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, 1998
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 [ ]
4,610,447
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(Shares of Common Stock outstanding on September 30, 1998)
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997
UNAUDITED
<TABLE>
Third Quarter First Nine Months
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Operating revenue ............................... $3,481,246 $3,323,716 $10,367,582 $9,646,945
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Operating expenses
Maintenance of way ........................... 254,934 403,926 963,697 985,701
Maintenance of equipment ..................... 391,337 372,532 1,209,648 1,131,883
Transportation expense ....................... 910,689 838,496 2,444,232 2,330,582
Administrative expense ....................... 894,379 841,335 2,659,060 2,418,077
Depreciation & amortization ................. 395,963 371,590 1,182,827 1,115,614
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2,847,302 2,827,879 8,459,464 7,981,857
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Operating income ................................ 633,944 495,837 1,908,118 1,665,088
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Other income & expense
Other (income) expense ....................... (50,798) (50,111) (156,361) (244,931)
Interest expense, equipment .................. 171,364 188,135 570,432 585,753
Interest expense, other ...................... 137,200 166,595 394,014 461,488
Net (gain) loss on sale of fixed assets ...... 11,824 (40,549) (63,871) (105,113)
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269,590 264,070 744,214 697,197
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Income before income taxes ...................... 364,354 231,767 1,163,904 967,891
Provision for income taxes ...................... 130,277 75,921 424,677 344,171
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Income before minority interest in preferred
stock dividends of consolidated subsidiaries . $ 234,077 $ 155,846 $ 739,227 $ 623,720
Minority interest in preferred stock dividends of
consolidated subsidiaries ................... $ 31,308 $ 31,308 $ 93,924 $ 93,924
Net income ...................................... $ 202,769 $ 124,538 $ 645,303 $ 529,796
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Basic earnings per common share ................. $ 0.04 $ 0.03 $ 0.14 $ 0.12
======================================================
Diluted earnings per common share ............... $ 0.04 $ 0.03 $ 0.14 $ 0.11
=======================================================
Cash dividends per common share ................. $ 0.00 $ 0.00 $ 0.02 $ 0.00
======================================================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
UNAUDITED
September 30 December 31
1998 1997
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ASSETS
Current Assets
Cash ............................................. $ 712,419 $ 407,428
Accounts receivable, less allowance
for doubtful accounts 1998 $98,834; 1997 $82,375 2,625,711 2,367,509
Inventories ...................................... 348,679 351,331
Prepaid expenses ................................. 259,769 192,952
Income tax refund claims ......................... 74,434 74,602
Deferred taxes ................................... 66,400 66,400
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Total current assets ........................ 4,087,412 3,460,222
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Property and Equipment less accumulated
depreciation 1998 $5,642,400; 1997 $4,602,015 ..... 19,665,449 19,974,702
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Intangible Assets, less accumulated amortization
1998 $236,968; 1997 $197,724 ...................... 1,079,024 1,117,205
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Investments, cash value of life insurance ........... 108,993 95,547
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Total assets ........................................ $24,940,878 $24,647,676
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................. $ 2,667,268 $ 2,518,190
Notes payable .................................... 369,495 250,034
Income taxes payable ............................. 369,253 61,749
Current maturities of long-term debt ............. 1,989,449 1,836,132
Accrued liabilities .............................. 464,494 432,145
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Total current liabilities ................... 5,859,959 5,098,250
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Long-term debt, net of current maturities ........... 11,429,084 12,465,498
Deferred income taxes ............................... 2,250,700 2,250,700
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Total liabilities & debt .................... 19,539,743 19,814,448
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Minority interest in subsidiaries ................... 1,186,000 1,186,000
Stockholders' Equity
Common stock ..................................... 4,607 4,607
Additional paid-in capital ....................... 2,041,003 2,040,203
Retained earnings ................................ 2,169,525 1,602,418
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Total stockholders' equity .................. 4,215,135 3,647,228
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Total liabilities and equity ........................ $24,940,878 $24,647,676
=========================
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FIRST NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
<TABLE>
First Nine Months
1998 1997
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<S> <C> <C>
Cash Flows From Operating Activities
Net income ................................................... $ 645,303 $ 529,796
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 93,924 93,924
Depreciation ...................................... 1,143,582 1,070,735
Amortization ...................................... 39,245 44,879
Increase in cash value life insurance ............. (13,446) (14,724)
(Gain) on sale of property & equipment ............ (63,871) (105,113)
Deferred taxes .................................... -0- 250,000
Change in assets and liabilities, net of effects from
acquisition of subsidiaries
(Increase) decrease accounts receivable ........... (258,202) (114,876)
(Increase) decrease inventories ................... 2,652 18,181
(Increase) decrease prepaid expenses .............. (66,817) (16,823)
(Increase) decrease intangible assets ............. 207 (4,715)
Increase (decrease) accounts payable .............. 149,078 (45,025)
(Increase) decrease income tax refund claims ...... 168 11,635
Increase (decrease) income tax payable ............ 307,504 70,708
Increase (decrease) accrued liabilities ........... 32,349 181,976
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Net cash provided by operating activities ......... 2,011,676 1,970,558
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Cash Flows From Investing Activities
Proceeds from sale of property & equipment ........ 315,706 194,959
Purchase of property & equipment, net of property
and equipment from acquisition of subsidiaries (1,087,439) (645,899)
Sale of subsidiary stock (Columbia & Northern) .... -0- 15,000
Acquisition of subsidiaries, net of cash acquired . -0- -0-
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Net cash (used in) investing activities ........... (771,733) (435,940)
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Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 2,813,442 2,122,544
Proceeds from long-term borrowings, net of debt
assumed in acquisition of subsidiaries ......... 3,779,181 207,927
Payments on short-term borrowings ................. (2,693,981) (2,143,701)
Payments on long-term borrowings .................. (4,662,278) (1,386,598)
Repurchase of minority interest
Cash dividends paid ............................... (92,201) -0-
Proceeds from warrants and options exercised ...... 800 59,090
Payments to minority interest ..................... (79,915) (79,915)
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Net cash provided by financing activities: ........ (934,952) (1,220,653)
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Net increase (decrease) in cash .............................. 304,991 313,965
Cash, beginning of period .................................... 407,428 501,212
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Cash, end of period .......................................... $ 712,419 $ 815,177
=========================
</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 Industrial Railway Co. (PRY),
Pioneer Resources, Inc. (PIR), 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 share:
Basic per-share amounts are computed by dividing net income (the numerator) by
the weighted average number of common shares outstanding (the denominator).
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the net income per share.
<PAGE>
NOTE 3. ESTIMATED IMPACT OF THE ADOPTION OF RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (FAS 128), "Earnings Per Share." FAS 128 requires the
presentation of both basic earnings per share and diluted earnings per share.
Basic per-share amounts are computed by dividing net income (the numerator) by
the weighted average number of common shares outstanding (the denominator).
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the net income per share. The Company initially applied FAS 128 for the
year ended December 31, 1997, and as required by this statement has restated all
per share information for the prior year to conform to the statement.
In July 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (FAS 130), was issued by the Financial Accounting
Standards Board. The standard establishes reporting of comprehensive income for
general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period and all other events
and circumstances from non-owner sources. The standard is effective for
financial statement periods beginning after December 15, 1997. The Company does
not believe the adoption of the standard will have a material impact on its
consolidated financial statements.
In July 1997, Statement of Financial Accounting Standard No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (FAS 131), was issued
by the Financial Accounting Standards Board. The standard requires the Company
to disclose the factors used to identify reportable segments including the basis
of organization, differences in products and services, geographic areas, and
regulatory environments. FAS 131 additionally requires financial results to be
reported in the financial statements for each reportable segment. The standard
will be effective for the Company's 1998 annual report and interim financial
statements following the 1998 annual report. The Company does not believe the
adoption of the standard will have a material impact on its consolidated
financial statements.
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,
1998, a total of 238,759 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, 1998, a total of 272,000
options are outstanding under this plan after forfeitures of 135,000 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, 1998, a total of 67,244 warrants had been exercised since their
issuance on June 24, 1995.
<PAGE>
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 thirteen railroads during the third quarter
of 1998: 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), and Pioneer Industrial Railway Co.(PRY). The Company also operated four
railroad-related subsidiaries, Pioneer Resources, Inc. (PIR), Pioneer Railroad
Equipment Co., Ltd. (PREL), Pioneer Railroad Services, Inc. (PRSI), and Pioneer
Air, Inc. (PAR).
Summary: Third Quarter 1998 Compared to Third Quarter 1997.
The Company's net income in the third quarter 1998 increased by 63% to $202,769
up from $124,538 in the same period last year. Operating revenue in the third
quarter 1998 increased by $158,000 or 5% to $3.48 million from $3.33 million in
the same period last year. Operating expense increased in the third quarter 1998
by approximately $20,000 or less than 1% to $2.84 million from $2.82 million in
the same period last year. Operating income increased in the third quarter 1998
by $138,000 or 28% to $634,000 up from $496,000 in the same period last year.
Operating Revenue:
The increase in operating revenue in the third quarter 1998 of $158,000 was
positively affected by a $127,000 increase in revenue from Pioneer Railroad
Equipment resulting from increased revenue from the Company's railcar fleet
which recorded revenues of $573,000 compared to $446,000 in the same period last
year. In addition, the Alabama Railroad had an increase of approximately $80,000
in operating revenue in the third quarter of 1998 to $275,000 compared to
$195,000 in the same period last year; the Alabama & Florida Railway had an
increase of approximately $37,000 in operating revenue in the third quarter of
1998 to $391,000 compared to $354,000 in the same period last year; the Decatur
Junction Railway had an increase of approximately $71,000 in operating revenue
in the third quarter of 1998 to $102,000 compared to $31,000 in the same period
last year; and the Michigan Southern had an increase of approximately $36,000 in
operating revenue in the third quarter of 1998 to $305,000 compared to $269,000
in the same period last year. Increased car loadings in the period was the
primary reason for the operating revenue increases on these railroads.
The increases in operating revenue from these subsidiaries was offset by a
$144,000 operating revenue decrease by the Minnesota Central Railroad, which had
operating revenue of $247,000 in the third quarter 1998 compared to $391,000 in
the same period last year. Most of the decrease in MCTA operating revenue
resulted from decreased car loadings of grain and clay resulting from market
conditions (grain) and track conditions. The Rochelle Railroad had a decrease in
operating revenue of $37,000 ( 33%) in the third quarter 1998 recording revenue
of $76,000 compared to $113,000 in the same period last year. This decrease is a
result of the lost business resulting from the joint operation of the railroad
associated with the City of Rochelle, Illinois terminating the RRCO's lease and
replacing RRCO as operator of the line with one of the on-line customers. The
Vandalia Railroad had a decrease in operating revenue of $27,000 (26%) in the
third quarter 1998 recording revenue of $77,000 compared to $104,000 in the same
period last year. This decrease is the result of a down-turn in the business of
one of the major customers on the line.
<PAGE>
The remaining operating subsidiaries had immaterial changes in revenue in the
third quarter 1998 compared to the same period last year.
Operating Expense:
The increase in operating expense of $20,000 in the third quarter 1998 was the
result of the following factors:
In the third quarter 1998, maintenance of way expense decreased as a result of
the capitalization of labor expense related to rehabilitation projects on the
Alabama Railroad, Alabama & Florida Railway, Minnesota Central Railroad and the
Mississippi Central Railroad. The total amount of labor capitalized was
approximately $105,000. The maintenance of equipment expense increase was the
result of increased maintenance expense on the railcar fleet. The increase in
transportation expense is the result of normal activities associated with the
increased car loadings in the period.
The remaining operating subsidiaries had no material changes in operating
expense in the third quarter 1998 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Other income of $51,000 in the third quarter 1998 and $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.
The Company experienced a decrease in interest expense of $46,000 in the third
quarter 1998 compared to the same period last year as the result of the
reduction in long term-debt from scheduled principal payments, and refinancing
activities.
Net loss on fixed asset dispositions during the third quarter 1998 of $12,000
included a gain of $4,000 from the sale of two railcars and a loss of $16,000
resulting from the destruction of a railcar. 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 1998 Compared to First Nine Months 1997.
The Company's net income in the first nine months 1998 increased by 22% to
$645,303 up from $529,796 in the same period last year. Operating revenue in the
first nine months 1998 increased by $721,000 or 7% to $10.4 million from $9.6
million in the same period last year. Operating expense increased in the first
nine months 1998 by $477,000 or 6% to $8.46 million from $7.99 million in the
same period last year. Operating income increased in the first nine months 1998
by $243,000 or 15% to $1,908,000 from $1,665,000 in the same period last year.
Operating Revenue:
The increase in operating revenue in the first nine months 1998 of $721,000 was
positively affected by a $555,000 increase in carhire revenue from PREL's
railcar fleet which recorded revenue of $1,981,000 compared to $1,426,000 in the
same period last year. In addition, increased car loadings resulted in increased
revenues by several railroad subsidiaries including the Keokuk Junction Railway
which had $255,000 of increased operating revenue in the first nine months 1998
recording operating revenue of $2,421,000 compared to $2,166,000 in the same
period last year; the Rochelle Railroad which had $99,000 of increased operating
revenue in the first nine months 1998 recording $415,000 compared to $316,000 in
the same period last year; the Decatur Junction which had $81,000 of increased
operating revenue in the first nine months 1998 recording $273,000 compared to
$192,000 in the same period last year; and the Michigan Southern Railroad which
had increased operating revenue of $134,000 in the first nine months 1998
recording $874,000 compared to $740,000 in the same period last year. Pioneer
Industrial Railway, which began operations in February 1998 had operating
revenue of $104,000 in the first nine months 1998.
<PAGE>
Operating revenue in the first nine months 1998 was adversely affected by a
$303,000 operating revenue decrease by the Minnesota Central Railroad, which had
operating revenue of $606,000 in the first nine months 1998 compared to $909,000
in the same period last year. The decrease in MCTA operating income resulted
from additional switching revenues recorded in 1997 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 was
adversely effected by a decrease in loadings of grain resulting from market
conditions and reduced loadings of clay resulting from a delay in the initial
arrival of empty cars for clay loading from the Union Pacific. MCTA track
conditions also adversely effected car loadings in the first nine months 1998.
The remaining operating subsidiaries had no material changes in operating
revenues in the first nine months 1998 compared to the same period last year.
Operating Expense:
The increase in operating expense of $478,000 in the first nine months 1998
resulted from the following factors:
Pioneer Railroad Equipment Co., Ltd. had increased operating expense of
$213,000, recording operating expense of 1,394,000 compared to $1,181,000 in the
same period last year as a result of increased maintenance expense on the
railcar fleet, increased depreciation expense and increased freight expense to
relocate the railcar fleet in a manner that would maximize usage. The Michigan
Southern Railroad had an increase in operating expense of $96,000, recording
operating expense of $583,000 compared to $487,000 in the same period last year.
Most of this increase resulted from increased personnel and transportation costs
resulting from increased rail traffic. Pioneer Industrial Railway, which began
operations in February 1998 had operating expense of $99,000 in the first nine
months 1998. Support services provided by the parent company, Pioneer Railcorp,
and also support services provided by Pioneer Railroad Services, increased
operating expense $268,000 in the first nine months 1998. Most of this increase
is related to increased payroll expenses related to hiring and retaining support
personnel.
The remaining operating subsidiaries had no material changes in operating
expenses in the first nine months 1998 compared to the same period last year.
Other Income and Expense Income Statement Line Item Discussion:
Other income of $156,000 for the first nine months 1998 and $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.
The Company experienced a decrease in interest expense of $83,000 in the first
nine months 1998 compared to the same period last year as the result of the
reduction in long term-debt from scheduled principal payments, and refinancing
activities. Net gain on fixed asset dispositions during the first nine months
1998 of $64,000 included a net gain of $92,000 from the sale or disposition of
railcars and a loss of $28,000 resulting from the sale of the Company's former
corporate headquarters building in Chillicothe, Illinois. 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.
Year 2000 Compliance:
The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the century
date change occurs, date-sensitive systems may either fail or not operate
properly unless the underlying programs are modified or replaced.
The Company has initiated a program to ensure that all computer applications
will be Year 2000 compliant by the year-end 1998. The program includes engaging
an outside consultant to review all of the Company's computer hardware and
software, as well as to confirm with outside vendors that their products are
Year 2000 compliant. Based on this review the Company believes its internal
systems and the major systems it depends upon from third parties will be Year
2000 compliant on a timely basis. Although final cost estimates have not been
determined, it is not expected that these expenses will have a material impact
on the Company's financial condition, liquidity, or results of operations.
<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 facilities totaling $1,200,000 of which $974,000
was available for use at the end of the third quarter 1998. 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 at
least $1 million in cash.
In March 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%. 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 is fully available for use as
of September 30, 1998.
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 1998.
In the second quarter 1998 the Company took advantage of the favorable interest
rate environment and refinanced approximately $3.3 million of debt which had
interest rates averaging 10% and replaced it with debt having fixed rate
interest of approximately 8.3%. Over the next 5 years this transaction is
projected to reduce interest expense by $250,000 and increase cashflow by
$200,000.
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. In 1998
400 warrants have been exercised. As of September 30, 1998, a total of 67,244
warrants originally issued had been exercised, and the Company realized $134,488
on the issuance of the warrants. The Company expects additional 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. No options have been exercised in 1998.
Since the plans inception a total of 69,700 options had been exercised and the
Company has realized $104,550 on the exercise of the options. On June 15, 1998,
the Company, acting upon a resolution approved by its Board of Directors,
entered into agreements with employees to repurchase all of the outstanding
stock options with exercise prices equal to or less than $1.65. In exchange for
forfeiting the options, employees received a one-time adjustment to their base
salary equal to $.15 per option share. In total, 441,512 options were forfeited
as a result of these agreements. A total of 20,000 options remain exercisable at
$1.50 and are held by an outside director. The primary reason this action was
taken by the Board of Directors was to lessen the potential dilution to all
common share holders from the exercise of the options based on the trading
volume of the Company stock. As of September 30, 1998, a total of 238,759
options are outstanding under this plan.
<PAGE>
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 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 $2.75, 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, 1998, a total of 272,000 options are
outstanding under this plan.
The Company is currently negotiating with the Minnesota Department of
Transportation for approximately $4.0 million of interest-free financing to
rehabilitate the Minnesota Central Railroad. As of the date of this report
negotiations are still in process with no certainty as to what the outcome will
be.
The City of Rochelle, Illinois terminated the Rochelle Railroad Co.'s lease
agreement effective January 19, 1998. The City is seeking to replace the
Rochelle Railroad as operator of the line with one of the on-line customers. The
Rochelle Railroad is seeking damages, seeking relief from the Surface
Transportation Board, and is also seeking to condemn the property. The outcome
of these actions is uncertain. If the Rochelle Railroad ceases operating the
railroad, it would have a material adverse effect on the Company's results of
operation. In 1997 the Rochelle Railroad Co. generated $408,000 in revenue and
$250,000 of operating income. In the third quarter of 1998 the Rochelle Railroad
Co. generated $76,000 in revenue and $19,000 of operating income. In the first
nine months 1998 the Rochelle Railroad Co. generated $415,000 in revenue and
$224,000 in operating income.
The Michigan Southern Railroad's lease expires in December 1998, and the Wabash
& Western Railway Co., d/b/a Michigan Southern Railroad ("Wabash"), a
wholly-owned subsidiary of Pioneer Railcorp, reached an agreement with Gordon D.
Morris, Michigan Southern Railroad Co., Inc., and Morris Leasing, Ltd.
("Leasing"), the entities from which Wabash currently leases its rail lines, to
acquire the stock of Michigan Southern Railroad Co., Inc. and the leased assets
of Morris and Leasing for $2.4 million. The Company believes this transaction
will close on January 1, 1999. The purchase will be funded with long-term debt.
In 1997 the Michigan Southern Railroad generated $1 million in revenue and
$326,000 of operating income. In the third quarter of 1998 the Michigan Southern
Railroad generated $305,000 in revenue and $99,000 of operating income, and in
the first nine months 1998 the Michigan Southern Railroad generated $874,000 of
revenue and $290,000 of operating income.
Except for the uncertainties of the Rochelle Railroad Co. litigation, the
Company anticipates favorable outcomes involving current legal proceedings. The
Company does not anticipate any material judgements against it or any of its
subsidiaries will arise out of the current proceedings.
The Company believes its cash flow from operations and its available working
capital credit lines will be more than sufficient to meet liquidity needs for at
least the next twelve months.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $2,012,000 in the
first nine months 1998 compared to $1,971,000 in the same period last year. Net
cash from operating activities for the first nine months 1998 resulted primarily
from $645,303 of net income, $1,183,000 of depreciation and amortization and an
increase in income tax payable of $308,000.
In the first nine months 1998 the Company purchased approximately $1,087,000 of
fixed assets and capital improvements. The capital additions included the
purchase of 60 railcars at a total cost of approximately $525,000, all financed
with long-term fixed-rate financing. In addition, the Company capitalized
approximately $247,000 of track and structure repair primarily related to severe
flooding in Alabama and Mississippi. Also, $65,000 in railcar and locomotive
betterments, $60,000 of leasehold improvements to the Pioneer Industrial Railway
track, $46,000 for the purchase of industrial development land, and
miscellaneous capital expenditures of approximately $144,000 for equipment and
other assets were capitalized in the first nine months 1998. All capital
expenditures other than the purchase of railcars were financed with working
capital cash flow.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are a number of legal actions pending between the Rochelle Railroad Co.
("RRCO"), the City of Rochelle, Illinois, and other entities, arising out of the
City's termination of RRCO's lease agreement. The City is seeking to replace
RRCO as operator of the line with one of the on-line customers. RRCO is seeking
damages, seeking relief from the Surface Transportation Board, and is also
seeking to condemn the property. The outcome of these actions is uncertain. If
RRCO were to cease operating the railroad, it would have a material adverse
effect on the Company's results of operation.
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 incident
which is likely to result in a liability that would materially affect the
Company's consolidated financial position or results of operation.
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
1998.
Item 5. OTHER INFORMATION
The Alabama & Florida Railway had five miles of track washed out as a result of
severe floods and heavy rains in March 1998. This damage has cut off rail
service between Andalusia and the end of the line in Geneva, Alabama. The
customers affected by the washout had not previously been heavy users of the
railroad, although several opportunities for significantly increased loads which
had just begun to be realized in the first quarter of 1998 have been lost until
such time the railroad is repaired. The total estimated cost to repair the flood
damage was finalized at approximately $658,000, lower then previous estimates by
the Company. The Company was awarded a federal grant for the full amount
required to restore the track and expects all repairs to be completed in the
spring of 1999.
On April 2, 1998, Pioneer Railcorp's Board of Directors declared a $.02 per
common share dividend payable to shareholders of record as of April 30, 1998,
and was paid June 5, 1998. The total dividend paid out was $92,200.94.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit # 11 - Statement re computation of per share earnings.
Exhibit # 27 - Financial data schedule.
No reports were filed on Form 8-K during the third quarter 1998.
<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
10/27/98 -----------------------------------
DATE GUY L. BRENKMAN
PRESIDENT & CEO
J. Michael Carr
10/27/98 -----------------------------------
DATE J. MICHAEL CARR
TREASURER & CHIEF FINANCIAL OFFICER
Following is information about the computation of the earnings per share (EPS)
data for the quarters ended September 30, 1998 and 1997:
For the Quarter Ended
September 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Income available to common stockholders .... $202,769 4,610,447 $ 0.04
========
Effect of Diluted Securities
Employee stock options ..................... -- --
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ............... $202,769 4,610,447 $ 0.04
=================================
For the Quarter Ended
September 30, 1997
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Income available to common stockholders ..... $124,538 4,592,339 $ 0.03
========
Effect of Diluted Securities
Employee stock options ...................... -- 41,282
---------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ................ $124,538 4,633,621 $ 0.03
=================================
Following is information about the computation of the earnings per share (EPS)
data for the first 9 months ended September 30, 1998 and 1997:
For the 9 months Ended
September 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Basic EPS
Income available to common stockholders .. $ 645,303 4,610,520 $ 0.14
========
Effect of Diluted Securities
Employee stock options ................... -- --
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ............. $ 645,303 4,610,520 $ 0.14
==================================
For the 9 months Ended
September 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Basic EPS
Income available to common stockholders ... $ 529,796 4,587,482 $ 0.12
========
Effect of Diluted Securities
Employee stock options .................... -- 41,465
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions .............. $ 529,796 4,628,947 $ 0.11
==================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's 2nd Quarter 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 712,419
<SECURITIES> 0
<RECEIVABLES> 2,724,545
<ALLOWANCES> 98,834
<INVENTORY> 348,679
<CURRENT-ASSETS> 4,087,412
<PP&E> 25,307,849
<DEPRECIATION> 5,642,400
<TOTAL-ASSETS> 24,940,878
<CURRENT-LIABILITIES> 5,859,959
<BONDS> 0
0
0
<COMMON> 4,607
<OTHER-SE> 4,210,528
<TOTAL-LIABILITY-AND-EQUITY> 24,940,878
<SALES> 0
<TOTAL-REVENUES> 10,367,582
<CGS> 0
<TOTAL-COSTS> 8,459,464
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 964,446
<INCOME-PRETAX> 1,163,904
<INCOME-TAX> 424,677
<INCOME-CONTINUING> 739,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 645,303<F2>
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<FN>
<F1>Other expenses are netted with other income in the period and the result
was income of $220,232. The Edgarlink program does not allow an income
number to be entered in this field.
<F2>The difference between income from continuing and net income relates
to minority interests in preferred stock dividends of consolidated
subsidiaries.
</FN>
</TABLE>
