 and most of the Company's outstanding options were granted prior to that date, its pro forma effect is not material and therefore, not presented. - 36 - NOTE 9 - STOCK OPTIONS, WARRANTS and PREFERRED STOCK (continued) - ---------------------------------------------------------------- The Company issued 60,000 warrants to purchase stock at $10.00 per share to a party involved in the financing of the TP&W acquisition in January, 1996. Due to the effects of stock dividends paid after issuance of warrants, there are currently 66,150 warrants available at an exercise price of $9.07. The Company in 1996 authorized 1 million shares of preferred stock issuable in series, the voting, dividend, liquidation and other rights of which may be determined by the Board of Directors at the time of issuance. No such preferred stock has been issued. NOTE 10 - EMPLOYEE BENEFIT PLAN - ------------------------------- On August 1, 1990, the Company established a defined contribution plan covering substantially all employees. Employees can contribute a portion of their salary or wages as prescribed under section 401(k) of the Internal Revenue Code and, subject to certain limitations, the Company will match a portion of the employees' contribution. The amounts of employer contributions were $93 thousand in 1996, $91 thousand in 1995 and $78 thousand in 1994. NOTE 11 - COMMITMENTS - --------------------- The Company has outstanding commitments of approximately $8.6 million in connection with the completion of various rehabilitation projects and construction in progress. Completion dates range from six months to three years. The commitments are expected to be partially offset by government agency funding of approximately $8.2 million. The Company entered into an agreement in August, 1992 to purchase certain property currently under lease for a total inflation adjusted purchase price of approximately $3.75 million. During the second quarter of 1995, the Company deposited $500 thousand towards the purchase. The Company will be required to pay an additional $750 thousand at closing, which is anticipated to occur during the first half of 1997. Early in 1996, the Company received a commitment for a credit facility from Manufacturers and Traders Trust Company for $2.5 million to finance the purchase. The commitment expires on March 31, 1997. The property is presently being used for relocation and expansion of its bulk distribution operations. During the fourth quarter of 1995, the Company entered into a contract to sell certain parcels of railroad property of a non- - 37 - NOTE 11 - COMMITMENTS (continued) - --------------------------------- operating Company subsidiary for $500 thousand, which is anticipated to close during the first half of 1997. The carrying amount is estimated at $110 thousand. The proceeds will be used for working capital purposes. Certain claims have been filed against the Company or its subsidiaries and have not been finally adjudicated. These claims when finally concluded and determined, will not, in the opinion of management based upon information that it presently possesses, have a material adverse effect on the consolidated financial position or results of operations. NOTE 12 - INVESTMENT IN AFFILIATE - --------------------------------- On January 31, 1996, the Company completed the purchase of a 40% interest in The Toledo, Peoria and Western Railroad Corporation (TP&W) for consideration totaling $2.25 million, including 25,000 shares of the Company's common stock. The non-stock portion of the consideration for the acquisition was funded through a $1 million loan and the private placement of 100,000 shares of the Company's common stock. Additionally, the Company issued warrants to purchase 60,000 common shares to another party involved in the transaction. The investment is accounted for under the provisions of APB 18, The Equity Method of Accounting for Investments in Common Stock. The TP&W owns a 284 mile Class III regional railroad which provides rail service on a generally East-West route across one of the top grain producing regions in the world. It stretches from Fort Madison, Iowa through Central Illinois (approximately 70 miles south of Chicago) to Logansport, Indiana and includes service to two company-operated intermodal facilities. The TP&W hauls agricultural products, chemicals, coal, fertilizer, food products, steel, manufactured goods and consumer products for such customers as ADM, Cilco, Witco, Lonza and Caterpillar. The TP&W showed a net income of $230 for the eleven months ended December 31, 1996. Accordingly, the Company is reporting 40% or $92 as Equity Interest in Income of Affiliate in its Consolidated Statement of Operations for 1996. Under an Administrative Services Agreement by and between the TP&W dated January 31, 1996, the Company performs certain administrative services for the TP&W. Total administrative services performed and billed by the Company for the eleven month period ended December 31, 1996 totaled $1 million. In the normal course of business, - 38 - NOTE 12 - INVESTMENT IN AFFILIATE (continued) - --------------------------------------------- certain other transactions exist between the Company and the TP&W. For the above mentioned period, these types of billings to the TP&W totaled approximately $336 thousand, offset in part by TP&W billings to the Company totaling approximately $99 thousand. At December 31, 1996 the Company had a net receivable from the TP&W of approximately $198 thousand, the majority of which is included in other current assets. Of this amount, $60 thousand represents amounts receivable under the Administrative Services Agreement and the remaining $138 are various direct charges incurred or services performed by the Company, net of direct payables to the TP&W. At December 31, 1995, the Company had incurred $592 thousand of advances related to the purchase which were recorded in other current assets and reimbursed at closing on January 31, 1996. The following is summarized financial information for the unconsolidated investee as of and for the eleven months ended December 31, 1996: (in thousands) Current assets $ 3,601 Noncurrent assets 18,478 Current liabilities 6,594 Noncurrent liabilities 9,847 Operating revenues 10,283 Operating expenses 9,282 Income from operations 1,001 Net income 230 In connection with a $7 million term loan between the TP&W and Creditanstalt Corporate Finance, Inc., (CCF) entered into on January 31, 1996, the Company, along with the other owners of TP&W entered into a cash collateral agreement and deficiency guarantee. The cash collateral agreement required the Company to make deposits totaling $400 thousand to CCF as collateral to secure the loan in the event of default by the TP&W. These deposits are included in other assets at December 31, 1996. The deficiency guarantee obligates the Company, severally, with the other owners of TP&W, to guarantee payment of the term loan in accordance with the terms of the loan agreement. The Company has also entered into a back-up agreement, dated January 31, 1996, with another owner of the TP&W (who is a member of the Board of Directors) whereby the Company agrees to reimburse this party for any amounts that the party is required to pay under the deficiency guarantee or for any portion of the party's deposits, paid in under the cash collateral agreement, that are applied by CCF towards the loan. - 39 - NOTE 13 - POTENTIAL CHANGE IN OWNERSHIP OF CONRAIL - -------------------------------------------------- On October 15, 1996 CSX Corporation and Conrail announced plans to merge. Thereafter, Norfolk Southern announced a competing tender offer to acquire ownership of Conrail. At March 24 1997, press reports indicate that the rail lines will be divided between CSX and NS, although the details of this division are not currently available. The Company's main operating subsidiary, NYS&W, derives approximately 49% of its operating revenue from traffic hauled for a CSX subsidiary, and derives approximately 20% of its operating revenue from intermodal traffic hauled in conjunction with Norfolk Southern. The Company has multi-year contracts for both of these revenue sources. The Company is unable to predict either the final outcome of the restructuring of the eastern U.S. railroad system at this time, or the impact such restructuring, if it occurs, will have on the Company in the future. - 40 - Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - --------------------------------------------------------------------------- None. PART III -------- The information required in Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management), and Item 13 (Certain Relationships and Related Transactions) except for the information set forth at the end of Part I with respect to Executive Officers of the Company, is incorporated herein by reference to the Company's Proxy Statement to be filed within 120 days of December 31, 1996. PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) (1) Financial Statements The following financial statements of Delaware Otsego Corporation are included in Part II, Item 8: Page ---- Report of Independent Auditors 21 Consolidated Balance Sheets at December 31, 1996 and 1995 22 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 24 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995, and 1994 25 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994 26 Notes to Consolidated Financial Statements 27 Schedules called for under Regulation S-X are not submitted because they are not applicable or not required or because the required information is not material or is included in the financial statements or notes thereto. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company in the fourth quarter. - 41 - (c) Exhibits Filed herewith (-) or incorporated by reference to ----------------------------- 3.1 Restated Certificate of Incorporation Exhibit 3.1 to Registrant's of the Delaware Otsego Corporation Annual Report on Form 10-K dated June 1, 1991 dated December 31, 1991 3.2 Certificate of Amendment of Certificate Exhibit 3.2 to Registrant's of Incorporation of Delaware Otsego Form 10-Q dated June 30, 1996 Corporation dated June 3, 1996 3.3 By-Laws of DOC dated April 5, 1988 Exhibit 3.8 to Registrant's Annual Report on Form 10-K dated December 31, 1988 10.1 Employment Agreement between DOC Exhibit 10.1 to Registrant's and Walter Rich dated June 3, 1995 Quarterly Report on Form 10-Q dated June 30, 1995 10.2 Direct Loan Agreement between New Exhibit 10(g) to Registration Jersey Economic Development Authority Statement on Form S-1, and NYS&W dated August 6, 1982 No. 2-94319 10.3 Agreement between Conrail and NYS&W Exhibit 10(p) to Registration dated March 30, 1982 relating to Statement on Form S-1, trackage rights over line of Conrail No. 2-94319 from Binghamton, New York to Warwick, New York via Campbell Hall and Maybrook, New York 10.4 Financing Agreement between NYS&W and Exhibit 19.11 to Form 10-Q FRA dated September 30, 1985 dated November 13, 1986 10.5 Agreement Amending Financing Agreement Exhibit 19.12 to Form 10-Q between FRA and NYS&W dated dated November 13, 1986 July 30, 1986 10.6 Amendment to Direct Loan Agreement Exhibit 19.18 to Form 10-Q between New Jersey Economic Development dated November 13, 1986 Authority and NYS&W dated July 15, 1986 10.7 Amendment to Direct Loan Agreement Exhibit 19.19 to Form 10-Q between New Jersey Economic Development dated November 13, 1986 Authority and NYS&W dated September 2, 1986 - 42 - 10.8 Amended and Restated Credit Agreement Exhibit 10.8 to Form 10-Q between Manufacturers and Traders Trust dated November 11, 1994 Company and DOC dated May 27, 1994 10.9 Agreement between NYS&W and Exhibit 10.9 to Registrant's Brotherhood of Locomotive Engineers Annual Report on Form 10-K dated March 30, 1994 dated March 27, 1995 10.10 Agreement between NYS&W and Exhibit 10.10 to Registrant's Brotherhood of Maintenance of Way Annual Report on Form 10-K Employes dated October 13, 1995 dated March 24, 1996 10.11 Modification to Direct Loan Agreement Exhibit 10(hh) to Registration and Direct Loan Promissory Note dated Statement on Form S-1, as of August 6, 1982 between the New No. 2-94319 Jersey Economic Development Authority and NYS&W dated July 17, 1984 10.22 Delaware Otsego Corporation Exhibit B to Definitive Proxy 1987 Stock Option Plan Statement Dated October 7, 1987 10.23 Delaware Otsego Corporation Exhibit B to Definitive Proxy 1993 Stock Option Plan Statement Dated May 5, 1993 10.27 Form of Delaware Otsego Corporation Exhibit 1 to Registrant's 6.5% Convertible Subordinated Note Form 8-K dated October 19, Due on September 1, 2003 1993 10.28 Guarantee Commitment between the Exhibit 10.28 to Registrant's Federal Railroad Administration and Annual Report on Form 10-K DOC dated September 29, 1994 dated March 27, 1995 10.29 Warrant Agreement between DOC and Exhibit 10.29 to Registrant's Creditanstalt Corporate Finance, Inc. Annual Report on Form 10-K dated January 31, 1996 dated March 24, 1996 10.30 Deficiency Guarantee among DOC and Exhibit 10.30 to Registrant's others and Creditanstalt Corporate Annual Report on Form 10-K Finance Inc. dated January 31, 1996 dated March 24, 1996 10.31 Cash Collateral Agreement among DOC Exhibit 10.31 to Registrant's and others and Creditanstalt Corporate Annual Report on Form 10-K Finance, Inc. dated January 31, 1996 dated March 24, 1996 - 43 - 11 Computation of Earnings Per Share - 21 Subsidiaries of Registrant - 23 Consent of Ernst & Young LLP - - 44 - SIGNATURES - --------------------------------------------------------------------------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Delaware Otsego Corporation has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. DELAWARE OTSEGO CORPORATION - --------------------------- Registrant By: s/ WALTER G. RICH ------------------------------------- Walter G. Rich, Director President and Chief Executive Officer Date: March 22, 1997 By: s/ WILLIAM B. BLATTER ------------------------------------- William B. Blatter, Senior Vice President and Chief Financial Officer Date: March 22, 1997 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: s/ MALCOLM C. HUGHES s/ NILES F. CURTIS ---------------------------- ------------------------------ Malcolm C. Hughes, Director Niles F. Curtis, Director March 22, 1997 March 22, 1997 s/ HARVEY POLLY s/ DAVID B. COMMON ---------------------------- ------------------------------ Harvey Polly, Director David B. Common, Director March 22, 1997 March 22, 1997 s/ ALBERT B. AFTOORA s/ ROBERT L. MARCALUS ---------------------------- ------------------------------ Albert B. Aftoora, Director Robert L. Marcalus, Director March 22, 1997 March 22, 1997 s/ CHARLES S. BRENNER s/ GERALD D. GROFF ---------------------------- ------------------------------ Charles S. Brenner, Director Gerald D. Groff, Director March 22, 1997 March 22, 1997 - 45 - EXHIBIT INDEX - --------------------------------------------------------------------------- Page ---- 11 Computation of Earnings Per Share 47 21 Subsidiaries of Registrant 48 23 Consent of Ernst & Young LLP 49 - 46 - EX-11 2 DELAWARE OTSEGO CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 (THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ---------------------------------------------------------------------------
1996 (1) 1995 (1) 1994 (1) -------- -------- -------- PRIMARY Weighted Average Shares Outstanding 1,820 1,694 1,694 ======== ======== ======== Net (Loss) Income before Extraordinary Item $ (1,165) $ 1,615 $ (2,220) Extraordinary Item - - (228) -------- -------- -------- Net (Loss) Income $ (1,165) $ 1,615 $ (2,448) ======== ======== ======== PRIMARY EARNINGS (LOSS) PER SHARE Net (Loss) Income before Extraordinary Item $ (0.64) $ 0.95 $ (1.31) Extraordinary Item - - (0.13) -------- -------- -------- Net (Loss) Income $ (0.64) $ 0.95 $ (1.44) ======== ======== ======== FULLY DILUTED Weighted Average Shares Outstanding 1,820 1,694 1,694 Assumed Conversion of 6.5% Convertible Subordinated Notes * 354 * -------- -------- -------- 1,820 2,048 1,694 ======== ======== ======== Net (Loss) Income before extraordinary item $ (1,165) $ 1,615 $ (2,220) Add: 6.5% Convertible Subordinated Note Interest, net of tax * 151 * -------- -------- -------- $ (1,165) $ 1,766 $ (2,220) Extraordinary Item - - (228) -------- -------- -------- $ (1,165) $ 1,766 $ (2,448) ======== ======== ======== FULLY DILUTED EARNINGS (LOSS) PER SHARE Net (Loss) Income before Extraordinary Item $ (0.64) $ 0.86 $ (1.31) Extraordinary Item - - (0.13) -------- -------- -------- Net (Loss) Income $ (0.64) $ 0.86 $ (1.44) ======== ======== ========
[FN] * Conversion of Convertible Subordinated Notes not assumed due to anti-dilutive effect. (1) Stock Options and warrants are not considered in the calculations as their effect is anti-dilutive or not material. - 47 - EX-21 3 EXHIBIT 21 - ---------------------------------------------------------------------------- SUBSIDIARIES OF REGISTRANT -------------------------- STATE OF NAME OF SUBSIDIARY INCORPORATION - -------------------------------------------------------------- ------------- Cooperstown and Charlotte Valley Railway Corporation New York Central New York Railroad Corporation New York Syracuse, Binghamton and New York Railroad Corporation New York Lackawaxen and Stourbridge Railroad Corporation Pennsylvania Delaware Otsego Equipment Corporation New York Fonfulco, Inc. New York The New York, Susquehanna and Western Railway Corporation New Jersey Susquehanna Properties, Inc. New York Staten Island Railway Corporation New York Delta Warehousing Corporation New Jersey Rahway Valley Company, Lessee New Jersey Rahway Valley Railroad Company New Jersey Susquehanna Bulk Systems, Inc. New Jersey - 48 - EX-23 4 Consent of Independent Auditors - ------------------------------- We consent to the incorporation by reference in the Registration Statement (Form S-8 and Form S-3 No. 33-34587) pertaining to the 1987 Stock Option Plan of Delaware Otsego Corporation of our report dated February 28, 1997 (except Note 13, as to which the date is March 24, 1997) with respect to the consolidated financial statements of Delaware Otsego Corporation and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Syracuse, New York March 24, 1997 - 49 - EX-27 5 ARTICLE 5 FINANCIAL DATA SCHEDULE FOR 12/31/96 10-K405.
5 1,000 Dec-31-1996 Jan-01-1996 Dec-31-1996 12-MOS 1179 0 5269 0 1179 10852 97724 33790 78323 16874 15963 0 0 229 34365 78323 32282 32282 0 33071 0 0 1719 (1867) (610) (1257) 0 0 0 (1165) (.64) (.64)
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