SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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
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(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization)
1318 S. Johanson Rd.
Peoria, IL 61607
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: 309-697-1400
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class Name of each exchange on which registered
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Common Stock, Class A Nasdaq SmallCap Market , Chicago Stock Exchange
Securities registered pursuant to 12(g) of the Act:
Common stock, Class A ($.001 par value)
Common Stock, Class B (no par value)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
Issuer's revenues for the fiscal year ended December 31, 1999 were $13,857,384
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 21, 2000 was $4,144,745
4,611,217
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(Shares of Common Stock outstanding on March 21 , 2000)
<PAGE>
This Form 10-KSB contains certain "forward-looking" statements as such term is
defined in The Private Securities Litigation Reform Act of 1995 and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitation, competitive factors, general economic conditions,
customer relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, one-time events and other factors described herein and in other
filings made by the Company with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected, or intended. The Company does not intend to
update these forward looking statements.
The remainder of this page is intentionally left blank
<PAGE>
PART I
Item 1. Business
General
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Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this Form 10-KSB, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (WMI), 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 May 6, 1999), Keokuk Junction Railway Co. (KJRY), 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) and an inactive subsidiary Midwest Terminal Railway Company
(formerly Rochelle Railroad Co.) (RRCO).
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 five major
railroads, Burlington Northern Santa Fe Railroad (BNSF), 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 four smaller railroads, the Kansas City Southern Railway
(KCS), the Arkansas & Missouri Railroad (AM), 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 railcars and locomotives to unaffiliated third parties.
Railroad Operations
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On July 7, 1991, the Fort Smith Railroad Co. (FSR), a wholly-owned subsidiary of
Pioneer Railcorp, entered into a twenty-year lease (with three twenty-year
renewals) with the Missouri Pacific Railroad Company (now Union Pacific
Railroad) and operates 18 miles of track from Fort Smith to Barling, Arkansas.
The FSR's primary interchange is with the Union Pacific Railroad Company (UP).
FSR also interchanges with the Arkansas & Missouri Railroad Co. (AM) and the
Kansas City Southern Railway (KCS). The traffic base on the FSR is very
diversified with both inbound and outbound shipments. The principal commodities
are iron/steel, scrap, baby food, fiberglass, particle board, charcoal, grains,
frozen poultry, meal, chemicals, alcoholic beverages, industrial sand, lumber,
paper, pulpboard, fiberboard, peanuts, fertilizer and military movements.
On October 25, 1991, the Alabama Railroad Co., a wholly-owned subsidiary of
Pioneer Railcorp, purchased 60 miles of railroad facilities and real estate from
CSX Transportation (CSX) and commenced operations soon thereafter. The line runs
from Flomaton to Corduroy, Alabama, and interchanges with CSX in Flomaton. The
railroad's principal commodities are outbound lumber products, primarily
pulpwood, particle board, and finished lumber.
On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. The railroad runs from Oxford,
Mississippi to Grand Junction, Tennessee, a total of 51 miles, 45.5 of which are
located in Mississippi. The railroad interchanges with the NS at Grand Junction,
Tennessee and the BNSF at Holly Springs, Mississippi. The Company changed the
name of this wholly-owned subsidiary to Mississippi Central Railroad Co. (MSCI)
in January 1993. The traffic base on the MSCI is primarily outbound finished
wood products and inbound products, such as resins, chemicals and pulpwood, for
the production of finished wood products. Other products shipped on the MSCI
include scrap steel and cottonseed.
<PAGE>
On November 23, 1992, the Alabama & Florida Railway Co. (AF), a wholly-owned
subsidiary of Pioneer Railcorp, purchased the tangible assets of the A&F Inc.,
d/b/a the Alabama & Florida Railroad Company. This line runs from Georgiana to
Geneva, Alabama, a distance of 76 miles and interchanges with CSX at Georgiana.
The AF's principal commodities are inbound resins, plastic pellets, fertilizer
and outbound peanuts, scrap plastic and pulpwood.
On September 23, 1993, the Decatur Junction Railway Co. (DT), a wholly-owned
subsidiary of Pioneer Railcorp, signed a lease agreement with Cisco Co-op Grain
Company (Cisco) and on September 24, 1993 with Central Illinois Shippers,
Incorporated (CISI), for the lease of two segments of track in east central
Illinois. The Cisco segment runs from Green's Switch (Decatur) to Cisco,
Illinois, approximately thirteen (13) miles. The CISI segment runs from Elwin to
Assumption, Illinois, a distance of approximately seventeen (17) miles. The two
lines connect via trackage rights on the Illinois Central Railroad (IC) through
Decatur, Illinois, a distance of approximately eight (8) miles. Railroad
operations began on the Cisco segment December 3, 1993, and began on the CISI
segment December 7, 1993.
On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company. The line located in Vandalia, Illinois,
interchanges with CSX and is approximately 3.45 miles long. The Railroad's
principal commodities are steel pipe, plastic pellets, fertilizer, and feed
ingredients.
On December 12, 1994, Pioneer Railcorp's wholly-owned subsidiary Minnesota
Central Railroad Co. acquired certain assets of MNVA Railroad, Inc. The assets
purchased included approximately 94 miles of operating railroad in south central
Minnesota. The railroad interchanges with the BNSF at Hanley Falls, Minnesota
and the TCWR at Norwood, Minnesota. The railroad's principal commodities are
grain, clay, fertilizer, canned goods, dairy products, and particleboard. On May
6, 1999, Pioneer Railcorp sold 100% of the MCTA stock 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.
On July 11, 1995, Pioneer Railcorp signed an agreement with the Trustee of the
Southwestern Michigan Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore &
Chicago Railroad (KLSC), to purchase all of the tangible assets of KLSC. Those
assets include approximately 15 miles of track and right of way, extending from
Hartford to Paw Paw, in Van Buren County, Michigan. The line interchanges with
CSX. Pioneer Railcorp then assigned its right to purchase to the West Jersey
Railroad Co., a wholly owned subsidiary of Pioneer, which had been operating the
former KLSC tracks under an Interstate Commerce Commission Directed Service
Order since June 24, 1995. West Jersey Railroad Co. amended its articles of
incorporation to change its name to "West Michigan Railroad Co.," effective
October 2, 1995. The sale was approved by the Interstate Commerce Commission by
order served October 18, 1995, and the West Michigan Railroad Co. took title to
the property on October 24, 1995.
On March 12, 1996, Pioneer Railcorp purchased 93% of the common stock of KNRECO,
Inc., an Iowa corporation d/b/a Keokuk Junction Railway (hereinafter "KJRY")
from the shareholders, and purchased all of the remaining common shares of KJRY
in April of 1996. KJRY operates a common carrier railroad line within the City
of Keokuk, Iowa, from Keokuk to LaHarpe, Illinois, and a branch line from
Hamilton to Warsaw, Illinois, a total of approximately 38 miles. In addition,
KJRY owns all of the common stock of Keokuk Union Depot Company, an Iowa
corporation, that owns the former Keokuk Union Depot building, along with
surrounding track and real estate. KNRECO, Inc. changed its corporate name to
Keokuk Junction Railway Co. effective April 10, 1996. The KJRY interchanges with
the BNSF at Keokuk, Iowa and the TPW at LaHarpe, Illinois. The railroad's
principal commodities are corn, corn germ, corn syrup, meal, gluten feed,
calcined coal, ferrosilicon, scrap iron, and railroad wheels.
On March 25, 1996, Pioneer Railcorp through its wholly-owned subsidiary Rochelle
Railroad Co. (RRCO) signed a one year lease with the city of Rochelle, Illinois,
to operate approximately 2 miles of track serving the Rochelle Industrial Park.
The line interchanges with the BNSF and the UP. Train operations began April 15,
1996. The lease required RRCO to make monthly payments to the city on a per car
basis and to maintain the trackage. The railroad's principal commodity is frozen
foods. The City of Rochelle, Illinois, terminated the Rochelle Railroad Co.'s
lease agreement effective January 19, 1998, however, Rochelle Railroad Co.
continued to operate on the trackage until November 13, 1998 pending the outcome
of certain legal proceedings. The Rochelle Railroad Co. changed its name to
Midwest Terminal Railway Company in 1998 and is presently an inactive
subsidiary.
<PAGE>
On November 13, 1996, Pioneer Railcorp purchased 100% of the common stock of the
Shawnee Terminal Railway Co. The line located in Cairo, Illinois, interchanges
with the Illinois Central Railroad and is approximately 2.5 miles long. The
Railroad's principal commodities are glycol and railroad freight cars for
cleaning.
On December 19, 1996, Pioneer Railcorp through its wholly-owned subsidiary
Michigan Southern Railroad Company signed a two year lease with the Michigan
Southern Railroad Co. Inc., Morris Leasing, Inc., and Gordon D. Morris to
operate 53 miles of track and certain railroad related assets. The lease called
for a fixed monthly payment for the equipment assets leased and a per car charge
for railroad usage. The lease contained an exclusive option to purchase the
stock of the Michigan Southern Railroad Company, Inc. and the railroad assets of
Morris Leasing, Inc., and this option was exercised on January 6, 1999, when the
Company's wholly-owned subsidiary Michigan Southern Railroad Company (MSO)
purchased all of the stock of the Michigan Southern Railroad Co., Inc. (MSRR)
from Gordon D. Morris. 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 the NS. The Michigan
line also interchanges with the Indiana Northeastern Railroad Company. The
railroad's principal commodities are scrap paper, scrap iron, fertilizer,
plastics, plywood, sugar and corn syrup.
On February 18, 1998, Pioneer Railcorp through its wholly-owned subsidiary
Pioneer Industrial Railway Co., began operating approximately 8.5 miles of
railroad in Peoria County, Illinois when the Peoria & Pekin Union Railway Co.
(PPU) assigned its lease with the owner, the Peoria, Peoria Heights & Western
Railroad (PPHW), effective February 18, 1998. The lease expires in July 2004.
PPHW is owned by the City of Peoria, Illinois and the village of Peoria Heights,
Illinois. The Pioneer Industrial Railway Co. has improved the condition of the
track since assuming operation and overall the track is considered to be in good
condition. The railroad's principal commodities are steel, salt, lumber and
plastic pellets.
On April 29, 1999, the Company purchased 100% of the stock of The 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 40 miles of
operating railroad and interchanges with the BNSF. The primary commodities
include grain, frozen beef, fertilizer, farm implements, feed products and
utility poles.
Railroad Equipment Leasing
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Pioneer Railroad Equipment Co., Ltd. (PREL), formed on April 1, 1990, leases
equipment to the Company's subsidiary railroads and also and leases railcars and
locomotives to unaffiliated third parties. PREL also earns income from
non-company railroads on its fleet of approximately 1,100 railcars (as of
December 31, 1999) when they carry freight on non-company railroads.
Corporate Support Operations
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Other corporate support operations engaged in by the Company are performed by
its wholly owned subsidiaries, Pioneer Railroad Services, Inc., Pioneer
Resources, Inc., and Pioneer Air, Inc. Pioneer Railroad Services, Inc. (PRS)
which began operations on October 1, 1993, provides accounting, management,
marketing, operational and agency services to the Company's subsidiary
railroads. Pioneer Resources, Inc. was formed on December 30, 1993 to manage
real estate and auxiliary resources for Company subsidiaries. Pioneer Air, Inc.
was formed on August 5, 1994 and currently owns a Cessna 421B aircraft which is
used by Pioneer Railcorp subsidiaries exclusively for Company business travel.
Marketing
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The Company's marketing department was established to foster continuing business
with existing customers and to develop and attract new customers and additional
loadings on all PRC railroads. The Company's attention to marketing has earned
recognition from industry publications, Class I railroads, and smaller rail
carriers. The Company's marketing department along with the Company's operations
center have become important value-added services offered to present and
potential customers.
<PAGE>
Distribution
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Virtually all interchange traffic is with unionized Class I carriers, and a
prolonged work stoppage on those carriers would have a material adverse impact
upon the Company, however, there has never been such a prolonged work stoppage
of the American railroad industry, and the Company considers the chances of such
an event to be remote. Recent mergers by Class I carriers and the associated
operating problems experienced by the Class I's has had a negative impact on the
Company's business, but the Company does not expect the impact to become
material or adverse.
Suppliers
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The Company does not believe that the loss of any supplier would have a material
adverse effect on its business, as there are alternative suppliers available.
Competition
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With respect to the industry in which PRC operates, the Company, like any other
railroad company, faces intense competition from the trucking industry, barge
lines and other railroads for the movement of commodities. The Company feels
(pricing and time sensitivity constant) that it has a competitive advantage due
to its integrated efforts in providing value-added rail services through its
marketing department and operations center, with continued emphasis on safe and
efficient train operations.
Competition for additional railroads as they become available on the market,
either as direct "spin-offs" from Class I Railroads or through the secondary
market, is intense. The Company believes that it has a competitive advantage for
the acquisition of future Class III Railroads due to the following factors: (1)
the Company's acquisition and operation of multiple railroads, (2) the Company's
experienced management team, (3) the Company's proficiency with industry-trend
technologies desired by Class I Railroads, such as Electronic Data Interchange
(EDI), (4) the quality of the Company's employees, and (5) Pioneer Railcorp's
acquisition line of credit.
Regulations
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The Company's subsidiaries are subject to regulation by the Surface
Transportation Board (STB) of the U.S. Department of Transportation (USDOT), the
Federal Railroad Administration (FRA), and certain state and local
jurisdictions. Such regulation affects rates, safety rules, maintenance of
track, other facilities, and right of way, and may affect the Company's revenues
and expenses. To date there has been no material effect on the Company's
operations because of regulatory action, nor does the Company expect any such
effect in the foreseeable future.
Employees
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On December 31, 1999, the Company had 104 employees which consisted of 81
operating personnel, 19 support staff and 4 executive officers.
Environmental Matters
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The Company's operations are subject to various regulations relating to the
protection of the environment, which have become increasingly stringent. These
environmental laws and regulations, which are implemented principally in the
U.S. by the Environmental Protection Agency ("EPA") and comparable state
agencies govern the management of hazardous wastes, the discharge of pollutants
into the air and surface and underground waters and the manufacture and disposal
of certain substances.
There are no material environmental claims pending or, to the Company's
knowledge at this time, threatened against the Company. The Company believes
that its operations are in material compliance with current environmental laws
and regulations. The Company estimates that any expenses incurred in maintaining
compliance with the current laws and regulations will not have any material
effect on the Company's earnings or capital expenditures. However, the Company
can provide no assurance that the current regulatory requirements will not
change, that currently unforeseen environmental incidents will not occur or that
past non-compliance with the environmental laws will not be discovered on the
Company's properties.
<PAGE>
Item 2. Property
In October 1994, the Company purchased a 16,000 square foot building located in
Peoria, Illinois as a permanent corporate headquarters facility. In conjunction
with the purchase of its corporate office building, the Company assumed a land
lease for the property on which the building is located. This twenty-five year
lease is renewable for five successive periods of five years with annual rents
equal to ten percent of the appraised value of the land, payable in monthly
installments, with appraisal value reviews every five years following the
origination date. The Company is responsible for costs of maintenance,
utilities, fire protection, taxes and insurance. The Building is pledged in a
financing agreement.
A description of the Company's railroad properties as of December 31, 1999 by
subsidiary follows:
A.) Fort Smith Railroad Co. (FSR): The FSR leases 18 miles of railroad from
the Union Pacific Railroad Company. A twenty year lease was signed and
operations begun on July 7, 1991. The line runs from Fort Smith to
Barling, Arkansas. The lease agreement contains numerous requirements
including maintaining existing traffic patterns, repair and replacement of
the right of way to the condition in which it was leased, and payment of
any applicable real estate taxes. The Company is entitled to a fixed rate
per carload switched from the UP as well as ninety percent of new leases
and easements and fifty percent of existing leases and easements on the
property. As long as these lease requirements are met, the Company may
continue to operate on the rail facilities without rent. The Company has
three twenty year renewal options. The FSR's track is in good condition.
B.) Alabama Railroad Co. (ALAB): The ALAB is 60 miles of operating railroad
running from Flomaton to Corduroy, Alabama. The assets and subsidiary
stock are pledged in various financing agreements. The Company considers
the track to be in good condition.
C.) Mississippi Central Railroad Co. (MSCI): The MSCI is 51.0 miles of
operating railroad running from Oxford, Mississippi to Grand Junction,
Tennessee. Approximately 45.5 miles of the track are located in
Mississippi. The assets and subsidiary stock are pledged in various
financing agreements. The Company considers the track to be in good
condition.
D.) Alabama & Florida Railway Co., Inc. (AF): The AF is 76 miles of operating
railroad running from Georgiana to Geneva, Alabama. The Company has an
option from CSX Transportation to negotiate a purchase price for the
underlying real estate and currently leases the property for a monthly
payment of $2,305. The Company has exclusive rights to the revenues
derived from the land leases and easements. In connection with the
operation of this line, the AF also leases from the Andalusia & Conecuh
Railroad Company a two mile segment of track connecting to the AF's line
in Andalusia, Alabama for a nominal fee. The Company also absorbs the cost
of all maintenance of that facility. The assets and subsidiary stock are
pledged in a financing agreement. The Company considers the line to be in
good condition.
E.) Decatur Junction Railway Co. (DT): The DT leases from Cisco Co-op Grain
Company (CISCO) a segment of track, approximately thirteen (13) miles in
length, that runs from Green's Switch (Decatur, Illinois) to Cisco,
Illinois. The DT also leases a segment of track from Central Illinois
Shippers, Incorporated (CISI), approximately seventeen (17) miles in
length, that runs from Elwin to Assumption, Illinois. The two lines are
connected via trackage rights on the Illinois Central Railroad
(approximately eight miles) through Decatur, Illinois. Both leases expire
in December 2006 and require the Company to perform normal track
maintenance and pay a nominal per car charge on traffic in excess of 1,000
car loads per year. The DT's track is considered to be in good condition,
as in recent years the owners of the line received in excess of $1,000,000
in rehabilitation grants from the Federal Railroad Administration (FRA).
F.) Vandalia Railroad Company (VRRC): The VRRC is approximately 3.45 miles of
operating railroad located in Vandalia, Illinois. The VRRC has a lease
with the City of Vandalia for the 3.45 miles of railway. This lease is
renewable for ten year periods beginning in September 2003, and the lease
of $1 is prepaid through September 2003. After September 2003, the lease
payments will be equal to $10 per loaded rail car handled in interchange.
The Company considers the track to be in good condition.
<PAGE>
G.) West Michigan Railroad Co. (WMI): The WMI is approximately 15 miles of
operating railroad running from Hartford to Paw Paw, Michigan. The track
is considered to be in good condition.
H.) Keokuk Junction Railway Co. (KJRY): The KJRY operates a common carrier
railroad line within the City of Keokuk, Iowa, from Keokuk to LaHarpe,
Illinois, and a branch line from Hamilton to Warsaw, Illinois, a total of
approximately 38 miles. The assets and subsidiary stock are pledged in
various financing agreements. The track is considered to be in good
condition.
I.) Shawnee Terminal Railway Company (STR): The STR operates 2.5 miles of
operating railroad in Cairo, Illinois. The track is considered to be in
good condition.
J.) Michigan Southern Railroad Company (MSO): The MSO is comprised of three
separate, non-contiguous lines totaling approximately 50 miles. One line
is 39 miles long extending from White Pigeon to Coldwater, Michigan, of
which approximately 30 miles of track from Sturgis to Quincy, Michigan is
owned by the Branch and St. Joseph Counties Rail Users Association (RUA).
The RUA leases that track to Michigan Southern Railroad Co., Inc., which
has contracted with MSO to operate it. On January 7, 1999, Michigan
Southern Railroad Co., Inc. gave notice to the RUA of the exercise of its
option to purchase the segment. No closing date has been set. The two
other lines are located in northern Indiana: one at Elkhart, which is
approximately 10 miles in length, and the other at Kendallville, which is
approximately 1 mile in length. All lines are considered to be in good
condition. The assets and subsidiary stock are pledged in various
financing agreements.
K.) Pioneer Industrial Railway Co. (PRY): The PRY operates a railroad line
approximately 8.5 miles long in Peoria County, Illinois. PRY assumed
operations from the Peoria & Pekin Union Railway Co. (PPU) when the PPU
assigned its lease with the owner, the Peoria, Peoria Heights & Western
Railroad (PPHW), effective February 18, 1998, expiring July 2004. PPHW is
owned by the City of Peoria, Illinois and the village of Peoria Heights,
Illinois. PRY has considerably improved the condition of the track since
assuming operation and, overall, the track is now considered to be in good
condition.
L.) The Garden City Western Railway Co., Inc. (GCW): The GCW is 40 miles of
operating railroad located in southwest Kansas originating in Garden City,
Kansas running north 26 miles to Shallow Water, KS and east 14 miles to
Wolf, KS. The assets and subsidiary stock are pledged in various financing
agreements. The Company considers the track to be in good condition.
Company management believes that all of its properties and assets are adequately
covered by insurance.
Item 3. 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.
As of the date of this Form 10-KSB, management is not aware of any incident
which is likely to result in a liability that would materially affect the
Company's consolidated financial position or results of operation.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to security holders for vote in the fourth
quarter 1999.
<PAGE>
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol "PRRR" and the Chicago Stock Exchange under
the trading symbol "PRR". The quarterly high and low sales price of the
Company's common stock for the periods below are as follows:
99-1Q 99-2Q 99-3Q 99-4Q 98-1Q 98-2Q 98-3Q 98-4Q
-----------------------------------------------------------------
High $1.75 $1.56 $1.94 $1.88 $1.75 $2.25 $1.81 $1.75
Low $1.25 $1.25 $1.25 $1.25 $1.25 $1.39 $1.19 $1.00
As of December 31, 1999, the Company had 1,811 common stockholders of record,
including brokers who hold stock for others. A cash dividend of $.0225 per
common share was paid to shareholders of record as of April 30, 1999. The total
dividend was $103,748 and was paid on June 5, 1999.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONNECTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, RELATED NOTES AND OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB.
Results of Operations
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This management's discussion and analysis of financial condition and results of
operations references the Company's two operating segments. The Company's
railroad operations consist of wholly-owned short line railroad subsidiaries
that offer similar services and the Company's equipment leasing operations
leases railcars, locomotives, and other railroad equipment to affiliated and
unaffiliated entities. All other operations are classified as corporate support
services 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, Roquette America, Inc., of approximately $2,824,000 in 1999 and
$2,567,000 in 1998.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
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The Company's net income in 1999 increased by $787,000 or 185% to $1,212,000 up
from $425,000 in 1998. Revenue increased by $343,000 or 2.5% to $13,857,000 from
$13,514,000 in 1998. Operating expense increased in 1999 by $111,000 or 1%, to
$11,615,000 from $11,504,000 in 1998. Operating income increased in 1999 by
$233,000 or 12% to $2,243,000 from $2,010,000 in 1998. In 1999 the Company
realized a pre-tax gain of approximately $1,481,000 attributable to the sale of
5.5 miles of railroad right-of-way and a loss of approximately $342,000 on the
sale of the Minnesota Central Railroad Co.
Operating income was increased in 1999 by the Company's railroad operations. The
railroad operations increased operating income by approximately $480,000 in
1999. The equipment leasing operations decreased operating income by
approximately $56,000 in 1999, primarily from increased costs associated with
relocating railcars with the intention of maximizing future utilization of the
cars and also increased depreciation expense associated with additional
equipment purchases. Corporate support services decreased operating income by
approximately $191,000 in 1999 primarily resulting from increased expenses
associated with increased payroll .
<PAGE>
Revenue:
Revenue increased in 1999 by $343,000 or 2.5%, to $13,857,000 from $13,514,000
in the prior year. The railroad operations increased revenue by approximately
$228,000 in 1999. Several operating railroad subsidiaries had increases in
revenues primarily resulting from increased loadings, and other rail-related
services. Some of the more significant increases in revenues include $471,000
from the Keokuk Junction Railway, and $248,000 from the Alabama & Florida
Railway. The Garden City Western Railway, which the Company began operating on
April 29, 1999, had revenues of $473,000 in 1999. However, as a result of the
sale of the stock of the Minnesota Central Railroad on May 6, 1999, the Company
had a decrease in revenues of $457,000 in 1999 compared to 1998. Also, as a
result of the termination of the Rochelle Railroad Co. lease in 1998, the
Company had a decrease in revenues of $440,000 in 1999 compared to 1998. The
equipment leasing operations had a $93,000 increase in revenue in 1999 from the
increased utilization of its railcars by non-affiliated railroads and also
increased revenue from locomotive leases to non-affiliated third parties.
Operating Expense:
Operating expense increased in 1999 by $111,000 or 1%, to $11,615,000 from
$11,504,000 in the prior year. The railroad operations decreased operating
expense by approximately $253,000 in 1999. As a result of the sale of the stock
of the Minnesota Central Railroad on May 6, 1999, the Company had a decrease in
operating expense of $637,000 in 1999 compared to 1998. Also, as a result of the
termination of the Rochelle Railroad Co. lease in 1998, the Company had a
decrease in operating expense of $226,000 in 1999 compared to 1998. The Garden
City Western Railway, which the Company began operating on April 29, 1999, had
operating expense of $289,000 in 1999. Several other operating railroads,
including the KJRY, ALAB, and AF had increased operating expense resulting from
increased maintenance of way expense and the FSR had increased transportation
expenses primarily related to increased car hire expense. The equipment leasing
operations increased operating expense approximately $150,000, primarily from
increased costs associated with relocating railcars with the intention of
maximizing future utilization of the cars and also increased depreciation
expense associated with additional equipment purchases. Corporate support
services increased operating expense approximately $212,000, primarily related
to increased payroll expenses related to hiring and retaining support personnel.
Maintenance of way and structures expense (MOW) increased $136,000 or 10% to
$1,487,000 from $1,351,000 in the prior year. Several railroad operations had
modest increases in MOW resulting from increased track maintenance, including
the KJRY, ALAB and AF. As a result of the sale of the stock of the Minnesota
Central Railroad on May 6, 1999, the Company had a decrease in MOW expense of
$60,000 in 1999 compared to 1998. The Garden City Western Railway, which the
Company began operating on April 29, 1999, had MOW expense of $70,000 in 1999.
Maintenance of equipment expense (MOE) decreased $70,000 or 4% to $1,551,000
from $1,621,000 in the prior year. The equipment leasing operations decreased
MOE expense approximately $32,000 as a result of decreased costs associated with
maintaining the Company's railcar fleet. The railroad operations had a decrease
in MOE expense of approximately $44,000. As a result of the sale of the stock of
the Minnesota Central Railroad on May 6, 1999, the Company had a decrease in MOE
expense of $61,000 in 1999 compared to 1998. The Garden City Western Railway,
which the Company began operating on April 29, 1999, had MOE expense of $34,000
in 1999. The Michigan Southern Railroad had a decrease in MOE expense of $68,000
in 1999, primarily related to a reduction in equipment lease expense resulting
from the purchase of certain leased assets in connection with the January 6,
1999 stock purchase by the Company.
Transportation expense (TRAN) decreased $311,000 or 9% to $3,042,000 from
$3,353,000 in the prior year. Most of the decreased TRAN expense was generated
by the railroad operations. As a result of the sale of the stock of the
Minnesota Central Railroad on May 6, 1999, the Company had a decrease in TRAN
expense of 347,000 in 1999 compared to 1998. Also, as a result of the
termination of the Rochelle Railroad Co. lease in 1998, the Company had a
decrease in TRAN expense of $96,000 in 1999 compared to 1998. The Garden City
Western Railway, which the Company began operating on April 29, 1999, had TRAN
expense of $34,000 in 1999. The Fort Smith Railroad had an increase in TRAN
expense of $102,000 in 1999 compared to the prior year primarily related to
increased carhire expense.
<PAGE>
General & administration expense (ADMIN) increased $177,000 or 5% to $3,772,000
from $3,595,000, in the prior year. The railroad operations were responsible for
a $124,000 decrease in ADMIN expense in 1999. As a result of the sale of the
stock of the Minnesota Central Railroad on May 6, 1999, the Company had a
decrease in ADMIN expense of $87,000 in 1999 compared to 1998. Also, as a result
of the termination of the Rochelle Railroad Co. lease in 1998, the Company had a
decrease in ADMIN expense of $106,000 in 1999 compared to 1998. The Garden City
Western Railway, which the Company began operating on April 29, 1999, had ADMIN
expense of $74,000 in 1999. Corporate support services increased ADMIN expense
approximately $174,000, primarily related to increased payroll expenses related
to hiring and retaining support personnel. The equipment leasing operations
increased ADMIN expense approximately $127,000, primarily from increased costs
associated with relocating railcars with the intention of maximizing future
utilization of the cars.
Depreciation and amortization expense increased $180,000 or 11%, to $1,763,000
compared to $1,583,000 in the prior year. Approximately $55,000 of the increase
is related to the growth of the Company's railcar and locomotive fleet. As a
result of the sale of the stock of the Minnesota Central Railroad on May 6,
1999, the Company had a decrease in depreciation and amortization expense of
$82,000 in 1999 compared to 1998. Also, as a result of the termination of the
Rochelle Railroad Co. lease in 1998, the Company had a decrease in depreciation
and amortization expense of $16,000 in 1999 compared to 1998. The Garden City
Western Railway, which the Company began operating on April 29, 1999, had
depreciation and amortization expense of $76,000 in 1999. The assets acquired
with the stock purchase of the Michigan Southern Railroad Co., Inc., on January
6, 1999 increased depreciation and amortization expense $130,000 in 1999.
Other Income and Expense Income Statement Line Item Discussion:
Interest income increased $2,100 to $9,600 from $7,500 in the prior year.
Interest expense increased $118,000 in 1999 to $1,416,000 compared to $1,298,000
in 1998. Interest expense was increased by $281,000 in 1999 as a result of the
financing for the MSO and GCW acquisitions. The sale of the Minnesota Central
stock resulted in a $36,000 decrease in interest expense. The equipment leasing
operations had a decrease of approximately $88,000 in interest expense as a
result of 1998 refinancing activities that took advantage of the favorable 1998
interest rate environment. A majority of the remaining decrease in interest
expense relates to refinancing activities in 1999.
In 1999, approximately $251,000 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 $197,000 of lease income in 1998, an
increase of $54,000. The Company continues to place a strong emphasis on
identifying and collecting revenues from third parties occupying Company
property.
Net gain on sale of property and equipment increased $1,435,000 in 1999 to
$1,512,000 compared to $77,000 in 1998. In 1999, $1,481,000 of income was
attributable to the sale of 5.5 miles of railroad right-of-way and approximately
$31,000 of income was attributable to the railroad equipment operations. 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 in 1998 from the sale of its former corporate headquarters in
Chillicothe, Illinois.
On May 6, 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
$342,000 on the sale of the stock and the write-off of net assets associated
with the Minnesota Central Railroad.
Other income increased $60,000 in 1999. 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.
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.
<PAGE>
Year 2000 Compliance:
The Year 2000 compliance issue existed because many computer systems and
applications were utilizing two-digit fields to designate a year. It was
believed as the century date change occurred, date-sensitive systems would
either fail or not operate properly unless the underlying programs were modified
or replaced.
To date, the Company does not believe that the Year 2000 Compliance had any
effect on its operations or its ability to process transactions. Management is
unaware of any impact on financial or operational information processing that is
likely to occur in the future attributable to the Year 2000 Compliance issue.
The Company believes all of its significant third party vendors are Year 2000
compliant and to date the Company is not aware of any vendor or unaffiliated
entity with a Year 2000 issue that would materially impact the Company's results
of operations, liquidity, or capital resources.
In 1998, the Company initiated a program to ensure that all computer
applications would be Year 2000 compliant on a timely basis. The program
included 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 expended
approximately $60,000 on its resolution of the Year 2000 compliance issue.
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 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
Co., Inc.
On May 21, 1999, the Company entered into a credit agreement with National City
Bank of Michigan/Illinois to refinance the $2.4 million debt that was
outstanding on the Citizens Bank & Trust line related to the Michigan Southern
Railroad Co., Inc. stock purchase. The National City Bank credit facility is a
fixed interest rate of 8.375% amortized over 10 years. The monthly principal and
interest payment on this note is $30,830.
On May 21, 1999, the Company 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 8.375% and reduced the interest rate on the Alabama &
Florida Railway Co. note from 9.25% to 8.375%. 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 $3.76 million.
<PAGE>
On June 18, 1999, the Company 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 used $1.5 million of this credit
facility to finance the purchase of The Garden City Western Railway, Inc. common
stock. The monthly principal and interest payment currently required to be
repaid is $18,900. As of December 31, 1999, the availability of the line has
been further reduced by a separate $810,000 financing agreement with National
City Bank used to purchase 11 locomotives. The note was due March 10, 2000 and
has been extended pending negotiations to convert the note to long-term fixed
rate financing.
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.
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. As of
December 31, 1999, a total of 67,766 warrants originally issued had been
exercised, and the Company realized $135,532 on the issuance of the warrants.
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 $3.56 to $4.40 per share. No options were exercised in 1999. 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. 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, 1999, a total of 151,759 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 prices ranging from $2.75 to $3.03, based upon
the trading price on the date of the grant, in whole or in part within 10 years
from the date of grant. As of December 31, 1999, a total of 215,000 options are
outstanding under this plan.
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.
Pioneer Railcorp guarantees certain long-term debt obligations of the Minnesota
Central Railroad Co. in connection with debt acquired as part of the initial
asset purchase by the Minnesota Central Railroad Co. in 1994. Pioneer Railcorp
remains as a guarantor on one note and could be required to repay the principal
and accrued interest on the note if it is defaulted upon. The principal balance
of the note as of December 31, 1999 was approximately $80,000.
<PAGE>
In 1999, Pioneer Railcorp's Board of Directors authorized and approved the
repurchase of up to one million shares (1,000,0000) of the Company's common
stock. In 1999, 19,000 shares were repurchased at a cost of $26,478 and as of
March 21, 2000, a total of 74,640 shares had been repurchased at a cost of
$107,570. The Company plans to continue buying back its common stock but
believes the repurchase will be on a more limited scope then previously
anticipated due to capital requirements and the trading volume of the Company's
stock.
In January 2000, the Company purchased 22 locomotives for $1,585,000. The
purchase of these locomotives was financed with short-term borrowing against the
Company's $5 million acquisition line of credit with National City Bank. The
Company plans to convert this debt to long-term fixed rate financing. The
Company plans to significantly increase its leasing of locomotives to
unaffiliated entities.
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 2000.
Balance Sheet and Cash Flow Items:
The Company generated net cash from operating activities of $3.5 million in 1999
and $2.5 million in 1998. Net cash from operating activities for 1999 was
generated from $1,212,000 of net income, $1,700,000 of depreciation and
amortization, $325,000 of deferred income taxes, an increase in income taxes
payable of $547,000, an increase in accrued expenses of $351,000, a loss on sale
of subsidiary stock of $342,000, $492,000 net cash provided by changes in
various other operating assets and liabilities, reduced by a gain on sale of
property and equipment of $1,512,000. 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.
On January 6, 1999, the Company's wholly-owned subsidiary Michigan Southern
Railroad Company (MSO) purchased all of the stock of the Michigan Southern
Railroad Co., Inc. 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 by National City Bank on May 21, 1999. The
Company had been operating the line under an operating lease since December of
1996. The Company recorded $3,470,000 of fixed assets relating to the purchase
of the stock of the Michigan Southern Railroad Co., Inc., of which $1,643,000
was allocated to track structures, $1,301,000 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.
On April 29, 1999, the Company purchased 100% of the stock of The 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 40 miles of
operating railroad. 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.
The Company recorded $2,145,000 of fixed assets relating to the purchase of The
Garden City Western Railway Inc. stock, 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 $340,000 allocated to transportation
equipment, vehicles, and railcars. In addition, as a result of the purchase, the
Company recorded goodwill in the amount of $24,000 and a deferred tax liability
of $677,000.
<PAGE>
In 1999, excluding assets recorded as a result of railroad acquisitions, the
Company purchased approximately $2.3 million of fixed assets and capital
improvements which included the purchase of approximately 150 railcars at a
total cost of $848,000. The Company capitalized approximately $17,000 of
leasehold improvements on the Fort Smith Railroad in connection with some
crossing and signal work. Capital expenditures for track totaled $107,000 in
1999. In addition, $1.1 million of transportation equipment was capitalized in
1999 which included the purchase of 14 locomotives for $967,000. Other capital
expenditures in 1999 include $172,000 for vehicles and equipment and $104,000 of
other miscellaneous capital expenditures including railcar and locomotive
betterments. The railcars purchased for $848,000 and 3 locomotives purchased for
$157,000 were financed with long-term fixed rate financing. Eleven locomotives
purchased for $810,000 were financed with a short-term note with National City
Bank and the Company plans to convert this debt to long-term fixed rate
financing. The remaining capital expenditures of approximately $485,000 were
funded through working capital.
On May 6, 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. 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.
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 $658,000 to the Alabama & Florida
Railway and a grant of $64,000 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, 1999 the Company had fully expended the $658,000 grant and
had recorded receivables of $159,000 and accounts payable to vendors of $130,000
relative to the Alabama & Florida Railway grant and had fully expended the
$64,000 grant to the Alabama Railroad.
Item 7. Financial Statements
The remainder of this page is intentionally left blank
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Financial Report
December 31, 1999
<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, 1999 and 1998, 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, 1999 and 1998, 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 11, 2000
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
ASSETS
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash ........................................................................ $ 2,356,844 $ 469,476
Accounts receivable, less allowance for doubtful
accounts 1999 $186,998; 1998 $156,282 .................................... 3,940,029 2,660,012
Inventories ................................................................. 272,278 331,841
Prepaid expenses ............................................................ 91,377 174,085
Income tax refund claims .................................................... 94,449 56,933
Deferred taxes .............................................................. 91,800 70,800
--------------------------
Total current assets ................................................... 6,846,777 3,763,147
Investments, cash value of life insurance ...................................... 131,503 112,348
Property and Equipment, net .................................................... 24,159,995 19,563,368
Intangible Assets, less accumulated amortization
1999 $239,846; 1998 $250,365 ................................................ 1,122,489 1,065,140
--------------------------
$32,260,764 $24,504,003
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable ............................................................... $ 810,000 $ 307,886
Current maturities of long-term debt ........................................ 2,390,042 1,988,041
Accounts payable ............................................................ 3,983,617 2,732,627
Accrued expenses ............................................................ 670,873 537,018
Income taxes payable ........................................................ 561,697 14,206
--------------------------
Total current liabilities .............................................. 8,416,229 5,579,778
--------------------------
Long-Term Debt, net of current maturities ...................................... 13,121,553 11,211,737
--------------------------
Deferred Taxes ................................................................. 4,505,100 2,545,900
--------------------------
Minority Interest in Subsidiaries .............................................. 1,154,000 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 1999 4,611,217 shares; 1998 4,610,597 shares ... 4,611 4,610
In treasury 1999 19,000 shares; 1998 no shares .............................. (19) --
--------------------------
Outstanding 1999 4,592,217; 1998 4,610,597 .................................. 4,592 4,610
Additional paid-in capital .................................................. 2,042,042 2,041,000
Retained earnings ........................................................... 3,017,248 1,934,978
--------------------------
5,063,882 3,980,588
--------------------------
$32,260,764 $24,504,003
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1999 and 1998
1999 1998
- --------------------------------------------------------------------------------
Railway operating revenue .......................... $13,857,384 $13,514,428
--------------------------
Operating expenses
Maintenance of way and structures ............... 1,486,960 1,351,140
Maintenance of equipment ........................ 1,550,973 1,621,232
Transportation .................................. 3,041,661 3,353,439
General and administrative ...................... 3,772,036 3,595,460
Depreciation .................................... 1,699,593 1,530,354
Amortization .................................... 63,531 52,641
--------------------------
11,614,754 11,504,266
--------------------------
Operating income ............................. 2,242,630 2,010,162
--------------------------
Other income (expenses)
Interest income ................................. 9,652 7,536
Interest expense ................................ (1,416,203) (1,297,928)
Lease income .................................... 251,278 197,087
Gain on sale of property and equipment .......... 1,512,112 77,005
Loss on sale of subsidiary ...................... (341,872) --
Other, net ...................................... 34,524 (25,250)
--------------------------
49,491 (1,041,550)
--------------------------
Income before provision for income taxes
and minority interest in preferred stock
dividends of consolidated subsidiaries ..... 2,292,121 968,612
Provision for income taxes ......................... 959,129 420,977
--------------------------
Income before minority interest in preferred
stock dividends of consolidated subsidiaries 1,332,992 547,635
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 120,515 122,870
--------------------------
Net income ................................... $ 1,212,477 $ 424,765
==========================
Basic earnings per common share .................... $ .26 $ .09
==========================
Diluted earnings per common share .................. $ .26 $ .09
==========================
See Notes to Consolidated Financial Statements.
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999 and 1998
Common Stock
----------------- Additional
Class A (voting) Paid-In Retained
Shares Amount Capital Earnings
- --------------------------------------------------------------------------------
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,
$.0225 per share ........... -- -- -- (92,205)
Net income .................... -- -- -- 424,765
------------------------------------------
Balance at December 31, 1998 ..... 4,610,597 4,610 2,041,000 1,934,978
Common stock issued upon
exercise of stock warrants . 620 1 1,042 --
Dividends on common stock,
$.0225 per share ........... -- -- -- (103,748)
Shares acquired in treasury for
retirement ................. (19,000) (19) -- (26,459)
Net income .................... -- -- -- 1,212,477
------------------------------------------
Balance at December 31, 1999 ..... 4,592,217 $4,592 $2,042,042 $3,017,248
==========================================
See Notes to Consolidated Financial Statements.
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998
<TABLE>
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income ................................................ $1,212,477 $ 424,765
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ............................ 120,515 122,870
Depreciation ........................................... 1,699,593 1,530,354
Amortization ........................................... 63,531 52,641
(Increase) in cash value life insurance ................ (19,155) (16,801)
(Gain) on sale of property and equipment ............... (1,512,112) (71,318)
Loss on sale of stock of subsidiary .................... 341,872 --
Deferred taxes ......................................... 325,360 290,800
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ............................... (1,474,931) (275,638)
Income tax refund claims .......................... (37,516) 17,669
Inventories ....................................... 59,563 19,490
Prepaid expenses .................................. 93,347 18,867
Increase (decrease) in liabilities:
Accounts payable .................................. 1,686,222 266,016
Accrued expenses .................................. 350,698 131,146
Income taxes payable .............................. 547,491 (47,543)
------------------------
Net cash provided by operating activities ......... 3,456,955 2,463,318
------------------------
Cash Flows From Investing Activities
Proceeds from sale of property and equipment .............. 1,584,455 340,303
Purchase of property and equipment ........................ (2,337,041) (1,482,722)
Intangible assets ......................................... (18,818) (576)
Acquisition of subsidiaries, net of cash acquired ......... (3,893,896) --
Proceeds from sale of subsidiary, net of cash distributed . (43,773) --
------------------------
Net cash (used in) investing activities ........... (4,709,073) (1,142,995)
------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings ....................... 3,463,323 3,272,648
Proceeds from long-term borrowings ........................ 5,021,590 5,898,636
Principal payments on short-term borrowings ............... (2,961,209) (3,214,796)
Principal payments on long-term borrowings ................ (2,102,538) (7,000,488)
Proceeds from common stock issued upon exercise of
stock warrants and options ............................. 1,042 800
Common stock dividend payments ............................ (103,748) (92,205)
Preferred stock dividend payments to minority interest .... (120,515) (122,870)
Purchase of common stock for the treasury ................. (26,459) --
Repurchase of minority interest ........................... (32,000) --
------------------------
Net cash provided by (used in) financing activities 3,139,486 (1,258,275)
------------------------
</TABLE>
<PAGE>
Pioneer Railcorp and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1999 and 1998
<TABLE>
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net increase in cash ............................. $1,887,368 $ 62,048
Cash, beginning of year ..................................... 469,476 407,428
-----------------------
Cash, end of year ........................................... $2,356,844 $ 469,476
=======================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest .............................................. $1,405,846 $1,346,232
=======================
Income taxes (net of refunds 1999 $3,403; 1998 $21,783) $ 123,794 $ 160,051
=======================
Supplemental Disclosures of Noncash Investing Information
Railroad acquisitions:
Fair value of assets acquired, principally property and
equipment ........................................... $5,745,331 $ --
Less liabilities assumed, principally deferred income
taxes ............................................... 1,845,331 --
-----------------------
Cash paid ........................................... 3,900,000 --
Less cash acquired .................................... 6,104 --
-----------------------
Net cash paid for stock acquisitions ............. $3,893,896 $ --
=======================
Sale of stock of railroad subsidiary:
Assets disposed of including cash ..................... $1,877,449 $ --
Less cash transferred to buyer ........................ 43,774 --
-----------------------
Assets disposed of, net of cash ..................... 1,833,675 --
Less liabilities forgiven ............................. 1,491,802 --
-----------------------
Loss before proceeds from sale of stock ............. 341,873 --
Cash proceeds from sale of stock ...................... 1 --
-----------------------
Net loss on sale of stock of subsidiary .......... $ 341,872 $ --
=======================
Increase in cash value over premiums paid ................ $ 19,155 $ 16,801
=======================
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, Kansas, Illinois, Indiana, Iowa, Michigan, Mississippi, and Tennessee.
The Company's subsidiaries include the following:
West Michigan Railroad Co. Keokuk Junction Railway Co. and its
Vandalia Railroad Company subsidiary, Keokuk Union Depot Company
Decatur Junction Railway Co. Michigan Southern Railroad Company and
Alabama & Florida Railway Co., Inc. its subsidiary, Michigan Southern
Mississippi Central Railroad Co. Railroad Co., Inc.
Alabama Railroad Co. The Garden City Western Railway, Inc.
Fort Smith Railroad Co. Shawnee Terminal Railway Company
Pioneer Railroad Equipment Co., Ltd. Pioneer Resources, Inc.
Pioneer Air, Inc. Pioneer Industrial Railway Co.
Pioneer Railroad Services, Inc. Midwest Terminal Railway Company
(inactive)
Pioneer Railroad Equipment Co., Ltd. holds title to a majority of the Company's
operating equipment, and Pioneer Air, Inc. owns an airplane utilized by the
Company for business purposes. Pioneer Railroad Services, Inc. provides
management, administrative and agency services to the Company's subsidiary
railroads. Pioneer Resources, Inc. holds title to certain real estate adjacent
to one of the Company's railroads. All other subsidiaries are short-line common
carrier railroad operations.
Significant accounting policies:
Principles of consolidation: The consolidated financial statements include the
accounts of Pioneer Railcorp and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and cash equivalents: For the purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with maturity of three
months or less to be cash equivalents. There are no cash equivalents as of
December 31, 1999 and 1998. 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.
Capital projects primarily represent transportation equipment or roadbed
modification projects which have either been purchased and the Company is in the
process of modifying and upgrading prior to placing the assets into service, or
roadbed modification projects which are not yet complete. As the assets have not
yet been placed into service, the Company does not depreciate these assets.
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, 1999 and 1998.
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, 1999 and 1998.
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 grants: 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, 1999, the
Company had fully expended the $657,757 grant and had recorded receivables of
$159,000 and accounts payable to vendors of $130,000. The Company had fully
expended the $64,340 grant as of December 31, 1998.
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,
-----------------------------
1999 1998
-----------------------------
Land ....................................... $ 2,979,438 $ 1,433,888
Roadbed .................................... 9,135,967 7,806,216
Transportation equipment ................... 2,815,931 2,428,275
Railcars ................................... 11,730,121 10,746,046
Buildings .................................. 1,397,636 1,058,052
Machinery and equipment .................... 1,420,363 1,005,897
Office equipment ........................... 441,110 429,805
Leasehold improvements ..................... 210,247 204,886
Capital projects ........................... 1,271,914 447,463
-----------------------------
31,402,727 25,560,528
Less accumulated depreciation .............. 7,242,732 5,997,160
-----------------------------
$24,159,995 $19,563,368
=============================
Note 3. Pledged Assets, Notes Payable, and Long-Term Debt
The Company has a $5 million master credit facility with National City Bank,
Peoria, Illinois, to provide a revolving acquisition line of credit. This
facility is collateralized by commercial pledges and security agreements of
various subsidiaries, certain transportation equipment, and other tangible and
intangible assets. The interest rate is adjustable at 1.0% over the bank's prime
rate (9.5% at December 31, 1999). Amounts drawn on the master line are
characterized as separate notes that must generally be repaid monthly over
periods of up to ten years. The Company has two notes outstanding under this
line of credit as of December 31, 1999, of $1,453,263 and $810,000,
respectively. The $1,453,263 note is classified as long-term and due June 2001,
while the $810,000 note payable which is due March 10, 2000, is classified as
current.
The Company has a $100,000 line of credit with Citizens Bank and Trust Company,
Chillicothe, Missouri, that expires July 2000, 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, 1999 and 1998.
The Company had a $600,000 line of credit with National City Bank, Peoria,
Illinois, that expired July 1999, bearing interest at prime, as published in The
Wall Street Journal, plus 1%, and was collateralized by accounts receivable and
general intangibles of certain subsidiaries. The Company had no outstanding
balances under this line of credit as of December 31, 1999 and $225,738
outstanding as of December 31, 1998.
The Company had various unsecured notes payable totaling $82,148 as of December
31, 1998, for the financing of insurance premiums. This note was due in monthly
installments of $20,537, including interest at 7.95%, with final installment due
May 1999.
<PAGE>
Long-term debt at December 31, 1999 and 1998, consists of the following:
<TABLE>
1999 1998
-----------------------
<S> <C> <C>
Note payable under master line of credit agreement with National City Bank, due
in monthly installments of $18,900 including interest at 1.0% over the bank's
prime rate (9.5% at December 31, 1999), final 2001, collateralized by real
estate, rail facilities, and other assets of Garden City & Western Railway,
Inc. ......................................................................... $ 1,453,263 $ --
Note payable, National City Bank, due in monthly installments of
$30,830 including interest at 8.375%, final installment due May
2004, collateralized by the assets of the Michigan Southern
Railroad Company and Michigan Southern Railroad Company, Inc. ................ 2,406,715 --
Mortgage payable, National City Bank, due in monthly installments
of $3,775 including interest at 8.5%. The interest rate is adjustable
every five years and is presently based on the Bank's base rate as
of October 31, 1999. Final installment due June 2008, collateralized
by Pioneer Railcorp's corporate headquarters building ........................ 383,958 395,606
Mortgage payable, National City Bank, due in monthly installments
of $18,700, including interest at 8.375% through May 2004 when the rate will
be adjusted, final installment due January 2007, collateralized by real
estate, rail facilities, and other assets of Alabama & Florida Railway Co.,
Inc. ......................................................................... 1,170,613 1,293,713
Notes payable, Wells Fargo Equipment, due in monthly installments
from $3,070 to $24,018, including interest ranging from 7.26% to 9.00%, final
installments due June 2004 to May 2006, collateralized
by railcars .................................................................. 2,146,401 1,380,863
Note payable, Keycorp, due in monthly installments of $22,744,
including interest at 8.86%, final installment due December 2004,
collateralized by railcars ................................................... 916,105 1,098,977
Notes payable, Bank of America, due in monthly installments of
$23,305, including interest at 8.75%, final installment due December
2002, collateralized by railcars ............................................ 736,060 940,998
Various notes payable, due in monthly installments from $417 to $573,
including interest ranging from 9.50% to 10.25%, final installments due from
July 2000 to December 2001, collateralized by vehicles
and railcars ................................................................. 34,889 62,468
Note payable, National City Bank, due in monthly installments of
$37,235, including interest at 8.375% through May 2004 when the rate will be
adjusted, final installment due December 2008, collateralized by Keokuk
Junction Railway Co. stock and assets ........................................ 2,591,359 2,813,177
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 ............................... 547,586 641,325
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 .................... 233,817 268,885
Note payable, Fifth Third Leasing, due in monthly installments of
$39,286, including interest at 8.29%, final installment due May
2003, collateralized by locomotives, boxcars, covered hoppers,
and gondolas ................................................................. 1,398,524 1,738,554
Notes payable, United Capital, due in monthly installments of $32,763,
and $12,028 including interest at 8.38% and 7.72%, final install-
ments due May 2002 and May 2004, collateralized by railcars .................. 1,454,383 1,856,393
Noninterest-bearing note payable, State of Mississippi, due in
annual installments of $3,792, final installment due February 2009,
collateralized by track structure ............................................ 37,922 45,465
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
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, debt
eliminated in 1999 as part of sale of subsidiary (see Note 16) ............... -- 128,675
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, debt eliminated in
1999 as part of sale of subsidiary (see Note 16) ............................. -- 152,235
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,
debt eliminated in 1999 as part of sale of subsidiary
(see Note 16) ................................................................ -- 375,845
------------------------
15,511,595 13,199,778
Less current portion ............................................................ 2,390,042 1,988,041
------------------------
$13,121,553 $11,211,737
========================
</TABLE>
<PAGE>
Aggregate maturities required on long-term debt as of December 31, 1999, are due
in future years as follows:
Years ending December 31: Amount
- --------------------------------------------------------------------------------
2000 $ 2,390,042
2001 3,798,117
2002 2,554,459
2003 1,904,016
2004 2,786,267
Thereafter 2,078,694
-----------
$15,511,595
===========
Note 4. Income Tax Matters
The Company and all but two of its subsidiaries file a consolidated federal
income tax return. Those two subsidiaries file separate federal income tax
returns.
The provision for income taxes charged to operations for the years ended
December 31, 1999 and 1998, was as follows:
1999 1998
-------------------
Current:
Federal .......................... $549,067 $101,335
State ............................ 84,702 28,842
-------------------
633,769 130,177
-------------------
Deferred
Federal .......................... 296,660 231,100
State ............................ 28,700 59,700
-------------------
325,360 290,800
-------------------
$959,129 $420,977
===================
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, 1999 and 1998, due to the following:
1999 1998
------------
Computed "expected" tax expense .................................. 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit ................ 3.3 6.0
Goodwill amortization ......................................... .7 1.9
Other ......................................................... 2.8 .5
------------
41.8% 43.4%
============
Deferred tax assets and liabilities consist of the following components as of
December 31, 1999 and 1998:
1999 1998
-------------------------
Deferred tax assets:
AMT credit carryforwards ...................... $ 869,800 $ 463,400
NOL carryforwards ............................. 391,100 1,070,800
Deferred compensation ......................... 44,600 35,200
Other ......................................... 91,800 70,800
-------------------------
1,397,300 1,640,200
Deferred tax liabilities:
Property and equipment ........................ (5,810,600) (4,115,300)
-------------------------
$(4,413,300) $(2,475,100)
=========================
<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,
1999 and 1998, as follows:
1999 1998
----------------------------
Current deferred tax assets .................. $ 91,800 $ 70,800
Net noncurrent deferred tax liabilities ...... (4,505,100) (2,545,900)
----------------------------
Net deferred tax liability ................... $(4,413,300) $(2,475,100)
============================
The Company and its subsidiaries have Alternative Minimum Tax (AMT) credit
carryforwards of approximately $870,000 and $463,000 at December 31, 1999 and
1998, 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 $922,000 at December 31, 1999, which can be used to offset future
taxable income of those subsidiaries. Net operating loss carryforwards expire as
follows:
Years ending December 31: Amount
- -----------------------------------------------------------------------------
2011 $ 215,000
2012 522,000
2018 185,000
----------
$ 922,000
==========
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. Company
contributions, at the rate of 50% of the first 8% of each employee's
contributions, were made to the plan through September 30, 1999, at which time
management elected to discontinue making future Company contributions. Expenses
under the plan were $38,000 and $43,000 for the years ended December 31, 1999
and 1998, respectively.
Note 6. Deferred Compensation Agreements
The Company has deferred compensation agreements with two former 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 Company has
recorded the $116,000 and $92,000 present value of the estimated liability under
the agreements as of December 31, 1999 and 1998, respectively, using a discount
rate of 7%. Deferred compensation expense totaled $24,000 and $14,000 for the
years ended December 31, 1999 and 1998, respectively.
Note 7. Stock Options and Warrants
The Company's accounting for stock options and warrants 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. Alternatively, SFAS 123 employs fair
value based measurement and generally results in the recognition of compensation
for all awards of stock to employees. SFAS 123 does not require an entity to
adopt those provisions, but, rather, permits continued application of APB 25.
While the Company has elected not to adopt the recognition and measurement
provisions of SFAS 123, it is required to make certain disclosures pursuant to
SFAS 123.
<PAGE>
On April 12, 1994, the Board of Directors approved a stock option plan (the 1994
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 $3.56 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. As of December 31, 1999, 151,759
options are outstanding and exercisable under the 1994 plan. The options expire
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. 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. During 1999, the remaining
20,000 options held by an outside director pursuant to the April 12, 1994, stock
plan were forfeited.
On May 28, 1996, the Board of Directors approved a stock option plan (the 1996
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 ranges from $2.75 to $3.03,
based upon the trading price on the date of the grant. As of December 31, 1999,
215,000 options are still outstanding under the 1996 plan.
Other pertinent information related to the plans is as follows:
1999 1998
------------------- ------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------------------------
Outstanding at beginning of year 436,759 $ 3.13 973,271 $ 2.36
Forfeited ...................... (70,000) 2.68 (95,000) 2.65
Repurchased .................... -- -- (441,512) 1.54
Exercised ...................... -- -- -- --
----------------------------------------
Outstanding at end of year ..... 366,759 $ 3.22 436,759 $ 3.13
========================================
Exercisable at end of year ..... 151,759 194,759
======= =======
A further summary about stock options outstanding as of December 31, 1999, is as
follows:
Options Options
Outstanding Exercisable
------------------------------------- ----------------------
Weighted-
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------
$2.75 - 3.56 305,000 4.73 $3.06 90,000 $3.56
$3.92 - 4.40 61,759 .59 4.01 61,759 4.01
------- -------
366,759 151,759
======= =======
<PAGE>
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:
1999 1998
-----------------------
Net income:
As reported ............................ $1,212,477 $ 424,765
Proforma ............................... $1,150,477 $ 344,765
Basic earnings per common share:
As reported ............................ $ .26 $ .09
Proforma ............................... $ .25 $ .08
Diluted earnings per common share:
As reported ............................ $ .26 $ .09
Proforma ............................... $ .25 $ .08
On June 24, 1995, the Company issued 4,198,284 warrants to stockholders of
record as a dividend. 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 4,130,420 and 4,131,040 warrants
outstanding as of December 31, 1999 and 1998, respectively.
Note 8. Lease Commitments and Total Rental Expense
The Company has entered into seven lease agreements covering certain of its
railroad properties. For railroad 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, generally ranging from $10 to $15 on all cars over a range of 300
to 1,000 cars per year on each segment. The leases expire between September 2001
and July 2011 and three of these railroads have ten to twenty year renewal
options.
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.
The total approximate minimum rental commitment as of December 31, 1999,
required under noncancelable leases, and excluding executory costs and per car
rentals, is due in future years as follows:
Years Ending December 31: Amount
- ------------------------------------------------------------------------------
2000 $ 46,000
2001 42,000
2002 42,000
2003 42,000
2004 42,000
Thereafter 233,000
--------
$447,000
========
The total rental expense under the leases was approximately $154,000 and
$347,000 for the years ended December 31, 1999 and 1998, respectively.
Note 9. Major Customer
Revenue earned from a major railroad segment customer amounted to approximately
$2,824,000 and $2,567,000 during the years ended December 31, 1999 and 1998,
respectively. Accounts receivable as of December 31, 1999 and 1998, include
approximately $529,000 and $381,000, 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.
<PAGE>
Following is a summary of the minority interest in subsidiaries as of December
31, 1999 and 1998:
<TABLE>
1999 1998
-----------------------
<S> <C> <C>
Preferred stock of Alabama Railroad Co. ............................................
Par value - $1,000 per share
Authorized - 700 shares
Issued and outstanding - 409 and 424 shares (cumulative 12% dividend;
callable at Company' option at 150% of face value) at December 31, 1999 and
1998, respectively ........................................................... $ 409,000 $ 424,000
Preferred stock of Alabama & Florida Railway Co., Inc.
Par value - $1,000 per share
Authorized - 500 shares
Issued and outstanding - 406 and 421 shares (cumulative 9% dividend; callable
at Company's option after June 22, 1995, at 150% of face value) at
December 31, 1999 and 1998, respectively ..................................... 406,000 421,000
Preferred stock of Mississippi Central Railroad Co.
Par value - $1,000 per share
Authorized - 1,000 shares
Issued and outstanding - 339 and 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) at December 31, 1999
and 1998, respectively ....................................................... 339,000 341,000
-----------------------
$1,154,000 $1,186,000
=======================
</TABLE>
Note 11. Commitments and Contingencies
Commitments: In December 1999, the Company entered into a two-year extension of
an existing executive employment contract with the Company's president. The
two-year extension provides for a base salary with an annual inflation
adjustment based upon the Consumer Price Index. Should the Company acquire or
form additional railroads, the base salary will increase $25,000 for the
acquisition of railroads of 125 miles or less, and $50,000 for railroads over
125 miles. Should the president's employment be terminated, the contract
requires a lump sum payment equal to three years of his then current salary.
Should the president retire, he is entitled to a lump sum payment of one year's
salary.
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 for the repair
and rehabilitation of weather damaged railroad track and related structures the
Company owns in Alabama. The Company's obligations under the two Alabama grants
expire five years after the completion of the repairs. In the unlikely event the
Company should discontinue using the underlying track prior to the expiration of
the aforementioned commitment period, the Company is contingently liable to
repay to the Federal Railroad Administration the full value of awarded funds
pursuant to the Alabama grants.
The Company is contingently liable as a guarantor on an outstanding loan payable
to the U.S. Small Business Administration. The $75,000 loan is the primary
responsibility of the Minnesota Central Railroad Co. (Minnesota Central), which
the Company sold in 1999; however, the Company had guaranteed the debt prior to
the sale of the Minnesota Central.
<PAGE>
Note 12. Earnings Per Share
Following is information about the computation of the earnings per share (EPS)
data for the years ended December 31, 1999 and 1998:
<TABLE>
For the Year Ended December 31, 1999
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders .... $1,212,477 4,610,439 $ .26
=======
Effect of Dilutive Securities
Employee stock options ..................... -- --
------------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ................ $1,212,477 4,610,439 $ .26
===================================
For the Year Ended December 31, 1998
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------
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
==================================
</TABLE>
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.
Note 13. Common Stock Repurchase
During the year ended December 31, 1999, the Company's Board of Directors
approved a plan to begin repurchasing shares of the Company's common stock from
stockholders. As of December 31, 1999, the Company had repurchased 19,000 shares
of common stock at an average price of approximately $1.39 per share, for a
total of $26,478.
The common stock repurchased is accounted for as treasury stock in the Company's
1999 consolidated balance sheet and statement of stockholders' equity. As such,
treasury shares held reduce the number of shares of common stock outstanding as
of December 31, 1999, and the value of the treasury stock reduces stockholders'
equity. The $26,459 excess of the purchase price of the treasury stock over the
par value of the stock was charged to retained earnings.
<PAGE>
Note 14. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
The carrying value of cash, cash value of life insurance, notes payable,
and variable rate long-term debt approximates fair value.
The remaining carrying value of fixed rate long-term debt collectively
approximates fair value based upon the similarity of interest rates
negotiated on debt instruments in 1999 and 1998 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 15. 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's two reportable segments consist of railroad operations and equipment
leasing operations. All other operations are classified as corporate support
services 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,
----------------------------
1999 1998
--------------------------
<S> <C> <C>
Segment Assets
Railroad operations ...................................... $18,394,208 $13,626,948
Equipment leasing operations ............................. 11,558,068 10,055,047
Corporate support services ............................... 2,308,488 822,008
--------------------------
Total consolidated segment assets ................... $32,260,764 $24,504,003
==========================
Expenditures for additions to long-lived assets
Railroad operations
Purchases ............................................. $ 128,005 $ 467,199
Acquired through purchase of subsidiaries ............. 5,614,510 --
Equipment leasing operations ............................. 2,176,434 932,336
Corporate support services ............................... 32,602 83,187
--------------------------
Total expenditures for additions to long-lived assets $ 7,951,551 $ 1,482,722
==========================
Revenues
Revenues from external customers
Railroad operations ...................................... $11,146,579 $10,918,188
Equipment leasing operations ............................. 2,678,305 2,585,072
Corporate support services ............................... 32,500 11,168
--------------------------
Total revenues from external customers .............. 13,857,384 13,514,428
--------------------------
Intersegment revenues
Railroad operations ...................................... $ -- $ --
Equipment leasing operations ............................. 392,700 427,100
Corporate support services ............................... 5,933,463 5,156,045
--------------------------
Total intersegment revenues ......................... 6,326,163 5,583,145
--------------------------
Total revenue ....................................... $20,183,547 $19,097,573
Reconciling items
Intersegment revenues .................................... (6,326,163) (5,583,145)
--------------------------
Total consolidated revenues ......................... $13,857,384 $13,514,428
==========================
</TABLE>
<PAGE>
<TABLE>
For Year Ended December 31,
---------------------------
1999 1998
-----------------------
<S> <C> <C>
Expenses
Interest expense
Railroad operations .......................................... $ 120,143 $ 190,096
Equipment leasing operations ................................. 659,359 747,577
Corporate support services ................................... 636,701 360,255
-----------------------
Total consolidated interest expense ..................... $1,416,203 $1,297,928
=======================
Depreciation and amortization expense
Railroad operations .......................................... $ 701,634 $ 581,604
Equipment leasing operations ................................. 972,868 918,307
Corporate support services ................................... 88,622 83,084
-----------------------
Total consolidated depreciation and amortization expense $1,763,124 $1,582,995
=======================
Segment profit
Railroad operations .......................................... $4,559,919 $4,079,300
Equipment leasing operations ................................. 1,271,247 1,362,173
Corporate support services ................................... 2,737,627 2,151,834
-----------------------
Total segment profit .................................... 8,568,793 7,593,307
Reconciling items
Intersegment revenues ........................................ (6,326,163) (5,583,145)
Income taxes ................................................. (959,129) (420,977)
Minority interest in preferred stock dividends of subsidiaries (120,515) (122,870)
Other income (expense), net .................................. 49,491 (1,041,550)
-----------------------
Total consolidated net income ........................... $1,212,477 $ 424,765
=======================
</TABLE>
Note 16. Purchases and Disposition of Railroad Facilities
Effective January 6, 1999, the Company, through its wholly-owned subsidiary,
Michigan Southern Railroad Company, exercised its option to purchase the common
stock of Michigan Southern Railroad Co., Inc., which it had previously operated
pursuant to a lease, for $2,400,000 cash in a transaction accounted for using
the purchase method. Accordingly, the operating results of the acquired company
have been included in the consolidated statement of income since the date of
acquisition.
The excess of the aggregate purchase price over the fair market value of the net
assets acquired of $90,000 is being amortized over 40 years using the
straight-line method. The Company financed this acquisition with $2,400,000 of
long-term borrowings.
On April 29, 1999, the Company acquired the common stock of the Garden City
Western Railway, Inc. for $1,500,000 cash in a transaction accounted for using
the purchase method. The operating results of the acquired company have been
included in the consolidated statement of income since the date of acquisition.
The excess of the aggregate purchase price over the fair market value of the net
assets acquired of $24,077 is being amortized over 40 years using the
straight-line method. The Company financed this acquisition with $1,500,000 of
long-term borrowings.
<PAGE>
Unaudited pro forma consolidated results of operations for the years ended
December 31, 1999 and 1998, as though Michigan Southern Railroad Co., Inc. and
The Garden City Western Railway, Inc. had been acquired as of January 1, 1998,
follows:
1999 1998
-------------------------------
Railway operating revenue .............. $14,042,350 $14,229,399
Net income ............................. 1,191,351 513,577
Earnings per common share .............. .26 .11
The above amounts reflect adjustments for amortization of goodwill, additional
depreciation on revalued purchased assets, and interest on borrowed funds.
Effective May 6, 1999, the Company entered into an agreement whereby it sold the
common stock of the Minnesota Central Railroad Co. for $1. The subsidiary had
historically generated net losses, thus management decided to dispose of it in
1999. The Company recognized a loss of $341,872 associated with this sale.
Note 17. Subsequent Event
In January 2000, the Company purchased 22 locomotives at a cost of $1,585,000.
The purchase of these locomotives was financed with borrowings of $1,585,000
against the $5,000,000 master line of credit with National City Bank. The
long-term borrowings are collateralized by the locomotives.
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting Financial
Disclosure
None.
PART III
Item 9. Directors and Executive Officers of the Registrant
Set forth below are the names and ages of all the directors and executive
officers of the Registrant and the positions and offices held by such persons as
of December 31, 1999.
Name (Age) Position
- --------------------- -------------------------------
Guy L. Brenkman (52) Director (Chairman) & President
Orvel L. Cox (57) Director
Timothy F. Shea (51) Director
John S. Fulton (67) Director
J. Michael Carr (35) Director & Treasurer
Daniel A. LaKemper (42) Secretary
Scott Isonhart (33) Assistant Secretary
All of the above Directors and Officers were elected at the Annual Meeting of
the Stockholders (and the board meeting which followed) on June 15, 1999 to
serve until the next annual meeting. There is no family relationship between any
officer or director.
Information about Directors and Executive Officers
- --------------------------------------------------
Mr. Brenkman, Chairman of the Board of Directors and President of Pioneer
Railcorp and its subsidiaries, was the incorporator of the Company and has been
a member of the Board of Directors and President of the Company since its
formation. Mr. Brenkman's past business experience includes real estate sales
and management, securities sales, and seven years of operational railroad
industry experience before managing the day to day railroad operations of
Pioneer in 1988. Mr. Brenkman, acting as agent of the Issuer conducted the
public offering of Pioneer Railcorp, which raised its initial capital, and
secondary capital for expansions.
Mr. Cox, Director, also serves as same for each of the Company's subsidiaries
and Vice President of Mechanical for same. Mr. Cox has 40 years of active
railroading experience with 31 of those years working for Class I railroads. Mr.
Cox has been a director and officer of Pioneer Railcorp since its inception and
has been involved in all phases of the development and growth of the Company.
Timothy F. Shea, Director, was elected to the board in 1997. Mr Shea owns RE/MAX
Property Management in Peoria, Illinois, and has been a real estate property
manager with RE/MAX since 1984. Mr. Shea has a BS-Business Management from
Bradley University, Peoria, Illinois.
Mr. Fulton, Director, was elected to the Board in 1993. Mr. Fulton has 17 years
experience in the real estate business concentrating in retail sales, real
estate development and appraising. Mr. Fulton's previous positions include
industrial appraising (6 years) with Cole, Layer Trumble of Dayton, Ohio, and 5
years with Pepsi-Cola. Mr. Fulton holds a BS degree in Public Administration
from Bradley University in Peoria, Illinois.
Mr. Carr, Treasurer, also serves as Treasurer for each of the Company's
subsidiaries and Chief Financial Officer for same. Mr. Carr has been employed by
the Company since March 1993. Before joining the Company, Mr. Carr worked in
public accounting and banking for seven years, most recently as Controller for
United Federal Bank. Mr. Carr is a CPA and holds a BS-Accounting from Illinois
State University, Normal, Illinois.
Mr. LaKemper, Secretary, also serves as same for each of the Company's
subsidiaries. Mr. LaKemper is the Company's General Counsel and serves as same
for each of the Company's subsidiaries. Mr. LaKemper has been employed by the
Company since May 1992. Before joining the Company, Mr. LaKemper practiced law
since 1982 working in private practice and, most recently, as General Counsel
for a manufacturing concern. Mr. LaKemper holds a Juris Doctorate from Creighton
University School of Law in Omaha, Nebraska and a BS-History from Bradley
University in Peoria, Illinois.
<PAGE>
Mr. Isonhart, Assistant Secretary, also serves as same for the Company's
subsidiaries. Mr. Isonhart has been employed in the finance department of the
Company since May 1993 and has a BS-Accounting from Bradley University in
Peoria, Illinois.
Item 10. Executive Compensation
Summary Compensation Table
- ------------------------------------
Annual
Compensation Long Term Compensation
--------------- -------------------------
Restricted
Name & Stock Other
Position Year Salary Award Options/SARs Compensation
- ---------- ----- -------- ----------- ------------ ------------
Guy L. Brenkman, CEO 1999 $538,297 ---- ---- $5,000 (a)
1998 $486,494 ---- ---- $5,000 (a)
1997 $419,695 ---- ---- $4,750 (a)
(a) - Registrant's contribution to the Company's defined contribution plan.
Option/SAR Grants in Last Fiscal Year
- ----------------------------------------------
None
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
- ----------------------------------------
<TABLE>
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
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guy Brenkman-CEO 0 0 24,909/80,000 $0/$0
</TABLE>
In December 1993, the Company entered into a five-year executive employment
contract with the Company's president, which was extended through December 2001
by the Board of Directors. The agreement provides for a base salary with annual
inflation adjustments based upon the Consumer Price Index. The original
agreement provided for three weeks paid vacation in 1993 to be increased by 1
week each year thereafter. The president at his election can be paid for any
unused vacation during the year. 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, 2000, the president's base salary was $464,986. 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
The Garden City Western Railway Co. 05/01/99 05/01/99
<PAGE>
Directors of the Registrant each were compensated $2,000 in 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of March 21, 2000, the beneficial
ownership of all directors and officers of the Company as a group. These figures
include shares of Common Stock that the executive officers have the right to
acquire within 60 days of March 21, 2000 pursuant to the exercise of stock
options and warrants.
Title of Class: Common Stock ($.001 par value)
Beneficial Percent
Name Of Beneficial Owner Ownership Of Class
----------------------------------------------------------------
Guy L. Brenkman (2) 3,487,299 39.21%
Orvel L. Cox (3) 198,549 2.23%
Daniel A. LaKemper (4) 98,314 1.11%
John S. Fulton (5) 23,400 .26%
J. Michael Carr (6) 53,050 .60%
Scott Isonhart (7) 11,100 .12%
Tim Shea 5,000 .06%
--------- ---------
Directors and Executive
Officers as a Group: 3,876,712 43.59%(1)
FOOTNOTES:
(1) Based on 8,893,396 shares of Common Stock and Equivalents outstanding as of
March 21, 2000.
(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, 18,890 shares are held by Mr. Brenkman under the Pioneer Railcorp
Retirement Savings Plan and 2,340 shares are held by Mr. Brenkman's wife,
in which he disclaims beneficial ownership.
(3) Of the total number of shares shown as owned by Mr. Cox, 30,000 shares
represent the number of shares Mr. Cox has the right to acquire within 60
days upon the exercise of options granted under the Company's 1994 Stock
Option Plan, and 101,770 shares represent the number of shares Mr. Cox has
the right to acquire within 60 days through the exercise of Warrants. In
addition, 1,909 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, 964 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, 2,000 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, 52,000 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. Isonhart, 11,000 shares
represent the number of shares Mr. Isonhart 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. Isonhart has
the right to acquire within 60 days through the exercise of Warrants.
<PAGE>
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 representations of its directors and executive officers, the Company
believes that during the years ended December 31, 1999 and 1998 all Section
16(a) filing requirements were satisfied.
Item 13. Exhibits and Reports on Form 8-K
Exhibit # 3(I) - Articles of Incorporation of the Company (incorporated by
reference to Exhibit 1 of the Company's registration statement of Form S-3 filed
July 7, 1995, amended August 30, 1995, September 20, 1995 and September 25,
1995).
Exhibit # 3(ii) - Bylaws of the Company (incorporated by reference to Exhibit #2
of the Company's registration statement on Form S-8 filed January 31, 1996).
Exhibit # 10.1 - 1994 Stock Option Plan for Pioneer Railcorp (incorporated by
reference to Exhibit #3 of the Company's registration statement on Form S-8
filed January 31, 1996).
Exhibit # 10.2 - Form of incentive stock option under the 1994 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to Exhibit #4 of the Company's
registration statement on Form S-8 filed January 31, 1996).
Exhibit # 10.3 - Form of option agreement for non-employee Directors under the
1994 Stock Option Plan for Pioneer Railcorp (incorporated by reference to
Exhibit #5 of the Company's registration statement on Form S-8 filed January 31,
1996).
Exhibit # 10.4 - Executive Contract (incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1994, filed March 31, 1995, amended
August 31, 1995 and September 20, 1995).
Exhibit # 10.5 - 1996 Stock Option Plan for Pioneer Railcorp (incorporated by
reference to the Company's Form 10-KSB for the year ended December 31, 1996,
filed March 31, 1997).
Exhibit # 10.6 - Form of incentive stock option under the 1996 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to the Company's Form 10-KSB for
the year ended December 31, 1996, filed March 31, 1997).
Exhibit # 10.7 - Form of option agreement for non-employee Directors under the
1996 Stock Option Plan for Pioneer Railcorp (incorporated by reference to the
Company's Form 10-KSB for the year ended December 31, 1996, filed March 31,
1997).
Exhibit # 21 - Subsidiaries of the registrant.
Exhibit # 27 - Financial Data Schedule.
No reports were filed on Form 8-K during the fourth quarter 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PIONEER RAILCORP
(Registrant)
By: /s/ Guy L. Brenkman
------------------------------------
Guy L. Brenkman, President,
Chief Executive Officer and Director
Dated: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s J. Michael Carr
------------------------------------
J. Michael Carr, Treasurer,
Chief Financial Officer and Director
Dated: March 24, 2000
By: /s/ Orvel Cox
------------------------------------
Orvel Cox, Director
Dated: March 24, 2000
By: /s/ John Fulton
------------------------------------
John Fulton, Director
Dated: March 24, 2000
Exhibit 21
Pioneer Railcorp Subsidiaries:
Alabama & Florida Railway Co., Inc.
Alabama Railroad Co.
Decatur Junction Railway Co.
Fort Smith Railroad Co.
Keokuk Junction Railway Co.
Michigan Southern Railroad Company.
Midwest Terminal Railway Company
Mississippi Central Railroad Co.
Pioneer Air, Inc.
Pioneer Industrial Railway Co.
Pioneer Railroad Equipment Co., Ltd.
Pioneer Railroad Services, Inc.
Pioneer Resources, Inc.
Shawnee Terminal Railway Company
The Garden City Western Railway, Inc
Vandalia Railroad Company
West Michigan Railroad Co.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's December 31, 1999 Form 10-KSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,356,844
<SECURITIES> 0
<RECEIVABLES> 4,127,027
<ALLOWANCES> 186,998
<INVENTORY> 272,278
<CURRENT-ASSETS> 6,846,777
<PP&E> 31,402,727
<DEPRECIATION> 7,242,732
<TOTAL-ASSETS> 32,260,764
<CURRENT-LIABILITIES> 8,416,229
<BONDS> 0
0
0
<COMMON> 4,592
<OTHER-SE> 5,059,290
<TOTAL-LIABILITY-AND-EQUITY> 32,260,764
<SALES> 0
<TOTAL-REVENUES> 13,857,384
<CGS> 0
<TOTAL-COSTS> 11,614,754
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,416,203
<INCOME-PRETAX> 2,292,121
<INCOME-TAX> 959,129
<INCOME-CONTINUING> 1,332,992
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,212,477
<EPS-BASIC> .26
<EPS-DILUTED> .26
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