U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended June 30, 1997
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
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 NASDAQ, Chicago Stock Exchange
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
4,589,513
----------------------------------------------------
(Shares of Common Stock outstanding on June 30, 1997
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended June 30, 1997 and 1996
UNAUDITED
<TABLE>
Second Quarter First Six Months
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1997 1996 1997 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Operating revenue ............................... $ 3,509,995 $ 3,171,895 $ 6,323,230 $ 5,622,337
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Operating expenses
Maintenance of way ........................... 354,099 249,926 581,776 455,571
Maintenance of equipment ..................... 391,095 395,792 759,351 671,586
Transportation expense ....................... 782,996 678,906 1,492,085 1,134,195
Administrative expense ....................... 782,011 809,819 1,576,742 1,424,076
Depreciation & amortization ................. 376,438 356,230 744,024 670,806
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2,686,639 2,490,673 5,153,978 4,356,234
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Operating income ................................ 823,356 681,222 1,169,252 1,266,103
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Other income & expense
Other (income) expense ....................... (60,902) (123,461) (194,820) (181,694)
Interest expense, equipment .................. 195,459 199,976 397,617 400,143
Interest expense, other ...................... 148,717 157,655 294,892 244,922
Net (gain) loss on sale of fixed assets ...... (35,612) 2,630 (64,564) (26,875)
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247,662 236,800 433,125 436,496
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Income before income taxes ...................... 575,694 444,422 736,127 829,607
Provision for income taxes ...................... 209,350 178,210 268,250 320,610
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Income before minority interest in preferred
stock dividends of consolidated subsidiaries . $ 366,344 $ 266,212 $ 467,877 $
508,997
Minority interest in preferred stock dividends of
consolidated subsidiaries ................... $ 31,308 $ 31,308 $ 62,615 $ 62,615
Net income ...................................... $ 335,036 $ 234,904 $ 405,262 $ 446,382
========================================================
Earnings per common share ....................... $ 0.05 $ 0.04 $ 0.07 $ 0.08
========================================================
Weighted average number of common shares
and common share equivalents used in
computing earnings per share .................... 8,871,667 9,008,052 8,869,699 9,000,368
========================================================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
UNAUDITED
<TABLE>
June 30 December 31
----------- -----------
1997 1996
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<S> <C> <C>
ASSETS
Current Assets
Cash ............................................... $ 858,169 $ 501,212
Accounts receivable, less allowance
for doubtful accounts (1997 $64,468; 1996 $45,291) 2,369,342 2,071,289
Inventories ........................................ 402,143 420,952
Prepaid expenses ................................... 110,097 261,427
Income tax refund claims ........................... 338,246 349,881
Deferred taxes ..................................... 25,901 25,901
-------------------------
Total current assets .......................... 4,103,898 3,630,662
-------------------------
Property and Equipment less accumulated
depreciation 1997 $3,926,501; 1996 $3,294,610 ....... 19,753,307 20,131,566
-------------------------
Intangible Assets, less accumulated amortization
1997 $171,328; 1996 $140,109 ........................ 1,144,919 1,171,114
-------------------------
Investments, cash value of life insurance ............. 84,738 74,962
-------------------------
Total assets .......................................... $25,086,862 $25,008,304
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................... $ 2,811,942 $ 2,973,258
Notes payable ...................................... 1,044,973 769,535
Income taxes payable ............................... 248,178 18,978
Current maturities of long-term debt ............... 1,930,473 1,813,246
Accrued liabilities ................................ 599,918 491,610
-------------------------
Total current liabilities ..................... 6,635,484 6,066,627
-------------------------
Long-term debt, net of current maturities ............. 11,639,482 12,564,133
Deferred income taxes ................................. 1,967,651 1,967,651
-------------------------
Total liabilities & debt ...................... 20,242,617 20,598,411
-------------------------
Minority interest in subsidiaries ..................... 1,188,000 1,188,000
Stockholders' Equity
Common stock ....................................... 4,587 4,571
Additional paid-in capital ......................... 2,010,223 1,981,149
Retained earnings .................................. 1,641,435 1,236,173
-------------------------
Total stockholders' equity .................... 3,656,245 3,221,893
-------------------------
Total liabilities and equity .......................... $25,086,862 $25,008,304
=========================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ending June 30, 1997 and 1996
UNAUDITED
<TABLE>
6 Months Ended
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income .................................................. $ 405,262 $ 446,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 62,615 62,616
Depreciation ...................................... 712,815 645,765
Amortization ...................................... 31,209 25,041
Increase in cash value life insurance ............. (9,776) (7,169)
(Gain) on sale of property & equipment ............ (64,564) (26,875)
Deferred taxes .................................... -0- 160,000
Change in assets and liabilities, net of effects from
acquisition of subsidiaries
(Increase) decrease accounts receivable ........... (298,053) (133,935)
(Increase) decrease inventories ................... 18,809 (5,413)
(Increase) decrease prepaid expenses .............. 151,330 39,734
(Increase) decrease intangible assets ............. (5,014) (33,558)
Increase (decrease) accounts payable .............. (161,316) (426,248)
(Increase) decrease income tax refund claims ...... 11,635 50,998
Increase (decrease) income tax payable ............ 229,200 21,050
Increase (decrease) accrued liabilities ........... 108,310 86,431
--------------------------
Net cash provided by operating activities ......... 1,192,462 904,816
--------------------------
Cash Flows From Investing Activities
Proceeds from sale of property & equipment ........ 137,957 32,700
Purchase of property & equipment, net of property
and equipment from acquisition of subsidiaries (407,951) (898,012)
Acquisition of subsidiaries, net of cash acquired . -0- (2,786,882)
--------------------------
Net cash (used in) investing activities ........... (269,994) (3,652,194)
--------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 1,283,301 901,160
Proceeds from long-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 119,700 3,177,519
Payments on short-term borrowings ................. (1,007,863) (387,651)
Payments on long-term borrowings .................. (927,124) (917,345)
Repurchase of minority interest ................... (1,000)
Proceeds from warrants and options exercised ...... 29,090 75,840
Payments to minority interest ..................... (62,615) (62,615)
--------------------------
Net cash provided by financing activities: ........ (565,511) 2,785,908
--------------------------
Net increase (decrease) in cash ............................. 356,957 38,530
Cash, beginning of period ................................... 501,212 276,230
--------------------------
Cash, end of period ......................................... $ 858,169 $ 314,760
==========================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES
NOTE 1. STATEMENTS
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-QSB. Accordingly,
certain disclosures required by generally accepted accounting principles are not
included herein. These interim statements should be read in conjunction with the
latest financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-KSB and subsequent Form 10-QSB filings.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of consolidation:
The consolidated financial statements include Pioneer Railcorp (Pioneer) and its
wholly-owned and controlled subsidiaries (collectively, "the Company"). The
significant subsidiaries are as follows: West Michigan Railroad Co. (WJ), Wabash
& Western Railway Co. d/b/a Michigan Southern Railroad (MSO), Fort Smith
Railroad Co. (FSR), Alabama Railroad Co. (ALAB), Mississippi Central Railroad
Co. (MSCI), Alabama & Florida Railway Co., Inc. (AF), Decatur Junction Railway
Co. (DT), Vandalia Railroad Company (VRRC), Minnesota Central Railroad Co.
(MCTA), Keokuk Junction Railway Co. (KJRY), Rochelle Railroad Co. (RRCO),
Shawnee Terminal Railway Company (STR), Pioneer Railroad Equipment Co., Ltd.
(PREL), Pioneer Air, Inc. (PAR), and Pioneer Railroad Services, Inc. (PRS). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Inventories:
Inventories consisting of various mechanical parts, track materials and
locomotive supplies are stated at the lower of cost (determined by the average
cost method) or market.
Property and equipment:
Property and equipment are stated at cost. Depreciation is computed principally
on a straight-line basis over the following estimated useful lives:
Roadbed - 20 years
Transportation equipment - 10 to 15 years Railcars - 10 to 15 years Buildings -
20 to 40 years Machinery and equipment - 5 to 10 years Office equipment - 5 to
10 years
Maintenance and repair expenditures, which keep the rail facilities in proper
operating condition, are charged to operations as incurred. Expenditures
considered to be renewals and betterments are capitalized if such expenditures
improve track conditions and benefit future operations with more efficient use
of rail facilities.
Intangible assets:
Intangible assets consist principally of goodwill which is being amortized by
the straight-line method over a forty-year period. The Company reviews
intangible assets quarterly to determine potential impairment by comparing the
carrying value of the intangible with the undiscounted anticipated future cash
flows of the related property before interest charges. If future cash flows are
less than the carrying value, the Company will determine the fair market value
of the property and adjust the carrying value of the intangibles if the fair
market value is less than the carrying value.
Earnings per common and common share equivalent share:
Primary earnings per common share was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding at the end of the respective periods under the Treasury Stock
Method.
<PAGE>
NOTE 3. ESTIMATED IMPACT OF THE ADOPTION OF RECENT ACCOUNTING
STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 requires the presentation of both basic earnings per share and diluted
earnings per share. Basic earnings per share will be computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share will be computed in the same manner used by the Company in
computing earnings per share. SFAS No. 128 will be effective for the Company's
1997 annual report. If SFAS No. 128 had been in effect during the second quarter
of 1997, basic earnings per share would have been $.07 per share and diluted
earnings per share would have been $.05 per share. If SFAS No. 128 had been in
effect during the first six months of 1997, basic earnings per share would have
been $.09 per share and diluted earnings per share would have been $.07 per
share.
The Company is not aware of any other recent accounting standard issued, but not
yet required to be adopted by the Company, that would have a material effect on
its financial position or results of operations.
NOTE 4. STOCK OPTION PLANS
On April 12, 1994, Pioneer adopted, with the subsequent approval of its
shareholders, a stock option plan permitting the issuance of up to 836,000
shares of common stock. Options granted under the plan were incentive based. The
options became exercisable on July 5, 1995 at a price equal to the market value
of the common stock at the date of grant, and the effect on earnings per share
has been reflected in the accompanying financial statements. As of June 30,
1997, a total of 782,300 options are outstanding under this plan after
forfeitures and exercises.
On June 26, 1996, the Company's shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options are fully vested and will be exercisable
as of July 1, 2001, and the effect on earnings per share has been reflected in
the accompanying financial statements. The exercise date can be accelerated if
Pioneer Railcorp common shares reach a closing price of $7.25 per share, or
higher, for any consecutive 10-day period, as reported in the Wall Street
Journal. The options will be exercisable at the market price of the common
shares at the date the options were granted, in whole or in part within 10 years
from the date of grant. As of June 30, 1997, a total of 287,000 options are
outstanding under this plan after forfeitures of 120,000 shares.
NOTE 5. STOCK SPLIT AND STOCK WARRANTS ISSUED AS DIVIDENDS
On May 16, 1995 the Board of Directors authorized a 2 for 1 stock split to
shareholders of record June 30, 1995, payable July 1, 1995. This increased the
outstanding common shares to 4,198,084 from 2,099,042. In addition, on June 24,
1995 the shareholders ratified an amendment to the Articles of Incorporation
authorizing the issuance of stock warrants as a dividend to shareholders
immediately after the stock split. Each shareholder received one warrant for
each share of common stock owned. Each warrant permits shareholders to purchase
an additional share of common stock at a predetermined price of $2 per share.
The warrants expire on July 1, 2015, and the effect of the warrants on earnings
per share has been reflected in the accompanying financial statements. As of
June 30, 1997, a total of 66,844 warrants had been exercised.
NOTE 6. MINORITY INTERESTS IN SUBSIDIARIES
Three of the Company's subsidiaries have preferred stock outstanding. This stock
is accounted for as minority interest in subsidiaries and dividends on the stock
are accounted for as a current expense.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company operated the following twelve railroads during the second quarter of
1997: West Michigan Railroad Co. (WJ), Wabash & Western Railway Co. d/b/a
Michigan Southern Railroad (MSO), Fort Smith Railroad Co. (FSR), Alabama
Railroad Co. (ALAB), Mississippi Central Railroad Co. (MSCI), Alabama & Florida
Railway Co., Inc. (AF), Decatur Junction Railway Co. (DT), Vandalia Railroad
Company (VRRC), Minnesota Central Railroad Co. (MCTA), Keokuk Junction Railway
Co. (KJRY), Rochelle Railroad Co. (RRCO), and Shawnee Terminal Railway Company
(STR). The Company also operated three railroad-related subsidiaries, Pioneer
Railroad Equipment Co., Ltd. (PREL), Pioneer Railroad Services, Inc. (PRSI), and
Pioneer Air, Inc (PAR). Summary: Second Quarter 1997 Compared to Second Quarter
1996.
<PAGE>
The Company's net income in the second quarter 1997 increased by 43% to $335,036
up from $234,904 in the same period last year. Operating revenue in the second
quarter 1997 increased by $338,000 or 11% to $3.5 million from $3.17 million in
the same period last year. Operating expense increased in the second quarter
1997 by approximately $200,000 or 8% to $2.69 million from $2.49 million in the
same period last year. Operating income increased in the second quarter 1997 by
$142,000 or 21% to $823,000 from $681,000 in the same period last year.
Several factors contributed positively to the increase in second quarter 1997
net income:
The Company's Michigan Southern Railroad, which began operating in the fourth
quarter 1996, had operating income of $113,000 in the second quarter 1997. The
Rochelle Railroad, which began operating in April of 1996, had an increase in
operating income of $51,000, recording operating income of $52,000 in the second
quarter 1997 compared to $1,000 in the same period last year. This increase
resulted from increases in pricing. The Keokuk Junction Railway had an increase
in operating income of $192,000, recording operating income of $401,000 in the
second quarter 1997 compared to $209,000 in the same period last year. The
increase in operating income resulted from increased operating efficiencies
resulting from the Company's operating procedures, and increased rail shipments
resulting from marketing efforts by the Company. The Minnesota Central Railroad
had an increase in operating income of $131,000, recording operating income of
$156,000 in the second quarter 1997 compared to $25,000 in the same period last
year. Most of the increase in MCTA operating income resulted from additional
switching revenues recorded due to adjustments involving time limits for the
settlement of freight and switching liabilities required by railway accounting
rules as established by the Association of American Railroads, the governing
body of all North American railroads. The MCTA also benefited from more
efficient train handling as a result of a new operating plan developed by the
Company.
In addition, the Fort Smith Railroad had increased operating income of $43,000
in the second quarter 1997 and the Decatur Junction Railway had increased
operating revenue of $25,000 in the quarter.
Several factors adversely affected second quarter 1997 net income:
Pioneer Railroad Equipment operating income was down $293,000, recording
operating income of $116,000 in the second quarter 1997 compared to $409,000 in
the same period last year. PREL's decrease related to lost revenue due to
under-utilization of grain hopper cars and box cars system- wide, and the
non-renewal of a short-term lease of 75 covered hoppers to a non-affiliated
party that generated income of approximately $90,000 in the second quarter 1996
and was in effect from November 1995 through May 1996. The Company has made
efforts to relocate certain groups of railcars and expects a modest increase in
railcar revenues from these efforts.
The Mississippi Central Railroad operating income decreased approximately
$57,000 in the second quarter 1997, recording operating income of $22,000 in the
second quarter 1997 compared to $79,000 in the same period last year. MSCI's
decrease resulted from changes in logistics and supply of inbound pulpwood which
has reduced the competitiveness of MSCI's served locations. The Company is
vigorously pursuing avenues to regain pulpwood shipments.
The Alabama Railroad operating income decreased approximately $67,000 in the
second quarter 1997, recording operating income of $48,000 in the second quarter
1997 compared to $115,000 in the same period last year. ALAB's decrease resulted
from the same circumstances affecting MSCI, changes in logistics and supply of
inbound wood raw materials. The Company does not anticipate a further drop in
shipping levels, but is uncertain as to when levels will increase.
Operating Revenue:
The increase in operating revenue in the second quarter 1997 of $338,000 was
positively affected by a $145,000 increase of revenue generated from the Keokuk
Junction Railway which began operations under Pioneer Railcorp ownership on
March 13, 1996. Also, the Michigan Southern Railroad, which the Company began
operating in December 1996, had $254,000 of operating revenue in the quarter. In
addition, the Minnesota Central Railroad had an increase of approximately
$154,000 in operating revenue in the second quarter of 1997 to $498,000 compared
to $345,000 in the same period last year. Most of the increase in MCTA operating
revenue resulted from additional switching revenues recorded due to adjustments
involving time limits for the settlement of freight and switching liabilities
required by railway accounting rules as established by the Association of
American Railroads, the governing body of all North American railroads. In
addition, the Fort Smith Railroad had increased revenues of $88,000, the
Rochelle Railroad had increased revenues of $35,000 and the Alabama & Florida
Railway had increased revenues of $49,000. Almost all of these increases relate
to increases in pricing.
<PAGE>
The increases in operating revenue from these subsidiaries was offset by a
$93,000 operating revenue decrease by the Mississippi Central Railroad, which
had operating revenue of $149,000 in the second quarter 1997 compared to
$242,000 in the same period last year. Operating revenue from Pioneer Railroad
Equipment Co. was down approximately $321,000 in the second quarter 1997
recording operating revenue of $510,000 in the second quarter 1997 compared to
$831,000 in the same period last year. The PREL revenue decrease was a result of
under-utilization of grain hopper cars and box cars system wide, and the
non-renewal of a short-term lease of 75 covered hoppers to a non-affiliated
party.
The remaining operating subsidiaries had immaterial changes in revenue in the
second quarter 1997 compared to the same period last year.
Operating Expense:
Operating expense increased in the second quarter 1997 by approximately $200,000
or 8% to $2.6 million from $2.4 million in the same period last year. This
increase in operating expense resulted from the following factors:
The $104,000 increase in maintenance of way expense in the second quarter 1997
to $354,000 compared to $250,000 for the same period last year included $40,000
recorded by the Michigan Southern Railroad, which the Company began operating in
December 1996. The remaining increase in maintenance of way expense resulted
from moderate increases at the Minnesota Central Railroad and the Keokuk
Junction Railway. The $104,000 increase in transportation expense in the second
quarter 1997 to $783,000 from $679,000 was primarily attributable to the
Michigan Southern Railroad's transportation expense of $58,000 and a combination
of moderate increases from several other operating subsidiaries as a result of
minor derailments, increased carhire expense, fuel and other miscellaneous
items.
The remaining operating subsidiaries had no material changes in operating
expense in the second quarter 1997 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Other income of $61,000 for the second quarter 1997 consists of real estate
lease income, scrap income and other miscellaneous items. The decrease in the
second quarter 1997 other income compared to the same period last year primarily
resulted from a one-time scrap sale of approximately $90,000 recorded in the
second quarter 1996. None of the other income transactions are material in
nature when considered alone.
The Company experienced an 8% decrease in interest expense in the second quarter
1997 compared to the same period last year as the result of the reduction in
long term-debt from scheduled principal payments, and the absence of any
additional debt during the quarter.
Net gain on fixed asset dispositions during the second quarter 1997 of $36,000
included $5,500 from the sale of an excess locomotive, $11,000 from the sale of
a small parcel of land and $20,000 from the sale of a crane that was used
sparingly in Company operations.
Summary: First Six Months 1997 Compared to First Six Months 1996.
The Company's net income in the first six months 1997 decreased by 9% to
$405,262 down from $446,382 in the same period last year. Operating revenue in
the first six months 1997 increased by $701,000 or 12% to $6.3 million from $5.6
million in the same period last year. Operating expense increased in the first
six months 1997 by $800,000 or 18% to $5.1 million from $4.3 million in the same
period last year. Operating income decreased in the first six months 1997 by
$97,000 or 8% to $1,169,000 from $1,266,000 in the same period last year.
Several factors attributed to the decrease in the first six months 1997 net
income:
The Minnesota Central Railroad had limited rail operations in the first quarter
1997 as a result of the severe winter weather in the region which resulted in a
decrease in operating income of $129,000 in the first quarter 1997 when compared
to the same period in 1996. The Minnesota Central resumed operations in the
second quarter 1997, and as a result of a more efficient operating plan and
additional switching revenues previously discussed, the MCTA was able to record
six month operating income not materially different than the same period in the
prior year.
<PAGE>
Pioneer Railroad Equipment operating income was down $468,000, recording
operating income of $370,000 in the first six months 1997 compared to $838,000
in the same period last year. PREL's decrease related to lost revenue due to
non-utilization of grain hopper cars assigned to the MCTA in the first quarter
1997, under-utilization of grain hopper cars and boxcars system wide in the
second quarter 1997, and the non-renewal of a short-term lease of 75 covered
hoppers to a non-affiliated party that was in effect from November 1995 through
May of 1996 which generated $200,000 of revenue during the six month period
1996. The Company has made efforts to relocate certain groups of railcars and
expects a modest increase in railcar revenues from these efforts. The expected
shift of grain markets to the west coast in the fall of 1997 would significantly
increase the Company's revenues from its grain hopper fleet.
The Mississippi Central Railroad operating income decreased approximately
$138,000 in the first six months 1997, recording operating income of $55,000 in
the first six months 1997 compared to $193,000 in the same period last year.
MSCI's decrease resulted from changes in logistics and supply of inbound
pulpwood which has reduced the competitiveness of MSCI's served locations. The
Company is vigorously pursuing avenues to regain pulpwood shipments.
The Alabama Railroad operating income decreased approximately $74,000 in the
first six months 1997, recording operating income of $88,000 in the first six
months 1997 compared to $160,000 in the same period last year. ALAB's decrease
resulted from the same circumstances affecting MSCI, changes in logistics and
supply of inbound wood raw materials. The Company does not anticipate a further
drop in shipping levels, but is uncertain as to when levels will increase.
The Company's Keokuk Junction Railway subsidiary, which the Company began
operating on March 13, 1996, contributed operating income of $644,000 in the
first six months 1997, compared to $248,000 in the same period in 1996, an
increase of $396,000. The Rochelle Railroad, which began operations in April
1996, had increased operating income of $88,000. The Michigan Southern Railroad,
which began operations in December 1996, had operating income of $166,000.
Interest expense increased approximately $47,000 in the first six months 1997 to
$692,000 compared to $645,000 in the same period last year, most of which was a
direct result of the financing of the Keokuk Junction Railway acquisition.
Operating Revenue:
The increase in operating revenue in the first six months 1997 of $701,000 was
positively affected by a $715,000 increase in revenue generated from the Keokuk
Junction Railway which began operations under Pioneer Railcorp ownership on
March 13, 1996. Also, the Rochelle Railroad, which began operations in April
1996, had $133,000 of increased operating revenue in the first six months 1997,
and the Michigan Southern Railroad, which began operations in December 1996, had
$470,000 of operating revenue in the six month period. In addition, the Alabama
& Florida Railway had an increase of approximately $130,000 in operating revenue
in the first six months with revenues of $718,000 compared to $588,000 in the
same period last year.
The increases in operating revenue from these subsidiaries was offset by a
decrease in revenues from Pioneer Railroad Equipment Co. which had a $460,000
decrease in revenues to $1,157,000 in the first six months 1997 compared to
$1,617,000 in the same period last year. The PREL revenue decrease was a result
of non-utilization of grain hopper cars assigned to the MCTA in the first
quarter 1997, under-utilization of grain hopper cars and boxcars system wide in
the second quarter 1997, and the non-renewal of a short-term lease of 75 covered
hoppers to a non-affiliated party that was in effect from November 1995 through
May of 1996 and generated $200,000 of revenue during the six month period 1996.
Mississippi Central Railroad operating revenue was down approximately $196,000
with revenues of $299,000 in the first six months 1997 compared to $495,000 in
the same period last year. MSCI's decrease in revenues resulted from changes in
logistics and supply of inbound pulpwood which has reduced the competitiveness
of MSCI's served locations. The Company is vigorously pursuing avenues to regain
pulpwood shipments. The Minnesota Central Railroad which had limited operations
in the first quarter 1997 because of severe winter weather, had strong second
quarter 1997 revenues, as mentioned above, with the net result being a slight
decrease in operating revenue of $24,000 in the first six months 1997.
The remaining operating subsidiaries had no material changes in operating
revenues in the first six months 1997 compared to the same period last year.
<PAGE>
Operating Expense:
The increase in operating expense of $800,000 in the first six months 1997
resulted from the following factors:
Increases in maintenance of way, maintenance of equipment, and transportation
expense in the first six months 1997 was primarily attributable to the Michigan
Southern Railroad which began operations in December 1996, and the Keokuk
Junction Railway which the Company began operating in March of 1996. The
Michigan Southern Railroad increased maintenance of way expense $48,000 in the
first six months 1997 and the Keokuk Junction increased maintenance of way
expense $34,000 in the period. The Michigan Southern Railroad increased
maintenance of equipment expense $53,000 in the first six months 1997 and the
Keokuk Junction Railway increased maintenance of equipment expense $47,000 in
the period. The increase in transportation expense was primarily attributable to
the Michigan Southern Railroad which had transportation expense of $160,000 and
the Keokuk Junction Railway which had increased transportation expense of
$166,000 when compared to 1996. The Minnesota Central had a decrease in
transportation expense of $43,000 in the first six months 1997 as a result of
the reduced operations resulting from the severe weather in the first quarter
and efficient train handling in the second quarter. The increase in
administrative expense in the first six months 1997 was attributable to both new
operating subsidiaries and administrative expense related to payroll costs
associated with the hiring of additional support personnel.
The remaining operating subsidiaries had no material changes in operating
expenses in the first six months 1997 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Other income of $195,000 for the first six months 1997 consists of real estate
lease income, scrap income and other miscellaneous items. None of the other
income transactions are material in nature when considered alone.
Interest expense increased in the first six months 1997 by $47,000 and is
attributable to financing related to the Company's March 12, 1996 acquisition of
the Keokuk Junction Railway.
Net gain on fixed asset dispositions during the first six months 1997 of $65,000
included $30,000 from the sale of 2 excess locomotives, $5,000 from the sale of
a railcar, $11,000 from the sale of a small parcel of land and $20,000 from the
sale of a crane that was used sparingly in operations. Net gain on fixed asset
dispositions during the first six months 1996 of $27,000 was primarily
attributable to the sale of 5.36 miles of Alabama Railroad right of way. The
real estate was not located on an active part of the rail line.
Liquidity and Capital Resources:
The Company primarily uses cash generated from operations to fund working
capital needs and relies on long-term financing for railcars, new operating
subsidiaries, and other significant capital expenditures. The Company has
working capital lines of credit totaling $1,175,000 of which approximately
$227,000 was available at the end of the second quarter 1997.
In addition, the Company has seen the market value of its railcar and locomotive
fleet increase significantly over the last several years. This increase in value
has resulted from the short supply of railcars and locomotives compared to the
increased demand for their use. The Company believes it could refinance part of
its railcar or locomotive fleet with an asset-based lender and generate up to $1
million in cash.
In March of 1996, the Company negotiated a credit facility with its primary bank
to provide a $2.5 million annual revolving acquisition line of credit. This
facility is collateralized by the common stock of the Alabama Railroad Co. and
the Mississippi Central Railroad Co., as well as the Company's investment in
stock of any subsidiaries acquired under the line. The interest rate for the
line is currently 11.00%. The interest rate is adjustable quarterly to 2.5% over
New York Prime, limited to a one percent annual increase or decrease, not to
exceed 13.5% or be reduced below 10%. Any amounts drawn on the line must be
repaid monthly over a seven year period. The line was 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 and has an
available balance of approximately $320,000 as of June 30, 1997.
<PAGE>
On July 1, 1995, the Company's stock split and warrant issuance became payable
to shareholders. The 2 for 1 stock split increased the number of shares issued
and outstanding from 2,099,042 to 4,198,084. At the same time shareholders
became entitled to purchase an additional 4,198,084 common shares through stock
warrants issued by the Company as dividends. One warrant was issued for each
share of common stock held after the split, entitling the holder to purchase 1
share of common stock for $2 per share. The shares purchased through the
exercise of the warrants must be held for 1 year from the date of purchase. A
total of 9,670 warrants were exercised in the first six months 1997, and the
Company realized $19,340 on the exercise of the warrants. The Company expects
increased capital to be generated by the continued exercise of warrants but is
uncertain as to the amount. A total of 4,132,490 warrants are outstanding as of
June 30, 1997.
The Company granted 836,000 options to certain employees under its 1994
incentive stock option plan. The options are exercisable at prices equal to the
market value of the Company's stock at the date of grant. The exercise price
ranges are from $1.50 to $4.40 per share. The Company expects increased capital
to be generated by the exercise of options but is uncertain as to the amount. A
total of 6,500 options were exercised in the first six months 1997 and the
Company realized $9,750 as a result of their exercise. As of June 30, 1997, a
total of 782,300 options are outstanding under this plan after forfeitures and
exercises.
Long-term equipment financing has historically been readily available to the
Company for its railcar acquisition needs. The Company believes it will be able
to continue obtaining long-term equipment financing should the need arise. The
Company's plans for new equipment debt in the foreseeable future is 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 1997.
The Company is considering and analyzing the refinancing of some of its present
debt, particularly its $2.5 million annual revolving acquisition line of credit.
As of the date of this report, the Company believes it will have financing in
place to repay its acquisition line of credit by the end of the third quarter
1997.
The Company anticipates favorable outcomes involving current legal proceedings.
The Company does not anticipate any material judgements against it or any of its
subsidiaries will arise out of the current proceedings.
The Company believes its cash flow from operations and its available working
capital credit lines will be adequate to meet liquidity needs for at least the
next twelve months.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $1,192,000 in the
first six months 1997 compared to $905,000 in the same period last year. Net
cash from operating activities for the first six months 1997 resulted primarily
from $405,000 of net income, $744,000 of depreciation and amortization, an
increase in accounts receivable of $298,000, a decrease in trade payables of
$161,000, an increase in income taxes payable of $229,000 and an increase in
accrued liabilities of $108,000.
In the first six months 1997 the Company purchased approximately $438,000 of
fixed assets and capital improvements. The capital additions included the
purchase of approximately 17 railcars at a total cost of $122,000, financed with
long-term fixed rate financing. In addition, the Company capitalized
approximately $110,000 of track and structure betterments, $65,000 in railcar
and locomotive betterments, $48,000 of leasehold improvements to several
operating railroads, $18,000 for a parcel of industrial development land located
adjacent to the Alabama & Florida Railway and the remaining capital expenditures
of approximately $75,000 were for machinery, equipment and other assets. All the
expenditures other than the railcars purchased were financed with working
capital cash flow.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Several lawsuits were pending by and against Pioneer Railcorp and/or its
subsidiaries (collectively, the "Company") during the second quarter of 1997.
Two crossing accident cases are currently pending, one in the Circuit Court of
Sebastian County, Arkansas, involving a crossing accident which occurred in Fort
Smith in December 1993, and another in the Federal District Court for the Middle
District of Alabama (Montgomery), involving an accident which occurred in
Andalusia, Alabama in May, 1996. Management is vigorously defending these cases.
The Company does not believe it has any liability in the Arkansas case. Alabama
law is considerably less favorable to the Company's interests, however, the
Company believes it has adequate insurance coverage and that neither case is
likely to result in a material adverse effect on the Registrant's consolidated
financial position or results of operation.
A Federal Employer's Liability Act ("FELA") lawsuit is pending against the
Alabama & Florida Railway in Alabama. That action was brought by a former
employee of a track contractor (or its sub-contractor), and is being defended by
the contractor pursuant to an indemnification agreement. The Company does not
believe it has any liability in the matter, and does not believe the case will
result in a material adverse effect on the Registrant's consolidated financial
position or results of operation.
The Keokuk Junction Railway Co. received a summons on July 22, 1997, giving
notice of a FELA lawsuit filed by an employee who alleges he was injured on the
job. No other proceedings have been had in that case and management is still
evaluating the claim. The Company believes it has adequate insurance to cover
any possible liability, and that the case is not likely to result in a material
adverse effect on the Registrant's consolidated financial position or results of
operation.
There are two cases currently pending between Ralston L. Taylor, the former
General Manager of Keokuk Junction Railway ("KJRY"), and the Company. One of
those cases, which is in the District Court of Lee County (Iowa) involves
certain allegations by Mr. Taylor relating to the termination of his employment
relationship with KJRY. Management believes that Mr. Taylor's position is
without merit, and that the case is not likely to result in a material adverse
effect on the Registrant's consolidated financial position or results of
operation.
Fort Smith Railroad's appeal to the Seventh Circuit of a Railway Labor Act
ruling by the United States District Court for the Central District of Illinois
was not successful. Management believes the issue of the situs of bargaining is
an important one and is considering petitioning the United States Supreme Court
for a writ of certiorari in this case. The ruling by the Seventh Circuit did not
have a material adverse effect on the Registrant's consolidated financial
position or results of operation.
The cases between Minnesota Central Railroad Co. ("MCTA") and MNVA Railroad,
Inc. ("MNVA") and Dakota, Missouri Valley & Western Railroad, Inc., concerning
the asset sale from MNVA to MCTA in December, 1994 were settled and dismissed in
April, 1997. The settlement did not have a material adverse effect on the
Company's consolidated financial position or results of operation.
Pioneer's subsidiary railroads have a number of claims against delinquent
licensees, customers and others, some of which are in litigation, and others of
which are likely to result in litigation. None of the amounts involved, however,
would have a material impact on the Company's consolidated financial position or
results of operations if they proved to be uncollectible.
In the course of business, the Company experiences crossing accidents, employee
injuries, delinquent and/or disputed accounts, and other incidents, which give
rise to claims that may result in litigation. Management vigorously pursues
settlement and release of such claims, but at any one time, some such incidents,
which could result in lawsuits by and against the Company, remain unresolved.
Management believes it has valid claims for, or good defenses to, these actions.
Management considers such claims to be a routine part of the Company's business.
As of the date of this Form-10-QSB, management is not aware of any other
incident which is likely to result in a liability that would materially effect
the Company's consolidated financial position or results of operation.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders was held on June 18, 1997 at the
Company's headquarters in Peoria, Illinois. All five seats on the Board of
Directors were up for election at this meeting. Directors Guy L. Brenkman, J.
Michael Carr, Orvel L. Cox, and John S. Fulton were re-elected for a one year
term. Timothy F. Shea was elected a Director, replacing John P. Wolk who was not
up for re-election.
In addition to the election of the Board of Directors, shareholders ratified the
appointment of McGladrey & Pullen, LLP, Certified Public Accountants and
Consultants, as the Company's independent public accountants for the coming
year.
The vote totals for the matters voted upon at the Annual Meeting were as
follows:
<TABLE>
Proposal Votes For Votes Withheld Abstained
- -------------------------------------------- --------- -------------- ---------
<S> <C> <C> <C>
Nomination of Guy L. Brenkman
to the Board of Directors .................. 3,366,190 10,300 14,420
Nomination of Orvel L. Cox
to the Board of Directors .................. 3,365,690 10,800 14,420
Nomination of Timothy F.Shea
to the Board of Directors .................. 3,311,340 65,150 14,420
Nomination of John S. Fulton
to the Board of Directors .................. 3,362,490 14,000 14,420
Nomination of J. Michael Carr
to the Board of Directors .................. 3,362,090 14,400 14,420
Ratification of McGladrey & Pullen, LLP
as Independent Auditor ..................... 3,371,792 16,168 2,950
</TABLE>
Item 5. OTHER INFORMATION
Pioneer Railcorp sold all of the outstanding stock of Columbia & Northern
Railway Co. to a non-affiliated non-railroad entity, effective July 26, 1997.
This transaction did not have a material effect on the Company's consolidated
financial position or results of operation.
The Company has been notified by the City of Rochelle that it intends to
terminate the Rochelle Railroad Co.'s lease, without cause, in January 1998.
Management is evaluating its options in this matter, and it is possible that
litigation may result.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit # 20.1 Notice of Annual Meeting and Proxy Statement used to solicit
votes for the Annual Meeting of Shareholders, held June 18, 1997.
Exhibit # 20.2 Form of Ballot used at the Annual Meeting on June 18, 1997.
Exhibit # 20.3 Annual Report for 1996 sent to shareholders with the Notice of
Annual Meeting and Proxy Statement.
No reports were filed on Form 8-K during the second quarter 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
PIONEER RAILCORP
(Registrant)
/s/ Guy L. Brenkman
8/13/97 -----------------------------------
DATE GUY L. BRENKMAN
PRESIDENT & CEO
/s/ J. Michael Carr
8/13/97 -----------------------------------
DATE J. MICHAEL CARR
TREASURER & CHIEF FINANCIAL OFFICER
NOTICE OF ANNUAL MEETING TO BE HELD JUNE 18, 1997
PIONEER RAILCORP
Peoria, Illinois 61607
To the Stockholders:
The Annual Meeting of Stockholders will be held at Pioneer Railcorp's Corporate
Office, 1318 S.Johanson Road, Peoria, Illinois, on Wednesday, June 18, 1997,
commencing at 9:00 a.m. local time, for the purpose of considering and voting
on the following matters as described in the attached Proxy Statement:
- - To elect five directors for a one year term;
- - To consider and act upon a proposal to ratify the appointment of
independent public accountants for 1997;
- - Any other matters that may properly come before the meeting.
Only stockholders of record at the close of business on April 30, 1997, will be
entitled to vote at this meeting. A copy of the Company's Annual Report
containing financial data and a summary of operations for 1996 is being mailed
to the Company's stockholders with this Proxy Statement.
In order that your stock may be represented at the meeting in case you are not
personally present, please complete, sign and date the enclosed proxy/voting
instruction card and return it promptly in the accompanying addressed envelope.
By order of the Board of Directors.
/s/ Daniel A. LaKemper
- ----------------------
Daniel A. LaKemper
Secretary
May 12, 1997
<PAGE>
Pioneer Railcorp
1318 S. Johanson Road
Peoria, Illinois 61607
309-697-1400
Proxy Statement
This Proxy Statement and the accompanying proxy will be sent to stockholders of
Pioneer Railcorp on our about May 12, 1997, in connection with the solicitation
by the Board of Directors of proxies to be used at the Annual Meeting of
Stockholders of the Company to be held at Pioneer Railcorp's corporate office,
1318 S. Johanson Road, Peoria, Illinois 61607, on Wednesday, June 18, 1997,
commencing at 9:00 a.m. local time. The Company's Annual Report for 1996,
including financial statements, is also included herein.
The record date for stockholders entitled to vote at the Annual Meeting is April
30, 1997. As of April 30, 1997, the Company had issued and outstanding 4,588,263
shares of common stock, of which 4,588,263 are entitled to one vote per share.
It is the Company's policy that all proxies, ballots, and voting tabulations
that identify shareholders will be kept confidential, except where disclosure
may be required by applicable law, where shareholders write comments on their
proxy cards, or where disclosure is expressly requested by a shareholder.
The Proxy
Any person giving a proxy has the power to revoke it at any time before it is
voted, upon written notice to J. Michael Carr, Chief Financial Officer of the
Company.
Any proxy cards returned without specification will be voted as to each proposal
in accordance with the recommendations of the Board of Directors.
The Company will bear the costs of solicitation of proxies. Following the
mailing of proxy soliciting material, proxies may be solicited by directors,
officers and regular employees of the Company in person or by telephone or fax.
The Company will also reimburse persons holding stock for others in their names
or in those of their nominees for their reasonable expenses in sending proxy
material to their principals and obtaining their proxies.
Beneficial Ownership of Stock
There are no shareholders, as of March 26, 1997, known by the Company to be
beneficial owners of more than 5% of its outstanding common stock other than
Company directors and officers.
<PAGE>
Nominees for Election as Directors
Guy L. Brenkman, age 50, 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.
Orvel L. Cox, age 53, Director, also serves as same for each of the Company's
subsidiaries and Superintendent of Transportation for same. Mr. Cox has 37 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.
John S. Fulton, age 63, Director, was elected to the Board in 1993. Mr. Fulton
has 18 years experience in the real estate business concentrating in retail
sales, real estate development and appraising. Mr. Fulton's previous positions
include Industrial Appraising with Cole, Layer Trumble of Dayton, Ohio. Mr.
Fulton holds a BS degree in Public Administration from Bradley University in
Peoria, Illinois.
J. Michael Carr, age 33, 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.
Timothy F. Shea, age 48, is employed by RE/MAX and has been a real estate
property manager with RE/MAX since 1984. Mr. Shea has a BS-business management
from Bradley University, Peoria, Illinois.
General Information Relating to the Board of Directors
The Board of Directors of the Corporation consists of five members, each elected
for a term of one year. The board met a total of 2 times in 1996, at which time
all directors were present.
Compensation of Directors
Directors of the Company were compensated $1,000 in 1996 and received
reimbursement for out of pocket expenses.
Committees
The Audit Committee is the only standing committee of the Board of Directors.
The purpose of the Audit Committee is to recommend to the Board of Directors the
engagement of, and the fee to be paid to, the independent public accountants.
The Audit Committee also reviews with the independent accountants as deemed
necessary, the Corporation's accounting policies, conflict of interest policy,
internal control systems and financial operations and reporting. The committee
met once in 1996 and current members of this committee are John P. Wolk, John S.
Fulton, and Orvel L. Cox.
Security Ownership of Directors and Executive Officers
The following table sets forth information, as of March 26, 1997, the beneficial
ownership of all directors and officers of the Company as a group. These figures
include shares of Common Stock that the executive officers have the right to
acquire within 60 days of March 26, 1997 pursuant to the exercise of stock
options and warrants.
<PAGE>
Title of Class: Common Stock ($.001 par value)
Beneficial Percent
Name Of Beneficial Owner Ownership Of Class
- ------------------------------------------- ---------- --------
Guy L. Brenkman (2) ....................... 3,511,948 35.8%
Orvel L. Cox (3) .......................... 235,844 2.4%
Daniel A. LaKemper (4) .................... 144,393 1.5%
John P. Wolk (5) .......................... 144,000 1.5%
John S. Fulton (6) ........................ 42,000 .4%
J. Michael Carr (7) ....................... 67,716 .7%
Kevin Williams (8) ........................ 11,100 .1%
--------- -----
Directors and Executive
Officers as a Group: ...................... 4,157,001 42.4%(1)
FOOTNOTES:
(1) Based on 9,814,053 shares of Common Stock and Equivalents outstanding as of
March 26, 1997.
(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 10,142 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 2,538 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 727 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.
(8) Of the total number of shares shown as owned by Mr. Williams, 11,000 shares
represent the number of shares Mr. Williams has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 100 shares represent the number of shares Mr. Williams 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.
<PAGE>
Compensation of the Chief Executive Officer
Summary Compensation Table
Annual
Compensation Long Term Compensation
--------------- --------------------------------------
Restricted
Name & Stock Other
Position Year Salary Award Options/SARs Compensation
- -------- ---- -------- --------------------------------------
Guy L. Brenkman, CEO 1996 $350,098 ---- 80,000 $ 4,750 (a)
1995 $310,546 ---- 37,000 $ 4,500 (a)
1994 $227,609 $125,000 150,000 $ 4,500 (a)
(a) - Registrant's contribution to the Company's defined contribution plan.
Option/SAR Grants in Last Fiscal Year
<TABLE>
Potential Realizable
Value at Assumed
% of Total Annual Rates
Options Granted of Stock Price
to Employees Appreciation
Options in the Fiscal Exercise Expiration For Option Term
Name Granted Year Price Date 5% 10%
- ---- ------- ------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Guy L. Brenkman - CEO 80,000 20% $3.03 6/26/07 $133,874 $385,285
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number
of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/ Options/SARs
Shares SARs at FY-End At FY-End
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- ---------------- ----------- -------- --------------- ---------------
Guy Brenkman-CEO 0 0 60,606/ 206,394 $51,515/$16,485
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, 1996, the president's base
salary was $329,230. 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.
Proposal 1 - Ratification of Appointment of Independent Public Accountants
The Board of Directors, upon recommendation of its Audit Committee, has
appointed McGladrey & Pullen, LLP, Certified Public Accountants and Consultants,
as independent public accountants of the Company with respect to its operations
for the year 1997, subject to ratification by the holders of common stock of the
Company. In taking this action, the members of the Board and the Audit Committee
considered carefully McGladrey's performance for the Company with respect to
services performed in the years 1994-1996 and its general reputation for
adherence to professional auditing standards.
The Board of Directors recommends a vote FOR this proposal.
<PAGE>
Stockholder Proposals
Stockholders are entitled to submit proposals on matters appropriate for
stockholder action consistent with regulations of the Securities and Exchange
Commission. In order for a stockholder proposal for the 1998 Annual Meeting of
Stockholders to be eligible for inclusion in the Corporation's Proxy Statement
and form of proxy, it must be received by the Corporate Secretary no later than
January 13, 1998.
Other Matters
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than as set forth above. However, if any other matters come
before the Meeting, the proxies received pursuant to this solicitation will be
voted thereon in accordance with the judgment of the person or persons acting
under the proxies.
/s/ Pioneer Railcorp
PIONEER RAILCORP
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
JUNE 18, 1997
ELECTION OF DIRECTORS:
Guy L. Brenkman, J. Michael Carr, Orvel L. Cox, John S. Fulton, Timothy F. Shea
FOR all nominees listed above
- -------
FOR all nominees listed above, except
- -------
WITHHOLD authority to vote for all nominees listed above
- -------
PROPOSAL 1 - Ratification of Appointment of Independent Public Accountants
FOR the appointment of McGladrey & Pullen, LLP as the Company's 1997
- ------- independentpublic accountants
AGAINST the appointment of McGladrey & Pullen, LLP as the Company's
- ------- 1997 independent public accountants
THE UNDERSIGNED APPOINTS GUY L. BRENKMAN AS PROXY, TO VOTE THEIR
SHARES AS
DIRECTED ABOVE AT THE 1997 ANNUAL MEETING OF STOCKHOLDERS AND ANY
ADJOURNMENT
THEREOF. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE
ELECTION
OF THE PERSONS NOMINATED FOR DIRECTORS AND FOR BOTH PROPOSALS
SUBMITTED BY THE
COMPANY AS OUTLINED IN THE PROXY STATEMENT.
Dated: , 1997
----------------------------------
- -----------------------------------------------
Signature
- -----------------------------------------------
Signature if Held Jointly
TO THE SHAREHOLDERS
The fiscal year 1996 ended with mixed results for Pioneer Railcorp, with both
disappointing and encouraging developments. The disappointment was the
unanticipated negative operating performance of the Minnesota Central Railroad.
In the fourth quarter of 1996, the Minnesota Central Railroad was initially
crippled, then completely shut down as a result of the most severe weather
conditions in that region in years. The loss of expected grain traffic on the
Minnesota Central Railroad due to the weather conditions, as well as a decrease
in grain shipments in the last six months of 1996 resulting from market
conditions, adversely affected the revenues from the Company's covered hopper
fleet. None the less, Pioneer Railcorp ended the year profitable.
On the positive side, Pioneer Railcorp acquired five new railroad operations in
1996, including the Keokuk Junction Railway, which was the Company's most
significant acquisition to date in terms of revenues and car loads. System wide,
Pioneer Railcorp railroads handled approximately 32,000 car loads in 1996, up
from 23,000 in 1995. In addition, the diversity of the Company's railroad
portfolio enabled the Company to survive the adverse effects of the Minnesota
Central Railroad and post a profit in 1996, though far short of our
expectations. Without the diversity of the Company's railroad portfolio, the
effects of the Minnesota Central Railroad could have been far worse indeed.
In 1996, the Company continued to build and strengthen its management team and
asset base. The Company railcar and locomotive fleets were added to and improved
upon and several departments were enhanced through the purchase and upgrade of
mechanical and track equipment. The Company continues to make major investments
in its track, facilities and structures for the long-term. In 1996, the Alabama
& Florida Railway spent over $200,000 rebuilding one major bridge trestle and
strengthening another. The Fort Smith Railroad replaced its mobile home office,
which was destroyed by a tornado, with a modern office and mechanical facility.
The Keokuk Junction Railway built a railcar storage yard and installed a railcar
scale to better handle long-term customer needs.
Pioneer Railcorp continues to position itself for solid long-term growth and
operating results the shareholders seek. I believe Pioneer Railcorp begins 1997
positioned and equipped to do a terrific job of serving the rail users who
support our railroads, and doing it in the safest and most efficient manner
possible. At the same time, I believe the Company's shareholders will reap the
rewards associated with our well managed and equipped railroads.
Sincerely yours,
/s/ Guy L. Brenkman
- --------------------------
Guy L. Brenkman
Chairman - President - CEO
<PAGE>
Company Background
Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this annual report, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (WJ) (formerly West Jersey Railroad Co.), Wabash & Western Railway
Co. d/b/a Michigan Southern Railroad (MSO), Fort Smith Railroad Co. (FSR),
Alabama Railroad Co. (ALAB), Mississippi Central Railroad Co. (MSCI), Alabama &
Florida Railway Co., Inc. (AF), Decatur Junction Railway Co. (DT), Vandalia
Railroad Company (VRRC), Minnesota Central Railroad Co. (MCTA), Keokuk Junction
Railway Co. (KJRY), Rochelle Railroad Co. (RRCO), Columbia & Northern Railway
Co. (CNOW), Shawnee Terminal Railway Com-pany (STR), Pioneer Railroad Equipment
Co., Ltd. (PREL), Pioneer Air, Inc. (PAR), and Pioneer Railroad Services, Inc.
(PRS).
The Company operates in two business activities - railroad transportation and
railroad equipment leasing. 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 five smaller
railroads, the Kansas City Southern Railway (KCS), the Arkansas & Missouri
Railroad (AM), the Twin Cities & Western Railway (TCW), the Toledo Peoria &
Western Railway Corporation (TPW), and Indiana Northeastern Railroad Company
(IN). PRC's rail system is devoted to carrying freight. PRC also seeks to
encourage development on or near, and utilization of, its real estate right of
way by potential shippers as a source of additional revenue. The Company also
generates revenue by granting to various entities, such as utilities, pipeline
and communications companies and non-industrial tenants, the right to occupy its
railroad right of way and other real estate property. The Company also leases
rail equipment to, and repairs rail equipment owned by, others.
Pioneer Railcorp Subsidiaries
Fort Smith Railroad Co.
On July 7, 1991, the Fort Smith Railroad Co. (FSR), a wholly-owned subsidiary of
Pioneer Railcorp, entered into a twenty-year lease (with three twenty-year
renewals) with the Missouri Pacific Railroad Company (MP) and operates 18 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 railroad's principal commodities are iron, steel,
scrap steel, baby food, fiberglass, particle board, charcoal, grains, frozen
poultry, meal, chemicals, alcoholic beverages, industrial sand, lumber, paper,
pulpboard, fiberboard, peanuts, fertilizer and military movements.
Alabama Railroad Co., Inc.
On October 25, 1991, the Alabama Railroad Co., Inc. a wholly-owned subsidiary of
Pioneer Railcorp, purchased 60 miles of railroad facilities and real estate from
CSX Transportation (CSX). The line runs from Flomaton to Cor-duroy, Alabama, and
interchanges with CSX in Flomaton. The railroad's principal commodities are
pulpwood, particle board, and finished lumber.
Mississippi Central Railroad Co.
On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. The railroad runs from Oxford,
Mississippi to Grand Junction, Tennessee, a total of 56.5 miles, 51 of which are
located in Mississippi. The railroad interchanges with the Norfolk Southern
Railway (NS) at Grand Junction, Tennessee and the Burlington Northern Santa Fe
(BNSF) at Holly Springs, Mississippi. The Company changed the name of this
wholly-owned subsidiary to Mississippi Central Railroad Co. (MSCI) in January
1993. The railroad's principal commodities are outbound finished wood products
and inbound products, such as resins, chemicals, pulpwood for the production of
finished wood product, scrap steel and cottonseed.
<PAGE>
Alabama & Florida Railway Co., Inc.
On November 23, 1992, the Alabama & Florida Railway Co., Inc. (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 railroad's principal commodities are resins, plastics,
fertilizer, peanuts and pulpwood. Decatur Junction Railway Co. On September 23,
1993, the Decatur Junction Railway Co. (DT), a wholly-owned subsidiary of
Pioneer Railcorp, signed a lease agreement with Cisco Co-op Grain Company
(Cisco) and on September 24, 1993 with Central Illinois Shippers, Incorporated
(CISI), for the lease of two segments of track in east central Illinois.
Approximately 38 miles of railroad is operated including 8 miles of trackage
rights on the Illinois Central Railroad (IC) through Decatur, Illinois. The
leases run through December 31, 2006. The railroad's principal commodities are
agriculture products.
Vandalia Railroad Company
On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company. The line located in Vandalia, Illinois,
interchanges with Conrail and is approximately 3.45 miles long. The railroad's
principal commodities are steel pipe, plastic pellets, fertilizer and feed
ingredients.
Minnesota Central Railroad Co.
On December 12, 1994, Pioneer Railcorp's wholly-owned subsidiary Minnesota
Central Railroad Co., acquired certain assets of MNVA Railroad, Inc. The assets
purchased included approximately 94 miles of operating railroad in southwest
Minnesota, 7 locomotives, 33 railcars, an engine house in Morton, Minnesota,
several vehicles, pieces of maintenance equipment, and miscellaneous parts,
materials and supplies. The railroad interchanges with the Burlington Northern
Santa Fe (BNSF) at Hanley Falls and the Twin Cities & Western Railroad at
Norwood. The railroad's principal commodities are grain, clay, fertilizer,
canned goods, dairy products and particle board.
West Michigan Railroad Co.
On July 11, 1995, Pioneer Railcorp signed an agreement with the Trustee of the
South- western Michigan Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore &
Chicago Railroad (KLSC), to purchase all of the tangible assets of KLSC. Those
assets include approximately 15 miles of track and right of way, extending from
Hartford to Paw Paw, Michigan, a depot building and parking lot in Paw Paw and
various attendant licenses and rights involving the real estate. This agreement
was approved by the United States Bankruptcy Court for the Western District of
Michigan in an order that became final on or about September 21, 1995. Pioneer
Railcorp then assigned its right to purchase to the West Jersey Railroad Co., a
wholly-owned subsidiary of Pioneer, which had been operating the former KLSC
tracks under an 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. The railroad's principal commodities are frozen and canned
foods.
Columbia & Northern Railway Co.
On February 21, 1996, Pioneer Railcorp through its wholly-owned subsidiary
Columbia & Northern Railway Co. (CNOW) signed a lease with the Marion County
(Mississippi) Railroad Authority ("Authority") to operate approximately 29 miles
of trackage between Columbia and Silver Creek, Mississippi. In addition, CNOW
leases approximately 5 miles of track between Silver Creek and Furguson,
Mississippi, from the Illinois Central Railroad for interchange purposes.
Shipping contracts have delayed the train operations of CNOW and it is uncertain
as to when rail transportation will commence.
Keokuk Junction Railway Co.
On March 12, 1996, Pioneer Railcorp purchased 93% of the common stock of KNRECO,
Inc., an Iowa corporation d/b/a Keokuk Junction Railway (hereinafter "KJRY").
All of the remaining common shares were purchased in April of 1996. KJRY
operates a common carrier railroad line within the City of Keokuk, Iowa, from
Keokuk to LaHarpe, Illinois, and a branch line from Hamilton to Warsaw,
Illinois, a total of approximately 38 miles. In addition, KJRY owns all of the
common stock of Keokuk Union Depot Company, an Iowa corporation, that owns the
former Keokuk Union Depot building, along with surrounding track and real
estate. KNRECO, Inc. changed its corporate name to Keokuk Junction Railway Co.
effective April 10, 1996. The KJRY interchanges with the BNSF at Keokuk, Iowa
and the TPW at LaHarpe, Illinois. The railroad's principal commodities are corn,
corn germ, corn syrup, meal, gluten feed, calcined coal, ferro silicon, scrap
iron and railroad wheels.
<PAGE>
Rochelle Railroad Co.
On March 25, 1996, Pioneer Railcorp through its wholly-owned subsidiary Rochelle
Railroad Co. (RRCO), signed a one-year lease with a five-year renewal option,
signed in March 1997, with the City of Rochelle, Illinois, to operate
approximately 2 miles of track serving the Rochelle Industrial Park. The line
interchanges with the BNSF and the UP. Train operations began April 15, 1996.
The railroad's principal commodity is frozen foods.
Shawnee Terminal Railway Company
On November 13, 1996, Pioneer Railcorp purchased 100% of the common stock of the
Shawnee Terminal Railway Company. The line located in Cairo, Illinois,
interchanges with the Illinois Central Railroad and is approximately 2.5 miles
long. The railroad's principal commodities are glycol and railroad freight cars
for cleaning.
Michigan Southern Railroad
On December 19, 1996, Pioneer Railcorp through its wholly-owned subsidiary
Wabash & Western Railway Co. d/b/a Michigan Southern Railroad, signed a two-year
lease with the Michigan Southern Railroad Company, Inc., Morris Leasing Co.,
Ltd. and Gordon D. Morris to operate 53 miles of track and certain railroad
related assets. The lease contains an exclusive option to purchase the stock of
the Michigan Southern Railroad Company, Inc. and the railroad assets of Morris
Leasing Co., Ltd. and Gordon D. Morris within the lease term. The railroad is
comprised of three separate non-contiguous lines, one located in southern
Michigan and two located in northern Indiana. All lines have separate
interchanges with Conrail. The Michigan line also interchanges with the Indiana
Northeastern Railroad Company. The railroad's principal commodities are scrap
paper, scrap iron, fertilizer, plastics, plywood, sugar and corn syrup.
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
850 railcars (as of December 31, 1996) while carrying 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. 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>
Managements Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The Company's net income in 1996 decreased by 78% to $102,000 down from $462,000
in 1995. Operating revenue increased by $2.4 million, or 28% to $11 million from
8.6 million in 1995. Operating expense increased in 1996 by $2.7 million or 40%
to $9.6 million from $6.9 million in the prior year. Operating income decreased
in 1996 by $300,000 or 18% to $1.4 million from $1.7 million in the prior year.
Several operating subsidiaries performances were responsible for the change in
operating income in 1996. The Keokuk Junction Railway, acquired in March 1996,
contributed $792,000 of operating income in 1996. In addition, increased volume
and pricing resulted in 1996 operating income increases of $67,000 on the
Alabama & Florida Railway and $87,000 on the Vandalia Railroad.
The Alabama Railroad had a decrease in operating income of $188,000 in 1996 as a
result of a three month shut down of the line's largest customer due to plant
modernization. The Minnesota Central Railroad had a decrease in operating income
of $202,000 in 1996 primarily due to severe weather in the 4th quarter and the
effects of decreased grain shipping resulting from both market conditions and
weather.
Pioneer Railroad Equipment Co., Ltd. revenue was affected by the situation on
the ALAB and MCTA due to the non-utilization of box cars and grain hopper cars
assigned to these railroads. PREL operating income increased $51,000 in 1996.
The small increase in operating income combined with an increase in
non-operating expense (primarily interest expense) of $318,000 resulted in an
overall decrease in pre-tax net income of $267,000 in 1996.
The Decatur Junction Railway had a $155,000 decrease in operating income in
1996, primarily resulting from the January 1996 expiration of a non-recurring
switching contract in effect for most of 1995. Pioneer Railroad Services, Inc.
had increased expenses related to hiring and retaining several support personnel
in 1996, and other administrative costs, which decreased operating income by
$599,000.
Operating Revenue:
Operating revenue increased in 1996 by $2.4 million or 28% to $11 million from
$8.6 million in the prior year. The increase in operating revenue is
attributable to the Keokuk Junction Railway acquisition on March 12, 1996, the
Rochelle Railroad operating lease which began in April of 1996, and increased
revenue from the Company's railcar fleet. The Keokuk Junction Railway had
operating revenue of $2.3 million in 1996 and the Rochelle Railroad had
operating revenue of $172,000 in 1996. Carhire revenue from the Company's
railcar fleet (approximately 850 cars at 12/31/96) increased by $150,000 or 8%
to $1.91 million from $1.76 million in the prior year. In addition, the Company
had increased revenue in 1996 from the lease of its railcars and excess
locomotives to non-affiliated entities. This activity generated $337,000 of
revenue in 1996 compared to $125,000 of revenue in 1995. The increase is
primarily attributable to a short term lease of 150 grain covered hopper cars
which expired in May of 1996.
Other factors affected the Company's 1996 operating revenue. 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 January 2, 1996, generated $139,000 of
revenue in 1995. As a result of this contract expiring and a decrease in local
grain shipments, DT revenue was down $150,000 or 32% to $313,000 from $463,000
in the prior year.
The Mississippi Central Railroad had a decrease in revenue of $124,000 or 13% to
$803,000 from $927,000 in the prior year. This decrease was a direct result of a
reduction in particle board shipments in 1996 compared to 1995.
The Alabama Railroad had a decrease in revenue of $176,000 or 24% to $572,000
from $748,000 in the prior year. This decrease was a direct result of a three
month shut down of the largest shipper on the railroad in order to facilitate
the modernization of its plant facilities.
The Vandalia Railroad had an increase in operating revenue of $135,000 or 52% to
$397,000 from $262,000 in the prior year. This increase in revenue resulted from
both increased freight volume and pricing.
The Rochelle Railroad contributed $172,000 in revenue from 1996 operations. The
Shawnee Terminal Railway and the Michigan Southern Railroad, both which began
operations in the fourth quarter of 1996, did not contribute significant revenue
in 1996.
<PAGE>
The remaining operating subsidiaries had constant overall revenue in 1996
compared to 1995.
Operating Expense
Operating expense increased in 1996 by $2.7 million or 40% to $9.6 million from
$6.9 million in the prior year. The increase in operating expense is
attributable to the Keokuk Junction Railway Co. acquisition on March 12, 1996,
an increase in depreciation expense related to the growth of the Company's
railcar fleet, and increases in administrative expense resulting from the
current, and anticipated future growth of the Company. The Keokuk Junction
Railway had operating expense of $1.46 million in 1996. Depreciation expense
related to the Company's railcar fleet and equipment increased approximately
$300,000 or 74% to $705,000 from $405,000 in the prior year. Administration
expense increased $800,000 to $3.1 million or 35% from $2.3 million in the prior
year. The Rochelle Railroad had operating expense of $139,000 in 1996. The
Shawnee Terminal Railway and the Michigan Southern Railroad, both which began
operations in the fourth quarter, did not have significant operating expense in
1996.
Operating Expense Income Statement Line Item Discussion:
Maintenance of ways expense (MOW) increased $54,000 or 7% to $932,000 from
$878,000 in the prior year. The Keokuk Junction Railway had $70,000 of MOW
expense in 1996. The Minnesota Central had a decrease in MOW expense of $80,000
or 34% to $154,000 from $234,000 in 1996 primarily resulting from the
capitalization of $150,000 of labor related to the MCTA track rehabilitation
project in 1996. Other operating subsidiaries had constant MOW expense in 1996
compared to 1995.
Maintenance of equipment expense (MOE) increased $311,000 or 31% to $1,342,000
from $1,031,000 in the prior year. Most of this increase is attributable to the
Keokuk Junction Railway which had $300,000 of MOE expense in 1996. Approximately
$156,000 of Keokuk's MOE expense relates to a monthly railcar lease contract, in
effect at acquisition, with an unrelated third party. Other operating
subsidiaries had constant MOE expense in 1996 compared to 1995.
Transportation expense (TRAN) increased $1,028,00 or 56% to $2,851,000 from
$1,823,000 in the prior year. The Keokuk Junction Railway had $707,000 of TRAN
expense in 1996. The Minnesota Central had an increase in TRAN expense of
$240,000 or 43% to $793,000 from $553,000 in the prior year. The MCTA increase
resulted from increased fuel expense, derailment expense and car hire expense
resulting from inefficient train operations caused by the poor track condition.
The Rochelle Railroad had $78,000 of TRAN expense in 1996. The Mississippi
Central Railroad had a decrease in TRAN expense of approximately $112,000 or 33%
to $232,000 from $344,000 in the prior year. The MSCI reduction is a result of
decreased locomotive maintenance expense and fuel expense resulting from the
reduction in shipping, and a reduction in car hire expense as a result of the
increased utilization of Company owned railcars. Other operating subsidiaries
had constant TRAN expense in 1996 compared to 1995.
Administration expense (ADMIN) increased $827,000 to $3,067,000 or 37% from
$2,240,000 in the prior year. The Keokuk Junction Railway had $247,000 of ADMIN
expense in 1996 and the Rochelle Railroad had $57,000 of ADMIN expense in 1996.
Expenses related to hiring and retaining several support personnel in 1996
increased ADMIN by approximately $241,000. ADMIN expense related to executive
compensation contracts increased approximately $36,000 in 1996. The Company
increased its liability insurance limits up to $10 million which increased
insurance expense approximately $86,000 in 1996. In addition, the medical
expense relating to the Company's self-funded employee health insurance plan
increased $94,000 in 1996. This increase is a result of extremely low medical
expenses in 1995 of $43,000 compared to $137,000 in 1996. The Company health
plan includes reinsurance that provides for a maximum expense cap which protects
the Company from incurring medical expenses over a specified amount. This amount
is similar to what the cost would be to the Company under a traditional third
party plan.
Depreciation and amortization expense increased $479,000 or 52% to $1,393,000
compared to $914,000 in the prior year. Approximately 27% or $129,000 of the
increase in this expense is related to the Keokuk Junction Railway and
approximately 63% or $300,000 of this increase is related to the growth of the
Company's railcar fleet. The remainder is attributed to other miscellaneous
capital additions.
Other Income and Expense Income Statement Line Item Discussion:
Other income and expense, excluding interest expense and gain on sale of assets,
increased $113,000 to $246,000 compared to $133,000 in the prior year. The
majority of this income is generated from the granting of easements and leases
for the use of railroad right of way property. Also included in this income are
revenues generated from scrap sales, and other non-operating revenues and
expenses. In 1996 the Fort Smith Railroad received $93,000 of revenue
representing its interest in track removed and scrapped from its Paris Branch
line. No other item included in this category is material when considered alone.
<PAGE>
Equipment interest expense increased $550,000 or 70% to $1,335,000 compared to
$785,000 in the prior year. Approximately $319,000 of increased interest expense
is related to equipment financing and $230,000 is related to the financing of
the Keokuk Junction Railway acquisition and the debt assumed in the transaction.
Net gain on fixed asset dispositions increased $14,000 in 1996 to $58,000
compared to $44,000 in 1995. Approximately $30,000 of the net gain on fixed
asset dispositions was attributable to the sale of 5.3 miles of Alabama Railroad
right of way. In addition, a gain of $20,000 was realized from the sale of a
locomotive and $10,000 was realized from the sale of two trolley cars. The
remainder of the net gain resulted from the disposition of the other
miscellaneous pieces of equipment, none of which was disposed of at a
significant gain or loss.
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. The Company does not believe this new accounting standard will have a
material impact on its financial statements.
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 working capital facilities totaling $1.1 million of which
$448,000 was available at the end of 1996. In addition, the Company has seen the
market value of its railcar fleet increase significantly over the last several
years. This increase in value has resulted from the short supply of railcars
compared to the increased demand for their use. The Company believes it could
refinance or sell part of its railcar fleet and generate up to $1 million in
cash.
In March of 1996, the Company negotiated a credit facility with its primary bank
to provide a $2.5 million annual revolving acquisition line of credit. This
facility is collateralized by the common stock of the Alabama Railroad Co. and
the Mississippi Central Railroad Co., as well as the Company's investment in
stock of any subsidiaries acquired under the line. The interest rate for the
line is currently 10.75%. The interest rate is adjustable quarterly to 2.5% over
New York Prime, limited to a one percent annual increase or decrease, not to
exceed 13.5% or be reduced below 10%. Any amounts drawn on the line must be
repaid monthly over a seven-year period. The line has been fully drawn upon in
connection with the Company's March 12, 1996 acquisition of KNRECO, Inc. d/b/a
Keokuk Junction Railway, common stock.
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 is 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 1997. The Company is considering and analyzing the refinancing of some of its
present debt, particularly its $2.5 million annual revolving acquisition line of
credit.
On July 1, 1995, the Company's stock split and warrant issuance became payable
to shareholders. The 2 for 1 stock split increased the number of shares issued
and outstanding from 2,099,042 to 4,198,084. At the same time shareholders
became entitled to purchase an additional 4,198,084 shares through stock
warrants issued by the Company as dividends. One warrant was issued for each
share of common stock held after the split, entitling the holder to purchase 1
share of common stock for $2.00 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, 1996, a total of 57,174 warrants had been exercised, and the
Company realized $114,348 on the issuance of the warrants. The Company expects
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. As of December 31, 1996, a total of 43,200
options had been exercised, and the Company realized $64,800 on the issuance of
the options. The Company expects capital to be generated by the exercise of
options in 1997 but is uncertain as to the amount.
<PAGE>
On June 26, 1996, the Company shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options will be fully vested and will be
exercisable as of July 1, 2001. The exercise date can be accelerated if Pioneer
Railcorp common shares reach a closing price of $7.25 per share, or higher, for
any consecutive 10-day period, as reported in the Wall Street Journal. The
options will be exercisable at the market price of the common shares at the date
the options were granted, in whole or in part within 10 years from the date of
grant.
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 1997.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $1.8 million in 1996
and $1.4 million in 1995. Net cash from operating activities from 1996 resulted
from $102,000 of net income, $1,393,000 of depreciation and amortization,
$185,000 of deferred income taxes, and an increase in accounts payable of
$538,000, partially offset by $418,000 net cash used by changes in operating
assets and liabilities, primarily due to increases in accounts receivable of
$103,000, income tax refund claims of $202,000, and pre-paid expenses of
$104,000.
In 1996 the Company purchased approximately $6.3 million of fixed assets and
capital improvements of which approximately $4.2 million relate to railroad
acquisitions. Other fixed asset and capital additions totaling approximately
$2.1 million in 1996 included the purchase of approximately 70 railcars at a
total cost of $805,000. The majority of railcars purchased were financed with
long-term fixed rate financing. The Company capitalized approximately $425,000
related to its ongoing efforts to rehabilitate and improve the Minnesota Central
Railroad track. The rehabilitation expenditures were financed initially through
working capital which was subsequently replenished in December of 1996 through
the refinancing of 14 locomotives at a fixed rate of 10.25% for a seven year
term. The total amount borrowed in the locomotive refinancing was $1 million of
which $331,000 was used to pay off existing debt on the locomotives with the
remaining loan proceeds of $669,000 used to replenish the Company's working
capital utilized for the MCTA track rehabilitation.
In addition to the Minnesota Central Railroad track rehabilitation, the Company
capitalized approximately $626,000 of track and structure betterments in 1996 on
several other operating subsidiaries. Approximately $426,000 of these track
betterments was funded with operating cash flows and approximately $200,000 was
financed with the long-term debt related to the Alabama & Florida Railway Co.,
Inc. refinance. In 1996 the Company also purchased approximately $219,000 of
machinery, equipment and other assets, and $25,000 of furniture and fixtures for
the corporate office. All these expenditures were financed with working capital
cash flow. In December of 1996 the Company refinanced the outstanding debt
related to its 1992 acquisition of the Alabama & Florida Railway Co., Inc. The
Company borrowed $1.5 million at an interest rate of 9.25% and a ten-year term.
The interest rate is subject to repricing in five years to the then prevailing
market rate of interest. The principal balance of the debt retired was
approximately $1.13 million dollars and had a fixed interest rate of 12%.
Approximately $200,000 of the loan proceeds were used to pay for the
rehabilitation of two bridges, one being the Pea River bridge which had been out
of service for several years. Several customers on the other side of the Pea
River bridge have begun shipping by rail and it is possible that within several
years the AF could be handling annually an additional 1,000 car loads generating
almost $500,000 in revenues as a result of the bridge restoration. The remaining
loan proceeds were used for working capital.
Regarding Pioneer Railcorp's acquisition of the Keokuk Junction Railway Co. in
1996, the total consideration for the purchase was $6,015,604. This was paid by
$3,124,358 in cash, 342 shares of Pioneer Railcorp Class A common stock valued
at $1,240 and the assumption of liabilities and debt totaling $2,890,006. The
total liabilities assumed consisted of current liabilities of $1,496,006,
long-term debt of $446,000 and a deferred tax liability of $948,000.
The 1996 balance sheet presented has significant changes when compared to 1995
as a result of the Keokuk Junction Railway acquisition and includes the
following Keokuk Junction Railway December 31, 1996 approximate balances: cash
$186,000, accounts receivable $697,000, income tax receivable $61,000, cash
value of life insurance $75,000, prepaid expenses $30,000, accounts payable
$1,412,000, and accrued expenses of $138,000.
<PAGE>
Administration expense (ADMIN) increased $827,000 to $3,067,000 or 37% from
$2,240,000 in the prior year. The Keokuk Junction Railway had $247,000 of ADMIN
expense in 1996 and the Rochelle Railroad had $57,000 of ADMIN expense in 1996.
Expenses related to hiring and retaining several support personnel in 1996
increased ADMIN by approximately $241,000. ADMIN expense related to executive
compensation contracts increased approximately $36,000 in 1996. The Company
increased its liability insurance limits up to $10 million which increased
insurance expense approximately $86,000 in 1996. In addition, the medical
expense relating to the Company's self-funded employee health insurance plan
increased $94,000 in 1996. This increase is a result of extremely low medical
expenses in 1995 of $43,000 compared to $137,000 in 1996. The Company health
plan includes reinsurance that provides for a maximum expense cap which protects
the Company from incurring medical expenses over a specified amount. This amount
is similar to what the cost would be to the Company under a traditional third
party plan.
Depreciation and amortization expense increased $479,000 or 52% to $1,393,000
compared to $914,000 in the prior year. Approximately 27% or $129,000 of the
increase in this expense is related to the Keokuk Junction Railway and
approximately 63% or $300,000 of this increase is related to the growth of the
Company's railcar fleet. The remainder is attributed to other miscellaneous
capital additions.
Other Income and Expense Income Statement Line Item Discussion:
Other income and expense, excluding interest expense and gain on sale of assets,
increased $113,000 to $246,000 compared to $133,000 in the prior year. The
majority of this income is generated from the granting of easements and leases
for the use of railroad right of way property. Also included in this income are
revenues generated from scrap sales, and other non-operating revenues and
expenses. In 1996 the Fort Smith Railroad received $93,000 of revenue
representing its interest in track removed and scrapped from its Paris Branch
line. No other item included in this category is material when considered alone.
Equipment interest expense increased $550,000 or 70% to $1,335,000 compared to
$785,000 in the prior year. Approximately $319,000 of increased interest expense
is related to equipment financing and $230,000 is related to the financing of
the Keokuk Junction Railway acquisition and the debt assumed in the transaction.
Net gain on fixed asset dispositions increased $14,000 in 1996 to $58,000
compared to $44,000 in 1995. Approximately $30,000 of the net gain on fixed
asset dispositions was attributable to the sale of 5.3 miles of Alabama Railroad
right of way. In addition, a gain of $20,000 was realized from the sale of a
locomotive and $10,000 was realized from the sale of two trolley cars. The
remainder of the net gain resulted from the disposition of the other
miscellaneous pieces of equipment, none of which was disposed of at a
significant gain or loss.
In March 1997, the accounting requirements for calculating earnings per share
were revised. Basic earnings per share for 1997 and later will be calculated
solely on average common shares outstanding. Diluted earnings per share will
reflect the potential dilution of stock options and other common stock
equivalents. All prior calculations will be restated to be comparable to the new
methods. The Company does not believe this new accounting standard will have a
material impact on its financial statements.
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 working capital facilities totaling $1.1 million of which
$448,000 was available at the end of 1996. In addition, the Company has seen the
market value of its railcar fleet increase significantly over the last several
years. This increase in value has resulted from the short supply of railcars
compared to the increased demand for their use. The Company believes it could
refinance or sell part of its railcar fleet and generate up to $1 million in
cash.
In March of 1996, the Company negotiated a credit facility with its primary bank
to provide a $2.5 million annual revolving acquisition line of credit. This
facility is collateralized by the common stock of the Alabama Railroad Co. and
the Mississippi Central Railroad Co., as well as the Company's investment in
stock of any subsidiaries acquired under the line. The interest rate for the
line is currently 10.75%. The interest rate is adjustable quarterly to 2.5% over
New York Prime, limited to a one percent annual increase or decrease, not to
exceed 13.5% or be reduced below 10%. Any amounts drawn on the line must be
repaid monthly over a seven-year period. The line has been fully drawn upon in
connection with the Company's March 12, 1996 acquisition of KNRECO, Inc. d/b/a
Keokuk Junction Railway, common stock.
<PAGE>
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 is 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 1997. The Company is considering and analyzing the refinancing of some of its
present debt, particularly its $2.5 million annual revolving acquisition line of
credit.
On July 1, 1995, the Company's stock split and warrant issuance became payable
to shareholders. The 2 for 1 stock split increased the number of shares issued
and outstanding from 2,099,042 to 4,198,084. At the same time shareholders
became entitled to purchase an additional 4,198,084 shares through stock
warrants issued by the Company as dividends. One warrant was issued for each
share of common stock held after the split, entitling the holder to purchase 1
share of common stock for $2.00 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, 1996, a total of 57,174 warrants had been exercised, and the
Company realized $114,348 on the issuance of the warrants. The Company expects
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. As of December 31, 1996, a total of 43,200
options had been exercised, and the Company realized $64,800 on the issuance of
the options. The Company expects capital to be generated by the exercise of
options in 1997 but is uncertain as to the amount.
On June 26, 1996, the Company shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options will be fully vested and will be
exercisable as of July 1, 2001. The exercise date can be accelerated if Pioneer
Railcorp common shares reach a closing price of $7.25 per share, or higher, for
any consecutive 10-day period, as reported in the Wall Street Journal. The
options will be exercisable at the market price of the common shares at the date
the options were granted, in whole or in part within 10 years from the date of
grant.
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 1997.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $1.8 million in 1996
and $1.4 million in 1995. Net cash from operating activities from 1996 resulted
from $102,000 of net income, $1,393,000 of depreciation and amortization,
$185,000 of deferred income taxes, and an increase in accounts payable of
$538,000, partially offset by $418,000 net cash used by changes in operating
assets and liabilities, primarily due to increases in accounts receivable of
$103,000, income tax refund claims of $202,000, and pre-paid expenses of
$104,000.
In 1996 the Company purchased approximately $6.3 million of fixed assets and
capital improvements of which approximately $4.2 million relate to railroad
acquisitions. Other fixed asset and capital additions totaling approximately
$2.1 million in 1996 included the purchase of approximately 70 railcars at a
total cost of $805,000. The majority of railcars purchased were financed with
long-term fixed rate financing. The Company capitalized approximately $425,000
related to its ongoing efforts to rehabilitate and improve the Minnesota Central
Railroad track. The rehabilitation expenditures were financed initially through
working capital which was subsequently replenished in December of 1996 through
the refinancing of 14 locomotives at a fixed rate of 10.25% for a seven year
term. The total amount borrowed in the locomotive refinancing was $1 million of
which $331,000 was used to pay off existing debt on the locomotives with the
remaining loan proceeds of $669,000 used to replenish the Company's working
capital utilized for the MCTA track rehabilitation.
<PAGE>
In addition to the Minnesota Central Railroad track rehabilitation, the Company
capitalized approximately $626,000 of track and structure betterments in 1996 on
several other operating subsidiaries. Approximately $426,000 of these track
betterments was funded with operating cash flows and approximately $200,000 was
financed with the long-term debt related to the Alabama & Florida Railway Co.,
Inc. refinance. In 1996 the Company also purchased approximately $219,000 of
machinery, equipment and other assets, and $25,000 of furniture and fixtures for
the corporate office. All these expenditures were financed with working capital
cash flow. In December of 1996 the Company refinanced the outstanding debt
related to its 1992 acquisition of the Alabama & Florida Railway Co., Inc. The
Company borrowed $1.5 million at an interest rate of 9.25% and a ten-year term.
The interest rate is subject to repricing in five years to the then prevailing
market rate of interest. The principal balance of the debt retired was
approximately $1.13 million dollars and had a fixed interest rate of 12%.
Approximately $200,000 of the loan proceeds were used to pay for the
rehabilitation of two bridges, one being the Pea River bridge which had been out
of service for several years. Several customers on the other side of the Pea
River bridge have begun shipping by rail and it is possible that within several
years the AF could be handling annually an additional 1,000 car loads generating
almost $500,000 in revenues as a result of the bridge restoration. The remaining
loan proceeds were used for working capital.
Regarding Pioneer Railcorp's acquisition of the Keokuk Junction Railway Co. in
1996, the total consideration for the purchase was $6,015,604. This was paid by
$3,124,358 in cash, 342 shares of Pioneer Railcorp Class A common stock valued
at $1,240 and the assumption of liabilities and debt totaling $2,890,006. The
total liabilities assumed consisted of current liabilities of $1,496,006,
long-term debt of $446,000 and a deferred tax liability of $948,000.
The 1996 balance sheet presented has significant changes when compared to 1995
as a result of the Keokuk Junction Railway acquisition and includes the
following Keokuk Junction Railway December 31, 1996 approximate balances: cash
$186,000, accounts receivable $697,000, income tax receivable $61,000, cash
value of life insurance $75,000, prepaid expenses $30,000, accounts payable
$1,412,000, and accrued expenses of $138,000.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pioneer Railcorp
Peoria, Illinois
We have audited the accompanying consolidated balance sheets of Pioneer Railcorp
and subsidiaries as of December 31, 1996 and 1995, 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, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Peoria, Illinois
February 21, 1997
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
ASSETS
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash ........................................................................ $ 501,212 $ 276,230
Accounts receivable, less allowance for doubtful
accounts 1996 $45,291; 1995 $15,958 ...................................... 2,071,289 1,283,124
Inventories ................................................................. 420,952 287,772
Prepaid expenses ............................................................ 261,427 123,609
Income tax refund claims .................................................... 349,881 50,998
Deferred taxes .............................................................. 25,901 35,000
---------------------------
Total current assets ................................................... 3,630,662 2,056,733
---------------------------
Investments, cash value of life insurance ...................................... 74,962 --
---------------------------
Property and Equipment, less accumulated depreciation
1996 $3,294,610; 1995 $1,979,998 ............................................ 20,131,566 15,220,168
---------------------------
Intangible Assets, less accumulated amortization
1996 $140,109; 1995 $100,493 ................................................ 1,171,114 647,031
---------------------------
$ 25,008,304 $ 17,923,932
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable ...............................................................$ 769,535 $ 80,333
Current maturities of long-term debt ........................................ 1,813,246 1,412,552
Accounts payable ............................................................ 2,973,258 1,115,241
Accrued expenses ............................................................ 491,610 354,834
Income taxes payable ........................................................ 18,978 17,367
--------------------------
Total current liabilities .............................................. 6,066,627 2,980,327
--------------------------
Long-Term Debt, net of current maturities ...................................... 12,564,133 9,934,737
--------------------------
Deferred Taxes ................................................................. 1,967,651 843,000
--------------------------
Minority Interest in Subsidiaries .............................................. 1,188,000 1,195,000
--------------------------
Commitments and Contingencies (Note 13)
Stockholders' Equity
Common stock, Class A (voting), par value $.001 per share, authorized
20,000,000 shares, issued and outstanding 1996 4,573,343 shares; 1995
4,487,881 shares ......................................................... 4,571 4,487
Additional paid-in capital .................................................. 1,981,149 1,832,353
Retained earnings ........................................................... 1,236,173 1,134,028
--------------------------
3,221,893 2,970,868
--------------------------
$ 25,008,304 $ 17,923,932
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996 and 1995
<TABLE>
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Railway operating revenue $ 10,979,218 $ 8,577,421
-----------------------------------
Operating expenses
Maintenance of way and structures 931,574 877,654
Maintenance of equipment 1,342,059 1,030,975
Transportation 2,851,485 1,822,982
General and administrative 3,067,191 2,240,581
Depreciation 1,343,377 871,910
Amortization 49,966 42,548
-----------------------------------
9,585,652 6,886,650
-----------------------------------
Operating income 1,393,566 1,690,771
-----------------------------------
Other income (expenses)
Interest income 7,709 3,005
Interest expense (1,335,304) (785,371)
Lease income 125,295 74,551
Gain on sale of assets 57,820 43,862
Other, net 112,584 54,738
-----------------------------------
(1,031,896) (609,215)
-----------------------------------
Income before provision for income taxes
and minority interest in preferred stock
dividends of consolidated subsidiaries 361,670 1,081,556
Provision for income taxes 135,960 495,443
-----------------------------------
Income before minority interest in preferred
stock dividends of consolidated subsidiaries 225,710 586,113
Minority interest in preferred stock dividends of
consolidated subsidiaries 123,565 124,405
-----------------------------------
Net income $ 102,145 $ 461,708
===================================
Earnings per common share $ .02 $ .11
===================================
Weighted average number of common shares used in
computing earnings per common share 4,530,379 4,244,162
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
<TABLE>
Common Stock
---------------------- Additional
Class A (Voting) Paid-In Retained
Shares Amount Capital Earnings
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 - (2,098)
Common stock issued to acquire
property, equipment, and
inventory 272,543 272 664,139 -
Common stock issued upon
exercise of stock warrants 19,254 19 38,489 -
Net income - - - 461,708
-----------------------------------------------------
Balance at December 31, 1995 4,487,881 4,487 1,832,353 1,134,028
Common stock issued to acquire
property, equipment, and
inventory 2,342 2 8,238 -
Common stock issued upon
exercise of stock warrants
and options 83,120 82 140,558 -
Net income - - - 102,145
-----------------------------------------------------
Balance at December 31, 1996 4,573,343 $ 4,571 $ 1,981,149 $ 1,236,173
=====================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 102,145 $ 461,708
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in preferred stock dividends of consolidated
subsidiaries 123,565 124,405
Depreciation 1,343,377 871,910
Amortization 49,966 42,548
Increase in cash value life insurance (5,085) -
(Gain) on sale of property and equipment (57,820) (43,862)
Deferred taxes 185,625 334,000
Changes in assets and liabilities, net of effects from
acquisition of subsidiaries:
(Increase) in accounts receivable (103,068) (348,550)
(Increase) in income tax refund claims (202,292) (50,998)
(Increase) decrease in inventories 1,991 (58,635)
(Increase) in prepaid expenses (104,113) (2,145)
(Increase) in intangible assets (26,659) (85,298)
Increase in accounts payable 538,375 189,861
Increase (decrease) in accrued expenses (39,900) 72,943
Increase (decrease) in income taxes payable 1,611 (65,762)
-------------------------------
Net cash provided by operating activities 1,807,718 1,442,125
-------------------------------
Cash Flows From Investing Activities
Proceeds from sale of property and equipment 108,650 244,012
Purchase of property and equipment, net of property and
equipment from acquisition of subsidiaries (2,179,547) (5,096,695)
Acquisition of subsidiaries, net of cash acquired (2,795,644) (300,000)
-------------------------------
Net cash (used in) investing activities (4,866,541) (5,152,683)
-------------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries 1,443,750 1,409,911
Proceeds from long-term borrowings, net of debt assumed in
acquisition of subsidiaries 5,715,100 5,479,157
Payments on short-term borrowings (754,547) (1,483,738)
Payments on long-term borrowings (3,130,573) (1,498,060)
Proceeds from common stock issued upon exercise of
stock warrants and options 140,640 38,508
Preferred stock dividend payments to minority interest (123,565) (124,405)
Repurchase of minority interest (7,000) (14,000)
-------------------------------
Net cash provided by financing activities 3,283,805 3,807,373
-------------------------------
Net increase in cash 224,982 96,815
Cash, beginning of year 276,230 179,415
-------------------------------
Cash, end of year $ 501,212 $ 276,230
==============================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 1,324,640 $ 779,914
==============================
Income taxes, net $ 151,448 $ 278,203
==============================
Supplemental Schedule of Noncash Investing and Financing Activities
Railroad acquisitions
Fair value of assets acquired, net of cash 1996 $338,714; 1995 none $ 5,686,890 $ 500,000
Cash paid for stock and assets (2,795,644) (300,000)
-----------------------------
Liabilities and debt assumed; and stock issued $ 2,891,246 $ 200,000
=============================
Reconciliation:
Liabilities assumed $ 2,444,442 $ -
Debt assumed 445,564 -
Issuance of common stock 1996 342 shares; 1995 76,190 shares 1,240 200,000
----------------------------
$ 2,891,246 $ 200,000
============================
Additional property, equipment and inventory acquired
upon issuance of common stock 1996 2,000 shares;
1995 196,353 shares $ 7,000 $ 464,411
============================
Accounts receivable applied to acquire equipment $ 4,741 $ -
============================
</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 is the parent company of thirteen
short-line common carrier rail- road operations, an equipment leasing company, a
subsidiary which owns an airplane, and a service company. Pioneer Railcorp and
its subsidiaries (the "Company") operate in the following states: Alabama,
Arkansas, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, and
Tennessee.
The Company's active subsidiaries include the following:
<TABLE>
<S> <C>
West Michigan Railroad Co. Pioneer Air, Inc.
Minnesota Central Railroad Co. Pioneer Railroad Services, Inc.
Vandalia Railroad Company Columbia & Northern Railway Co.
Decatur Junction Railway Co. Keokuk Junction Railway Co. and its
Alabama & Florida Railway Co., Inc. subsidiary, Keokuk Union Depot Company
Mississippi Central Railroad Co. Wabash & Western Railway Co., d/b/a
Alabama Railroad Co. Michigan Southern Railroad
Fort Smith Railroad Co. Rochelle Railroad Co.
Pioneer Railroad Equipment Co., Ltd. Shawnee Terminal Railway Company
</TABLE>
Pioneer Railroad Equipment Co., Ltd. holds title to a majority of the Company's
operating equipment, and Pioneer Air, Inc. owns an airplane utilized by the
Company for business purposes. 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, 1996 and 1995.
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
on-line customers and 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
Improvements to leased property are depreciated over the lesser of the lease or
life of the improvements.
<PAGE>
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.
The Company reviews applicable assets on a quarterly basis to determine whether
any circumstances or events would indicate an impairment. The Company does not
believe that impairment exists at December 31, 1996.
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. The Company does not
believe that impairment exists at December 31, 1996.
Earnings per common share: The earnings per common share were computed by
dividing the net income by the weighted average number of shares of common stock
outstanding during each of the years after giving retroactive effect to the
stock split discussed in Note 11. Common stock equivalents were excluded from
the computation since they were antidilutive in 1996 and the dilutive effect in
1995 was not material.
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 and limited
to an aggregate excess amount computed under the terms of the insurance contract
using specified participant rates. 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:
<TABLE>
December 31,
---------------------------------
1996 1995
---------------------------------
<S> <C> <C>
Land $ 1,352,965 $ 280,606
Roadbed 7,455,782 4,840,367
Transportation equipment 2,235,551 1,594,150
Railcars 9,659,443 8,328,207
Buildings 1,078,122 687,958
Machinery and equipment 873,279 704,117
Office equipment 379,171 297,665
Leasehold improvements 67,511 -
Capital projects 324,352 467,096
----------------------------------
23,426,176 17,200,166
Less accumulated depreciation 3,294,610 1,979,998
----------------------------------
$ 20,131,566 $ 15,220,168
==================================
</TABLE>
<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, that expires April 1998, bears interest at 10.5%, and is
collateralized by transportation equipment. The Company has an outstanding
balance under this line of credit as of December 31, 1996, of $75,000.
The Company has a $400,000 line of credit with Keokuk Savings Bank and Trust
Company, Keokuk, Iowa, that expires March 1998, bears interest at prime, as
published in The Wall Street Journal, plus 1.5%, and is collateralized by
accounts receivable, inventory and general intangibles. The Company has an
outstanding balance under this line of credit at December 31, 1996, of $204,398.
The Company has a $600,000 line of credit with First of America Bank - Illinois,
N.A., Peoria, Illinois, that expires July 1997, bears interest at prime, as
published in The Wall Street Journal, plus 1%, and is collateralized by accounts
receivable and general intangibles of certain subsidiaries. The Company has an
outstanding balance under this line of credit as of December 31, 1996, of
$347,276.
The Company has a $5,121 and $11,682 unsecured note payable to MINNRAIL, Inc. as
of December 31, 1996 and 1995, 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 $137,740 and $68,651 as
of December 31, 1996 and 1995, respectively, for the financing of insurance
premiums. These notes are due in monthly installments from $2,198 to $26,141,
including interest ranging from 8.5% to 11.11%, with final installments due from
April to August 1997.
Long-term debt at December 31, 1996 and 1995, consists of the following:
<TABLE>
1996 1995
------------------------------
<S> <C> <C>
Mortgage payable, First of America Bank - Illinois, N.A., due
in monthly installments of $3,775, including interest at 8.5%,
through 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 $ 416,112 $ 425,021
Mortgage payable, First of America Bank - Illinois, N.A., due in
monthly installments of $19,314, including interest at
9.25%, through December 2, 2001. At that date, the interest rate
adjusts to a U.S. Treasury index (5-year constant maturity) plus
3.5%, final installment due December 2006, collateralized by
real estate, rail facilities, and other assets of Alabama & Florida
Railway Co., Inc. 1,500,000 -
Mortgage payable, Camden National Bank, due in monthly install-
ments of $4,304, including interest at 12%, final installment due
July 2001, collateralized by Alabama Railroad Co. real estate and
rail facilities 192,019 218,850
Mortgage payable, State of Illinois Department of Transportation,
due in annual installments of $40,581, including interest at 2%,
final installment due December 2004, collateralized by railroad
and railroad ties (net of unamortized discount of $79,521) 217,751 -
Notes payable, Ford Motor Credit Company, due in monthly install-
ments 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 54,224 65,703
Notes payable, Commerce Bank, due in monthly installments from
$593 to $646, including interest at 8.5%, final installments due
January 1998, collateralized by vehicles 15,189 28,155
Notes payable, Norwest Equipment Finance, Inc., due in monthly
installments of $2,184 to $8,743, including interest ranging
from 8.85% to 10.75%, final installments due from May 2002
to August 2003, collateralized by railcars and equipment 1,597,880 1,059,044
-------------------------------
Balance carried forward $ 3,993,175 $ 1,796,773
-------------------------------
</TABLE>
<PAGE>
<TABLE>
1996 1995
------------------------------
<S> <C> <C>
Balance brought forward $ 3,993,175 $ 1,796,773
Note payable, Keycorp, due in monthly installments of $22,744,
including interest at 8.86%, final installment due December 2003,
collateralized by railcars 1,419,675 1,560,000
Note payable, Nations Bank, due in monthly installments of
$23,305, including interest at 8.75%, final installment due
December 2002, collateralized by railcars 1,315,557 1,460,000
Notes payable, FBS Leasing, due in monthly installments from
$510 to $12,998, including interest ranging from 8.37% to 9.6%,
final installments due from August 2001 to October 2004,
collateralized by railcars 1,218,244 1,337,721
Note payable, A&F, Inc., paid December 1996 - 1,285,600
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 1,687,445 1,935,017
Notes payable, Concord Commercial Group, due in monthly install-
ments from $1,105 to $4,516, final installments due from June 1998
to March 1999, including interest at 9%, collateralized by railcars 234,132 348,578
Notes payable, Minnesota Valley Bank, due in monthly installments
of $4,700, including interest at prime plus 2-2.75%, final
installment due December 2001, collateralized by equipment acquired
from MNVA Railroad, Inc. 204,667 236,834
Note payable, Burling Bank, paid December 1996 - 407,143
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. 314,956 391,527
Note payable, Rail Authority, interest only payments required through
October 1998, then 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
Note payable, Citizens Bank and Trust Company, due in monthly
installments of $4,410, including interest at 9.5%, final install-
ment due June 1997, collateralized by locomotives 29,984 77,480
Note payable, Kyle Railways, Inc., due in monthly installments
of $2,630, including interest at 8%, final installment due
April 1998, unsecured 39,787 66,972
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 26,765 43,657
-------------------------------
Balance carried forward $ 10,864,387 $ 11,327,302
-------------------------------
</TABLE>
<PAGE>
<TABLE>
1996 1995
------------------------------
<S> <C> <C>
Balance brought forward $ 10,864,387 $ 11,327,302
Notes payable, First of America Bank, due in monthly
installments aggregating $404, including interest at 6.75%,
final installment due June 1999, collateralized by automobiles 11,113 15,060
Note payable, U.S. Small Business Administration, due in
monthly installments of $3,062, including interest at 4%, final
installment due January 2004, collateralized by second mortgage
on all subsidiary-owned real estate and a personal guarantee of
the subsidiary's former president which the Company has indemnified
(net of unamortized discount of $35,529) 187,655 -
Note payable, LDI Corporation, due in monthly installments of
$16,731, including interest of 10.25%, final installment due
December 2003, collateralized by locomotives 1,000,000 -
Note payable, Citizens Bank and Trust Company, due in monthly
installments of $42,483, including interest adjustable quarterly to
New York prime plus 2.5%, final installment due March 2003,
collateralized by common stock in Alabama Railroad Co., Mississippi
Central Railroad Co., and any property later acquired with these
loan proceeds 2,314,224 -
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
-------------------------------
14,377,379 11,347,289
Less current portion 1,813,246 1,412,552
-------------------------------
$ 12,564,133 $ 9,934,737
===============================
</TABLE>
Aggregate maturities required on long-term debt as of December 31, 1996, are due
in future years as follows:
Years ending December 31, Amount
- ------------------------------------------
1997 $ 1,813,246
1998 1,968,197
1999 1,998,351
2000 2,155,042
2001 1,936,010
Thereafter 4,506,533
-----------
$14,377,379
===========
Note 4. Income Tax Matters
The Company and thirteen of its subsidiaries file a consolidated federal income
tax return. Three of the subsidiaries file separate federal income tax returns.
The provision (credit) for income taxes charged to operations for the years
ended December 31, 1996 and 1995, was as follows:
1996 1995
---------------------------------
Current:
Federal $ (57,678) $ 149,781
State 8,013 11,662
Deferred 185,625 334,000
----------------------------------
$ 135,960 $ 495,443
==================================
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, 1996 and 1995, due to the following:
1996 1995
-------------------
Computed "expected" tax expense 35.0 % 35.0 %
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit 8.8 4.6
Other (6.2) 6.2
--------------------
37.6 % 45.8 %
====================
<PAGE>
The Company and its subsidiaries have Alternative Minimum Tax (AMT) credit
carryforwards of approximately $401,000 and $424,000 at December 31, 1996 and
1995, 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 $2,224,000 at December 31, 1996, 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, 1996 and 1995:
1996 1995
---------------------------------
Deferred tax assets:
AMT credit carryforwards $ 401,000 $ 424,000
NOL carryforwards 832,000 278,000
Deferred compensation 25,000 -
Other 25,901 35,000
----------------------------------
1,283,901 737,000
Deferred tax liabilities:
Property and equipment (3,181,000) (1,545,000)
Other (44,651) -
----------------------------------
$ (1,941,750) $ (808,000)
==================================
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,
1996 and 1995 as follows:
1996 1995
----------------------------------
Current deferred tax assets $ 25,901 $ 35,000
Net noncurrent deferred tax liabilities (1,967,651) (843,000)
----------------------------------
Net deferred tax liability $ (1,941,750) $ (808,000)
==================================
Note 5. Retirement Plans
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
$9,500, whichever is least. The Company matches 50% of the first 8% of each
employee's contribution. Keokuk Junction Railway Co. also has a separate
retirement plan with substantially similar terms. The Company intends to merge
the plans during 1997. The Company's expense under the plans was $34,778 and
$21,413 for the years ended December 31, 1996 and 1995, respectively.
Note 6. Deferred Compensation Agreements
The Company has deferred compensation agreements with one employee and one
former employee. The agreements provide monthly benefits for 15 years beginning
with the month immediately following the employees' normal retirement date, as
defined in the agreements. If an employee terminates employment with the Company
for any reason other than death prior to the employees' normal retirement date,
benefits are rendered on a pro rata basis. The present value of the estimated
liability under the agreements is being accrued using a discount rate of 7%
ratably over the remaining years to the date when the employees are first
eligible for benefits. The deferred compensation charged to expense totaled
$10,541 for the year ended December 31, 1996.
<PAGE>
Note 7. Stock Option Plans
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 prescribes a fair-value based measurement of
accounting for stock-based compensation plans with employees, including the
Company's stock option plans which are described below. The fair-value based
measurement prescribed by SFAS 123 results in the recognition of compensation
for all awards of stock to employees. The Company's present accounting is in
accordance with APB Opinion No. 25 which generally requires that the amount of
compensation cost that must be recognized is the quoted market price of the
stock at the measurement date, less the amount the employer is required to pay
to acquire the stock. SFAS 123 provides that its recognition and measurement
provisions may be adopted on or after the beginning of the fiscal year in which
it was issued, but does not require an entity to adopt those provisions. The
Company has elected not to adopt the recognition and measurement provisions of
SFAS 123.
On April 12, 1994, the Board of Directors approved a stock option plan under
which the Company 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 11. 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. The options
expire at various dates from April 12, 1999 to July 5, 2000.
On May 28, 1996, the Board of Directors approved a stock option plan under which
the Company granted options to key management, other employees, and outside
directors for the purchase of 407,000 shares of its common stock. The plan was
approved by the Company's stockholders on June 26, 1996. The options become
fully vested and exercisable as of July 1, 2001, except that the vesting and
exercise date are accelerated to the tenth consecutive business day that the
Company's stock trades at a price of at least $7.25. Vested options may be
exercised in whole or in part within 10 years from the date of grant. The
exercise price for these options is $2.75, the trading price on the date of the
grants. None of the outstanding options have been exercised as of December 31,
1996.
Other pertinent information related to the plans is as follows:
<TABLE>
1996 1995
----------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------------------------------------
<S> <C> <C> <C> <C>
Shares under option, beginning of year 836,000 $ 2.15 840,000 $ 1.53
Granted 407,000 2.75 256,000 3.56
Expired (100,000) 2.75 (260,000) 1.50
Exercised (43,200) 1.50 - -
-----------------------------------------------------
Under option, end of year 1,099,800 $ 2.35 836,000 $ 2.15
=====================================================
Exercisable at end of year 792,800 836,000
=========== ===========
Weighted-average fair value per option
of options granted during the year $ 1.97 $ 1.37
=========== ===========
</TABLE>
<PAGE>
Grants under the above plans are accounted for following APB Opinion No. 25 and
related interpretations as permitted under generally accepted accounting
principles. Accordingly, no compensation cost has been recognized. Had
compensation cost for the stock-based compensation plans been determined based
on the grant date, fair values of awards (the method described in SFAS 123)
reported net income, and earnings per common share would have been reduced to
the proforma amounts shown below:
1996 1995
-----------------------------
Net income:
As reported $ 102,145 $ 461,708
Proforma $ 27,145 $ 230,708
Earnings per common share:
As reported $ .02 $ .11
Proforma $ .01 $ .05
In determining the proforma amounts above, the fair value of each option was
estimated at the grant date using the Black-Scholes option-pricing model with
the following assumptions:
1996 1995
-----------------------------
Dividend rate $ - $ -
Expected life (years) 7.5 4
Risk-free interest rate 6.55% 5.86-7.27%
Price volatility 66% 44%
Note 8. Lease Commitments and Total Rental Expense
In July 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 and operates 18 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.,
Inc., leases a 2 mile segment of track connecting to the subsidiary's facilities
in Andalusia, Alabama, from the Andalusia & Conecuh 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 Geneva, Alabama, from
CSX Transportation, Inc. for $2,305 per month.
In 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.
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 lease expires in 2008 and 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.
In February 1996, the Company, through its wholly-owned subsidiary, Columbia &
Northern Railway Co., entered into a lease with the Marion County Railroad
Authority for 28.78 miles of railway. This ten year lease is renewable with five
ten-year renewal options, and the annual lease of $1 is prepaid through February
2056. The Company is responsible for costs of normalized maintenance.
<PAGE>
Also in February 1996, the Company, through its wholly-owned subsidiary,
Rochelle Railroad Co., entered into a one-year lease with a five-year renewal
option, signed in March 1997, with the City of Rochelle, Illinois, County of
Ogle, for the exclusive right to operate the City's rail line. The Company is
required to pay the City of Rochelle $20 per car handled on the line. The
Company also is required to install, at its own expense, a passing track on the
line for an estimated cost of $86,000 on or before August 1, 1997. The agreement
contains numerous requirements, including repair and replacement of the track in
the condition it was leased (substantially FRA Class I).
In December 1996, the Company, through its wholly-owned subsidiary, Wabash &
Western Railway Co., d/b/a Michigan Southern Railroad, entered into a lease with
Michigan Southern Railroad Co., Inc., Morris Leasing Co., Ltd., and Gordon D.
Morris for 49.6 miles of railway and equipment. The lease expires in December
1997, with a one-year renewal option, and the Company has an option to purchase
the stock and leased personal property of the railroad upon expiration of the
lease. Monthly equipment lease payments are $5,000, payable in advance of each
calendar month. Monthly railway lease payments are equal to $25 per car on all
loaded cars up to 4,000 cars per year and $15 per car thereafter. The Company is
responsible for payment of all expenses, including wages, payroll taxes, fuel,
trackage rights and lease fees, insurance, utilities, and property taxes.
The Company, through its wholly-owned subsidiary, Keokuk Junction Railway,
leases approximately 50 railcars under certain agreements which expire between
June 1997 and May 1998 and require minimum monthly rentals.
The total minimum rental commitment as of December 31, 1996, required under
noncancelable leases, and excluding executory costs and per car rentals, is due
in future years as follows:
Years Ending December 31, Amount
- -----------------------------------------------------
1997 $ 307,856
1998 187,356
1999 46,256
2000 46,256
2001 46,256
Thereafter 361,212
--------------
$ 995,192
==============
The total rental expense incurred under the leases was $273,433 and $55,109 for
the years ended December 31, 1996 and 1995, respectively.
Note 9. Major Customer
Revenue earned from a major customer amounted to approximately $1,465,000 during
the year ended December 31, 1996. Accounts receivable as of December 31, 1996,
includes approximately $344,000 due from this customer.
Note 10. 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.
During March and April 1996, the Company acquired all the outstanding common
stock of KNRECO, Inc., d/b/a Keokuk Junction Railway, in exchange for $3,124,358
cash, the assumption of liabilities and debt of $2,890,006, and the issuance of
342 shares of common stock, at $3 5/8 per share, for a total acquisition cost of
$6,015,604. 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.
In December 1996, the Company acquired all of the outstanding common stock of
Shawnee Terminal Railway Company in exchange for $10,000.
The above acquisitions have been accounted for by the purchase method of
accounting and, accordingly, operating results of these companies are included
in the consolidated statements of income from the date of acquisition.
<PAGE>
Unaudited pro forma consolidated results of operations for the years ended
December 31, 1996 and 1995, as though Keokuk Junction Railway Co. had been
acquired as of January 1, 1995, follows:
1996 1995
--------------------------------
Railway operating revenue $ 11,873,809 $ 11,769,636
Net income 57,811 725,597
Earnings per common share 0.01 0.17
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. and Shawnee
Terminal Railway Company from January 1, 1995, to the date of acquisitions would
not have a significant effect on the consolidated results of operations for the
years ended December 31, 1996 and 1995.
Note 11. 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 stockholders of record on June 30, 1995. In addition, on June 24, 1995, the
stockholders ratified an amendment to the Articles of Incorporation authorizing
the issuance of stock warrants as a dividend to stockholders immediately after
the stock split. Each stockholder received one warrant for each share of stock
owned, resulting in the issuance of 4,198,084 warrants. Each warrant permits
stockholders 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. There were 4,140,910
and 4,178,830 warrants outstanding at December 31, 1996 and 1995, respectively.
Note 12. 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, 1996 and 1995:
<TABLE>
1996 1995
-----------------------------
<S> <C> <C>
Preferred stock of Alabama Railroad Co.
Par value - $1,000 per share
Authorized - 700 shares
Issued and outstanding - 425 and 427 shares (cumulative
12% dividend; callable at Company's option at 150% of face value)
at December 31, 1996 and 1995, respectively $ 425,000 $ 427,000
Preferred stock of Alabama & Florida Railway Co., Inc.
Par value - $1,000 per share
Authorized - 500 shares
Issued and outstanding - 422 and 423 shares (cumulative 9% dividend;
callable at Company's option after June 22, 1995, at 150%
of face value) at December 31, 1996 and 1995, respectively 422,000 423,000
Preferred stock of Mississippi Central Railroad Co.
Par value - $1,000 per share
Authorized - 1,000 shares
Issued and outstanding - 341 and 345 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,
1996 and 1995, respectively 341,000 345,000
----------------------------
$ 1,188,000 $ 1,195,000
============================
</TABLE>
<PAGE>
Note 13. 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.
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.
Note 14. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
The carrying value of cash, cash value of life insurance, 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 1996 and 1995 as compared to existing
interest rates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the trained work force,
customer goodwill, and similar items.
<PAGE>
Market for Pioneer Railcorp Common Stock
The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the trading symbol "PRRR" and 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):
95-1Q 95-2Q 95-3Q 95-4Q 96-1Q 96-2Q 96-3Q 96-4Q
-----------------------------------------------------------------------
High $2.63 $4.50 $4.50 $3.38 $4.13 $4.00 $3.13 $3.13
Low $2.00 $2.19 $2.63 $2.00 $3.38 $2.75 $2.00 $1.88
As of December 31, 1996, the Company had 1,768 common stockholders of record,
including brokers who held stock for others. No common stock cash dividends have
been declared or paid.
Board of Directors
Guy L. Brenkman, CEO and President, Pioneer Railcorp
J. Michael Carr, Chief Financial Officer, Pioneer Railcorp
Orvel L. Cox, Superintendent Car Department, Pioneer Railcorp Services, Inc.
John S. Fulton, Purple Realty
John P. Wolf, Director of Distribution, Kimball International
Officers
Guy L. Brenkman, Chief Executive Officer and President
John P. Wolf, Treasurer
J. Michael Carr, Assistant Treasurer
Daniel A. LeKemper, Secretary
Kevin L. Williams, Assistant Secretary
Corporate Information
The Corporate offices of Pioneer Railcorp and its subsidiaries are located at
1318 S. Johanson Road, Peoria, Illinois, 61607; Telephone number 309-697-1400.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's 2nd quarter 1997 Form 10-QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 858,169
<SECURITIES> 0
<RECEIVABLES> 2,433,810
<ALLOWANCES> 64,468
<INVENTORY> 402,143
<CURRENT-ASSETS> 4,103,898
<PP&E> 23,679,808
<DEPRECIATION> 3,926,501
<TOTAL-ASSETS> 25,086,862
<CURRENT-LIABILITIES> 6,635,484
<BONDS> 0
0
0
<COMMON> 4,587
<OTHER-SE> 3,651,658
<TOTAL-LIABILITY-AND-EQUITY> 25,086,862
<SALES> 0
<TOTAL-REVENUES> 6,323,230
<CGS> 0
<TOTAL-COSTS> 5,153,978
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 692,509
<INCOME-PRETAX> 736,127
<INCOME-TAX> 268,250
<INCOME-CONTINUING> 467,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405,262<F2>
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<FN>
<F1>Other expenses are netted with other income in the period. The result was
income of $259,384. The edgarlink program does no allow a income number to be
entered in this field. The other expense portion of this number is immaterial.
<F2>The difference between Income Continuing and Net Income relates to Minority
Interests in Preferred Stock Dividends of consolidated subsidiaries
</FN>
</TABLE>
