TO THE SHAREHOLDERS:
Despite the much-publicized problems associated with the Class I railroad
mergers in 1999, Pioneer Railcorp completed a very successful year. In 1999 the
Company maintained system-wide revenue loadings in excess of 41,000 railcars,
paid its second annual cash dividend of 2 1/4 cents per share, and enjoyed
bottom line growth as increased revenues grew at a faster pace than expenses.
On April 29, 1999, Pioneer Railcorp purchased the Garden City Western Railway
Company located in southwestern Kansas. Unlike many railroads in Kansas, the
GCW's traffic base is not dependent upon wheat for its survival. The majority of
the line's traffic is inbound. The outbound commodities handled are outbound
grain (wheat & milo), frozen meat and scrap steel. The inbound commodities
handled are inbound chemicals, farm equipment, feed ingredients, fertilizers and
utility poles. The GCW has a well-developed rail-to-truck transfer facility. The
Company has already achieved gains in traffic through intense marketing,
business development, placement of a car supply and increased service delivery
by adding crew starts and four locomotives.
In 1999 the Company's Pioneer Railroad Equipment Co., LTD subsidiary made
several good railroad equipment acquisitions and began to increase the number of
lease transactions to non-affiliated short line railroad and industrial
customers.
Perhaps our most important accomplishment in 1999 was the continued improvement
in our safety record. I personally thank our employees for making "safety" a
habit and encourage continued improvement for next year.
As I look back on 1999, I am very proud of the Pioneer Railcorp family of
subsidiaries, the management team and employees that make it all come together
each and every day of the year. I am also thankful to all of our loyal
customers, our shareholders and our lending partners that place trust and
confidence in Pioneer Railcorp each day.
As Pioneer Railcorp enters 2000, it does so well positioned, well managed, well
equipped, more confident, financially sound, and a recognized leader in the
short line railroad industry.
Sincerely,
/s/ Guy L. Brenkman
-----------------------
Guy L. Brenkman
Chairman, President and
Chief Executive Officer
<PAGE>
Company Background
Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this annual report, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (WMI), 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.
Pioneer Railcorp Subsidiaries
Fort Smith Railroad Co.
On July 7, 1991, the Fort Smith Railroad Co. (FSR), a wholly-owned subsidiary of
Pioneer Railcorp, entered into a twenty-year lease (with three twenty-year
renewals) with the Missouri Pacific Railroad Company (now Union Pacific
Railroad) and operates 18 miles of track from Fort Smith to Barling, Arkansas.
The FSR's primary interchange is with the Union Pacific Railroad Company (UP).
FSR also interchanges with the Arkansas & Missouri Railroad Co. (AM) and the
Kansas City Southern Railway (KCS). The railroad's principal commodities are
iron, steel, scrap, baby food, fiberglass, particle board, charcoal, grains,
frozen poultry, meal, chemicals, alcoholic beverages, industrial sand, lumber,
paper, pulpboard, fiberboard, peanuts, fertilizer and military movements.
Alabama Railroad Co.
On October 25, 1991, the Alabama Railroad Co., a wholly-owned subsidiary of
Pioneer Railcorp, purchased 60 miles of railroad facilities and real estate from
CSX Transportation (CSX). The line runs from Flomaton to Corduroy, Alabama, and
interchanges with CSX in Flomaton. The railroad's principal commodities are
pulpwood, particle board, and finished lumber.
Mississippi Central Railroad Co.
On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. The railroad runs from Oxford,
Mississippi to Grand Junction, Tennessee, a total of 51 miles, 45.5 of which are
located in Mississippi. The railroad interchanges with the Norfolk Southern
Railway (NS) at Grand Junction, Tennessee and the Burlington Northern Santa Fe
(BNSF) at Holly Springs, Mississippi. The Company changed the name of this
wholly-owned subsidiary to Mississippi Central Railroad Co. (MSCI) in January
1993. The railroad's principal commodities include outbound finished wood
products as well as the resins, chemicals and pulpwood for production of the
finished wood products, scrap steel and cottonseed.
Alabama & Florida Railway Co.
On November 23, 1992, the Alabama & Florida Railway Co. (AF), a wholly-owned
subsidiary of Pioneer Railcorp, purchased the tangible assets of the A&F Inc.,
d/b/a the Alabama & Florida Railroad Company. This line runs from Georgiana to
Geneva, Alabama, a distance of 76 miles and interchanges with CSX at Georgiana.
The railroad's principal commodities are resins, plastics, fertilizer, peanuts,
and pulpwood.
<PAGE>
Decatur Junction Railway Co.
On September 23, 1993, the Decatur Junction Railway Co. (DT), a wholly-owned
subsidiary of Pioneer Railcorp, signed a lease agreement with Cisco Co-op Grain
Company (Cisco) and on September 24, 1993 with Central Illinois Shippers,
Incorporated (CISI), for the lease of two segments of track in east central
Illinois. Approximately 38 miles of railroad is operated including 8 miles of
trackage rights on the Illinois Central Railroad (IC) through Decatur, Illinois.
The leases run through December 31, 2006. The railroad's principal commodities
are primarily agriculture products.
Vandalia Railroad Company
On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company. The line located in Vandalia, Illinois,
interchanges with Conrail (CR) and is approximately 3.45 miles long. The
railroad's principal commodities are steel pipe, plastic pellets, fertilizer,
and feed ingredients.
West Michigan Railroad Co.
On July 11, 1995, Pioneer Railcorp signed an agreement with the Trustee of the
Southwestern Michigan Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore &
Chicago Railroad (KLSC), to purchase all of the tangible assets of KLSC. Those
assets include approximately 15 miles of track and right-of-way, extending from
Hartford to Paw Paw, Michigan. Pioneer Railcorp then assigned its right to
purchase to the West Jersey Railroad Co., a wholly owned subsidiary of Pioneer,
which had been operating the former KLSC tracks under a Interstate Commerce
Commission Directed Service Order since June 24, 1995. West Jersey Railroad Co.
amended its articles of incorporation to change its name to "West Michigan
Railroad Co." effective October 2, 1995. The sale was approved by the Interstate
Commerce Commission by order served October 18, 1995, and the West Michigan
Railroad Co. took title to the property on October 24, 1995. The railroad's
principal commodities are frozen and canned foods.
Keokuk Junction Railway Co.
On March 12, 1996, Pioneer Railcorp purchased 93% of the common stock of KNRECO,
Inc., an Iowa corporation d/b/a Keokuk Junction Railway (hereinafter "KJRY")
from the shareholders, and purchased all of the remaining common shares of KJRY
in April of 1996. KJRY operates a common carrier railroad line within the City
of Keokuk, Iowa, from Keokuk to LaHarpe, Illinois, and a branch line from
Hamilton to Warsaw, Illinois, a total of approximately 38 miles. In addition,
KJRY owns all of the common stock of Keokuk Union Depot Company, an Iowa
corporation, that owns the former Keokuk Union Depot building, along with
surrounding track and real estate. KNRECO, Inc. changed its corporate name to
Keokuk Junction Railway Co. effective April 10, 1996. The KJRY interchanges with
the Burlington Northern Santa Fe (BNSF) at Keokuk, Iowa and the Toledo Peoria &
Western Railway Corporation (TPW) at LaHarpe, Illinois. The railroad's principal
commodities are corn, corn germ, corn syrup, meal, gluten feed, calcined coal,
ferro silicon, scrap iron, and railroad wheels.
Shawnee Terminal Railway Company
On November 13, 1996, Pioneer Railcorp purchased 100% of the common stock of the
Shawnee Terminal Railway Company. The line located in Cairo, Illinois,
interchanges with the Illinois Central Railroad (IC) and is approximately 2.5
miles long. The railroad's principal commodities are glycol and railroad freight
cars for cleaning.
Michigan Southern Railroad
On December 19, 1996, Pioneer Railcorp through its wholly-owned subsidiary
Michigan Southern Railroad Company, signed a two year lease with the Michigan
Southern Railroad Company, Inc., Morris Leasing, Inc. and Gordon D. Morris to
operate 53 miles of track and certain railroad related assets. The lease
contained an exclusive option to purchase the stock of the Michigan Southern
Railroad Company, Inc. and the railroad assets of Morris Leasing Co., Ltd. and
Gordon D. Morris, and this option was exercised on January 6, 1999. The railroad
is comprised of three separate non-contiguous lines, one located in southern
Michigan and two located in northern Indiana. All lines have separate
interchanges with Conrail (CR). The Michigan line also interchanges with the
Indiana Northeastern Railroad Company (IN). The railroad's principal commodities
are scrap paper, scrap iron, fertilizer, plastics, plywood, sugar and corn
syrup.
<PAGE>
Pioneer Industrial Railway Co.
On February 18, 1998, Pioneer Railcorp through its wholly-owned subsidiary
Pioneer Industrial Railway Co., began operating approximately 8.5 miles of
railroad in Peoria County, Illinois when the Peoria & Pekin Union Railway Co.
(PPU) assigned its lease with the owner, the Peoria, Peoria Heights & Western
Railroad (PPHW), effective February 18, 1998. The PPHW is owned by the City of
Peoria, Illinois and the Village of Peoria Heights, Illinois. The railroad's
principal commodities are steel, salt, lumber and plastic pellets.
The Garden City Western Railway, Inc.
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.
Pioneer Railroad Equipment Co., Ltd.
Pioneer Railroad Equipment Co., Ltd. (PREL), which was formed on April 1, 1990,
leases equipment to the Company's subsidiary railroads and also purchases, sells
and leases equipment to and from unrelated parties. PREL also earns income from
non-company railroads on its fleet of approximately 1,100 railcars (as of
December 31, 1999) when they carry freight on non-company railroads. PREL also
engages in retail sales of promotional items.
Corporate Support Operations
Other corporate support operations engaged in by the Company are performed by
its wholly owned subsidiaries, Pioneer Railroad Services, Inc., Pioneer
Resources, Inc., and Pioneer Air, Inc. Pioneer Railroad Services, Inc. (PRS)
which began operations on October 1, 1993, provides accounting, management,
marketing, operational and agency services to the Company's subsidiary
railroads. Pioneer Resources, Inc. was formed on December 30, 1993 to manage
real estate and auxiliary resources for Company subsidiaries. Pioneer Air, Inc.
was formed on August 5, 1994 and currently owns a Cessna 421B aircraft which is
used by Pioneer Railcorp subsidiaries exclusively for Company business travel.
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<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in connection with the Company's
consolidated financial statements. related notes and other financial information
included elsewhere in this annual report.
Results of Operations:
This management's discussion and analysis of financial condition and results of
operations references the Company's two operating segments. The Company's
railroad operations consist of wholly-owned short line railroad subsidiaries
that offer similar services and the Company's equipment leasing operations
leases railcars, locomotives, and other railroad equipment to affiliated and
unaffiliated entities. All other operations are classified as corporate 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
--------------------------------------------------------------------------------
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 .
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
On June 26, 1996, the Company's shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options will be fully vested and will be
exercisable as of July 1, 2001. The exercise date can be accelerated if Pioneer
Railcorp common shares reach a closing price of $7.25 per share, or higher, for
any consecutive 10-day period, as reported in the Wall Street Journal. The
options will be exercisable at 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.
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.
<PAGE>
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.
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.
The remainder of this page is intentionally left blank
<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>
Market for Pioneer Railcorp Common Stock
The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol "PRRR" and the Chicago Stock Exchange under
the trading symbol "PRR". The quarterly high and low sales price of the
Company's common stock for the periods below are as follows:
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.
Board of Directors
Guy L. Brenkman, CEO and President, Pioneer Railcorp
J. Michael Carr, Chief Financial Officer, Pioneer Railcorp
Orvel L. Cox, Vice President, Pioneer Railroad Equipment Co., Ltd.
John S. Fulton, The Fayette Companies
Timothy F. Shea, President, RE/MAX Property Management
Officers
Guy L. Brenkman, Chief Executive Officer and President
J. Michael Carr, Treasurer
Daniel A. LaKemper, Secretary
Scott Isonhart, Assistant Secretary
Corporate Information
The Corporate offices of Pioneer Railcorp and its subsidiaries are located at
1318 S. Johanson Road, Peoria, Illinois, 61607; Telephone number 309-697-1400.
Reports and Publications
A copy of Pioneer Railcorp's 1999 Form 10-KSB to the Securities and Exchange
Commission (without exhibits), quarterly financial reports and other
publications and news releases can be obtained through the Investor Relations
Department or accessed through the Company's web page located at
www.Pioneer-Railcorp.com.
