U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 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 [ ]
4,609,513
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(Shares of Common Stock outstanding on September 30, 1997)
<PAGE>
PART 1. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended September 30, 1997 and 1996
Nine Months Ended September 30, 1997 and 1996
UNAUDITED
<TABLE>
Third Quarter First Nine Months
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Operating revenue .......................................... $ 3,323,716 $ 2,923,037 $ 9,646,945 $ 8,545,374
----------- ----------- ----------- -----------
Operating expenses
Maintenance of way ...................................... 403,926 239,501 985,701 695,071
Maintenance of equipment ................................ 372,532 365,567 1,131,883 1,037,153
Transportation expense .................................. 838,496 732,165 2,330,582 1,866,360
Administrative expense .................................. 841,335 827,800 2,418,077 2,251,875
Depreciation & amortization ............................ 371,590 358,097 1,115,614 1,028,903
----------- ----------- ----------- -----------
2,827,879 2,523,130 7,981,857 6,879,362
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Operating income ........................................... 495,837 399,907 1,665,088 1,666,012
----------- ----------- ----------- -----------
Other income & expense
Other (income) expense .................................. (50,111) (43,856) (244,931) (225,550)
Interest expense, equipment ............................. 188,135 195,544 585,753 595,687
Interest expense, other ................................. 166,595 145,711 461,488 390,633
Net (gain) loss on sale of fixed assets ................. (40,549) (1,337) (105,113) (28,212)
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264,070 296,062 697,197 732,558
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Income before income taxes ................................. 231,767 103,845 967,891 933,454
Provision for income taxes ................................. 75,921 38,175 344,171 358,785
----------- ----------- ----------- -----------
Income before minority interest in preferred
stock dividends of consolidated subsidiaries ............ $ 155,846 $ 65,670 $ 623,720 $ 574,669
Minority interest in preferred stock dividends of
consolidated subsidiaries .............................. $ 31,308 $ 31,308 $ 93,924 $ 93,924
Net income ................................................. $ 124,538 $ 34,362 $ 529,796 $ 480,745
=========== =========== =========== ===========
Earnings per common share .................................. $ 0.03 $ 0.01 $ 0.10 $ 0.09
=========== =========== =========== ===========
Weighted average number of common shares
and common share equivalents used in
computing earnings per share ............................... 8,854,411 8,376,613 8,850,526 8,359,989
=========== =========== =========== ===========
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
UNAUDITED
<TABLE>
September 30, December 31,
1997 1996
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<S> <C> <C>
ASSETS
Current Assets
Cash ............................................... $ 815,177 $ 501,212
Accounts receivable, less allowance
for doubtful accounts (1997 $85,205; 1996 $19,926) 2,186,165 2,071,289
Inventories ........................................ 402,771 420,952
Prepaid expenses ................................... 278,250 261,427
Income tax refund claims ........................... 338,246 349,881
Deferred taxes ..................................... 25,901 25,901
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Total current assets .......................... 4,046,510 3,630,662
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Property and Equipment less accumulated
depreciation 1997 $4,233,893; 1996 $2,959,210 ....... 19,586,666 20,131,566
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Intangible Assets, less accumulated amortization
1997 $184,585; 1996 $129,204 ........................ 1,130,950 1,171,114
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Investments, cash value of life insurance ............. 89,686 74,962
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Total assets .......................................... $24,853,812 $25,008,304
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................... $ 2,928,233 $ 2,973,258
Notes payable ...................................... 748,378 769,535
Income taxes payable ............................... 78,086 18,978
Current maturities of long-term debt ............... 1,938,054 1,813,246
Accrued liabilities ................................ 673,604 491,610
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Total current liabilities ..................... 6,366,355 6,066,627
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Long-term debt, net of current maturities ............. 11,260,653 12,564,133
Deferred income taxes ................................. 2,217,653 1,967,651
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Total liabilities & debt ...................... 19,844,661 20,598,411
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Minority interest in subsidiaries ..................... 1,188,000 1,188,000
Stockholders' Equity
Common stock ....................................... 4,607 4,571
Additional paid-in capital ......................... 2,040,203 1,981,149
Retained earnings .................................. 1,776,341 1,236,173
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Total stockholders' equity .................... 3,821,151 3,221,893
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Total liabilities and equity .......................... $24,853,812 $25,008,304
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</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ending September 30, 1997 and 1996
UNAUDITED
<TABLE>
9 Months Ended
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1997 1996
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<S> <C> <C>
Cash Flows From Operating Activities
Net income .................................................. $ 529,796 $ 480,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 93,924 93,923
Depreciation ...................................... 1,070,735 989,844
Amortization ...................................... 44,879 39,059
Increase in cash value life insurance ............. (14,724) (12,026)
(Gain) on sale of property & equipment ............ (105,113) (28,212)
Deferred taxes .................................... 250,000 160,000
Change in assets and liabilities, net of effects from
acquisition of subsidiaries
(Increase) decrease accounts receivable ........... (114,876) (23,434)
(Increase) decrease inventories ................... 18,181 (5,379)
(Increase) decrease prepaid expenses .............. (16,823) (126,820)
(Increase) decrease intangible assets ............. (4,715) (33,213)
Increase (decrease) accounts payable .............. (45,025) 297,110
(Increase) decrease income tax refund claims ...... 11,635 50,998
Increase (decrease) income tax payable ............ 70,708 (31,255)
Increase (decrease) accrued liabilities ........... 181,976 (40,697)
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Net cash provided by operating activities ......... 1,970,558 1,810,644
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Cash Flows From Investing Activities
Proceeds from sale of property & equipment ........ 194,959 55,100
Purchase of property & equipment, net of property
and equipment from acquisition of subsidiaries (645,899) (1,528,725)
Sale of Subsidiary Stock (Columbia & Northern) .... 15,000
Acquisition of subsidiaries, net of cash acquired . -0- (2,786,882)
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Net cash (used in) investing activities ........... (435,940) (4,260,507)
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Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 2,122,544 1,113,295
Proceeds from long-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 207,927 3,346,619
Payments on short-term borrowings ................. (2,143,701) (418,891)
Payments on long-term borrowings .................. (1,386,598) (1,350,942)
Repurchase of minority interest ................... -0- (5,000)
Proceeds from warrants and options exercised ...... 59,090 101,740
Payments to minority interest ..................... (79,915) (79,915)
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Net cash provided by financing activities: ........ (1,220,653) 2,706,906
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Net increase (decrease) in cash ............................. 313,965 257,043
Cash, beginning of period ................................... 501,212 276,230
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Cash, end of period ......................................... $ 815,177 $ 533,273
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</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. (WMI),
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 third quarter
of 1997, basic earnings per share would have been $.03 per share and diluted
earnings per share would have been $.03 per share. If SFAS No. 128 had been in
effect during the first nine months of 1997, basic earnings per share would have
been $.12 per share and diluted earnings per share would have been $.10 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 September 30,
1997, a total of 762,300 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 September 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
September 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 third quarter of
1997: West Michigan Railroad Co. (WMI), 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: Third Quarter 1997 Compared to Third Quarter
1996.
<PAGE>
The Company's net income in the third quarter 1997 increased by $89,674 or 260%
to $124,036 up from $34,362 in the same period last year. Operating revenue in
the third quarter 1997 increased by $400,000 or 14% to $3.3 million from $2.9
million in the same period last year. Operating expense increased in the third
quarter 1997 by approximately $300,000 or 12% to $2.83 million from $2.53
million in the same period last year. Operating income increased in the third
quarter 1997 by $96,000 or 24% to $496,000 from $400,000 in the same period last
year.
Several factors contributed positively to the increase in third quarter 1997 net
income:
The Company's Michigan Southern Railroad, which began operating in the fourth
quarter 1996, had operating income of $86,000 in the third quarter 1997. The
Rochelle Railroad, which began operating in April of 1996, had an increase in
operating income of $57,000, recording operating income of $58,000 in the third
quarter 1997 compared to $1,000 in the same period last year.
The Alabama & Florida Railway operating income increased by $34,000 or 27% to
$162,000 up from $128,000 in the same period last year. The Alabama Railroad
operating income increased to $67,000 from a loss of $13,000 in the same period
last year. The increase in operating income from the Alabama Railroad resulted
from its major customer which had limited outbound shipments in the third
quarter 1996 because its plant was temporally shutdown to facilitate a
modernization of the plant facilities and equipment.
Several factors adversely affected third quarter 1997 net income:
The Minnesota Central Railroad had a decrease in operating income of $126,000,
recording operating loss of $14,000 in the third quarter 1997 compared to
operating income of $112,000 in the same period last year. Most of the decreases
in MCTA operating income resulted from additional maintenance of way expense
recorded for non-capitalized track maintenance. The MCTA did benefit from more
efficient train handling as a result of a new operating plan developed by the
Company.
Pioneer Railroad Equipment operating income was down $106,000, recording
operating income of $140,000 in the third quarter 1997 compared to $246,000 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. The Company is
continuing efforts to relocate certain groups of railcars and expects an
increase in railcar revenues from these efforts.
Operating Revenue:
The increase in operating revenue in the third quarter 1997 of $400,000 or 14%
to $3.5 million from $2.9 million was positively affected by the Michigan
Southern Railroad, which the Company began operating in December 1996, which had
$269,000 of operating revenue in the quarter. In addition, the Keokuk Junction
Railway had an increase of approximately $54,000 in operating revenue in the
third quarter of 1997 to $795,000 compared to $741,000 in the same period last
year. The Rochelle Railroad had an increase of approximately $44,000 in
operating revenue in the third quarter of 1997 to $114,000 compared to $70,000
in the same period last year. The Alabama Railroad had an increase of
approximately $106,000 in operating revenue in the third quarter of 1997 to
$196,000 compared to $90,000 in the same period last year. The increase in
revenues from the Keokuk Junction Railway and Rochelle Railroad relate to
increases in pricing, while the Alabama Railroad revenue increase resulted from
its major customer which had limited outbound shipments in the third quarter
1996 because its plant was temporally shutdown to facilitate a modernization of
the plant facilities and equipment.
The increases in operating revenue from these subsidiaries was offset by a
operating revenue decrease by Pioneer Railroad Equipment Co. which was down
approximately $114,000 recording operating revenue of $535,000 in the third
quarter 1997 compared to $649,000 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.
The remaining operating subsidiaries had immaterial changes in revenue in the
third quarter 1997 compared to the same period last year.
Operating Expense:
Operating expense increased in the third quarter 1997 by approximately $300,000
or 12% to $2.83 million from $2.53 million in the same period last year. This
increase in operating expense resulted from the following factors:
<PAGE>
The $165,000 increase in maintenance of way expense in the third quarter 1997 to
$404,000 compared to $239,000 for the same period last year included $54,000
recorded by the Michigan Southern Railroad, which the Company began operating in
December 1996. The remaining increase in maintenance of way expense resulted
from increases at the Minnesota Central Railroad and the Keokuk Junction
Railway. The $106,000 increase in transportation expense in the third quarter
1997 to $838,000 from $732,000 was primarily attributable to the Michigan
Southern Railroad's transportation expense of $79,000 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 third quarter 1997 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Other income of $50,000 for the third quarter 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 slightly in the third quarter 1997 to $354,000 compared to $341,000 in
the same period last year. Net gain on fixed asset dispositions during the third
quarter 1997 of $40,000 included $32,000 from the sale of an excess locomotive
and $7,800 from the disposal of two railcars.
Summary: First Nine Months 1997 Compared to First Nine Months 1996.
The Company's net income in the first nine months 1997 increased by $49,051 or
10% to $529,796 up from $480,745 in the same period last year. Operating revenue
in the first nine months 1997 increased by $1.1 million or 13% to $9.6 million
from $8.5 million in the same period last year. Operating expense increased in
the first nine months 1997 by $1.1 million or 16% to $7.9 million from $6.8
million in the same period last year. Operating income remained constant at $1.6
million in both nine month periods ended in 1997 and 1996.
The following factors attributed to the first nine 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 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 was able to record six
month operating income not materially different than the same period in the
prior year. However, due to increased operating cost in the third quarter the
Minnesota Central had a decrease in operating income of $125,000 during the
first nine months 1997 compared to the same period last year.
Pioneer Railroad Equipment operating income was down $574,000, recording
operating income of $510,000 in the first nine months 1997 compared to
$1,084,000 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 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 in 1996. The Company has made efforts to relocate certain
groups of railcars and expects an increase in railcar revenues from these
efforts.
The Mississippi Central Railroad operating income decreased approximately
$128,000 in the first nine months 1997, recording operating income of $76,000 in
the first nine months 1997 compared to $204,000 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 Company's Keokuk Junction Railway subsidiary, which the Company began
operating on March 13, 1996, contributed operating income of $979,000 in the
first nine months 1997, compared to $566,000 in the same period in 1996, an
increase of $413,000. The Rochelle Railroad, which began operations in April
1996, had increased operating income of $144,000 recording $146,000 in the first
nine months of 1997 compared to $2,000 in the same period last year. This
increase primarily resulted from increased pricing. The Michigan Southern
Railroad, which began operations in December 1996, had operating income of
$253,000. The Alabama & Florida Railway Co. had increased operating income of
$90,000 recording $499,000 in the first nine months of 1997 compared to $409,000
in the same period last year. This increase primarily resulted from increased
pricing.
Interest expense increased approximately $61,000 in the first nine months 1997
to $1,047,000 compared to $986,000 in the same period last year, most of which
was a direct result of the financing of the Keokuk Junction Railway acquisition.
<PAGE>
Operating Revenue:
The increase in operating revenue in the first nine months 1997 of $1.1 million
was positively affected by a $769,000 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 $175,000 of increased operating revenue in the first nine months 1997,
and the Michigan Southern Railroad, which began operations in December 1996, had
$739,000 of operating revenue in the nine month period. In addition, the Alabama
& Florida Railway had an increase of approximately $160,000 in operating revenue
in the first nine months with revenues of $1,072,000 compared to $912,000 in the
same period last year and the Alabama Railroad Co. had an increase of
approximately $58,000 in operating revenue in the first nine months with
revenues of $517,000 compared to $459,000 in the same period last year.
The increases in operating revenue from the subsidiaries mentioned previously
were offset by a decrease in revenues from Pioneer Railroad Equipment Co. which
had a $574,000 decrease in revenues to $1,692,000 in the first nine months 1997
compared to $2,266,000 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 first nine months 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 in 1996.
Mississippi Central Railroad operating revenue was down approximately $199,000
with revenues of $447,000 in the first nine months 1997 compared to $646,000 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, strong second
quarter 1997 revenues and constant third quarter revenues, reported a slight
decrease in operating revenue of $48,000 in the first nine months 1997.
The remaining operating subsidiaries had no material changes in operating
revenues in the first nine months 1997 compared to the same period last year.
Operating Expense:
The increase in operating expense of $1.1 million in the first nine months 1997
resulted from the following factors:
Increases in maintenance of way, maintenance of equipment, and transportation
expense in the first nine 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 $102,000 in the
first nine months 1997 and the Keokuk Junction Railway increased maintenance of
way expense $67,000 in the period. In addition, the Minnesota Central Railroad
had increased maintenance of way expense of $85,000 in the first nine months
1997 resulting from an increase in non-capitalized track maintenance. The
Michigan Southern Railroad increased maintenance of equipment expense $85,000 in
the first nine months 1997 and the Keokuk Junction Railway increased maintenance
of equipment expense $42,000 in the period. The increase in transportation
expense was primarily attributable to the Michigan Southern Railroad which had
transportation expense of $238,000 and the Keokuk Junction Railway which had
increased transportation expense of $162,000 when compared to 1996. The increase
in administrative expense in the first nine 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 nine months 1997 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Other income of $245,000 for the first nine 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 approximately $61,000 in the first nine months 1997
to $1,047,000 compared to $986,000 in the same period last year, most of which
was a direct result of the financing of the Keokuk Junction Railway acquisition.
Net gain on fixed asset dispositions during the first nine months 1997 of
$105,000 included $62,000 from the sale of three excess locomotives, $13,000
from the disposition of three railcars, $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 nine months
1996 of $28,000 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.
<PAGE>
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
$582,000 was available at the end of the third 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 $400,000 as of September 30, 1997.
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 nine 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 4,131,240 warrants are outstanding as of
September 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 26,500 options were exercised in the first nine months 1997 and the
Company realized $39,750 as a result of their exercise. As of September 30,
1997, a total of 762,300 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 the next twelve months.
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 has approved financing in place to
repay its acquisition line of credit upon review and execution of loan documents
which is expected to be completed in early November, 1997. Upon execution of the
loan doucments the Comapny will have $2.5 million available for railroad
acquisitions up to at least March 8, 1998.
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.
<PAGE>
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $1,971,000 in the
first nine months 1997 compared to $1,811,000 in the same period last year. Net
cash from operating activities for the first nine months 1997 resulted primarily
from $530,000 of net income, $1,115,000 of depreciation and amortization, an
increase in accounts receivable of $115,000, an increase in deferred taxes of
$250,000, and an increase in accrued liabilities of $182,000.
In the first nine months 1997 the Company purchased approximately $650,000 of
fixed assets and capital improvements. The capital additions included the
purchase of 29 railcars at a total cost of $210,000, financed with long-term
fixed rate financing. In addition, the Company capitalized approximately
$152,000 of track and structure betterments, $150,000 in railcar and locomotive
betterments, $61,000 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 $45,000 were for machinery, equipment and other assets. All the
expenditures other than the railcars purchased were financed with working
capital cash flow.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Several lawsuits were pending by and against Pioneer Railcorp and/or its
subsidiaries (collectively, the "Company") during the third quarter of 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.
Another FELA action is currently pending against the Keokuk Junction Railway Co.
in the U.S. District Court for the Central District of Illinois. This case is
still under investigation, but 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.
The Company recently settled the two cases involving Ralston L. Taylor, the
former General Manager of Keokuk Junction Railway ("KJRY"). The settlement of
these cases did not result in a material adverse effect on the Registrant's
consolidated financial position or results of operation. As part of the
settlement, Mr. Taylor entered into a non-competition agreement that extends
until January 1, 2025.
The Company is pursuing two declaratory judgment actions against utility
companies which management believes are illegally occupying railroad
right-of-way. Management believes it has valid legal arguments for the positions
it has taken it these cases, but neither are likely to result in a material
adverse effect on the Registrant's consolidated financial position or results of
operation, if determined adversely.
Fort Smith Railroad's appeal of a Railway Labor Act ruling by the United States
District Court for the Central District of Illinois to the Seventh Circuit Court
of Appeals was not successful. Management believes the issue of the situs of
bargaining is an important one and has filed a Petition for a Writ of Certiorari
with the United States Supreme Court in this case.
<PAGE>
Recently, Fort Smith Railroad Co. ("FSR") filed an action against the American
Train Dispatchers Division of the Brotherhood of Locomotive Engineers (which
represents hourly employees of FSR) in the United States District Court for the
Western District of Arkansas at Fort Smith, alleging that the publication of
certain material was defamatory, and was in violation of a previous settlement
agreement between the union and FSR. The union has not as yet filed an answer to
that suit.
The City of Rochelle also recently filed an action in the Circuit Court of Ogle
County, Illinois to construe the contract between the City and the Rochelle
Railroad Co. Management does not believe that the Ogle County Circuit Court has
jurisdiction to hear this case and is evaluating its options in this matter.
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.
In other legal matters affecting the Company, Wabash & Western Railway Co.,
d/b/a Michigan Southern Railroad ("MSO") has given notice that it is renewing
its lease of its Michigan Southern Railroad properties for an additional year.
The lease was due to expire December 19, 1997. By renewing its lease, MSO also
retains its purchase option on the railroad.
MSO also reached an agreement with Norfolk Southern Corporation ("NS") which
will preserve MSO's access to two Class I railroads after the anticipated
takeover by NS of the Conrail trackage which connects with MSO's lines. This
agreement will preserve competitive access for MSO's customers and MSO now fully
supports the NS/CSX plan for the distribution of Conrail's lines.
Finally, as of the date of this 10-QSB the labor dispute at FSR remains
unresolved. The National Mediation Board declared an impasse in negotiations,
and FSR declined the Board's offer of arbitration. The cooling-off period ended
October 27, 1997, and FSR then exercised its right to self- help by imposing a
20% wage increase. The union has not called a strike, although it may yet do so.
Management continues to assess its options in this matter, and is hopeful that a
strike can be averted, but is confident that FSR will be able to provide
uninterrupted service to its customers regardless of the course events may take.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the third quarter
1997.
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
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
11/10/97 ------------------------------------------
DATE GUY L. BRENKMAN
PRESIDENT & CEO
/s/ J. Michael Carr
11/10/97 ------------------------------------------
DATE J. MICHAEL CARR
TREASURER & CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's 3rd Quarter 1997 Form 10-QSB and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 815,177
<SECURITIES> 0
<RECEIVABLES> 2,271,370
<ALLOWANCES> 85,205
<INVENTORY> 402,771
<CURRENT-ASSETS> 4,046,510
<PP&E> 23,820,559
<DEPRECIATION> 4,233,893
<TOTAL-ASSETS> 24,853,812
<CURRENT-LIABILITIES> 6,366,355
<BONDS> 0
0
0
<COMMON> 4,607
<OTHER-SE> 3,816,544
<TOTAL-LIABILITY-AND-EQUITY> 24,853,812
<SALES> 0
<TOTAL-REVENUES> 9,646,945
<CGS> 0
<TOTAL-COSTS> 7,981,857
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,047,241
<INCOME-PRETAX> 967,891
<INCOME-TAX> 344,171
<INCOME-CONTINUING> 623,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529,796<F2>
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<FN>
<F1>Other expenses are netted with other income in the period. the result was
income of $244,931. The edgarlink program does not allow anincome number to be
entered in this field. The other expense portion of this amount is immaterial.
<F2>The difference between Income Continuing and Net Income relates to Minority
Interests in Preferred Stock Dividends of consolidated subsidiaries.
</FN>
</TABLE>
