U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 1999
Commission File Number 33-6658-C
Pioneer Railcorp
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(Exact name of Registrant as specified in its charter)
Iowa 37-1191206
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization)
1318 S. Johanson Rd Peoria, IL 61607
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: 309-697-1400
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class Name of each exchange on which registered
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Common Stock, Class A NASDAQ, Chicago Stock Exchange
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [ X ] NO [ ].
4,610,717
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(Shares of Common Stock outstanding on June 30, 1999)
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended June 30, 1999 and 1998
UNAUDITED
<TABLE>
Second Quarter First Six Months
----------------------------- -----------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Operating revenue .......................................... $ 3,493,955 $ 3,653,418 $ 6,935,933 $ 6,890,265
-----------------------------------------------------------------
Operating expenses
Maintenance of way ...................................... 383,052 411,733 719,237 708,762
Maintenance of equipment ................................ 387,481 416,010 758,332 818,311
Transportation expense .................................. 730,197 796,949 1,613,028 1,533,543
Administrative expense .................................. 954,244 944,794 1,772,456 1,764,681
Depreciation & amortization ............................ 453,560 394,601 875,409 786,864
-----------------------------------------------------------------
2,908,534 2,964,087 5,738,462 5,612,161
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Operating income ........................................... 585,421 689,331 1,197,471 1,278,104
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Other income & expense
Other (income) expense .................................. (63,162) (36,421) (198,286) (105,563)
Loss on sale of subsidiary .............................. 565,873 -0- 565,873 -0-
Interest expense, equipment ............................. 162,403 199,235 327,309 399,068
Interest expense, other ................................. 187,162 111,199 371,285 256,822
Net (gain) loss on sale of fixed assets ................. (335) (68,579) (2,215) (75,695)
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851,941 205,434 1,063,966 474,632
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Income before income taxes ................................. (266,520) 483,897 133,505 803,472
Provision for income taxes ................................. (111,300) 180,500 41,500 294,400
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Income before minority interest in preferred
stock dividends of consolidated subsidiaries ............ ($ 155,220) $ 303,397 $ 92,005 $ 509,072
Minority interest in preferred stock dividends of
consolidated subsidiaries .............................. $ 31,308 $ 31,308 $ 62,615 $ 62,615
Net income ................................................. $ (186,528) $ 272,089 $ 29,390 $ 446,457
=================================================================
Basic earnings per common share ............................ $ (0.04) $ 0.06 $ 0.01 $ 0.10
=================================================================
Diluted earnings per common share .......................... $ (0.04) $ 0.06 $ 0.01 $ 0.10
=================================================================
Cash dividends per common share ............................ $ 0.0225 $ 0.0200 $ 0.0225 $ 0.0200
=================================================================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
UNAUDITED
<TABLE>
June 30 December 31
1999 1998
-------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash ............................................... $ 384,150 $ 469,476
Accounts receivable, less allowance
for doubtful accounts 1999 $169,445; 1998 $156,282 2,723,250 2,660,012
Inventories ........................................ 299,673 331,841
Prepaid expenses ................................... 124,985 174,085
Income tax refund claims ........................... 33,272 56,933
Deferred taxes ..................................... 70,800 70,800
-------------------------
Total current assets .......................... 3,636,130 3,763,147
-------------------------
Property and Equipment less accumulated
depreciation 1999 $6,379,739; 1998 $5,997,160 ....... 23,897,702 19,563,368
-------------------------
Intangible Assets, less accumulated amortization
1999 $215,599; 1998 $250,365 ........................ 1,147,711 1,065,140
-------------------------
Investments, cash value of life insurance ............. 120,606 112,348
-------------------------
Total assets .......................................... $28,802,149 $24,504,003
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................... $ 2,424,358 $ 2,732,627
Notes payable ...................................... 0 307,886
Income taxes payable ............................... 225,160 14,206
Current maturities of long-term debt ............... 2,267,843 1,988,041
Accrued liabilities ................................ 438,481 537,018
-------------------------
Total current liabilities ..................... 5,355,842 5,579,778
-------------------------
Long-term debt, net of current maturities ............. 14,208,292 11,211,737
Deferred income taxes ................................. 4,158,740 2,545,900
-------------------------
Total liabilities & debt ...................... 23,722,874 19,337,415
-------------------------
Minority interest in subsidiaries ..................... 1,173,000 1,186,000
Stockholders' Equity
Common stock ....................................... 4,610 4,610
Additional paid-in capital ......................... 2,041,044 2,041,000
Retained earnings .................................. 1,860,621 1,934,978
-------------------------
Total stockholders' equity .................... 3,906,275 3,980,588
-------------------------
Total liabilities and equity .......................... $28,802,149 $24,504,003
=========================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FIRST SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30,1998
UNAUDITED
<TABLE>
First Six Months
1999 1998
-------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income ................................................. $ 29,390 $ 446,457
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 62,615 62,615
Depreciation .................................. 839,620 760,700
Amortization .................................. 35,789 26,164
Increase in cash value life insurance ........... (8,258) (9,336)
(Gain) on sale of property & equipment . (2,215) (75,695)
Loss on sale of subsidiary ...................... 565,872 -0-
Deferred taxes .................................. (224,000) -0-
Change in assets and liabilities, net of effects from
acquisition of subsidiaries
(Increase) decrease accounts receivable .... (258,152) (86,186)
(Increase) decrease inventories ............ 32,168 (2,148)
(Increase) decrease prepaid expenses ....... 59,739 76,123
(Increase) decrease intangible assets ...... (4,283) (279)
Increase (decrease) accounts payable ............ 126,963 376,917
(Increase) decrease income tax refund claims 23,661 124
Increase (decrease) income tax payable .......... 210,954 172,400
Increase (decrease) accrued liabilities ......... 99,411 (19,365)
-------------------------
Net cash provided by operating activities ....... 1,589,274 1,728,491
-------------------------
Cash Flows From Investing Activities
Proceeds from sale of property & equipment ...... 10,925 305,709
Purchase of property & equipment, net of property
and equipment from acquisition of subsidiaries .. (1,206,913) (846,115)
Acquisition of subsidiaries, net of cash acquired (3,875,000) -0-
-------------------------
Net cash (used in) investing activities ......... (5,070,988) (540,406)
-------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries .......... 1,013,472 2,097,918
Proceeds from long-term borrowings, net of debt
assumed in acquisition of subsidiaries .......... 7,273,650 3,692,181
Payments on short-term borrowings ............... (1,321,358) (2,122,965)
Payments on long-term borrowings ................ (3,390,059) (4,216,936)
Repurchase of minority interest ................. (13,000) -0-
Proceeds from warrants and options exercised .... 40 800
Cash dividends paid ............................. (103,742) (92,201)
Payments to minority interest ................... (62,615) (62,615)
-------------------------
Net cash provided by financing activities: ...... 3,396,388 (703,818)
-------------------------
Net increase (decrease) in cash ............................ (85,326) 484,267
Cash, beginning of period .................................. 469,476 407,428
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Cash, end of period ........................................ $ 384,150 $ 891,695
=========================
</TABLE>
<PAGE>
SEGMENT INFORMATION
Description of products and services from reportable segments:
Pioneer 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.
Factors management used to identify the reportable segments:
Pioneer Railcorp's reportable segments consist of a 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.
Second Quarter
------------------------
1999 1998
------------------------
Revenues from external customers
Railroads ..................................... 2,816,860 2,950,973
Leasing company ............................... 677,095 702,445
Corporate ..................................... 0 0
-------------------------
Total revenues from external customers ..... 3,493,955 3,653,418
=========================
Intersegment revenues
Railroads ..................................... 0 0
Leasing company ............................... 98,400 105,400
Corporate ..................................... 1,578,853 1,414,943
------------------------
Total intersegment revenues ................ 1,677,253 1,520,343
========================
Segment profit
Railroads ..................................... 1,189,681 1,245,879
Leasing company ............................... 337,902 376,670
Corporate ..................................... 735,091 587,125
------------------------
Total segment profit ....................... 2,262,674 2,209,674
Reconciling items
Intersegment revenues ........................ (1,677,253) (1,520,343)
Income taxes ................................. 111,300 (180,500)
Minority interest ............................ (31,308) (31,308)
Other income(expense), net ................... (851,941) (205,434)
------------------------
Total consolidated net income ............. (186,528) 272,089
========================
<PAGE>
Six Months Ended
6/30/99 6/30/98
--------------------------
Assets
Railroads ................................... 16,937,190 14,096,831
Leasing company ............................. 10,801,450 10,059,207
Corporate ................................... 1,063,509 826,843
--------------------------
Total assets ............................. 28,802,149 24,982,881
==========================
Revenues from external customers
Railroads ................................... 5,609,389 5,482,100
Leasing company ............................. 1,326,544 1,408,165
Corporate ................................... 0 0
--------------------------
Total revenues from external customers ... 6,935,933 6,890,265
==========================
Intersegment revenues
Railroads ................................... 0 0
Leasing company ............................. 202,500 211,400
Corporate ................................... 2,856,499 2,566,781
--------------------------
Total intersegment revenues .............. 3,058,999 2,778,181
==========================
Segment profit
Railroads ................................... 2,247,003 2,174,350
Leasing company ............................. 693,751 765,971
Corporate ................................... 1,315,716 1,115,964
--------------------------
Total segment profit ..................... 4,256,470 4,056,285
Reconciling items
Intersegment revenues ...................... (3,058,999) (2,778,181)
Income taxes ............................... (41,500) (294,400)
Minority interest .......................... (62,615) (62,615)
Other income(expense), net ................. (1,063,966) (474,632)
--------------------------
Total consolidated net income ........... 29,390 446,457
==========================
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES
NOTE 1. STATEMENTS
The accompanying Consolidated Statements of Income, Balance Sheets, and
Statements of Cash Flows are unaudited. The interim financial statements reflect
all adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. These interim statements should be read in
conjunction with the latest financial statements and notes thereto included in
the Company's latest Annual Report on Form 10-KSB and subsequent Form 10-QSB
filings. The results of operations for the interim period should not be
considered indicative of results to be expected for the full year.
NOTE 2. NATURE OF BUSINESS
The consolidated financial statements include Pioneer Railcorp (Pioneer) and its
wholly-owned and controlled subsidiaries (collectively, "the Company"). The
Company's railroad operations segment consists of wholly-owned short line
railroad subsidiaries that offer similar services and includes the following
wholly-owned subsidiaries: West Michigan Railroad Co. (WMI), Michigan Southern
Railroad Company (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) (sold effective May 1, 1999), Keokuk
Junction Railway Co. (KJRY), Midwest Terminal Railway Company (formerly Rochelle
Railroad Co.) (RRCO), Shawnee Terminal Railway Company (STR), Pioneer Industrial
Railway Co. (PRY), The Garden City Western Railway, Inc.(GCW). The Company's
equipment leasing segment leases railcars, locomotives, and other railroad
equipment to affiliated and unaffiliated entities and includes only the
wholly-owned subsidiary Pioneer Railroad Equipment Co., Ltd. (PREL). All other
Company operations are classified as corporate and include the following
wholly-owned subsidiaries: Pioneer Resources, Inc. (PRI), Pioneer Air, Inc.
(PAR), and Pioneer Railroad Services, Inc. (PRS). All significant intercompany
balances and transactions have been eliminated in consolidation.
NOTE 3. ESTIMATED IMPACT OF THE ADOPTION OF RECENT ACCOUNTING
STANDARDS
In July 1997, Statement of Financial Accounting Standard No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (FAS 131), was issued
by the Financial Accounting Standards Board. The standard requires the Company
to disclose the factors used to identify reportable segments including the basis
of organization, differences in products and services, geographic areas, and
regulatory environments. FAS 131 additionally requires financial results to be
reported in the financial statements for each reportable segment. The standard
is effective for the Company's 1998 annual report and interim financial
statements following the 1998 annual report. The Company does not believe the
adoption of this standard will have a material impact on its consolidated
financial statements.
The Company is not aware of any other recent accounting standard issued, but not
yet required to be adopted by the Company, that would have a material effect on
its financial position or results of operations.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 segment consists of wholly-owned short line railroad
subsidiaries that offer similar services and the Company's equipment leasing
segment 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.
Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this Form 10-QSB, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (WMI), Michigan Southern Railroad Company (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), Midwest Terminal Railway Company,
(formerly Rochelle Railroad Co.) (RRCO), Shawnee Terminal Railway Company (STR),
Pioneer Industrial Railway Co. (PRY), The Garden City Western Railway,
Inc.(GCW), Pioneer Resources, Inc. (PRI), Pioneer Railroad Equipment Co., Ltd.
(PREL), Pioneer Air, Inc. (PAR), and Pioneer Railroad Services, Inc. (PRS).
Summary: Second Quarter 1999 Compared to Second Quarter 1998.
The Company recorded a net loss of $186,528 in the second quarter 1999 compared
to net income of $272,089 in the same period last year. Net Income was affected
by a one-time charge relating to the sale of the Minnesota Central Railroad Co.
stock and the write-off of the net assets associated with the MCTA in the amount
of $566,000 before tax and $342,000 after tax. Therefore, excluding the MCTA
sale transaction, net income for the second quarter 1999 would have been
approximately $155,000. Revenue decreased by $159,000 or 5% to $3,494,000 from
$3,653,000 in the same period last year. Operating expense decreased by $56,000
or 2%, to $2,908,000 from $2,964,000 in the same period last year. Operating
income decreased by $104,000, or 15% to $585,000 from $689,000 in the same
period last year.
In the second quarter 1999 the Company's railroad operations had decreased
operating income of approximately $56,000. Railroad operating income was
adversely affected by the loss of the Rochelle Railroad Co. operations, which
resulted in a decrease of operating income of $111,000 in the quarter compared
to the same period last year. In addition, the Fort Smith Railroad had decreased
operating income in the second quarter 1999 of $62,000 compared to the same
period last year resulting from increased maintenance of equipment expense and
costs associated with using non-affiliated railcars for customer loadings.
Railroad operating income was positively affected in the second quarter 1999 by
increased operating income from the Keokuk Junction Railway of $111,000 compared
to the same period last year. In addition, The Garden City Western Railway Inc.,
which the Company began operating May 1, 1999, generated $39,000 of operating
income. The equipment leasing operations decreased operating income by
approximately $33,000 in the period, primarily from a reduction in the
utilization of its railcar fleet by non-affiliated railroads and costs
associated with relocating part of the fleet to enhance future revenues.
Corporate operations decreased operating income by approximately $15,000 in the
period.
Revenue:
Revenue decreased in the second quarter 1999 by $159,000 or 5% to $3,494,000
from $3,653,000 in the same period last year. The railroad operations had
decreased revenue of approximately $135,000 in the second quarter 1999 compared
to the same period last year. Some of the more significant decreases in revenue
include $160,000 from the Minnesota Central Railroad, which was sold April 30,
1999 and a $183,000 decrease in revenue resulting from the termination of the
Rochelle Railroad lease which ceased operations on November 13, 1998.
Significant increases in revenue in the second quarter 1999 included a $127,000
revenue increase by the Keokuk Junction Railway and $103,000 of revenue
generated by The Garden City Western Railway. The equipment leasing operations
had a $25,000 decrease in revenue in the period resulting from the decreased
utilization of its railcars by non-affiliated railroads.
<PAGE>
Operating Expense:
Operating expense decreased in the second quarter 1999 by $56,000 or 2%, to
$2,908,000 from $2,964,000 in the prior year. The railroad operations had
decreased operating expense of approximately $102,000 in the second quarter
1999, of which $153,000 was attributable to the sale of the Minnesota Central
Railroad stock, and $71,000 was attributable to the termination of the Rochelle
Railroad lease. In addition, the Fort Smith Railroad had increased operating
expense in the second quarter 1999 of $51,000 compared to the same period last
year resulting from increased maintenance of equipment expense and costs
associated with using non-affiliated railcars for customer loadings. The Garden
City Western Railway Inc. had operating expense of $64,000. The equipment
leasing operations increased operating expense approximately $7,000. Corporate
support services increased operating expense approximately $53,000 primarily
related to professional services, and public relation expenditures, increased
health insurance costs and payroll related expenditures.
Maintenance of way and structures expense (MOW) decreased in the second quarter
$29,000 or 7% to $383,000 from $412,000 in the same period last year, most all
of which is related to the railroad operations. The primary decrease in MOW
related to the sale of the MCTA which decreased MOW $26,000 in the second
quarter 1999 compared to the same period last year. The Garden City Western
Railway increased MOW $15,000 in the second quarter.
Maintenance of equipment expense (MOE) decreased in the second quarter 1999
$29,000, or 7% to $387,000 from $416,000 in the same period last year.
Approximately $20,000 of the decrease related to the equipment leasing
operations as a result of decreased costs associated with maintaining the
Company's railcar fleet. The railroad operations had an increase in MOE of
approximately $3,000. The Garden City Western Railway had $6,000 of MOE expense
in the quarter. The Fort Smith Railroad had an increase in MOE of $14,000 in the
quarter, primarily related to increased car repair supplies. The MCTA had a
decrease of $14,000 in the quarter. Corporate operations had a decrease in MOE
of approximately $11,000 primarily related to reduced payroll expenses.
Transportation expense (TRAN) decreased in the second quarter 1999 $67,000, or
1% to $730,000 from $797,000 in the same period last year. Most of the decreased
TRAN was generated by the railroad operations, primarily from the Minnesota
Central Railroad which had a decrease of $74,000 and the Rochelle Railroad which
had a decrease of $29,000. The Fort Smith Railroad had increased TRAN in the
second quarter 1999 of $29,000 related to costs associated with using
non-affiliated railcars for customer loadings. The Garden City Western Railway
had $5,000 of TRAN in the quarter. Corporate operations had a increase in TRAN
of approximately $18,000 primarily related to increased payroll expenses.
General & administration expense (ADMIN) increased $9,000 in the second quarter
1999 to $954,000 from $945,000, in the prior year. The railroad operations were
responsible for approximately a $31,000 decrease in ADMIN in the period
primarily from the Minnesota Central Railroad which had a decrease of $19,000
and the Rochelle Railroad which had a decrease of $35,000. The Garden City
Western Railway had $18,000 of ADMIN in the quarter. Corporate operations
increased ADMIN by approximately $25,000 in the period. The equipment leasing
operations increased ADMIN approximately $15,000 as a result of expenses related
to repositioning the Company's railcar fleet.
Depreciation and amortization expense increased in the second quarter 1999
$59,000, or 15%, to $454,000 compared to $395,000 in the same period last year.
The railroad operations had increased depreciation and amortization expense of
$46,000. Approximately $50,000 of the railroad operation increase is related to
depreciation expense of assets associated with the purchase of the Michigan
Southern Railroad stock on January 1, 1999. The Garden City Western Railway had
depreciation and amortization expense of $18,000 in the quarter. The Sale of the
Minnesota Central decreased depreciation and amortization expense $20,000 in the
quarter. The equipment leasing operations had increased depreciation and
amortization expense of $12,000 in the quarter resulting from increases to the
railcar and locomotive fleet.
Other Income and Expense Income Statement Line Item Discussion:
In the second quarter 1999 other income increased $7,000 to $43,000 compared to
$36,000 in the same period last year. The increase relates primarily to
additional lease income for the use of railroad property. 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.
<PAGE>
A loss on the sale of the Minnesota Central Railroad Co. stock and the write-off
of the net assets associated with the MCTA in the amount of $566,000 was
recorded in the second quarter 1999.
Interest expense related to equipment financing decreased $37,000 in the second
quarter 1999 to $162,000 compared to $199,000 in the same period last year. A
majority of this decrease is the result of refinancing activities associated
with the equipment leasing operations. Other interest expense increased $76,000
in the second quarter 1999 to $187,000 from $111,000 in the same period last
year. A majority of this increase relates to the financing of the purchase of
the Michigan Southern Railroad stock on January 1, 1999 for the amount of
$2,400,000 and the purchase of The Garden City Western Railway Inc. stock on May
1, 1999 for the amount of $1,500,000.
Net gain on fixed asset dispositions decreased approximately $68,000 in the
second quarter 1999 to less than $1,000 compared to $69,000 in the same period
last year. The net gain on fixed asset dispositions in the second quarter 1999
resulted from insignificant sales of miscellaneous vehicles and equipment. Net
gain on fixed asset dispositions during the second quarter 1998 of $69,000
included a gain of $97,000 from the sale of railcars and a loss of $28,000
resulting from the sale of the Company's old corporate building in Chillicothe,
Illinois.
Summary: First Six Months 1999 Compared to First Six Months 1998.
The Company's net income for the first six months 1999 was $29,390 compared to
net income of $446,457 in the same period last year, a decrease of $417,067. Net
Income was affected by a one-time charge in the second quarter 1999 relating to
the sale of the Minnesota Central Railroad Co. stock and the write-off of the
net assets of the MCTA in the amount of $566,000 before tax and $342,000 after
tax. Therefore, excluding the MCTA sale transaction, net income for the first
six months 1999 would have been approximately $371,000. Revenue increased by
$46,000 or 1% to $6,936,000 from $6,890,000 in the same period last year.
Operating expense increased by $126,000 or 3%, to $5,738,000 from $5,612,000 in
the same period last year. Operating income decreased by $81,000, or 7% to
$1,197,000 from $1,278,000 in the same period last year.
Operating income was increased in the first six months 1999 by the Company's
railroad operations by approximately $42,000 in the period. Railroad operating
income was adversely affected by the loss of the Rochelle Railroad Co.
operations, which resulted in a decrease of operating income of $208,000 in the
first six months 1999 compared to the same period last year. In addition, the
Fort Smith Railroad had decreased operating income of $62,000 in the first six
months 1999 compared to the same period last year resulting from increased
maintenance of equipment expenses and costs associated with using non-affiliated
railcars for customer loadings. Railroad operating income was positively
affected in the first six months 1999 by increased operating income from the
Keokuk Junction Railway of $208,000 in the first six months 1999 compared to the
same period last year. In addition, operating income generated by The Garden
City Western Railway Inc. which the Company began operating May 1, 1999 was
$39,000. The Minnesota Central Railroad increased operating income $52,000 in
the first six months 1999 primarily resulting from a one-time shipping contract
in the first quarter 1999 of approximately 166 cars of pipe for a utility
company that generated approximately $140,000 of revenue. The Alabama & Florida
Railway operating income increased by approximately $97,000 in the first six
months 1999. The Michigan Southern Railroad had decreased operating income of
$85,000 in the first 6 months 1999. The Michigan Southern decrease was caused by
decreased revenues from one of the railroads primary shippers resulting from a
tariff increase issued by Conrail prior to its break-up which made the rail move
non-competitive. The Company is working with the new connecting carrier, the NS,
to reduce the rates to a more competitive level. In addition, in the first six
months 1999 the MSO had a reduction in contract service income generated from
road crossing flagging projects, had increased signal maintenance expenses, and
had increased carhire expense . The equipment leasing operations decreased
operating income by approximately $64,000 in the first six months 1999,
primarily from a reduction in the utilization of its railcar fleet by
non-affiliated railroads and costs associated with relocating part of the fleet
to enhance future revenues. In addition, corporate support services decreased
operating income by approximately $59,000 in the first six months 1999.
<PAGE>
Revenue:
Revenue increased in the first six months 1999 by $46,000 or 1% to $6,936,000
from $6,890,000 in the same period last year. The railroad operations increased
revenue by approximately $127,000 in the period. Significant increases in
revenue in the first six months 1999 included a $200,000 revenue increase by the
Keokuk Junction and $103,000 of revenue generated by The Garden City Western
Railway. In addition, the Alabama & Florida had increased revenue of $113,000 in
the first six months 1999. Some of the more significant decreases in revenue
include a $338,000 decrease in revenue resulting from the termination of the
Rochelle Railroad lease which ceased operations on November 13, 1998, and a
$62,000 decrease in revenue from the Michigan Southern Railroad caused by
decreased revenues from one of the railroads primary shippers resulting from a
tariff increase issued by Conrail prior to its break-up which made the rail move
non-competitive. The Company is working with the new connecting carrier, the NS,
to reduce the rates to a more competitive level. Michigan Southern revenues were
also reduced by a reduction in contract service income generated from road
crossing flagging projects. The equipment leasing operations had a $81,000
decrease in revenue in the period resulting from the decreased utilization of
its railcars by non-affiliated railroads.
Operating Expense:
Operating expense increased in the first six months 1999 by $126,000 or 3%, to
$5,738,000 from $5,612,000 in the prior year. The railroad operations increased
operating expense by approximately $68,000 in the first six months 1999. The
Fort Smith Railroad had increased operating expense in the first six months 1999
of $99,000 compared to the same period last year resulting from increased
maintenance of equipment expense and costs associated with using non-affiliated
railcars for customer loadings. The Garden City Western Railway Inc. had
operating expense of $64,000. The Michigan Southern Railroad had increased
operating expense of $25,000 resulting from increased signal maintenance expense
and increased carhire expense. Operating expense was decreased $32,000 as a
result of the sale of the Minnesota Central Railroad stock and also was
decreased $130,000 resulting from the termination of the Rochelle Railroad
lease. The equipment leasing operations decreased operating expense
approximately $18,000. Corporate support services increased operating expense
approximately $76,000, primarily related to professional services, and public
relation expenditures, increased health insurance costs and payroll related
expenditures.
Maintenance of way and structures expense (MOW) increased in the first six
months 1999 $10,000 or 2% to $719,000 from $709,000 in the same period last
year, most all of which is related to the railroad operations. The Michigan
Southern Railroad had increased MOW of $15,000 as a result of increased signal
maintenance. The Garden City Western Railway increased MOW $15,000 in period.
MOW was decreased $24,000 as a result of the sale of the Minnesota Central.
Maintenance of equipment expense (MOE) decreased in the first six months 1999
$60,000, or 8% to $758,000 from $818,000 in the same period last year. Most of
the decrease is related to the equipment leasing operations as a result of
decreased costs associated with maintaining the Company's railcar fleet. The
railroad operations had an increase in MOE of approximately $9,000. The Garden
City Western Railway had $6,000 of MOE in the first six months 1999 and the Fort
Smith Railroad had an increase in MOE of $25,000 in the period, primarily
related to increased car repair supplies. The MCTA had a decrease in MOE of
$25,000 in the first six months 1999. Corporate operations had a decrease in MOE
of approximately $11,000 primarily related to reduced payroll expenses.
Transportation expense (TRAN) increased in the first six months 1999 $80,000, or
6% to $1,613,000 from $1,533,000 in the same period last year. Most of the
increase in TRAN was generated by the railroad operations. The Fort Smith
Railroad had increased TRAN in the first six months 1999 of $65,000 associated
with using non-affiliated railcars for customer loadings. The Garden City
Western Railway had $5,000 of TRAN in the period. The Minnesota Central Railroad
had an increase of $62,000 in TRAN as a result increased costs associated with
handling the special pipe shipment in the first quarter 1999. TRAN was decreased
by $57,000 as a result of the termination of the Rochelle Railroad lease.
Corporate operations increased TRAN approximately $27,000 primarily due to
increased payroll expenses.
<PAGE>
General & administration expense (ADMIN) increased $7,000 in the first six
months 1999 to $1,772,000 from $1,765,000, in the prior year. The railroad
operations were responsible for approximately a $73,000 decrease in ADMIN in the
period primarily from the Minnesota Central Railroad which had a decrease of
$37,000 and the Rochelle Railroad which had a decrease of $54,000. The Garden
City Western Railway had $18,000 of ADMIN in the period. Corporate operations
increased ADMIN by approximately $50,000 in the period, primarily related to
professional services, and public relation expenditures, increased health
insurance costs and payroll related expenditures. The equipment leasing
operations increased ADMIN approximately $30,000 as a result of expenses related
to repositioning the Company's railcar fleet.
Depreciation and amortization expense increased in the first six months 1999
$89,000, or 12%, to $875,000 compared to $787,000 in the same period last year.
The railroad operations had increased depreciation and amortization expense of
$68,000. Approximately $71,000 of the railroad operation increase is related to
depreciation expense of assets associated with the purchase of the Michigan
Southern Railroad stock on January 1, 1999. The Garden City Western Railway had
depreciation and amortization expense of $18,000 in the period. The Sale of the
Minnesota Central decreased depreciation and amortization expense $20,000 in the
period. The equipment leasing operations had increased depreciation and
amortization expense of $19,000 in the period resulting from increases to the
railcar and locomotive fleet.
Other Income and Expense Income Statement Line Item Discussion:
In the first six months 1999 other income increased $93,000 to $198,000 compared
to $105,000 in the same period last year. The increase relates primarily to
additional lease income for the use of railroad property. 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.
A loss on the sale of the Minnesota Central Railroad Co. stock and the write-off
of the net assets associated with the MCTA in the amount of $566,000 was
recorded in the second quarter 1999.
Interest expense related to equipment financing decreased $72,000 in the first
six months 1999 to $327,000 compared to $399,000 in the same period last year. A
majority of this decrease is the result of refinancing activities associated
with the equipment leasing operations. Other interest expense increased $114,000
in the first six months 1999 to $371,000 from $257,000 in the same period last
year. A majority of this increase relates to the financing of the purchase of
the Michigan Southern Railroad stock on January 1, 1999 for the amount of
$2,400,000 and the purchase of The Garden City Western Railway Inc. stock on May
1, 1999 for the amount of $1,500,000.
Net gain on fixed asset dispositions decreased approximately $73,000 in the
first six months 1999 to $2,000 compared to $75,000 in the same period last
year. The net gain on fixed asset dispositions in the first six months 1999
resulted from insignificant sales of miscellaneous vehicles and equipment. Net
gain on fixed asset dispositions during the first six months 1998 of $76,000
included a gain of $105,000 from the sale or disposition of railcars and a loss
of $28,000 resulting from the sale of the Company's former corporate
headquarters building in Chillicothe, Illinois.
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.
<PAGE>
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.
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 all of which was
available for use at the end of the first six months 1999. 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 Citizens Bank &
Trust located in Chillicothe, MO., to provide a $2.5 million annual revolving
acquisition line of credit. This facility was 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 was 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 were to be repaid monthly over a seven
year period. On January 1, 1999, the Company borrowed $2.4 million on the line
in connection with its purchase of the stock of the Michigan Southern Railroad.
This credit facility was replaced with a credit facility with National City Bank
of Michigan/Illinois and the $2.4 million advanced for the purchase of the
Michigan Southern Railroad stock was financed on a separate note with National
City Bank of Michigan/Illinois on May 21, 1999.
The Company, on June 18, 1999, entered into a credit agreement with National
City Bank of Michigan/Illinois to provide a $5 million revolving acquisition
line of credit for railroad acquisitions at a variable interest rate of prime
plus 1%, renewable every 2 years. Amounts drawn on the line are amortized over a
10 year period. This credit line is secured by all non real estate assets of the
Mississippi Central Railroad Co., the Alabama Railroad Co. and any company
acquired using proceeds from the credit line. This credit facility replaced the
Citizens Bank & Trust credit line. The Company has used $1.5 of this credit
facility to finance the purchase of The Garden City Western Railway, Inc. common
stock, leaving $3.5 million available for future acquisitions. The monthly
principal and interest payment currently required to be repaid is $18,800.
<PAGE>
The Company, on May 21, 1999, entered into a credit agreement with National City
Bank of Michigan/Illinois to refinance the $2.4 million that was outstanding on
the Citizens Bank & Trust line related to the Michigan Southern Railroad stock
purchase. The National City Bank credit facility is a fixed interest rate of
8.5% amortized over 10 years. The monthly principal and interest payment on this
note is $30,830.
The Company, on May 21, 1999, entered into interest repricing agreements with
National City Bank that reduced the interest rate on the Keokuk Junction Railway
Co. note from 9.5% to 8.5% and reduced the interest rate on the Alabama &
Florida Railway Co. note from 9.25% to 8.5%. Both rates are fixed and will be
repriced in five years to the bank's cost of funds plus 2.25%. The total
outstanding principal balance on the Keokuk Junction Railway and the Alabama &
Florida Railway notes is approximately $4 million.
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 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 from the
termination of the Rochelle Railroad will be recovered through increased
marketing efforts on the remaining operating railroads.
Pioneer Railcorp previously guaranteed two long-term debt obligations of the
Minnesota Central Railroad Co. in connection with the initial asset purchase by
the Minnesota Central Railroad Co. in 1994. Pioneer Railcorp remains on the
notes as a guarantor and could be required to repay the principal and accrued
interest of the notes if they are defaulted upon. The principal balance of the
notes as of June 30, 1999 was approximately $116,000.
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 the next twelve months.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $1,589,000 in the
first six months 1999 compared to $1,192,000 in the same period last year. Net
cash from operating activities for the first six months 1999 was generated from
$29,000 of net income, $875,000 of depreciation and amortization, an increase in
accounts payable of $127,000 an increase in income tax payable of $211,000, an
increase of net cash provided by changes in various other operating assets and
liabilities of $263,000, and a noncash write off of approximately $566,000
related to the Company's investment in the net assets of the Minnesota Central
Railroad at the date of sale. Net cash from operating activities was reduced by
an increase in accounts receivable of $258,000, and a decrease in deferred taxes
of $224,000 related to the disposition of the Minnesota Central Railroad
<PAGE>
In the first six months 1999, the Company recorded $3,119,000 million of fixed
assets relating to the purchase of the stock of the Michigan Southern Railroad,
of which $1,643,300 was allocated to track structures, $1,300,700 allocated to
land and right of way, $175,000 allocated to buildings, and the remaining
$351,000 allocated to transportation equipment, vehicles, and railcars. In
addition, as a result of the purchase, the Company recorded goodwill in the
amount of $90,000 and a deferred tax liability of $1,160,000.
In the first six months 1999, the Company recorded $2,144,510 million of fixed
assets relating to the purchase of the stock of The Garden City Western Railway
Inc., of which $1,280,000 was allocated to track structures, $272,000 allocated
to land and right of way, $253,000 allocated to buildings, and the remaining
$339,510 allocated to transportation equipment, vehicles, and railcars. In
addition, as a result of the purchase, the Company recorded goodwill in the
amount of $24,077 and a deferred tax liability of $676,840.
In the first six months 1999, the Company purchased approximately $1,207,000 of
fixed assets and capital improvements, including 170 railcars costing $828,650.
The railcars were financed with long term fixed rate debt. Other capital
expenditures include $71,0000 for track, $12,000 for leasehold improvements,
$46,000 for a locomotive, $90,000 for various vehicles and equipment, with the
remaining $249,350 related to railcar and locomotive betterments and purchases
of vehicles and equipment.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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.
On January 7, 1999, Michigan Southern Railroad Company, Inc. exercised its
option to purchase the rail line owned by the Branch & St. Joseph Counties Rail
Users Association, Inc. (RUA) between Sturgis and Coldwater, Michigan. RUA
refused to honor the option and litigation is currently pending in the Michigan
Circuit Court for St. Joseph County, Michigan. Management believes it will
prevail in this matter, but RUA's attempted introduction of another carrier onto
the line creates a risk to the Company's business in Coldwater. Management does
not believe that this controversy is likely to have a material adverse affect on
the Company's consolidated financial position or results of operation. The
Company believes the cost to purchase the rail line will be approximately
$600,000.
As of the date of this Form 10-QSB, management is not aware of any incident
which is likely to result in a liability that would materially affect the
Company's consolidated financial position or results of operation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders was held on June 15, 1999 at the
Company's headquarters in Peoria, Illinois. All five seats on the Board of
Directors were up for election at this meeting. Directors Guy L. Brenkman, J.
Michael Carr, Orvel L. Cox, Timothy F. Shea, and John S. Fulton were re-elected
for a one year term.
In addition to the election of the Board of Directors, shareholders ratified the
appointment of McGladrey & Pullen, LLP, Certified Public Accountants and
Consultants, as the Company's independent public accountants for the coming
year.
<PAGE>
The vote totals for the matters voted upon at the Annual Meeting were as
follows:
Votes
Proposal Votes For Withheld
- -------------------------------------------------- --------- --------
Nomination of Guy L. Brenkman
to the Board of Directors ........................ 3,589,802 195,622
Nomination of Orvel L. Cox
to the Board of Directors ........................ 3,659,974 125,450
Nomination of Timothy F.Shea
to the Board of Directors ........................ 3,543,164 242,260
Nomination of John S. Fulton
to the Board of Directors ........................ 3,596,794 188,630
Nomination of J. Michael Carr
to the Board of Directors ........................ 3,659,474 125,950
Ratification of McGladrey & Pullen, LLP
as Independent Auditor ........................... 3,702,264 129,200
Item 5. OTHER INFORMATION
Effective January 1, 1999, the Company's wholly-owned subsidiary Michigan
Southern Railroad Company (MSO) purchased all of the stock of the Michigan
Southern Railroad Company, Inc. (MSRR) from Gordon D. Morris, for $2.4 million.
The transaction was initially funded with long-term fixed rate debt obtained
from the Company's $2.5 million revolving acquisition line of credit with
Citizens Bank and Trust and subsequently refinanced with a separate note with
National City Bank on May 21, 1999. The Company had been operating the line
under an operating lease since December of 1996.
On April 30, 1999, the Company purchased 100% of the stock of Garden City
Western Railway, Inc.(GCW) from the Garden City Coop, Inc. and immediately began
operations. The GCW is located in southwest Kansas and totals 45 miles of
operating railroad. In 1998 the GCW handled over 2,000 cars and has handled over
3,000 cars in previous years. The primary commodities include grain, frozen
beef, fertilizer, farm implements, feed products and utility poles. The Company
projects that during the first full year of operations, the GCW will add
approximately $750,000 of revenue and $250,000 of operating income. The purchase
was financed with a 60 day note with an interest rate of Prime plus 1% from
National City Bank and was refinanced with the National City Bank revolving
acquisition line of credit on June 18, 1999.
<PAGE>
On May 13, 1999, Pioneer Railcorp sold all of the stock of the Minnesota Central
Railroad Co. to Southern Rail Resources, Inc., an Iowa Corporation. Southern
Rail Resources, Inc. is not affiliated with Pioneer Railcorp or any of Pioneer
Railcorp's officers, directors, or employees. The Company realized a loss of
$19,999 on the sale of the stock and $546,000 on the write-off of net assets
associated with the Minnesota Central Railroad. At the date of the sale, the
Minnesota Central accounted for approximately $374,000 of revenue and $387,000
of operating expense on Pioneer Railcorp's consolidated statement of income. At
the date of the sale, the Minnesota Central accounted for approximately $1.8
million of assets and $1.3 million of liabilities reported on the consolidated
balance sheet of Pioneer Railcorp. Since the transaction was a stock sale, all
liabilities of the Minnesota Central Railroad Co.
remain with the Minnesota Central Railroad Co.
On March 22, 1999, Pioneer Railcorp's Board of Directors declared a $.0225 per
common share dividend payable to shareholders of record as of April 30, 1999,
payable by June 30,1999. The total dividend paid was $103,742.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit # 11 - Statement re computation of per share earnings.
Exhibit # 20.1 Notice of Annual Meeting and Proxy Statement used to solicit
votes for the Annual Meeting of Shareholders, held June 15, 1999.
Exhibit # 20.2 Form of Ballot used at the Annual Meeting on June 15, 1999.
Exhibit # 20.3 Annual Report for 1998 sent to shareholders with the Notice of
Annual Meeting and Proxy Statement.
Exhibit # 27 - Financial data schedule.
The following reports were filed on Form 8-K during the first six months 1999:
(1) Form 8-K filed January 15, 1999 regarding the purchase of the Michigan
Southern Railroad stock.
(2) Form 8-K filed May 27, 1999 regarding the sale of the Minnesota Central
Railroad Co. stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
PIONEER RAILCORP
(Registrant)
8/10/99 /s/ Guy L. Brenkman
------- --------------------------------------
DATE GUY L. BRENKMAN
PRESIDENT & CEO
8/10/99 /s/ J. Michael Carr
------- --------------------------------------
DATE J. MICHAEL CARR
TREASURER & CHIEF FINANCIAL OFFICER
Following is information about the computation of the earnings per share (EPS)
data for the quarter ended June 30, 1999 and 1998:
For the Quarter Ended June 30, 1999
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Basic EPS
Income available to common stockholders ... $(186,528) 4,610,717 $(0.04)
=======
Effect of Diluted Securities - None
Diluted EPS
Income available to common stockholders
plus assumed conversions .............. $(186,528) 4,610,717 $(0.04)
==================================
For the Quarter Ended June 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Basic EPS
Income available to common stockholders .. $ 272,089 4,610,592 $0.06
======
Effect of Diluted Securities
Employee stock options ................... -- 64,150
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ............. $ 272,089 4,674,742 $0.06
=================================
Following is information about the computation of the earnings per share (EPS)
data for the first 6 months ended June 30, 1999 and 1998:
For the Six Months
Ended June 30, 1999
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Basic EPS
Income available to common stockholders .. $ 29,390 4,610,717 $ 0.01
======
Effect of Diluted Securities - None
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ............. $ 29,390 4,610,717 $ 0.01
=================================
For the Six Months
Ended June 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
Basic EPS
Income available to common stockholders .. $ 446,457 4,610,520 $ 0.10
======
Effect of Diluted Securities
Employee stock options ................... 36,373
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ............. $ 446,457 4,646,893 $ 0.10
==================================
NOTICE OF ANNUAL MEETING TO BE HELD JUNE 15, 1999
PIONEER RAILCORP
Peoria, Illinois 61607
To the Stockholders:
The Annual Meeting of Stockholders will be held at Pioneer Railcorp's Corporate
Office, 1318 S. Johanson Road, Peoria, Illinois, on Tuesday, June 15, 1999,
commencing at 9:00 a.m. local time, for the purpose of considering and voting on
the following matters as described in the attached Proxy Statement:
- - To elect five directors for a one year term;
- - To consider and act upon a proposal to ratify the appointment of
independent public accountants for 1999;
- - Any other matters that may properly come before the meeting.
Only stockholders of record at the close of business on April 30, 1999, will be
entitled to vote at this meeting. A copy of the Company's Annual Report
containing financial data and a summary of operations for 1998 is being mailed
to the Company's stockholders with this Proxy Statement.
In order that your stock may be represented at the meeting in case you are not
personally present, please complete, sign and date the enclosed proxy/voting
instruction card and return it promptly in the accompanying addressed envelope.
By order of the Board of Directors
/s/ Daniel A. LaKemper
- ----------------------
Daniel A. LaKemper
Secretary
May 7, 1999
Pioneer Railcorp
1318 S. Johanson Road
<PAGE>
Peoria, Illinois 61607
309-697-1400
Proxy Statement
This Proxy Statement and the accompanying proxy will be sent to stockholders of
Pioneer Railcorp on or about May 7, 1999, in connection with the solicitation by
the Board of Directors of proxies to be used at the Annual Meeting of
Stockholders of the Company to be held at Pioneer Railcorp's corporate office,
1318 S. Johanson Road, Peoria, Illinois 61607, on Tuesday, June 15, 1999,
commencing at 9:00 a.m. local time. The Company's Annual Report for 1998,
including financial statements, is also included herein.
The record date for stockholders entitled to vote at the Annual Meeting is April
30, 1999. As of April 30, 1999, the Company had issued and outstanding 4,610,697
shares of common stock, of which 4,610,697 are entitled to one vote per share.
The presence, in person or by proxy, of the holders of a majority of the total
number of shares entitled to vote constitutes a quorum for the transaction of
business at the meeting. Assuming that a quorum is present, the affirmative vote
of a majority of the shares of the Company present in person or represented by
proxy at the Meeting, and entitled to vote, is required for the election of
directors and for the ratification of McGladrey & Pullen, LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1999.
Votes cast by proxy or in person at the meeting will be tabulated by an
appointed employee of the Company and will determine if a quorum is present.
Abstentions will be treated as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter submitted to the shareholders for a vote.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
It is the Company's policy that all proxies, ballots, and voting tabulations
that identify shareholders will be kept confidential, except where disclosure
may be required by applicable law, where shareholders write comments on their
proxy cards, or where disclosure is expressly requested by a shareholder.
The Proxy
Any person giving a proxy has the power to revoke it at any time before it is
voted, upon written notice to J. Michael Carr, Chief Financial Officer of the
Company.
Any proxy cards returned without specification will be voted as to each proposal
in accordance with the recommendations of the Board of Directors.
The Company will bear the costs of solicitation of proxies. Following the
mailing of proxy soliciting material, proxies may be solicited by directors,
officers and regular employees of the Company in person or by telephone or fax.
The Company will also reimburse persons holding stock for others in their names
or in those of their nominees for their reasonable expenses in sending proxy
material to their principals and obtaining their proxies.
Beneficial Ownership of Stock
There are no shareholders, as of March 19, 1999, known by the Company to be
beneficial owners of more than 5% of its outstanding common stock other than
Company directors and officers.
Nominees for Election as Directors
Guy L. Brenkman, age 52, Chairman of the Board of Directors and President of
Pioneer Railcorp and its subsidiaries was the incorporator of the Company and
has been a member of the Board of Directors and President of the Company since
its formation. Mr. Brenkman's past business experience includes real estate
sales and management, securities sales, and seven years of operational railroad
industry experience before managing the day-to-day railroad operations of
Pioneer in 1988. Mr. Brenkman, acting as agent of the Issuer, conducted the
public offering of Pioneer Railcorp, which raised its initial capital, and
secondary capital for expansions.
Orvel L. Cox, age 56, 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.
<PAGE>
John S. Fulton, age 66, Director, was elected to the Board in 1993. Mr. Fulton
has 25 years experience in real estate development and industrial appraising.
Mr. Fulton holds a BS degree in Public Administration from Bradley University in
Peoria, Illinois.
J. Michael Carr, age 35, Treasurer, also serves as Treasurer for each of the
Company's subsidiaries and Chief Financial Officer for same. Mr. Carr has been
employed by the Company since March 1993. Before joining the Company, Mr. Carr
worked in public accounting and banking for seven years, most recently as
Controller for United Federal Bank. Mr. Carr is a CPA and holds a BS-Accounting
from Illinois State University, Normal, Illinois.
Timothy F. Shea, age 50, 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.
General Information Relating to the Board of Directors
The Board of Directors of the Corporation consists of five members, each elected
for a term of one year. The board met a total of 6 times in 1998, at which time
all directors were present.
Compensation of Directors
Directors of the Company were each compensated $2,000 in 1998 and received
reimbursement for out of pocket expenses.
Committees
The Audit Committee is the only standing committee of the Board of Directors.
The purpose of the Audit Committee is to recommend to the Board of Directors the
engagement of, and the fee to be paid to, the independent public accountants.
The Audit Committee also reviews with the independent accountants as deemed
necessary, the Corporation's accounting policies, conflict of interest policy,
internal control systems, and financial operations and reporting. The committee
met 3 times in 1998. Current members of this committee are Timothy F. Shea, John
S. Fulton, and Orvel L. Cox.
Security Ownership of Directors and Executive Officers
The following table sets forth information, as of March 19, 1999, regarding the
beneficial ownership of all directors and officers of the Company as a group.
These figures include shares of Common Stock that the executive officers have
the right to acquire within 60 days of March 19, 1999 pursuant to the exercise
of stock options and warrants.
Title of Class: Common Stock ($.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.
<PAGE>
(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.
Compensation of the Chief Executive Officer
Summary Compensation Table
- --------------------------
Annual
Compensation Long Term Compensation
--------------- -------------------------------------
Restricted
Name & Stock Other
Position Year Salary Award Options/SARs Compensation
- ---------- ---- -------- ---------- ------------ ------------
Guy L. Brenkman, CEO 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
<PAGE>
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.
Proposal 1 - Ratification of Appointment of Independent Public Accountants
The Board of Directors, upon recommendation of its Audit Committee, has
appointed McGladrey & Pullen, LLP, Certified Public Accountants and Consultants,
as independent public accountants of the Company with respect to its operations
for the year 1999, subject to ratification by the holders of common stock of the
Company. In taking this action, the members of the Board and the Audit Committee
considered carefully McGladrey's performance for the Company with respect to
services performed in the years 1994-1998 and its general reputation for
adherence to professional auditing standards. The Board of Directors anticipates
that representatives of McGladrey & Pullen, LLP will be present at the Meeting,
will have the opportunity to make a statement if they desire, and will be
available to respond to appropriate questions.
The Board of Directors recommends a vote FOR this proposal.
Stockholder Proposals
Stockholders are entitled to submit proposals on matters appropriate for
stockholder action consistent with regulations of the Securities and Exchange
Commission. In order for a stockholder proposal for the 2000 Annual Meeting of
Stockholders to be eligible for inclusion in the Corporation's Proxy Statement
and form of proxy, it must be received by the Corporate Secretary no later than
December 31, 1999.
Other Matters
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than as set forth above. However, if any other matters come
before the Meeting, the proxies received pursuant to this solicitation will be
voted thereon in accordance with the judgment of the person or persons acting
under the proxies.
Pioneer Railcorp, May 7, 1999
PIONEER RAILCORP
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
JUNE 15, 1999
ELECTION OF DIRECTORS:
Guy L. Brenkman, J. Michael Carr, Orvel L. Cox, John S. Fulton, Timothy F. Shea
_______ FOR all nominees listed above
_______ FOR all nominees listed above, except
_______ WITHHOLD authority to vote for all nominees listed above
PROPOSAL 1 - Ratification of Appointment of Independent Public Accountants
_______ FOR the appointment of McGladrey & Pullen, LLP as the Company's 1999
independent public accountants
_______ AGAINST the appointment of McGladrey & Pullen, LLP as the Company's
1999 independent public accountants
THE UNDERSIGNED APPOINTS GUY L. BRENKMAN AS PROXY, TO VOTE THEIR SHARES AS
DIRECTED ABOVE AT THE 1999 ANNUAL MEETING OF STOCKHOLDERS AND ANY ADJOURNMENT
THEREOF. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION
OF THE PERSONS NOMINATED FOR DIRECTORS AND FOR BOTH PROPOSALS SUBMITTED BY THE
COMPANY AS OUTLINED IN THE PROXY STATEMENT.
Dated: ___________________________, 1999
_________________________________________
Signature
_________________________________________
Signature if Held Jointly
TO THE SHAREHOLDERS:
1998 was a year of consolidation and internal strengthening of our position in
the short line industry. We concluded the purchase of the three Michigan
Southern Railroad properties in late 1998, with an effective date of January 1,
1999. We also strengthened the operating and mechanical departments throughout
the year and continued our focus on enhanced customer service through more
efficient and timely train schedules and procedures that produced record rail
usage on our lines. In addition, 1998 was the first year a cash dividend was
paid to the shareholders, an amount of $.02 per share.
Much of the attention to growth through acquisitions in 1998 was aimed at a
regional railroad offering, in which Pioneer Railcorp was a finalist, but not
successful in structuring a deal that would benefit the Company. In addition,
during the year we continued to analysis other potential properties, some of
which have lead to negotiations that could develop into acquisitions in 1999.
1998 resulted in the highest number of railcar loadings in the history of the
Company, exceeding 41,000 railcar loadings. We view this increase as a direct
result of our intense marketing efforts with particular emphasis on increasing
volume from current customers while remaining alert for new opportunities.
As I look back on 1998 I am very proud of the Pioneer Railcorp family of
subsidiaries, the management team and employees that make it all come together
every day of the year. I am also thankful to the loyal customers of our
railroads, our shareholders, and our lenders that place trust and confidence in
Pioneer Railcorp each day.
All of us at Pioneer Railcorp look forward to the challenges of 1999 and beyond
knowing that our Company is well positioned, well managed, well equipped,
financially sound, and a leader in the short line industry, not a follower.
Sincerely,
/s/ Guy L. Brenkman
- -----------------------
Guy L. Brenkman
Chairman, President and
Chief Executive Officer
<PAGE>
Company Background
Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this annual report, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (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), Pioneer Resources, Inc.
(PRI), 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.
Pioneer Railcorp Subsidiaries
Fort Smith Railroad Co.
On July 7, 1991, the Fort Smith Railroad Co. (FSR), a wholly-owned subsidiary of
Pioneer Railcorp, entered into a twenty-year lease (with three twenty-year
renewals) with the Missouri Pacific Railroad Company (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 railroad's 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.
Alabama Railroad Co.
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). The line runs from Flomaton to Corduroy, Alabama, and
interchanges with CSX in Flomaton. The railroad's principal commodities are
pulpwood, particle board, and finished lumber.
Mississippi Central Railroad Co.
On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. The railroad runs from Oxford,
Mississippi to Grand Junction, Tennessee, a total of 56.5 miles, 51 of which are
located in Mississippi. The railroad interchanges with the Norfolk Southern
Railway (NS) at Grand Junction, Tennessee and the Burlington Northern Santa Fe
(BNSF) at Holly Springs, Mississippi. The Company changed the name of this
wholly-owned subsidiary to Mississippi Central Railroad Co. (MSCI) in January
1993. The railroad's principal commodities include outbound finished wood
products as well as the resins, chemicals and pulpwood for production of the
finished wood products, scrap steel and cottonseed.
<PAGE>
Alabama & Florida Railway Co.
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 railroad's principal commodities are resins, plastics, fertilizer, peanuts,
and pulpwood.
Decatur Junction Railway Co.
On September 23, 1993, the Decatur Junction Railway Co. (DT), a wholly-owned
subsidiary of Pioneer Railcorp, signed a lease agreement with Cisco Co-op Grain
Company (Cisco) and on September 24, 1993 with Central Illinois Shippers,
Incorporated (CISI), for the lease of two segments of track in east central
Illinois. Approximately 38 miles of railroad is operated including 8 miles of
trackage rights on the Illinois Central Railroad (IC) through Decatur, Illinois.
The leases run through December 31, 2006. The railroad's principal commodities
are primarily agriculture products.
Vandalia Railroad Company
On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company. The line located in Vandalia, Illinois,
interchanges with Conrail (CR) and is approximately 3.45 miles long. The
railroad's principal commodities are steel pipe, plastic pellets, fertilizer,
and feed ingredients.
Minnesota Central Railroad Co.
On December 12, 1994, Pioneer Railcorp's wholly-owned subsidiary Minnesota
Central Railroad Co., acquired certain assets of MNVA Railroad, Inc. The assets
purchased included approximately 94 miles of operating railroad in southwest
Minnesota, 7 locomotives, 33 railcars, an engine house in Morton, Minnesota,
several vehicles, pieces of maintenance equipment, and miscellaneous parts,
materials and supplies. The railroad interchanges with the Burlington Northern
Santa Fe (BNSF) at Hanley Falls and the Twin Cities and Western Railroad (TCWR)
at Norwood. The railroad's principal commodities are grain, clay, fertilizer,
canned goods, dairy products, and particle board.
West Michigan Railroad Co.
On July 11, 1995, Pioneer Railcorp signed an agreement with the Trustee of the
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, 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 a Interstate Commerce
Commission Directed Service Order since June 24, 1995. West Jersey Railroad Co.
amended its articles of incorporation to change its name to "West Michigan
Railroad Co." effective October 2, 1995. The sale was approved by the Interstate
Commerce Commission by order served October 18, 1995, and the West Michigan
Railroad Co. took title to the property on October 24, 1995. The railroad's
principal commodities are frozen and canned foods.
Keokuk Junction Railway Co.
On March 12, 1996, Pioneer Railcorp purchased 93% of the common stock of KNRECO,
Inc., an Iowa corporation d/b/a Keokuk Junction Railway (hereinafter "KJRY")
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 Burlington Northern Santa Fe (BNSF) at Keokuk, Iowa and the Toledo Peoria &
Western Railway Corporation (TPW) at LaHarpe, Illinois. The railroad's principal
commodities are corn, corn germ, corn syrup, meal, gluten feed, calcined coal,
ferro silicon, scrap iron, and railroad wheels.
<PAGE>
Rochelle Railroad Co.
On March 25, 1996, Pioneer Railcorp through its wholly-owned subsidiary Rochelle
Railroad Co. (RRCO), signed a one year lease with a five-year renewal option,
signed in March 1997, with the City of Rochelle, Illinois, to operate
approximately 2 miles of track serving the Rochelle Industrial Park. The line
interchanges with the Burlington Northern Santa Fe (BNSF) and the Union Pacific
Railroad Company (UP) Train operations began April 15, 1996. 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.
Shawnee Terminal Railway Company
On November 13, 1996, Pioneer Railcorp purchased 100% of the common stock of the
Shawnee Terminal Railway Company. The line located in Cairo, Illinois,
interchanges with the Illinois Central Railroad (IC) and is approximately 2.5
miles long. The railroad's principal commodities are glycol and railroad freight
cars for cleaning.
Michigan Southern Railroad
On December 19, 1996, Pioneer Railcorp through its wholly-owned subsidiary
Wabash & Western Railway Co. d/b/a Michigan Southern Railroad, signed a two year
lease with the Michigan Southern Railroad Company, Inc., Morris Leasing Co. Ltd.
and Gordon D. Morris to operate 53 miles of track and certain railroad related
assets. The lease contains an exclusive option to purchase the stock of the
Michigan Southern Railroad Company, Inc. and the railroad assets of Morris
Leasing Co., Ltd. and Gordon D. Morris, 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 (CR). The Michigan line also interchanges
with the Indiana Northeastern Railroad Company (IN). The railroad's principal
commodities are scrap paper, scrap iron, fertilizer, plastics, plywood, sugar
and corn syrup.
Pioneer Industrial Railway Co.
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 PPHW is owned by the City of
Peoria, Illinois and the Village of Peoria Heights, Illinois. The railroad's
principal commodities are steel, salt, lumber and plastic pellets.
Pioneer Railroad Equipment Co., Ltd.
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
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.
<PAGE>
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.
Results of Operations
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.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
- --------------------------------------------------------------------------------
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
On July 1, 1995, the Company's stock split and warrant issuance became payable
to shareholders. The 2 for 1 stock split increased the number of shares issued
and outstanding from 2,099,142 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.
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.
<PAGE>
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.
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.
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.
<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 rail- roads. 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 employ- ment 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>
Market for Pioneer Railcorp Common Stock
The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the 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
-----------------------------------------------------------------
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. In 1998 a $.02 common stock cash
dividend was declared and paid.
Board of Directors
Guy L. Brenkman, CEO and President, Pioneer Railcorp
J. Michael Carr, Chief Financial Officer, Pioneer Railcorp
Orvel L. Cox, Superintendent Car Department, Pioneer Railroad Services, Inc.
John S. Fulton, Purple Reality
Timothy F. Shea, President, RE/MAX Property Management
Officers
Guy L. Brenkman, Chief Executive Officer and President
J. Michael Carr, Treasurer
Daniel A. LaKemper, Secretary
Kevin L. Williams, Assistant Secretary
Corporate Information
The Corporate offices of Pioneer Railcorp and its subsidiaries are located at
1318 S. Johanson Road, Peoria, Illinois, 61607; Telephone number 309-697-1400.
Reports and Publications
A copy of Pioneer Railcorp's 1998 Form 10-KSB to the Securities and Exchange
Commission (without exhibits) can be obtained without charge by contacting the
Company's Investor Relations Department
Quarterly financial reports and other publications and news releases can also be
obtained through the Investor Relations Department or accessed through the
Company's web page located at www.Pioneer-Railcorp.com.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Registrant's
Second Quarter Form 10-QSB and is qualified in its entirety by reference to
those financial statments.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 384,150
<SECURITIES> 0
<RECEIVABLES> 2,892,695
<ALLOWANCES> 169,445
<INVENTORY> 299,673
<CURRENT-ASSETS> 3,636,130
<PP&E> 30,277,441
<DEPRECIATION> 6,379,739
<TOTAL-ASSETS> 28,802,149
<CURRENT-LIABILITIES> 5,355,842
<BONDS> 0
0
0
<COMMON> 4,610
<OTHER-SE> 3,901,665
<TOTAL-LIABILITY-AND-EQUITY> 28,802,149
<SALES> 0
<TOTAL-REVENUES> 6,935,933
<CGS> 0
<TOTAL-COSTS> 5,738,462
<OTHER-EXPENSES> 365,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 698,594
<INCOME-PRETAX> 133,505
<INCOME-TAX> 41,500
<INCOME-CONTINUING> 92,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,390<F1>
<EPS-BASIC> .01
<EPS-DILUTED> .01
<FN>
<F1>The difference between income from continuing operations and net income related
to minority in preferrd stock dividends of consolidated subsidiaries.
</FN>
</TABLE>
