SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
----------------
January 31, 1996
----------------
Date of Report (Date of earliest event reported)
DELAWARE OTSEGO CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 0-12985 16-0913491
------------------------ ---------------- ---------------------
(State or other juris- (Commission file (IRS Employer
diction of incorporation number) identification number)
1 Railroad Avenue, Cooperstown, New York 13326
---------------------------------------------------
(Address of principal executive offices) (zip code)
607-547-2555
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. Acquisition or Disposition of Assets:
On January 31, 1996, Delaware Otsego Corporation (the "Registrant")
acquired 400 shares of common stock of The Toledo, Peoria and Western
Railroad Corporation ("TP&W Railroad") for consideration totalling $2.25
million, including 25,000 shares of the Registrant's common stock. The
shares acquired represent 40% of the outstanding equity of TP&W Railroad.
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 Registrant's common stock.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits:
(a) Financial Statements of Business Acquired.
Prior to January 31, 1996, TP&W Railroad had no operations and,
accordingly, no financial statements are available. On January 31, 1996,
TP&W Railroad acquired all outstanding shares of Marksman Corp. The
following audited financial statements of Marksman Corp. are filed with
this report:
Report of Independent Auditors............................. Page 5
Consolidated Balance Sheets as at December 31, 1995
and 1994................................................. Page 6
Consolidated Statement of Operations and Accumulated
Deficit for the Years Ended December 31, 1995
and 1994................................................. Page 7
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995 and 1994......................... Page 8
Notes to Consolidated Financial Statements............... Page 9
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed consolidated
financial statements are filed with this report:
Pro Forma Condensed Balance Sheet as at December 31, 1995.. Page 16
Pro Forma Condensed Statement of Operations for Year
Ended December 31,1995............................ Page 17
Notes to Condensed Consolidated Financial Statements....... Page 18
Consent of KPMG Peat Marwick LLP........................... Page 20
- 2 -
<PAGE>
The Pro Forma Condensed Consolidated Balance Sheet of Registrant as
at December 31, 1995 reflects the financial position of Registrant after
giving effect to the transaction described in Item 2 and assumes the
transaction took place on December 31, 1995. The Pro forma condensed
Consolidated Statement of Operations for the year ended December 31, 1995
assumes that the transaction occurred on January 1, 1995.
Assumptions underlying the pro forma adjustments are described in
the Registrant's notes to the unaudited pro forma consolidated financial
information, which should be read in conjunction with these statements.
These statements should also be read in conjunction with the Consolidated
Financial Statements of the Registrant, as reflected in its Annual Report
on Form 10-K for the year ended December 31, 1995 and the consolidated
financial statements of Marksman Corp. and subsidiary for the year ended
December 31, 1995 submitted under Item 7(a).
The unaudited consolidated pro forma results do not purport to be
indicative of the results of operations that would have been obtained if
the foregoing acquisition had actually occurred on January 1, 1995, or of
the future financial position or future results of operations of Registrant.
(c) Exhibits.
Accountants' Consent.
- 3 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
DELAWARE OTSEGO CORPORATION
Dated: April 12, 1996 WALTER G. RICH
-----------------------------------
Walter G. Rich
President & Chief Executive Officer
- 4 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
-------------------------------------------
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
MARKSMAN Corp.:
We have audited the accompanying consolidated balance sheets of MARKSMAN
Corp. and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of operations and accumulated deficit, and cash
flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
MARKSMAN Corp. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that MARKSMAN Corp. and subsidiary will continue as a going
concern. The Company's net losses, stockholders' deficit, deficiency in
net working capital, and the existence of defaults with respect to its
obligations, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these
matters are described in notes 9 and 12. The consolidated financial
statements do not include any adjustments that result from the outcome of
this uncertainty.
KPMG Peat Marwick LLP
March 22, 1996
Boston, Massachusetts
- 5 -
<PAGE>
<TABLE>
MARKSMAN CORP. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1995 and 1994
-----------------------------
<CAPTION>
ASSETS: (notes 5 and 12)
- ------------------------
------------------------
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 492,162 $ 597,217
Accounts receivable, net of allowance for
doubtful accounts of $113,317 in 1995 and
$88,317 in 1994 2,020,275 1,869,179
Reimbursable construction costs 149,083 516,511
Materials and supplies 34,805 37,394
Prepaid expenses 26,259 28,029
Other current 212 18,753
----------- -----------
TOTAL CURRENT ASSETS 2,722,796 3,067,083
PROPERTY, PLANT AND EQUIPMENT (note 3)
Land 6,702,293 6,660,065
Buildings, machinery, equipment
and leasehold improvements 16,573,381 14,957,336
----------- -----------
23,275,674 21,617,401
Less accumulated depreciation (4,928,311) (4,087,566)
----------- -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT 18,347,363 17,529,835
Other assets 13,543 29
----------- -----------
$21,083,702 $20,596,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT (note 12)
- -----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,070,301 $ 2,835,816
Accrued and other current liabilities (note 4) 12,006,134 10,242,524
Current maturities of long-term debt (note 5) 20,896,026 20,896,026
----------- -----------
TOTAL CURRENT LIABILITIES 35,972,461 33,974,366
Long-term debt (note 5) 1,261,006 -
----------- -----------
TOTAL LIABILITIES 37,233,467 33,974,366
Commitments and contingencies (notes 8 and 9)
STOCKHOLDERS' DEFICIT (note 6):
Common stock, no par value; 1,000 shares
authorized and 100 shares issued 250,000 250,000
Additional paid-in capital 1,470,000 1,470,000
Accumulated deficit (17,869,765) (15,097,419)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (16,149,765) (13,377,419)
----------- -----------
$21,083,702 $20,596,947
=========== ===========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
<TABLE>
MARKSMAN CORP. AND SUBSIDIARY
Consolidated Statements of Operations and Accumulated Deficit
Years ended December 31, 1995 and 1994
-------------------------------------------------------------
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
OPERATING REVENUES:
Railway operating revenues $ 8,921,890 $ 9,736,857
Real property revenues 209,652 191,695
Other operating revenue 962,239 798,232
------------- -------------
TOTAL OPERATING REVENUES 10,093,781 10,726,784
OPERATING EXPENSES:
Maintenance of way and structures 1,312,156 1,183,543
Maintenance of equipment 1,822,593 1,911,281
Transportation 3,082,902 2,948,198
Car hire expense 841,778 1,099,259
Depreciation and amortization 843,820 776,651
General, administrative and other 2,444,502 2,617,086
------------- -------------
TOTAL OPERATING EXPENSES 10,347,751 10,536,017
INCOME (LOSS) FROM OPERATIONS (253,970) 190,767
OTHER EXPENSE:
Interest expense (note 5) (2,479,305) (1,547,751)
Loss on sale of property,
equipment and other (39,071) (31,476)
------------- -------------
OTHER EXPENSE (2,518,376) (1,579,227)
------------- -------------
NET LOSS (2,772,346) (1,388,460)
ACCUMULATED DEFICIT, BEGINNING OF YEAR (15,097,419) (13,708,959)
------------- -------------
ACCUMULATED DEFICIT, END OF YEAR $ (17,869,765) $ (15,097,419)
============= =============
</TABLE>
[FN]
See accompanying notes to consolidated financial statements
- 7 -
<PAGE>
<TABLE>
MARKSMAN CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
--------------------------------------
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Operating activities:
Net loss $ (2,772,346) $ (1,388,460)
Adjustments to reconcile
net loss to net cash provided
by operating activities:
Depreciation and amortization 843,820 776,651
(Gain) loss on property and
equipment disposal 17,703 (6,903)
Changes in operating assets
and liabilities:
(Increase) in accounts receivable (151,096) (410,199)
(Increase) decrease in materials,
supplies, prepaids and other
current assets 390,328 (227,675)
(Increase) decrease in other assets (13,514) 23,138
Increase in accounts payable 234,485 278,681
Increase in accrued and
other liabilities 1,763,610 1,454,668
------------ ------------
Net cash provided by
operating activities 312,990 499,901
Investing activities:
Reimbursement for property and
equipment damage - 353,485
Additions to property, plant and equipment (455,295) (686,688)
Proceeds from disposal of property
and equipment 37,250 15,100
------------ ------------
Net cash used in investing activities (418,045) (318,103)
------------ ------------
Increase (decrease) in cash and
cash equivalents (105,055) 181,798
Cash and cash equivalents, beginning of year 597,217 415,419
------------ ------------
Cash and cash equivalents, end of year $ 492,162 $ 597,217
============ ============
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 570,000 $ 130,000
============ ============
</TABLE>
Noncash item:
During 1995, the Company placed into service railway improvements
financed by a State of Illinois track loan in the amount of $1,261,006.
[FN]
See accompanying notes to consolidated financial statements.
- 8 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
------------------------------------------
(1) Principles of Consolidation
- -------------------------------
The consolidated financial statements include the accounts of MARKSMAN Corp.,
and its wholly owned subsidiary, Toledo, Peoria & Western Railway
Corporation (collectively, the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
(2) Summary of Significant Accounting Policies
- ----------------------------------------------
(a) Description of Business
- ---------------------------
Toledo, Peoria & Western Railway Corporation, a wholly owned subsidiary
of Marksman Corp., operates a shortline railroad which extends from Fort
Madison, Iowa to Remington, Indiana. Other revenue consists of leasing
land and other railroad activities (primarily switching railroad cars at
the request of its customers). (Also see note 10 regarding significant
customers).
(b) Cash and Cash Equivalents
- -----------------------------
Cash and cash equivalents include cash on hand, cash in banks and all
highly liquid investments with original maturities of three months or
less.
(c) Materials and Supplies
- --------------------------
Materials and supplies, which consist mainly of fuel oil and lubricants,
are stated at lower of cost (first-in, first-out) or market.
(d) Accounts Receivable and Revenue Recognition
- -----------------------------------------------
Accounts receivable and accounts payable in the consolidated balance
sheet include 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 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.
Land lease revenue is recognized proportionately over the period of the
lease. Advance rental payments in excess of revenue recognized are
classified as deferred rental revenue (note 4).
(e) Property and Equipment
- --------------------------
Property and equipment are stated at cost. Depreciation and amortization
is determined based on the estimated economic lives of the related
property and equipment using the straight-line method.
Costs of reimbursable rehabilitation projects not yet complete are
recorded in reimbursable construction costs.
(f) Environmental Expenditures
- ------------------------------
Expenditures that relate to current operations are expensed or capitalized
as appropriate. Expenditures that relate to an existing condition
caused by past operations are expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable and the
costs can be reasonably estimated.
- 9 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(g) Income Taxes
- ----------------
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled.
(h) Use of Estimates
- --------------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial statements
in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(i) Impairment of Long-Lived Assets
- -----------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS 121) which
provides guidance on when to assess and how to measure impairment of
long-lived assets, certain intangibles and goodwill related to those
assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. This statement is effective
for financial statements for fiscal years beginning after December 15,
1995. The Company has not yet assessed the future impact of adopting
SFAS 121.
(3) Property, Plant and Equipment
- ---------------------------------
Property, plant and equipment consists of the following at December 31:
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Transportation property:
Land and track structures $ 19,002,527 $ 17,544,176
Locomotives 1,958,691 1,823,941
Machinery and equipment 1,666,039 1,605,196
-------------- -------------
22,627,257 20,973,313
Other property:
Vehicles 22,910 22,910
Furniture and fixtures 11,221 11,114
Office equipment 439,971 435,749
Leasehold improvements 174,315 174,315
-------------- -------------
648,417 644,088
-------------- -------------
Total property, plant and equipment 23,275,674 21,617,401
Less accumulated depreciation
and amortization 4,928,311 4,087,566
-------------- -------------
Property, plant and equipment, net $ 18,347,363 $ 17,529,835
============== =============
</TABLE>
- 10 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(4) Other Current Liabilities
- -----------------------------
Other Current liabilities consist of the following at December 31:
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Interline payables $ 6,762,896 $ 6,506,523
Interest payable 3,908,832 2,146,932
Casualty and other claims reserve 435,529 761,523
Deferred rental revenue 119,842 91,645
Salaries and wages payable 155,426 46,585
Payroll taxes payable 137,584 122,888
Accrued expenses 486,026 566,428
-------------- -------------
$ 12,006,134 $ 10,242,524
============== =============
</TABLE>
(5) Indebtedness
- ----------------
At December 31, 1995 and 1994, the Company was in default with respect to
its senior term loan, subordinated debt and junior subordinated debt.
Accordingly, these obligations are presented as currently due.
Indebtedness consists of the following at December 31:
- ------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Currently Due:
(a) Senior term loan $ 13,575,000 $ 13,575,000
(b) Subordinated debt 4,771,026 4,771,026
(c) Junior subordinated debt 2,550,000 2,550,000
-------------- -------------
Current portion of long-term debt 20,896,026 20,896,026
Long-term debt:
(d) Illinois Track Loan 1,261,006 -
-------------- -------------
Long-term debt, excluding
current maturities $ 1,261,006 $ -
============== =============
</TABLE>
Original terms of the defaulted debt are:
- -----------------------------------------
(a) Senior term loan, modified, interest at Libor plus 2.5% through December
31, 1996, and Libor plus 3% until December 31, 1997; secured by all
assets and stock; total balance is in default and is payable on demand.
- 11 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(b) Subordinated debt consists of Tranche A, ($2,771,026) modified, interest
free until December 31, 1996, interest at 8% through December 31, 1996
added to principal through December 31, 1996; total balance is in
default and payable on demand; and
Tranche B. ($2,000,000) modified, interest free through December 31,
1996, total balance is in default and payable on demand.
(c) Junior subordinated debt consists of Series A, ($1,500,000) interest at
Libor plus 1% payable monthly in arrears; total balance is in default
and payable on demand, and
Series B, ($1,050,000) interest free until December 31, 1997, interest
at 12% payable quarterly in arrears through December 31, 1999; total
balance is in default and payable on demand.
(d) State of Illinois Track Loan, fifteen annual payments of $103,922
beginning on March 6, 1997, with interest at 3%.
The senior and subordinated debt agreements require the maintenance of
certain financial ratios and include certain covenants for which the
Company was in default at December 31, 1995 and 1994. Accordingly,
under generally accepted accounting principles the entire balance of
the senior term loan and the senior and junior subordinated debt
outstanding have been included in current liabilities. Certain loan
agreements provide for the payment of additional interest in the event
of default. The consolidated financial statements include the estimated
additional interest expense which arises as a result of the Company's
default.
The Company's senior creditor has declared the Company in default of
its obligations. The creditor has entered into a Forbearance Agreement
dated April 25, 1995, whereby the creditor has conditionally agreed to
forbear from exercising its remedies (which may include foreclosure
proceedings) to permit the Company to negotiate with its other
creditors and potential purchasers/investors for the stock or asset
sale of the Company. The Company has obtained similar forbearance
agreements from each of the subordinated creditors (see note 12).
(6) Stock Purchase Warrants
- ---------------------------
Under a provision of the Tranche B subordinated debt agreement (note 5),
the lender received warrants to purchase 82 shares of MARKSMAN Corp. common
stock for $1.00 per share. The warrants are exercisable during a ten-year
period beginning upon the Company's repayment of the senior debt or upon
registration of the stock of the Company in an initial public offering.
The Company has reserved 82 shares of common stock for issuance under this
agreement. The warrant holders may require the Company to repurchase the
shares of common stock obtained by exercise of the warrants.
No value has been assigned to the put option at December 31, 1995 and 1994,
because of the Company's negative operating results.
- 12 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(7) Income Taxes
- ----------------
The Company has available net operating loss carryforwards of approximately
$19,900,000 for income tax purposes expiring through 2010. The Company
also has a net operating loss carryforward available under the federal
alternative minimum tax system. However, if changes in the Company's stock
ownership, combined with unissued stock represented by warrants and stock
options, exceed 50% during any three-year period, the utilization of the
net operating loss carryforwards may be subject to limitation (see note 12).
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred tax assets:
- --------------------
Accounts receivable and interline settlements $ 46 $ 35
Accrued expenses not currently deductible for
income tax purposes 1,405 1,259
Net operating loss carryforwards 7,724 7,196
------- -------
Total gross deferred tax assets 9,175 8,490
Less valuation allowance (6,445) (5,898)
------- -------
Net deferred tax assets 2,730 2,592
------- -------
</TABLE>
<TABLE>
<S> <C> <C>
Deferred tax liability:
- -----------------------
Plant and equipment, principally due to
differences in depreciation (2,730) (2,592)
------- -------
Total gross deferred tax liability (2,730) (2,592)
------- -------
Net deferred tax asset (liability) $ - $ -
======= =======
</TABLE>
(8) Commitments and Contingencies
- ---------------------------------
(a) Commitments
- ---------------
The Company is committed under long-term lease agreements, which expire
at various dates through 1997, for facilities. Future minimum lease
payments under long-term operating leases at December 31, 1995, are as
follows:
1996 $ 44,507
1997 7,491
----------
$ 51,998
==========
Rent expense under operating leases amounted to $36,752 and $0 in 1995
and $36,752 and $6,635 in 1994 for facilities and equipment,
respectively.
- 13 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(b) Contingencies
- -----------------
The Company is from time to time subject to claims arising in the
ordinary course of business. Such claims are assessed by the Company's
management and legal counsel. If the assessment of the claims indicates
that it is probable that a material loss has been incurred and the amount
of the liability can be estimated, then the estimated liability would be
accrued in the Company's financial statements. Certain employees and
non-employees have filed claims against the Company for alleged injuries.
Management believes that the outcome of these matters will not have a
material effect on the Company's financial position.
(c) Environmental Matters
- -------------------------
The U.S. Environmental Protection Agency ("USEPA") performed a screening
site inspection at one of the Company's properties. The site inspection
report raises the possibility that at some date the USEPA may assert
claims for remediation against the Company. Some properties are
presently and have in the past been leased or licensed to others who are
or have maintained hazardous materials handling facilities on the
properties, which may have resulted in spills on the property or
operation in violation of certain federal or state laws. The Company's
policy is to make provision for the cost of environmental matters when it
is probable that a liability has been incurred and such liability can be
reasonably estimated.
(9) Liquidity
- -------------
At December 31, 1995, current liabilities exceeded current assets by
$33,249,665 and total liabilities exceeded total assets by $16,149,765.
The Company has obtained forbearance agreements from its principal creditors
who have agreed to forbear from exercising remedies available under the
credit agreements while the Company negotiates with potential purchasers/
investors for the stock or asset sale of the Company (see note 12).
(10) Significant Customers
- --------------------------
The Company obtained revenues from two customers, representing 22% and 17%
of operating revenues in 1995 and 25% and 21% of operating revenues in 1994,
respectively. Receivables from each customer represented 31% and 11% of
total freight receivables in 1995 and 34% and 15% in 1994, respectively.
The Company does not require collateral. The risk associated with this
concentration is not deemed significant.
- 14 -
<PAGE>
MARKSMAN CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(11) Fair Value of Financial Instruments
- ----------------------------------------
The following table presents the carrying amount and fair values of
indebtedness interline payables, and interest payable at December 31, 1995.
The fair value of the senior and subordinated indebtedness is determined
based upon the amount of payment at January 31, 1996 in forgiveness of the
loans (see note 12). The fair value of the interline payable and interest
payable is determined based on the events described in note 12.
1995
-------------------------
Carrying Fair
Amount Value
------------ ------------
Senior term loan $ 13,575,000 $ 6,000,000
Subordinated debt 4,771,026 1,000,000
Junior Subordinated debt 2,550,000 200,000
Long-term debt 1,261,006 1,261,006
Interline payable 6,762,896 1,498,623
Interest payable 3,908,832 -
Cash and cash equivalents, accounts receivable, reimbursable construction
costs, materials and supplies, prepaid expenses, other current assets,
accounts payable, accrued expenses, and other current liabilities, exclusive
of interline payable and interest payable are stated at carrying amounts
that approximate fair value because of the short maturity of those
instruments.
The Company believes that the fair value of the long-term debt of $1,261,006
approximates its carrying value because comparable financing arrangements
are currently available for borrowings to be used for comparable purposes.
(12) Subsequent Event (Unaudited)
- ---------------------------------
On January 31, 1996, the Company reached a settlement with its senior and
subordinated creditors whereby the creditors accepted payments of $7,200,000
in full settlement of obligations with a carrying value of $20,896,026 plus
accrued interest of $3,908,832. The $7,200,000 was provided by a creditor
and an investor group. Subsequent to the Company's settlement with the
aforementioned creditors, ownership of the Company was transferred to an
investor group and to an additional creditor which exchanged interline
claims of approximately $5.2 million for 20 percent of the common shares
of the investor group.
The financial statements do not include any adjustments to reflect the
settlement agreement.
- 15 -
<PAGE>
DELAWARE OTSEGO CORPORATION and SUBSIDIARIES
Pro Forma Condensed Balance Sheet
(Unaudited)
(000's)
--------------------------------------------
-------------------------------------------
DECEMBER 31, 1995
-------------------------------------------
Delaware Otsego
Corporation Pro Forma
Historical Adjustments Pro Forma
--------------- ----------- -------------
Assets
Cash & Cash Equivalents $ 1,213 $ 164 (A) $ 1,377
Accounts Receivable 5,406 5,406
Other Current Assets 3,317 (592)(A) 2,725
Deferred Income Taxes 332 332
Property, Plant & Equipment - Net 62,987 62,987
Investment in Affiliate 0 2,142 (A)(F) 2,142
Other Assets 1,523 150 (A) 1,673
------- ------- -------
TOTAL ASSETS $74,778 $ 1,864 $76,642
======= ======= =======
Liabilities and Stockholders' Equity
Notes Payable $ 2,100 $ 2,100
Accounts Payable 10,400 10,400
Accrued Liabilities 1,977 (27)(E) 1,950
Current Maturities of Long-Term Debt 1,075 200 (B) 1,275
Long-Term Debt Less Current Maturities 12,802 600 (B) 13,402
Deferred Income Tax 10,398 10,398
Convertible Subordinated Notes 3,580 3,580
Stockholders' Equity:
Common Stock 202 18 (C) 220
Additional Paid-In Capital 4,029 1,357 (C) 5,386
Contributed Capital 18,021 18,021
Retained Earnings 10,194 (284)(G) 9,910
------- ------- -------
Total Stockholders' Equity 32,446 1,091 33,537
------- ------- -------
Total Liabilities & Stockholders' Equity $74,778 $ 1,864 $76,642
======= ======= =======
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<PAGE>
<TABLE>
DELAWARE OTSEGO CORPORATION and SUBSIDIARIES
Pro Forma Condensed Statement of Operations
(Unaudited)
(000's, except per share amounts)
--------------------------------------------
<CAPTION>
-----------------------------------------
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
Delaware Otsego
Corporation Pro Forma
Historical Adjustments Pro Forma
--------------- ----------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Railway Operating Revenue $ 34,524 $ 34,524
--------- ---------
Total Operating Revenues 34,524 34,524
OPERATING EXPENSES
Maintenance, Transportation, & Car Hire 26,712 26,712
Depreciation & Amortization 4,186 4,186
General, Administrative & Other 5,188 5,188
Interest Expense, Net 1,276 $ 78 (D) 1,354
Other (Income) Expense (5,331) (5,331)
--------- --------- --------
Income Before Income Taxes 2,493 (78) 2,415
Provision for Income Taxes 878 (27)(E) 851
--------- --------- --------
Income Before Equity Interest
in Loss of Affiliate 1,615 (51) 1,564
Equity Interest in Loss of Affiliate 0 (108)(F) (108)
--------- --------- --------
Net Income $ 1,615 $ (159) $ 1,456
========= ========= ========
Earnings Per Share:
Primary $ 1.00 $ 0.83(H)
Fully Diluted $ 0.91 $ 0.77(H)
</TABLE>
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<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
- -------------------------------------------------------------------------
(A) Adjustments to reflect the acquisition of a 40% interest in The
Toledo, Peoria and Western Railroad Corporation ("TP&W Railroad")
for consideration totalling $2.25 million, including 25,000 shares
of the Company's common stock valued at $250 thousand. 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.
Adjustment also reflects, the reimbursement to the Company of
$592,000 of advances related to the purchase, additional
$150,000 collateral payment to secure TP&W Railroad debt, and
$200,000 principal and $78,000 interest payments in 1995 related to
the loan previously noted, assuming the acquisition occurred January
1, 1995.
(B) Adjustment reflects balance of $1 million loan, noted in (A), at
December 31, 1995 assuming the transaction occurred January 1,
1995 and principal installments of $200,000 were made in 1995.
(C) Adjustment reflects value of common stock issued as described in
(A) assuming the transaction occurred January 1, 1995 adjusted
for the effects of 5% stock dividends issued in 1995 and 1996.
(D) Adjustment relates to additional pro forma interest expense in
connection with the $1 million loan, noted in (A), assuming the
transaction occurred January 1, 1995.
(E) Adjustment relates to the pro forma tax effects at the Company's
effective tax rate of the pro forma adjustments for the year
ended December 31, 1995.
(F) Adjustment reflects 40% of the pro forma net loss of TP&W Railroad
for the year ended December 31, 1995. Such amounts were derived
from the historical consolidated financial statements of MARKSMAN
Corp. and subsidiary (which was acquired by the TP&W Railroad on
January 31, 1996) adjusted to reflect the following: Depreciation
expense reduction on property, plant and equipment based on the
allocation of the TP&W Railroad purchase price; interest expense
reduction resulting from the forgiveness of certain loan
obligations net of the effects of new debt incurred in
connection with the acquisition; payroll and related fringe
benefit reductions; and certain facility cost savings assuming
the transaction occurred January 1, 1995.
This amount has been reflected as a reduction of the initial
investment noted in (A).
Adjustment does not reflect the Company's pro forma effects on
general and administrative expenses from providing
administrative services to the TP&W Railroad.
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<PAGE>
(G) Adjustment reflects the effect of income statement pro forma
adjustments and the effect of the 1995 and 1996 stock dividends
on the Company's common stock issued as noted in (A) assuming
the transaction occurred January 1, 1995.
(H) Adjusted for the effect of the 125,000 shares of the Company's
common stock issued, as noted in (A), adjusted for the effects
of the 1995 and 1996 stock dividends issued assuming these
shares were outstanding since January 1, 1995 and the effect of
the pro forma income statement adjustments.
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ACCOUNTANTS' CONSENT
--------------------
The Board of Directors
Marksman Corp.:
We consent to the inclusion of our report dated March 22, 1996, with
respect to the consolidated balance sheets of Marksman Corp. and subsidiary
as of December 31, 1995 and 1994, and the related consolidated statements
of operations and accumulated deficit, and cash flows for the years then
ended, which report appears in the Form 8-K of Delaware Otsego Corporation
dated April 12, 1996.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 12, 1996
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