U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarter ended September 30, 1996
Commission File Number 33-6658-C
Pioneer Railcorp
(Exact name of Registrant as specified in its charter)
Iowa 37-1191206
(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization)
1318 S. Johanson Rd Peoria, IL 61607 (Address of
principal executive offices) (Zip code)
Registrant's telephone number: 309-697-1400
Securities registered pursuant to Section 12(g) of
the Act:
Title of each Class Name of each exchange on which registered
- --------------------- -----------------------------------------
Common Stock, Class A NASDAQ , Chicago Stock Exchange
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.
4,548,143
---------------------------------------------------------
(Shares of Common Stock outstanding on September 30, 1996)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months and Nine Months Ended September 30, 1996 and 1995
UNAUDITED
<TABLE>
Three Months Nine Months
Ended September 30 Ended September 30
----------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenue .......................................... $ 2,923,037 $ 2,090,160 $ 8,545,374 $ 6,205,690
-----------
Operating Expense
Maintenance of Ways ..................................... 239,501 230,616 695,071 645,904
Maintenance of Equipment ................................ 365,567 227,961 1,037,153 766,029
Transportation Expense .................................. 732,165 426,600 1,866,360 1,291,603
Administrative Expense .................................. 827,800 587,161 2,251,875 1,556,113
Depreciation and Amortization ........................... 358,097 228,967 1,028,903 656,050
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Total Operating Expense .................................... 2,523,130 1,701,305 6,879,362 4,915,699
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Operating Income ........................................... 399,907 388,855 1,666,012 1,289,991
-----------------------------------------------------------------
Other Income & Expense
Other (Income) Expense .................................. (43,856) (31,530) (225,550) (177,093)
Interest Expense, Equipment ............................. 195,544 136,206 595,687 332,143
Interest Expense, Other ................................. 145,711 65,520 390,633 228,917
Net (Gain) Loss on Fixed Assets ......................... (1,337) -0- (28,212) (36,924)
-----------------------------------------------------------------
Total Other Income & Expense ............................... 296,062 170,196 732,558 347,043
-----------------------------------------------------------------
Net Income Before Income Taxes ............................. 103,845 218,659 933,454 942,948
Provision for Income Taxes ................................. 38,175 83,550 358,785 378,150
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Income Before Minority Interest in Preferred
Stock Dividends of Consolidated Subsidiaries ............ $ 65,670 $ 135,109 $ 574,669 $ 564,798
Minority Interest in Preferred Stock Dividends of
Consolidated Subsidiaries .............................. $ 31,308 $ 31,308 $ 93,923 $ 93,923
Net Income available to
Common Stockholders .................................... $ 34,362 $ 103,802 $ 480,746 $ 470,875
=================================================================
Earnings Per Share ......................................... $ 0.01 $ 0.02 $ 0.09 $ 0.09
=================================================================
Weighted average number of common shares
and common share equivalents used in
computing earnings per share ............................... 8,376,613 8,396,883 8,359,989 8,396,883
=================================================================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
UNAUDITED
<TABLE>
September 30 December 31
1996 1995
------------ ------------
<S> <C> <C>
Current Assets
Cash ............................................... $ 533,273 $ 276,230
Accounts Receivable, less allowance
for doubtful accounts (1996 $19,926; 1995 $20,590) 2,095,700 1,283,124
Material & Supply Inventory ........................ 428,321 287,772
Prepaid Expenses ................................... 284,134 123,609
Income Taxes Receivable ............................ 86,165 50,998
Deferred Taxes ..................................... 35,000 35,000
------------ ------------
Total Current Assets .......................... 3,462,592 2,056,733
------------ ------------
Property and Equipment
Land ............................................... 1,351,965 280,606
Railroad Facilities ................................ 7,003,817 4,840,367
Locomotives & Transportation Equipment ............. 2,205,069 1,594,150
Leasehold Improvements ............................. 41,544 14,614
Buildings .......................................... 898,628 673,344
Machinery and Equipment ............................ 856,947 704,117
Office Equipment and Computers ..................... 374,276 297,665
Railcars ........................................... 9,642,790 8,328,206
Capital Projects in Progress ....................... 420,230 467,096
less accumulated depreciation .................... (2,959,210) (1,979,998)
------------ ------------
Total Property and Equipment .................. 19,836,055 15,220,169
------------ ------------
Intangible Assets, less accumulated amortization ...... 897,041 637,301
1996 $129,204; 1995 $100,493
Other Assets .......................................... 19,242 9,729
------------ -----------
Total Assets .......................................... $ 24,214,930 $ 17,923,932
============ ============
Current Liabilities
Accounts Payable ................................... $ 2,794,914 $ 1,115,241
Notes Payable ...................................... 774,737 80,333
Income Taxes Payable ............................... (13,888) 17,367
Current Portion of Long Term-Debt .................. 1,910,892 1,412,551
Accrued Liabilities ................................ 450,809 354,834
------------ -----------
Total Current Liabilities ..................... 5,917,464 2,980,326
------------ -----------
Long-Term Debt ........................................ 11,877,638 9,934,738
Deferred Income Taxes ................................. 1,654,228 843,000
------------ ------------
Total Liabilities & Debt ...................... 19,449,330 13,758,064
------------ -----------
Minority interest in Subsidiaries ..................... 1,190,000 1,195,000
Stockholders' Equity
Common Stock ....................................... 4,545 4,487
Additional Paid-In Capital ......................... 1,942,275 1,832,353
Retained Earnings .................................. 1,628,780 1,134,028
------------ ------------
Total Stockholders' Equity .................... 3,575,600 2,970,868
------------ -----------
Total Liabilities and Equity .......................... $ 24,214,930 $ 17,923,932
============ ============
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ending September 30, 1996 and 1995
UNAUDITED
<TABLE>
9 Months Ended
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net income .................................................. $ 480,746 $ 470,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 93,923 93,923
Depreciation ...................................... 989,844 656,050
Amortization ...................................... 39,059 -0-
(Gain) on sale of property & equipment ............ (28,212) (26,261)
Deferred taxes .................................... 160,000 162,000
Change in assets and liabilities, net of effects from
acquisition of subsidiaries
(Increase) decrease accounts receivable ........... (35,460) (269,150)
(Increase) decrease inventories ................... (5,379) (95,014)
(Increase) decrease prepaid expenses .............. (126,820) (11,899)
(Increase) decrease other assets .................. (33,213) (105,336)
Increase (decrease) accounts payable .............. 297,110 (107,434)
(Increase) decrease income tax refund claims ...... 50,998 -0-
Increase (decrease) income tax payable ............ (31,255) (12,749)
Increase (decrease) accrued liabilities ........... (40,697) 108,937
----------- -----------
Net cash provided by operating activities ......... 1,810,644 863,944
----------- -----------
Cash Flows From Investing Activities
Proceeds from sale of property & equipment ........ 55,100 302,607
Purchase of property & equipment, net of property
and equipment from acquisition of subsidiaries (1,528,725) (1,961,382)
Acquisition of subsidiaries, net of cash acquired . (2,786,882) -0-
----------- -----------
Net cash (used in) investing activities ........... (4,260,507) (1,658,775)
----------- -----------
Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 1,113,295 937,360
Proceeds from long-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 3,346,619 1,788,233
Payments on short-term borrowings ................. (418,891) (591,675)
Payments on long-term borrowings .................. (1,350,942) (1,062,856)
Repurchase of preferred stock ..................... (5,000) (10,000)
Proceeds from options and warrants exercised ...... 101,740
Payments to minority interest ..................... (79,915) (79,915)
----------- -----------
Net cash provided by financing activities: ........ 2,706,906 981,147
----------- -----------
Net increase (decrease) in cash ............................. 257,043 186,316
Cash, beginning of period ................................... 276,230 179,415
----------- -----------
Cash, end of period ......................................... $ 533,273 $ 365,731
=========== ===========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES
NOTE 1. STATEMENTS
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-QSB. Accordingly,
certain disclosures required by generally accepted accounting principles are not
included herein. These interim statements should be read in conjunction with the
latest financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-KSB and subsequent Form 10-QSB filings.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of consolidation:
The consolidated financial statements include Pioneer Railcorp (Pioneer) and its
wholly-owned and controlled subsidiaries (collectively, "the Company"). The
significant subsidiaries are as follows: West Michigan Railroad Co. (WJ), Wabash
& Western Railway Co. (WGRY), Fort Smith Railroad Co. (FSR), Alabama Railroad
Co. (ALAB), Mississippi Central Railroad Co. (MSCI), Alabama & Florida Railway
Co., Inc. (AF), Decatur Junction Railway Co. (DT), Vandalia Railroad Company
(VRRC), Minnesota Central Railroad Co.(MCTA), Keokuk Junction Railway Co. (KJRY)
formerly KNRECO, Inc., Columbia & Northern Railway Co. (CNOW), Rochelle Railroad
Co. (RRCO), Pioneer Railroad Equipment Co., Ltd. (PREL), Pioneer Railroad
Services, Inc. (PRSI), and Pioneer Air, Inc. (PAR). All significant intercompany
balances and transactions have been eliminated in consolidation.
Inventories:
Inventories consisting of various mechanical parts, track materials and
locomotive supplies are stated at the lower of cost (determined by the average
cost method) or market.
Property and equipment:
Property and equipment are stated at cost. Depreciation is computed principally
on a straight-line basis over the following estimated useful lives:
Roadbed - 20 years
Transportation equipment - 10 to 15 years
Railcars - 10 to 15 years
Buildings - 20 to 40 years
Machinery and equipment - 5 to 10 years
Office equipment - 5 to 10 years
Maintenance and repair expenditures, which keep the rail facilities in proper
operating condition, are charged to operations as incurred. Expenditures
considered to be renewals and betterments are capitalized if such expenditures
improve track conditions and benefit future operations with more efficient use
of rail facilities.
Intangible assets:
Intangible assets consist principally of goodwill which is being amortized by
the straight-line method over a forty-year period. The Company reviews
intangible assets quarterly to determine potential impairment by comparing the
carrying value of the intangible with the undiscounted anticipated future cash
flows of the related property before interest charges. If future cash flows are
less than the carrying value, the Company will determine the fair market value
of the property and adjust the carrying value of the intangibles if the fair
market value is less than the carrying value.
Earnings per common and common equivalent share:
Primary earnings per common share was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding at the end of the respective periods under the Treasury Stock
Method.
NOTE 3. ESTIMATED IMPACT OF THE ADOPTION OF RECENT ACCOUNTING STANDARDS
In November 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." SFAS 123 encourages, but does not require, accounting for stock
based compensation awards on the basis of fair value at the date the awards are
granted. The fair value of the award is included in expense on the statement of
income. Companies that do not adopt SFAS 123 will be required to disclose what
net income and earnings per share would have been, had they adopted SFAS 123.
SFAS 123 is effective for fiscal years beginning after December 15, 1996. The
Company does not intend to adopt SFAS 123.
<PAGE>
The Company is not aware of any other recent accounting standard issued, but not
yet required to be adopted by the Company, that would have a material effect on
its financial position or results of operations.
NOTE 4. STOCK OPTION PLANS
On April 12, 1994, Pioneer adopted, with the subsequent approval of its
shareholders, a stock option plan permitting the issuance of up to 836,000
shares of common stock. Options granted under the plan were incentive based. The
options became exercisable on July 5, 1995 at a price equal to the market value
of the common stock at the date of grant, and the effect on earnings per share
has been reflected in the accompanying financial statements. As of September 30,
1996, a total of 20,200 options have been exercised.
On June 26, 1996, the Company shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options are fully vested and will be exercisable
as of July 1, 2001, and the effect on earnings per share has been reflected in
the accompanying financial statements. The exercise date can be accelerated if
Pioneer Railcorp common shares reach a closing price of $7.25 per share, or
higher, for any consecutive 10-day period, as reported in the Wall Street
Journal. The options will be exercisable at the market price of the common
shares at the date the options were granted, in whole or in part within 10 years
from the date of grant.
NOTE 5. STOCK SPLIT AND STOCK WARRANTS ISSUED AS DIVIDENDS
On May 16, 1995 the Board of Directors authorized a 2 for 1 stock split to
shareholders of record June 30, 1995, payable July 1, 1995. This increased the
outstanding common shares to 4,198,084 from 2,099,042. In addition, on June 24,
1995 the shareholders ratified an amendment to the Articles of Incorporation
authorizing the issuance of stock warrants as a dividend to shareholders
immediately after the stock split. Each shareholder received one warrant for
each share of common stock owned. Each warrant permits shareholders to purchase
an additional share of common stock at a predetermined price of $2 per share.
The warrants expire on July 1, 2015, and the effect of the warrants on earnings
per share has been reflected in the accompanying financial statements. As of
September 30, 1996, a total of 54,974 warrants had been exercised.
NOTE 6. MINORITY INTERESTS IN SUBSIDIARIES
Three of the Company's subsidiaries have preferred stock outstanding. This stock
is accounted for as minority interest in subsidiaries and dividends on the stock
are accounted for as a current expense.
NOTE 7. PURCHASE OF RAILROAD FACILITIES
On March 12, 1996, Pioneer purchased 176,675 shares of the common stock of
KNRECO, Inc., (an Iowa corporation d/b/a Keokuk Junction Railway hereinafter
"KNRECO") from the shareholders, for $16.50 per share. This represented
approximately 93% of the outstanding common stock of KNRECO. Operating results
of KNRECO are included in the consolidated statements of income from the date of
acquisition. As of June 30, 1996, Pioneer had purchased the remaining
outstanding shares, and KNRECO (now KJRY) is a wholly-owned subsidiary.
Unaudited pro forma consolidated results of operations for the nine month period
ended September 30, 1996 as though KNRECO had been acquired as of January 1,
1996, and for the fiscal year-end December 31, 1995 as though KNRECO had been
acquired at the beginning of the fiscal year 1995 are presented below:
Nine Month
Period 1996 Fiscal 1995
----------- -----------
Operating revenue ...................... $ 9,289,465 $11,035,763
Operating expense ...................... 7,787,665 9,219,620
Income from operations ................. 1,501,800 1,816,143
Other income and expense ............... 640,318 758,308
Income taxes ........................... 344,593 423,134
Minority interest ...................... 93,923 124,405
Net income ............................. 422,966 510,296
Earnings per share ..................... $ .09 $ .11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company operated the following eleven railroads during the third quarter of
1996: West Michigan Railroad Co. (WJ), Fort Smith Railroad Co. (FSR), Alabama
Railroad Co. (ALAB), Mississippi Central Railroad Co. (MSCI), Alabama & Florida
Railway Co. (AF), Decatur Junction Railway Co. (DT), Vandalia Railroad Company
(VRRC), Minnesota Central Railroad Co. (MCTA), Keokuk Junction Railway Co.
(KJRY), Columbia & Northern Railway Co. (CNOW), and Rochelle Railroad Co.
(RRCO). The Company also operated three railroad-related subsidiaries, Pioneer
Railroad Equipment Co., Ltd. (PREL), Pioneer Railroad Services, Inc. (PRSI), and
Pioneer Air, Inc (PAR).
Summary:
The Company's net income in the third quarter 1996 decreased by 67% to $34,400
down from $103,800 for the same period last year. Operating revenue in the third
quarter 1996 increased by $832,000 or 40% to $2.9 million from $2.1 million
during the same period last year. Operating expense increased in the third
quarter 1996 by $821,000, or 49% to $2.5 million from $1.7 million for the same
period last year. Operating income increased in the third quarter 1996 by
$11,000 or 3% to $400,000 from $389,000 for the same period last year.
Non-operating expense increased $126,000 or 75% to $296,000 from $170,000 for
the same period last year.
Net income for the first nine months 1996 increased by 3% to $481,000 up from
$471,000 for the same period last year. Operating revenue for the first nine
months 1996 increased by $2.3 million or 37% to $8.5 million from $6.2 million
during the same period last year. Operating expense increased during the first
nine months 1996 by $2 million, or 41%, to $6.9 million from $4.9 million for
the same period last year. Operating income increased during the first nine
months 1996 by $400,000 or 31% to $1.7 million from $1.3 million for the same
period last year. Non-operating expense increased $386,000 or 112% to $733,000
from $347,000 for the same period last year.
Several factors attributed to the decrease in third quarter 1996 net income:
The Company's Alabama Railroad Co. subsidiary experienced a decrease in
operating profit of approximately $100,000 in the quarter as a result of its
major customer reducing outbound shipments while its facilities were temporally
shutdown for most of the third quarter 1996 to facilitate a modernization of the
plant facilities and equipment. The customer is expected to return to full
production in the fourth quarter 1996 and rail shipment levels are expected to
be equal or greater than comparative periods as a result of the plant
modernization. The temporary plant shutdown also idled a majority of the
Company's boxcar fleet assigned to service the customer in the third quarter
1996.
In addition, the Company's Minnesota Central Railroad Co. subsidiary (MCTA) was
affected by an unexpected seasonal decrease in grain shipping in the third
quarter 1996 which idled a majority of the Company's covered hopper railcars
purchased in the fourth quarter 1995 and placed in service on the MCTA. MCTA
grain shipments were significantly reduced in the third quarter, especially in
the months of August and September, due to a limited marketable surplus of corn
as a result of a light 1995 harvest. The fall 1995 national corn harvest was
approximately 7.3 billion bushels compared to 10.1 billion bushels in 1994.
Nationwide railcar loadings of grain were down approximately 28% in the third
quarter 1996 compared to the same period last year.
The net decrease in third quarter 1996 pretax income as a result of the idle
boxcars and covered hoppers was approximately $100,000. Strong utilization of
the boxcars and covered hoppers is expected in the fourth quarter 1996 and
foreseeable subsequent periods extending through the second quarter 1997. Grain
shipping is traditionally lowest in the third quarter compared to other
quarterly periods. Current national corn harvest forecasts for the fall of 1996
provided to the Company estimate a harvest of approximately 9.1 billion bushels
of corn. The Company does not anticipate a similar grain shortage situation in
the third quarter 1997 as a result of the 1996 harvest, and accordingly does not
anticipate that the results of operations will be affected in the third quarter
1997 as in the third quarter 1996.
The Company increased its railroad liability insurance coverage to ranges of $7
million to $10 million limits from the previous ranges of $2 million to $5
million limits. Management believes that the new coverage limits are the
appropriate levels required to protect the Company's assets and shareholder
interests. This increase in coverage increased premiums in the third quarter
1996 to $59,000 compared to $28,000 in the same period last year, an increase of
$31,000 or 111%. The additional expense the Company will recognize over the next
nine months as a result of the coverage increase will be approximately $93,000
or $31,000 per quarter.
<PAGE>
The Company's Keokuk Junction Railway Co. subsidiary which began operations on
March 13, 1996 contributed operating income of $318,000 in the third quarter
1996.
Other administrative expenses (excluding liability insurance premiums) increased
approximately $184,000 in the third quarter 1996 as a result of current and
anticipated growth of the Company. Interest expense increased approximately
$80,000 as a result of the financing of the Keokuk Junction Railway, and
approximately $60,000 as a result of the Company's railcar fleet growth.
Operating Revenue:
The increase in operating revenue in the third quarter 1996 of $832,000 are
primarily attributable to $750,000 of revenue generated from the Keokuk Junction
Railway Co., (KJRY) which began operations under Pioneer Railcorp ownership on
March 13, 1996. In addition, the Alabama Railroad Co. had a decrease of
approximately $100,000 in operating revenue in the quarter and the nine month
period as a result of the temporary plant shutdown detailed above. Also, the
Company did not realize a significant increase in car hire revenue (in relation
to the growth of the railcar fleet) as a result of the idle boxcars and covered
hoppers previously mentioned. Third quarter 1996 revenues from the railcar fleet
were up $65,000, but would have been much higher if the boxcars and covered
hoppers received normal use in the quarter. For the first nine months 1996
operating revenue increased $2.3 million primarily resulting from the KJRY
acquisition and the Company's railcar fleet growth. In the nine month period
ending September 30, 1996, the KJRY contributed operating revenue of $1.5
million. Car hire revenue from the Company's railcar fleet increased by $500,000
or 42% to $1.7 million from $1.2 million for the nine month period last year. In
addition, revenue generated from leasing railcars and excess locomotives to
non-affiliated entities increased $270,000 for the first nine months 1996. The
Company was not significantly involved in this activity during this period in
the prior year.
The loss of the West Jersey Railroad lease in April 1995 and its subsequent
operation of the former KLSC railroad as the West Michigan Railroad had an
immaterial effect on operating revenue. The Rochelle Railroad Co., which began
operations April 15, 1996, contributed $70,000 of operating revenue during the
third quarter and $140,000 during the nine month period. The Columbia & Northern
Railway Co. did not have any operating revenue during these periods (please see
Part II Item 5).
The remaining operating subsidiaries had constant overall revenue in the third
quarter and the first nine months 1996 compared to the same period last year.
Operating Expense:
The increase of operating expense of $821,000 in the third quarter 1996 and $2
million in the first nine months 1996 resulted from the following factors:
The Company's railcar fleet growth resulted in additional depreciation expense
of $73,000 for the quarter and $248,000 for the first nine months compared to
the same periods last year. In addition, the Keokuk Junction Railway incurred
$424,000 of operating expense in the third quarter 1996 and $1 million during
the first nine months 1996. In addition to administrative expense included in
the KJRY operating expense, other administrative expense increased $210,000 in
the third quarter 1996 and $573,000 during the first nine months 1996 compared
to the same period last year. The majority of the increase in administrative
expense is related to payroll costs associated with the hiring of additional
support personnel.
The loss of the West Jersey Railroad lease in April 1995 and its subsequent
operation of the former KLSC railroad as the West Michigan Railroad, had an
immaterial effect on operating expense in 1996. The Columbia & Northern Railway
Co. had $5,000 of operating expense in the quarter and $27,000 of operating
expense for the nine month period. The Rochelle Railroad Co. had $70,000 of
operating expense in the quarter and $139,000 for the nine month period.
The remaining operating subsidiaries had constant overall operating expense in
the third quarter 1996 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Other Income of $44,000 for the third quarter 1996 and $226,000 for the first
nine months 1996 consists of real estate lease income, scrap income and other
miscellaneous items.
Equipment interest expense increased in the third quarter 1996 by $60,000, or
45% to $196,000 compared to $136,000 during the same period last year. Equipment
interest expense increased during the first nine months 1996 by $264,000 or 80%
to $596,000 compared to $332,000 for the same period last year. All of this
increase is a result of financing activities for the Company's railcar
acquisitions.
<PAGE>
Other interest expense increased in the third quarter 1996 by $80,000, or 122%
to $146,000 compared to $66,000 during the same period last year. Other interest
expense increased in the first nine months 1996 by $162,000 or 71% to $391,000
compared to $229,000 for the same period last year. Most of this increase is a
result of financing activities for the Company's acquisition of the Keokuk
Junction Railway Co.
Net gain on fixed asset dispositions during the first nine months 1996 includes
$29,505 generated from the sale of 5.36 miles of Alabama Railroad Co. right of
way. The real estate was not located on an active part of the rail line.
Liquidity and Capital Resources:
The Company primarily uses cash generated from operations to fund working
capital needs and relies on long-term financing for railcars, new operating
subsidiaries, and other significant capital expenditures.
The Company had approximately $500,000 in unused working capital facilities
available at the end of the third quarter 1996. In addition, the Company has
seen the market value of its railcar and locomotive fleet increase significantly
over the last several years. This increase in value has resulted from the short
supply of railcars and locomotives compared to the increased demand for their
use. The Company believes it could refinance part of its railcar or locomotive
fleet with an asset-based lender and generate up to $1 million in cash. On July
1, 1995, the Company's stock split and warrant issuance became payable to
shareholders. The 2 for 1 stock split increased the number of shares issued and
outstanding from 2,099,042 to 4,198,084. At the same time shareholders became
entitled to purchase an additional 4,198,084 common shares through stock
warrants issued by the Company as dividends. One warrant was issued for each
share of common stock held after the split, entitling the holder to purchase 1
share of common stock for $2 per share. The shares purchased through the
exercise of the warrants must be held for 1 year from the date of purchase. In
the first nine months 1996, a total of 35,720 warrants were exercised, and the
Company realized $71,440 on the issuance of the warrants. The Company expects
increased capital to be generated by the continued exercise of warrants but is
uncertain as to the amount. A total of 4,143,110 warrants are outstanding as of
September 30, 1996.
The Company granted 836,000 options to certain employees under its 1994
incentive stock option plan. The options are exercisable at prices equal to the
market value of the Company's stock at the date of grant. The exercise price
ranges are from $1.50 to $4.40 per share. The Company expects increased capital
to be generated by the exercise of options but is uncertain as to the amount. A
total of 20,200 options have been exercised as of September 30, 1996 and the
Company realized $30,300 as a result of their exercise.
In the first quarter 1996 the Company negotiated a credit facility with its
primary bank to provide a $2.5 million annual revolving acquisition line of
credit. This facility is collateralized by the common stock of the Alabama
Railroad Co. and the Mississippi Central Railroad Co., as well as the Company's
investment in stock of any subsidiaries acquired under the line. The interest
rate for the line is currently 10.75%. The interest rate is adjustable quarterly
to 2.5% over New York Prime, limited, however, to a 1 percent annual increase or
decrease, not to exceed 13.5% or be reduced below 10%. Any amounts drawn on the
line must be repaid monthly over a seven year period. As of the date of this
filing, the line has been fully drawn upon in connection with the Company's
March 12, 1996 acquisition of a controlling interest of KNRECO, Inc. d/b/a
Keokuk Junction Railway, common stock (See Item 5- Other Information). The
current monthly debt service resulting from the $2.5 million borrowed is
$43,000.
Long-term equipment financing has historically been readily available to the
Company for its railcar acquisition program. The Company believes it will be
able to continue obtaining long-term equipment financing should the need arise.
The Company's plans for new equipment debt in the foreseeable future are
contingent upon new railroad acquisitions and increased needs and/or
opportunities for railcars. The Company does not expect to make significant
additions to its railcar fleet through the first quarter of 1997.
The Company is considering refinancing some of its present debt. The Company
currently has agreed in principal to a financing proposal providing capital to
refinance the debt secured by the Alabama & Florida Railway Co. assets. Included
in this refinancing are proceeds to pay for the rehabilitation of the Pea River
bridge which has been out of service since early 1994. This rehabilitation was
completed in the third quarter 1996 and restored rail service to several
customers east of the bridge. The Company is carrying approximately $200,000 in
accounts payable related to this project. In addition, the Company is seeking to
refinance the Citizens Bank & Trust acquisition line of credit which would make
available $2.5 million for the purchase of operating railroads.
<PAGE>
The Company's Minnesota Central Railroad subsidiary (MCTA) continues work to
improve its track conditions. MCTA has begun a mini rehabilitation, focusing
primarily on the east-end of the line. MCTA has budgeted $125,000 in materials
and labor for the remaining 1996 fiscal year related to this project. MCTA
intends to seek financing to replenish working capital used for this project,
but is prepared to use internal cash flows if needed.
The Company anticipates favorable outcomes involving current legal proceedings.
The Company does not anticipate any material judgements against it or any of its
subsidiaries will arise out of the current proceedings.
The Company believes its cash flow from operations and its available working
capital credit lines will be adequate to meet liquidity needs for at least the
next twelve months.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $1.8 million in the
first nine months 1996 compared to $864,000 during the same period last year.
Net cash from operating activities for the first nine months 1996 resulted
primarily from $481,000 of net income, $1.1 million of depreciation and
amortization, an increase in prepaid expenses of $127,000, an increase in trade
payables of $297,000 and an increase in deferred taxes of $160,000.
During the first nine months 1996 the Company purchased approximately $1.5
million of fixed assets and capital improvements. Included in the capital
additions were 61 railcars purchased at a cost of $770,000. All of the railcars
purchased were financed with long-term fixed rate financing. The Company
capitalized approximately $400,000 of track betterments in the first nine months
1996, all of which were funded with operating cash flows. The remaining capital
additions of approximately $330,000 were primarily for machinery and equipment
and also were funded by operating cash. Therefore, approximately $730,000 of the
Company's capital additions were funded by internal cash flow in the first nine
months 1996. The Company is considering refinancing equipment to replenish the
working capital used for the 1996 capital additions.
The Company's consolidated balance sheet as of September 30, 1996 includes the
assets and liabilities acquired in the purchase of KNRECO stock on March 12,
1996. Additions to the balance sheet as a result of the purchase of KNRECO stock
are as follows:
Cash $339,000, Accounts Receivable $849,521, Inventory $145,000, Prepaid
Expenses $34,000, Fixed Assets $4,099,300, Goodwill $275,000, Accounts Payable
$1,383,000, Note Payable $445,563, Deferred Income Tax Liability of $651,000,
and Other Liabilities of $136,000. In addition, the Company borrowed $2.5
million and used $625,000 of working capital to finance the acquisition.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Several lawsuits were pending by and against Pioneer Railcorp and/or its
subsidiaries (collectively, the "Company") during the third quarter of 1996,
including the following:
There is litigation pending between Minnesota Central Railroad Co. ("MCTA") and
MNVA Railroad, Inc. ("MNVA") and Dakota, Missouri Valley & Western Railroad,
Inc., resulting from the asset sale from MNVA to MCTA in December 1994. Two
cases, involving claims by and against MCTA and Pioneer, are currently pending
in Minnesota and Illinois. A third case was settled during September 1996, and
MCTA is working on implementing the settlement agreement which involves the Twin
Cities & Western Railroad. Management does not believe that any of these cases
will result in a material adverse effect on the Registrant's consolidated
financial position or results of operation.
A Federal Employer's Liability Act ("FELA") lawsuit is also pending against the
Alabama & Florida Railway Co. in Alabama. That action was brought by a former
employee of a track contractor (or its sub-contractor), and is being defended by
the contractor pursuant to an indemnification agreement. The Company does not
believe it has any liability in the matter, and does not believe the case will
result in a material adverse effect on the Registrant's consolidated financial
position or results of operation.
There is litigation pending in the District Court of Lee County, Iowa, between
Keokuk Junction Railway Co. ("KJRY") and Pioneer Railcorp and Ralston L. Taylor,
the former General Manager of KJRY (prior to Pioneer's purchase of the stock of
KJRY) involving certain alleged contractual obligations of KJRY. The Company
does not believe it has any liability in the matter, and does not believe the
case will result in a material adverse effect on the Registrant's consolidated
financial position or results of operation.
<PAGE>
There is litigation pending in the Federal Courts between Fort Smith Railroad
Co. ("FSR") and the American Train Dispatchers (the union representing FSR
employees) involving interpretation of the Railway Labor Act. Regardless of the
outcome, it is not anticipated that either side will have a material monetary
liability resulting from this litigation.
Finally, a lawsuit that was brought against the West Jersey Railroad Co. (as a
result of a crossing accident that occurred in December 1990), was dismissed,
based upon the statute of limitations, during the first quarter of 1996. An
appeal of that dismissal was recently denied by the New Jersey Supreme Court.
The Company believes that it is unlikely this dismissal will be reversed, should
there be any further appeal, and does not believe the case is likely to result
in a material adverse effect on the Registrant's consolidated financial position
or results of operation.
Pioneer's subsidiary railroads have a number of claims against delinquent
licensees, customers and others, some of which are in litigation, and others of
which are likely to result in litigation. None of the amounts involved, however,
would have a material impact on the Company's consolidated financial position or
results of operations if they proved to be uncollectible.
In the course of business, the Company experiences crossing accidents, employee
injuries, delinquent and/or disputed accounts, and other incidents, which give
rise to claims that may result in litigation. Management vigorously pursues
settlement and release of such claims, but at any time, some such incidents,
which could result in lawsuits by and against the Company, remain unresolved.
Management believes it has valid claims for, or good defenses to, these actions.
Management considers such claims to be a routine part of the Company's business.
As of the date of this Form 10-QSB, the Company is aware of only one such
incident which could result in a liability that would materially affect the
Company's consolidated financial position or results of operation. That incident
involved a grade crossing accident on the Alabama & Florida Railway that
seriously injured two people. Both the Company's investigation, and that of the
local police, determined that the driver was at fault in this accident, however,
the Company discloses it as a matter of prudence.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the third quarter
1996.
Item 5. OTHER INFORMATION
On March 12, 1996, the Registrant purchased 176,675 shares of the common stock
of KNRECO, Inc., an Iowa corporation d/b/a Keokuk Junction Railway (hereinafter
"KJRY") from the shareholders, for $16.50 per share. This represents
approximately 93% of the outstanding common stock of KJRY. The Registrant also
offered to purchase all of the remaining common shares of KJRY, and as of the
date of this report, Pioneer Railcorp has acquired 100% of said shares.
KJRY operates a common carrier railroad line within the City of Keokuk, Iowa,
and from Keokuk to LaHarpe, Illinois, as well as a branch from Hamilton to
Warsaw, Illinois, a total of approximately 38 miles. KJRY also owns 5
locomotives, 30 railcars (of various descriptions), an office building, engine
house, and several vehicles, miscellaneous pieces of equipment, materials and
supplies. In addition, KJRY owns all of the common stock of Keokuk Union Depot
Company, an Iowa corporation, that owns the former Keokuk Union Depot building,
along with surrounding track and real estate. KNRECO, Inc. changed its corporate
name to Keokuk Junction Railway Co.
effective April 10, 1996.
Prior to the purchase there was no material relationship between the Registrant
and KNRECO, Inc. or any of the officers, directors or shareholders of KNRECO,
Inc. and the Registrant.
The total consideration for the purchase of 100% of the outstanding shares of
KNRECO, Inc. was $3,125,597. This was paid by $3,124,357 in cash, and the
remainder in Pioneer Railcorp Class A common stock (342 shares). The purchase
was financed largely through a $2.5 million acquisition line of credit Pioneer
Railcorp has with Citizens Bank & Trust Company of Chillicothe, Missouri. The
line of credit is collateralized by the Common Stock of the Alabama Railroad Co.
and the Mississippi Central Railroad Co., as well as the Company's investment in
stock of any subsidiaries acquired under the line. The interest rate for the
line is currently 10.75%. The interest rate is adjustable quarterly to 2.5% over
New York Prime, limited, however, to a 1 percent annual increase or decrease,
not to exceed 13.5% or be reduced below 10%. Any amounts drawn on the line must
be repaid monthly over a seven year period. The current monthly debt service
resulting from the $2.5 million borrowed is $43,000. The remainder of the
purchase price was financed through internal cash flow.
<PAGE>
The Company, through its wholly-owned subsidiary Rochelle Railroad Co. (RRCO)
signed a one year lease with the city of Rochelle, Illinois on March 25, 1996,
to operate approximately 2 miles of track serving the Rochelle Industrial Park.
Train operations began April 15, 1996. The lease requires RRCO to make monthly
payments to the city on a per car basis and to maintain the trackage. The
Company estimates the RRCO will handle approximately 5,000 carloads during the
first year of operations. As a result of certain shipping contracts in place at
time of operation, the RRCO is not expected to significantly increase operating
income until the 4th quarter 1996.
The Company through its wholly-owned subsidiary Columbia & Northern Railway Co.
(CNOW) signed a lease with the Marion County (Mississippi) Railroad Authority
("Authority") to operate approximately 29 miles of trackage between Columbia and
Silver Creek, Mississippi. The lease with the Authority was executed on February
21, 1996 and provides for a term of ten years, with 5 ten-year renewal options
at a rental of $1.00 per year. The lease requires CNOW to maintain the track.
CNOW exercised its renewal options and has prepaid the lease for 60 years. In
addition, CNOW leases approximately 5 miles of track between Silver Creek and
Furguson, Mississippi, from the Illinois Central Railroad for interchange
purposes. CNOW has been restoring the tracks and preparing to begin operation of
the line, but has not yet started train operation. The Company estimates that
CNOW will handle a small number of cars in 1996 and will not materially affect
the results of operations of the Company.
In the second quarter 1996, the Company's Keokuk Junction Railway signed a
contract with its major customer, Roquette America, Inc, granting KJRY the right
to exclusively switch cars into and from the plant. It is anticipated that this
contract will have a positive effect on operating income in the future, but is
uncertain as to what extent.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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 thereunto duly authorized.
PIONEER RAILCORP
(Registrant)
11/01/96 /s/ Guy L. Brenkman
-------- -------------------------------
DATE GUY L. BRENKMAN
PRESIDENT & CEO
11/01/96 /s/ Michael Carr
-------- --------------------------------
DATE J. MICHAEL CARR
ASSISTANT TREASURER &
CHIEF FINANCIAL OFFICER
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's 3rd Quarter 1996 Form 10-QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 533,273
<SECURITIES> 0
<RECEIVABLES> 2,115,626
<ALLOWANCES> 19,926
<INVENTORY> 428,321
<CURRENT-ASSETS> 3,462,592
<PP&E> 22,795,265
<DEPRECIATION> 2,959,210
<TOTAL-ASSETS> 24,214,930
<CURRENT-LIABILITIES> 5,917,464
<BONDS> 0
0
0
<COMMON> 4,545
<OTHER-SE> 3,571,055
<TOTAL-LIABILITY-AND-EQUITY> 24,214,930
<SALES> 0
<TOTAL-REVENUES> 8,545,374
<CGS> 0
<TOTAL-COSTS> 6,879,362
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 986,320
<INCOME-PRETAX> 933,454
<INCOME-TAX> 358,785
<INCOME-CONTINUING> 574,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 480,746<F2>
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1>Other expenses and income for the period netted together result in income of
$253,762, primarily from equipment and property leases. The EDGARLink program
does not allow for a income number to be entered in this field.
<F2>The difference between Income Continuing and Net Income of $93,923 relates to
Minority Interests in Preferred Stock Dividends of Consolidated Subsidiaries
</FN>
</TABLE>
