SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File Number 33-6658-C
Pioneer Railcorp
(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 Common Stock,
Class A Nasdaq SmallCap Market , Chicago Stock Exchange
Securities registered pursuant to 12(g) of the Act:
Common stock, Class A ($.001 par value)
Common Stock, Class B (no par value)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
Issuer's revenues for the fiscal year ended December 31, 1998 were $13,514,428
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 19, 1999 was $12,799,249
4,610,597
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(Shares of Common Stock outstanding on March 19 , 1999)
<PAGE>
This Form 10-KSB contains certain "forward-looking" statements as such term is
defined in The Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitation, competitive factors, general economic conditions,
customer relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, one-time events and other factors described herein and in other
filings made by the Company with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected, or intended. The Company does not intend to
update these forward looking statements.
The remainder of this page is intentionally left blank
<PAGE>
PART I
Item 1. Business
General
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Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this Form 10-KSB, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (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. (PRI), Pioneer Railroad
Equipment Co., Ltd. (PREL), Pioneer Air, Inc. (PAR), and Pioneer Railroad
Services, Inc. (PRS).
The Company operates in two business activities - railroad transportation and
railroad equipment leasing. Railroad transportation is provided by the Company's
wholly-owned short line railroad subsidiaries whose rail system provides
shipping links for customers along its routes and interchanges with six major
railroads, Burlington Northern Santa Fe Railroad (BNSF), Conrail, Inc. (CR), CSX
Transportation (CSX), Illinois Central Railroad (IC), Norfolk Southern Railway
(NS) and Union Pacific Railroad (UP). Additionally, the Company's railroad
subsidiaries have interchanges with five smaller railroads, the Kansas City
Southern Railway (KCS), the Arkansas & Missouri Railroad (AM), the Twin Cities &
Western Railway (TCWR), the Toledo, Peoria & Western Railway Corporation (TPW),
and Indiana Northeastern Railroad Company (IN). PRC's rail system is devoted to
carrying freight. The Company also seeks to encourage development on or near,
and utilization of, the real estate right of way of its operating railroads by
potential shippers as a source of additional revenue and also generates revenue
by granting to various entities, such as utilities, pipeline and communications
companies and non-industrial tenants, the right to occupy its railroad right of
way and other real estate property. The Company's railroad equipment leasing
operation provides locomotives, railcars and other railroad related vehicles and
equipment to the Company's operating railroad subsidiaries. In addition, the
Company's railroad equipment leasing operation leases rail equipment to, and
repairs rail equipment owned by others.
Railroad Operations
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On July 7, 1991, the Fort Smith Railroad Co. (FSR), a wholly-owned subsidiary of
Pioneer Railcorp, entered into a twenty-year lease (with three twenty-year
renewals) with the Missouri Pacific Railroad Company (now Union Pacific
Railroad) and operates 18 miles of track from Fort Smith to Barling, Arkansas.
The FSR's primary interchange is with the Union Pacific Railroad Company (UP).
FSR also interchanges with the Arkansas & Missouri Railroad Co. (AM) and the
Kansas City Southern Railway (KCS). The traffic base on the FSR is very
diversified with both inbound and outbound shipments. The principal commodities
are iron/steel, scrap, baby food, fiberglass, particle board, charcoal, grains,
frozen poultry, meal, chemicals, alcoholic beverages, industrial sand, lumber,
paper, pulpboard, fiberboard, peanuts, fertilizer and military movements.
On October 25, 1991, the Alabama Railroad Co., a wholly-owned subsidiary of
Pioneer Railcorp, purchased 60 miles of railroad facilities and real estate from
CSX Transportation (CSX) and commenced operations soon thereafter. The line runs
from Flomaton to Corduroy, Alabama, and interchanges with CSX in Flomaton. The
railroad's principal commodities are outbound lumber products, primarily
pulpwood, particle board, and finished lumber.
On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. The railroad runs from Oxford,
Mississippi to Grand Junction, Tennessee, a total of 56.5 miles, 51 of which are
located in Mississippi. The railroad interchanges with the NS at Grand Junction,
Tennessee and the BNSF at Holly Springs, Mississippi. The Company changed the
name of this wholly-owned subsidiary to Mississippi Central Railroad Co. (MSCI)
in January 1993. The traffic base on the MSCI is primarily outbound finished
wood products and inbound products, such as resins, chemicals and pulpwood, for
the production of finished wood products. Other products shipped on the MSCI
include scrap steel and cottonseed.
<PAGE>
On November 23, 1992, the Alabama & Florida Railway Co. (AF), a wholly-owned
subsidiary of Pioneer Railcorp, purchased the tangible assets of the A&F Inc.,
d/b/a the Alabama & Florida Railroad Company. This line runs from Georgiana to
Geneva, Alabama, a distance of 76 miles and interchanges with CSX at Georgiana.
The AF's principal commodities are inbound resins, plastic pellets, fertilizer
and outbound peanuts, scrap plastic and pulpwood.
On September 23, 1993, the Decatur Junction Railway Co. (DT), a wholly-owned
subsidiary of Pioneer Railcorp, signed a lease agreement with Cisco Co-op Grain
Company (Cisco) and on September 24, 1993 with Central Illinois Shippers,
Incorporated (CISI), for the lease of two segments of track in east central
Illinois. The Cisco segment runs from Green's Switch (Decatur) to Cisco,
Illinois, approximately thirteen (13) miles. The CISI segment runs from Elwin to
Assumption, Illinois, a distance of approximately seventeen (17) miles. The two
lines connect via trackage rights on the Illinois Central Railroad (IC) through
Decatur, Illinois, a distance of approximately eight (8) miles. Railroad
operations began on the Cisco segment December 3, 1993, and began on the CISI
segment December 7, 1993.
On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company. The line located in Vandalia, Illinois,
interchanges with Conrail and is approximately 3.45 miles long. The Railroad's
principal commodities are steel pipe, plastic pellets, fertilizer, and feed
ingredients.
On December 12, 1994, Pioneer Railcorp's wholly-owned subsidiary Minnesota
Central Railroad Co. acquired certain assets of MNVA Railroad, Inc. The assets
purchased included approximately 94 miles of operating railroad in south central
Minnesota. The railroad interchanges with the BNSF at Hanley Falls, Minnesota
and the TCWR at Norwood, Minnesota. The railroad's principal commodities are
grain, clay, fertilizer, canned goods, dairy products, and particleboard.
On July 11, 1995, Pioneer Railcorp signed an agreement with the Trustee of the
Southwestern Michigan Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore &
Chicago Railroad (KLSC), to purchase all of the tangible assets of KLSC. Those
assets include approximately 15 miles of track and right of way, extending from
Hartford to Paw Paw, in Van Buren County, Michigan. Pioneer Railcorp then
assigned its right to purchase to the West Jersey Railroad Co., a wholly owned
subsidiary of Pioneer, which had been operating the former KLSC tracks under an
Interstate Commerce Commission Directed Service Order since June 24, 1995. West
Jersey Railroad Co. amended its articles of incorporation to change its name to
"West Michigan Railroad Co.," effective October 2, 1995. The sale was approved
by the Interstate Commerce Commission by order served October 18, 1995, and the
West Michigan Railroad Co. took title to the property on October 24, 1995.
On March 12, 1996, Pioneer Railcorp purchased 93% of the common stock of KNRECO,
Inc., an Iowa corporation d/b/a Keokuk Junction Railway (hereinafter "KJRY")
from the shareholders, and purchased all of the remaining common shares of KJRY
in April of 1996. KJRY operates a common carrier railroad line within the City
of Keokuk, Iowa, from Keokuk to LaHarpe, Illinois, and a branch line from
Hamilton to Warsaw, Illinois, a total of approximately 38 miles. In addition,
KJRY owns all of the common stock of Keokuk Union Depot Company, an Iowa
corporation, that owns the former Keokuk Union Depot building, along with
surrounding track and real estate. KNRECO, Inc. changed its corporate name to
Keokuk Junction Railway Co. effective April 10, 1996. The KJRY interchanges with
the BNSF at Keokuk, Iowa and the TPW at LaHarpe, Illinois. The railroad's
principal commodities are corn, corn germ, corn syrup, meal, gluten feed,
calcined coal, ferrosilicon, scrap iron, and railroad wheels.
On March 25, 1996, Pioneer Railcorp through its wholly-owned subsidiary Rochelle
Railroad Co. (RRCO) signed a one year lease with the city of Rochelle, Illinois,
to operate approximately 2 miles of track serving the Rochelle Industrial Park.
The line interchanges with the BNSF and the UP. Train operations began April 15,
1996. The lease required RRCO to make monthly payments to the city on a per car
basis and to maintain the trackage. The railroad's principal commodity is frozen
foods. The City of Rochelle, Illinois, terminated the Rochelle Railroad Co.'s
lease agreement effective January 19, 1998, however, Rochelle Railroad Co.
continued to operate on the trackage until November 13, 1998 pending the outcome
of certain legal proceedings.
On November 13, 1996, Pioneer Railcorp purchased 100% of the common stock of the
Shawnee Terminal Railway Co. The line located in Cairo, Illinois, interchanges
with the Illinois Central Railroad and is approximately 2.5 miles long. The
Railroad's principal commodities are glycol and railroad freight cars for
cleaning.
<PAGE>
On December 19, 1996, Pioneer Railcorp through its wholly-owned subsidiary
Wabash & Western Railway Co. signed a two year lease with the Michigan Southern
Railroad Company, Inc., Morris Leasing, Inc., and Gordon D. Morris to operate 53
miles of track and certain railroad related assets. The lease calls for a fixed
monthly payment for the equipment assets leased and a per car charge for
railroad usage. The lease contains an exclusive option to purchase the stock of
the Michigan Southern Railroad Company, Inc. and the railroad assets of Morris
Leasing, Inc., and this option was exercised on January 1, 1999. The railroad is
comprised of three separate, non-contiguous lines, one located in southern
Michigan and two located in northern Indiana. All lines have separate
interchanges with Conrail. The Michigan line also interchanges with the Indiana
Northeastern Railroad Company. The railroad's principal commodities are scrap
paper, scrap iron, fertilizer, plastics, plywood, sugar and corn syrup.
On February 18, 1998, Pioneer Railcorp through its wholly-owned subsidiary
Pioneer Industrial Railway Co., began operating approximately 8.5 miles of
railroad in Peoria County, Illinois when the Peoria & Pekin Union Railway Co.
(PPU) assigned its lease with the owner, the Peoria, Peoria Heights & Western
Railroad (PPHW), effective February 18, 1998. The lease expires in July 2004.
PPHW is owned by the City of Peoria, Illinois and the village of Peoria Heights,
Illinois. The Pioneer Industrial Railway Co. has improved the condition of the
track since assuming operation and overall the track is now considered to be in
good condition. The railroad's principal commodities are steel, salt, lumber and
plastic pellets.
Railroad Equipment Leasing
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Pioneer Railroad Equipment Co., Ltd. (PREL), which was formed on April 1, 1990,
leases equipment to the Company's subsidiary railroads and also purchases, sells
and leases equipment to and from unrelated parties. PREL also earns income from
non-company railroads on its fleet of approximately 980 railcars (as of December
31, 1998) when they carry freight on non-company railroads.
PREL also engages in retail sales of promotional items.
Corporate Support Operations
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Other corporate support operations engaged in by the Company are performed by
its wholly owned subsidiaries, Pioneer Railroad Services, Inc., Pioneer
Resources, Inc., and Pioneer Air, Inc. Pioneer Railroad Services, Inc. (PRS)
which began operations on October 1, 1993, provides accounting, management,
marketing, operational and agency services to the Company's subsidiary
railroads. Pioneer Resources, Inc. was formed on December 30, 1993 to manage
real estate and auxiliary resources for Company subsidiaries. Pioneer Air, Inc.
was formed on August 5, 1994 and currently owns a Cessna 421B aircraft which is
used by Pioneer Railcorp subsidiaries exclusively for Company business travel.
Marketing
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The Company's marketing department was established to foster continuing business
with existing customers and to develop and attract new customers and additional
loadings on all PRC railroads. At the end of 1998, the Company had two full-time
marketing employees. The Company's attention to marketing has earned recognition
in industry publications, Class I railroads, and smaller rail carriers. The
Company's marketing department along with the Company's operations center have
become important value-added services offered to present and potential
customers.
Distribution
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Virtually all interchange traffic is with unionized Class I carriers, and a
prolonged work stoppage on those carriers would have a material adverse impact
upon the Company, however, there has never been such a prolonged work stoppage
of the American railroad industry, and the Company considers the chances of such
an event to be remote.
Suppliers
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The Company does not believe that the loss of any supplier would have a material
adverse effect on its business, as there are alternative suppliers available.
<PAGE>
Competition
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With respect to the industry in which PRC operates, the Company, like any other
railroad company, faces intense competition from the trucking industry, barge
lines and other railroads for the movement of commodities. The Company feels
(pricing and time sensitivity constant) that it has a competitive advantage due
to its integrated efforts in providing value-added rail services through its
marketing department and operations center, with continued emphasis on safe and
efficient train operations.
Competition for additional railroads as they become available on the market,
either as direct "spin-offs" from Class I Railroads or through the secondary
market, is intense. The Company believes that it has a competitive advantage for
the acquisition of future Class III Railroads due to the following factors: (1)
the Company's acquisition and operation of multiple railroads, (2) the Company's
experienced management team, (3) the Company's proficiency with industry-trend
technologies desired by Class I Railroads, such as Electronic Data Interchange
(EDI), (4) the quality of the Company's employees, and (5) Pioneer Railcorp's
$2.5 million acquisition line of credit.
Regulations
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The Company's subsidiaries are subject to regulation by the Surface
Transportation Board (STB) of the U.S. Department of Transportation (USDOT), the
Federal Railroad Administration (FRA), and certain state and local
jurisdictions. Such regulation affects rates, safety rules, maintenance of
track, other facilities, and right of way, and may affect the Company's revenues
and expenses. To date there has been no material effect on the Company's
operations because of regulatory action, nor does the Company expect any such
effect in the foreseeable future.
Employees
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On December 31, 1998, the Company had 108 employees which consisted of 83
operating personnel, 20 support staff and 5 executive officers.
During 1994, the employees of the FSR voted for union representation.
Negotiations with the American Train Dispatchers Department of the Brotherhood
of Locomotive Engineers (BLE) reached an impasse and no contract was reached.
The BLE was decertified on March 4, 1998 by the National Mediation Board and
there is no union representation for the FSR employees.
<PAGE>
Item 2. Property
In October 1994, the Company purchased a 16,000 square foot building located in
Peoria, Illinois as a permanent corporate headquarters facility. In conjunction
with the purchase of its corporate office building, the Company assumed a land
lease for the property on which the building is located. This twenty-five year
lease is renewable for five successive periods of five years with annual rents
equal to ten percent of the appraised value of the land, payable in monthly
installments, with appraisal value reviews every five years following the
origination date. The Company is responsible for costs of maintenance,
utilities, fire protection, taxes and insurance. The Building is pledged in a
financing agreement.
A description of the Company's railroad properties as of December 31, 1998 by
subsidiary follows:
A.) Fort Smith Railroad Co. (FSR): The FSR leases 18 miles of railroad from the
Union Pacific Railroad Company. A twenty year lease was signed and
operations begun on July 7, 1991. The line runs from Fort Smith to Barling,
Arkansas. The lease agreement contains numerous requirements including
maintaining existing traffic patterns, repair and replacement of the right
of way to the condition in which it was leased, and payment of any
applicable real estate taxes. The Company is entitled to a fixed rate per
carload switched from the UP as well as ninety percent of new leases and
easements and fifty percent of existing leases and easements on the
property. As long as these lease requirements are met, the Company may
continue to operate on the rail facilities without rent. The Company has
three twenty year renewal options. The FSR's track is in good condition.
B.) Alabama Railroad Co. (ALAB): The ALAB is 60 miles of operating railroad
running from Flomaton to Corduroy, Alabama. The assets and subsidiary stock
are pledged in various financing agreements. The Company considers the
track to be in good condition.
C.) Mississippi Central Railroad Co. (MSCI): The MSCI is 56.5 miles of
operating railroad running from Oxford, Mississippi to Grand Junction,
Tennessee. Approximately 51 miles of the track are located in Mississippi.
The assets and subsidiary stock are pledged in various financing
agreements. The Company considers the track to be in good condition.
D.) Alabama & Florida Railway Co., Inc. (AF): The AF is 76 miles of operating
railroad running from Georgiana to Geneva, Alabama. The Company has an
option from CSX Transportation to negotiate a purchase price for the
underlying real estate and currently leases the property for a monthly
payment of $2,305. The Company has exclusive rights to the revenues derived
from the land leases and easements. In connection with the operation of
this line, the AF also leases from the Andalusia & Conecuh Railroad Company
a two mile segment of track connecting to the AF's line in Andalusia,
Alabama for a nominal fee. The Company also absorbs the cost of all
maintenance of that facility. The assets and subsidiary stock are pledged
in a financing agreement. The Company considers the line to be in good
condition.
E.) Decatur Junction Railway Co. (DT): The DT leases from Cisco Co-op Grain
Company (CISCO) a segment of track, approximately thirteen (13) miles in
length, that runs from Green's Switch (Decatur, Illinois) to Cisco,
Illinois. The DT also leases a segment of track from Central Illinois
Shippers, Incorporated (CISI), approximately seventeen (17) miles in
length, that runs from Elwin to Assumption, Illinois. The two lines are
connected via trackage rights on the Illinois Central Railroad
(approximately eight miles) through Decatur, Illinois. Both leases expire
in December 2006 and require the Company to perform normal track
maintenance and pay a nominal per car charge on traffic in excess of 1,000
car loads per year. The DT's track is considered to be in good condition,
as in recent years the owners of the line received in excess of $1,000,000
in rehabilitation grants from the Federal Railroad Administration (FRA).
F.) Vandalia Railroad Company (VRRC): The VRRC is approximately 3.45 miles of
operating railroad located in Vandalia, Illinois. The VRRC has a lease with
the City of Vandalia for the 3.45 miles of railway. This lease is renewable
for ten year periods beginning in September 2003, and the lease of $1 is
prepaid through September 2003. After September 2003, the lease payments
will be equal to $10 per loaded rail car handled in interchange. The
Company considers the track to be in good condition.
<PAGE>
G.) Minnesota Central Railroad Co. (MCTA): The MCTA is approximately 94 miles
of operating railroad running from Hanley Falls to Norwood, Minnesota. The
assets and subsidiary stock are pledged in various financing agreements.
Certain sections of the line are in poor condition and the Company made a
significant effort to improve the line in 1995 and 1996, and did in fact
significantly improve a continuous 20 mile section of the railroad. The
remaining sections of line are in poor condition. During 1997, the Company
was awarded a $396,000 grant from the Minnesota Department of
Transportation which is funded with federal disaster funds from the Federal
Railroad Administration pursuant to the Federal Fiscal Year 1997
Supplemental Appropriations Act. The grant was designed to aid the Company
with the labor and material costs of rehabilitating and repairing track and
bridge structures belonging to the Minnesota Central Railroad Co. which
were damaged by severe weather conditions during the 1996-1997 winter. The
Company continues negotiations with the State of Minnesota Department of
Transportation (MNDOT) for up to approximately $4.2 million of interest
free financing to rehabilitate the entire line. As of the date of this
report, the outcome of these negotiations is uncertain and the Company is
continuing to evaluate its options concerning the MCTA including repairing
a portion of the line using its own capital resources.
H.) West Michigan Railroad Co. (WMI): The WMI is approximately 15 miles of
operating railroad running from Hartford to Paw Paw, Michigan. The track is
considered to be in good condition.
I.) Keokuk Junction Railway Co. (KJRY): The KJRY operates a common carrier
railroad line within the City of Keokuk, Iowa, from Keokuk to LaHarpe,
Illinois, and a branch line from Hamilton to Warsaw, Illinois, a total of
approximately 38 miles. The assets and subsidiary stock are pledged in
various financing agreements. The track is considered to be in good
condition.
J.) Rochelle Railroad Co. (RRCO): The RRCO leased and operated approximately 2
miles of railroad serving the Rochelle Industrial Park located in the City
of Rochelle, Illinois. The track was considered to be in good condition.
The City of Rochelle, Illinois, terminated the Rochelle Railroad Co.'s
lease agreement effective January 19, 1998, however, Rochelle Railroad Co.
continued to operate on the trackage until November 13, 1998 pending the
outcome of certain legal proceedings.
K.) Shawnee Terminal Railway Company (STR): The STR operates 2.5 miles of
operating railroad in Cairo, Illinois. The track is considered to be in
good condition.
L.) Wabash & Western Railway Co. d/b/a/ Michigan Southern Railroad (MSO): On
December 19, 1996, Pioneer Railcorp, through its wholly-owned subsidiary
Wabash & Western Railway Co., signed a two year lease with the Michigan
Southern Railroad Company, Inc. (MSRR), Morris Leasing Co., Ltd. and Gordon
D. Morris to operate 53 miles of track and certain railroad related assets.
The railroad is comprised of three separate, non-contiguous lines totaling
approximately 50 miles. One line is 39 miles long extending from White
Pigeon to Coldwater, Michigan, of which approximately 30 miles of track
from Sturgis to Quincy, Michigan is owned by the Branch and St. Joseph
Counties Rail Users Association (RUA). The RUA leases that track to MSRR,
which has contracted with MSO to operate it. On January 7, 1999, MSRR gave
notice to the RUA of the exercise of its option to purchase the segment. No
closing date has been set. The two other lines are located in northern
Indiana: one at Elkhart, which is approximately 10 miles in length, and the
other at Kendallville, which is approximately 1 mile in length. All lines
are considered to be in good condition. The lease required a fixed monthly
payment for the equipment assets and a per car charge for railroad usage.
Effective January 1, 1999, MSO purchased all of the stock of the MSRR from
Gordon D. Morris.
M.) Pioneer Industrial Railway Co.: The PRY operates a railroad line
approximately 8.5 miles long in Peoria County, Illinois. PRY assumed
operations from the Peoria & Pekin Union Railway Co. (PPU) when the PPU
assigned its lease with the owner, the Peoria, Peoria Heights & Western
Railroad (PPHW), effective February 18, 1998, expiring July 2004. PPHW is
owned by the City of Peoria, Illinois and the village of Peoria Heights,
Illinois. PRY has considerably improved the condition of the track since
assuming operation and, overall, the track is now considered to be in good
condition.
Company management believes that all of its properties and assets are adequately
covered by insurance.
<PAGE>
Item 3. Legal Proceedings
During 1998, the Rochelle Railroad Co., settled all of the actions pending
between it and the City of Rochelle, Illinois, and ceased operating the line in
November 1998. The settlement in itself did not have a material, adverse effect
upon the Company's results of operations, but the termination of railroad
operations will significantly decrease operating revenues and operating income.
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-KSB, 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.
There were no matters submitted to security holders for vote in the fourth
quarter 1998.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol "PRRR" and the Chicago Stock Exchange under
the trading symbol "PRR". The quarterly high and low sales price of the
Company's common stock for the periods below are as follows:
97-1Q 97-2Q 97-3Q 97-4Q 98-1Q 98-2Q 98-3Q 98-4Q
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High $2.63 $2.13 $1.88 $1.88 $1.75 $2.25 $1.81 $1.75
Low $1.75 $1.13 $1.38 $1.32 $1.25 $1.39 $1.19 $1.00
As of December 31, 1998, the Company had 1,814 common stockholders of record,
including brokers who hold stock for others. No common stock cash dividends have
been declared or paid.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONNECTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, RELATED NOTES AND OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB.
Results of Operations
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This management's discussion and analysis of financial condition and results of
operations references the Company's two operating segments. The Company's
railroad operations consist of wholly-owned short line railroad subsidiaries
that offer similar services and the Company's equipment leasing operations
leases railcars, locomotives, and other railroad equipment to affiliated and
unaffiliated entities. All other operations are classified as corporate for
purpose of these discussions. All information provided for each operating
segment is presented after elimination of all intersegment transactions,
therefore reflecting its share of consolidated results.
The Company's railroad operating segment had revenue earned from a major
customer of approximately $2,564,000 in 1998 and $1,760,000 in 1997.
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
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The Company's net income in 1998 increased by 16% to $425,000 up from $366,000
in 1997. Revenue increased by $735,000 or 6% to $13,514,000 from $12,779,000 in
1997. Operating expense increased in 1998 by $694,000 or 6%, to $11,504,000 from
$10,810,000 in the prior year. Operating income increased in 1998 by $41,000, or
2% to $2,010,000 from $1,969,000 in the prior year.
Operating income was increased in 1998 by both the Company's railroad operations
and equipment leasing operations. The railroad operations increased operating
income by approximately $56,000 in 1998 and the equipment leasing operations
increased operating income approximately $300,000 in 1998, primarily from
increased utilization of its railcar fleet by non-affiliated railroads. These
increases in operating income were offset by an increase in corporate support
services operating expense of approximately $315,000.
Revenue:
Revenue increased in 1998 by $735,000, or 6%, to $13,514,000 from $12,779,000 in
the prior year. The railroad operations increased revenue by approximately
$214,000 in 1998. Several operating railroad subsidiaries had increases in
revenues primarily resulting from increased loadings. Some of the more
significant increases in revenues include $155,000 from the Pioneer Industrial
Railway which began operations in February of 1998, $130,000 from the Michigan
Southern Railroad, $115,000 from the Keokuk Junction, and $163,000 from the
Alabama Railroad. However, the Minnesota Central Railroad had a decrease in
revenues of approximately $324,000 in 1998, recording revenues of $831,000 in
1998 compared to $1,155,000 in the previous year. The decrease in Minnesota
Central Railroad revenue resulted from decreased loadings of grain and clay
resulting from market conditions (grain) and track conditions. The equipment
leasing operations had a $510,000 increase in revenue in 1998 from the increased
utilization of its railcars by non-affiliated railroads.
Operating Expense:
Operating expense increased in 1998 by $694,000 or 6%, to $11,504,000 from
$10,810,000 in the prior year. The railroad operations increased operating
expense by approximately $160,000 in 1998, of which approximately $141,000 is
attributable to the new operating subsidiary, Pioneer Industrial Railway. The
equipment leasing operations increased operating expense approximately $210,000,
primarily from increased maintenance on the railcar fleet and increased
depreciation expense. Corporate support services increased operating expense
approximately $327,000, primarily related to professional services, public
relations, and increased payroll expenses related to hiring and retaining
support personnel.
Maintenance of way and structures expense (MOW) increased $10,000, or 1% to
$1,351,000 from $1,341,000 in the prior year. Several railroad operations had
modest increases in MOW resulting from increased track maintenance. These
increases were offset by a decrease in MOW expense by the Minnesota Central
Railroad of approximately $125,000 resulting primarily from the capitalization
of labor related to MCTA track rehabilitation expenditures in 1998.
Maintenance of equipment expense (MOE) increased $86,000, or 6% to $1,621,000
from $1,535,000 in the prior year. The equipment leasing operations increased
MOE expense approximately $117,000 as a result of increased costs associated
with maintaining the Company's railcar fleet. The railroad operations had a
decrease in MOE expense of approximately $55,000.
Transportation expense (TRAN) increased $198,000, or 6% to $3,353,000 from
$3,155,000 in the prior year. Most of the increased TRAN expense was generated
by the railroad operations, primarily from the Pioneer Industrial Railway which
had $104,000 of transportation expense during 1998.
General & administration expense (ADMIN) increased $312,000 in 1998 to
$3,595,000 or 10% from $3,283,000, in the prior year. The railroad operations
were responsible for approximately $81,000 of the increased ADMIN expense in
1998. Corporate expenses related to professional services, public relations, and
other corporate support expenditures increased ADMIN expense by approximately
$206,000 in 1998.
Depreciation and amortization expense increased $86,000, or 6%, to $1,583,000
compared to $1,497,000 in the prior year. Approximately $71,000 of the increase
is related to the growth of the Company's railcar fleet.
<PAGE>
Other Income and Expense Income Statement Line Item Discussion:
Other income and expense decreased $32,000 to $1,042,000 compared to $1,074,000
in the prior year. In 1998, approximately $197,000 of lease income was generated
by the Company's railroad operations from the granting of easements and leases
for the use of railroad right of way property, compared to $225,000 of lease
income in 1997, a decrease increase of $28,000. The decrease relates primarily
to additional lease income in 1997 generated from new leases that included
revenues in 1997 for lease income for the use of railroad property prior to
entering into the lease agreement. The Company continues to place a strong
emphasis on identifying and collecting revenues from third parties occupying
Company property. In addition to lease income, other income and expense includes
revenues generated from scrap sales, and other miscellaneous non-operating
revenues and expenses, primarily generated by the company's railroad operations.
Interest expense decreased $86,000 in 1998 to $1,298,000 compared to $1,384,000
in 1997. The equipment leasing operations had a decrease of approximately
$30,000 in interest expense as a result of 1998 refinancing activities to take
advantage of the favorable 1998 interest rate environment and the remaining
decrease in interest expense relates to the refinancing of the Keokuk Junction
Railway debt in late 1997.
Net gain on fixed asset dispositions decreased $28,000 in 1998 to $77,000
compared to $105,000 in 1997. In 1998, approximately $108,000 of the net gain on
fixed asset dispositions was attributable to the railroad equipment operations
and the disposition of railcars. In addition, the corporate operations had a
loss of approximately $28,000 from the sale of its former corporate headquarters
in Chillicothe, Illinois.
Impact of New Accounting Pronouncements:
The Company is not aware of any 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.
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 on a timely basis. The program includes engaging an
outside consultant to review all of the Company's computer hardware and
software, as well as to confirm with significant outside vendors that their
products are Year 2000 compliant. Based on this review the Company believes its
internal systems are Year 2000 compliant.
The Company relies primarily on one third party software company whose software
is critical to daily operations. The Company believes this third party vendor
will be Year 2000 compliant in a timely manner. If the third party vendor is not
Year 2000 compliant in a timely manner, it will have a materially adverse affect
on the Company. To date the Company is not aware of any unaffiliated entity with
a Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no means
of ensuring that unaffiliated entities will be Year 2000 compliant. The
inability of unaffiliated entities to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company.
The Company has expended approximately $49,000 to date on its resolution of the
Year 2000 compliance issue and estimates that less than $10,000 will be expended
to complete Year 2000 compliance.
As noted, the Company will be dependent on successful resolution of Year 2000
issues by unaffiliated entities. Failure by one or more of these unaffiliated
entities to successfully resolve the Year 2000 issue could result in the
mishandling of revenue loads and delayed collection of revenues. In addition,
disruptions in the economy generally resulting from the Year 2000 issues could
also materially adversely affect the Company. The amount of lost revenue as the
results of these events cannot reasonably be determined at this time, but could
be material in nature.
The Company currently has no contingency plans in place to address unknown
shortcomings in its internal systems or those of unaffiliated entities. The
Company plans to continually evaluate its Year 2000 situation periodically
throughout the year.
<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 1998. In addition, the Company believes the
market value of its railcar fleet is significantly higher then the amount of
debt associated with the railcar fleet. Therefore, the Company believes it could
refinance or sell part of its railcar fleet and generate up to $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. Subsequent to the year ended December
31, 1998, on January 1, 1999, the Company borrowed $2.4 million on the line in
connection with its exercise of it purchase option on the Michigan Southern
Railroad.
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 1999.
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%. In the fourth quarter 1998 the company
refinanced approximately $2 million of debt which had interest rates averaging
10% and replaced it with debt having average fixed rate interest of
approximately 7.4%. The Company is seeking to refinance, at more favorable
interest rates, the debt of the Alabama & Florida Railway Co., the Keokuk
Junction Railway Co., and the debt related to the acquisition of the Michigan
Southern Railroad. The Company hopes to complete these refinancings within the
first 4 months of 1999.
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 2,099,142 to 4,198,284. At the same time shareholders
became entitled to purchase an additional 4,198,284 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,
a total of 400 warrants were exercised and the Company realized $800 as a result
of their exercise. As of December 31, 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 were 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
shareholders from the exercise of the options based on the trading volume of the
Company stock. As of December 31, 1998, a total of 194,759 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 December 31, 1998, a total of 242,000 options are
outstanding under this plan.
The Company is still negotiating with the State of Minnesota Department of
Transportation (MNDOT) for up to approximately $4.2 million of interest free
financing to rehabilitate the entire line. As of the date of this report, the
outcome of these negotiations is uncertain and the Company is continuing to
evaluate its options concerning the MCTA including repairing a portion of the
line using its own capital resources, primarily long-term debt. If the Company
undertakes its own rehabilitation program, it is estimated that the total
capital requirement would be less than $2 million.
The City of Rochelle, Illinois, terminated the Rochelle Railroad Co.'s lease
agreement effective January 19, 1998, however, Rochelle Railroad Co. continued
to operate on the trackage until November 13, 1998 pending the outcome of
certain legal proceedings. In 1998 the Rochelle Railroad Co. generated $440,000
in revenue and $216,000 of operating income. In 1997, the Rochelle Railroad Co.
generated $408,000 in revenue and $250,000 of operating income. The Company
believes that a majority of the lost operating income resulting form the
termination of the Rochelle Railroad will be recovered through increased
marketing efforts on the remaining operating railroads.
The Company anticipates that the outcomes involving current legal proceedings
will not materially affect the Company's consolidated financial position or
results of operation.
The Company believes its cash flow from operations and its available working
capital credit lines, will be more than sufficient to meet liquidity needs
through at least 1999.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $2.5 million in 1998
and $1.8 million in 1997. Net cash from operating activities for 1998 was
generated from $425,000 of net income, $1,583,000 of depreciation and
amortization, $291,000 of deferred income taxes, an increase in accounts payable
of $266,000, $211,000 net cash provided by changes in various other operating
assets and liabilities, reduced by an increase in accounts receivable of
$276,000.
In 1998, the Company purchased approximately $1.5 million of fixed assets and
capital improvements which included the purchase of approximately 76 railcars at
a total cost of $745,000. The Company capitalized approximately $60,000 in
leasehold improvements relating to the Pioneer Industrial Railway trackage and
approximately $30,000 of leasehold improvements on the Fort Smith Railroad in
connection with a reload center. Capital expenditures for track totaled $237,000
in 1998 of which $152,000 was for the Minnesota Central Railroad. In addition,
$132,000 of transportation equipment was capitalized in 1998 which included
$85,000 of capital expenditures to rebuild locomotives and $47,000 of capital
expenditures for the Company's corporate aircraft. Several parcels of land were
purchased for $22,000. Other capital expenditures in 1998 include $80,000 for
vehicles and equipment, $90,000 of bridge repairs and $104,000 of other
miscellaneous capital expenditures. The purchases of railcars for $745,000, was
financed with long-term fixed rate financing and $45,000 of bridge repairs was
financed with an interest free note from the State of Mississippi.
The remaining $710,000 of capital expenditures were funded through working
capital.
<PAGE>
During 1998, the Company was awarded two grants from the Alabama Department of
Transportation which were funded with federal disaster funds from the Federal
Railroad Administration pursuant to the Federal Fiscal Year 1998 Supplemental
Appropriations Act. A grant in the amount of $657,757 to the Alabama & Florida
Railway and a grant of $64,340 to the Alabama Railroad were designed to aid the
Company with labor and material costs of rehabilitating and repairing track and
bridge structures which were damaged by severe weather conditions in March 1998.
As of December 31, 1998 the Company had expended approximately $165,000 and had
recorded receivables of $16,500 relative to the Alabama & Florida Railway grant
and had fully expended the $64,340 grant to the Alabama Railroad.
During 1997, the Company was awarded a $396,000 grant from the Minnesota
Department of Transportation which is funded with federal disaster funds from
the Federal Railroad Administration pursuant to the Federal Fiscal Year 1997
Supplemental Appropriations Act. The grant is designed to aid the Company with
the labor and material costs of rehabilitating and repairing track and bridge
structures of the Minnesota Central Railroad Co. which were damaged by severe
weather conditions during the 1996-1997 winter. As of December 31, 1998, the
Company had expended approximately $357,000 and had receivables of $112,000 and
payables of $112,000 pursuant to the grant.
Pioneer Railcorp sold all of the outstanding stock of the Columbia & Northern
Railway to a non-affiliated entity on July 26, 1997 for $15,000. The transaction
did not have a material effect on the Company's financial position or results of
operation.
On February 20, 1998, Pioneer Railcorp through its wholly-owned subsidiary
Pioneer Industrial Railway Co., was assigned a lease by the Peoria Pekin & Union
Railway Company (PPU) to operate approximately 9 miles of railroad located in
Peoria County, Illinois. The PRY interchanges with the PPU at Peoria, Illinois.
The railroad's principal commodities are steel, lumber, and salt.
As previously mentioned herein this report Form 10-KSB filing, effective January
1, 1999, MSO purchased all of the stock of the MSRR from Gordon D. Morris, for
$2.4 million funding the transaction with long-term fixed rate debt obtained
from the Company's $2.5 million revolving acquisition line of credit.
Item 7. Financial Statements
<PAGE>
Pioneer Railcorp and Subsidiaries
CONSOLIDATED Financial Report
December 31, 1998
<PAGE>
Contents
- ----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
- ----------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
- ----------------------------------------------------------------------------
<PAGE>
Independent Auditor's Report
To the Board of Directors
Pioneer Railcorp
Peoria, Illinois
We have audited the accompanying consolidated balance sheets of Pioneer Railcorp
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Railcorp and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Peoria, Illinois
February 15, 1999
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
ASSETS
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash ........................................................................ $ 469,476 $ 407,428
Accounts receivable, less allowance for doubtful
accounts 1998 $156,282; 1997 $82,375 ..................................... 2,660,012 2,367,509
Inventories ................................................................. 331,841 351,331
Prepaid expenses ............................................................ 174,085 192,952
Income tax refund claims .................................................... 56,933 74,602
Deferred taxes .............................................................. 70,800 66,400
------------------------
Total current assets ................................................... 3,763,147 3,460,222
Investments, cash value of life insurance ...................................... 112,348 95,547
Property and Equipment, net .................................................... 19,563,368 19,974,702
Intangible Assets, less accumulated amortization
1998 $250,365; 1997 $197,724 ................................................ 1,065,140 1,117,205
------------------------
$24,504,003 $24,647,676
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable ............................................................... $ 307,886 $ 250,034
Current maturities of long-term debt ........................................ 1,988,041 1,836,132
Accounts payable ............................................................ 2,732,627 2,518,190
Accrued expenses ............................................................ 537,018 432,145
Income taxes payable ........................................................ 14,206 61,749
------------------------
Total current liabilities .............................................. 5,579,778 5,098,250
------------------------
Long-Term Debt, net of current maturities ...................................... 11,211,737 12,465,498
------------------------
Deferred Taxes ................................................................. 2,545,900 2,250,700
------------------------
Minority Interest in Subsidiaries .............................................. 1,186,000 1,186,000
------------------------
Commitments and Contingencies (Note 11)
Stockholders' Equity
Common stock, Class A (voting), par value $.001 per share, authorized
20,000,000 shares, issued and outstanding
1998 4,610,597 shares; 1997 4,610,197 shares ............................. 4,610 4,610
Additional paid-in capital .................................................. 2,041,000 2,040,200
Retained earnings ........................................................... 1,934,978 1,602,418
------------------------
3,980,588 3,647,228
------------------------
$24,504,003 $24,647,676
========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1998 and 1997
1998 1997
- --------------------------------------------------------------------------------
Railway operating revenue .......................... $13,514,428 $12,779,249
-------------------------
Operating expenses
Maintenance of way and structures ............... 1,351,140 1,340,940
Maintenance of equipment ........................ 1,621,232 1,534,999
Transportation .................................. 3,353,439 3,155,099
General and administrative ...................... 3,595,460 3,282,602
Depreciation .................................... 1,530,354 1,439,010
Amortization .................................... 52,641 57,878
-------------------------
11,504,266 10,810,528
-------------------------
Operating income ............................. 2,010,162 1,968,721
-------------------------
Other income (expenses)
Interest income ................................. 7,536 5,522
Interest expense ................................ (1,297,928) (1,384,325)
Lease income .................................... 197,087 224,569
Gain on sale of property and equipment .......... 77,005 105,113
Provision for unamortized interest discounts
due to debt refinancing ...................... - - (101,245)
Other, net ...................................... (25,250) 76,297
-------------------------
(1,041,550) (1,074,069)
-------------------------
Income before provision for income taxes
and minority interest in preferred stock
dividends of consolidated subsidiaries ..... 968,612 894,652
Provision for income taxes ......................... 420,977 405,687
-------------------------
Income before minority interest in preferred
stock dividends of consolidated subsidiaries 547,635 488,965
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 122,870 122,720
-------------------------
Net income ................................... $ 424,765 $ 366,245
=========================
Basic earnings per common share .................... $ .09 $ .08
=========================
Diluted earnings per common share .................. $ .09 $ .08
=========================
See Notes to Consolidated Financial Statements.
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
Common Stock
------------------- Additional
Class A (voting) Paid-In Retained
Shares Amount Capital Earnings
- --------------------------------------------------------------------------------
Balance at December 31, 1996 ... 4,574,027 $ 4,574 $1,981,146 $1,236,173
Common stock issued upon
exercise of stock warrants
and options .............. 36,170 36 59,054 - -
Net income .................. - - - - - - 366,245
--------------------------------------------
Balance at December 31, 1997 ... 4,610,197 4,610 2,040,200 1,602,418
Common stock issued upon
exercise of stock warrants 400 - - 800 - -
Dividends on common stock,
$.02 per share ........... - - - - - - (92,205)
Net income .................. - - - - - - 424,765
--------------------------------------------
Balance at December 31, 1998 ... 4,610,597 $ 4,610 $2,041,000 $1,934,978
============================================
See Notes to Consolidated Financial Statements.
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 a nd 1997
<TABLE>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income ................................................. $ 424,765 $ 366,245
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ............................. 122,870 122,720
Depreciation ............................................ 1,530,354 1,439,010
Amortization ............................................ 52,641 57,878
(Increase) in cash value life insurance ................. (16,801) (20,585)
(Gain) on sale of property and equipment ................ (71,318) (105,113)
Deferred taxes .......................................... 290,800 242,550
Provision for unamortized interest discounts
due to debt refinancing ............................... - - 101,245
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ................................ (275,638) (296,220)
Income tax refund claims ........................... 17,669 275,279
Inventories ........................................ 19,490 69,621
Prepaid expenses ................................... 18,867 68,475
Increase (decrease) in liabilities:
Accounts payable ................................... 266,016 (455,068)
Accrued expenses ................................... 131,146 (59,465)
Income taxes payable ............................... (47,543) 42,771
--------------------------
Net cash provided by operating activities .......... 2,463,318 1,849,343
--------------------------
Cash Flows From Investing Activities
Proceeds from sale of property and equipment ............... 340,303 194,959
Purchase of property and equipment ......................... (1,482,722) (1,371,992)
Intangible assets .......................................... (576) (3,969)
--------------------------
Net cash (used in) investing activities ............ (1,142,995) (1,181,002)
--------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings ........................ 3,272,648 3,915,971
Proceeds from long-term borrowings ......................... 5,898,636 4,608,427
Principal payments on short-term borrowings ................ (3,214,796) (4,435,472)
Principal payments on long-term borrowings ................. (7,000,488) (4,785,421)
Proceeds from common stock issued upon exercise of
stock warrants and options .............................. 800 59,090
Common stock dividend payments ............................. (92,205) --
Preferred stock dividend payments to minority interest ..... (122,870) (122,720)
Repurchase of minority interest ............................ -- (2,000)
--------------------------
Net cash (used in) financing activities ............ (1,258,275) (762,125)
--------------------------
Net increase (decrease) in cash .................... $ 62,048 $ (93,784)
Cash, beginning of year ....................................... 407,428 501,212
--------------------------
Cash, end of year ............................................. $ 469,476 $ 407,428
==========================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest ................................................ $ 1,346,232 $ 1,415,858
==========================
Income taxes (net of refunds 1998 $21,783; 1997 $232,251) $ 160,051 $ (154,913)
==========================
</TABLE>
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 a nd 1997
<TABLE>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Noncash Inventory Information
Loss on discontinuation of Rochelle Railroad Co. lease:
Leasehold improvements disposed of, net ................. $ (74,132) $ - -
Liabilities forgiven .................................... 51,580 - -
Proceeds to be received by Company ...................... 16,865 - -
--------------------------
Loss on lease discontinuation ......................... $ (5,687) $ - -
==========================
Cancellation of equipment purchase commitment:
Equipment .................................................. $ (25,000) $ - -
Accrued expenses ........................................... 25,000 - -
--------------------------
$ - - $ - -
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Pioneer Railcorp is the parent company of thirteen
short-line common carrier railroad operations, an equipment leasing company, a
subsidiary which owns an airplane, and two service companies. Pioneer Railcorp
and its subsidiaries (the "Company") operate in the following states: Alabama,
Arkansas, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, and
Tennessee.
The Company's subsidiaries include the following:
West Michigan Railroad Co. Pioneer Railroad Services, Inc.
Minnesota Central Railroad Co. Keokuk Junction Railway Co. and its
Vandalia Railroad Company subsidiary, Keokuk Union Depot Company
Decatur Junction Railway Co. Wabash & Western Railway Co., d/b/a
Alabama & Florida Railway Co., Inc. Michigan Southern Railroad
Mississippi Central Railroad Co. Rochelle Railroad Co. (inactive)
Alabama Railroad Co. Shawnee Terminal Railway Company
Fort Smith Railroad Co. Pioneer Resources, Inc.
Pioneer Railroad Equipment Co., Ltd. Pioneer Industrial Railway Co.
Pioneer Air, Inc.
Pioneer Railroad Equipment Co., Ltd. holds title to a majority of the
Company's operating equipment, and Pioneer Air, Inc. owns an airplane utilized
by the Company for business purposes. Pioneer Railroad Services, Inc. provides
management, administrative and agency services to the Company's subsidiary
railroads. Pioneer Resources, Inc. holds title to certain real estate adjacent
to one of the Company's railroads. All other subsidiaries are short-line common
carrier railroad operations.
Significant accounting policies:
Principles of consolidation: The consolidated financial statements include the
accounts of Pioneer Railcorp and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and cash equivalents: For the purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with maturity of three
months or less to be cash equivalents. There are no cash equivalents as of
December 31, 1998 and 1997. Periodically throughout the year, the Company has
amounts on deposit with financial institutions that exceed the depository
insurance limits. The Company has not experienced any loss as a result of those
deposits and does not expect any in the future.
Receivables credit risk: The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Provisions are made for
estimated uncollectible trade accounts receivable. To date, losses on accounts
receivable have been minimal in relation to the volume of sales and have been
within management's expectations.
Revenue recognition: Freight revenue, generally derived on a per car basis from
on-line customers and connecting carriers with whom the Company interchanges, is
considered earned at the time a shipment is either delivered to or received from
the connecting carrier at the point of interchange.
Inventories: Inventories consisting of various mechanical parts, track
materials, locomotive supplies and diesel fuel, are stated at the lower of cost
(determined by the average cost method) or market. Inventories are used on a
daily basis for normal operations and maintenance.
Property and equipment: Property and equipment is stated at cost. Depreciation
is generally computed on a straight-line basis over the following estimated
useful lives:
Years
-----
Roadbed .................................................... 20
Transportation equipment ................................... 10-15
Railcars ................................................... 10-25
Buildings .................................................. 20-40
Machinery and equipment .................................... 5-10
Office equipment ........................................... 5-10
<PAGE>
Leasehold improvements are depreciated over the lesser of the lease term or life
of the improvements.
Maintenance and repair expenditures, which keep the rail facilities in operating
condition, are charged to operations as incurred. Expenditures considered to be
renewals and betterments are capitalized if such expenditures improve the track
conditions and benefit future operations with more efficient use of the rail
facilities.
The Company reviews applicable assets on a quarterly basis to determine
potential impairment by comparing carrying value of underlying assets with the
anticipated future cash flows and does not believe that impairment exists as of
December 31, 1998 and 1997.
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 by subsidiary to determine potential
impairment by comparing the carrying value of the intangible with the
undiscounted anticipated future cash flows of the related property before income
taxes and management fees generated by Pioneer Railroad Services, Inc. If future
cash flows are less than the carrying value, the Company will determine the fair
market value of the property and adjust the carrying value of the intangibles if
the fair market value is less than the carrying value. The Company does not
believe that impairment exists as of December 31, 1998 and 1997.
Earnings per common share: The Company follows the guidance of Financial
Accounting Standards Board (FASB) Statement No. 128, "Earnings per Share," which
requires the presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants, and convertible
securities, outstanding that trade in a public market. Those entities that have
only common stock outstanding are required to present basic earnings per-share
amounts. Basic per-share amounts are computed by dividing net income (the
numerator) by the weighted-average number of common shares outstanding (the
denominator). All other entities are required to present basic and diluted
per-share amounts. 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 common share.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Government grant: During 1998, the Company was awarded two grants from the
Alabama Department of Transportation which are funded with federal disaster
funds from the Federal Railroad Administration pursuant to the Federal Fiscal
year 1998 Supplemental Appropriations Act. The $657,757 and $64,340 grants are
designed to aid the Company with the labor and material costs of rehabilitating
and repairing track and bridge structures belonging to the Alabama & Florida
Railway Company and the Alabama Railroad Company, respectively, which were
damaged by severe weather conditions in March 1998. As of December 31, 1998, the
Company had expended approximately $165,000 and had recorded receivables of
$16,500 relative to the $657,757 grant and had fully expended the $64,340
pursuant to the other grant.
During 1997, the Company was awarded a $395,688 grant from the Minnesota
Department of Transportation which is funded with federal disaster funds from
the Federal Railroad Administration pursuant to the Federal Fiscal Year 1997
Supplemental Appropriations Act. The grant is designed to aid the Company with
the labor and material costs of rehabilitating and repairing track and bridge
structures belonging to the Minnesota Central Railroad Co. which were damaged by
severe weather conditions in late 1996 and early 1997. As of December 31, 1998,
the Company had expended approximately $357,000 and had recorded receivables of
approximately $68,000 and accounts payable to vendors of approximately $68,000
pursuant to this grant.
The grant funds are applied as a reduction of the related capital additions for
rehabilitating and repair of the applicable track and bridge structures in
determining the carrying value of the assets. The grant is recognized as income
by way of reduced depreciation charges over the estimated useful lives of the
underlying property and equipment.
<PAGE>
Self-insurance: The Company self-insures a portion of the risks associated with
medical expenses incurred by its employees and their dependents. Under the terms
of the self-insurance agreement, the Company is responsible for the first
$20,000 of qualifying medical expenses per person on an annual basis and limited
to an aggregate excess amount computed under the terms of the insurance contract
using specified participant rates. An insurance contract with a life insurance
company covers individual claims in excess of $20,000 on an annual basis and
total claims exceeding the aggregate excess, subject to a maximum lifetime
reimbursement of $2,000,000 per person.
Use of estimates in the preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Note 2. Property and Equipment
Property and equipment consist of the following:
December 31,
-----------------------------
1998 1997
-----------------------------
Land ....................................... $ 1,433,888 $ 1,412,388
Roadbed .................................... 7,806,216 7,567,135
Transportation equipment ................... 2,428,275 2,202,965
Railcars ................................... 10,746,046 9,963,828
Buildings .................................. 1,058,052 1,090,207
Machinery and equipment .................... 1,005,897 933,034
Office equipment ........................... 429,805 395,122
Leasehold improvements ..................... 204,886 211,371
Capital projects ........................... 447,463 800,667
-----------------------------
25,560,528 24,576,717
Less accumulated depreciation .............. 5,997,160 4,602,015
-----------------------------
$19,563,368 $19,974,702
=============================
Note 3. Pledged Assets, Notes Payable, and Long-Term Debt
The Company has a $2.5 million credit facility with Citizens Bank and Trust
Company, Chillicothe, Missouri, to provide a 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 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 Company has no outstanding balance under this line of credit as of
December 31, 1998 and 1997.
The Company has a $100,000 line of credit with Citizens Bank and Trust Company,
Chillicothe, Missouri, that expires July 1999, bears interest at 9.5%, and is
collateralized by transportation equipment. The Company had no outstanding
balances under this line of credit as of December 31, 1998 and 1997.
The Company has a $500,000 line of credit with National City Bank, Peoria,
Illinois, that expires July 1999, bears interest at prime, as published in The
Wall Street Journal, plus 1%, and is collateralized by accounts receivable and
general intangibles of certain subsidiaries. The Company had no outstanding
balance under this line of credit as of December 31, 1998 and 1997.
The Company has a $600,000 line of credit with National City Bank, Peoria,
Illinois, that expires July 1999, bears interest at prime, as published in The
Wall Street Journal, plus 1%, and is collateralized by accounts receivable and
general intangibles of certain subsidiaries. The Company had outstanding
balances under this line of credit of $225,738 and $148,050 as of December 31,
1998 and 1997, respectively.
<PAGE>
The Company has various unsecured notes payable totaling $82,148 and $101,984 as
of December 31, 1998 and 1997, respectively, for the financing of insurance
premiums. This note is due in monthly installments of $20,537, including
interest at 7.95%, with final installment due May 1999.
Long-term debt at December 31, 1998 and 1997, consists of the following:
<TABLE>
1998 1997
-------------------------
<S> <C> <C>
Mortgage payable, National City Bank, due in monthly installments of $3,775,
including interest at 8.5%, through October 1, 1999. At that date and every
five years thereafter, the interest rate may be adjusted based on the Bank's
base rate, final installment due June 2008, collateralized by Pioneer
Railcorp's corporate headquarters building ......................................... $ 395,606 $ 406,299
Mortgage payable, National City Bank, due in monthly installments
of $19,314, including interest at 9.25%, through December 2001. At that date,
the interest rate adjusts to a U.S. Treasury index 5-year constant maturity)
plus 3.5%, final installment due December 2006, collateralized by real
estate, rail facilities, and other assets of Alabama & Florida Railway Co., Inc. ... 1,293,713 1,398,669
Notes payable, Norwest Equipment Finance, Inc., due in monthly
installments of $24,018, including interest at 7.26%, final install-
ment due June 2004, collateralized by railcars ..................................... 1,380,863 1,638,397
Note payable, Keycorp, due in monthly installments of $22,744,
including interest at 8.86%, final installment due December 2003,
collateralized by railcars ......................................................... 1,098,977 1,266,399
Notes payable, Nations Bank, due in monthly installments from
$8,524 to $23,305, including interest ranging from 8.75% to 9.35%, final
installments due from December 2002 to December
2003, collateralized by railcars ................................................... 940,998 1,929,281
Notes payable, Concord Commercial Group, due in monthly
installments of $2,239, including interest at 9%, final installment
due March 1999, collateralized by railcars ......................................... 6,599 108,950
Notes payable, Minnesota Valley Bank, due in monthly installments
of $4,700, including interest at prime plus 2-2.75%, final
installment due December 2001, collateralized by equipment
acquired from MNVA Railroad, Inc. .................................................. 128,675 168,603
Note payable, U.S. Small Business Administration, due in monthly
installments of $7,577, including interest at 4%, final installment due
October 2000, collateralized by track acquired from MNVA
Railroad, Inc. ..................................................................... 152,235 235,197
Note payable, Rail Authority, interest only payments required through
October 1998, then due in monthly installments of $3,975, including interest
at 7.5%, final installment due January 2011, collateralized
by rail line acquired from MNVA Railroad, Inc. ..................................... 375,845 380,000
Various notes payable, due in monthly installments from $404 to $573,
including interest ranging from 6.75% to 10.25%, final installments due from
June 1999 to December 2001, collateralized by vehicles
and railcars ....................................................................... 62,468 109,591
Note payable, National City Bank, due in monthly installments of
$39,041, including interest at 9.5%, through September 2002. At that date,
the interest rate will be adjusted to 250 basis point over the weekly average
yield on U.S. Treasury Securities, final installment due December 2007,
collateralized by Keokuk Junction Railway Co. stock and assets ..................... 2,813,177 3,000,000
Notes payable, Center Capital Corporation, due in monthly
installments from $1,402 to $5,202, including interest from 8.90% to 9.75%,
final installments due from January 2002 to August 2005, collateralized by 70
ton box cars ....................................................................... 641,325 188,732
Note payable, Pullman Bank & Trust Company, due in monthly
installments of $4,933, including interest at 9.45%, final install-
ment due December 2004, collateralized by covered hoppers .......................... 268,885 301,000
Note payable, GE Capital, due in monthly installments of $39,286,
including interest at 8.2%, final installment due May 2003,
collateralized by locomotives, boxcars, covered hoppers, and
gondolas ........................................................................... 1,738,554 --
Note payable, Lyon Credit, due in monthly installments of $32,763,
including interest at 8.38%, final installment due May 2002,
collateralized by railcars ......................................................... 1,856,393 --
Noninterest-bearing note payable, State of Mississippi, due in
annual installments of $4,547, final installment due June 2008,
collateralized by track structure .................................................. 45,465 --
Mortgage payable, Camden National Bank, due in monthly
installments of $4,304, including interest at 12%, final installment due July
2001, collateralized by Alabama Railroad Co.
real estate and rail facilities .................................................... -- 161,785
Note payable, FBS Leasing, due in monthly installments of $510,
including interest of 8.37%, final installment due December 2001,
collateralized by railcars ......................................................... -- 1,087,819
Note payable, US Bancorp, due in monthly installments from
$10,088, including interest of 9%, final installment due
December 2002, collateralized by railcars .......................................... -- 1,023,926
Note payable, LDI Corporation, due in monthly installments of
$16,731, including interest at 10.25%, final installment due
December 2003, collateralized by locomotives ....................................... -- 896,982
--------------------------
13,199,778 14,301,630
Less current portion .................................................................. 1,988,041 1,836,132
--------------------------
$11,211,737 $12,465,498
==========================
</TABLE>
<PAGE>
Aggregate maturities required on long-term debt as of December 31, 1998, are due
in future years as follows:
Years ending December 31: Amount
- -------------------------------------------
1999 $ 1,988,041
2000 2,118,123
2001 2,187,834
2002 2,167,981
2003 1,524,092
Thereafter 3,213,707
-----------
$13,199,778
===========
Note 4. Income Tax Matters
The Company and all but three of its subsidiaries file a consolidated federal
income tax return. Those three subsidiaries file separate federal income tax
returns.
The provision (credit) for income taxes charged to operations for the years
ended December 31, 1998 and 1997, was as follows:
1998 1997
--------------------
Current:
Federal ...................................... $101,335 $115,432
State ........................................ 28,842 47,705
Deferred ........................................ 290,800 242,550
--------------------
$420,977 $405,687
====================
The income tax provision differs from the amount of income tax determined by
applying the federal income tax rate to pretax income from operations for the
years ended December 31, 1998 and 1997, due to the following:
1998 1997
-------------
Computed "expected" tax expense ............................... 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit ............. 6.0 6.0
Other ...................................................... 2.4 4.3
-------------
43.4% 45.3%
=============
Deferred tax assets and liabilities consist of the following components as of
December 31, 1998 and 1997:
1998 1997
------------------------------
Deferred tax assets:
AMT credit carryforwards .............. $ 463,400 $ 434,500
NOL carryforwards ..................... 1,070,800 1,037,100
Deferred compensation ................. 35,200 29,800
Other ................................. 70,800 66,400
------------------------------
1,640,200 1,567,800
Deferred tax liabilities:
Property and equipment ................ (4,115,300) (3,752,100)
------------------------------
$(2,475,100) $(2,184,300)
==============================
<PAGE>
The components giving rise to the deferred tax assets and liabilities described
above have been included in the consolidated balance sheets as of December 31,
1998 and 1997, as follows:
1998 1997
----------------------------
Current deferred tax assets .................. $ 70,800 $ 66,400
Net noncurrent deferred tax liabilities ...... (2,545,900) (2,250,700)
----------------------------
Net deferred tax liability ................... $(2,475,100) $(2,184,300)
============================
The Company and its subsidiaries have Alternative Minimum Tax (AMT) credit
carryforwards of approximately $463,000 and $435,000 at December 31, 1998 and
1997, respectively. This excess of AMT over regular tax can be carried forward
indefinitely to reduce future federal income tax liabilities. Certain
subsidiaries of the Company also have net operating loss carryforwards totaling
approximately $2,906,000 at December 31, 1998, which can be used to offset
future taxable income of those subsidiaries. Net operating loss carryforwards
expire as follows:
Years ending December 31: Amount
- ----------------------------------------------------
2008 $ 9,000
2009 16,000
2010 352,000
2011 1,641,000
2012 632,000
2013 256,000
-----------
$ 2,906,000
===========
Note 5. Retirement Plan
The Company has a defined contribution plan covering substantially all
employees. Employees are eligible to participate in the plan upon employment and
may elect to contribute, on a tax deferred basis, the lesser of 15% of their
salary, or $10,000. Company contributions are discretionary, and during 1998 and
1997, the Company elected to match 50% of the first 8% of each employee's
contributions. Expenses under the plan were $43,153 and $43,769 for the years
ended December 31, 1998 and 1997, respectively.
Note 6. Deferred Compensation Agreements
The Company has deferred compensation agreements with two Keokuk Junction
Railway Co. employees. The agreements provide monthly benefits for 15 years
beginning with the month immediately following the employees' normal retirement
date, as defined in the agreements. If an employee terminates employment with
the Company for any reason other than death prior to the employees' normal
retirement date, benefits are rendered on a pro rata basis. The $91,566 and
$77,441 present value of the estimated liability as of December 31, 1998 and
1997, respectively, under the agreements is being accrued ratably over the
remaining years to the date when the employees are first eligible for benefits
using a discount rate of 7%. Deferred compensation expense totaled $14,125 and
$12,638 for the years ended December 31, 1998 and 1997, respectively.
<PAGE>
Note 7. Stock Options and Warrants
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 prescribes a fair-value based measurement of
accounting for stock-based compensation plans with employees, including the
Company's stock option plans which are described below. The fair-value based
measurement prescribed by SFAS 123 results in the recognition of compensation
for all awards of stock to employees. The Company's present accounting is in
accordance with APB Opinion No. 25 and related interpretations which generally
requires that the amount of compensation cost that must be recognized, if any,
is the quoted market price of the stock at the measurement date, less the amount
the grantee is required to pay to acquire the stock. SFAS 123 provides that its
recognition and measurement provisions may be adopted on or after the beginning
of the fiscal year in which it was issued, but does not require an entity to
adopt those provisions. The Company has elected not to adopt the recognition and
measurement provisions of SFAS 123.
On April 12, 1994, the Board of Directors approved a stock option plan under
which the Company granted options to key management, other employees, and
outside directors for the purchase of 760,000 shares of its common stock. The
plan was approved by the Company's stockholders on June 11, 1994. The options
became exercisable when the Company's stock reached a $4 trading price for a ten
day period in July 1995, as specified in the stock option plan. The exercise
price is equal to the trading price on the date of the grants and ranges from
$1.50 to $3.92 per share. Since the target price was reached by December 31,
1995, in accordance with the provisions of the plan, additional options for
76,000 shares were granted. The exercise price for these options is equal to or
greater than the trading price on the date of the grants and ranges from $4.00
to $4.40 per share. The options expire at various dates from April 12, 1999 to
July 5, 2000.
On June 1, 1998, the Board of Directors approved a plan for repurchase of
441,512 of the outstanding options issued to Company employees on April 12,
1994. Consequently, only 20,000 options held by an outside director remain
outstanding pursuant to the April 12, 1994, stock plan. The employees were paid
$.15 for each option repurchased, with the repurchase cost payable to the
employees in the form of increased compensation over a one-year period
commencing in June, 1998.
On May 28, 1996, the Board of Directors approved a stock option plan under which
the Company granted options to key management, other employees, and outside
directors for the purchase of 407,000 shares of its common stock. The plan was
approved by the Company's stockholders on June 26, 1996. The options become
fully vested and exercisable as of July 1, 2001, except that the vesting and
exercise date are accelerated to the tenth consecutive business day that the
Company's stock trades at a price of at least $7.25. Vested options may be
exercised in whole or in part within 10 years from the date of grant. The
exercise price for these options is $2.75, the trading price on the date of the
grants.
Other pertinent information related to the plans is as follows:
1998 1997
--------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------------------
Outstanding at beginning of year 973,271 $ 2.36 1,099,800 $ 2.35
Forfeited ...................... (95,000) 2.65 (100,029) 2.56
Repurchased .................... (441,512) 1.54 - - - -
Exercised ...................... - - - - (26,500) 1.50
-------------------------------------------
Outstanding at end of year ..... 436,759 $ 3.13 973,271 $ 2.36
===========================================
Exercisable at end of year ..... 194,759 691,271
======== =========
<PAGE>
A further summary about stock options outstanding as of December 31, 1998, is as
follows:
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted-
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------
$1.50 20,000 4 months $ 1.50 20,000 $ 1.50
$2.75 - 3.56 352,000 5 years 3.07 110,000 3.56
$3.92 - 4.40 64,759 1.6 years 4.01 64,759 4.01
---------- --------
436,759 194,759
========== ========
Grants under the above plans are accounted for following APB Opinion No. 25 and
related interpretations as permitted under generally accepted accounting
principles. Accordingly, no compensation cost has been recognized. Had
compensation cost for the stock-based compensation plans been determined based
on the grant date fair values of awards (the method described in FASB Statement
No. 123) reported net income, and earnings per common share would have been
reduced to the proforma amounts shown below:
1998 1997
----------------------
Net income:
As reported ........................... $ 424,765 $ 366,245
Proforma .............................. $ 344,765 $ 294,245
Basic earnings per common share:
As reported ........................... $ .09 $ .08
Proforma .............................. $ .08 $ .06
Diluted earnings per common share:
As reported ........................... $ .09 $ .08
Proforma .............................. $ .08 $ .06
On June 24, 1995, the stockholders authorized the issuance of stock warrants as
a dividend to stockholders of record, resulting in the issuance of 4,198,284
warrants. Each warrant permits stockholders a right to purchase an additional
share of stock at a predetermined price of $2 per share. Stock acquired by
exercise of each warrant must be held for a one year period of time. The
warrants expire July 1, 2015. There are 4,131,040 and 4,131,440 warrants
outstanding as of December 31, 1998 and 1997, respectively.
Note 8. Lease Commitments and Total Rental Expense
The Company has entered into six lease agreements covering certain of its
railroad properties. For rail- road properties it leases, the Company ordinarily
assumes, upon the commencement date, all operating and financial
responsibilities, including maintenance, payment of property taxes, and
regulatory compliance. Lease payments on five railroad properties are based on a
per car basis, ranging from $10 to $25 on all cars over a range of 300 to 4,000
cars per year on each segment. The leases expire between September 2003 and July
2018 and two of these railroads have five to twenty year renewal options.
One railroad lease, which expired on December 31, 1998, contained an option to
purchase the stock and leased personal property of the railroad upon expiration
of the lease. As disclosed in Note 15 to the financial statements, the Company
exercised its option to purchase this railroad subsequent to December 31, 1998.
The Company has a land lease for the corporate office building. This lease
expires in 2008 and is renewable for five successive periods of five years with
annual rents equal to ten percent of the appraised value of the land, payable in
monthly installments, and with appraisal value reviews every five years
following the origination date. The Company is responsible for costs of
maintenance, utilities, taxes, and insurance.
<PAGE>
The total approximate minimum rental commitment as of December 31, 1998,
required under noncancelable leases, and excluding executory costs and per car
rentals, is due in future years as follows:
Years Ending December 31: Amount
- ----------------------------------------------
1999 $ 46,300
2000 46,300
2001 46,300
2002 46,300
2003 46,300
Thereafter 302,375
---------
$ 533,875
=========
The total rental expense under the leases was $347,281 and $440,986 for the
years ended December 31, 1998 and 1997, respectively.
Note 9. Major Customer
Revenue earned from a major railroad segment customer amounted to approximately
$2,567,000 and $1,760,000 during the years ended December 31, 1998 and 1997,
respectively. Accounts receivable as of December 31, 1998 and 1997, include
approximately $381,000 and $427,000, respectively, from this customer.
Note 10. Minority Interest in Subsidiaries
Three of the Company's subsidiaries have preferred stock outstanding. This stock
is accounted for as minority interest in subsidiaries and dividends on the stock
are accounted for as a current expense.
Following is a summary of the minority interest in subsidiaries as of December
31, 1998 and 1997:
Amounts
----------
Preferred stock of Alabama Railroad Co.
Par value - $1,000 per share
Authorized - 700 shares
Issued and outstanding - 424 (cumulative 12% dividend;
callable at Company's option at 150% of face value) ...... $ 424,000
Preferred stock of Alabama & Florida Railway Co., Inc.
Par value - $1,000 per share
Authorized - 500 shares
Issued and outstanding - 421 (cumulative 9% dividend;
callable at Company's option after June 22, 1995, at
150% of face value) ..................................... 421,000
Preferred stock of Mississippi Central Railroad Co.
Par value - $1,000 per share
Authorized - 1,000 shares
Issued and outstanding - 341 shares (cumulative 10% dividend;
convertible at a rate of $10 per common share, callable at
Company's option after March 1, 1996, at 110% of face value) 341,000
----------
$1,186,000
==========
Note 11. Commitments and Contingencies
Commitments: In December 1998, the Company entered into a one-year extension of
an existing executive employment contract with the Company's president. The
one-year extension provides for a base salary with an annual inflation
adjustment based upon the Consumer Price Index. Should the Company acquire or
form additional railroads, the base salary will increase $25,000 for the
acquisition of railroads of 125 miles or less, and $50,000 for railroads over
125 miles. Should the president's employment be terminated, the contract
requires a lump sum payment equal to three years of his then current salary.
Should the president retire, he is entitled to a lump sum payment of one year's
salary.
<PAGE>
Contingencies: In the course of its business, the Company's subsidiaries
experience crossing accidents, employee injuries, delinquent or disputed
accounts and other incidents, which give rise to claims that may result in
litigation. Management vigorously pursues settlement of such claims, but at any
one time, some such incidents, which could result in lawsuits by and against the
Company and its subsidiary railroads, remain unresolved. Management believes it
has valid claims for, or good defenses to, these actions. Management considers
such claims to be a routine part of the Company's business and, as of the date
of this statement, management believes that no incident has the potential to
result in a liability that would materially effect the Company's consolidated
financial position or results of operations.
As discussed in Note 1, the Company was awarded grants in 1998 and 1997 for the
repair and rehabilita- tion of weather damaged railroad track and related
structures the Company owns in Alabama and Minnesota. The Company's obligations
under the two Alabama grants expire five years after the completion of the
repairs, while the Company's obligation under the Minnesota grant expires two
years after the completion of repairs. In the unlikely event the Company should
discontinue using the underlying track prior to the expiration of the
aforementioned commitment periods, the Company is contingently liable to repay
to the Federal Railroad Administration the full value of awarded funds pursuant
to the Alabama grants and the value of materials installed pursuant to the
Minnesota grant. Management estimates that materials installed pursuant to the
Minnesota grant approximate $123,000.
Note 12. Earnings Per Share
Following is information about the computation of the earnings per share (EPS)
data for the years ended December 31, 1998 and 1997:
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
For Year Ended December 31, 1998
-----------------------------------
Basic EPS
Income available to common stockholders .... $424,765 4,610,434 $ .09
=======
Effect of Dilutive Securities
Employee stock options ..................... -- 1,132
---------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ................ $424,765 4,611,566 $ .09
=================================
For Year Ended December 31, 1997
-----------------------------------
Basic EPS
Income available to common stockholders .... $366,245 4,593,750 $ .08
========
Effect of Dilutive Securities
Employee stock options ..................... -- 57,576
---------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ................ $366,245 4,651,326 $ .08
=================================
The Company has authorized the issuance of stock warrants and granted options to
employees to purchase shares of common stock as discussed in Note 7. In
determining the effect of dilutive securities, certain stock warrants and
options were not included in the computation of diluted earnings per share
because the exercise price of those warrants and options exceeded the average
market price of the common shares during the applicable year.
<PAGE>
Note 13. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
The carrying value of cash, cash value of life insurance, notes payable,
and variable rate long-term debt approximates fair value.
The remaining carrying value of fixed rate long-term debt collectively
approximates fair value based upon the similarity of interest rates
negotiated on debt instruments in 1998 and 1997 as compared to existing
interest rates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the trained work force,
customer goodwill, and similar items.
Note 14. Segment Information
During 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise". This Statement, applicable
only to public companies, establishes standards for reporting information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.
Description of products and services from reportable segments: Pioneer Railcorp
has two reportable segments, investing in operating railroad entities and an
investment in a railroad equipment entity. All other operations are classified
as corporate for purposes of this disclosure.
Measurement of segment profit or loss and segment assets: The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Pioneer Railcorp evaluates segment profit based
on operating income before intersegment revenues, provision for income taxes,
items of other income and expense, and minority interest in preferred stock
dividends of consolidated subsidiaries.
Intersegment transactions: Intersegment transactions are recorded at cost.
<PAGE>
Factors management used to identify the reportable segment: Pioneer Railcorp's
reportable segments consists of wholly-owned short line railroad subsidiaries
that offer similar services and a railroad equipment subsidiary that leases
railcars, locomotives, and other railroad equipment to affiliated and
unaffiliated entities. The corporate operations consist of support services
provided to the operating segments.
<TABLE>
For Year Ended
December 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Segment Assets
Railroads .................................................... $13,626,948 $13,481,006
Leasing company .............................................. 10,055,047 10,270,060
Corporate .................................................... 822,008 895,610
--------------------------
Total consolidated segment assets ....................... $24,504,003 $24,647,676
==========================
Expenditures for additions to long-lived assets
Railroads .................................................... $ 467,199 $ 303,763
Leasing company .............................................. 932,336 989,453
Corporate .................................................... 83,187 78,776
--------------------------
Total expenditures for additions to long-lived assets ... $ 1,482,722 $ 1,371,992
==========================
Revenues
Revenues from external customers
Railroads .................................................... $10,918,188 $10,703,799
Leasing company .............................................. 2,585,072 2,075,450
Corporate .................................................... 11,168 - -
--------------------------
Total revenues from external customers .................. 13,514,428 12,779,249
--------------------------
Intersegment revenues
Railroads .................................................... - - - -
Leasing company .............................................. 427,100 352,500
Corporate .................................................... 5,156,045 4,602,034
--------------------------
Total intersegment revenues ............................. 5,583,145 4,954,534
--------------------------
Total revenue ........................................... $19,097,573 $17,733,783
Reconciling items
Intersegment revenues ........................................ (5,583,145) (4,954,534)
--------------------------
Total consolidated revenues ............................. $13,514,428 $12,779,249
==========================
Expenses
Interest expense
Railroads .................................................... $ 190,096 $ 258,863
Leasing company .............................................. 747,577 777,168
Corporate .................................................... 360,255 348,294
--------------------------
Total consolidated interest expense ..................... $ 1,297,928 $ 1,384,325
==========================
Depreciation and amortization expense
Railroads .................................................... $ 581,604 $ 569,750
Leasing company .............................................. 918,307 847,723
Corporate .................................................... 83,084 79,415
--------------------------
Total consolidated depreciation and amortization expense $ 1,582,995 $ 1,496,888
==========================
Segment profit
Railroads .................................................... $ 4,079,300 $ 4,022,039
Leasing company .............................................. 1,362,173 987,652
Corporate .................................................... 2,151,834 1,913,564
--------------------------
Total segment profit .................................... 7,593,307 6,923,255
Reconciling items
Intersegment revenues ........................................ (5,583,145) (4,954,534)
Income taxes ................................................. (420,977) (405,687)
Minority interest in preferred stock dividends of subsidiaries (122,870) (122,720)
Other income (expense), net .................................. (1,041,550) (1,074,069)
--------------------------
Total consolidated net income ........................... $ 424,765 $ 366,245
==========================
</TABLE>
<PAGE>
Note 15. Subsequent Event
On January 1, 1999, the Company exercised its option to purchase the stock of
the Michigan Southern Railroad for cash of $2,400,000 in a transaction to be
accounted for using the purchase method of accounting. The acquisition was
financed with $2,400,000 borrowings against the Company's acquisition line as
described in Note 3. Management has yet to determine the fair market value of
the net assets acquired.
The excess, if any, of the aggregate purchase price over the fair market value
of the net assets acquired will be amortized on a straight-line basis over 40
years in accordance with the Company's policy.
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting Financial
Disclosure
None.
PART III
Item 9. Directors and Executive Officers of the Registrant
Set forth below are the names and ages of all the directors and executive
officers of the Registrant and the positions and offices held by such persons as
of December 31, 1998.
Name (Age) Position
- --------------------- -------------------------------
Guy L. Brenkman (51) Director (Chairman) & President
Orvel L. Cox (56) Director
Timothy F. Shea (50) Director
John S. Fulton (66) Director
J. Michael Carr (34) Director & Treasurer
Daniel A. LaKemper (41) Secretary
Kevin L. Williams (26) Assistant Secretary
All of the above Directors and Officers were elected at the Annual Meeting of
the Stockholders (and the board meeting which followed) on June 16, 1998 to
serve until the next annual meeting. There is no family relationship between any
officer or director.
Information about Directors and Executive Officers
- --------------------------------------------------
Mr. Brenkman, Chairman of the Board of Directors and President of Pioneer
Railcorp and its subsidiaries was the incorporator of the Company and has been a
member of the Board of Directors and President of the Company since its
formation. Mr. Brenkman's past business experience includes real estate sales
and management, securities sales, and seven years of operational railroad
industry experience before managing the day to day railroad operations of
Pioneer in 1988. Mr. Brenkman, acting as agent of the Issuer conducted the
public offering of Pioneer Railcorp, which raised its initial capital, and
secondary capital for expansions.
Mr. Cox, Director, also serves as same for each of the Company's subsidiaries
and Superintendent of Transportation for same. Mr. Cox has 39 years of active
railroading experience with 31 of those years working for Class I railroads. Mr.
Cox has been a director and officer of Pioneer Railcorp since its inception and
has been involved in all phases of the development and growth of the Company.
Timothy F. Shea, Director, owns RE/MAX Property Management and has been a real
estate property manager with RE/MAX since 1984. Mr. Shea has a BS-Business
Management from Bradley University, Peoria, Illinois.
Mr. Fulton, Director, was elected to the Board in 1993. Mr. Fulton has 17 years
experience in the real estate business concentrating in retail sales, real
estate development and appraising. Mr. Fulton's previous positions include
Industrial Appraising (6 years) with Cole, Layer Trumble of Dayton, Ohio, and 5
years with Pepsi-Cola. Mr. Fulton holds a BS degree in Public Administration
from Bradley University in Peoria, Illinois.
Mr. Carr, Treasurer, also serves as Treasurer for each of the Company's
subsidiaries and Chief Financial Officer for same. Mr. Carr has been employed by
the Company since March 1993. Before joining the Company, Mr. Carr worked in
public accounting and banking for seven years, most recently as Controller for
United Federal Bank. Mr. Carr is a CPA and holds a BS-Accounting from Illinois
State University, Normal, Illinois.
Mr. LaKemper, Secretary, also serves as same for each of the Company's
subsidiaries. Mr. LaKemper is the Company's General Counsel and serves as same
for each of the Company's subsidiaries. Mr. LaKemper has been employed by the
Company since May 1992. Before joining the Company, Mr. LaKemper practiced law
since 1982 working in private practice and, most recently, as General Counsel
for a manufacturing concern. Mr. LaKemper holds a Juris Doctorate from Creighton
University School of Law in Omaha, Nebraska and a BS-History from Bradley
University in Peoria, Illinois.
Mr. Williams, Assistant Secretary, also serves as same for the Company's
subsidiaries. In addition, Mr. Williams serves as the Company's stock transfer
agent. Mr. Williams has been employed by the Company since June 1993 and has a
degree in paralegal services from Midstate College in Peoria, Illinois.
Item 10. Executive Compensation
Summary Compensation Table
- --------------------------
Annual
Compensation Long Term Compensation
-------------- -------------------------------------------
Restricted
Name & Stock Other
Position Year Salary Award Options/SARs Compensation
- --------------------------------------------------------------------------------
Guy L. Brenkman, CEO 1998 $486,494 - - - - $ 5,000 (a)
1997 $419,695 - - - - $ 4,750 (a)
1996 $350,098 - - 80,000 $ 4,750 (a)
(a) - Registrant's contribution to the Company's defined contribution plan.
Option/SAR Grants in Last Fiscal Year
- -------------------------------------
None
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
---------------------------------------------------
Value of
Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs
Options/SARs at FY-End At FY-End
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Guy Brenkman-CEO 0 0 24,909/ 80,000 $0/$0
In December 1993, the Company entered into a five-year executive employment
contract with the Company's president, which was extended one year by the Board
of Directors on November 18, 1998 and will expire in December 1999. The
agreement provides for a base salary with annual inflation adjustments based
upon the Consumer Price Index. Should the Company acquire or form additional
railroads, the base salary will increase $25,000 for the acquisition of
railroads of 125 miles or less, and $50,000 for railroads over 125 miles. At
January 1, 1999, the president's base salary was $428,203. Should the
president's employment be terminated, the contract requires a lump sum payment
equal to three years of his then current salary. Should the president retire, he
is entitled to a lump sum payment of one year's salary.
Although Mr. Brenkman is authorized by his contract to receive an increase in
compensation immediately upon the start of a new railroad, he has generally
declined these increases, until in his opinion, the railroad appears to be self
supporting and can absorb the cost of such raise. In several instances, Mr.
Brenkman has not taken a raise at all. A detailed list of these raises since
1993 is listed as follows:
Date Raise
Subsidiary Date Acquired Effective
----------------------------------
Vandalia Railroad Company 10/07/94 10/07/94
Minnesota Central Railroad Co. 12/12/94 02/01/95
West Michigan Railroad Co. 07/11/95 No Raise Taken
Columbia & Northern Railway 02/21/96 No Raise Taken
Keokuk Junction Railway Co. 03/12/96 04/16/96
Rochelle Railroad Co 03/25/96 04/16/96
Shawnee Terminal Railway Co. 11/12/96 01/01/98
Michigan Southern Railroad 12/18/96 01/01/97
Pioneer Industrial Railway Co. 02/20/98 No Raise Taken
Directors of the Registrant each were compensated $2,000 in 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of March 19, 1999, the beneficial
ownership of all directors and officers of the Company as a group. These figures
include shares of Common Stock that the executive officers have the right to
acquire within 60 days of March 19, 1999 pursuant to the exercise of stock
options and warrants.
Title of Class: Common Stock ($.001 par value)
Beneficial Percent
Name Of Beneficial Owner Ownership Of Class
Guy L. Brenkman (2) 3,493,395 39.09%
Orvel L. Cox (3) 198,520 2.22%
Daniel A. LaKemper (4) 97,798 1.09%
John S. Fulton (5) 42,200 .47%
J. Michael Carr (6) 53,050 .59%
Kevin Williams (7) 11,100 .12%
Tim Shea 5,000 .06%
--------- -------
Directors and Executive
Officers as a Group: 3,901,063 43.65%(1)
FOOTNOTES:
(1) Based on 8,936,396 shares of Common Stock and Equivalents outstanding as of
March 19, 1999.
(2) Of the total number of shares shown as owned by Mr. Brenkman, 24,909 shares
represent the number of shares Mr. Brenkman has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 1,740,800 shares represent the number of shares Mr.
Brenkman has the right to acquire within 60 days through the exercise of
Warrants. Mr. Brenkman owns all shares in joint tenancy with his wife. In
addition, 17,986 shares are held by Mr. Brenkman under the Pioneer Railcorp
Retirement Savings Plan and 2,340 shares are held by Mr. Brenkman's wife,
in which he disclaims beneficial ownership.
(3) Of the total number of shares shown as owned by Mr. Cox, 30,000 shares
represent the number of shares Mr. Cox has the right to acquire within 60
days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 101,770 shares represent the number of shares Mr. Cox has
the right to acquire within 60 days through the exercise of Warrants. In
addition, 1,880 shares are held by Mr. Cox under the Pioneer Railcorp
Retirement Savings Plan. Mr. Cox's shares are owned in joint tenancy with
his wife. Mr. Cox and his wife own one Preferred Share in the Mississippi
Central Railroad Co.
(4) Of the total number of shares shown as owned by Mr. LaKemper, 19,850 shares
represent the number of shares Mr. LaKemper has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 40,000 shares represent the number of shares Mr. LaKemper
has the right to acquire within 60 days through the exercise of Warrants.
In addition, 948 shares are held by Mr. LaKemper under the Pioneer Railcorp
Retirement Savings Plan. Mr. LaKemper's shares are owned in joint tenancy
with his wife.
(5) Of the total number of shares shown as owned by Mr. Fulton, 22,000 shares
represent the number of shares Mr. Fulton has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 10,200 shares represent the number of shares Mr. Fulton
has the right to acquire within 60 days upon the exercise of Warrants.
(6) Of the total number of shares shown as owned by Mr. Carr, 53,050 shares
represent the number of shares Mr. Carr has the right to acquire within 60
days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 1,000 shares represent the number of shares Mr. Carr has
the right to acquire within 60 days through the exercise of Warrants.
(7) Of the total number of shares shown as owned by Mr. Williams, 11,000 shares
represent the number of shares Mr. Williams has the right to acquire within
60 days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 100 shares represent the number of shares Mr. Williams has
the right to acquire within 60 days through the exercise of Warrants.
There are no shareholders known by the Registrant to be beneficial owners of
more than 5% of its outstanding common stock other than Mr. Brenkman.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers, and any persons holding more than ten percent of
the Company's common stock to report their initial ownership of the Company's
common stock and any subsequent changes in that ownership to the Securities and
Exchange Commission and to provide copies of such reports to the Company. Based
upon the Company's review of the copies of such reports received by the Company
and written representations of its directors and executive officers, the Company
believes that during the year ended December 31, 1997, all Section 16(a) filing
requirements were satisfied with the following exceptions: Timothy Shea,
Director, failed to file 1997 Form 5 by the deadline date. The Company believes
that during the year ended December 31, 1998, all Section 16(a) filing
requirements were satisfied.
The remainder of this page is intentionally left blank
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
Exhibit # 3(I) - Articles of Incorporation of the Company (incorporated by
reference to Exhibit 1 of the Company's registration statement of Form S-3 filed
July 7, 1995, amended August 30, 1995, September 20, 1995 and September 25,
1995).
Exhibit # 3(ii) - Bylaws of the Company (incorporated by reference to Exhibit #2
of the Company's registration statement on Form S-8 filed January 31, 1996).
Exhibit # 10.1 - Credit Agreement, dated March 8, 1996, between the Company and
Citizens Bank and Trust Company, Chillicothe , Mo. (incorporated by reference to
Exhibit #10.1 of the Company's on Form 10-KSB filed March 27, 1996).
Exhibit # 10.2 - Exhibits to Credit Agreement, dated March 8, 1996, between the
Company and Citizens Bank and Trust Company, Chillicothe , Mo. (incorporated by
reference to Exhibit #10.2 of the Company's on Form 10-KSB filed March 27,
1996.)
Exhibit # 10.3 - Purchase agreement, dated March 12, 1996 between the Company
and John Warfield, regarding the Company's purchase of controlling interest in
KNRECO, Inc., d/b/a Keokuk Junction Railway (incorporated by reference to
Exhibit #10.3 of the Company's on Form 10-KSB filed March 27, 1996).
Exhibit # 10.4 - 1994 Stock Option Plan for Pioneer Railcorp (incorporated by
reference to Exhibit #3 of the Company's registration statement on Form S-8
filed January 31, 1996).
Exhibit # 10.5 - Form of incentive stock option under the 1994 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to Exhibit #4 of the Company's
registration statement on Form S-8 filed January 31, 1996).
Exhibit # 10.6 - Form of option agreement for non-employee Directors under the
1994 Stock Option Plan for Pioneer Railcorp (incorporated by reference to
Exhibit #5 of the Company's registration statement on Form S-8 filed January 31,
1996).
Exhibit # 10.7 - Executive Contract (incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1994, filed March 31, 1995, amended
August 31, 1995 and September 20, 1995).
Exhibit # 10.8 - 1996 Stock Option Plan for Pioneer Railcorp (incorporated by
reference to the Company's Form 10-KSB for the year ended December 31, 1996,
filed March 31, 1997).
Exhibit # 10.9 - Form of incentive stock option under the 1996 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to the Company's Form 10-KSB for
the year ended December 31, 1996, filed March 31, 1997).
Exhibit # 10.10 - Form of option agreement for non-employee Directors under the
1996 Stock Option Plan for Pioneer Railcorp (incorporated by reference to the
Company's Form 10-KSB for the year ended December 31, 1996, filed March 31,
1997).
Exhibit # 21 - Subsidiaries of the registrant.
Exhibit # 27 - Financial Data Schedule.
No reports were filed on Form 8-K during the fourth quarter 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PIONEER RAILCORP
(Registrant)
By: /s/ Guy L. Brenkman
------------------------------------
Guy L. Brenkman, President,
Chief Executive Officer and Director
Dated: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ J. Michael Carr
------------------------------------
J. Michael Carr, Treasurer,
Chief Financial Officer and Director
Dated: March 19, 1999
By: /s/ Orvel Cox
-----------------------------------
Orvel Cox, Director
Dated: March 19, 1999
By: /s/ John Fulton
-----------------------------------
John Fulton, Director
Dated: March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's December 31, 1998, Form 10-KSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 469,476
<SECURITIES> 0
<RECEIVABLES> 2,816,294
<ALLOWANCES> 156,282
<INVENTORY> 331,841
<CURRENT-ASSETS> 3,763,147
<PP&E> 25,560,528
<DEPRECIATION> 5,997,160
<TOTAL-ASSETS> 24,504,003
<CURRENT-LIABILITIES> 5,597,778
<BONDS> 0
0
0
<COMMON> 4,610
<OTHER-SE> 3,975,978
<TOTAL-LIABILITY-AND-EQUITY> 24,504,003
<SALES> 0
<TOTAL-REVENUES> 13,514,428
<CGS> 0
<TOTAL-COSTS> 11,504,266
<OTHER-EXPENSES> 25,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,297,928
<INCOME-PRETAX> 968,612
<INCOME-TAX> 420,977
<INCOME-CONTINUING> 547,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424,765<F1>
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1>The difference between Income from Continuing Operations of $547,635 and Net
Income of $424,765 relates to $122,870 of dividends paid to minority interests
in 1998.
</FN>
</TABLE>
Pioneer Railcorp Wholly-Owned Subsidiaries
Alabama Railroad Co.
Alabama & Florida Railway Co.
Decatur Junction Railway Co.
Fort Smith Railroad Co.
Minnesota Central Railroad Co.
Mississippi Central Railroad Co.
Pioneer Air, Inc.
Pioneer Railroad Equipment Co., Ltd.
Pioneer Railroad Services, Inc.
Vandalia Railroad Company
Wabash & Grand River Railway Co.
West Michigan Railroad Co., (Formerly West Jersey Railroad Co.)
