SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1995
Commission File Number 33-6658-C
Pioneer Railcorp
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(Exact name of Registrant as specified in its charter)
Iowa 37-1191206
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(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization)
1318 S. Johanson Rd
Peoria, IL 61607
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: 309-697-1400
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Securities registered pursuant to Section 12(g) of the Act:
Title of each Class Name of each exchange on which registered
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Common Stock, Class A Chicago Stock Exchange
Securities registered pursuant to 12(g) of the Act:
Common stock, Class A ($.001 par value) Common Stock, Class B (no par value)
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1995 were $8,577,421.
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 25, 1996 was $9,680,930
4,510,243
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(Shares of Common Stock outstanding on March 25, 1996)
<PAGE>
PART I
Item 1. Business
General
Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this Form 10-KSB, 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.), Wabash & Western Railway
Co. (WGRY) (formerly Wabash & Grand River Railway 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 andcommunications 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.
Railroad Operations
On October 1, 1988, Pioneer Railcorp became the lessee and operator of a
railroad line in Salem and Gloucester counties, New Jersey. On July 1, 1990,
Pioneer Railcorp assigned its lease to the West Jersey Railroad Co. (WJ), a
Class III common carrier freight railroad and a wholly-owned subsidiary of
Pioneer Railcorp. The lease ended April 30, 1995, and the WJ's offer to renew
the lease was not accepted.
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 traffic base on the FSR is very diversified with both inbound
and outbound shipments. 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.
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) and commenced operations soon thereafter. The purchase
was funded by issuing a mortgage note secured by the property for $300,000 and
issuing $432,000 of preferred stock. The line runs from Flomaton to Corduroy,
Alabama, and interchanges with CSX in Flomaton. The railroad's principal
commodities are outbound lumber products, primarily pulpwood, particle board,
and finished lumber.
On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. (which formed the shortline railroad and
operated it since 1982). This purchase was funded by cash, a note to Kyle
Railways, Inc. and by the assumption of debt. 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 NS at Grand Junction,
Tennessee and the 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.
<PAGE>
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 inbound resins, plastic pellets, fertilizer
and outbound peanuts, scrap plastic and pulpwood.
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. The Cisco segment runs from Green's Switch (Decatur) to Cisco,
Illinois, approximately thirteen (13) miles. The CISI segment runs from Elwin to
Assumption, Illinois, a distance of approximately seventeen (17) miles. The two
lines connect via trackage rights on the Illinois Central Railroad (IC) through
Decatur, Illinois, a distance of approximately eight (8) miles. Railroad
operations began on the Cisco segment December 3, 1993, and began on the CISI
segment December 7, 1993. Both leases run through December 31, 2006. Pioneer
Railcorp has a 10 year renewal option on the Cisco line. They require DT to
perform normalized maintenance on the line and for DT to compensate the owners
based upon the number of cars handled. This compensation requires the DT to pay
$10.00 per car on all cars over 1,000 per year on each segment.
On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company in exchange for $300,000 cash and the issuance
of 57,500 shares of Pioneer Railcorp Rule 144 restricted Class A common stock at
$4.87 per share. 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.
On December 12, 1994, Pioneer Railcorp's 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. 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 BNSF at Hanley
Falls, MN and the TCW at Norwood, MN. The railroad's principal commodities are
grain, clay, fertilizer, canned goods, dairy products, and particle board.
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 for
$300,000 cash and $200,000 of Pioneer Railcorp common stock. Those assets
include approximately 15 miles of track and right-of-way, extending from
Hartford to Paw Paw, in Van Buren County, 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) when they carry freight on non-company
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.
<PAGE>
Marketing
The Company's marketing department was established to foster continuing business
with existing customers and to develop and attract new customers and additional
loadings on all PRC railroads. The Company's marketing department is based in
Peoria, Illinois.
Distribution
Virtually all interchange traffic is with unionized Class I carriers, and a
prolonged work stoppage on those carriers would have a material adverse impact
upon the Company; however, there has never been such a prolonged work stoppage
of the American railroad industry, and the Company considers the chances of that
to be remote.
Suppliers
The Company does not believe that the loss of any supplier would have a material
adverse effect on it's business, as there are alternative suppliers available.
Competition
With respect to the industry in which PRC operates, the Company, like any other
railroad company, faces intense competition from the trucking industry, barge
lines and other railroads for moving commodities.
In regards to competition for additional railroads, as they become available on
the market, either as direct "spin-offs" from Class I Railroads or through the
secondary market, competition for these acquisitions is intense. The Company
believes that it has a competitive advantage for the acquisition of future Class
III Railroads due to several factors: (1.) the Company has acquired and
currently operates multiple railroads, (2.) the Company's experienced management
team, (3.) the Company's proficiency with industry-trend technologies desired by
Class I Railroads, such as Electronic Data Interchange (EDI), and (4.) the
quality of the Company's employees.
Regulations
The Company's subsidiaries are subject to regulation by the Surface
Transportation Board of the U.S. Department of Transportation, the Federal
Railroad Administration (FRA), and certain state and local jurisdictions, such
as state Departments of Transportation, in connection with some aspects of its
railroad operations. Such regulation affects rates, safety rules, maintenance of
track, other facilities, and right of way, and may effect the Company's revenues
and expenses. To date there has been no material effect on the Company's
operations because of regulatory action, nor does the Company expect any such
effect in the foreseeable future.
Employees
On December 31, 1995, the Company had 70 employees, 52 of whom are operating
personnel, 14 support staff and 4 were executive officers.
During 1994 the employees of the FSR voted for union representation.
Negotiations are underway with the American Train Dispatchers Union which may or
may not result in a contract in the future.
Item 2. Property
The Company purchased in October 1994 a 16,000 square foot building located in
Peoria, Illinois as a permanent corporate headquarters facility. The Company
moved its corporate office to these facilities in November 1994. With the
Company's business plan developing rapidly, the need for owned facilities with
ample room for expansion was addressed by this move. The Company's former
headquarters in Chillicothe, Illinois is being offered for sale or lease.
A description of the Company's railroad properties as of 12/31/95 by subsidiary
follows:
a.) Fort Smith Railroad Co. (FSR): The FSR leases a line of railroad 18
miles long from the Missouri Pacific Railroad Company (a subsidiary of
the Union Pacific Railroad Company). A twenty year lease was signed and
operations began on July 7, 1991. The line runs from Fort Smith to
Paris, Arkansas. The lease agreement contains numerous requirements
including maintaining existing traffic patterns, repair and replacement
of the right of way in the condition it was leased in and payment of
any applicable real estate taxes. The Company is entitled to a fixed
rate per carload switched from the UP/MP as well as ninety percent of
new leases and easements and fifty percent 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
rent. The Company has three twenty year renewal options. The FSR's
track is in good condition.
<PAGE>
b.) Alabama Railroad Co. (ALAB): The ALAB is a line totaling 60 miles of
operating railroad running from Flomaton to Corduroy, Alabama which was
purchased by the Company from CSX Transportation (CSX) on October 25,
1991. The purchase included both the track materials and underlying
real estate and also included some rail assets associated with a
connecting CSX line abandonment. These rail assets which were part of
the transaction included an additional 1.5 miles of real estate and
track materials and an additional 3.5 miles of track materials only,
which had to be removed within twelve months of the transaction. The
purchase was funded by issuing a mortgage note for $300,000 and issuing
$432,000 of preferred stock. The Company considers the track to be in
good condition.
c.) Mississippi Central Railroad Co. (MSCI): The MSCI, formerly Natchez
Trace Railroad (NTR), is a line totaling 56.5 miles of operating
railroad running from Oxford, Mississippi to Grand Junction, Tennessee.
Approximately 51 of the total miles are located in Mississippi. On
April 1, 1992, 100% of the common stock of this railroad was purchased
by the Company from Kyle Railways, Inc., which had operated the
shortline railroad since 1982. The purchase was funded by internal
cash, a note to Kyle Railways, Inc. and by assumption of the NTR's
debt. The Mississippi portion of the line was owned by the Layfayette,
Marshall and Benton Regional Railroad Authority and operated by the
MSCI under a lease-purchase arrangement. On December 21, 1993, MSCI
concluded the purchase of the Mississippi portion of the line from the
Rail Authority. The Company considers the track to be in good
condition, as several bridge and track rehabilitations have taken place
during the railroad's existence. On February 25, 1991, a large washout
occurred on the line a short distance from where the line enters the
city of Oxford, Mississippi, denying access to several MSCI customers.
In late 1995 the MSCI repaired the washout and re-opened the line. The
Company is actively pursuing new business on this segment of the line;
however no significant revenues were generated in 1995 as a result of
the washout repair.
d.) Alabama & Florida Railway Co. (AF): On November 23, 1992, the Company
purchased 76 miles of track facilities and railroad equipment from A&F,
Inc., which had been doing business as Alabama & Florida Railroad. This
railroad runs between Georgiana and Geneva, Alabama. The purchase was
funded by issuing a mortgage note for $1,750,000 and by the proceeds of
the issuance of $431,000 in preferred stock. The Company has an option
from CSX Transportation to negotiate a purchase price for the
underlying real estate and currently leases the property for a monthly
payment of $1,667. The Company has exclusive rights to the revenues
derived from the land leases and easements. In connection with the
operation of this line, the AF also leases from the Andalusia & Conecuh
Railroad Company a two mile segment of track connecting to the AF's
line in Andalusia, Alabama for $375 per month, plus $15 per car over
300 cars annually. The Company also absorbs the cost of all maintenance
of that facility. The Company considers the line to be in good
condition.
e.) Decatur Junction Railway Co. (DT): The DT leases from Cisco Co-op Grain
Company (CISCO) a segment of track, approximately thirteen (13) miles
in length, that runs from Green's Switch (Decatur, Illinois) to Cisco,
Illinois. The DT also leases a segment of track from Central Illinois
Shippers, Incorporated (CISI), approximately seventeen (17) miles in
length, that runs from Elwin to Assumption, Illinois. The two lines are
connected via trackage rights on the Illinois Central Railroad
(approximately eight miles) through Decatur, Illinois. The DT's track
is considered to be in good condition, as in recent years the owners of
the line received in excess of $1,000,000 in rehabilitation grants from
the Federal Railroad Administration (FRA). The Company is required to
perform normal track maintenance.
f.) Vandalia Railroad Company (VRRC): The VRRC is approximately 3.45 miles
of operating railroad located in Vandalia, Illinois. The railroad was
purchased with $300,000 cash and the issuance of 57,500 shares of Rule
144 restricted common stock of the Registrant. The VRRC has a lease
with the City of Vandalia for the 3.45 miles of railway. This lease is
renewable for ten year periods beginning in September 2003, and the
lease of $1 is prepaid through September 2003. After September 2003,
the lease payments will be equal to $10 per loaded rail car handled in
interchange. The Company considers the track to be in good condition.
<PAGE>
g.) Minnesota Central Railroad Co. (MCTA): On December 12, 1994 the Company
purchased approximately 94 miles of operating railroad and railroad
equipment from MNVA Railroad, Inc. The purchase was funded by the
assumption of debt totaling $1,656,173. Certain sections of the line
are in poor condition and the Company made a significant effort to
improve the line in 1995, and plans to repeat these efforts in 1996.
The Company decided against seeking rehabilitation grant funds from the
Minnesota Department of Transportation and believes it can improve the
track with its own resources.
h.) West Michigan Railroad Co. (WJ): 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 for $300,000
cash and $200,000 of Pioneer Railcorp common stock. Those assets
include approximately 15 miles of track and right-of-way, extending
from Hartford to Paw Paw, in Van Buren County, 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 Railcorp, 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.
Item 3. Legal Proceedings
Several lawsuits were pending by and against Pioneer Railcorp and/or its
subsidiaries (collectively, the "Company") during 1995.
The Company (through its Decatur Junction Railway Co. subsidiary) was involved
in litigation in both state and federal court against Indiana Hi-Rail
Corporation (the former operator of DT's lines). The cases involved alleged
breaches of contract by Indiana Hi-Rail Corporation ("IHRC"), and counter-claims
by IHRC against Pioneer Railcorp and DT. A settlement of all of thesecases was
reached with the Trustee of the IHRC's Bankruptcy Estate, and their dismissal is
pending. The settlement did not have a material effect on the Company's
consolidated financial position or results of operations.
Two lawsuits brought against the Fort Smith Railroad Co. by a former employee
went to trial during the third quarter of 1995. That trial resulted in the
dismissal of one action and a jury verdict in favor of the Company in the other
action. Neither of those results was appealed.
The Fort Smith Railroad was also involved as a Defendant in litigation arising
out of an accident which occurred on or about December 8, 1993 in which a
motorist was fatally injured when he collided with an FSR train at a crossing
near Lavaca, Arkansas. That case was settled prior to trial. FSR was required to
pay its insurance retention of $25,000, which had already been reserved for in
1994. The remainder of the settlement was paid by FSR's liability insurance
carrier.
There are a number of outstanding issues between Minnesota Central Railroad Co.
("MCTA") and MNVA Railroad, Inc. ("MNVA") and Dakota, Missouri Valley & Western
Railroad, Inc., remaining from the asset sale from MNVA to MCTA last December.
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 Company's consolidated
financial position or results of operations.
A Federal Employer's Liability Act ("FELA") lawsuit is also pending against the
Alabama & Florida Railway Co. in Alabama. That action was brought by a former
employee of a track contractor (or its sub-contractor), and is being defended by
the contractor pursuant to an indemnification agreement. The Company does not
believe it has any liability in the matter, and does not believe the case will
result in a material adverse effect on the Registrant's consolidated financial
position or results of operations.
The Company's subsidiary railroads have a number of claims against delinquent
licensees, customers and others, some of which are in litigation, and other of
which are likely to result in litigation. None of the amounts involved, however,
would have a material impact on the Company's consolidated financial position or
results of operations if they proved to be uncollectible.
<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,
and as of the date of this Form 10-KSB, management believes that no such
incident, which is not described herein, is likely to result in a liability that
would materially effect the Company's consolidated financial position or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to security holders for vote in the fourth
quarter 1995.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters.
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.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company's net income in 1995 increased by 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.
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 Co. lease in April 1995 and it's subsequent operation of the former
KLSC 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.
<PAGE>
Operating Expenses (general):
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 Co.
lease in April 1995 and it's subsequent operation of the former KLSC railroad,
had an immaterial effect on operating expenses in 1995.
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.
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.
<PAGE>
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 has $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.
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. 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. 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.
<PAGE>
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 .
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>
Item 7. Financial Statements
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>
Item 8. Changes In and Disagreements With Accountants on Accounting Financial
Disclosure
None.
PART III
Item 9. Directors and Executive Officers of the Registrant
Set forth below are the names and ages of all the directors and executive
officers of the Registrant and the positions and offices held by such persons as
of December 31, 1995.
Name (Age) Position
- ----------------------- -------------------------------
Guy L. Brenkman (48) Director (Chairman) & President
Orvel L. Cox (53) Director
John P. Wolk (46) Director and Treasurer
John S. Fulton (62) Director
J. Michael Carr (32) Director and Assistant Treasurer
Daniel A. LaKemper (38) Secretary
All of the above Directors and Officers were elected at the Tenth Annual Meeting
of the Stockholders (and the board meeting which followed) on June, 24 1995 to
serve until the next annual meeting. There is no family relationship between any
officer or director.
Information about Directors and Executive Officers
Mr. Brenkman, 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 of operational 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.
Mr. Cox, Director, also serves as same for each of the Company's subsidiaries
and Chief Mechanical officer 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 officer of Pioneer Railcorp since it's inception and
has been involved in all phases of the development and growth of the Company.
Mr. Wolk, Director and Treasurer for Pioneer Railcorp, was elected to the Board
in 1991. Mr. Wolk is Director of Distribution for Kimball International 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.
Mr. Fulton, Director, was elected to the Board in 1993. Mr. Fulton has 17 years
experience in the real estate business concentrating in retail sales, real
estate development and appraising. 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.
Mr. Carr, 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. 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.
Mr. LaKemper, Secretary, also serves as same for each of the Registrant's
subsidiaries. Mr. LaKemper is the Company's General Counsel and serves as same
for each of the Company's subsidiaries. Mr. LaKemper has been employed by the
Company since May 1992. Before joining the Company, Mr. LaKemper practiced law
since 1982 working in solo private practice and, most recently, as General
Counsel for a manufacturing concern. Mr. LaKemper holds a Juris Doctorate from
Creighton University School of Law in Omaha, Nebraska and a BS-History from
Bradley University in Peoria, Illinois.
<PAGE>
Item 10. Executive Compensation
Summary Compensation Table
- ------------------------------------
Annual
Compensation Long Term Compensation
--------------- -------------------------------------
Options/ Other
Name & Position Year Salary Stock Award SARs Compensation
- -------------------- ---- -------- ----------- -------- --------------
Guy L. Brenkman, CEO 1995 $310,546 0 37,000 $4,500 (a)
1994 $227,609 0 150,000 $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.B renkman - CEO 17,000 7% $4.40 7/5/00
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- --------------------------------------------------------------------------------
Value of
Unexercised
Number of Securities In-the Money
Underlying Unexercised Options/SARs
Options/SAR Options/SARs at FY-E At FY-End
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisble
- ---- --------------- ----------- ---------------------- --------------
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 $1,000 in 1995.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of March 26, 1996, the beneficial
ownership of all directors and officers of the Company as a group. These figures
include shares of Common Stock that the executive officers have the right to
acquire within 60 days of March 26, 1996 pursuant to the exercise of stock
options
and warrants.
Title of Class: Common Stock ($.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)
<PAGE>
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. (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.
Item 13. Exhibits and Reports on Form 8-K
Exhibit # 3(I) - Articles of Incorporation of the Company (incorporated by
reference to Exhibit 1 of the Company's registration statement of Form S-3 filed
July 7, 1995, amended August 30, 1995, September 20, 1995 and
September 25, 1995).
Exhibit # 3(ii) - Bylaws of the Company (incorporated by reference to Exhibit #2
of the Company's registration statement on Form S-8 filed January 31, 1996.)
Exhibit # 10.1 - Credit Agreement, dated March 8, 1996, between the Company and
Citizens Bank and Trust Company, Chillicothe , Mo.
Exhibit # 10.2 - Exhibits to Credit Agreement, dated March 8, 1996, between the
Company and Citizens Bank and Trust Company, Chillicothe , Mo.
Exhibit # 10.3 - Purchase agreement, dated March between the Company and John
Warfield, regarding the Company's purchase of controlling interest in KNRECO,
Inc., d/b/a Keokuk Junction Railway
Exhibit # 10.4 - 1994 Stock Option Plan for Pioneer Railcorp, (incorporated by
reference to Exhibit #3 of the Company's registration statement on Form S-8
filed January 31, 1996).
Exhibit # 10.5 - Form of incentive stock option under the 1994 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to Exhibit #4 of the Company's
registration statement on Form S-8 filed January 31, 1996).
<PAGE>
Exhibit # 10.6 - Form of option agreement for non-employee Directors under the
1994 Stock Option Plan for Pioneer Railcorp (incorporated by reference to
Exhibit #5 of the Company's registration statement on Form S-8 filed January 31,
1996).
Exhibit # 10.7 - Executive Contract (incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1994, filed March 31, 1995, amended
August 31, 1995 and September 20, 1995).
Exhibit # 21 - Subsidiaries of the registrant.
Exhibit # 27 - Financial Data Schedule.
The following reports were filed on Form 8-K during the fourth quarter 1995:
(1) Form 8-K filed November 21, 1995 regarding the purchase of 150 covered
hoppers from Norfolk and Western Railway Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PIONEER RAILCORP
(Registrant)
By:/s/ Guy L. Brenkman
----------------------------------------
Guy L. Brenkman, Director, President and
Chief Executive Officer
Dated: March 27, 1996
------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By:/s/ J. Michael Carr
----------------------------------------
J. Michael Carr, Assistant Treasurer,
Chief Financial Officer and Director
Dated: March 27, 1996
------------------------------------
By: /s/ Orvel Cox
----------------------------------------
Orvel Cox, Director
Dated: March 27, 1996
------------------------------------
By: /s/ John Fulton
---------------------------------------
John Fulton, Director
Dated: March 27, 1996
------------------------------------
LOAN AGREEMENT
This Loan Agreement, made and entered into this 8th day
of March 1996, by and between Citizens Bank and
Trust Company, of Chillicothe, Missouri, hereinafter "LENDER',
and Pioneer Railcorp, an Iowa Corporation, Alabama Railroad Co.,
an Iowa Corporation, and Mississippi Central Railroad Co., a
Mississippi Corporation, hereinafter collectively "BORROWER" and
respectively "Pioneer" and "Subsidiaries".
RECITALS
The parties recite and declare:
a. BORROWER has requested LENDER to lend to it up to the sum
of Two Million Five Hundred Thousand Dollars
($2,500,000) (the "loan amount") for a line of Credit Loan
(the "Loan").
b. LENDER is willing to lend BORROWER up to the sum of Two
Million Five Hundred Thousand Dollars ($2,500,000)
on the terms and conditions hereinafter set forth.
In consideration of the above recitals, the following
covenants and conditions, and other good and valuable
consideration, the receipt of which is acknowledged, the parties
agree as follows:
SECTION ONE
DEFINITIONS
a. "Borrower" shall mean Pioneer Railcorp, Alabama Railroad
Co., and Mississippi Central Railroad Co.
b. "Collateral documents" means all those documents
securing or perfecting security for the loan.
C. "It" or 'its", when used to identify Borrower, refers to
each of Pioneer Railcorp, Alabama Railroad Co., and Mississippi
Central Railroad Co. and when used to identify Subsidiaries,
refers to each of Alabama Railroad Co., and Mississippi Central
Railroad Co.
d. "Liquidated value" shall mean that value as determined
by a qualified independent analyst approved by Lender but
compensated by Borrower, after deduction of all projected
expenses required to generate sale of assets.
e. "Loan Amount" means the total credit available
hereunder, regardless of whether drawn upon or advanced.
f. "Market Value" shall mean that value as determined by a
qualified independent analyst approved by Lender but compensated
by Borrower, taking into account comparable short line sales.
g. "Permitted liens" means:
1. liens for taxes, assessments and similar charges,
incurred in the ordinary course of business, that are not
yet due and payable;
2. pledges or deposits made in the ordinary course of
business to secure payment of workers compensation, or to
participate in any fund in connection with workers
compensation, unemployment insurance, old-age pensions,
railroad retirement, employee medical insurance, or other
social security programs;
3. liens of mechanics, materialmen, warehousemen,
carriers, or other like liens, securing obligations incurred in
the ordinary course of business, that are not yet due and
payable; and
4. pledges or deposits made in the ordinary course of
business pursuant to the rights of preferred shareholders.
SECTION TWO
THE LOAN
a. Disbursement of the Loan. Advances of the loan within
the credit limit thereof shall be made by LENDER by crediting the
BORROWER'S deposit account with LENDER upon presentation to
LENDER of BORROWER'S written request and instructions, signed by
the authorized officer or officers of BORROWER. It is understood
and agreed, however, that LENDER is not obligated to make
advances at any time when there has been a default hereunder by
BORROWER that has not been cured to the satisfaction of LENDER.
b. The Note. At the time of making the loan, BORROWER will
execute and deliver a note to LENDER, in the form of that
attached as Exhibit "A".
C. Payments of Principal. The principal of any advance on
the Loan of less than Two Hundred Fifty Thousand
Dollars ($250,000) shall be repaid in full upon the termination
of this Loan Agreement. The principal of any advance on the Loan
of Two Hundred Fifty Thousand and NOIIOO Dollars ($250,000.00) or
more shall be amortized, with Interest as hereinafter provided,
over a seven (7) year period and paid monthly with interest,
commencing one (1) month from the date of such advancement.
d. Interest. Each advance shall bear interest at the
initial rate of eleven percent (11%) per annum, adjustable
quarterly to two and one-half percent (2.5%) over the New York
Prime Rate limited, however, to a one percent (1%) annual
increase or decrease, provided, interest shall not be adjusted to
exceed thirteen and one-half percent (13.5%) as a maximum rate nor
to reduce below ten percent (10%) per annum. Interest on any
advance on the Loan of less than Two Hundred Fifty Thousand
Dollars ($250,000) shall be payable upon termination of
this Loan Agreement. Interest on any advance on the Loan of Two
Hundred Fifty Thousand Dollars ($250,000) or more
shall be amortized with principal over a seven (7) year period
and paid monthly with such amortized principal, commencing one
(1) month from the date of such advancement.
e. Term of Loan Agreement. This loan agreement shall
extend for a term of one (1) year from the date of its execution.
f. Fees. Borrower shall pay to Lender a commitment fee
equal to one percent (1%) of the loan amount, payable one-half
percent (1/2%) at the time of loan closing, and payable one-half
percent (1/2%) at the time of the first advance on the loan amount,
which latter one-half percent (1/2%) may be a part of such advance.
SECTION THREE
CONDITIONS PRECEDENT
The obligation of LENDER to make the loan or to make
advances thereunder is subject to the following conditions
precedent:
a. Documents required for closing. Except as otherwise
hereinafter specifically provided, BORROWER shall have delivered
to LENDER, prior to disbursement (except for item vii below) of
the initial advance on the loan (the closing), the following:
i. The note (Exhibit "A" attached), signed in proper
form by the authorized officer of officers of BORROWER;
ii. A Pledge Agreement and Assignment in the form as
that attached hereto as Exhibit "B", together with
certificates representing the shares pledged and assigned,
together with a limited stock power in the form of that
attached hereto as Exhibit "C";
iii. A certified (as of the date of closing) copy of
resolutions of the respective boards of directors of
BORROWER authorizing the execution, delivery, and
performance of this Agreement, the note, the collateral
documents, and each other document to be delivered pursuant
hereto;
iv. Certified copies (as of date of closing) of
BORROWER'S respective By-Laws;
v. A Certificate (as of date of closing) of BORROWER'S
respective corporate secretaries as to incumbency and
signatures of the officers of BORROWER signing this
Agreement, the Note, the collateral documents, and each
other document to be delivered pursuant hereto;
vi. Copies, certified as of the most recent date
practicable, by the Secretaries of State of the States of
incorporation, of BORROWER'S certificates of incorporation,
together with a certificate (as of the date of closing) of
BORROWER'S corporate secretaries to the effect that such
certificates of incorporation have not been amended since
the dates of certification;
vii. Certificates, dated not more than 90 days
following the closing, of the Secretaries of State of the
States of incorporation, and of each state in which BORROWER
is qualified as a foreign corporation, as to the good
standing of BORROWER; and
viii. A written opinion of BORROWER'S counsel, as of
the date of closing and addressed to LENDER, in form
satisfactory to LENDER, to the effect that:
(A) Pioneer and Subsidiaries are corporations
organized, existing, and in good standing under the
laws of their respective states of Incorporation
(naming such states) and are qualified to transact
business and are in good standing in those states where
the nature of businesses or property owned by BORROWER
requires qualification and, to the knowledge of such
counsel, are not required to be qualified as foreign
corporations in any other jurisdiction;
(B) BORROWER has the power to execute and deliver
this Agreement, to borrow money hereunder, to grant the
collateral required hereunder, to execute and deliver
the note and the collateral documents, and to perform
such obligations;
(C) All corporate action by BORROWER, all consents
and approvals of any persons, necessary to the validity
of this Agreement, the note, the collateral documents,
and each other document to be delivered, has been duly
obtained, and this Agreement, the note, the collateral
documents, and such other documents do not conflict
with any provisions of the charter or by-laws of
BORROWER, of any applicable laws or any other agreement
binding BORROWER or its property of which such counsel
has knowledge;
(D) This Agreement, the note, the collateral
documents, and all other agreements to be delivered
hereunder have been executed by, and each is valid and
binding obligations of, BORROWER enforceable in
accordance with its terms;
(E) The pledged stock constituting all of the
issued and outstanding capital common stock of
Subsidiaries, and all pledged stock is fully paid and
non-assessable; and
(F) Such counsel is without any knowledge of any
matters contrary to the representations and warranties
contained in Section Five, Paragraph a;
ix. A certificate, as of the date of the closing,
signed by the presidents or a vice presidents of Pioneer
and Subsidiaries, to the effect that:
(A) The representations and warranties set forth
within Section Five, Paragraph a, are true as of the
date of the closing; and
(B) No event of default, and no event that with
the giving of notice or passage of time, or both, would
become such an event of default, has occurred as of
such date;
b. Certain events. At the time of the closing:
i. No event of default shall have occurred and be
continuing, and no event shall have occurred and be
continuing that, with the giving of notice or passage of
time, or both, would be an event of default;
ii. No material adverse change shall have occurred in
the financial condition of BORROWER since the date of this
Agreement or the closing, as applicable; and
iii. All of the collateral documents shall have
remained in full force and effect.
c. Legal Matters. At the time of the closing, all
incidental legal matters shall be satisfactory to Cleaveland,
Macoubrie & Cox, L.L.C., counsel to LENDER.
SECTION FOUR
COLLATERAL SECURITY
a. Composition of the collateral. The property in which a
security interest is granted pursuant to the provisions of
Paragraphs b and c of this Section is collectively called the
"collateral". The collateral, together with all of BORROWERIS
other property of any kind held by LENDER, shall stand as one
general, continuing, collateral security for all obligations of
BORROWER as herein evidenced and contained and may be retained by
LENDER until all such obligations have been satisfied in full.
b. Rights in property held by LENDER. As security for the
prompt satisfaction of all obligations, BORROWER assigns,
transfers, and sets over to LENDER all of its right, title, and
interest in and to, and grants LENDER a lien on and a security
interest in, all amounts that may be owing from time to time by
LENDER to BORROWER in any capacity, including, but not limited
to, any balance or share belonging to BORROWER, or any deposit or
other account with LENDER, which lien and security interest shall
be independent of any right of setoff that LENDER may have.
C. Rights in property held by BORROWER. As further
security for the prompt satisfaction of all obligations arising
under this Agreement, BORROWER pledges and assigns to LENDER all
outstanding capital common stock of Subsidiaries, consisting of
300,000 shares of capital common stock of Alabama Railroad Co. and
1,100,000 shares of capital common stock of Mississippi Central
Railroad Co.
d. Rights in property later acquired by BORROWER. As
additional security, BORROWER shall grant LENDER a valid first
lien and security interest, free of other encumbrances, in any
property acquired wholly or in part with loan proceeds. BORROWER
shall notify LENDER at least fifteen (15) days in advance of any
such intended acquisition. In the instance loan proceeds are
used to acquire a short line or other railroad, BORROWER shall
acquire the controlling interest therein and may not use loan
proceeds to purchase a minority interest.
e. Priority of liens. The above-stated liens shall be
first and prior liens except for permitted liens with respect to
property acquired by BORROWER with loan proceeds.
f. Financing statements.
i. BORROWER will:
(A) Join with LENDER in executing such financing
statements (including amendments and continuation
statements) in form satisfactory to LENDER, as LENDER
may from time to time specify;
(B) Pay to reimburse LENDER for all costs and
taxes of filing or recording the statements in such
public offices as LENDER may designate; and
(C) Take such other steps as LENDER may direct,
including the noting of LENDER'S lien on the collateral
and on any certificates of title therefor, to perfect
LENDER'S interest in the collateral.
ii. In addition to the foregoing, and not in
limitation thereof:
(A) A carbon, photographic, or other reproduction
of this Agreement shall be sufficient as a financing
statement and may be filed in any appropriate office in
lieu thereof; and
(B) To the extent lawful, BORROWER appoints LENDER
as its limited attorney-in-fact (without requiring
LENDER to act as such) to execute any financing
statement in the name of BORROWER, and to perform all
other acts that LENDER deems appropriate to preserve
and continue its security interest in, and to protect
and preserve, the collateral.
SECTION FIVE
REPRESENTATIONS AND WARRANTIES
a. original. To induce LENDER to enter into this
Agreement, BORROWER represents and warrants to LENDER as follows:
i. Pioneer and Subsidiaries are corporations duly
organized, validly existing, and in good standing under the
laws of the states of their incorporation; BORROWER has the
lawful power to own its properties and to engage in the
businesses it conducts, and is qualified and in good
standing as foreign corporations in the jurisdictions
wherein the nature of the businesses transacted by it or
property owned by it makes such qualification necessary;
ii. BORROWER is not in default with respect to any of
its existing indebtedness, and the making and performance of
this Agreement, the note, and the collateral documents will
not immediately or with the passage of time, or the giving
of notice, or both;
(A) Violate the charter or by-law provisions of
BORROWER, or violate any laws or result in a default
under any contract, agreement, or agreement to which
BORROWER is a party or by which BORROWER or its
property is bound; or
(B) Result in the creation or imposition of any
security interest in, or lien or encumbrance on, any of
the assets of BORROWER, except in favor of LENDER;
iii. BORROWER has the power and authority to enter
into and perform this Agreement, the note, and the
collateral documents, and to incur such obligations, and has
taken all corporate action necessary to authorize the
execution, delivery, and performance of this Agreement, the
note, and the collateral documents;
iv. This Agreement and the collateral documents are,
and the note when delivered will be, valid, binding, and
enforceable in accordance with their respective terms;
V. Except as disclosed in Exhibit _, there is no
pending order, notice, claim, litigation, proceeding, or
investigation against or affecting BORROWER, whether or not
covered by insurance, that would materially and adversely
affect the businesses or prospects of BORROWER if adversely
determined;
vi. BORROWER has good marketable title to all
collateral offered up to LENDER as security for the loan;
vii. The financial statements, including any schedules
and notes pertaining thereto, have been prepared in
accordance with generally accepted accounting principles
consistently applied, and fully and fairly present the
financial condition of BORROWER at the dates thereof and the
results of operations for the periods covered thereby, and
there have been no material adverse changes in the
consolidated financial condition or businesses of BORROWER
to the date hereof;
viii. As of closing, BORROWER has no material
indebtedness of any nature, including, but not limited to,
liabilities for taxes and of any interest or penalties
relating thereto, except to the extent reflected (in a
footnote or otherwise) and, reserved against in the December 31,
1995, financial statements, or any material indebtedness of
any nature not fully reflected and reserved against in the
December 31,1996, financial statements;
ix. Except as otherwise permitted in this Agreement,
BORROWER has filed all federal, state, and local tax returns
and other reports required by law to be filed prior to the
effective date hereof and that are material to the conduct
of its businesses; has paid or caused to be paid all taxes,
assessments, and other governmental charges that are due and
payable prior to the effective date thereof; and has made
adequate provision for the payment of such taxes,
assessments, or other charges accruing but not yet payable;
and BORROWER has no knowledge of any deficiency or
additional assessment in a materially important amount in
connection with any taxes, assessments, or charges, not
provided for on its books;
X. Except as otherwise disclosed in Exhibit _, or
except to the extent that the failure to comply would not
materially interfere with the conduct of the businesses of
BORROWER, BORROWER has complied with all applicable laws
with respect to:
(A) The conduct of its businesses; and
(B) The use, maintenance, and operation of the
real and personal properties owned or leased in the
conduct of its businesses;
xi. No representation or warranty by BORROWER contained
herein or in any certificate or other document furnished by
BORROWER pursuant hereto contains any untrue statement of
material fact or omits to state a material fact necessary to
make such representations or warranty not misleading in
light of the circumstances under which it was made;
xii. Each consent, approval or authorization of, or
filing, registration, or qualification with, any person
required to be obtained or effected by BORROWER in
connection with the execution and delivery of this
Agreement, the note, and the collateral documents, or the
undertaking or performance of such obligations, has been
obtained or effected.
SECTION SIX
BORROWER'S COVENANTS
BORROWER covenants and agrees with LENDER that, so long as
any of its obligations arising under this Agreement remain
unsatisfied, BORROWER will comply with the following covenants:
a. Affirmative covenants.
i. BORROWER will use the proceeds of the loan only for
purposes promotive of its current businesses, specifically
for the acquisition of assets or entities consistent with
short line rail operations.
ii. BORROWER shall promptly furnish LENDER with true
and complete copies of all filings made by BORROWER with the
Securities and Exchange Commission, including particularly,
but not limited to, copies of all 10 Q filings and all 10 K
filings, the latter to include: (I) A consolidated statement
of shareholders' equity and a consolidated statement of
changes in financial position of BORROWER for such fiscal
year; (II) consolidated and consolidating income statements
of BORROWER for such fiscal year; and (III) consolidated and
consolidating balance sheets of BORROWER as of the end of
such fiscal year-all in reasonable detail, including all
supporting schedules and comments-the consolidated statement
and balance sheet to be audited by independent certified
public accountant selected by BORROWER and acceptable to
LENDER (which acceptance shall not be unreasonably
withheld), and certified by such accountants to have been
prepared in accordance with generally accepted accounting
principles consistently applied by BORROWER, except for any
inconsistencies explained in such certificate. In addition,
BORROWER will obtain from such independent certified public
accountants and deliver to LENDER, within ninety (90) days
after the close of each fiscal year, the accountants'
written statement that, in making the examination necessary
to their certification, they have obtained no knowledge of
any event of default by BORROWER, or disclosing all events
of default of which they have obtained knowledge; provided,
however, that in making their examination such accountants
shall not be required to go beyond the bounds of generally
accepted auditing procedures for the purpose of certifying
financial statements; LENDER shall have the right, from time
to time, to discuss BORROWER'S affairs directly with
BORROWER'S independent certified public accountants after
written notice to BORROWER and opportunity of BORROWER to be
present at any such discussion.
iii. BORROWER will maintain its inventory, equipment,
real estate, and other properties in good condition and
repair (normal wear and tear excepted); will pay and
discharge or will cause to be paid and discharged when due,
the cost of repairs to or maintenance of the same; and will
pay or cause to be paid all rental or mortgage payments due
on such real estate.
iv. BORROWER will maintain, or cause to be maintained,
public liability insurance and fire and extended coverage
insurance on all buildings owned by it exceeding $10,000.00
in value. BORROWER will furnish to LENDER such evidence of
insurance as LENDER may require.
v. BORROWER will pay or cause to be paid when due all
taxes, assessments, and charges or levies imposed on it or
on any of its property or that it is required to withhold
and pay over, except when contested in good faith by
appropriate proceedings, with adequate reserves therefor
having been set aside on their books. But BORROWER shall
pay or cause to be paid all such taxes, assessments,
charges, or levies promptly when foreclosure on any lien
that has attached (or security therefor) appears imminent.
vi. BORROWER will maintain and provide evidence to
Lender's satisfaction, at least annually, of:
(A) Market values of Subsidiaries of at least one
hundred fifty percent (150%) of loan amount; and
(B) Liquidation values of Subsidiaries of at least
one hundred ten percent (110%) of loan amount.
vii. BORROWER, within a reasonable time after written
request therefor, will make available for inspection by
authorized representatives of LENDER, any of its books and
records, and will furnish LENDER any information regarding
its business affairs and financial condition.
viii. BORROWER will collect is accounts and sell its
inventory only in the ordinary course of business.
ix. BORROWER will keep accurate and complete records
of its accounts, inventory, and equipment, consistent with
sound business practices.
x. BORROWER will give immediate notice to the LENDER of
any extraordinary event involving it that might materially
and adversely affect is operations, financial condition,
property, or businesses.
xi. Within thirty (30) days after LENDER'S request
therefor, BORROWER will furnish LENDER with copies of
federal income tax returns filed by BORROWER.
xii. BORROWER will pay when due (or within applicable
grace periods) all indebtedness due third persons, except
when the amount is being contested in good faith by
appropriate proceedings and with adequate reserves therefor
being set aside on the books of BORROWER. If BORROWER
defaults in the payment of any principal (or installment
thereof) of, or interest on, any such indebtedness, LENDER
shall have the right, in its discretion, to pay such
interest or principal for the account of BORROWER and be
reimbursed by BORROWER on demand.
xiii. BORROWER will notify LENDER immediately if it
becomes aware of the occurrence of any event of default or
of any fact, condition, or event that, with the giving of
notice or passage of time, or both, could become an event of
default, or of the failure of BORROWER to observe any of its
undertakings under this Agreement.
xiv. BORROWER will notify LENDER thirty (30) days in
advance of any change in the location of any of its places
of business or of the establishment of any new, or the
discontinuance of any existing, place of business.
xv. BORROWER will:
(A) Fund all its defined benefit pension plans, if
any, in accordance with no less than the minimum
funding standards required under ERISA;
(B) Furnish LENDER, upon request, promptly after
the filing of the same, with copies of all reports or
other statements filed with the United States
Department of Labor or the Internal Revenue Service
with respect to all employee benefit plans; and
(C) Promptly advise LENDER of any reportable event
or prohibited transaction, as defined in ERISA, with
respect to any employee benefit plan.
b. Negative covenants.
i. BORROWER will not change its name, enter into any
merger, consolidation, reorganization or recapitalization,
or reclassify its capital stock without prior written
approval of LENDER, which approval shall not be unreasonably
withheld.
ii. BORROWER will not sell, transfer, lease, or
otherwise dispose of all, or (except in the ordinary course
of business) any material part of, its assets.
iii. SUBSIDIARIES will not mortgage, pledge, grant, or
promote to exist a security interest in or lien on any of
its assets of any kind, now owned or hereafter acquired,
except for permitted liens and except for the security
interest to LENDER herein provided for.
iv. SUBSIDIARIES will not become liable, directly or
indirectly, as guarantor or otherwise, for any obligation of any
other person or entity, except for the endorsement of commercial
paper for deposit or collection in the ordinary course of business.
v. SUBSIDIARIES will not, except upon prior written approval
of LENDER, incur, create, assume, or permit to exist any additional
indebtedness except:
(A) The loan;
(B) Trade indebtedness incurred in the ordinary course
of business; and
(C) Indebtedness secured by permitted liens.
(D) Equipment leases as defined in sub-paragraph ix
below.
vi. SUBSIDIARIES will not declare or pay any dividends, or
make any other payment or distribution on account of its capital
stock other than preferred stock, excepting dividends of normal
operating profits.
vii. BORROWER will not form any subsidiary or make any
investment in, or make any loan in the nature of an investment to,
another person or entity, of a value in excess of $50,000, except
for those in the ordinary course of business:
(A) for the purposes of this Loan Agreement, or
(B) to entities wholly owned and controlled by BORROWER.
viii. BORROWER will not make any loan or advance to any
officer, shareholder, director, or employee of BORROWER,
except temporary advances in the ordinary course of
business, without prior written approval of LENDER, nor
increase salaries or bonuses to executive and management
personnel to more than 120% of current levels except
pursuant to current agreements or contracts as disclosed to
LENDER.
ix. SUBSIDIARIES will not increase any of its lease
obligations except for new leases on terms equivalent to or
superior than those commonly found in the market, which new
leases shall be so certified to Lender by BORROWERS chief
financial officer(s). As used in this paragraph, the term
"lease" means a lease reflected on the consolidated balance
sheet of Subsidiaries or a lease that should be so reflected
under generally accepted accounting principles.
x. SUBSIDIARIES will not purchase, or otherwise invest
in or hold, securities, nonoperating real estate, or other
nonoperating assets, except:
(A) Direct obligations of the United States of
America;
(B) The present investment in any such asset; and
(C) Operating assets that hereafter become
nonoperating assets.
Subsidiaries may, however, the foregoing notwithstanding,
purchase, invest in, or hold, nonoperating real estate or
interests therein purchased or acquired for reasonable
prospective inclusion in operations provided that not more
than $50,000 is expended for such purchase or acquisition
annually unless prior written approval for a greater
expenditure is obtained from LENDER.
xi. Subsidiaries will not issue, redeem, purchase, or
retire any of its capital stock or grant or issue any
warrant, right, or option pertaining thereto, or other
security convertible into any of the foregoing, excepting
the existing rights of preferred shareholders of the
Mississippi Central Railroad Co.
xii. BORROWER will not prepay any subordinated
indebtedness, indebtedness for borrowed money, or
indebtedness secured by any of its assets (except the Loan
and except indebtedness incurred in the ordinary course of
business) or enter into or modify any agreement as a result
of which the terms of payment of any of the foregoing
indebtedness are waived or modified.
xiii. SUBSIDIARIES will not enter into any sale-
leaseback transaction.
xiv. SUBSIDIARIES will not acquire any stock in, or all
or substantially all of the asset of, any other person or
entity, except as authorized herein.
xv. BORROWER will not furnish LENDER with any
certificate or other document that will contain any untrue
statement of material fact or that will omit to state a
material fact necessary to make it not misleading in light
of the circumstances under which it was furnished.
xvi. BORROWER will not directly or indirectly apply any
part of the proceeds of the loan to the purchasing or
carrying of any "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal
Reserve System, or any regulations, interpretations, or
rulings thereunder.
xvii. BORROWER will not, except, upon prior written
approval of LENDER, make any substantial change in its
management or in its principal purpose of businesses.
xviii. BORROWER will not use loan proceeds or any
advancement on the loan, in whole or in part, for payment of
normal operating expenditures of current businesses.
SECTION SEVEN
DEFAULT
a. Events of default. The occurrence of any one or more of
the following events shall constitute an event of default under
this Agreement.
i. BORROWER shall fail to pay when due any installment
of principal or interest, or any fee or charge payable
hereunder, and such failure shall continue for a period of
thirty (30) days.
ii. BORROWER shall fail to observe or perform any other
obligation to be observed or performed by it hereunder or
under any of the collateral documents, and this failure
shall continue for thirty (30) days after: (A) Notice of the
failure from the LENDER; or (B) the LENDER is notified of
the failure or should have been so notified pursuant to the
provisions of Paragraph a (xiv) of Section Six, whichever is
earlier.
iii. BORROWER shall fail to pay any indebtedness due to
any third persons, and this failure shall continue beyond
any applicable grace period, unless such indebtedness is
material in nature and is contested in good faith, or
BORROWER shall suffer to exist any other event of default
under the Agreement binding BORROWER.
iv. BORROWER shall fail to pay when due any sum owing
to LENDER, or fail to observe or perform in favor of LENDER,
under any other loan agreement, note or contractual
undertaking with LENDER, allowing agreed upon grace periods.
v. Any financial statement, representation, warranty,
or certificate made or furnished by BORROWER to LENDER in
connection with this Agreement, or as inducement to LENDER
to enter into this Agreement, or in any separate statement
or document to be delivered hereunder to LENDER, shall be
materially false, incorrect, or incomplete when made,
providing, no such false, incorrect or incomplete statement,
representation, warranty or certificate shall constitute a
default if such statement, representation, warranty or
certificate was, when given and thereafter, when relied upon
by LENDER, truthful to the best knowledge and belief of
BORROWER.
vi. BORROWER shall admit its inability to pay its debts
as they mature, or shall make an assignment for the benefit
of its or any of its creditors.
vii. Proceedings in bankruptcy, or for reorganization
of BORROWER, or for the readjustment of any of its
respective debts, under the Bankruptcy Code, as amended, or
any part thereof, or under any other laws, whether state or
federal, for the relief of debtors, now or hereafter
existing, shall be commenced against BORROWER and shall not
be discharged within sixty (60) days of their commencement,
or any such proceeding shall be commenced by BORROWER.
viii. A receiver or trustee shall be appointed for
BORROWER or for any substantial part of its respective
assets, or any proceedings shall be instituted for the
dissolution or the full or partial liquidation of BORROWER,
and the receiver or trustee shall not be discharged within
sixth (60) days of his or her appointment, or the
proceedings shall not be discharged within sixty (60) days
of their commencement, or BORROWER shall discontinue
business or materially change the nature of its businesses.
ix. BORROWER shall suffer a final judgment or final
judgments for payment of money aggregating in excess of
Twenty-Five Thousand Dollars ($25,000) and shall
not discharge the same within a period of ninety (90) days,
unless, pending further proceedings, execution has not been
commenced or, if commenced, has been effectively stayed.
x. A judgment creditor of BORROWER shall obtain
possession of any of the collateral by any means, including,
but without limitation, levy, distraint, replevin, or self-
help, providing such action represents a material part of
collateral.
xi. Any obliges of subordinated indebtedness shall fail
to comply with the subordination provisions of the
instruments evidencing the subordinated indebtedness.
b. Acceleration. Immediately, and without notice, on the
occurrence of an event of default specified in Paragraphs a(v)
through a (viii) of this Section, or at the option of LENDER if
LENDER shall reasonably deem itself insecure, or on the
occurrence of any other event of default, but only on written
notice, all obligations, whether hereunder or otherwise, shall
immediately become due and payable without further action of any
kind.
C. Remedies. After any acceleration, as provided in
Paragraph b of this Section, LENDER shall have, in addition to
the rights and remedies given to it by this Agreement, the note,
and the collateral documents, all those rights and remedies
allowed by all applicable laws, including, but not limited to,
the Uniform Commercial Code as enacted in any jurisdiction in
which any collateral may be located. Without limiting the
generality of the foregoing, LENDER, immediately and without
demand of performance and without other notice-except as
specifically required by this Agreement or the collateral
documents-or any demand whatsoever to BORROWER, all of which are
hereby expressly made, and, without advertisement, may sell at
public or private sale, or otherwise realize on, in Chillicothe,
Missouri, or elsewhere, the whole, or from time to time, any part
of the collateral, or any interest that BORROWER may have
therein. After deducting from the proceeds of sale or other
disposition of the collateral all expenses, including all
reasonable expenses for legal services, LENDER shall apply such
proceeds towards the satisfaction of the obligations. Any
remainder of the proceeds after satisfaction in full of the
obligations shall be distributed as required by applicable laws.
Notice of any sale or other disposition shall be given to
BORROWER at least fifteen (15) days before the time of any
intended public sale or of the time after which any intended
private sale or other disposition of the collateral is to be
made, which BORROWER hereby agrees shall be reasonable notice of
such sale or other disposition. BORROWER agrees to assemble, or
cause to be assembled, at its own expense the collateral at such
place or places as LENDER shall designate. At any such sale or
other disposition, LENDER, to the extent permissible under
applicable laws, may purchase the whole or any part of the
collateral, free from any right of redemption on the part of
BORROWER, which right is hereby waived and released. Without
limiting the generality of any of the rights and remedies
conferred on LENDER under this paragraph, LENDER, to the full
extent permitted by applicable laws, may:
i. Enter on the premises of BORROWER, exclude
therefrom BORROWER or any affiliate, and take immediate
possession of the collateral, either personally or by means
of a receiver appointed by a court of competent
jurisdiction;
ii. At LENDER'S option, use, operate, manage, and
control the collateral in any manner;
iii. Collect and receive all rents, income, revenue,
earnings, issues, and profits) and
iv. Maintain, repair, renovate, alter, or remove the
collateral as LENDER may determine in its discretion.
SECTION EIGHT
CONSTRUCTION OF AGREEMENT
The provisions of this Agreement shall be in addition to
those of any guaranty, pledge, security agreement, note, or other
evidence of liability held by LENDER, all of which shall be
construed as complementary to each other. Nothing herein
contained shall prevent LENDER from enforcing any or all other
notes, guaranty, pledge, or security agreements in accordance
with their respective terms.
SECTION NINE
FURTHER ASSISTANCE
From time to time, BORROWER shall execute and deliver to
LENDER such additional documents and will provide such additional
information as LENDER may reasonably require to carry out the
terms of this Agreement and be informed of BORROWER'S status and
affairs.
SECTION TEN
ENFORCEMENT AND WAIVER BY LENDER
LENDER shall have the right at all times to enforce the
provisions of this Agreement and the collateral documents in
strict accordance with their terms, notwithstanding any conduct
or custom on the part of LENDER in refraining from so doing at
any time or times. The failure of LENDER at any time or times to
enforce its rights under such provisions, strictly in accordance
with the same, shall not be construed as having created a custom
in any way or manner contrary to specific provisions of this
Agreement or as having in any way or manner modified or waived
the same. All rights and remedies of LENDER are cumulative and
concurrent, and the exercise of one right or remedy shall not be
deemed a waiver or release of any other right or remedy.
SECTION ELEVEN
EXPENSES OF LENDER
BORROWER, on demand, will reimburse LENDER for all expenses,
including the reasonable fees and expenses of legal counsel for
LENDER, incurred by LENDER in connection with the preparation,
administration, amendment, modification, or enforcement of this
Agreement and the collateral documents, and the collection or
attempted collection of the note.
SECTION TWELVE
NOTICE
Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if
delivered in person, or, if sent, by certified mail, postage
prepaid, return receipt requested, or telegraph, as follows,
unless such address is changed by written notice.
a. If to BORROWER: ATTN: Guy Brenkman, 1318 South Johanson
Rd., Peoria, Illinois, 61607.
b. If to LENDER: ATTN: Andrew Coffelt, P.O. Box 50,
Chillicothe, Missouri, 64601.
SECTION THIRTEEN
WAIVER AND RELEASE BY BORROWER
To the maximum extent permitted by applicable laws,
BORROWER:
a. Waives (i) protest of all commercial paper at any time
held by the LENDER on which the BORROWER is in any way liable;
and (ii) notice of acceleration and of intention to accelerate,
and notice and opportunity to be heard, after acceleration,
exercised by LENDER of the remedies of self-help, set off, or of
other summary procedures committed by any applicable laws or by
any agreement with BORROWER, and, except when required hereby or
by any applicable laws, notice of any other action taken by
LENDER; and
b. Releases LENDER and its officers, attorneys, agents, and
employees from all claims for loss or damage caused by any act or
omission on the part of any of them, except wilful misconduct.
SECTION FOURTEEN
GOVERNING LAW
It is agreed that this Agreement shall be governed by,
construed, and enforced in accordance with the laws of the State
of Missouri.
SECTION FIFTEEN
BINDING EFFECT
This Agreement shall inure to the benefit of, and shall be
binding on, the respective successors and permitted assigns of
the parties.
SECTION SIXTEEN
ASSIGNMENT
BORROWER has no right to assign any of its rights or
obligations under this Agreement without the prior, express, and
written consent of LENDER, which consent shall not be withheld
unreasonably. LENDER shall not market the Loan on an individual
basis.
SECTION SEVENTEEN
ENTIRE AGREEMENT
This Agreement shall constitute the entire Agreement between
the parties and any prior understanding or representation of any
kind preceding the date of this Agreement shall not be binding on
either party except to the extent incorporated in this Agreement.
SECTION EIGHTEEN
MODIFICATION OF AGREEMENT
Any modification of this Agreement or additional obligation
assumed by either party in connection with this Agreement shall
be binding only if evidenced in writing signed by each party or
an authorized representative of each party.
SECTION NINETEEN
ATTORNEYS FEES
In the event any action is filed in relation to this
Agreement, the unsuccessful party in the action shall pay to the
successful party, in addition to all sums that either party may
be called on to pay, a reasonable sum for the successful party's
attorney fees.
SECTION TWENTY
PARAGRAPH HEADINGS
The titles to the paragraphs of this Agreement are solely
for the convenience of the parties and shall not be used to
explain, modify, simplify, or aid in the interpretation of the
provisions of this Agreement.
SECTION TWENTY-ONE
SEVERABILITY
In any provision of this Agreement shall be held invalid
under any applicable laws, such invalidity shall not affect any
other provision of this Agreement that can be given effect
without the invalid provision, and, to this end, the provisions
of this Agreement are severable.
SECTION TWENTY-TWO
COUNTERPARTS
This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute but one and the same
instrument.
SECTION TWENTY-THREE
SEAL
This Agreement is intended to take effect as an instrument
under seal.
IN WITNESS WHEREOF, each party has caused this Agreement to
be executed by an authorized representative on the date indicated
above.
Citizens Bank and Trust Company
By: /s/ Andy B. Coffelt, V.P.
Pioneer Railcorp
By: /s/ Guy L. Brenkman, CEO
Alabama Railroad Co.
By: /s/ Guy L. Brenkman, President
Mississippi Central Railroad Co.
By: /s/ Guy L. Brenkman, President
EXHIBIT "A"
PROMISSORY NOTE
Principal Loan Date Maturity Loan No. Call Collateral
$2,500,000.00
Account Officer Initials
ABC
Borrower: Pioneer Railcorp (TIN:)
Alabama Railroad Co. (TIN:)
Mississippi Central Railroad Co. (TIN:)
Lender: Citizens Bank and Trust Company
Main office
700 Jackson Street, P.O. Box 50
Chillicothe, Missouri 64601
Principal Amount $2,500,000 Interest Rate: 11%
Date of Note:
PROMISE TO PAY PRINCIPAL AND INTEREST. For value received,
Pioneer Railcorp, an Iowa Corporation, Alabama Railroad Co., an
Iowa Corporation, and Mississippi Central Railroad Co., a
Mississippi Corporation, with its principal place of business at
Holly Springs, Mississippi, ("Borrower"), promise to pay to the
order of Citizens Bank and Trust Company, of Chillicothe,
Missouri, ("Lender") the principal sum of Two Million Five
Hundred Thousand Dollars ($2,500,000), or the
aggregate unpaid principal amount of all advances thereon,
pursuant to a "Loan Agreement" of even date (the "Loan") all as
follows, to-wit; The principal of any advance on the Loan of less
than Two Hundred Fifty Thousand Dollars ($250,000)
shall be paid in full upon the termination of the Loan Agreement.
The principal of any advance on the Loan of Two Hundred Fifty
Thousand Dollars ($250,000) or more shall be
amortized, with interest as hereinafter provided, over a seven
(7) year period and paid monthly with interest, commencing one
(1) month from the date of such advancement.
Each advance shall bear interest at the initial rate of eleven
percent (11%) per annum, adjustable quarterly to two and one-half
percent (21/2%) over New York Prime, limited, however, to a one
percent (1%) annual increase or decrease, provided, interest
shall not be adjusted to exceed thirteen and one-half percent
(13 1/2%) as a maximum rate nor to reduce below ten percent (10%)
per annum. Interest on any advance on the Loan of less than Two
Hundred Fifty Thousand Dollars ($250,000) shall be
payable upon termination of the Loan Agreement. Interest on any
advance on the Loan of Two Hundred Fifty Thousand and N01100
Dollars ($250,000.00) or more shall be amortized with principal
over a seven (7) year period and paid monthly with such amortized
principal, commencing one (1) month from the date of such
advancement.
PREPAYMENT. Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due.
LATE CHARGE. If a payment is 16 days or more late, Borrower will
be charged 5.000% of the regularly scheduled payment.
DEFAULT. Borrower will be in default upon the occurrence of any
Event of Default as provided in Section Seven of the Loan
Agreement.
LENDER'S RIGHTS. Upon the occurrence of an Event of Default, or
upon the occurrence of any event authorizing Lender to accelerate
the full and complete payment of this Note, as provided in
Section Seven of said Loan Agreement, Lender may exercise any or
all of those remedies provided in said Section Seven of the Loan
Agreement.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00
if Borrower makes a payment on Borrower's loan and the check or
pre-authorized charge with which Borrower pays is later
dishonored.
RIGHTS OF SETOFF. Borrower grants to Lender a contractual
possessory security interest in, and hereby assigns, conveys,
delivers, pledges, and transfers to Lender all Borrower's right,
title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else
and all accounts Borrower may open in the future, excluding
however all IRA, Keogh, and trust accounts. Borrower authorizes
Lender, to the extent permitted by applicable law, to charge or
setoff all SUMS owing on this Note (except non-material amounts
being negotiated in good faith) against any and all such accounts
in the event of default and allowance of all applicable grace
periods.
LINE OF CREDIT. This Note evidences a revolving line of credit.
Advances under this Note may be requested by Borrower only as
provided in the Loan Agreement. All communications, instruction,
or directions to Lender are to be directed to Lender's office
shown above. The following party or parties are authorized as
provided in this paragraph to request advances under the line of
credit until Lender receives from Borrower at Lender's address
shown above written notice of revocation of their authority: GUY
BRENKMAN. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized
person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may
be evidenced by endorsements on this Note or by Lender's internal
records. Lender will have no obligation to advance funds under
this Note if: (a) Borrower or any guarantor is in default under
the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any
guarantor seeks, claims or otherwise attempts to limit, modify or
revoke such guarantor's guarantee of this Note or any other loan
with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender; or
(a) Lender in good faith deems itself insecure under this Note,
the Loan Agreement, or any other agreement between Lender and
Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of
its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses
this Note, to the extent allowed by law, waive presentment,
demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may
renew or extend (repeatedly and for any length of time) this
loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties
also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE
NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO
FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO
EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU
(BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR
DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE
CONTAINED IN THIS WRITING AND THE LOAN AGREEMENT EXECUTED ON EVEN
DATE, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE
AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO
MODIFY IT.
Borrower:
Pioneer Railcorp
By: /s/ Guy Brenkman
Its: CEO
Alabama Railroad Co.
By: /s/ Guy Brenkman
its: President
Mississippi Central Railroad Co.
By:/s/ Guy Brenkman
Its: President
EXHIBIT "B"
PLEDGE AGREEMENT AND ASSIGNMENT
This Agreement, made and entered into this 8th day of
March, 1996, by and between Citizens Bank and Trust
Company, of Chillicothe, Missouri, hereinafter "LENDER", and
Pioneer Railcorp, an Iowa Corporation, hereinafter "PLEDGOR".
WITNESSETH:
1. In order to induce LENDER to make certain financial
accommodations to PLEDGOR and its subsidiaries, and to secure to
LENDER repayment thereof in a timely manner, all as provided by
the terms of that certain "Loan Agreement" dated March 8th, 1996,
PLEDGOR hereby pledges, delivers over and assigns to LENDER
as collateral security the following capital common shares of
stock, to-wit:
300,000shares of Alabama Railroad Co., an Iowa Corporation,
1,100,000 shares of Mississippi Central Railroad Co., a
Mississippi Corporation.
2. If, with the consent of LENDER, PLEDGOR shall substitute
or exchange other securities in place of those herein mentioned,
all of the rights and privileges of LENDER and all of the
obligations of PLEDGOR with respect to the certificates Of stock
originally pledged or held as collateral hereunder shall be
forthwith applicable to such substituted or exchanged securities.
3. During the term of this Agreement, and provided that
PLEDGOR is not in default hereof, PLEDGOR shall have the right to
vote all stock pledged hereunder and LENDER shall execute due and
timely proxies, If necessary, in favor of PLEDGOR for this
purpose.
4. In the event that during the term of this Agreement,
subscription warrants or any other rights or options shall be
issued in connection with said stock, such warrants, rights and
options shall be immediately assigned by LENDER to PLEDGOR. if
any of such warrants, rights or options are exercised by PLEDGOR,
all new certificates of stock so acquired by PLEDGOR shall be
immediately assigned to LENDER to be held under the terms hereof
in the manner as the certificates of stock originally pledged
under this Agreement.
5. Upon occurrence of any default, as defined in the "Loan
Agreement", or upon any occurrence resulting in acceleration of
payment of any indebtedness due Lender by Pledgor, all
indebtedness secured hereby shall, at the option of LENDER,
become immediately due and payable, notwithstanding any credit or
extension of time allowed, and LENDER shall thereupon have all of
the rights and remedies granted in the "Loan Agreement".
Compliance by LENDER with the provisions of any law prohibiting
LENDER from selling evidences of debt under pledge is hereby
expressly waived.
6. This Agreement shall constitute a continuing agreement
applying to any and all future, as well as existing, transactions
between PLEDGOR and LENDER, and all powers, rights, privileges,
obligations, and duties herein set forth shall apply to, inure to
the benefit of, and be binding on the successors and assigns of
the parties hereto, until terminated upon full payment of the
indebtedness due LENDER by PLEDGOR. Upon full payment of the
Loan and termination of the Loan Agreement or any extension
thereof, LENDER will appropriately release said shares and any
other collateral.
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement to triplicate copies thereof, each of which shall be
considered an original, the day and year first above written.
Citizens Bank and Trust Company
By: /s/ Andy B. Coffelt, V.P.
LENDER
Pioneer Railcorp
By:/s/ Guy Brenkman, CEO
PLEDGOR
EXHIBIT "C"
LIMITED STOCK POWER
For value received, the undersigned (hereinafter "Borrower")
hereby orders, assigns and transfers to Citizens Bank and Trust
Company, of Chillicothe, Missouri (hereinafter "Lender")
1,100,000 shares of Mississippi Central Railroad Co. capital stock,
300,000 shares of Alabama Railroad Co. Outstanding
in Borrower's name on the books of such corporation,
represented by certificate no(s).2- Alabama Railroad Co., Number 1
Mississippi Central Railroad Co.
solely as security for the
repayment of all indebtedness due or to be due Lender (the
"Loan"), and as security for the performance and observance of
all covenants and obligations of Borrower in connection
therewith, all as evidenced and reflected by the following ("Loan
Documents"):
Note dated: March 8th, 1996
Loan Agreement dated: March 8th, 1996
Pledge agreement and assignment dated: March 8th, 1996
Borrower hereby irrevocably constitutes and appoints Lender
attorney-in-fact to transfer such stock on the books of said
Corporation and to negotiate said stock in the event of a default
of Borrower or specified under the Loan Documents or any
extension or renewal thereof.
IN WITNESS WHEREOF, Borrower has executed this Limited Stock
Power this 8th day of March, 1996.
Pioneercorp
By: Guy L. Brenkman - CEO
Borrower
STOCK PURCHASE AND SALE AGREEMENT
THIS STOCK PURCHASE AND SALE AGREEMENT ("Agreement"), dated
this 29th. day of February, 1996, by and between PIONEER RAILCORP,
an Iowa corporation ("Pioneer"), and JOHN WARFIELD, an individual
whose principal place of business is at 117 S. Water St., Keokuk,
Iowa 526322 ("Seller"); and KNRECO, INC., d/b/a KEOKUK JUNCTION
RAILWAY, an Iowa corporation ("KNRECO") and KEOKUK UNION DEPOT
COMPANY, an Iowa corporation ("KUD"); WITNESSETH THAT:
WHEREAS Seller is the owner of 126,380 shares of the common
stock of KNRECO, and said shares constitute 66.72% of the issued
and outstanding shares of KNRECO (there being a total of 189,430
shares issued and outstanding); and
WHEREAS Pioneer desires to buy and Seller desires to sell said
shares of stock; and
WHEREAS it is in the best interest of KNRECO and KUD to
cooperate with the contemplated transaction;
NOW, THEREFORE, Seller, KNRECO, KUD and Pioneer, hereby agree
as follows:
1. SALE AND TRANSFER OF SHARES. Subject to the terms and
conditions set forth in this Agreement, Seller will sell, transfer
and convey to Pioneer all 126,380 of the issued and outstanding
shares of KNRECO he owns, plus any and all other rights, options or
warrants Seller may have (the "Shares"), and Pioneer will purchase
said Shares (being the 126,380 shares outstanding, plus any and all
other rights or options Seller may have), for the consideration set
forth in Section 4, hereinbelow.
2. ACQUIRER. Pioneer is an owner of railroads and by reason
of its business and financial experience, and that of its officers
and directors, Pioneer represents and warrants to Seller that it
has the capacity to protect its own interest in the transaction,
and qualifies as an "accredited investor" as defined by the U.S.
Securities & Exchange Commission. Pioneer acknowledges that it has
been informed that the shares have not been registered under the
Securities Act of 1933, or under any state securities act. Pioneer
represents and warrants that it is purchasing the shares for its
own account and not with a view towards resale of the shares.
3. DESCRIPTION OF SHARES. The shares involved in this
transaction will be the common stock of KNRECO, being the only
class of securities issued by KNRECO, and representing 66.72% of
the outstanding shares.
Page 1 of 15.
4. TERMS OF PAYMENT. The Purchase Price ("Price") shall be
paid (less the $5,000 earnest money downpayment) as follows:
(A) $16.50 per share in cash at Closing; or
(B) At the option of Seller, all or any portion of the
Purchase Price may be paid in shares of Pioneer Common Stock
(hereinafter the "Pioneer Stock"), at a rate of 1 share of Pioneer
Stock per $3.625 of the Purchase Price; to be tendered by
certificate(s) at Closing. Seller shall elect, in writing, not
less than five (5) days before Closing, how much of the Purchase
Price he will take in Pioneer Stock, if he wishes to avail himself
of this right; Provided, that if Seller exercises this right, he
hereby certifies that he recognizes the attributes of the stock
described in Section 5, hereinbelow, and is a resident of a state
that permits the sale without registration under its state
securities laws; and
(C) As a condition of Closing, Pioneer shall promptly upon
the execution of this Agreement make an offer to purchase all of
the issued and outstanding shares of KNRECO (but not the treasury
shares), for the purchase price specified in Section 4(A) and (B),
above. Seller and his counsel have reviewed and approved the
language of the offer to be submitted to the other shareholders of
KNRECO (the "Shareholders"), the form of which is attached hereto
as "Exhibit H". Pioneer shall then transmit said offer to the
Shareholders as expeditiously as possible, but by no means slower
than First Class United States Mail. Shareholders shall have a
deadline of not more than one business day prior to Closing to
return their executed election form, and up to forty-five days to
tender their original stock certificate(s). Pioneer shall accept
a faxed election form as timely, if the original is forwarded with
the stock certificate(s). Pioneer shall pay the cash Purchase
Price at Closing to all Shareholders who tender their stock
certificate(s) with their election form (and shall pay the Pioneer
Stock portion of the purchase price as expeditiously as possible
thereafter), and the remaining Shareholders shall be paid within
five business days of receipt of said certificate(s). Seller shall
assist Pioneer, as required, to enable it to make a prompt
distribution of the Purchase Price to Shareholders.
Notwithstanding the above-specified deadlines, any of the
Shareholders who are not present within the United States of
America or the Dominion of Canada during the time of the offer,
shall be given sixty (60) to return their election and their
original certificate(s) and such tender shall be considered timely;
and
(D) As a further condition of this Agreement, Pioneer shall
provide Seller at Closing with an agreement whereby it will defend,
indemnify and hold Seller harmless in the event that the United
States Small Business Administration (or its successor, designee or
Page 2 of 15.
agent) requires Seller individually to repay the $290,300 loan it
extended to KNRECO and more fully described in a loan agreement and
guaranty dated January 25, 1994.
5. PIONEER STOCK. The Pioneer Stock issued to Seller, as
provided in Section 4(B), above, will not be registered under the
Securities Act of 1933, or any state securities act. It will be
issued as a "private placement", and will be "restricted" as to
resale, pursuant to SEC Rule 144. Seller represents and warrants
to Pioneer that, by virtue of his business and financial
experience, and that of his attorneys and other advisors, he has
the capacity to protect his own interests in this transaction, and
that he qualifies as an "accredited investor" as defined by the
U.S. Securities & Exchange Commission. Seller acknowledges that he
has been informed that the Pioneer Stock has not been registered
under the Securities Act of 1933, or under any state securities
act, and he individually represents and warrants that he is
acquiring the Pioneer Stock for his own account and not with a view
towards resale, and that he will not sell, transfer, pledge or
otherwise dispose of the Pioneer Stock, except in accordance with
SEC Rule 144.
6. DELIVERY OF SHARES. At Closing, Seller shall deliver an
executed Bill of Sale and Stock Power, in the form attached hereto
as "Exhibit E", along with the original stock certificates (No.
#_______________), and any other appropriate documents, pursuant to
Section 1, representing the total of 126,380 shares to be
transferred, and shall deliver said certificates to Pioneer. Upon
such delivery, Pioneer shall tender the purchase price (including
the cash portion thereof by cashier's or certified check).
7. STB APPROVAL. Pioneer will file (on or before March 1,
1996), and prosecute the appropriate filings with the U.S. Surface
Transportation Board ("STB") to transfer ownership and control of
KNRECO. Pioneer shall pay all costs and expenses incurred in such
proceedings (including the fees of any attorneys retained by
Pioneer), and this transaction is expressly conditioned upon the
parties obtaining such STB approval. Pioneer may terminate this
Agreement prior to Closing in the event of the imposition by the
STB of any term or condition on its approval which is unacceptable
to it, including such conditions as labor protection.
8. OTHER COVENANTS AND CONDITIONS PRECEDENT. In addition to
the STB approval condition contained in Section 7, Pioneer's
obligation to close this Agreement shall be subject to the
following other conditions and covenants:
(A) A due diligence review by Pioneer, including on-site
inspection of the property and equipment (subject to the
execution of Exhibit D), and a review of KNRECO's financial
and traffic information, contracts, agreements, and corporate
Page 3 of 15.
records. Seller, KNRECO and KUD agree to permit free access,
at all reasonable times, to Pioneer for the purpose of such
due diligence review, and agree to arrange a meeting between
Pioneer and KNRECO's customers, at a mutually convenient time
and place.
(B) KNRECO shall not sell, lease, transfer, pledge,
assign, grant any lien or security interest in, or otherwise
encumber or dispose of any asset (other than supplies and
materials in the ordinary course of business), after the date
of this Agreement, except as specifically provided herein.
(C) KUD shall not sell, lease, transfer, pledge, assign,
grant any lien or security interest in, or otherwise encumber
or dispose of any asset (other than supplies and materials in
the ordinary course of business), after the date of this
Agreement, except as specifically provided herein.
(D) Neither KNRECO nor KUD have, since December 31,1995,
nor shall either before closing, pay any dividends,
director fees, grant any bonuses, increases in salaries, wages
or benefits, or make or pay any other compensation, gift, or
remuneration to any shareholder, officer, director, employee,
agent, or other entity which is in excess of their usual or
ordinary wages, salary or benefits.
(E) All Shareholders and all issued and outstanding
shares of every class and series are listed on Exhibit F,
attached hereto, and KNRECO and KUD have not and will not, at
or prior to Closing issue any warrants, options, rights or
additional shares or other shares whatsoever, nor shall any
treasury shares be transferred or reissued; Provided, however,
that nothing contained herein shall prohibit the valid
transfer of existing issued and outstanding shares between
shareholders who have received Pioneer's offer to purchase, if
such transfer is disclosed in writing at least three business
days prior to Closing and the previous owner acknowledges in
writing that he received the offer and transferred such shares
voluntarily and with full knowledge of such offer.
(F) Any personal property present on the railroad
(except for foreign line railcars), or adjoining right-of-way,
shall be assumed to be owned by KNRECO, unless otherwise
disclosed in writing at the execution of this Agreement. All
owned and leased railcars, locomotives and other rolling stock
shall be listed on Exhibit A.
(G) All assets of KNRECO and all assets of KUD, shall,
at Closing, be owned (or leased, if so stated on Exhibit A) by
KNRECO, free and clear of any lien, security interest, or
other encumbrance or claim by any third party, except for
permitted encumbrances listed on Exhibit B.
Page 4 of 15.
(H) Seller and KNRECO covenant that KNRECO will not
enter into, conclude, or otherwise commit itself to any agreement
with Burlington Northern Santa Fe Railway ("BNSF"), or any entity
affiliated with BNSF, at or prior to Closing, pertaining to
crossings, industrial trackage, the "Moar" line, land or track use
or ownership, interchange arrangements, track maintenance,
liability, or similar issues, without the prior written consent of
Pioneer. Seller and KNRECO acknowledge that Pioneer desires to
review this matter and contact BNSF directly prior to entering into
any such agreement.
Seller shall sign a statement at Closing, certifying that the
covenants contained herein have been adhered to.
9. ENVIRONMENTAL DISCLOSURE AND INDEMNIFICATION. Seller and
KNRECO shall, at least five (5) days prior to Pioneer making the
offer to the Shareholders (pursuant to Section 4(C) and 18 herein),
furnish Pioneer a written and signed statement, disclosing any and
all material Environmental Problems known to Seller and/or KNRECO
and/or KUD. Seller warrants and represents that to the best of his
knowledge there are no "Environmental Problems" not so disclosed.
"Environmental Problem" means any claim, demand, request, inquiry,
action or proceeding (whether public or private, formal or
informal) brought under the federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended,
("CERCLA"), or any similar federal, state, or local statute,
ordinance, rule, regulation, order or mandate of whatever nature
which concerns environmental danger, damage, contamination, toxic
wastes, hazardous materials, or the like; or any condition which
could reasonably give rise to such claim or proceeding. Seller
shall assign to Pioneer, KNRECO and KUD, at closing, his rights, if
any, to indemnification from any other entity whose past acts or
omissions might have created latent Environmental Problems.
10. CATASTROPHIC LOSS. In the event KNRECO experiences a
major derailment or accident, natural disaster, or other
catastrophic loss of assets or value between the date of this
Agreement and Closing, Closing shall be extended until repairs are
made and service is restored. In the event that service cannot be
restored within sixty (60) days, either party shall have the right
and option to terminate this Agreement, and neither party shall
have any further liability hereunder.
11. SALE EXCLUSIVE. Seller agrees that Pioneer shall have
the exclusive right to purchase the stock of KNRECO from the date
of this Agreement through the date of Closing (or such later date
as Closing shall be set for pursuant to Section 22), and that he
will not sell, offer for sale, solicit or entertain offers to buy,
or otherwise attempt to market any or all of the stock of KNRECO to
any other party for that time period.
Page 5 of 15.
12. SELLER'S WARRANTY; DISCLOSURE AND INDEMNIFICATION.
(I) Except as disclosed in writing at least five (5) days
prior to Pioneer making the offer to other shareholders (pursuant
to Section 4(C) and 18, herein), Seller warrants and represents
that, having made all appropriate inquiries, he has no knowledge of
the existence of any of the following:
(A) Any outstanding orders, fines, code violations,
investigations or other actions by the Federal Railroad
Administration ("FRA"); the Environmental Protection Agency
("EPA"); the Occupational Safety & Health Administration
("OSHA"); or any other federal or state agency having safety
and/or health jurisdiction.
(B) Any outstanding notices, judgments, orders, suits, or
actions, or any unasserted claims (including any claims under
the Federal Employers' Liability Act ("FELA"), or any other
employment-related claims, such as employment discrimination,
sexual harassment, employee-benefit disputes, Railway Labor
Act proceedings, etc.), involving employees, former employees,
vendors, contractors, lessors, lessees, shippers, shipper
employees or others, including other railroads.
(C) Any correspondence from the City of Keokuk, the U.S. Army
Corps of Engineers, the U.S. Coast Guard, the State of Iowa,
the State of Illinois, or any other entity concerning the
Mississippi River Bridge at Keokuk (including the use,
maintenance, rehabilitation, or condition thereof) and/or any
plans to construct, change, move, modify or enlarge any
levees, flood walls or flood control facilities.
(D) Any default under any agreements, obligations, leases,
mortgages, notes, equipment leases, assignments and/or
security documents of any kind, by KNRECO, or has any event
occurred, or does any condition exist, that, but for the
passage of time and/or the giving of notice, would constitute
such a default.
(E) Any payroll, FICA, railroad retirement, unemployment,
income, real estate, personal property or other taxes or
assessments (including sales, use, excise, fuel or other
federal, state and local obligations), due and payable prior
to Closing and not, in fact, paid, including any unasserted
amounts, interest, fines and/or penalties.
(F) Any correspondence, notice, or communications from or by
any customer of KNRECO to the effect that such customer
intends, or is considering, ceasing or materially reducing its
rail usage (shipping or receiving).
Page 6 of 15.
(G) Any other action which adversely affects the good
standing of the KNRECO as a corporation in Iowa, and/or a
foreign corporation in Illinois.
(H) Any claims by any other railroad for unpaid car hire, car
repair or interline settlements, which amounts are not
included in the financial statements disclosed to Pioneer, or
included in the list provided for in Section 12(II) herein.
Seller represents and warrants that KNRECO is not currently a party
to any litigation, nor has it any outstanding fines, judgments or
other orders against it, nor has it received any notices of
material claims, defaults or liabilities which do not appear on the
financial statements disclosed to Pioneer, or included in the list
provided for in Section 12(II).
(II) Seller agrees to furnish Pioneer an itemized list, three
(3) days before Closing (and to update at Closing, if necessary),
of all payables not shown on the December 31, 1995 financial
statement, if the total amount due any entity is $1,000. or more.
Pioneer and Seller acknowledge that some of these accounts will be
estimates, Seller agrees such estimates will be made in good faith
and using his best judgment. Seller also agrees to furnish
Pioneer, at least three (3) days before Closing, with an itemized
list of all accounts payable and contingent liabilities (including
car hire, car repairs, freight damage claims, derailment expenses,
and the like) which appeared, or should have appeared, in the
December 31, 1995 financial statements, if the total amount due any
entity and not already paid, is in excess of $2,000.
(III) Seller warrants that KNRECO and/or KUD will not violate
any of the covenants contained in Section 8.
(IV) Seller agrees to, and shall, indemnify, protect, and
hold harmless, Pioneer, its officers, directors, employees, agents,
attorneys, insurers, successors and assigns, as well as KNRECO and
KUD, and their officers, directors, employees, agents, attorneys,
insurers, successors and assigns, from and against any and all
undisclosed liabilities, claims, demands, losses, penalties, fines,
judgments, costs and expenses (including court costs and attorney
fees and expenses) "Claims", arising out of, resulting from,
connected with, or based upon, the breach of any warranty, covenant
or representation made in herein, or any of the matters referred to
in Sections 8, 9, 12, 13, 14 and 23, which Seller knew or should
have known to be existing at or prior to Closing and not disclosed
to Pioneer in writing, in accordance with the terms of this
Agreement, prior to Closing. The parties agree that such
indemnification shall only apply to material breaches of Sections
9, 12(I) and (II) and 13, and stipulate that, as used herein
"material" shall be deemed to mean any breach involving Claims
aggregating $7,500 or more; any breach involving Claims aggregating
less than $7,500 shall be deemed not material.
Page 7 of 15.
13. INJURIES AND CROSSING ACCIDENTS. Seller warrants and
represents, to the best of his knowledge there have not been any
employee injuries or any crossing accidents, or motor vehicle
accidents involving the railroad, its trains or other equipment or
vehicles, within the three (3) years prior to the execution of this
Agreement (and that any occurring between the execution of this
Agreement and Closing will be fully disclosed in writing, prior to
Closing).
14. WARRANTIES OF SELLER. Seller represents and warrants to
Pioneer that KNRECO is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Iowa,
and is authorized to do business as a foreign corporation in the
State of Illinois; that Seller has the right, power, legal
capacity, and authority to enter into and perform his obligations
under this Agreement; and that KNRECO is not in default or breach
of any contract or obligation, nor has any event occurred nor does
any condition exist which, but for the passage of time, and/or the
giving of notice, would constitute such a default. KNRECO shall
provide its Secretary's Certificate of the incumbency of its
officers and directors at Closing.
Seller represents and warrants to Pioneer that KUD is a
corporation duly organized, validly existing, and in good standing
under the laws of the State of Iowa; and that KUD is not in default
or breach of any contract or obligation, nor has any event occurred
nor does any condition exist which, but for the passage of time,
and/or the giving of notice, would constitute such a default. KUD
shall provide its Secretary's Certificate of the incumbency of its
officers and directors at Closing.
15. WARRANTIES OF PIONEER. Pioneer represents and warrants
to Seller that it has the right, power and legal capacity to enter
into and perform its obligations under this Agreement; that its
Board of Directors, stockholders, and/or any other party having
power or authority to approve this transaction has done so (with
the exception of the STB). Pioneer shall provide its Secretary's
Certificate of the incumbency of its officers at Closing.
16. INSIDER LOANS. Seller, KNRECO, and KUD represent and
warrant that there are no notes or loans (or loan guarantees) to
officers, directors or employees of KNRECO or KUD, and that no such
loans or guarantees shall be created at or before Closing, except
for expense reimbursements due in the ordinary course of business
in an aggregate amount of not more than $1,000, which expenses
shall be documented by the persons involved and paid by KNRECO
prior to Closing.
17. C-CORPORATION STATUS. Seller and KNRECO represent that
KNRECO and KUD are "C-Corporations" under Internal Revenue Service
regulations.
Page 8 of 15.
18. APPROVAL BY KNRECO BOARD. Within five (5) days of the
execution of this Agreement, Pioneer and Seller shall advise the
Board of Directors of KNRECO and KUD of the contents of this
Agreement and the intent of Pioneer to offer to purchase all of the
issued and outstanding shares of KNRECO. If the Board votes to
recommend that the Shareholders of KNRECO accept Pioneer's offer,
the Board shall submit that recommendation to all of the
Shareholders. Pioneer's offer shall include the disclosures
required by Securities & Exchange Commission regulations, including
a copy of Pioneer's most recent Form 10-Q and Form 10-K.
19. OPTION OF PIONEER. In the event that insufficient
numbers of shareholders accept the offer to enable Pioneer to
purchase at least 80% of the issued and outstanding stock at
Closing, Pioneer shall have the option to withdraw from this
transaction; shall be entitled to the return of its earnest money
deposit, and shall have no further liability hereunder.
20. EMPLOYMENT AGREEMENTS. Pioneer desires to receive the
services of Seller and Ralston Taylor to assist in the transition
of KNRECO's operation to Pioneer ownership. Therefore, at Closing,
Pioneer, KNRECO and Seller will enter into an employment contract,
providing for Seller to serve as a management employee, in a
consulting capacity, for a period commencing at Closing, and
running through April 30, 1999, for a salary of $50,000 per year
(paid on a semi-monthly basis). Such services shall consist of
assistance in connection with the transition, advice and
information regarding operations, employees, customers, connecting
railroads, suppliers, and so forth, and assistance with on-going
issues (including accidents, injuries, etc.). Such services shall
be on a best-efforts basis by Seller and will not involve
substantial time commitments, and will generally be in the form of
telephone consultations. Pioneer and KNRECO agree that KNRECO will
also pay Seller's health insurance premiums (for Pioneer Railroad
Services Inc.'s group health coverage); the premiums for Seller's
non-qualified retirement plan insurance policy; and Seller's
clubhouse dues in the Keokuk Country Club.
In the event Pioneer also purchases the shares owned by
Ralston L. Taylor ("Taylor"), Pioneer agrees that KNRECO will offer
Taylor, at Closing, an employment contract providing that he will
be employed as a management employee of KNRECO, in a consulting
capacity, for a period commencing at Closing, and running through
July 31, 1998, at an annual salary of $30,000 per year, payable
semi-monthly. KNRECO shall also pay the premiums on Taylor's heath
insurance under the Pioneer group policy and the premiums on his
non-qualified retirement plan insurance policy; and KNRECO will
change the beneficiary on the life insurance benefit on such policy
to such person as Taylor may direct.
21. CLOSING. The transfer of the ownership of the shares
from Seller to Pioneer (herein "Closing") shall take place on
Page 9 of 15.
Tuesday, March 12, 1996, at 4:00 p.m. CST, at the offices of KNRECO
in Keokuk, Iowa. The certificates, Bill of Sale and Stock Power,
consideration, and other documentation shall be physically
exchanged by the parties at Closing, as provided in Sections 4, 6,
8, 20, 24, 26 and 28 herein.
22. EXTENSION OF CLOSING. If, for any reason beyond the
control of the parties, Closing cannot take place as provided in
Section 21, either party shall have the right and option to extend
the date of Closing for up to thirty (30) days.
23. EMPLOYEE MATTERS. Seller, KNRECO and KUD hereby
represent and warrant that there are no contracts currently in
force with any officer, director, employee or independent
contractor of KNRECO or KUD with respect to continued employment or
severance pay, or which would otherwise inhibit KNRECO's or KUD's
right to terminate such person's employment or contractual
relationship, without cause or notice (other than the contracts
listed in Exhibit G), and Seller, KNRECO and KUD agree not to enter
into any such contract at or before Closing, except with the
written consent of Pioneer.
24. STATUS OF COMPANY AT CLOSING. Seller, KNRECO and KUD
shall deliver original, true and correct copies of any and all
deeds, abstracts of title, plats, leases, tariff and rate
agreements, interchange agreements, surcharge agreements, demurrage
and car hire agreements, and all other contracts and agreements;
track charts; valuation maps; blueprints; articles of
incorporation, by-laws, state corporation records, minutes of
shareholder and Board of Directors meetings, the Iowa Certificates
of Incorporation, the stock transfer books (including all canceled
stock certificates), the corporate seals; the original stock
certificates of the Keokuk Union Depot Company, and all other
subsidiaries of KNRECO; all keys to switch locks, the depot and any
other structures; and all accounting, financial, traffic,
maintenance, employee and other books and records of KNRECO and
KUD, to Pioneer at Closing. All existing contracts, leases and
agreements shall be left in force, including any railcar storage
agreements, and all insurance policies.
25. COOPERATION OF PARTIES. Seller, KNRECO and KUD agree to
cooperate with Pioneer in the transition of control of KNRECO and
KUD; to provide such information as Seller, KNRECO and KUD have on
any and all facets of the business, and to assist in any on-going
matters. The parties agree that, in addition to the documents
referred to hereinabove, each party will deliver such other or
additional documentation as is reasonably required by their
respective counsel. Pioneer and KNRECO agree to allow Seller
reasonable access to the books and records of KNRECO for the
purpose of preparing any taxes or other documents required or for
responding to any IRS inquiries or audits relating to periods prior
to Closing.
Page 10 of 15.
26. NON-COMPETITION. As part of this Agreement, and as part
of the consideration for the employment contracts provided for in
Section 20, Seller agrees that he will execute at Closing a non-competition
agreement, in the form attached hereto as "Exhibit C"
and Ralston L. Taylor shall, as part of the consideration for his
employment contract, be required to execute at Closing, a non-competition
agreement, in substantially the same form.
27. BROKERS; ATTORNEYS. The parties jointly represent that
no broker procured this sale, and that no commission is due any
broker, sales agent, or other third party. The parties agree that
KNRECO shall be responsible for all legal fees incurred in
connection with the review, drafting, and negotiation of this
Agreement, up until the time it is executed, which fees shall not
exceed $6,100. All legal fees incurred in connection with this
transaction after execution of this Agreement, with the exception
of the preparation of appropriate filings for the approval of the
transaction by the STB, shall be the sole responsibility of Seller.
28. KNRECO OFFICERS AND DIRECTORS. All the then-current
officers, and directors of KNRECO and KUD will be required to
resign their positions, in writing, effective at Closing. Any
compensation, severance, or other consideration due any officer,
director or employee of KNRECO or KUD by reason of his service
prior to Closing, or his resignation, shall be paid by Seller or
forgiven.
29. WAIVER OF BREACH. The waiver by any party of the breach
of any condition, covenant or provision herein contained shall in
no way impair the right of the aggrieved party to avail itself of
any subsequent breach, whether of the same or similar nature, or
not, nor shall any failure or delay on the part of any party in
exercising any right, power or remedy hereunder preclude any
subsequent exercise thereof.
30. CHOICE OF LAW; CHOICE OF FORUM. This Agreement shall be
construed to have been executed in Peoria, Illinois, and it shall
be governed, construed and enforced in accordance with the laws of
the State of Illinois. Litigation arising out of or connected with
this Agreement may be instituted and maintained in the State Courts
of the State of Illinois, only, and the parties consent to
jurisdiction over their person and over the subject matter of any
such litigation in those courts, and consent to service of process
issued by such courts.
Prior to instituting litigation regarding any dispute
involving this Agreement, any party may request resolution of such
dispute by non-binding arbitration. The other party(ies) shall
respond to such request within a reasonable time; Provided,
however, that the parties shall not be obligated to request or
accept such arbitration.
Page 11 of 15.
31. BINDING EFFECT AND ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties, and their
respective officers, directors, employees, agents, attorneys,
insurers, heirs, personal representatives, successors and assigns;
Provided, however, that no party may assign any right or obligation
hereunder, except with the written approval of all other parties
hereto.
32. THIRD PARTY BENEFICIARIES. This Agreement is solely for
the benefit of the parties hereto, and, where provided for, their
respective officers, directors, employees, shareholders, agents,
attorneys, insurers, successors and assigns. Nothing contained
herein shall be construed to confer any rights upon any third
party, with the exception of Ralston L. Taylor and the other
Shareholders of KNRECO.
33. SEVERABILITY. If any clause or provision of this
Agreement shall be finally determined invalid, illegal or
unenforceable by a Court of competent jurisdiction, then that
clause or provision only shall be held inoperative, as though not
herein contained, and the remainder of this Agreement shall remain
operative and in full force and effect.
34. CONSTRUCTION OF AGREEMENT. This Agreement constitutes
the entire agreement between the parties and supersedes any and all
prior agreements, oral or written (except for the Letter of Intent
which this Agreement shall be read in conjunction with). No
waiver, modification or amendment of this Agreement shall be of any
force or effect unless made in writing and signed by the parties,
and specifying with particularity the nature and extent of such
waiver, modification or amendment. Unless otherwise expressly
provided or unless the context requires otherwise, words importing
the singular number shall mean and include the plural number, and
vice versa. Where the term "including" is used herein, it shall be
construed to mean "including, but not limited to,". Where any term
such as "his" or "him" is used herein, it shall be construed to
have been used for convenience only, and shall be construed to
include the masculine, feminine, and neuter genders, unless the
context requires otherwise.
Seller agrees that where references are made herein to the
best of his "knowledge", that Seller, as President and Chairman of
KNRECO and KUD, will be charged with having personal knowledge of
any and all knowledge possessed by any officer, director, employee,
insurer, or attorney of KNRECO and/or KUD; Provided, however, that
insofar as employee injuries (for purposes of Section 13, above),
the sole knowledge of the allegedly injured employee shall not be
charged to Seller merely because the allegedly injured person
is/was an employee.
35. SURVIVAL OF REMEDIES AND WARRANTIES. The
representations, covenants, warranties, indemnifications and
Page 12 of 15.
remedies contained in this Agreement shall survive the execution
and Closing of this Agreement, and shall be deemed to have been
reconfirmed by the parties at Closing.
36. NOTICES. All notices, demands, requests or other
communications which may be or are required to be given or sent by
any party pursuant to this Agreement shall be in writing and shall
be deemed to have been properly given if sent by certified mail to
the parties at the following addresses:
Seller: John Warfield with copy to:
John D. Heffner, Esq.
Rea, Cross & Auchincloss
Suite 420
1920 "N" Street, N.W.
Washington, D. C. 20036
Pioneer: Pioneer Railcorp
1318 S. Johanson Road
Peoria, Illinois 61607
KNRECO: Keokuk Junction Railway
and
KUD: Keokuk Union Depot Company
117 S. Water Street
Keokuk, Iowa 52632
or such other address as the parties may from time to time give
notice of.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first appearing above.
PIONEER RAILCORP JOHN WARFIELD
By:__/s/ Guy L. Brenkman______ ___/s/ John Warfield________
Name: Guy L. Brenkman, CEO
KNRECO, INC. KEOKUK UNION DEPOT COMPANY
By:___/s/ John Warfield_______ By:___/s/ John Warfield______
Name: Name:
Its: Its:
Page 13 of 15.
CERTIFICATE OF EXECUTION
STATE OF IOWA )
) ss
COUNTY OF LEE )
Before me the undersigned Notary Public personally appeared
John Warfield, being personally well known to me, and under oath he
stated that he executed the foregoing Agreement voluntarily and
with full authority so to do.
________________________________
Notary Public
CERTIFICATE OF EXECUTION
STATE OF ILLINOIS )
) ss
COUNTY OF PEORIA )
Before me the undersigned Notary Public personally appeared
Guy L. Brenkman, being personally well known to me, and under oath
he stated he was the duly elected President of Pioneer Railcorp
("Corporation"), and that he executed the foregoing Agreement with
full authority, and on behalf of the Corporation.
________________________________
Notary Public
Page 14 of 15.
CERTIFICATE OF EXECUTION
STATE OF IOWA )
) ss
COUNTY OF LEE )
Before me the undersigned Notary Public personally appeared
___John Warfield________, being personally well known to me, and
under oath he stated he was the duly elected __________________ of
KNRECO, INC. ("Corporation"), and that he executed the foregoing
Agreement with full authority, and on behalf of the Corporation.
________________________________
Notary Public
CERTIFICATE OF EXECUTION
STATE OF IOWA )
) ss
COUNTY OF LEE )
Before me the undersigned Notary Public personally appeared
___John Warfield________, being personally well known to me, and
under oath he stated he was the duly elected __________________ of
KEOKUK UNION DEPOT COMPANY ("Corporation"), and that he executed
the foregoing Agreement with full authority, and on behalf of the
Corporation.
________________________________
Notary Public
Page 15 of 15.
EXHIBIT INDEX
Exhibit Number Title
A Locomotives, Railcars & Rolling Stock
B Permitted Encumbrances
C Form of Non-Competition Agreements
D Inspection of Property
E Bill of Sale and Stock Power
F Shareholder List
G Contracts
H Offer to other Shareholders
EXHIBIT A
LOCOMOTIVES, RAILCARS AND OTHER ROLLING STOCK
1. One (1) 1000 HP EMD Diesel Locomotive, KJRY #405
2. One (1) 1500 HP Cummmins Diesel Locomotive, KJRY #252
3. One (1) 1500 HP EMD GP-7 Diesel Locomotive, KJRY #488
4. One (1) 1750 HP EMD GP-10 Diesel Locomotive, KJRY #469
5. One (1) 1750 HP EMD GP-10 Diesel Locomotive, KJRY #471
6. Two (2) Trolly Cars
7. Railcars:
Two (2) 50 ft. Boxcars, KJRY #813 and KJRY #939
One (1) 60 ft. Boxcer, KJRY #222
Two (2) Flat Cars, KJRY #6 and KJRY #8
One (1) Open-Top Hopper, KJRY #3
One (1) Caboose, KJRY #2
One (1) Open-platform obs. car, "Chief Keokuck"
One (1) Diner, KJRY #4
One (1) Sleeper, KJRY #5
One (1) Wooden Boxcar, KJRY #7
One (1) Baggage Car, KJRY #9
One (1) Steel Boxcar, KJRY #10
Fifteen (15) 4000 cu. ft. Covered Hoppers, KJRY #4000-4014
Five (5) 4427 cu. ft. Covered Hoppers, KJRY #4401-4405
Two (2) 4740 cu. ft. Covered Hoppers, KJRY #4740 and #4741
EXHIBIT B
PERMITTED ENCUMBRANCES PURSUANT TO SECTION 8(G)
Encumbrance Approximate Amount at March 11, 1996
State of Illinois $331,379.17
S.B.A. $246,611.21
Keokuk Savings Bank -0-
____________
TOTAL $577,990.38
The above balances are correct and complete to the best of my
knowledge as of March 11, 1996.
/s/James D. Hartrick, CPA
EXHIBIT C
COVENANT NOT TO COMPETE
The undersigned, JOHN WARFIELD (herein "Warfield"), for and in
consideration of the rights, privileges and benefits conferred upon
him by the Stock Purchase and Sale Agreement (including, but not
limited to, the employment contract provided for therein) between
himself, Pioneer Railcorp, KNRECO, INC. and Keokuk Union Depot
Company, dated February ___, 1996 (the "Purchase Agreement"), the
sufficiency of such consideration Warfield hereby stipulates to,
WARFIELD DOES HEREBY COVENANT AND AGREE THAT HE WILL NOT, without
the prior written consent of PIONEER RAILCORP (herein also
"Pioneer"), directly or indirectly, or through any other entity,
individually or in concert:
(A) own, manage, operate, acquire, control, negotiate to
acquire, or be connected in any manner with, any entity providing
rail service, rail car storage or railcar repair, over any line of
railroad in either Lee County, Iowa or Hancock County, Illinois; or
(B) solicit, in competition with KNRECO, or its corporate
successor, or assisting others (except Pioneer) with same, the
business of any shipper or receiver of freight located on KNRECO,
or whose facility is located within 75 miles of Keokuk, Iowa, and
is served or sought to be served by KNRECO or its corporate
successor, with the exception of any shipper or receiver currently
located on the Cedar Rapids and Iowa City Railroad ("CRANDIC").
This agreement shall remain in force for a period commencing
at the Closing of said Purchase Agreement, on or about March 8,
1996, and continuing through January 1, 2010.
This Agreement covers employment in any capacity whatsoever;
provided, however, that nothing contained herein shall be construed
to prohibit Warfield from owning securities of any publicly-traded
Class I railroad. Warfield understands, acknowledges, and agrees
that this Agreement is a material consideration for the Employment
Contract referenced above.
Any waiver by Pioneer of any breach of this Agreement by
Warfield, shall not operate as or be construed to be a waiver of
any subsequent breach of the same or similar kind(s), nor shall any
waiver by Pioneer of any breach of a non-competition agreement by
anyone else constitute a waiver of any one or more provisions of
this Agreement.
In the event a Court of competent jurisdiction finally
determines that any of the restrictions contained in this Agreement
are illegal, invalid, or too broad to be enforced, such
provision(s) shall be considered severable, and/or the Court shall
be permitted to modify the provisions contained herein to the
extent necessary to permit their enforceability.
This agreement is personal and Warfield may not assign this
Agreement. Any attempt to so assign shall be absolutely void.
Subject thereto, this Agreement shall be binding upon and inure to
the benefit of the successors and assigns of Warfield.
In the event of any breach, Pioneer shall be entitled to full
injunctive relief, which right shall be cumulative with and not
successive or exclusive of any other legal rights.
This Agreement shall be construed and enforced under the laws
of the State of Illinois, and the parties consent to jurisdiction
over their person and over the subject matter of any such
litigation in the courts of the State of Illinois only, and consent
to service of process issued by such courts.
IN WITNESS WHEREOF, the undersigned has caused this Agreement
to be executed as of the day and year stated below.
DATED:
__[Delivered at Closing]________________
John Warfield
EXHIBIT D
INSPECTION OF PROPERTY
1. Between the date of execution of this Agreement and the
Closing Date, KNRECO shall provide Pioneer, including its officers,
employees, agents, and outside consultants, with access to all
properties, lines, equipment, facilities, and business records of
KNRECO and KUD in order to make such noninvasive physical and
environmental investigation and testing as Pioneer deems
appropriate; provided, however, that 1) such investigation shall
not unreasonably interfere with the operations on and use of the
KNRECO's property by Keokuk Junction Railway and Burlington
Northern Santa Fe Railway, 2) Pioneer shall not disclose to any
other party(ies) KNRECO's or Keokuk Junction Railway's confidential
traffic or business matters (other than the disclosures required to
be made as part of Pioneer's Securities & Exchange Commission
("SEC") reporting responsibilities, including, but not limited to
any 10-K, 8-K, or similar reports that may be filed during such
time period; and 3) Pioneer shall not disclose to anyone (other
than any party lending or providing it with financing for this
acquisition) the results of such investigation or testing (also,
with the exception of SEC reporting obligations).
2. KNRECO reserves the right to monitor and approve any
environmental assessments, tests, studies, procedures, measurements
or analyses performed by or for Pioneer in, on, to, or with respect
to KNRECO's property. Pioneer shall require any outside agent or
consultant it retains to do an Environmental Assessment to sign a
copy of this Agreement.
3. Upon receipt of any test results, Pioneer shall
immediately at its cost furnish KNRECO with a copy of all results,
assessments, reports and/or studies based upon the Environmental
Assessment.
4. If the Environmental Assessment reveals contamination of
the Subject Property in amount(s) and/or concentration(s) beyond
the minimum acceptable levels established by appropriate
governmental authorities, or if Pioneer is unwilling to accept the
environmental condition of KNRECO's property as revealed by the
Environmental Assessment, Pioneer's sole remedy shall be to
terminate this Agreement. Pioneer acknowledges that KNRECO is not
required to correct, remedy or cure any environmental conditions or
contamination of the Subject Property as a condition to Closing or
as an obligation with respect to performance required after
Closing.
5. If Pioneer elects not to undertake or contract for an
Environmental Assessment, or if Pioneer does not elect to terminate
-1-
this Agreement after receiving results of the Environmental
Assessment, Pioneer shall take the property "As Is, Where Is",
subject to the warranties and representations in the Purchase
Agreement that to the best of Seller's knowledge there are no
material Environmental Problems, and shall assume all risks of the
condition of the Property, regardless of the cause or date or
origin of any environmental condition, and shall release all rights
and/or claims against Seller for the costs of remediation or cure
of any such condition which Seller is not or has no reason to be
aware of at or prior to Closing.
6. Pioneer hereby agrees to indemnify, protect, defend and
hold harmless Seller from and against any and all liability, cost,
and expense arising out of or connected with the exercise by
Pioneer, its officers, agents, or employees, of the rights of
access and investigation herein granted, regardless or whether such
liability, cost and expense is caused in whole or in part by the
fault, failure, negligence, misconduct, nonfeasance or misfeasance
of Seller, except for instances of gross negligence or intentional
acts.
7. Pioneer acknowledges that Seller has made and will make
no representations, warranties, guaranties, statements or
information, express or implied, pertaining to the KNRECO's
property, the physical, environmental or condition thereof, or its
merchantability or suitability for any use or purpose whatsoever,
except for those made in the Purchase Agreement, or in documents or
disclosures produced or made pursuant to the provisions of the
Purchase Agreement.
Executed this _____ day of February 1996 by Pioneer Railcorp.
By:___/s/________________________
Guy L. Brenkman, President.
EXHIBIT E
BILL OF SALE AND IRREVOCABLE STOCK POWER
FOR VALUE RECEIVED, the undersigned does hereby sell, assign, and
transfer to PIONEER RAILCORP, an Iowa corporation, all right, title
and interest the undersigned has to 126,380 shares of KNRECO, INC.
common stock (the "Shares"), along with any and all other shares,
options, warrant and stockholder rights in said KNRECO, INC. which
the undersigned may have any claim to or interest in whatsoever.
The undersigned represents and warrants that he is the sole legal
and beneficial owner of said Shares, and that he holds title to
said Shares free and clear of any liens, claims, demands,
encumbrances, privileges, security interests, or rights of any
other entity, and that he has the right to sell the same.
The undersigned further acknowledges that he has received all
dividends and distributions of whatever nature to which he is/was
entitled to as a shareholder, director or equity or rights holder
of KNRECO; and he further waives, releases, and quit-claims any
claim, demand or action he may have against KNRECO as a
shareholder, director or equity or rights holder of KNRECO,
pursuant to the Iowa Business Corporation Act; the United States
Securities Act of 1933; the Securities Exchange Act of 1934; any
state securities or corporation act; or any other legal or
equitable theory.
The undersigned does hereby irrevocably constitute and appoint
PIONEER RAILCORP, attorney to transfer said stock on the books of
said KNRECO, INC., with full power of substitution in the premises.
Dated:__________________, 1996.
[Delivered at Closing]
_________________________________
Signature of Owner.
[SIGNATURE GUARANTEE]
Exhibit F
Stockholders
Name Shares
Adolph, Laura 1,700
Cllebracht, Joe 1,500
Fanucchi, Edward 1,250
Finley, Robert W. Jr. 5,700
Gudiness, Arline 300
Hartrick, James 1,000
Heffner, John 2,000
Johnson, James 3,525
Knox-Dick, Henry 1,380
Lofton, Richard 500
Mogytych, A. Jr. 487
Opferman, Dennis 2,100
Richmond, Bill 50
Sangree, Carl Jr. 1,000
Taylor, R.L. 15,838
Victor, Paul 2,100
Wagenlease, Inc 1,000
Warfield, John C. 12,000
Warfield, John J. 126,380
Weber, Rudolph 7,000
Weber, Thomas 2,320
Zweerts, Jan 300
EXHIBIT G
CONTRACTS DISCLOSED PURSUANT TO SECTION 23
NONE.
EXHIBIT H
February 29, 1996
To the Shareholders of KNRECO, INC.:
As you know, Pioneer Railcorp ("Pioneer") has entered into an
Agreement to purchase the shares of John Warfield, President,
Chairman, and majority shareholder of KNRECO, Inc. ("KNRECO"). A
copy of that Agreement is enclosed in this package for your
information.
Pioneer is now making that same offer to all of the Shareholders of
KNRECO.
Pioneer will purchase your KNRECO, Inc. stock for $16.50 per share,
in cash, or, if you elect, part or all of the payment can be made
in Pioneer Railcorp common stock. The price of Pioneer stock has
been set at one Pioneer share per $3.625 of the purchase price. If
you elect to take the entire purchase price in Pioneer Stock, that
amount will be rounded to the next highest full share.
Enclosed, for your review, are copies of Pioneer's most recent
annual report and proxy statement, and its most recent Form 10-KSB;
Form 10-QSB, and Form S-3, as filed with the Securities & Exchange
Commission, and the most recent financial statements of KNRECO,
Inc., as presented by its Board of Directors to Pioneer.
You have the opportunity to ask questions and receive answers
concerning the terms and conditions of the offer, by calling me at
(309) 697-1400.
You may also receive additional information from KNRECO.
If you elect to receive some or all of your purchase price in
Pioneer stock, you will receive Class A common stock, which is the
only class currently outstanding, and is listed on the Chicago
Stock Exchange under the symbol, "PRR"; However, the Pioneer stock
issued to sellers in this transaction will not be registered under
the Securities Act of 1933, or any state securities act, and will
be RESTRICTED as to transfer under Securities & Exchange Commission
Rule 144. It may not be sold, transferred, or pledged for a period
of two years after issuance, except for transfers by gift or
inheritance. The stock becomes tradeable after the expiration of
the two-year holding period. The restriction does not affect any
other rights. These shares will have the same voting rights,
dividend rights, and other rights that Pioneer Class A common
shares may have.
Offer to KNRECO Shareholders
Page 2 of 3.
Pioneer stock has been traded on the exchange since July, 1993.
Between July 1993 and June 1995, the stock traded in a range of
$2.00 to $9.00. In July, 1995 there was a 2 for 1 split. Since
then the stock has traded from a low of $2.25 a share, to a high of
$4.50. The Closing price yesterday, February 28, was $3.875 (or
$7.75 on a pre-split basis). Your price of $3.625 was set on the
date Pioneer entered into its letter of intent to make this offer.
In accepting one of the payment options involving Pioneer
shares,you represent and warrant that, by virtue of your business
and financial experience, and that of your professional advisors,
you have the capacity to protect your own interests in this
transaction, and that you qualify as an "accredited investor" as
defined by the U.S. Securities & Exchange Commission.
In order to accept the offer to purchase, you will be required to
fill out and sign the Form of Election, enclosed with this letter;
sign the Bill of Sale and Stock Power; and deliver your original
KNRECO, Inc. stock certificates. The Form of Election specifies
the payment option you desire. By executing the Bill of Sale and
Stock Power, you warrant that you are the sole owner of the number
of shares shown on your election form, and that you have no other
interest in, or claim upon, KNRECO, Inc., as a shareholder. If the
information contained on the Form of Election is incorrect, or if
your records show you are entitled to any other right or interest
in KNRECO, Inc. by reason of being a shareholder, contact me
immediately.
For United States residents, accepting the entire purchase price in
Pioneer stock would constitute a TAX-FREE TRANSACTION for the
shareholder. Your basis in your KNRECO stock would carry over to
the Pioneer stock, and you would not be liable for federal income
tax until you sold your Pioneer stock. If you accept all, or any
portion of the purchase price in cash, you will have to report that
as a sale of your KNRECO stock. For further information as to the
tax consequences of the transaction, you are urged to consult your
tax professional.
This offer will remain open until the 5:00 pm (CST) Monday, March
11, 1996. Those shareholders who sign and return the Form of
Election by that time will be deemed to have made a timely
election. If you return the executed Bill of Sale and Stock Power
along with your original KNRECO, Inc. stock certificate(s) by that
date, payment will be made on March 12, 1996. If you cannot send
your certificates by that date, but have timely sent your Form of
Election, you will have forty-five (45) days to deliver your Bill
of Sale and Stock Power, along with your original stock
certificates. If those items are not delivered within that time
Offer to KNRECO Shareholders
Page 3 of 3.
period, your election will be deemed to have lapsed. Also, I will
offer, if any of you wish to have your canceled KNRECO
certificate(s) returned to you as a memento, please put a note to
that effect with it, and we will be glad to do that.
SPECIAL NOTE: Any KNRECO shareholder who is not present within the
United States of America or the Dominion of Canada during the time
of the offer (February 29 - March 11, 1996) will be permitted sixty
(60) days from the date of this letter to return the Form of
Election, Bill of Sale and Stock Power, and original stock
certificate(s), and such election and delivery shall be deemed
timely.
Any shareholder who elects not to sell his/her stock, or who fails
to return the Form of Election, or deliver the Bill of Sale and
Stock Power along with their original stock certificate(s) in a
timely manner, will be deemed to have rejected this offer, and
waived any rights they may have hereunder. You will remain a
shareholder of KNRECO. Pioneer and/or KNRECO reserve the right to
extend, renew or make another offer to purchase all or any portion
of the remaining shares of KNRECO, Inc., HOWEVER, neither Pioneer
nor KNRECO make any representations, expressed or implied, that any
offer to purchase KNRECO shares will be extended, renewed, or made
again. SUCH ACTION MAY OR MAY NOT BE TAKEN, TOTALLY AT THE
DISCRETION OF PIONEER and/or KNRECO, INC. Shareholders will assume
the risk that they will never have a market for their KNRECO, Inc.
shares.
I urge you to read the enclosed materials carefully before making
your decision. Again, please do not hesitate to contact us if you
have any questions about the transaction. We look forward to
receiving your response.
Sincerely yours,
/s/
Guy L. Brenkman,
Chairman-CEO.
Enclosures.
FORM OF ELECTION
I,______________________________________("Seller"), being the
legal and beneficial owner of ____________ shares of KNRECO, Inc.
Common Stock, having received the offer to purchase said shares
from PIONEER RAILCORP, dated February 29, 1996, hereby elect as
follows:
A. [ ] I accept the offer, and wish to receive the purchase
price in:
1. [ ] Cash.
2. [ ] _____% Cash and _____% Pioneer Stock.
3. [ ] Pioneer Stock
If Seller checked payment option two or three, he/she
hereby represents and warrants that they have been informed that
the Pioneer Stock will be issued as a "private placement", and will
not be registered under the Securities Act of 1933, or any state
securities act. Seller understands it will be "restricted" as to
transfer, pursuant to SEC Rule 144. Seller represents and warrants
to Pioneer that, by virtue of his/her business and financial
experience, and that of their professional advisors, they have the
capacity to protect their own interests in this transaction, and
that they qualify as an "accredited investor" as defined by the
U.S. Securities & Exchange Commission. Seller further warrants
that he/she is acquiring the Pioneer Stock for their own account,
and not with a view towards resale (as an underwriter), and that
he/she will not sell, transfer, pledge or otherwise dispose of the
Pioneer Stock, except in accordance with SEC Rule 144. Seller
warrants that he/she is not a resident of a state which requires
registration of the transaction.
B. [ ] I decline the offer. I understand that by doing so I am
waiving any rights I may have under said offer, and that this offer
may not be extended, renewed or made again. I acknowledge that I
will remain a stockholder of KNRECO, Inc. and that there may never
be a market for my shares of KNRECO, Inc., and in declining the
offer, I accept that risk.
Please sign exactly as your name(s)
appear on your stock certificate(s):
________________________________
Dated:__________________, 1996.
________________________________
INSTRUCTIONS: After you have made your election, you should return
this form in the envelope provided. IF YOU MARKED ELECTION "A";
you must provide your Social Security Number (or tax identification
number) below, and, in order to receive your payment, you must sign
and return the Bill of Sale and Stock Power along with your
original stock certificates.
Social Security Number (or tax ID
Number):_______________________________
PIONEER RESERVES THE RIGHT TO REJECT THIS FORM OF ELECTION IF IT IS
NOT EXECUTED AND RECEIVED BY 5:00 pm, CST, MONDAY MARCH 11, 1996.
IN ORDER TO RECEIVE PAYMENT YOU MUST BE RETURN YOUR EXECUTED BILL
OF SALE AND STOCK POWER AND YOUR ORIGINAL STOCK CERTIFICATE(S) BY
APRIL 26, 1996. PIONEER RESERVES THE RIGHT TO DECLARE THIS
ELECTION VOID AND LAPSED IF THE EXECUTED BILL OF SALE AND STOCK
POWER AND THE CERTIFICATE(S) ARE NOT DELIVERED BY THAT DATE.
Pioneer Railcorp Wholly-Owned Subsidiaries
Alabama Railroad Co., incorporated in Iowa
Alabama & Florida Railway Co., incorporated in Iowa
Decatur Junction Railway Co., incorporated in Iowa
Fort Smith Railroad Co., incorporated in Iowa
Minnesota Central Railroad Co., incorporated in Iowa
Mississippi Central Railroad Co., incorporated in Mississippi
Pioneer Air, Inc., incorporated in Iowa
Pioneer Railroad Equipment Co., Ltd., incorporated in Iowa
Pioneer Railroad Services, Inc., incorporated in Iowa
Vandalia Railroad Company, incorporated in Illinois
Wabash & Western Railway Co., incorporated in Iowa
West Michigan Railroad Co., Incorporated in Iowa
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registran's December 31, 1995 Form 10-KSB and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 276,230
<SECURITIES> 0
<RECEIVABLES> 1,299,082
<ALLOWANCES> 15,958
<INVENTORY> 287,772
<CURRENT-ASSETS> 2,056,733
<PP&E> 17,200,166
<DEPRECIATION> 1,979,998
<TOTAL-ASSETS> 17,923,932
<CURRENT-LIABILITIES> 2,980,327
<BONDS> 0
0
0
<COMMON> 4,487
<OTHER-SE> 2,966,381
<TOTAL-LIABILITY-AND-EQUITY> 17,923,932
<SALES> 0
<TOTAL-REVENUES> 8,577,421
<CGS> 0
<TOTAL-COSTS> 6,886,650
<OTHER-EXPENSES> (176,156)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 785,371
<INCOME-PRETAX> 1,081,556
<INCOME-TAX> 495,443
<INCOME-CONTINUING> 586,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 461,708<F1>
<EPS-PRIMARY> .11
<EPS-DILUTED> .10
<FN>
<F1>The difference between Income from Continuing Operations of $586,113 and Net
Income of $461,708 related to $124,405 of dividends paid to minority interests
in subsidiaries in 1995.
</FN>
</TABLE>
