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 June 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.
4,532,643
-----------------------------------------------------
(Shares of Common Stock outstanding on June 30, 1996)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Quarter Ending June 30, 1996 and 1995
First Six Months Ending June 30, 1996 and 1995
UNAUDITED
<TABLE>
Second Quarter Second Quarter First Six First Six
1996 1995 Months 1996 Months 1995
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenue .......................................... $ 3,171,895 $ 2,174,930 $ 5,622,337 $ 4,115,530
-----------
Operating Expenses
Maintenance of Ways ..................................... 249,926 227,633 455,571 415,288
Maintenance of Equipment ................................ 395,792 280,092 671,586 538,067
Transportation Expenses ................................. 678,906 442,287 1,134,195 865,003
Administrative Expenses ................................. 809,819 497,190 1,424,076 968,952
Depreciation and Amortization ........................... 356,230 218,409 670,806 427,083
----------------------------------------------------------------
Total Operating Expenses ................................... 2,490,673 1,665,611 4,356,234 3,214,393
----------------------------------------------------------------
Operating Income ........................................... 681,222 509,319 1,266,103 901,137
----------------------------------------------------------------
Other Income & Expense
Other (Income) Expense .................................. (123,461) (82,666) (181,694) (145,564)
Interest Expense, Equipment ............................. 199,976 106,456 400,143 195,937
Interest Expense, Other ................................. 157,655 86,941 244,922 163,397
Net (Gain) Loss on Fixed Assets ......................... 2,630 (32,874) (26,875) (36,924)
----------------------------------------------------------------
Total Other Income & Expense ............................... 236,800 77,857 436,496 176,846
----------------------------------------------------------------
Net Income Before Income Taxes ............................. 444,422 431,462 829,607 724,291
Provision for Income Taxes ................................. 178,210 183,300 320,610 294,600
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Income Before Minority Interest in Preferred
Stock Dividends of Consolidated Subsidiaries ............ $ 266,212 $ 248,162 $ 508,997 $ 429,691
Minority Interest in Preferred Stock Dividends of
Consolidated Subsidiaries .............................. $ 31,308 $ 31,308 $ 62,615 $ 62,615
Net Income available to
Common Stockholders .................................... $ 234,904 $ 216,855 $ 446,382 $ 367,076
=================================================================
Earnings Per Share ......................................... $ 0.04 $ 0.05 $ 0.08 $ 0.08
=================================================================
Weighted average number of common shares
and common share equivalents used in
computing earnings per share ............................... 8,385,052 4,196,084 8,377,368 4,196,084
=================================================================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
UNAUDITED
<TABLE>
June 30 December 31
1996 1995
------------ ------------
<S> <C> <C>
Current Assets
Cash ........................................................................ $ 314,760 $ 276,230
Accounts Receivable, less allowance
for doubtful accounts (1996 $22,787; 1995 $15,958) ........................ 2,201,344 1,283,124
Material & Supply Inventory ................................................. 428,355 287,772
Prepaid Expenses ............................................................ 117,580 123,609
Income Taxes Receivable ..................................................... 137,163 50,998
Deferred Taxes .............................................................. 35,000 35,000
--------------------------------------
Total Current Assets ................................................... 3,234,202 2,056,733
--------------------------------------
Property and Equipment
Land ........................................................................ 1,344,210 280,606
Railroad Facilities ......................................................... 6,781,705 4,840,367
Locomotives & Transportation Equipment ...................................... 2,185,188 1,594,150
Leasehold Improvements ...................................................... 33,744 14,614
Buildings ................................................................... 804,144 673,344
Machinery and Equipment ..................................................... 871,659 704,117
Office Equipment and Computers .............................................. 366,240 297,665
Railcars .................................................................... 9,465,925 8,328,206
Capital Projects in Progress ................................................ 342,734 467,096
less accumulated depreciation ............................................. (2,625,092) (1,979,998)
--------------------------------------
Total Property and Equipment ........................................... 19,570,456 15,220,169
--------------------------------------
Intangible Assets, less accumulated amortization ............................... 911,059 637,301
1996 $88,410; 1995 $100,493
Other Assets ................................................................... 19,617 9,729
--------------------------------------
Total Assets ................................................................... $ 23,735,335 $ 17,923,932
======================================
Current Liabilities
Accounts Payable ............................................................ $ 2,071,556 $ 1,115,241
Notes Payable ............................................................... 593,843 80,333
Income Taxes Payable ........................................................ 89,415 17,367
Current Portion of Long Term-Debt ........................................... 1,861,805 1,412,551
Accrued Liabilities ......................................................... 577,937 354,834
--------------------------------------
Total Current Liabilities .............................................. 5,194,556 2,980,326
--------------------------------------
Long-Term Debt ................................................................. 12,191,222 9,934,738
Deferred Income Taxes .......................................................... 1,654,228 843,000
--------------------------------------
Total Liabilities & Debt ............................................... 19,040,005 13,758,064
--------------------------------------
Minority interest in Subsidiaries .............................................. 1,194,000 1,195,000
Stockholders' Equity
Common Stock ................................................................ 4,535 4,487
Additional Paid-In Capital .................................................. 1,916,385 1,832,353
Retained Earnings ........................................................... 1,580,410 1,134,028
--------------------------------------
Total Stockholders' Equity ............................................. 3,501,330 2,970,868
--------------------------------------
Total Liabilities and Equity ................................................... $ 23,735,335 $ 17,923,932
======================================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ending June 30, 1996 and 1995
UNAUDITED
<TABLE>
6 Months Ended
--------------------------
1996 1995
-------------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net income .................................................. $ 446,379 $ 367,076
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 62,616 62,615
Depreciation ...................................... 645,765 406,823
Amortization ...................................... 25,041 20,260
(Gain) on sale of property & equipment ............ (26,875) (26,261)
Deferred taxes .................................... 160,000 142,000
Change in assets and liabilities, net of effects from
acquisition of subsidiaries
(Increase) decrease accounts receivable ........... (141,104) (143,060)
(Increase) decrease inventories ................... (5,413) (5,278)
(Increase) decrease prepaid expenses .............. 39,734 43,573
(Increase) decrease other assets .................. (33,558) (104,761)
Increase (decrease) accounts payable .............. (426,248) (215,107)
(Increase) decrease income tax refund claims ...... 50,998 -0-
Increase (decrease) income tax payable ............ 21,050 (34,269)
Increase (decrease) accrued liabilities ........... 86,431 465
--------------------------
Net cash provided by operating activities ......... 904,816 514,076
--------------------------
Cash Flows From Investing Activities
Proceeds from sale of property & equipment ........ 32,700 155,706
Purchase of property & equipment, net of property
and equipment from acquisition of subsidiaries (898,012) (1,556,062)
Acquisition of subsidiaries, net of cash acquired . (2,786,882) -0-
--------------------------
Net cash (used in) investing activities ........... (3,652,194) (1,400,356)
--------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 901,160 549,675
Proceeds from long-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 3,177,519 1,631,113
Payments on short-term borrowings ................. (387,651) (436,241)
Payments on long-term borrowings .................. (917,345) (788,422)
Repurchase of preferred stock ..................... (1,000) (7,000)
Proceeds from options and warrants exercised ...... 75,840 -0-
Payments to minority interest ..................... (62,615) (62,615)
--------------------------
Net cash provided by financing activities: ........ 2,785,908 886,510
--------------------------
Net increase (decrease) in cash ............................. 38,530 230
Cash, beginning of period ................................... 276,230 179,415
--------------------------
Cash, end of period ......................................... $ 314,760 $ 179,645
==========================
</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 is 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 - 0 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. Earnings per share information for 1995 has been retroactively restated
to reflect the effect of the stock split and warrants described in Note 5 below.
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.
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.
<PAGE>
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 are incentive based. When
Pioneer Railcorp common shares reached a closing price of $4.00 per share, or
higher, for any consecutive 10-day period, as reported in the Wall Street
Journal, the options were exercisable at the market price of the common shares
at the date the options were granted, in whole or in part, at any time for five
years after vesting. The conditions for their vesting were met on July 5, 1995
and the effect on earnings per share has been reflected in the accompanying
financial statements. As of June 30, 1996 a total of 10,000 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. The options will be fully vested and exercisable
as of July 1, 2001. Vesting 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. Upon vesting, 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. 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 stock owned. Each warrant permits shareholders to purchase an
additional share of 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. Earnings per share
information for 1995 has been retroactively restated to reflect the effect of
the stock split and warrants. As of June 30, 1996, a total of 49,670 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 six months ended
June 30, 1996 as though KNRECO had been acquired as of January 1, 1996 follows:
1996
----------
Operating revenue ............................ $6,366,000
Operating expense ............................ 5,264,000
Income from operations ....................... 1,102,000
Other income and expense ..................... 344,000
Income taxes ................................. 303,000
Minority interest ............................ 62,615
Net income ................................... 392,385
Earnings per share ........................... $ .07
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company operated the following eleven railroads during the second 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).
<PAGE>
The Company's net income in the second quarter 1996 increased by 8% to $235,000
up from $217,000 for the same period last year. Operating revenues in the second
quarter 1996 increased by $1 million or 45% to $3.2 million from $2.2 million
during the same period last year. Operating expenses increased in the second
quarter 1996 by $800,000, or 47%, to $2.5 million from $1.7 million for the same
period last year. Operating income increased in the first quarter 1996 by
$180,000 or 35% to $681,000 from $509,000 for the same period last year.
Net income for the first six months 1996 increased by 21% to $446,000 up from
$367,000 for the same period last year. Operating revenues for the first six
months 1996 increased by $1.5 million or 37% to $5.6 million from $4.1 million
during the same period last year. Operating expenses increased during the first
six months 1996 by $1.2 million, or 37%, to $4.4 million from $3.2 million for
the same period last year. Operating income increased during the first six
months 1996 by $400,000 or 44% to $1.3 million from $900,000 for the same period
last year.
Operating Revenues:
The increase in operating revenues in the second quarter 1996 and for the first
6 months of 1996 is attributable to the growth of the Company's railcar fleet
and the revenues generated from the Keokuk Junction Railway Co., which began
operations under Pioneer Railcorp ownership on March 13, 1996. Car hire revenues
from the Company's railcar fleet (approximately 800 cars on 6/30/96) increased
in the second quarter by $217,000 or 56%, to $620,000 from $403,000 during the
same period last year. For the first six months 1996 car hire revenues increased
by $400,000 or 50% to $1.2 million from $800,000 for the same period last year.
In addition, revenues generated from leasing railcars and excess locomotives to
non-affiliated entities provided an additional $124,000 in revenues in the
second quarter 1996 and $274,000 for the first six months 1996. The Company was
not significantly involved in this activity during these periods in the prior
year. The Keokuk Junction Railway contributed $689,000 in operating revenues in
the second quarter 1996 and $830,000 in operating revenues for the period March
13, 1996 through June 30, 1996. 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 revenues. The Rochelle
Railroad Co., which began operations April 15, 1996, contributed $70,000 of
operating revenues during the second quarter and first six months 1996. The
Columbia & Northern Railway Co. did not have any operating revenues during this
period (please see Part II Item 5).
The remaining operating subsidiaries had constant overall revenues in the second
quarter and the first 6 months 1996 compared to the same period last year.
Operating Expenses:
The increase of operating expenses in the second quarter and first six months
1996 resulted from the following factors. The Company's railcar fleet growth
resulted in additional depreciation expense of $90,000 for the quarter and
$170,000 for the first six months compared to the same periods last year.
Administrative expense increased $210,000 in the second quarter 1996 and
$260,000 during the first six months 1996 compared to the same period last year
resulting from the addition of support personnel and other overhead incurred as
a result of current and anticipated future growth of the Company. In addition,
the Keokuk Junction Railway incurred $480,000 of operating expense in the second
quarter 1996 and $580,000 during the first 6 months 1996. 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 expenses in 1996. The Columbia & Northern Railway Co. had $22,000 in
operating expenses in the quarter and the Rochelle Railroad Co. had $70,000 of
operating expenses in the quarter.
<PAGE>
The remaining operating subsidiaries had constant overall operating expenses in
the first quarter 1996 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Equipment interest expense increased in the second quarter 1996 by $94,000, or
89% to $200,000 compared to $106,000 during the same period last year. Equipment
interest expense increased in the first six months 1996 by $204,000 or 104% to
$400,000 compared to $196,000 for the same period last year. All of this
increase is a result of financing activities for the Company's railcar
acquisitions.
Other interest expense increased in the second quarter 1996 by $70,000, or 81%
to $157,000 compared to $87,000 during the same period last year. Other interest
expense increased in the first six months 1996 by $81,000 or 50 % to $245,000
compared to $163,000 for the same period last year. All 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 six 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 $500,000 in unused working capital facilities available at the
end of the second quarter 1996. In addition, the Company has seen the market
value of its railcar fleet increase significantly over the last several years.
This increase in value has resulted from the short supply of railcars compared
to the increased demand for their use. The Company believes it could refinance
part of its railcar 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 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 date of purchase. In the
first six months 1996, a total of 30,420 warrants were exercised, and the
Company realized $60,840 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 4,148,410 warrants are outstanding as of
June 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 from $1.50 to $4.40 per share. The Company expects increased capital to
be generated by the exercise of options in 1996, but is uncertain as to the
amount. A total of 10,000 options have been exercised as of June 30, 1996.
<PAGE>
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 one 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 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
in the second half of 1996.
The Company is considering and analyzing the refinancing of some of its present
debt. The Company currently is negotiating the refinance of the debt secured by
the Alabama & Florida Railway Co. assets. Included in this proposed refinancing
are proceeds to rehabilitate the Pea River bridge which has been out of service
since early 1994. This rehabilitation will restore rail service to several
customers east of the bridge. The Company has began rehabilitation of the bridge
irrespective of financing and will use internal cashflows to fund the project
which is estimated to cost $200,000. In addition, the Company hopes to refinance
the Citizens Bank & Trust acquisition line of credit which would make available
$2.5 million dollars for the purchase of operating railroads.
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 $400,000 in materials
and labor for the remaining 1996 fiscal year related to this project. MCTA
intends to seek financing for the cost of this project, but is prepared to use
internal cashflows if needed. MCTA is also considering applying for a
rehabilitation loan from the State of Minnesota for approximately $4.5 million.
If this financing is granted, the resources would be sufficient to completely
restore the MCTA track to good operating condition throughout the line. The
Company would propose that the pay back on this financing be a 15 year term
based on a fixed payment amount per revenue car hauled on MCTA. As of the date
of this report, the MCTA does not have any indication from the State of
Minnesota as to the availability of this rehabilitation financing.
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 more than sufficient to meet liquidity needs for at
least the next twelve months.
<PAGE>
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $905,000 in the
first six months 1996 compared to $514,000 during the same period last year. Net
cash from operating activities for the first six months 1996 resulted from
$446,000 of net income, $670,000 of depreciation and amortization, a decrease
in trade payables of $426,000, a decrease in trade receivables of $141,000,
a increase in deferred taxes of $160,000, and $195,000 net cash received by
changes in operating assets and liabilities, of which no amounts are
individually material.
In the first 6 months 1996 the Company purchased approximately $900,000 of fixed
assets and capital improvements. Included in the capital additions were 20
railcars at a total cost of $600,000. All of the railcars purchased were
financed with long-term fixed rate financing. The Company capitalized
approximately $130,000 of track betterments in the first six months 1996, all of
which was funded with operating cash flows. The remaining capital additions were
primarily machinery and equipment and were funded by operating cash.
The Company's consolidated balance sheet as of June 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 second 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. Three
cases, involving claims by and against MCTA and Pioneer, are currently pending
in Minnesota and Illinois. 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 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"), 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.
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. That
dismissal was upheld by the New Jersey Supreme Court. The Company believes that
further appeals, if made, are likely to uphold the dismissal, 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
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.
<PAGE>
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 one 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 effect the
Company's consolidated financial position or results of operation. That incident
involved a grade crossing accident May 23, 1996 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
The Annual Meeting of the Shareholders was held on June 26, 1996 at the
Company's headquarters in Peoria, Illinois. All five seats on the Board of
Directors were up for election at this meeting. Directors Guy L. Brenkman, J.
Michael Carr, Orvel L. Cox, John P. Wolk and John S. Fulton were re-elected for
a one year term.
In addition to the election of the Board of Directors, shareholders ratified the
appointment of McGladrey & Pullen, LLP, Certified Public Accountants and
Consultants, as the Company's independent public accountants for the coming
year. The shareholders also approved a stock option plan, described more fully
in the Registrant's Proxy Statement, which is incorporated by reference herein.
The vote totals for the matters voted upon at the Annual Meeting were as
follows:
Proposal Votes For Votes Withheld Abstained
-------- --------- -------------- ---------
Nomination of Guy L. Brenkman
to the Board of Directors 2,913,213 205,354 31,547
Nomination of Orvel L. Cox
to the Board of Directors 3,118,567 0 31,547
Nomination of John P. Wolk
to the Board of Directors 3,118,367 200 31,547
Nomination of John S. Fulton
to the Board of Directors 3,116,667 1,900 31,547
Nomination of J. Michael Carr
to the Board of Directors 3,116,067 2,500 31,547
Ratification of McGladrey & Pullen, LLP
as Independent Auditor 2,941,670 5,620 174,297
Stock Option Plan 2,395,148 289,809 464,157
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.
<PAGE>
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 one 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.
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 effect
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
Exhibit # 10 Stock Option Plan approved by the shareholders at the Annual
Meeting of Shareholders, held June 26, 1996.
Exhibit # 20.1 Notice of Annual Meeting and Proxy Statement used to solicit
votes for the Annual Meeting of Shareholders, held June 26, 1996.
Exhibit # 20.2 Form of Ballot used at the Annual Meeting on June 26, 1996.
Exhibit # 20.3 Annual Report for 1995 sent to shareholders with the Notice of
Annual Meeting and Proxy Statement.
The Following reports were filed on Form 8-K during the second quarter 1996:
(1) Form 8-K/A filed May 23, 1996 regarding the purchase of a controlling
interest in the outstanding common stock of KNRECO, Inc., d/b/a/ Keokuk Junction
Railway.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
PIONEER RAILCORP
(Registrant)
8/13/96 /s/ Guy L. Brenkman
DATE __________________________
GUY L. BRENKMAN
PRESIDENT & CEO
8/13/96 /S/ J. Michael Carr
DATE __________________________
J. MICHAEL CARR
ASSISTANT TREASURER &
CHIEF FINANCIAL OFFICER
1996 STOCK OPTION PLAN FOR PIONEER RAILCORP
This Stock Option Plan is made as of June 26, 1996 by Pioneer Railcorp.
Recitals
A. The Company desires to attract, retain and motivate employees of the Company
whose efforts contribute to the success of the Company. This Plan is intended to
reward such employees by providing the opportunity to acquire or increase the
proprietary interest of such employees in the Company.
B. This Plan has been approved by the shareholders of the Company and by
the Board.
C. The options granted under this Plan to employees (other than the CEO) are
intended to be "incentive stock options" within the meaning of Code Section 422
(the Plan also includes non-employee directors, whose options may not qualify as
"incentive stock options"). Options granted to the CEO are not intended to be
"incentive stock options."
Agreements
Now therefore it is agreed as follows:
Article I - Definitions
As used herein, the following terms have the meanings hereinafter set forth
unless the context clearly indicates to the contrary:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Company" shall mean Pioneer Railcorp.
(c) "Fair Market Value" shall mean the lower of the closing bid price on the
NASDAQ, or the closing price on the Chicago Stock Exchange on the day an
Option is granted hereunder or, in the absence of any reported sales on
such day, the first preceding day on which there were such sales. The Fair
Market Value of the Stock on June 26, 1996 is $2.75 per share which is the
closing bid price on NASDAQ.
(d) "Option" shall mean an option to purchase Stock granted pursuant to the
provisions of Article V hereof.
(e) "Optionee" shall mean an employee to whom an Option has been granted
hereunder (or, where applicable, to a non-employee "outside" director to
whom an Option has been granted hereunder).
(f) "Plan" shall mean the 1996 Stock Option Plan for Pioneer Railcorp, the
terms of which are set forth herein.
(g) "Stock" shall mean the Class A Common Stock of the Company, or in the
event that the outstanding shares of Stock are hereafter changed into or
exchanged for shares of a different stock or securities of the Company or
some other corporation, such other stock or securities.
(h) "Stock Option Agreement" shall mean the agreement between the Company and
the Optionee under which the Optionee may purchase Stock hereunder.
(i) "Ten Percent Shareholder" shall mean an individual who owns stock of the
Company possessing more than 10 percent of the total combined voting power
of all classes of stock of the Company within the meaning of Code Section
422 (b)(6).
(j) "CEO" shall mean the Chief Executive Officer designated by the Board of
Directors, currently Guy L. Brenkman.
<PAGE>
Article II- Participants
Any employee (or outside director) of the Company or of a subsidiary of the
Company shall be eligible to participate in the Plan. The Board may grant
Options to any eligible person in accordance with such determinations as the
Board from time to time in its sole discretion shall make. Options may be
granted to eligible persons in the following groups:
Group Maximum Option Shares
----- ---------------------
CEO 80,000
Executive Group 80,000
Non-Executive Director Group 25,000
Employee Group 222,000
Article III- Administration
3.1 Duties and powers of the Board. The Plan shall be administered by the Board.
Subject to the express provisions of the Plan, the Board shall have sole
discretion and authority to determine from among eligible persons those to whom
and the time or times at which Options may be granted and the number of shares
of Stock to be subject to each Option. Subject to the express provisions of the
Plan, the Board shall also have complete authority to interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to it, to determine
the details and provisions of each Stock Option Agreement and to make all other
determinations necessary or advisable in the administration of the Plan.
3.2 Company assistance. The Company shall supply full and timely information to
the Board on all matters relating to eligible employees, their employment,
death, retirement, disability or other termination of employment, and such other
pertinent facts as the Board may require. The Company shall furnish the Board
with such clerical and other assistance as is necessary in the performance of
its duties.
Article IV - Shares of Stock Subject to Plan
4.1 Limitations. The number of shares of Stock which may be issued and sold
hereunder shall not exceed 407,000 shares. Such shares may be either
authorized and unissued shares or shares issued and thereafter acquired by the
Company.
4.2 Options and awards granted under Plan. Shares of stock with respect to
which an Option granted hereunder shall have been exercised, shall not again be
available for Option hereunder.
4.3 Reorganization. In the event that the outstanding shares of Stock hereafter
are changed into or exchanged for a different number or kind of shares or other
securities of the Company or of another corporation by reason of merger,
consolidation, other reorganization, recapitalization, reclassification,
combination of shares, stock split-up, or stock dividend:
(a) The aggregate number and kind of shares subject to Options which may be
granted hereunder shall be adjusted appropriately; and
(b) Rights under outstanding Options granted hereunder, both as to the
number of subject shares and the Option price, shall be adjusted
appropriately.
The foregoing adjustments and the manner of application of the foregoing
provisions shall be determined solely by the Board, and any such adjustment may
provide for the elimination of fractional share interests.
Article V - Options
5.1 Option grant and agreement. Each Option granted hereunder shall be evidenced
by minutes of a meeting or the written consent of the Board and by a written
Stock Option Agreement dated as of the date of grant and executed by the Company
and the Optionee, which Agreement shall set forth such terms and conditions as
may be determined by the Board consistent with the Plan.
<PAGE>
5.2 Option price. The per share Option price of the Stock subject to each Option
shall be determined by the Board, but the per share price shall not be less than
the Fair Market Value of the Stock on the date the Option is granted. The
foregoing notwithstanding, if the Optionee is a Ten Percent Shareholder, the
Option price per share shall not be less that 110% of the Fair Market Value of
the Stock on the date the Option is granted, however, the Options granted to the
CEO are not intended to be "incentive stock options" and his Option price will
be equal to the Fair Market Value of the Stock on the date of grant.
5.3 Option exercise. (a)The Options will be fully vested and exercisable as of
July 1, 2001. The vesting and exercise date of the Options will be accelerated
to the 10th consecutive business day that the Company stock trades at a price of
at least $4.50 greater than the price of the Company stock on the close of
business on June 26, 1996. Vested Options may be exercised in whole or in part
within 10 years from the date of grant, provided, however, that the aggregate
Fair Market Value of Stock (as determined as of the date of grant) which first
becomes exercisable with respect to any employee Optionee, other than the CEO,
in any calendar year may not exceed $100,000, regardless of the date the Option
is granted.
If the Optionee is a Ten Percent Shareholder, any Option must be exercised, if
at all, within five years from date of grant (excluding the CEO, whose Options
are not intended to be " incentive stock options).
(b) Options may be exercised in whole at any time, or in part from time to time
with respect to whole shares only, within the period permitted for the exercise
thereof, and shall be exercised by written notice of intent to exercise the
Option with respect to a specified number of shares delivered to the Company at
its principal office in the State of Illinois, and payment in cash to the
Company at said office of the amount of the Option price for the number of
shares of Stock with respect to which the Option is the being exercised.
5.4 Nontransferability of Option. No Option shall be transferred by an Optionee
other than by will or by the laws of descent and distribution. During the
lifetime of an Optionee, the Option shall be exercisable only by the Optionee.
5.5 Effect of death of other termination of employment. (a) Upon termination
of an Optionee's employment with the Company or subsidiary for any reason other
than death, the Optionee may, for a period of six months thereafter, exercise
any Options which were exercisable by the Optionee on the date
of termination. Any Options not so exercised shall terminate.
(b) If an Optionee dies while in the employ of the Company or subsidiary,
the Optionee's estate shall receive a pro-rata number of Options, based
upon the time the employee worked under the plan. The amount pro-rated
will be 20% per each year of service, rounding up to each year (i.e. 1
year and 1 month service will be equal to 2 years vesting or 40%). The
executor or administrator of the estate of the decedent or the person
or persons to whom an Option granted hereunder shall have been
validly transferred by the executor or the administrator pursuant
to will or the laws of descent and distribution shall have the right
to exercise the Optionee's Options to the extent that it was
exercisable by the Optionee at the date of termination of employment
by death.
(c) No transfer of an Option by the Optionee by will or by the laws of
descent and distribution shall be effective to bind the Company unless
the Company shall have been furnished with written notice thereof and
an authenticated copy of the will and/or such other evidence as the
Board may deem necessary to establish the validity of the transfer and
the acceptance by the transferee or transferees of the terms and
conditions of such Option.
5.6 Rights as shareholder. Any Optionee or a transferee of an Option shall have
no rights as a shareholder with respect to any shares subject to such Option
prior to the purchase of such shares by exercise of such Option as provided
herein.
Article VI - Stock Certificates
The Company shall not be required to issue or deliver any certificate of shares
of Stock purchased upon the exercise of any Option granted hereunder or any
portion thereof, prior to fulfillment of all the following conditions:
(a) The admission of such shares to listing on all stock exchanges on which
the Stock is then listed;
(b) The completion of any registration or other qualifications of such
shares under any federal or state law or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body, which the Board shall in its sole
discretion deem necessary of advisable;
(c) The obtaining of any approval or other clearance from any federal or
state governmental agency which the Board shall in its sole discretion
determine to be necessary or advisable; and
(d) The lapse of such reasonable period of time following the exercise of
the Option as the Board from time to time may establish for reasons of
administrative convenience.
<PAGE>
Article VII - Directors
This Plan shall also apply to outside directors of the Company, even though the
grant of an Option to an outside director will not be an "incentive stock
option" under Code Section 422. For Options granted to outside directors
hereunder, the provisions of this Plan shall apply to directors and shall be
interpreted in a manner as though the directors were employees.
Article VIII - Termination, Amendment, and Modifications of Plan
The Board may at any time terminate and may at any time and from time to time
and in respect amend or modify, the Plan; provided, however, that no such action
of the Board without approval of the majority of the shareholders of the Company
may:
(a) Increase the total number of shares of Stock subject to the Plan;
(b) Change the manner of determining the Option price;
(c) Withdraw the administration of the Plan from the Board; and
provided further, that no termination, amendment, or modification of the Plan
shall in any manner adversely affect any Option theretofore granted under the
Plan without the consent of the Optionee or permitted transferee of the Option.
Article IX - Miscellaneous
9.1 Employment. Nothing in the Plan or in any Option granted hereunder or in any
Stock Option Agreement relating thereto shall confer upon any employee the right
to continue in the employ of the Company.
9.2 Other compensation plans. The adoption of the Plan shall not affect any
other stock option or incentive or other compensation plans in effect for the
Company, nor shall the Plan preclude the Company from establishing any other
forms of incentive or other compensation for employees of the Company.
9.3 Plan binding on successors. The Plan shall be binding upon the successors
and assigns of the Company.
9.4 Partial invalidity. If any term or provision of this Plan shall be declared
invalid or unenforceable, all other terms and provisions hereof shall remain in
full force and effect to the fullest extent permitted by law.
9.5 Singular, plural; gender. Whenever used herein, nouns in the singular shall
include the plural, and the masculine pronoun shall include the feminine gender.
9.6 Headings, etc., no part of plan. Headings of Articles and Section hereof are
inserted for convenience and reference; they constitute no part of the Plan.
PIONEER RAILCORP
By: Pioneer Railcorp Board of Directors
Dated: June 26, 1996
NOTICE OF ANNUAL MEETING TO BE HELD JUNE 26, 1996
PIONEER RAILCORP
Peoria, Illinois 61607
To the Stockholders:
The Annual Meeting of Stockholders will be held at Pioneer Railcorp's Corporate
Office, 1318 S. Johanson Road, Peoria, Illinois, on Wednesday, June 26, 1996,
commencing at 9:00 a.m. local time, for the purpose of considering and voting on
the following matters as described in the attached Proxy Statement:
- - To elect five directors for a one year term;
- - To consider and act upon a proposal to ratify the appointment of
independent public accountants for 1996;
- - To consider and act upon the ratification of the Stock Option Plan proposed
by the Board of Directors;
- - Any other matters that may properly come before the meeting.
Only stockholders of record at the close of business on April 30, 1996, will be
entitled to vote at this meeting. A copy of the Company's Annual Report
containing financial data and a summary of operations for 1995 is being mailed
to the Company's stockholders with this Proxy Statement.
In order that your stock may be represented at the meeting in case you are not
personally present, please complete, sign and date the enclosed proxy/voting
instruction card and
return it promptly in the accompanying addressed envelope.
By order of the Board of Directors
/s/ Daniel A. LeKemper
- ----------------------
Daniel A. LaKemper
Secretary
May 28, 1996
<PAGE>
Pioneer Railcorp
1318 S. Johanson Road
Peoria, Illinois 61607
309-697-1400
Proxy Statement
This Proxy Statement and the accompanying proxy will be sent to stockholders of
Pioneer Railcorp on our about May 28, 1996, in connection with the solicitation
by the Board of Directors of proxies to be used at the Annual Meeting of
Stockholders of the Company to be held at Pioneer Railcorp's corporate office,
1318 S. Johanson Road, Peoria, Illinois 61607, on Wednesday, June 26, 1996,
commencing at 9:00 a.m. local time. The Company's Annual Report for 1995,
including financial statements, is also included herein.
The record date for stockholders entitled to vote at the Annual Meeting is April
30, 1996. As of April 30, 1996, the Company had issued and outstanding 4,515,973
shares of common stock, of which 4,515,973 were entitled to one vote per share.
It is the Company's policy that all proxies, ballots, and voting tabulations
that identify shareholders will be kept confidential, except where disclosure
may be required by applicable law, where shareholders write comments on their
proxy cards, or where disclosure is expressly requested by a shareholder.
The Proxy
Any person giving a proxy has the power to revoke it at any time before it is
voted, upon written notice to J. Michael Carr, Chief Financial Officer of the
Company.
Any proxy cards returned without specification will be voted as to each proposal
in accordance with the recommendations of the Board of Directors.
The Company will bear the costs of solicitation of proxies. Following the
mailing of proxy soliciting material, proxies may be solicited by directors,
officers and regular employees of the Company in person or by telephone or fax.
The Company will also reimburse persons holding stock for others in their names
or in those of their nominees for their reasonable expenses in sending proxy
material to their principals and obtaining their proxies.
Beneficial Ownership of Stock
There are no shareholders, as of March 26, 1996, known by the Company to be
beneficial owners of more than 5% of its outstanding common stock other than
Company directors and officers.
Nominees for Election as Directors
Guy L. Brenkman, age 48, Chairman of the Board of Directors and President of
Pioneer Railcorp and its subsidiaries was the incorporator of the Company and
has been a member of the Board of Directors and President of the Company since
its formation. Mr. Brenkman's past business experience includes real estate
sales and management, securities sales, and seven years outside railroad
industry experience before managing the day to day railroad operations of
Pioneer in 1988. Mr. Brenkman, acting as agent of the Issuer conducted the
public offering of Pioneer Railcorp, which raised its initial capital, and
secondary capital for expansions.
Orvel L. Cox, age 53, Director, also serves as same for each of the Company's
subsidiaries and Superintendent Car Department for same. Mr. Cox has 36 years of
active railroading experience, with 31 of those years working for Class I
railroads. Mr. Cox has been a director and/or officer of Pioneer since it's
inception and has been involved in all phases of the development and growth of
the Company.
John P. Wolk, age 46, Director and Treasurer for Pioneer, was elected to the
Board in 1991. Mr. Wolk is Director of Distribution for Kimball International
(NASDAQ symbol "KBALB") and previously spent seventeen years with Peabody Coal
Company, most recently as Vice President-Treasurer & Controller. Mr. Wolk holds
an MBA-Finance from St. Louis University and a BS-Business Administration from
the University of Missouri.
<PAGE>
John S. Fulton, age 62, Director, was elected to the Board in 1993. For the past
sixteen (16) years, Mr. Fulton has been in the real estate business
concentrating in retail sales, real estate development and appraising. Mr.
Fulton presently works as a Sales Agent for Purple Reality. Mr. Fulton's
previous positions include Industrial Appraising (6 years) with Cole, Layer
Trumble of Dayton, Ohio, and 5 years with Pepsi-Cola. Mr. Fulton holds a BS
degree in Public Administration from Bradley University in Peoria, Illinois.
J. Michael Carr, age 32, Assistant Treasurer, also serves as Treasurer for each
of the Company's subsidiaries and Chief Financial Officer for same. Mr. Carr has
been employed by the Company since March 1993 and was elected to the board in
1995. Before joining the Company, Mr. Carr worked in public accounting and
banking for seven years, most recently as Controller for United Federal Bank.
Mr. Carr is a CPA and holds a BS-Accounting from Illinois State University,
Normal, Illinois.
General Information Relating to the Board of Directors
The Board of Directors of the Corporation consists of five members, each elected
for a term of one year. The board met a total of 3 times in 1995, at which time
all directors were present.
Compensation of Directors
Directors of the Company were compensated $1,000 in 1995 and receive
reimbursement for out of pocket expenses. No compensation was paid to directors
prior to 1995 in excess of $200.
Committees
The Audit Committee is the only standing committee of the Board of Directors.
The purpose of the Audit Committee is to recommend to the Board of Directors the
engagement of, and the fee to be paid to, the independent public accountants.
The Audit Committee also reviews with the independent accountants as deemed
necessary, the Corporation's accounting policies, conflict of interest policy,
internal control systems and financial operations and reporting. The committee
met once in 1995 and current members of this committee are John P. Wolk, John S.
Fulton, and Orvel L. Cox.
Security Ownership of Directors and Executive Officers
The following table sets forth information, as of March 26, 1996, the beneficial
ownership of all directors and officers of the Company as a group. These figures
include shares of Common Stock that the executive officers have the right to
acquire within 60 days of March 26, 1996 pursuant to the exercise of stock
options and warrants.
Title of Class: Common Stock ($.001 par value)
Beneficial Percent
Name Of Beneficial Owner Ownership Of Class
------------------------ ---------- --------
Guy L. Brenkman (2.) ...................... 3,478,858 37.4%
Orvel L. Cox (3.) ......................... 234,806 2.5%
Daniel A. LaKemper (4.) ................... 144,054 1.6%
John P. Wolk (5.) ......................... 144,000 1.6%
John S. Fulton (6) ........................ 42,000 .5%
J. Michael Carr (7) ....................... 67,716 .7%
--------- -----
Directors and Executive
Officers as a Group: ...................... 4,111,434 44.3%(1)
========= =====
FOOTNOTES:
(1) Based on 9,303,657 shares of Common Stock and Equivalents outstanding as of
March 25, 1996.
(2) Of the total number of shares shown as owned by Mr. Brenkman, 60,606 shares
represent the number of shares Mr. Brenkman has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 1,740,800 shares represent the number of shares Mr.
Brenkman has the right to acquire within 60 days through the exercise of
Warrants. Mr. Brenkman owns all shares in joint tenancy with his wife. In
addition 7,052 shares are held by Mr. Brenkman under the Pioneer Railcorp
Retirement Savings Plan and 2,340 shares are held by Mr. Brenkman's wife,
in which he disclaims beneficial ownership.
<PAGE>
(3) Of the total number of shares shown as owned by Mr. Cox, 66,666 shares
represent the number of shares Mr. Cox has the right to acquire within 60
days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 101,770 shares represent the number of shares Mr. Cox has
the right to acquire within 60 days through the exercise of Warrants. In
addition 1,500 shares are held by Mr. Cox under the Pioneer Railcorp
Retirement Savings Plan. Mr. Cox's shares are owned in joint tenancy with
his wife. Mr. Cox and his wife own one Preferred Share in the Mississippi
Central Railroad Co.
(4) Of the total number of shares shown as owned by Mr. LaKemper, 66,666 shares
represent the number of shares Mr. LaKemper has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 40,000 shares represent the number of shares Mr. LaKemper
has the right to acquire within 60 days through the exercise of Warrants.
In addition 388 shares are held by Mr. LaKemper under the Pioneer Railcorp
Retirement Savings Plan. Mr. LaKemper's shares are owned in joint tenancy
with his wife.
(5) Of the total number of shares shown as owned by Mr. Wolk, 22,000 shares
represent the number of shares Mr. Wolk has the right to acquire within 60
days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 61,000 shares represent the number of shares Mr. Wolk has
the right to acquire within 60 days upon the exercise of Warrants. Mr. Wolk
has 60,000 shares held in joint tenancy with his wife. Mr. Wolk and his
wife jointly own ten Preferred Shares of the Alabama Railroad Co.
(6) Of the total number of shares shown as owned by Mr. Fulton, 22,000 shares
represent the number of shares Mr. Fulton has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 10,000 shares represent the number of shares Mr. Fulton
has the right to acquire within 60 days upon the exercise of Warrants.
(7) Of the total number of shares shown as owned by Mr. Carr, 66,666 shares
represent the number of shares Mr. Carr has the right to acquire within 60
days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 1,000 shares represent the number of shares Mr. Carr has
the right to acquire within 60 days through the exercise of Warrants.
There are no shareholders known by the Registrant to be beneficial owners of
more than 5% of its outstanding common stock other than Mr. Brenkman.
Compensation of the Chief Executive Officer
Summary Compensation Table
- ------------------------------------
Annual
Compensation Long Term Compensation
---------------- --------------------------------------
Restricted
Name & Stock Other
Position Year Salary Award Options/SARs Compensation
- -------- ---- -------- --------- ------------ -------------
Guy L. Brenkman, CEO 1995 $310,546 ---- 37,000 $4,500 (a)
1994 $227,609 ---- 150,000 $4,500 (a)
1993 $206,925 $125,000
(a) - Registrant's contribution to the Company's defined contribution plan.
Option/SAR Grants in Last Fiscal Year
- ----------------------------------------------
% of Total
Options Granted
to Employees
Options in the Fiscal Exercise Expiration
Name Granted Year Price Date
- ---------- ------- -------------- ----------- ----------
Guy L. Brenkman - CEO ...... 20,000 8% $ 3.92 6/16/00
Guy L. Brenkman - CEO ....... 17,000 7% $ 4.40 7/5/00
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
- ---------------------------------------------------
Number
of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End At FY-End
Shares Acquired Value Exercisable/ Exercisable/
On Exercise Realized Unexercisable Unexercisable
--------------- -------- ------------- ---------------
Guy Brenkman-CEO 0 0 167,000/0 $202,500/0
In December 1993, the Company entered into a five-year executive employment
contract with the Company's president. The five-year agreement provides for a
base salary with annual inflation adjustments based upon the Consumer Price
Index. Should the Company acquire or form additional railroads, the base salary
will increase $25,000 for the acquisition of railroads of 125 miles or less, and
$50,000 for railroads over 125 miles. At December 31, 1995, the president's base
salary was $271,625. Should the president's employment be terminated, the
contract requires a lump sum payment equal to three years of his then current
salary. Should the president retire, he is entitled to a lump sum payment of one
year's salary.
Director's of the Registrant each were compensated $1,000 in 1995.
Proposal 1 - Ratification of Appointment of Independent Public Accountants
The Board of Directors, upon recommendation of its Audit Committee, has
appointed McGladrey & Pullen, LLP, Certified Public Accountants and Consultants,
as independent public accountants of the Company with respect to its operations
for the year 1996, subject to ratification by the holders of common stock of the
Company. In taking this action, the members of the Board and the Audit Committee
considered carefully McGladrey's performance for the Company with respect to
services performed in 1995 and 1994, and its general reputation for adherence to
professional auditing standards.
The Board of Directors recommends a vote FOR this proposal.
Proposal 2 - By the Company, approval of Stock Option Plan
At the Company's Board of Directors meeting on May 28, 1996, the directors voted
for a resolution authorizing the adoption of the Stock Option Plan described
below in this proxy statement, and directed that the Company submit the plan to
the stockholders at the June 26, 1996 annual shareholder meeting.
The Board of Directors unanimously recommends a vote FOR the adoption of the
following resolution, which will be presented at the June 26, 1996 at the annual
shareholder meeting:
BE IT RESOLVED by the shareholders of Pioneer Railcorp, that the Option Plan
approved by the Board of Directors on May 26, 1996 shall be deemed to be
effective as of June 26, 1996.
The Board of Directors believe that the proposed Stock Option Plan is a key
element in achieving the Company's continued financial and operational success.
This plan has been designed to reward and motivate executives, managers, and
employees to work as a team to achieve our corporate goal of maximizing
shareholder return. A summary of the Stock Option Plan follows:
Stock Option Plan Summary:
June 26, 1996
<PAGE>
In as much as Pioneer stockholders stand to be rewarded with higher share prices
as the Company's management team grows and expands the Company, and stock
investment advisors look favorably on such plans; and the board believes that a
stock option plan is desirable method of compensation for officers, directors
and key employees, in that it will assist in the recruitment and retention of
qualified individuals, and fairly compensates the management team based upon
their performance; the Board of Directors hereby approves and recommends to the
shareholders a plan providing for the issuance of the following options:
Options shall be issued to the following groups:
Guy Brenkman, CEO ............................................. 80,000
Executive Group ............................................... 80,000
Non-Executive Director Group .................................. 25,000
Employee Group ................................................ 222,000
Total .................................................... 407,000
Exercise Price: The exercise price shall be equal to the market price of the
stock on the date of grant. In the case of a 10% or more owner, the exercise
price will be equal to 110% of the market price of the stock on the date of
grant if the options are to be considered incentive stock options under Internal
Revenue Service regulations.
Exercise Period: The options will be fully vested and exercisable as of July 1,
2001. The vesting and exercise date of the options will be accelerated to the
10th consecutive business day that the stock trades at a price at least $4.50
greater than the price of the stock at the close of business on June 26, 1996.
Vested options may be exercised, in whole or in part, within 10 years from date
of grant.
Option shares shall survive only if the option holder's employment remains
active with the Company until the options vest, unless the option holder dies
prior thereto, in which case the holder's estate shall receive a pro-rata number
of shares, based upon the time the employee worked under the plan. Any vested,
unexercised options owned by a holder at death shall become property of the
Holder's estate.
Stockholder Proposals
Stockholders are entitled to submit proposals on matters appropriate for
stockholder action consistent with regulations of the Securities and Exchange
Commission. In order for a stockholder proposal for the 1996 Annual Meeting of
Stockholders to be eligible for inclusion in the Corporation's Proxy Statement
and form of proxy, it must be received by the Corporate Secretary no later than
January 24, 1997.
Other Matters
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than as set forth above. However, if any other matters come
before the Meeting, the proxies received pursuant to this solicitation will be
voted thereon in accordance with the judgment of the person or persons acting
under the proxies.
/s/ Pioneer Railcorp
Pioneer Railcorp
May 28, 1996
PIONEER RAILCORP
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
JUNE 26, 1996
ELECTION OF DIRECTORS:
Guy L. Brenkman, J. Michael Carr, Orvel L. Cox, John S. Fulton, John P. Wolk
_______ FOR all nominees listed above
_______ FOR all nominees listed above, except
_______ WITHHOLD authority to vote for all nominees listed above
PROPOSAL 1 - Ratification of Appointment of Independent Public Accountants
_______ FOR the appointment of McGladrey & Pullen, LLP as the Company's 1996
independent public accountants
_______ AGAINST the appointment of McGladrey & Pullen, LLP as the Company's
1996 independent public accountants
PROPOSAL 2 - Ratification of Stock Option Plan
_______ FOR the ratification of the Stock Option Plan and the authorization of
the issuance of the options pursuant thereto
_______ AGAINST the ratification of the Stock Option Plan and the authorization
of the issuance of the options pursuant thereto
THE UNDERSIGNED APPOINTS GUY L. BRENKMAN AS PROXY, TO VOTE THEIR SHARES AS
DIRECTED ABOVE AT THE 1996 ANNUAL MEETING OF STOCKHOLDERS AND ANY ADJOURNMENT
THEREOF. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION
OF THE PERSONS NOMINATED FOR DIRECTORS AND FOR BOTH PROPOSALS SUBMITTED BY THE
COMPANY AS OUTLINED IN THE PROXY STATEMENT.
Dated: _______________________, 1996
____________________________________
Signature
____________________________________
Signature if Held Jointly
TO THE SHAREHOLDERS
Pioneer's 1995 operating results continue to show impressive growth and profit
figures with revenues increasing 26% to $8.6 million, assets increasing 32% to
$18 million and primary earnings per share increasing 38% to $.11 from .$08 in
the previous year.
The number of operating railroads remained constant at year-end at eight after
the loss of the West Jersey Railroad lease in May and the subsequent acquisition
of the West Michigan Railroad. The Railcar fleet increased to over 750 cars and
the earnings from the railcars increased to $1.8 million.
The Company continues to refine its business plan and has identified two
geographic areas it intends to concentrate its efforts in acquiring additional
railroads that will maximize the economics of scale that make Pioneer railroads
profitable. Those areas are the midwest and south, in the areas of our existing
railroads. At years end three candidates for acquisition were identified, and
subsequent to the date of this letter, two have been closed on and one was in
the final stages of closing. All three of these projects are in the geographic
areas mentioned above.
The Company has expanded its senior management team, splitting the mechanical
department into two positions, railcars and locomotives, and adding a senior
manager in charge of track. These positions had been planned for several years
but were not realized until the number of railroads, railcars and locomotives
had reached current levels. Pioneer is now well staffed to handle its management
needs for future anticipated growth in 1996 and beyond.
During 1995 Pioneer concluded positioning itself for a profitable future. We
have spent ten years building our machine and refining our abilities to operate
short line railroads and we are well positioned to increase profits and expand
our railroad portfolio as never before. We have paid our dues, and learned the
business well in those ten years, and I believe the next nine railroads will
come in rapid succession, reaching our goal of twenty by the end of the decade.
In closing, let me state that I remain extremely optimistic about our future and
I know all Pioneer employees, from the senior management team down through the
ranks, remain dedicated and optimistic as well.
Sincerely yours,
/s/ Guy L. Brenkman
- --------------------------
Guy L. Brenkman
Chairman - President - CEO
<PAGE>
Company Background
Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this annual report, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (WJ) (formerly West Jersey Railroad Co.), 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), Pioneer Railroad
Equipment Co., Ltd. (PREL), Pioneer Air, Inc. (PAR), and Pioneer Railroad
Services, Inc. (PRS).
The Company operates in one business segment - railroad transportation. PRC's
rail system provides shipping links for customers along its routes and
interchanges with six major railroads, Burlington Northern Santa Fe Railroad
(BNSF), Conrail, Inc. (CR), CSX Transportation (CSX) Illinois Central Railroad
(IC), Norfolk Southern Railway (NS) and Union Pacific Railroad (UP).
Additionally, the Company has interchanges with three smaller railroads, the
Kansas City Southern Railway (KCS), the Arkansas & Missouri Railroad (AM), and
the Twin Cities & Western Railway (TCW). PRC's rail system is devoted to
carrying freight. PRC also seeks to encourage development on or near, and
utilization of, its real estate right of way by potential shippers as a source
of additional revenue. The Company also generates revenue by granting to various
entities, such as utilities, pipeline and communications companies and
non-industrial tenants, the right to occupy its railroad right of way and other
real estate property. The Company also hires rail equipment to, and repairs rail
equipment owned by, others.
Pioneer Railcorp Subsidiaries
Fort Smith Railroad Co.
On July 7, 1991, the Fort Smith Railroad Co. (FSR), a wholly-owned subsidiary of
Pioneer Railcorp, entered into a twenty-year lease (with three twenty-year
renewals) with the Missouri Pacific Railroad Company (MP) to operate 49 miles of
track from Fort Smith to Paris, Arkansas. The FSR's primary interchange is with
the Union Pacific Railroad Company (UP), parent of the MP. FSR also interchanges
with the Arkansas & Missouri Railroad Co. (AM) and the Kansas City Southern
Railway (KCS). The principal commodities are iron, steel, scrap, baby food,
fiberglass, particle board, charcoal, grains, frozen poultry, meal, chemicals,
alcoholic beverages, industrial sand, lumber, paper, pulpboard, fiberboard,
peanuts, fertilizer and military movements. There are eleven other products
which are shipped on a periodic basis. In January of 1995 the FSR and the MP
jointly filed an abandonment application with the Interstate Commerce Commission
(ICC) to abandon approximately 31 miles of leased railroad. On July 6, 1995 the
petition was granted by the ICC effective August 19, 1995. This action reduced
the miles of track leased and operated by the FSR to 18 miles.
<PAGE>
Alabama Railroad Co.
On October 25, 1991, the Alabama Railroad Co., a wholly-owned subsidiary of
Pioneer Railcorp, purchased 60 miles of railroad facilities and real estate from
CSX Transportation (CSX). The line runs from Flomaton to Corduroy, Alabama, and
interchanges with CSX in Flomaton. The railroad's principal commodities are
pulpwood, particle board, and finished lumber.
Mississippi Central Railroad Co.
On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. The railroad runs from Oxford,
Mississippi to Grand Junction, Tennessee, a total of 56.5 miles, 51 of which are
located in Mississippi. The railroad interchanges with the Norfolk Southern
Railway (NS) at Grand Junction, Tennessee and the Burlington Northern Santa Fe
(BNSF) at Holly Springs, Mississippi. The Company changed the name of this
wholly-owned subsidiary to Mississippi Central Railroad Co. (MSCI) in January
1993. The traffic base on the MSCI is primarily outbound finished wood products
and inbound products, such as resins, chemicals and pulpwood for the production
of finished wood products. Other products shipped on the MSCI include scrap
steel and cottonseed.
Alabama & Florida Railway Co.
On November 23, 1992, the Alabama & Florida Railway Co. (AF), a wholly-owned
subsidiary of Pioneer Railcorp, purchased the tangible assets of the A&F Inc.,
d/b/a the Alabama & Florida Railroad Company. This line runs from Georgiana to
Geneva, Alabama, a distance of 76 miles and interchanges with CSX at Georgiana.
The AF's principal commodities are resins, plastics, fertilizer, peanuts, and
pulpwood.
Decatur Junction Railway Co.
On September 23, 1993, the Decatur Junction Railway Co. (DT), a wholly-owned
subsidiary of Pioneer Railcorp, signed a lease agreement with Cisco Co-op Grain
Company (Cisco) and on September 24, 1993 with Central Illinois Shippers,
Incorporated (CISI), for the lease of two segments of track in east central
Illinois. Approximately 38 miles of railroad is operated including 8 miles of
trackage rights on the Illinois Central Railroad (IC) through Decatur, Illinois.
The leases run through December 31, 2006. The Decatur Junction's commodities are
primarily agriculture products.
Vandalia Railroad Company
On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company. The line located in Vandalia, Illinois,
interchanges with Conrail and is approximately 3.45 miles long. The Railroad's
principal commodities are steel pipe, plastic pellets, fertilizer, and feed
ingredients.
Minnesota Central Railroad Co.
On December 12, 1994, Pioneer Railcorp's wholly-owned subsidiary Minnesota
Central Railroad Co., acquired certain assets of MNVA Railroad, Inc. The assets
purchased included approximately 94 miles of operating railroad in southwest
Minnesota, 7 locomotives, 33 railcars, an engine house in Morton, Minnesota,
several vehicles, pieces of maintenance equipment, and miscellaneous parts,
materials and supplies. The railroad interchanges with the Burlington Northern
Santa Fe (BNSF) at Hanley Falls and the Twin City and Western Railroad at
Norwood. The railroad's principal commodities are grain, clay, fertilizer,
canned goods, dairy products, and particle board.
<PAGE>
West Michigan Railroad Co.
On July 11, 1995, Pioneer Railcorp signed an agreement with the Trustee of the
Southwestern Michigan Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore &
Chicago Railroad (KLSC), to purchase all of the tangible assets of KLSC. Those
assets include approximately 15 miles of track and right-of-way, extending from
Hartford to Paw Paw, Michigan, a depot building and parking lot in Paw Paw and
various attendant licenses and rights involving the real estate. This agreement
was approved by the United States Bankruptcy Court for the Western District of
Michigan in an order that became final on or about September 21, 1995. Pioneer
Railcorp then assigned its right to purchase to the West Jersey Railroad Co., a
wholly owned subsidiary of Pioneer, which had been operating the former KLSC
tracks under a Interstate Commerce Commission Directed Service Order since June
24, 1995. West Jersey Railroad Co. amended its articles of incorporation to
change its name to "West Michigan Railroad Co." effective October 2, 1995. The
sale was approved by the Interstate Commerce Commission by order served October
18, 1995, and the West Michigan Railroad Co. took title to the property on
October 24, 1995.
Other Operations
Other operations engaged in by the Company are performed by its wholly owned
subsidiaries, Pioneer Railroad Equipment Co., Ltd. (PREL) which was formed on
April 1, 1990 and Pioneer Railroad Services, Inc. (PRS) which began operations
on October 1, 1993. PREL leases equipment to the Company's subsidiary railroads
and also purchases, sells and leases equipment to and from unrelated parties.
PREL also earns income from non-company railroads on its fleet of approximately
750 railcars (as of December 31, 1995) while carryinig freight on these
railroads. PREL also engages in retail sales of promotional items. PRS provides
accounting, management, marketing, operational and agency services to the
Company's subsidiary railroads and also sells computer technical services and
equipment to unrelated parties. In addition, Pioneer Air Inc., was formed on
August 5, 1994 and currently owns a Cessna 421B aircraft which is used by
Pioneer Railcorp subsidiaries exclusively for Company business travel.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's net income in 1995 increased by $71,000 or 18% to $462,000 up from
$391,000 in 1994. Operating revenues increased by $2.2 million, or 35% to $8.6
million from $6.4 million in 1994. Operating expenses increased in 1995 by $1.9
million, or 38%, to $6.9 million from $5 million in the prior year. Operating
income increased in 1995 by $300,000, or 24% to $1.7 million from $1.4 million
in the prior year.
<PAGE>
Operating Revenues:
Operating revenues increased in 1995 by $2.2 million, or 35%, to $8.6 million
from $6.4 million in the prior year. The increase in operating revenues is
attributable to the first full year of operations of the Minnesota Central
Railroad Co. and the Vandalia Railroad Co., and the increase in revenues from
the Company's growing railcar fleet. The Minnesota Central, which the Company
began operating December 13, 1994, generated an additional $1.3 million in
revenues in 1995. The Vandalia Railroad, which was purchased October 7, 1994,
added an additional $209,000 in revenues in 1995. Carhire revenues from the
Company's railcar fleet (approximately 750 cars at 12/31/95) increased by
$700,000, or 59%, to $1.8 million from $1.1 million in the prior year. In
addition, 1995 was the first year in which the Company made significant efforts
to lease its railcars and excess locomotives to non-affiliated entities. This
activity generated $125,000 in revenues in 1995. The loss of the West Jersey
Railroad lease in April 1995 and it's subsequent operation of the former KLSC
railroad as the West Michigan Railroad, had an immaterial affect on operating
revenues in 1995.
Other factors affected the Company's 1995 operating revenues. In early February
1995 the Company's Decatur Junction Railway Co. began performing contract
switching for the Illinois Central Railroad. This contract was executed as a
direct result of labor disputes at certain Decatur, Illinois industries, and the
refusal of Illinois Central train crews to cross the picket lines at local
industries. This contract, which ceased in early January 1996, generated
$139,000 of revenue in 1995.
The Mississippi Central Railroad had a decrease in revenues of $132,000, or 13%
to $925,000 from $1,057,000 in the prior year. This decrease was a direct result
of a reduction in particle board shipments in 1995 compared to 1994. The Company
does not anticipate a further decrease in this business for the foreseeable
future.
The remaining operating subsidiaries had constant overall revenues in 1995
compared to 1994.
Operating Expenses:
Operating expenses increased in 1995 by $1.9 million, or 38%, to $6.9 million
from $5 million in the prior year. The increase in operating expenses is
attributable to the first full year of operations of the Minnesota Central
Railroad Co. and the Vandalia Railroad Co., increases in equipment maintenance
resulting from the Company's growing railcar fleet, and increases in
administrative expenses resulting from the current, and anticipated future
growth of the Company. The Minnesota Central, which the Company began operating
December 13, 1994, added $1.1 million of operating expenses in 1995. The
Vandalia Railroad, which was purchased October 7, 1994, added $66,000 of
operating expenses in 1995. Operating expenses relating to the maintenance of
the Company's railcar fleet increased $188,000, or 72% to $448,000 from $260,000
in the prior year. Administration expense increased $515,000 to $2,240,000, or
30% from $1,725,000 in the prior year. The loss of the West Jersey Railroad
lease in April 1995 and it's subsequent operation of the former KLSC railroad as
the West Michigan Railroad, had an immaterial effect on operating expenses in
1995.
<PAGE>
Operating Expense Income Statement Line Item Discussion:
Maintenance of ways expense increased $287,000, or 49% to $878,000 from $591,000
in the prior year. This increase was a direct result of the Minnesota Central's
first full year incremental expense of $226,000. The Vandalia Railroad had an
insignificant amount of maintenance of way expense since it only operates 3.45
miles of trackage. Other operating subsidiaries had constant maintenance of way
expense in 1995 compared to 1994, with some reduction in expense being realized
through the use of contract services.
Maintenance of equipment expense increased $385,000, or 60% to $1,031,000 from
$646,000 in the prior year. This increase was a direct result of the Minnesota
Central's first year incremental expense of $152,000. The Vandalia Railroad had
an insignificant amount of maintenance of equipment expense. In addition, the
Company had an increase of $188,000 in expense as a result of its growing
railcar fleet. Other operating subsidiaries had constant maintenance of
equipment expense in 1995 compared to 1994.
Transportation expense increased $402,000, or 28% to $1,823,000 from $1,421,000
in the prior year. This increase was a direct result of the Minnesota Central's
first full year incremental expense of $532,000. The Vandalia Railroad added an
incremental expense of $10,000 as a result of its first full year of operations.
The Fort Smith Railroad had a decrease in transportation expense of
approximately $60,000 or 20% of its 1994 transportation costs and the Alabama &
Florida Railway had a decrease of $85,000 or 27% of its 1994 transportation
costs . Both of these reductions resulted from more efficient train handling
operations. Other operating subsidiaries had constant transportation expense in
1995 compared to 1994.
Administration expense increased $515,000 to $2,240,000, or 30% from $1,725,000
in the prior year. The Minnesota Central's first full year incremental expense
was $106,000. The Vandalia Railroad added an incremental expense of $48,000 as a
result of its first full year of operations. Professional fees increased $60,000
in 1995 primarily resulting from security registrations and other legal
services. Printing and postage expense increased $26,000, also as a direct
result of security registrations. The Company completed its first full year of
occupation in its new corporate headquarters. This expanded facility added
approximately $42,000 of overhead compared to occupancy expense in the former
office. Expenses relating to the hiring of several support personnel in 1995
increased administrative costs by approximately $200,000.
Depreciation and amortization expense increased $295,000, or 48%, to $914,000
compared to $619,000 in the prior year. Approximately 33% of the increase in
this expense is related to the Minnesota Central Railroad. Approximately 55% of
this increase is related to the Company's growing railcar fleet. The remainder
is attributed to other miscellaneous capital additions.
<PAGE>
Other Income and Expense Income Statement Line Item Discussion:
Other income and expenses, excluding interest expense and gain on sale of
assets, increased $80,000 to $133,000 compared to $53,000 in the prior year. The
majority of this income is generated from the granting of easements and leases
to use railroad right of way property. Also included in this income are revenues
generated from scrap sales, and other non-operating revenues and expenses. No
item included in this category is material when considered alone.
Equipment interest expense increased $195,000, or 69% to $475,000 compared to
$280,000 in the prior year. All of this increase is a result of financing
activities for the Company's railcar acquisitions. Other interest expense
increased $83,000 or 37% to $310,000 compared to $227,000 in the prior year.
Most of the increase is related to the debt assumed in the Minnesota Central
asset purchase.
Net gain on fixed asset dispositions increased $40,000 in 1995 to $43,000
compared to $3,000 in 1994. Approximately $25,000 of the gain was attributable
to the sale of 2.8 miles of Alabama Railroad track materials. This track was
removed from an area on the line that has been out of service for several years.
The disposition of 2 railcars resulted in an $18,000 gain. The remainder of the
net gain resulted from the disposition of other miscellaneous pieces of
equipment, none of which was disposed of at a significant gain or loss.
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.
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 $675,000 in unused working capital facilities available at the
end of 1995. In addition, the Company has seen the market value of its railcar
fleet increase significantly over the last several years. This increase in value
has resulted from the short supply of railcars compared to the increased demand
for there use. The Company believes it could refinance part of its railcar 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 2,098,042 to 4,196,084. At the same time shareholders
became entitled to purchase an additional 4,196,084 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 $2.00 per share. The shares purchased through the
exercise of the warrants must be held for 1 year from date of purchase. As of
December 31, 1995, a total of 19,254 warrants had been exercised, and the
Company realized $38,508 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.
<PAGE>
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 from $1.50 to $4.40 per share. The Company expects increased capital to
be generated by the exercise of options in 1996, but is uncertain as to the
amount. No options have been exercised as of the date of this report.
Subsequent to its fiscal year end, 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 11%. The interest rate is adjustable quarterly to
2.5% over New York Prime, limited, however, to a one 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 line has been fully
drawn upon in the first quarter 1996 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. The current monthly debt service resulting from the $2.5
million borrowed is $43,000, with monthly payments beginning on April 8, 1996.
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 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
in 1996. The Company is considering and analyzing the refinancing of some of its
present debt.
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 more than sufficient to meet liquidity needs
through at least 1996.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $1.4 million in 1995
and $1.8 million in 1994. Net cash from operating activities for 1995 resulted
from $462,000 of net income, $914,000 of depreciation and amortization, $334,000
of deferred income taxes, partially offset by $319,000 net cash used by changes
in operating assets and liabilities, primarily due to increases in accounts
receivable. Accounts receivable increased approximately $240,000 in 1995 as a
result of increased revenues from the Company's growing railcar fleet .
<PAGE>
In 1995 the Company purchased approximately $6 million of fixed assets and
capital improvements. The Company purchased approximately 300 railcars at a
total cost of $4.6 million, bringing its railcar fleet to approximately 750
cars. All of the railcars purchased were financed with long-term fixed rate
financing. The Company also acquired 6 GP-8 locomotives through the issuance of
$270,000 of Rule 144 common stock of the Company. The Company capitalized
$325,000 of track betterments in 1995, $290,000 which was funded with operating
cash flows and $35,000 funded by the issuance of Rule 144 Pioneer Railcorp
common stock. The Company purchased $180,000 of machinery and equipment in 1995,
of which $120,000 was for the purchase of vehicles financed with long term debt.
The remaining machinery and equipment was funded by operating cash. In 1994 the
Company purchased 170 railcars at a cost of $1.4 million. The majority of the
1994 railcar acquisitions were financed with long-term debt.
Of the $4.6 million of railcars purchased in 1995, the Company entered into
financing agreements for the purchase of 150 covered hoppers at a cost of $3
million in December of 1995. This transaction resulted in an increase of
approximately $285,000 in the current portion of long-term debt. The Company
believes the revenues generated from the use of the railcars in 1996 and future
years will more than cover the cashflow requirements of the related debt.
The Company purchased a Cessna 421 B aircraft for $20,000 cash and $135,000 in
Company common stock. The aircraft is used solely for Company business by
management and employees.
The Company purchased through bankruptcy court the tangible assets of the
Southwestern Michigan Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore &
Chicago Railroad. The assets purchased totaled $500,000, of which $300,000 was
generated through short-term borrowing and operating cash flow, and completely
refinanced with long-term debt using certain railcars as collateral. The
remaining $200,000 was financed by the issuance of common stock of the Company.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pioneer Railcorp
Peoria, Illinois
We have audited the accompanying consolidated balance sheets of Pioneer Railcorp
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Railcorp and
subsidiaries 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. Peoria, Illinois February 20, 1996,
except for Note 13 as to which the date is March 12, 1996
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
ASSETS
1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash ........................................................................ $ 276,230 $ 179,415
Accounts receivable, less allowance for doubtful
accounts 1995 $15,958; 1994 $14,000 ...................................... 1,283,124 934,574
Income tax refund claims .................................................... 50,998 --
Inventories ................................................................. 287,772 211,887
Prepaid expenses ............................................................ 123,609 121,464
Deferred taxes .............................................................. 35,000 16,850
------------ ------------
Total current assets ................................................... 2,056,733 1,464,190
------------ ------------
Property and Equipment, less accumulated depreciation
1995 $1,979,998; 1994 $1,225,487 ............................................ 15,220,168 10,228,372
------------ ------------
Intangible Assets, less accumulated amortization
1995 $100,493; 1994 $57,945 ................................................. 647,031 604,281
------------ ------------
$ 17,923,932 $ 12,296,843
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable ............................................................... $ 80,333 $ 154,160
Current maturities of long-term debt ........................................ 1,412,552 895,482
Accounts payable ............................................................ 1,115,241 925,380
Accrued expenses ............................................................ 354,834 261,891
Income taxes payable ........................................................ 17,367 83,129
------------ ------------
Total current liabilities .............................................. 2,980,327 2,320,042
------------ ------------
Long-Term Debt, net of current maturities ...................................... 9,934,737 6,470,710
------------ ------------
Deferred Taxes ................................................................. 843,000 490,850
------------ ------------
Minority Interest in Subsidiaries .............................................. 1,195,000 1,209,000
------------ ------------
Commitments and Contingencies (Note 11)
Stockholders' Equity
Common stock, Class A (voting), par value $.001 per share, authorized
20,000,000 shares, issued and outstanding
1995 4,487,881 shares; 1994 2,098,042 shares ............................. 4,487 2,098
Common stock, Class B (nonvoting), no par value;
authorized 2,000,000 shares; issued none ................................. 0 0
Additional paid-in capital .................................................. 1,832,353 1,129,725
Retained earnings ........................................................... 1,134,028 674,418
------------ ------------
2,970,868 1,806,241
------------ ------------
$ 17,923,932 $ 12,296,843
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995 and 1994
<TABLE>
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Railway operating revenue $ 8,577,421 $ 6,367,352
-------------------------------------
Operating expenses
Maintenance of way and structures 877,654 590,855
Maintenance of equipment 1,030,975 646,179
Transportation 1,822,982 1,420,709
General and administrative 2,240,581 1,725,068
Depreciation 871,910 588,756
Amortization 42,548 30,504
-------------------------------------
6,886,650 5,002,071
-------------------------------------
Operating income 1,690,771 1,365,281
-------------------------------------
Other income (expenses)
Interest income 3,005 2,317
Interest expense (785,371) (507,183)
Lease income 74,551 65,232
Gain on sale of assets 43,862 2,820
Other, net 54,738 (13,815)
-------------------------------------
(609,215) (450,629)
-------------------------------------
Income before provision for income taxes
and minority interest in preferred stock
dividends of consolidated subsidiaries 1,081,556 914,652
Provision for income taxes 495,443 398,529
-------------------------------------
Income before minority interest in preferred
stock dividends of consolidated subsidiaries 586,113 516,123
Minority interest in preferred stock dividends of
consolidated subsidiaries 124,405 125,230
-------------------------------------
Net income $ 461,708 $ 390,893
-------------------------------------
Earnings per common and common equivalent share:
Primary $ .11 $ .08
====================================
Fully diluted $ .10 $ .08
====================================
Weighted average number of common shares used in
computing earnings per common and common
equivalent share:
Primary and fully diluted 8,359,416 7,483,951
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1995
and 1994 <TABLE>
Class A (voting) Additional
------------------------- Paid-In Retained
Shares Amount Capital Earnings
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 2,040,542 $ 2,040 $ 849,469 $ 283,525
Common stock issued 57,500 58 280,256 0
Net income 0 0 0 390,893
---------------------------------------------------------
Balance at December 31, 1994 2,098,042 $ 2,098 $ 1,129,725 $ 674,418
Stock split July 1, 1995 2,098,042 2,098 0 (2,098)
Common stock issued to acquire
property, equipment and
inventory 272,543 272 664,139 0
Common stock issued upon
exercise of stock warrants 19,254 19 38,489 0
Net income 0 0 0 461,708
---------------------------------------------------------
Balance at December 31, 1995 4,487,881 $ 4,487 $ 1,832,353 $ 1,134,028
=========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 461,708 $ 390,893
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries 124,405 125,230
Depreciation 871,910 588,756
Amortization 42,548 30,504
(Gain) on sale of property and equipment (43,862) (2,820)
Deferred taxes 334,000 193,000
Changes in assets and liabilities, net of effects from acquisition of
subsidiaries:
(Increase) decrease in accounts receivable (348,550) 106,503
(Increase) in income tax refund claims (50,998) -
(Increase) in inventories (58,635) (45,175)
(Increase) in prepaid expenses (2,145) (25,635)
(Increase) in intangible assets (85,298) (136)
Increase in accounts payable 189,861 224,859
Increase in accrued expenses 72,943 139,340
Increase (decrease) in income taxes payable (65,762) 45,210
-------------------------------
Net cash provided by operating activities 1,442,125 1,770,529
-------------------------------
Cash Flows From Investing Activities
Proceeds from sale of property and equipment 244,012 41,450
Purchase of property and equipment, net of property and
equipment from acquisition of subsidiaries (5,096,695) (2,271,267)
Acquisition of subsidiaries, net of cash acquired (300,000) (237,200)
-------------------------------
Net cash (used in) investing activities (5,152,683) (2,467,017)
-------------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries 1,409,911 844,974
Proceeds from long-term borrowings, net of debt assumed in
acquisition of subsidiaries 5,479,157 1,933,506
Payments on short-term borrowings (1,483,738) (1,098,159)
Payments on long-term borrowings (1,498,060) (724,706)
Proceeds from common stock issued upon exercise of
stock warrants 38,508 -
Payments to minority interest (124,405) (125,230)
Repurchase of minority interest (14,000) -
-------------------------------
Net cash provided by financing activities 3,807,373 830,385
-------------------------------
Net increase in cash 96,815 133,897
Cash, beginning of year 179,415 45,518
-------------------------------
Cash, end of year $ 276,230 $ 179,415
==============================
</TABLE>
(Continued)
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 489,986 $ 425,091
===============================
Income taxes, net $ 278,203 $ 159,978
===============================
Supplemental Schedule of Noncash Investing
and Financing Activities
Railroad acquisitions
Fair value of assets acquired $ 500,000 $ 2,458,610
Cash paid for stock and assets (300,000) (300,000)
-------------------------------
Liabilities and debt assumed; and stock issued $ 200,000 $ 2,158,610
===============================
Reconciliation:
Liabilities assumed $ - $ 222,123
Debt assumed - 1,656,173
Issuance of common stock 1995 76,190 shares;
1994 57,500 shares 200,000 280,314
-------------------------------
$ 200,000 $ 2,158,610
===============================
Additional property, equipment and inventory acquired
upon issuance of common stock 1995 196,353 shares $ 464,411 $ -
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Pioneer Railcorp (the "Company") is the parent company of
eight active short-line common carrier railroad operations, an equipment leasing
company, an aircraft subsidiary, and a service company. The Company and its
subsidiaries operate in the following states: Alabama, Arkansas, Illinois,
Michigan, Minnesota, Mississippi, and Tennessee.
The Company's active subsidiaries include the following:
West Michigan Railroad Co.
Minnesota Central Railroad Co.
Vandalia Railroad Company
Decatur Junction Railway Co.
Alabama & Florida Railway Co.
Mississippi Central Railroad Co.
Alabama Railroad Co.
Fort Smith Railroad Co.
Pioneer Railroad Equipment Co. Ltd.
Pioneer Air, Inc.
Pioneer Railroad Services, Inc.
Pioneer Railroad Equipment Co., Ltd. holds title to a majority of the Company's
operating equipment, and Pioneer Air, Inc. holds title to the Company's
aircraft. Pioneer Railroad Services, Inc. provides management, administrative
and agency services to the Company's subsidiary railroads. All other
subsidiaries are active short-line common carrier railroad operations.
Significant accounting policies:
Principles of consolidation: The consolidated financial statements include the
accounts of Pioneer Railcorp and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Presentation of cash flows: For the purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with maturity of
three months or less to be cash equivalents. There are no cash equivalents at
December 31, 1995 and 1994.
Use of estimates in the preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue recognition: Freight revenue, generally derived on a per car basis from
the various connecting carriers with whom the Company interchanges, is
considered earned at the time a shipment is either delivered to or received from
the connecting carrier at the point of interchange.
Inventories: Inventories consisting of various mechanical parts, track
materials, locomotive supplies and diesel fuel, are stated at the lower of cost
(determined by the average cost method) or market. Inventories are used on a
daily basis for normal operations and maintenance.
Property and equipment: Property and equipment is stated at cost. Depreciation
is computed principally on a straight-line basis over the following estimated
useful lives:
Years
----------
Roadbed .................................................... 20
Transportation equipment ................................... 10-15
Railcars ................................................... 10-15
Buildings .................................................. 20-40
Machinery and equipment .................................... 5-10
Office equipment ........................................... 5-10
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 the track conditions and benefit future operations with more efficient
use of the rail facilities. <PAGE>
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.
Long-lived assets: The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed," in
March 1995, and this standard was adopted by the Company during 1995 with no
material effect on the Company's financial position or results of operations.
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, such as property and equipment, certain identifiable 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. The Company reviews
applicable assets on a quarterly basis to determine whether any circumstances or
events would indicate an impairment.
Earnings per common and common equivalent share: The earnings per common and
common equivalent share were computed by dividing the net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year for primary earnings per common and common
equivalent share. The number of common shares was increased by the number of
shares issuable under the stock option plan and stock warrants described in
Notes 6 and 9, and this theoretical increase in the number of shares was reduced
by the number of shares which were assumed to have been repurchased (20 percent
of the outstanding shares at the end of the year) using the proceeds from the
exercise of the options and warrants. The repurchase price was assumed to be the
average market price per share during the year for primary earnings per common
and common equivalent share. The repurchase price was assumed to be the ending
market price per share for fully diluted earnings per common and common
equivalent share. The remainder of the proceeds was assumed to have been used to
reduce debt with the net income adjusted for the interest expense reduction, net
of the related income tax effect. Earnings per share information for 1994 has
been retroactively restated to reflect the effect of the stock split and
warrants.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Self-insurance: The Company self-insures a portion of the risks associated with
medical expenses incurred by its employees and their dependents. Under the terms
of the self-insurance agreement, the Company is responsible for the first
$20,000 of qualifying medical expenses per person on an annual basis. The
insurance contract with Safeco Life Insurance Company limits the insurance
company's coverage to a $2,000,000 maximum lifetime reimbursement per person and
specifies that individual claims in excess of $20,000 on an annual basis and
total claims exceeding the aggregate excess will be fully covered by Safeco Life
Insurance Company, subject to the maximum lifetime reimbursement provision.
Note 2. Property and Equipment
Property and equipment consist of the following:
December 31,
-----------------------------
1995 1994
----------- -----------
Land ....................................... $ 280,606 $ 183,100
Roadbed .................................... 4,840,367 4,175,010
Transportation equipment ................... 1,594,150 1,481,464
Railcars ................................... 8,328,207 3,905,575
Buildings .................................. 687,958 725,592
Machinery and equipment .................... 704,117 612,060
Office equipment ........................... 297,665 253,808
Capital projects ........................... 467,096 117,250
----------- -----------
17,200,166 11,453,859
Less accumulated depreciation .............. 1,979,998 1,225,487
----------- -----------
$15,220,168 $10,228,372
=========== ===========
<PAGE>
Note 3. Pledged Assets, Notes Payable, and Long-Term Debt
The Company has a $75,000 line of credit with Citizens Bank and Trust Company,
Chillicothe, Missouri. The line of credit expires February 1996 and is
collateralized by transportation equipment. The Company has no outstanding
balance under this line of credit as of December 31, 1995. The balance owed as
of December 31, 1994, was $70,000. The line of credit bears interest at 10.5%.
The Company has a $600,000 line of credit with Merrill Lynch Business Financial
Services, Inc., Chicago, Illinois. The line of credit expires August 1996 and is
collateralized by accounts receivable, inventory and general intangibles. The
Company has no outstanding balance under this line of credit at December 31,
1995 or 1994. The line bears interest at prime, as published in The Wall Street
Journal, plus 1%.
The Company has a $11,682 and $35,962 unsecured note payable to MINNRAIL, Inc.
as of December 31, 1995 and 1994, respectively. This note was assumed as part of
the asset acquisition from MNVA Railroad, Inc. The note bears no interest and
requires quarterly payments on the basis of revenue carloads received or shipped
on the Minnesota Central Railroad Co., a Pioneer Railcorp subsidiary, at the
rate of $10 per car.
The Company has various unsecured notes payable totaling $68,651 and $48,198 as
of December 31, 1995 and 1994, respectively, for the financing of insurance
premiums. These notes are due in monthly installments from $1,761 to $9,907,
including interest ranging from 7.75% to 11.1%, with final installments due from
April 1996 to August 1996.
Long-term debt at December 31, 1995 and 1994, consists of the following:
<TABLE>
1995 1994
---------- ----------
<S> <C> <C>
Mortgage payable, First of America Bank, due in monthly installments of $3,775,
including interest at 8.5%, through October 1, 1999. At that date and every
five years thereafter, the interest rate may be adjusted based on the Bank's
base rate, final installment due June 2008, collateralized by
Pioneer Railcorp's corporate headquarters building .......................... $ 425,021 $ 433,297
Mortgage payable, Camden National Bank, due in monthly
installments of $4,304, including interest at 12%, final
installment due July 2001, collateralized by Alabama
Railroad Co. real estate and rail facilities ................................ 218,850 242,662
Notes payable, Ford Motor Credit Company, due in monthly
installments from $418 to $525, including interest ranging from 9.5% to
10.25%, final installments due from July
2000 to October 2000, collateralized by vehicles ............................ 65,703 0
Notes payable, Commerce Bank, due in monthly installments
from $593 to $646, including interest at 8.5%, final
installments due January 1998, collateralized by automobiles ................ 28,155 0
Notes payable, Norwest Equipment Finance, Inc., due in monthly
installments of $2,184 to $8,009, including interest ranging from 9.75% to
10.75%, final installments due from May 2002
to October 2002, collateralized by railcars ................................. 1,059,044 0
Note payable, Keycorp, due in monthly installments of
$22,744, including interest at 8.86%, final installment
due December 2003, collateralized by railcars ............................... 1,560,000 0
Note payable, Nations Bank, due in monthly installments
of $23,305, including interest at 8.75%, final installment
due December 2002, collateralized by railcars ............................... 1,460,000 0
Notes payable, FBS Leasing, due in monthly installments
from $510 to $12,998, including interest ranging from
8.37% to 9.60%, final installments due from August
2001 to March 2004, collateralized by railcars .............................. 1,337,721 1,447,028
---------- ----------
Balance carried forward ........................................................ $6,154,494 $2,122,987
========== ==========
<PAGE>
1995 1994
----------- -----------
<S> <C> <C>
Balance brought forward ........................................................ $ 6,154,494 $ 2,122,987
Note payable, A&F, Inc., due in monthly installments of
$25,537, including interest at 10%, increasing to 12% during the term, final
installment due October 2001, collateralized by track facilities of the
Alabama & lorida Railway Co. ................................................ 1,285,600 1,446,954
Notes payable, US Bancorp, due in monthly installments
from $637 to $11,995, including interest ranging from 9% to 10.9%, final
installments due from September 2001
to December 2002, collateralized by railcars ................................ 1,935,017 849,918
Notes payable, Concord Commercial Group, due in monthly
installments from $1,105 to $4,684, final installments due from June 1998 to
March 1999, including interest at 9%,
collateralized by railcars .................................................. 348,578 624,810
Notes payable, Minnesota Valley Bank, due in monthly
installments of $10,697, including interest at prime plus 2.00-2.75%, final
installment due December 2001, collateralized by equipment acquired from MNVA
Railroad, Inc. .............................................................. 236,834 617,004
Note payable, Burling Bank, due in monthly installments
of $7,143, final installment due September 2000, plus
interest at prime plus 2%, collateralized by locomotives .................... 407,143 492,857
Note payable, U.S. Small Business Administration, due in
monthly installments of $7,577, including interest at 4%,
final installment due September 2000, collateralized by
track acquired from MNVA Railroad, Inc. ..................................... 391,527 459,672
Note payable, Rail Authority, due in monthly installments
of $3,975, including interest at 7.5%, final installment
due January 2011, collateralized by rail line acquired
from MNVA Railroad, Inc. .................................................... 380,000 380,000
Various notes payable, due in monthly installments from
$332 to $1,559, final installments due from April 1995 to September ...... 1996,
including interest ranging from 7.75% to 16.5%, collateralized by vehicles
and maintenance
equipment ................................................................... 4,927 44,452
Note payable, Citizens Bank and Trust Company, due in monthly installments of
$4,410, including interest at 9.5%,
final installment due June 1997, collateralized by locomotives .............. 77,480 120,717
Note payable, Kyle Railways, Inc., due in monthly
installments of $2,630, including interest at 8%, final
installment due April 1998, unsecured ....................................... 66,972 92,073
Note payable, Citizens Bank and Trust Company, due in
monthly installments of $1,683, including interest at 9%,
final installment due May 1998, collateralized by railcars 43,657 59,120
Notes payable, First of America Bank, due in monthly
installments aggregating $1,206, including interest
ranging from 6.5% to 6.75%, final installment due
June 1999, collateralized by automobiles ................. 15,060 55,628
------------ ----------
11,347,289 7,366,192
Less: Current portion ....................................... (1,412,552) (895,482)
------------ ----------
$ 9,934,737 $6,470,710
============ ==========
</TABLE>
<PAGE>
Aggregate maturities required on long-term debt as of December 31, 1995, are due
in future years as follows:
Years ending December 31,
1996 $ 1,412,552
1997 1,520,645
1998 1,550,576
1999 1,580,925
2000 1,673,039
Thereafter 3,609,552
-----------
$11,347,289
===========
Note 4. Income Tax Matters
The Company and eight of its subsidiaries file a consolidated federal income tax
return. Three of the subsidiaries file separate federal income tax returns.
The provision for income taxes charged to operations for the years ended
December 31, 1995 and 1994, was as follows:
1995 1994
----------- -----------
Current:
Federal $ 149,781 $ 193,226
State 11,662 12,303
334,000 193,000
--------------------------
$ 495,443 $ 398,529
==========================
The income tax provision differs from the amount of income tax determined by
applying the federal income tax rate to pretax income from operations for the
years ended December 31, 1995 and 1994, due to the following:
1995 1994
-------------------------
Computed "expected" tax expense 35.0% 35.0%
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal tax benefit 4.6 4.5
Other 6.2 (.8)
--------------------------
45.8% 38.7%
--------------------------
The Company and its subsidiaries have Alternative Minimum Tax (AMT) credit
carryforwards of approximately $424,000 and $244,000 at December 31, 1995 and
1994, respectively. This excess of AMT over regular tax can be carried forward
indefinitely to reduce future federal income tax liabilities. Certain
subsidiaries of the Company also have net operating loss carryforwards totaling
approximately $704,000 at December 31, 1995, which can be used to offset future
taxable income of those subsidiaries. Net operating loss carryforwards expire in
the years 2006 and 2007.
Deferred tax assets and liabilities consist of the following components as of
December 31, 1995 and 1994:
1995 1994
----------- -----------
Deferred tax assets:
AMT credit carryforwards .............. $ 424,000 $ 244,000
NOL carryforwards ..................... 278,000 177,000
Restricted stock award ................ 0 79,000
Other ................................. 35,000 5,000
----------- -----------
737,000 505,000
Deferred tax liabilities:
Property and equipment ................ (1,545,000) (979,000)
----------- -----------
$ (808,000) $ (474,000)
=========== ===========
<PAGE>
The components giving rise to the deferred tax assets and liabilities described
above have been included in the consolidated balance sheets as of December 31,
1995 and 1994, as follows:
1995 1994
--------- ---------
Current deferred tax assets .................... $ 35,000 $ 16,850
Net noncurrent deferred tax liabilities ........ (843,000) (490,850)
--------- ---------
Net deferred tax liability ..................... $(808,000) $(474,000)
========= =========
Note 5. Retirement Plan
The Company has a defined contribution plan covering substantially all
employees, except employees who are members of a union which has bargained
separately for retirement benefits. To be eligible for the plan, an employee
must be 21 years of age and have completed one year of service. Employees may
elect to contribute, on a tax deferred basis, up to 15% of their salary, or
$9,240, whichever is least. The Company matches 50% of the first 8% of each
employee's contribution. The Company's expense under the plan was $21,413 and
$19,312 for the years ended December 31, 1995 and 1994, respectively.
Note 6. Stock Option Plan
On April 12, 1994, the Board of Directors approved a stock option plan under
which the Company has granted options to key management, other employees and
outside directors for the purchase of 760,000 shares of its common stock, as
adjusted for the stock split described in Note 9. The plan was approved by the
Company's stockholders on June 11, 1994. The options became exercisable when the
Company's stock reached a $4 trading price for a ten day period in July 1995, as
specified in the stock option plan. The exercise price is equal to the trading
price on the date of the grants and ranges from $1.50 to $3.92 per share. Since
the target price was reached by December 31, 1995, in accordance with the
provisions of the plan, additional options for 76,000 shares were granted. The
exercise price for these options is equal to or greater than the trading price
on the date of the grants and ranges from $4.00 to $4.40 per share. None of the
outstanding options have been exercised as of December 31, 1995. The options
expire at various dates from April 12, 1999 to July 5, 2000.
Note 7. Lease Commitments and Total Rental Expense
On July 7, 1991, the Company, through its wholly-owned subsidiary, Fort Smith
Railroad Co., entered into a twenty-year lease, with three twenty-year renewal
options, with the Missouri Pacific Railroad Company for 49 miles of rail
facilities in Arkansas. The agreement contains numerous requirements, including
maintaining existing traffic patterns, repair and replacement of the right of
way in the condition it was leased (substantially FRA Class I) and payment of
any applicable real estate taxes. The Company is entitled to a fixed rate per
car load switched from the Missouri Pacific Railroad Company, as well as 90% of
new leases and easements and 50% of existing leases and easements on the
property. As long as these lease requirements are met, the Company may continue
to operate on the rail facilities without additional lease costs.
The Company, through its wholly-owned subsidiary, Alabama & Florida Railway Co.,
leases a 2 mile segment of track connecting to the subsidiary's facilities in
Andalusia, Alabama, from the Andalusia & Concecuh Railroad Company, Inc. for
$375 per month, plus $15 per car on all cars over 300 per year. The Company also
bears the cost of all maintenance on the track. The subsidiary also leases the
real estate comprising the right of way from Georgiana to Genea, Alabama, from
CSX Transportation, Inc. for $1,667 per month.
During September 1993, the Company, through its wholly-owned subsidiary, Decatur
Junction Railway Co. (DT), entered into lease agreements, which expire in
December 2006, with Cisco Co-Op Grain Company (CISCO) and with Central Illinois
Shippers, Inc. (CISI). The Company has an option to renew the CISCO line lease
for a ten-year period. The CISCO segment is approximately 13 miles, while the
CISI segment is approximately 17 miles in distance; both are located in Illinois
and connect via trackage rights on the Illinois Central Railroad. Both leases
require DT to perform normalized maintenance on the line and pay $10 per car on
all cars over 1,000 per year on each segment.
Vandalia Railroad Company has a lease with the City of Vandalia, Illinois, for
3.45 miles of railway. This lease is renewable for ten year periods beginning in
September 2003, and the annual lease of $1 is prepaid through September 2003.
Lease payments will be equal to $10 per loaded railcar handled in interchange
beginning with the first renewal period in September 2003.
<PAGE>
In November 1994, in conjunction with the purchase of its corporate office
building, the Company assumed a land lease for the property on which the
building is located. This twenty-five year lease is renewable for five
successive periods of five years with annual rents equal to ten percent of the
appraised value of the land, payable in monthly installments, and with appraisal
value reviews every five years following the origination date. The Company is
responsible for costs of maintenance, utilities, fire protection, taxes and
insurance.
The total minimum rental commitment as of December 31, 1995, is due in future
years as follows:
Years Ending December 31,
1996 $ 38,604
1997 38,604
1998 38,604
1999 38,604
2000 38,604
Thereafter 333,819
-------------
Total minimum future payments $ 526,839
=============
The total rental expense incurred under the leases was $55,109 and $73,764 for
the years ended December 31, 1995 and 1994, respectively.
Note 8. Purchases of Railroad Facilities
In July 1995, the Company, through its wholly-owned subsidiary, West Michigan
Railroad Co., signed an agreement with the Trustee of the Southwestern Michigan
Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore & Chicago Railroad (KLSC) to
purchase all of the tangible assets of KLSC. This acquisition was made by the
Company for $300,000 cash and the issuance of 76,190 shares of common stock, at
$2 5/8 per share, for a total acquisition cost of $500,000.
In December 1994, the Company, through its wholly-owned subsidiary, Minnesota
Central Railroad Co., acquired certain assets of MNVA Railroad, Inc. The
purchase was consummated through the assumption of debt totaling $1,656,173.
In October 1994, the Company acquired all the outstanding common stock of the
Vandalia Railroad Company in exchange for $300,000 cash, the assumption of
liabilities of $222,123, and the issuance of 57,500 shares of $.001 par value
common stock, at $4 7/8 per share, for a total acquisition cost of $802,437. The
excess of the acquisition cost over the fair value of the net assets acquired
was allocated to goodwill and is being amortized over 40 years by the
straight-line method.
Operating results of these companies are included in the consolidated statements
of income from the date of acquisition.
Unaudited pro forma consolidated results of operations for the year ended
December 31, 1994, as though Minnesota Central Railroad Co. and Vandalia
Railroad Company had been acquired as of January 1, 1994, follows:
Railway operating revenue ............................... $7,919,905
Net income .............................................. 441,068
Earnings per common share ............................... 0.09
The above amounts reflect adjustments for amortization of goodwill, additional
depreciation on revalued purchased assets, and interest on borrowed funds.
To include the results of operations of West Michigan Railroad Co. from January
1, 1994 to the date of acquisition, would not have a significant effect on the
consolidated results of operations for the years ended December 31, 1995 and
1994.
Note 9. Stock Split and Stock Warrants Issued as Dividends
On May 16, 1995, the Board of Directors authorized a 2 for 1 stock split payable
to shareholders of record on June 30, 1995. 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 stock
owned. Each warrant permits shareholders to purchase an additional share of
stock at a predetermined price of $2 per share. Stock acquired by exercise of
each warrant must be held for a one year period of time. The warrants expire
July 1, 2015. <PAGE>
Note 10. Minority Interest 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.
Following is a summary of the minority interest in subsidiaries as of December
31, 1995 and 1994:
<TABLE>
1995 1994
----------------------------
<S> <C> <C>
Preferred stock of Alabama Railroad Co. .....................................
Par value - $1,000 per share
Authorized - 700 shares
Issued and outstanding - 427 and 432 shares (cumulative 12% dividend;
callable at Company's option at 150% of face value)
at December 31, 1995 and 1994, respectively ............................ $ 427,000 $ 432,000
Preferred stock of Alabama & Florida Railway Co. ............................
Par value - $1,000 per share
Authorized - 500 shares
Issued and outstanding - 423 and 431 shares (cumulative 9% dividend; callable
at Company's option after June 22, 1995, at 150% of face value)
at December 31, 1995 and 1994, respectively ............................ 423,000 431,000
----------------------------
Preferred stock of Mississippi Central Railroad Co.
Par value - $1,000 per share
Authorized - 1,000 shares
Issued and outstanding - 345 and 346 shares (cumulative 10% dividend;
convertible at a rate of $10 per common share, callable at Company's option
after March 1, 1996, at 110%
of face value) at December 31, 1995 and 1994, respectively ............. 345,000 346,000
---------------------------
$ 1,195,000 $ 1,209,000
===========================
</TABLE>
Note 11. Commitments and Contingencies
Commitments: In December 1993, the Company entered into a five-year executive
employment contract with the Company's president. The five-year agreement
provides for a base salary with annual inflation adjustments based upon the
Consumer Price Index. Should the Company acquire or form additional railroads,
the base salary will increase $25,000 for the acquisition of railroads of 125
miles or less, and $50,000 for railroads over 125 miles. Should the president's
employment be terminated, the contract requires a lump sum payment equal to
three years of his then current salary. Should the president retire, he is
entitled to a lump sum payment of one year's salary.
In September 1995, the Company entered into an agreement to purchase 21 railcars
for $546,000. The Company has secured financing for this purchase through a loan
agreement with Norwest Equipment Finance, Inc. These railcars were delivered to
the Company in February 1996.
Contingencies: In the course of its business, the Company's subsidiaries
experience crossing accidents, employee injuries, delinquent or disputed
accounts and other incidents, which give rise to claims that may result in
litigation. Management vigorously pursues settlement of such claims, but at any
one time, some such incidents, which could result in lawsuits by and against the
Company and its subsidiary railroads, 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 and, as of the date
of this statement, management believes that no incident has the potential to
result in a liability that would materially effect the Company's consolidated
financial position or results of operations. <PAGE>
Note 12. Fair Value of Financial Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 107 (SFAS 107), "Disclosures About Fair Value of
Financial Instruments," in December 1991 and this standard was adopted by the
Company during 1995 with no effect on the Company's financial position or
results of operations. SFAS 107 establishes disclosure standards for the fair
value of financial instruments. The following disclosures of the estimated fair
value of financial instruments are made in accordance with the requirements of
SFAS 107. The estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
The carrying value of cash, notes payable and variable rate long-term debt
approximates fair value.
The remaining carrying value of fixed rate long-term debt collectively
approximates fair value based upon the similarity of interest rates
negotiated on debt instruments in 1995 as compared to existing interest
rates.
Note 13. Subsequent Events
On March 12, 1996, the Company acquired 126,380 of the outstanding 189,430
shares of common stock of KNRECO, Inc., d/b/a Keokuk Junction Railway, for
$16.50 per share, and has offered to purchase the remaining outstanding shares
at the same purchase price.
Additionally, the Company has secured a $2,500,000 line of credit with Citizens
Bank and Trust Company of Chillicothe, Missouri. This credit facility was used
to finance the acquisition of the KNRECO, Inc. stock. Borrowings under the line
of credit are collateralized by the common stock of two subsidiaries: the
Alabama Railroad Co. and Mississippi Central Railroad Co.
The Company, through its newly formed subsidiary, Columbia & Northern Railway
Co., also entered into a lease agreement with the Marion County Railroad
Authority for 28.78 miles of railway. This lease has an initial term of ten
years and is renewable for five additional ten year periods, with an annual
rental of $1.
<PAGE>
Market for Pioneer Railcorp Common Stock.
The Company's common stock trades on the Chicago Stock Exchange under the
trading symbol "PRR". The quarterly high and low sales price of the Company's
common stock for the periods below are as follows (adjusted to reflect a 2 for 1
stock split on 6/30/95):
94-1Q 94-2Q 94-3Q 94-4Q 95-1Q 95-2Q 95-3Q 95-4Q
----- ----- ----- ----- ----- ----- ----- -----
High $2.19 $2.07 $3.00 $3.07 $2.63 $4.50 $4.50 $3.38
Low $1.50 $1.33 $1.50 $2.34 $2.00 $2.19 $2.63 $2.00
As of December 31, 1995, the Company had 1,753 common stockholders of record,
including brokers who hold stock for others. No common stock cash dividends have
been declared or paid.
Board of Directors
Guy L. Brenkman, CEO and President, Pioneer Railcorp
J. Michael Carr, Chief Financial Officer, Pioneer Railcorp
Orvel L. Cox, Superintendent Car Department, Pioneer Railroad Services, Inc.
John S. Fulton, Purple Reality
John P. Wolk, Director of Distribution, Kimball International
Officers
Guy L. Brenkman, Chief Executive Officer and President
John P. Wolk, Treasurer
J. Michael Carr, Assistant Treasurer
Daniel A. LaKemper, Secretary
Kevin L. Williams, Assistant Secretary
Corporate Information
The Corporate offices of pioneer Railcorp and its subsidiaries are located at
1318 S. Johanson Road, Peoria, Illinois, 61607; Telephone number 309-697-1400.
A copy of Pioneer Railcorp's 1995 Form 10-KSB to the Securities and Exchange
Commission (without exhibits) can be obtained by contacting the Company's
Investor Relations Department. Quarterly financial reports and other
publications and news releases can also be obtained through the Investor
Relations Department.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's 2nd Quarter 1996 Form 10-QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 314,760
<SECURITIES> 0
<RECEIVABLES> 2,224,131
<ALLOWANCES> 22,787
<INVENTORY> 428,355
<CURRENT-ASSETS> 3,234,202
<PP&E> 22,195,548
<DEPRECIATION> 2,625,092
<TOTAL-ASSETS> 23,735,335
<CURRENT-LIABILITIES> 5,194,556
<BONDS> 0
0
0
<COMMON> 4,535
<OTHER-SE> 3,496,795
<TOTAL-LIABILITY-AND-EQUITY> 23,735,335
<SALES> 0
<TOTAL-REVENUES> 5,622,337
<CGS> 0
<TOTAL-COSTS> 4,356,234
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 645,065
<INCOME-PRETAX> 829,607
<INCOME-TAX> 320,610
<INCOME-CONTINUING> 508,997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,382<F2>
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
<FN>
<F1>Other expenses and income for the period when netted together result in income
of $208,569, 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 Net Income and Income from Continuing Operations of
$62,615 relates to Minority Interests in Preferred Stock Dividends of
Consolidated Subsidiaries
</FN>
</TABLE>
